TITLE 18. Public Revenues
Division 1. State Board of Equalization--Property Tax
Chapter 1. Valuation Principles and Procedures
§1. General Application.
Note     •     History

The rules in this subchapter govern assessors when assessing, county boards of equalization and assessment appeals boards when equalizing, and the State Board of Equalization, including all divisions of the property tax department.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 110, 401, 1816, 1816.1, and Article 2, Chap. 3, Part 2, Div. 1, Revenue and Taxation Code.
HISTORY

1. New Subchapter 1 (Sections 1, 2, 3, 4 and 10) filed 6-23-67; effective thirtieth day thereafter (Register 67, No. 25).
2. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
3. Amendment filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
§2. The Value Concept.
Note     •     History

(a) In addition to the meaning ascribed to them in the Revenue and Taxation Code, the words “full value”, “full cash value”, “cash value”, “actual value”, and “fair market value” mean the price at which a property, if exposed for sale in the open market with a reasonable time for the seller to find a purchaser, would transfer for cash or its equivalent under prevailing market conditions between parties who have knowledge of the uses to which the property may be put, both seeking to maximize their gains and neither being in a position to take advantage of the exigencies of the other. 
When applied to real property, the words “full value”, “full cash value”, “cash value”, “actual value” and “fair market value” mean the price at which the unencumbered or unrestricted fee simple interest in the real property (subject to any legally enforceable governmental restrictions) would transfer for cash or its equivalent under the conditions set forth in the preceding sentence.
(b) When valuing real property (as described in paragraph (a)) as the result of a change in ownership (as defined in Revenue and Taxation Code, Section 60, et seq.) for consideration, it shall be rebuttably presumed that the consideration valued in money, whether paid in money or otherwise, is the full cash value of the property. The presumption shall shift the burden of proving value by a preponderance of the evidence to the party seeking to overcome the presumption. The presumption may be rebutted by evidence that the full cash value of the property is significantly more or less than the total cash equivalent of the consideration paid for the property. A significant deviation means a deviation of more than 5% of the total consideration.
(c) The presumption provided in this section shall not apply to:
(1) The transfer of any taxable possessory interest.
(2) The transfer of real property when the consideration is in whole, or in part, in the form of ownership interests in a legal entity (e.g., shares of stock) or the change in ownership occurs as the result of the acquisition of ownership interests in a legal entity.
(3) The transfer of real property when the information prescribed in the change in ownership statement is not timely provided.
(d) If a single transaction results in a change in ownership of more than one parcel of real property, the purchase price shall be allocated among those parcels and other assets, if any, transferred based on the relative fair market value of each.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 110, 110.1, 401, Revenue and Taxation Code; Carlson v. Assessment Appeals Board No. 1 (1985) 167 Cal.App.3d 1004; Dennis v. County of Santa Clara (1989) 215 Cal.App.3d 1019.
HISTORY

1. Amendment filed 12-26-75; effective thirtieth day thereafter (Register 75, No. 52).
2. Amendment filed 8-21-85; effective thirtieth day thereafter (Register 85, No. 34).
3. Amendment filed 8-26-91; operative 9-25-91 (Register 91, No. 52).
4. Editorial correction of subsection (b) (Register 2002, No. 3).
§3. Value Approaches.

In estimating value as defined in section 2, the assessor shall consider one or more of the following, as may be appropriate for the property being appraised:
(a) The price or prices at which the property and comparable properties have recently sold (the comparative sales approach).
(b) The prices at which fractional interests in the property or comparable properties have recently sold, and the extent to which such prices would have been increased had there been no prior claims on the assets (the stock and debt approach).
(c) The cost of replacing reproducible property with new property of similar utility, or of reproducing the property at its present site and at present price levels, less the extent to which the value has been reduced by depreciation, including both physical deterioration and obsolescence (the replacement or reproduction cost approach).
(d) If the income from the property is regulated by law and the regulatory agency uses historical cost or historical cost less depreciation as a rate base, the amount invested in the property or the amount invested less depreciation computed by the method employed by the regulatory agency (the historical cost approach).
(e) The amount that investors would be willing to pay for the right to receive the income that the property would be expected to yield, with the risks attendant upon its receipt (the income approach).
§4. The Comparative Sales Approach to Value.
Note     •     History

When reliable market data are available with respect to a given real property, the preferred method of valuation is by reference to sales prices. In using sales prices of the appraisal subject or of comparable properties to value a property, the assessor shall:
(a) Convert a noncash sale price to its cash equivalent by estimating the value in cash of any tangible or intangible property other than cash which the seller accepted in full or partial payment for the subject property and adding it to the cash portion of the sale price and by deducting from the nominal sale price any amount which the seller paid in lieu of interest to a lender who supplied the grantee with part or all of the purchase money.
(b) When appraising an unencumbered-fee interest, (1) convert the sale price of a property encumbered with a debt to which the property remained subject to its unencumbered-fee price equivalent by adding to the sale price of the seller's equity the price for which it is estimated that such debt could have been sold under value-indicative conditions at the time the sale price was negotiated and (2) convert the sale price of a property encumbered with a lease to which the property remained subject to its unencumbered-fee price equivalent by deducting from the sale price of the seller's equity the amount by which it is estimated that the lease enhanced that price or adding to the price of the seller's equity the amount by which it is estimated that the lease depressed that price.
(c) Convert a sale to the valuation date of the subject property by adjusting it for any change in price level of this type of property that has occurred between the time the sale price was negotiated and the valuation date of the subject property.
(d) Make such allowances as he deems appropriate for differences between a comparable property at the time of sale and the subject property on the valuation date, in physical attributes of the properties, location of the properties, legally enforceable restrictions on the properties' use, and the income and amenities which the properties are expected to produce. When the appraisal subject is land and the comparable property is land of smaller dimensions, and it is assumed that the subject property would be divided into comparable smaller parcels by a purchaser, the assessor shall allow for the cost of subdivision, for the area required for streets and alleys, for selling expenses, for normal profit, and for interest charges during the period over which it is anticipated that the smaller properties will be marketed.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 110, 110.1, 110.5 and 401, Revenue and Taxation Code; and Article XIII A, Sections 1 and 2, California Constitution.
HISTORY

1. Amendment of subsections (c) and (d) filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
§6. The Reproduction and Replacement Cost Approaches to Value.
History

(a) The reproduction or replacement cost approach to value is used in conjunction with other value approaches and is preferred when neither reliable sales data (including sales of fractional interests) nor reliable income data are available and when the income from the property is not so regulated as to make such cost irrelevant. It is particularly appropriate for construction work in progress and for other property that has experienced relatively little physical deterioration, is not misplaced, is neither over- nor underimproved, and is not affected by other forms of depreciation or obsolescence.
(b) The reproduction cost of a reproducible property may be estimated either by (1) adjusting the property's original cost for price level changes and for abnormalities, if any, or (2) applying current prices to the property's labor and material components, with appropriate additions for entrepreneurial services, interest on borrowed or owner-supplied funds, and other costs typically incurred in bringing the property to a finished state (or to a lesser state if unfinished on the lien date). Estimates made under (2) above may be made by using square-foot, cubic-foot, or other unit costs; a summation of the in-place costs of all components; a quantity survey of all material, labor, and other cost elements; or a combination of these methods.
(c) The original cost of reproducible property shall be adjusted, in the aggregate or by groups, for price level changes since original construction by multiplying the cost incurred in a given year by an appropriate price index factor. When detailed investment records are unavailable for earlier years or when only a small percentage of the total investment is involved, the investments in such years may be lumped and factored to present price levels by means of an index number that represents the assessor's best judgment of the weighted average price change. If the property was not new when acquired by its present owner and its original cost is unknown, its acquisition cost may be substituted for original cost in the foregoing calculations.
(d) The replacement cost of a reproducible property may be estimated as indicated in (b) (2) of this section by applying current prices to the labor and material components of a substitute property capable of yielding the same services and amenities, with appropriate additions as specified in subsection (b) (2).
(e) Reproduction or replacement cost shall be reduced by the amount that such cost is estimated to exceed the current value of the reproducible property by reason of physical deterioration, misplacement, over- or underimprovement, and other forms of depreciation or obsolescence. The percentage that the remainder represents of the reproduction or replacement cost is the property's percent good.
(f) When the allowance made pursuant to paragraph (e) exceeds the amount included in the depreciation tables used by the assessor, the reasons therefor shall be noted in the appraisal record for the property and the amount thereof shall be ascertainable from the record.
HISTORY

1. New section filed 9-7-67; effective thirtieth day thereafter (Register 67, No. 36).
2. Amendment of subsection (f) filed 2-24-70; effective thirtieth day thereafter (Register 70, No. 9).
3. Amendment of subsections (b) and (d) filed 2-22-71; effective thirtieth day thereafter (Register 71, No. 9).
4. Repealer of subsection (f) and renumbering of subsections (g) and (h) to subsections (f) and (g) filed 2-18-77 as an emergency; effective upon filing (Register 77, No. 8).
5. Change without regulatory effect amending subsections (b) and (d) and repealing subsection (g) filed 12-19-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 51).
§8. The Income Approach to Value.
Note     •     History

(a) The income approach to value is used in conjunction with other approaches when the property under appraisal is typically purchased in anticipation of a money income and either has an established income stream or can be attributed a real or hypothetical income stream by comparison with other properties. It is the preferred approach for the appraisal of land when reliable sales data for comparable properties are not available. It is the preferred approach for the appraisal of improved real properties and personal properties when reliable sales data are not available and the cost approaches are unreliable because the reproducible property has suffered considerable physical depreciation, functional obsolescence or economic obsolescence, is a substantial over- or underimprovement, is misplaced, or is subject to legal restrictions on income that are unrelated to cost.
(b) Using the income approach, an appraiser values an income property by computing the present worth of a future income stream. This present worth depends upon the size, shape, and duration of the estimated stream and upon the capitalization rate at which future income is discounted to its present worth. Ideally, the income stream is divided into annual segments and the present worth of the total income stream is the algebraic sum (negative items subtracted from positive items) of the present worths of the several segments. In practical application, the stream is usually either
(1) divided into longer segments, such as the estimated economic life of the improvements and all time thereafter or the estimated economic life of the improvements and the year in which the improvements are scrapped and the land is sold, or
(2) divided horizontally by projecting a perpetual income for land and an income for the economic life of the improvements, or
(3) projected as a level perpetual flow.
(c) The amount to be capitalized is the net return which a reasonably well informed owner and reasonably well informed buyers may anticipate on the valuation date that the taxable property existing on that date will yield under prudent management and subject to such legally enforceable restrictions as such persons may foresee as of that date. Net return, in this context, is the difference between gross return and gross outgo. Gross return means any money or money's worth which the property will yield over and above vacancy and collection losses, including ordinary income, return of capital, and the total proceeds from sales of all or part of the property. Gross outgo means any outlay of money or money's worth, including current expenses and capital expenditures (or annual allowances therefor) required to develop and maintain the estimated income. Gross outgo does not include amortization, depreciation, or depletion charges, debt retirement, interest on funds invested in the property, or rents and royalties payable by the assessee for use of the property. Property taxes, corporation net income taxes, and corporation franchise taxes measured by net income are also excluded from gross outgo.
(d) In valuing property encumbered by a lease, the net income to be capitalized is the amount the property would yield were it not so encumbered, whether this amount exceeds or falls short of the contract rent and whether the lessor or the lessee has agreed to pay the property tax.
(e) Recently derived income and recently negotiated rents or royalties (plus any taxes paid on the property by the lessee) of the subject property and comparable properties should be used in estimating the future income if, in the opinion of the appraiser, they are reasonably indicative of the income the property will produce in its highest and best use under prudent management. Income derived from rental of properties is preferred to income derived from their operation since income derived from operation is the more likely to be influenced by managerial skills and may arise in part from nontaxable property or other sources. When income from operating a property is used, sufficient income shall be excluded to provide a return on working capital and other nontaxable operating assets and to compensate unpaid or underpaid management.
(f) When the appraised value is to be used to arrive at an assessed value, the capitalization rate is to include a property tax component, where applicable, equal to the estimated future tax rate for the area times the assessment ratio.
(g) The capitalization rate may be developed by either of two means:
(1) By comparing the net incomes that could reasonably have been anticipated from recently sold comparable properties with their sales prices, adjusted, if necessary, to cash equivalents (the market-derived rate). This method of deriving a capitalization rate is preferred when the required sales prices and incomes are available. When the comparable properties have similar capital gains prospects, the derived rate already includes a capital gain (or loss) allowance and the income to be capitalized should not include such a gain (or loss) at the terminus of the income estimate.
(2) By deriving a weighted average of the capitalization rates for debt and for equity capital appropriate to the California money markets (the band-of-investment method) and adding increments for expenses that are excluded from outgo because they are based on the value that is being sought or the income that is being capitalized. The appraiser shall weight the rates for debt and equity capital by the respective amounts of such capital he deems most likely to be employed by prospective purchasers.
(h) Income may be capitalized by the use of gross income, gross rent, or gross production multipliers derived by comparing sales prices of closely comparable properties (adjusted, if necessary, to cash equivalents) with their gross incomes, gross rents, or gross production.
(i) The provisions of this rule are not applicable to lands defined as open-space lands by Chapter 1711, Statutes of 1967, nor are they applicable in all respects to possessory interests.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 110 and 401, Revenue and Taxation Code.
HISTORY

1. New section filed 12-19-67; effective thirtieth day thereafter (Register 67, No. 51).
2. Amendment of subsection (c) filed 12-22-76; effective thirtieth day thereafter (Register 76, No. 52).
3. Amendment of NOTE and subsection (c) filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
4. Amendment of subsections (c) and (f) filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
§10. Trade Level for Tangible Personal Property.
Note     •     History

(a) In appraising tangible personal property, the assessor shall give recognition to the trade level at which the property is situated and to the principle that property normally increases in value as it progresses through production and distribution channels. Such property normally attains its maximum value as it reaches the consumer level. Accordingly, tangible personal property shall be valued by procedures that are consistent with the general policies set forth herein.
(b) Except as provided by the following subdivisions, tangible personal property held by a consumer shall be valued at the amount of cash or its equivalent for which the property would transfer to a consumer of like property at the same trade level if exposed for sale on the open market. This value shall be estimated in accordance with regulations 4, 6, and 8. If a cost approach is employed, the cost shall include the full economic cost of placing the property in service. Full economic cost (i.e., replacement or reproduction cost), includes costs typically incurred in bringing the property to a finished state, including labor and materials, freight or shipping cost, installation costs, sales or use taxes, and additions for market supported entrepreneurial services (with appropriate allowances for trade, quantity, or cash discounts).-Full economic cost does not include extended service plans or extended warranties, supplies, or other assets or business services that may have been included in a purchase contract.
(c) Tangible personal property leased, rented, or loaned for a period of six months or less, having a tax situs at the place where the lessor normally keeps the property as provided in regulation 204, shall be valued at the amount of cash or its equivalent for which it would transfer to other lessors or retailers of like property. The value may be estimated by reference to the price at which the lessor could be expected to sell the property at fair market value to other lessors or retailers of like property. If that price is unknown, then the value may be estimated by reference to one or more of the following indicators of value: (1) the lessor's full economic cost of the property with a reasonable allowance for depreciation; (2) the cost indicated in subdivision (e) if the lessor is also the manufacturer; or (3) in accordance with subdivision (b).
(d) Tangible personal property leased, rented, or loaned for an extended but unspecified period or leased for a term of more than six months, having tax situs at the lessee's situs as provided in regulation 204, shall be valued by estimating the cash price or its equivalent for which the property could be sold at fair market value to an outside customer operating at the same level of trade as the lessee. If that price is unknown, then the value may be estimated by reference to one or more of the following indicators of value: (1) the lessee's full economic cost of the property with a reasonable allowance for depreciation; or (2) in accordance with subdivision (b).
(e) Tangible personal property acquired from internal sources for self-consumption or use, shall be valued by estimating the cash price or its equivalent for which the property could be sold at fair market value to an outside customer using the property at the same trade level, (with appropriate allowances for trade, quantity, or cash discounts). If that price is unknown, then the value may be estimated by reference to one or more of the following indicators of value: (1) the cost of property in its condition and location on the lien date, had it been acquired at fair market value from an outside supplier (including labor, materials, overhead, interdivisional and/or intercompany profits, interest on borrowed or owner supplied funds, sales or use tax, installation, and other costs incurred in bringing the property to a finished state, with appropriate allowances for trade, quantity, or cash discounts, and depreciation), or (2) in accordance with subdivision (b). The cost of the property in its condition and location on the lien date, had it been acquired at fair market value from an outside supplier, does not include extended service plans or extended warranties, supplies, other assets or business services. The quantity discount allowed a manufacturer, when it is its own largest customer, should be at least as large as that allowed its largest wholesale or retail customer.
(f) Tangible personal property in the hands of a person engaged in the function of a manufacturer, wholesaler, or retailer and a consumer shall be valued by estimating the cash price or its equivalent for which the property could be sold at fair market value to an outside customer operating at the same level of trade. The property shall be valued based on how it is situated or used on the lien date pursuant to subdivisions (b), (c), (d), and (e).
NOTE

Authority cited: Section 15606, Government Code. References: Sections 110 and 401, Revenue and Taxation Code.
HISTORY

1. Amendment filed 2-24-70 as an emergency; effective upon filing. Certificate of Compliance included (Register 70, No. 9).
2. Amendment filed 1-19-71; effective thirtieth day thereafter (Register 71, No. 4).
3. Amendment of subsection (f) filed 4-22-71; effective thirtieth day thereafter (Register 71, No. 17).
4. Amendment of section and Note filed 4-25-2000; operative 5-25-2000 (Register 2000, No. 17).
§20. Taxable Possessory Interests.
Note     •     History

(a) Possessory Interests. “Possessory interests” are interests in real property that exist as a result of:
(1) A possession of real property that is independent, durable, and exclusive of rights held by others in the real property, and that provides a private benefit to the possessor, except when coupled with ownership of a fee simple or life estate in the real property in the same person; or
(2) A right to the possession of real property, or a claim to a right to the possession of real property, that is independent, durable, and exclusive of rights held by others in the real property, and that provides a private benefit to the possessor, except when coupled with ownership of a fee simple or life estate in the real property in the same person; or
(3) Taxable improvements on tax-exempt land.
(b) Taxable Possessory Interests. “Taxable possessory interests” are possessory interests in publicly-owned real property. Excluded from the meaning of “taxable possessory interests”, however, are any possessory interests in real property located within an area to which the United States has exclusive jurisdiction concerning taxation. Such areas are commonly referred to as federal enclaves.
(c) Definitions. For purposes of this regulation:
(1) “Real property” is defined in section 104 of the Revenue and Taxation Code and includes public waters such as tidelands and navigable waters and waterways.
(2) “Possession” of real property means actual physical occupation. “Possession” requires more than incidental benefit from the public property, but requires actual physical occupation of the property pursuant to rights not granted to the general public; thus, the use of property such as hallways, common areas, and access roads at airports, stadiums, convention centers, or other public facilities by customers or employees of those who may lease other public property at the public facility of which they have exclusive use does not constitute “possession” of those hallways, common areas, or access roads by the lessee of the public property.
(3) A “right,” or a “claim to a right,” to the possession of real property means the right, or claim to a right, to actual physical occupation of real property. For purposes of this subdivision, a right, or a claim to a right, to the possession of real property may exist as a result of the possessor having or claiming to have: (i) a leasehold estate, an easement, a profit á prendre, or any other legal or equitable interest in real property of less than fee simple or life estate, regardless of how the interest may be identified in a deed, lease, or other document; or (ii) a use permit or agreement, such as a federal grazing permit, a permit to use a berth at a harbor, or a county use permit authorizing professional rafting outfitters to commercially operate on a river, that creates a legal or equitable interest in real property of less than fee simple or life estate.
(4) “Possessor” means the party or parties who hold the possessory interest, and any successors or assigns to such party or parties.
(5) “Independent” means a possession, or a right or claim to possession, if the possession or operation of the real property is sufficiently autonomous to constitute more than a mere agency. To be “sufficiently autonomous” to constitute more than a mere agency, the possessor must have the right and ability to exercise significant authority and control over the management or operation of the real property, separate and apart from the policies, statutes, ordinances, rules, and regulations of the public owner of the real property. For example, the control of an airport runway or taxiway by the Federal Aviation Administration (FAA) or another government agency or its agent is so complete that it precludes the airlines from exercising sufficient authority and control over the management or operation of the runways or taxiway and does not constitute sufficient “independence” to support a possessory interest.
(6) “Durable” means for a determinable period with a reasonable certainty that the possession of the real property by the possessor, or the possessor's right or claim with respect to the possession of the real property, will continue for that period.
(7) “Exclusive of rights held by others in the real property” means the enjoyment of an exclusive use of real property, or a right or claim to the enjoyment of an exclusive use together with the ability to exclude from possession by means of legal process others who may interfere with that enjoyment.
(A) For purposes of this subdivision, “exclusive uses” include the following types of uses of real property, as well as rights and claims to such types of uses of real property:
(1) The sole possession, occupancy, or use of real property,
(2) The possession, occupancy, or use of real property by co-tenants or co-owners as to leaseholds, easements, profits á prendre, or any other legal or equitable interests in real property of less than fee simple or life estate, where the uses constitute but a single use jointly enjoyed.
(3) The concurrent use of real property, not amounting to co-tenancy or co-ownership under subdivision (A)(2) above, by a person who has a primary or prevailing right to use the real property and/or to have its designees use the real property. For example, a public marina leases boat slips with a lease provision that allows the marina to rent a leased boat slip to a short-term user if the primary lessee is away; subject to the primary lessee's right to exclude the short-term user on the primary lessee's return. Under these facts, the primary lessee has a primary and prevailing right to use the leased boat slip. For purposes of this subdivision, concurrent use of real property demonstrating a primary or prevailing right also includes alternating uses of the same real property by more than one party, such as the case when certain premises are used by a professional basketball team on certain days of each week while a professional hockey team uses the same premises on certain other days.
(4) Concurrent uses of real property, not amounting to co-tenancy or co-ownership under subdivision (A)(2) above, by persons making qualitatively different uses of the real property. For purposes of this subdivision, qualitatively different uses of real property include: (i) those by persons making different kinds of uses of the same real property, such as the case when one person is developing mineral resources on real property while others are concurrently enjoying recreational uses on the same real property; and (ii) those where different persons have the right to concurrently enter onto and take different things from the same real property.
(5) Concurrent uses of real property, not amounting to co-tenancy or co-ownership under subdivision (A)(2) above, by persons engaged in qualitatively similar uses that diminish the quantity or quality of the real property. For purposes of this subdivision, uses that diminish the quantity and/or quality of the real property include: (i) grazing cattle; (ii) mining; (iii) the extraction of oil or gas; and (iv) the extraction of geothermal energy.
(6) Concurrent uses of real property, not amounting to co-tenancy or co-ownership under subdivision (A)(2) above, by persons engaged in qualitatively similar uses that do not diminish the quantity or quality of the real property, provided that the number of concurrent use grants is restricted. For purposes of this subdivision: “concurrent use grants” includes grants, permits, deeds, agreements, and other documents providing rights to the concurrent use of real property; and the number of concurrent use grants is “restricted” when the number of concurrent use grants is restricted either by law or pursuant to the policies or management decisions of the public owner of the real property or other public agency.
Example 1: Commercial rafting outfitters have a county use permit to commercially operate on a river. While any private recreational user may raft on the river without limitation or regulation, only approximately 80 commercial rafting outfitters are presently allowed to operate under permit on the river. The commercial rafting outfitters' use of the river is exclusive for purposes of this regulation since the number of commercial use permits issued by the county to commercial rafting outfitters is restricted, regardless of whether or not the commercial rafting outfitters' use of the river diminishes its quantity or quality.
Example 2: X operates a shuttle van service, picking up passengers at their homes and other locations, and transporting them to the airport. When the shuttle van reaches the airport, it utilizes the public street which surrounds the airport to drop passengers off at the various terminals at the airport. The street around the airport is available to all licensed drivers, for commercial and noncommercial uses. Neither the traffic laws, nor the policies or management decisions of the public owner of the airport facility restrict the number of users of the public street. In addition, under the assumed facts of this hypothetical, X's use of the public street surrounding the airport does not diminish the quantity or quality of the real property.
Given that (i) the shuttle vans using the public street are making qualitatively similar uses of that real property; (ii) there are no facts indicating that the quality or quantity of the real property is being diminished; and (iii) the number of users of the real property is not restricted, X's right to use the public street surrounding the airport is not exclusive, and X does not have a possessory interest in the public street surrounding the airport.
(B) A use of real property, or a right or claim to a use of real property, that does not contain one of the elements in subdivisions (A)(1) to (6) above, inclusive, shall be rebuttably presumed to be nonexclusive.
(C) In no event shall the presence of occasional trespassers or occasional interfering uses be sufficient in and of itself to make nonexclusive a use, or a right or claim to a use, that is otherwise exclusive for purposes of this regulation.
(8) “Private benefit” means that the possessor has the opportunity to make a profit, or to use or be provided an amenity, or to pursue a private purpose in conjunction with its use of the possessory interest. The use should be of some private or economic benefit to the possessor that is not shared by the general public. The fact that a possession of real property is not for a business or commercial purpose or that the possessor is a non-profit corporation does not preclude the possessor from being found to have received a “private benefit” from that possession.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Section 107, Revenue and Taxation Code.
HISTORY

1. New section filed 4-6-98; operative 5-6-98 (Register 98, No. 15).
§21. Taxable Possessory Interests-Valuation.
Note     •     History

(a) Definitions. For the purposes of this regulation: 
(1) “Real property” is defined in rule 20(c)(1). 
(2) “Possession” is defined in rule 20(c)(2). 
(3) A “right” to the possession of real property includes a “claim to a right” to the possession of real property within the meaning of rule 20(c)(3). 
(4) “Possessor” is defined in rule 20(c)(4). 
(5) The “term of possession” of a taxable possessory interest means the term of possession for valuation purposes. 
(6) The “stated term of possession” for a taxable possessory interest as of a specific date is the remaining period of possession as of that date as specified in the lease, agreement, deed, conveyance, permit, or other authorization or instrument that created, extended, or renewed the taxable possessory interest, including any option or options to renew or extend the specified period of possession if it is reasonable to assume that the option or options will be exercised. 
(7) “Contract rent” means any compensation or payments, in cash or its equivalent, that are required to be paid or provided by a possessor under an authorization or instrument that creates a taxable possessory interest for the rights in real property provided by the taxable possessory interest. 
(8) “Economic rent” means the estimated amount that would be paid by the possessor, on the valuation date in cash or its equivalent, for the rights in real property provided by the taxable possessory interest if (i) the rights to possession were offered in an open and competitive market and (ii) the public owner's interest in the property were not exempt or immune from taxation. Economic rent does not include payments by the possessor to the public owner that are not paid as consideration for rights in real property, such as payments for the rental of personal property, for the provision of security services, and for advertising and promotional services. 
(9) “Creation” means the creation of a taxable possessory interest. Creation includes (i) an initial grant or other conveyance of a taxable possessory interest; (ii) a subsequent grant or other conveyance of additional land or improvements to a preexisting taxable possessory interest; or (iii) a subsequent grant or other conveyance of additional valuable property rights or uses to a preexisting taxable possessory interest. 
(10) “Extension or renewal” means the lengthening of the period of possession of a taxable possessory interest, such as by the exercise of an option to extend or to renew a lease or permit. 
(b) Rights to be Valued. Except as provided in subsection (f) or specifically provided otherwise by law, the rights to be valued in a taxable possessory interest are all rights in real property held by the possessor. 
(1) The fair market value of a taxable possessory interest is not diminished by any obligation of the possessor to pay rent or to retire debt secured by the taxable possessory interest. In other words, the fair market value of a taxable possessory interest is the fair market value of the fee simple absolute interest reduced only by the value of the property rights, if any, granted by the public owner to other persons and by the value of the property rights retained by the public owner (excluding the public owner's right to receive rent). 
(2) Examples of rights in real property that may be granted or retained by the public owner include the following: (i) the right to take possession of the property upon the termination of the taxable possessory interest due to the occurrence of an event such as the expiration of the contract term, a breach of agreement, or the happening of a condition that terminates the possessor's right to possession; (ii) the right to put the property to a higher and better use or otherwise restrict the possessor's use of the property; (iii) the right to terminate possession upon notice; (iv) the right to approve a sublessee or assignee; (v) the right to approve a loan secured by the taxable possessory interest; and (vi) the right to allow other possessors to use the property. 
(c) Standard of Value. Assessors shall value a taxable possessory interest consistent with the requirements of subsections (a), (d), (e), and (f) of section 110 of the Revenue and Taxation Code. A taxable possessory interest subject to article XIII A of the California Constitution shall also be valued consistent with the requirements of section 110.1 of the Revenue and Taxation Code. 
(d) Term of Possession for Valuation Purposes 
(1) The term of possession for valuation purposes shall be the reasonably anticipated term of possession. The stated term of possession shall be deemed the reasonably anticipated term of possession unless it is demonstrated by clear and convincing evidence that the public owner and the private possessor have reached a mutual understanding or agreement, whether or not in writing, such that the reasonably anticipated term of possession is shorter or longer than the stated term of possession. If so demonstrated, the term of possession shall be the stated term of possession as modified by the terms of the mutual understanding or agreement. 
(2) If there is no stated term of possession, the reasonably anticipated term of possession shall be demonstrated by the intent of the public owner and the private possessor, and by the intent of similarly situated parties, using criteria such as the following: 
(A) The sale price of the subject taxable possessory interest and sales prices of comparable taxable possessory interests. 
(B) The rules, policies, and customs of the public owner and of similarly situated public owners. 
(C) The customs and practices of the private possessor and of similarly situated private possessors. 
(D) The history of the relationship of the public owner and the private possessor and the histories of the relationships of similarly situated public owners and private possessors. 
(E) The actions of the parties to the subject taxable possessory interest, including any amounts invested in improvements by the public owner or the private possessor. 
(3) For the purposes of this regulation, a taxable possessory interest that runs from month to month, a taxable possessory interest without fixed term, or a taxable possessory interest of otherwise unspecified duration shall be deemed to be a taxable possessory interest with no stated term of possession. 
(e) Valuation of Post-De Luz Taxable Possessory Interests. Except as specifically provided otherwise by law, and excluding a taxable possessory interest involving the production of gas, petroleum, or other hydrocarbons, the value of a taxable possessory interest created, extended, or renewed after December 24, 1955 (i.e., a “Post-De Luz” taxable possessory interest) may be estimated using one or more of the following methods, as appropriate for the taxable possessory interest being valued. 
(1) Comparative Sales Approach to Value. In the comparative sales approach, a taxable possessory interest is valued using the sale price of the subject taxable possessory interest or sales prices of comparable taxable possessory interests, provided such interests shall have sold under the conditions of fair market value described in subsection (a) of section 110. A taxable possessory interest may be valued by the direct comparison method or the indirect comparison method. 
(A) Direct Comparison Method 
In the direct comparison method, the appraiser shall add the following to the sale price of the subject taxable possessory interest, or to the sale price of a comparable taxable possessory interest, to derive an indicator of the fair market value of the subject taxable possessory interest: (i) the present value on the sale date of any unpaid future contract rent for the term of possession; (ii) the fair market value on the sale date of any debt assumed by the buyer of the taxable possessory interest; and (iii) the present value on the sale date of any future costs that the buyer is contractually obligated to pay for the right of possession (e.g., the cost of site restoration at the end of the term of possession) less the present value on the sale date of any future benefits in addition to the right of possession or use that the buyer is contractually entitled to receive (e.g., the salvage value of, or reimbursement value for, improvements existing at the end of the term of possession). The unpaid future contract rent in (i) above shall be reduced by any expense necessary to maintain the income from the taxable possessory interest, including any element of “gross outgo” as defined in subsection (c) of rule 8. 
When valuing a taxable possessory interest by comparison with the sales of other taxable possessory interests, the other taxable possessory interests shall be located sufficiently near the subject taxable possessory interest and shall be sufficiently alike in respect to character, size, situation, usability, zoning or other enforceable government restrictions on use (unless rebutted pursuant to subdivision (c) of section 402.1 of the Revenue and Taxation Code), and restrictions on possession or use contained in the legal authorization or instrument that created, extended or renewed the taxable possessory interest to make it clear that the comparable taxable possessory interests and the subject taxable possessory interest are comparable in value and that the cash equivalent price realized for the comparable taxable possessory interests may fairly be considered as shedding light on the value of the subject taxable possessory interest. The comparable sales also shall be sufficiently near in time to the valuation date of the subject taxable possessory interest. “Near in time to the valuation date'' does not include any sale more than 90 days after the valuation date. 
(B) Indirect Comparison Method. In the indirect comparison method, a taxable possessory interest is valued by (i) estimating the fair market value on the valuation date of the possessor's rights in real property in the taxable possessory interest as if owned in perpetuity (i.e., the value of the fee simple absolute interest in such rights) using sales of fee simple absolute interests in properties that are comparable to the subject property as prescribed in section 402.5 of the Revenue and Taxation Code and whose highest and best use corresponds to, or is comparable with, the permitted use of the subject taxable possessory interest; and (ii) reducing this value by both the present value of those property rights for the period subsequent to the term of possession (i.e., the value of the fee simple absolute interest in such rights at the end of the term of possession) and the present value of all other rights of fee simple absolute ownership, if any, that are not provided to the possessor. 
(2) Cost Approach to Value. In the cost approach, a taxable possessory interest is valued by (i) adding the estimated replacement cost new less depreciation of improvements that meet the requirements of the possessor's permitted use to the estimated value of the taxable possessory interest in land; and (ii) reducing this amount by the estimated present value of the improvements that shall revert to or be retained by the public owner at the end of the term of possession. 
(A) The replacement cost new less depreciation of the improvements may be estimated as prescribed in subsections (d) and (e) of rule 6. The estimated value of the taxable possessory interest in land may be estimated using the comparative sales approach (direct or indirect method) or the income approach (direct or indirect method), as prescribed in subsections (e)(1) and (e)(3). 
(B) If a possessor's property use is limited to specified time periods (e.g., certain hours of the day or certain days of the week) or is shared with other possessors, the value determined by the cost approach shall be reasonably allocated to each possessor in a manner that reflects each possessor's proportionate value of the right to possession. 
(3) Income Approach to Value. In the income approach, a taxable possessory interest is valued by discounting the future net income that the interest in real property is capable of producing. A taxable possessory interest may be valued using the direct income method or the indirect income method. 
(A) Direct Income Method. In the direct income method, a taxable possessory interest is valued by capitalizing the future net income that the taxable possessory interest is capable of producing under typical, prudent management for the term of possession. 
(B) Indirect Income Method. In the indirect income method, a taxable possessory interest is valued by (i) estimating the fair market value of the possessor's rights on the valuation date as if owned in perpetuity (i.e., the value of the fee simple absolute interest in such rights) using the income approach to value as prescribed in rule 8; and (ii) reducing this value by the present value of the those rights for the period subsequent to the term of possession (i.e., the present value of the value of the fee simple interest in such rights at the end of the term of possession). 
(C) Income to be Capitalized. The income to be capitalized in the valuation of a taxable possessory interest is the “net return” (as defined in subsection (c) of rule 8) attributable to the taxable possessory interest. The income to be capitalized may be based on either (i) the estimated economic rent for the subject taxable possessory interest or (ii) if the estimated economic rent is unreliable or unavailable, the estimated net operating income of a typical, prudent operator of the property subject to the taxable possessory interest. Rental income is preferable to operating income (i.e., income from operating a business) because operating income may be influenced by managerial skills and may derive, in part, from nontaxable property. The income to be capitalized must be attributable to the rights in real property in the subject taxable possessory interest and must reflect the restrictions on use inherent in the subject taxable possessory interest. 
Economic rent 
a. The economic rent of the subject taxable possessory interest may be estimated by reference to (i) the contract rent for the subject taxable possessory interest; (ii) contract rents for comparable taxable possessory interests; (iii) contract rents for comparable fee simple absolute interests in real property; or (iv) contract rents for other comparable interests in real property. All such contract rents shall have been negotiated in an open and competitive market involving real property reasonably comparable to the subject taxable possessory interest in terms of physical attributes, location, legally enforceable restrictions on the property's use, term of possession, and risk of cancellation of the taxable possessory interest by public owner. In addition, the contract rents shall have been negotiated sufficiently near in time to the valuation date as to shed light on the economic rent of the subject taxable possessory interest. 
b. When using the contract rent of a taxable possessory interest as an indicator of the economic rent, the assessor shall add to the contract rent (i) an estimate of the amount, if any, by which the contract rent has been reduced because improvements have been constructed at the possessor's expense that will revert to the public owner at the end of the term of possession; and (ii) an estimate of the amount, if any, by which the contract rent has been reduced because the possessor will bear the cost of restoring the real property to its original condition on reversion to the public owner, including the cost of removing improvements (less any estimated salvage value of, or reimbursement value for, the improvements), or the cost of any similar obligation. 
c. To arrive at the income to be capitalized, any expense necessary to maintain the income from the subject taxable possessory interest, including any element of “gross outgo” as defined in subsection (c) of rule 8, whether paid by the public owner or the possessor, must be deducted from the estimated economic rent if the expense will be paid out of the estimated economic rent. 
Net Operating Income 
a. Net operating income is gross operating income less allowed expenses. Gross operating income, allowed expenses, and net operating income are defined herein consistent with “gross return,” “gross outgo,” and “net return,” respectively, in subsection (c) of rule 8. 
b. When valuing a taxable possessory interest using operating income, allowed expenses include the following: cost of goods sold (if applicable), typical operating expenses, typical management expense, an allowance for a return on working capital, and an allowance for a return on the value of any nontaxable property that contributes to the gross operating income. Typical operating expenses may include expenses for the rental of personal property, for the provision of security services, and for advertising and promotional services, provided such expenses are necessary for the production of the gross income. Typical operating expenses and typical management expense include expenses that an owner/operator typically would bear to maintain the property and to continue the production of income from the property but are borne by the public owner in the case of the subject taxable possessory interest. 
c. Allowed expenses do not include the following: amortization, depreciation, depletion charges, debt retirement, interest on funds invested in the taxable possessory interest, the contract rent for the taxable possessory interest, property taxes on the taxable possessory interest, income taxes, or state franchise taxes measured by income. 
(D) Capitalization Rate. Subsection (g) of rule 8 provides that a capitalization rate may be developed by either comparing the anticipated net incomes of recently sold comparable properties with their sales prices, or by deriving a weighted average of the capitalization rates (rates of return) for debt and equity capital appropriate to California money markets. In accordance with rule 8, the capitalization rate used in the valuation of a taxable possessory interest may be developed by (i) comparing the anticipated net incomes from comparable taxable possessory interests with their sales prices stated in cash or its equivalent and adjusted as described in subsection (e)(1)(A); (ii) comparing the anticipated net incomes of comparable fee simple absolute interests in real property with their sales prices stated in cash or its equivalent, provided the comparable fee properties are not expected to produce significantly higher net incomes subsequent to the subject taxable possessory interest's term of possession than during it; or (iii) by deriving a weighted average of the capitalization rates for debt and equity capital appropriate for the subject taxable possessory interest, weighting the separate rates of debt and equity by the relative amounts of debt and equity capital expected to be used by a typical purchaser of the subject taxable possessory interest. Consistent with subsection (f) of rule 8, the capitalization rate shall contain a component for property taxes where applicable 
(f) Valuation of Pre-De Luz Taxable Possessory Interests. Except as specifically provided otherwise by law, and excluding a taxable possessory interest involving the production of gas, petroleum, or other hydrocarbons, the value of a taxable possessory interest created prior to December 24, 1955, and not since renewed or extended (i.e., a “Pre-De Luz” taxable possessory interest) is the excess of the fair market value on the valuation date of the taxable possessory interest over the present value of unpaid future contract rent for the unexpired term of possession (i.e., for the term of possession). This value may be estimated using one or more of the following methods, as appropriate for the taxable possessory interest being valued. 
(1) Comparative Sales Approach to Value. A Pre-De Luz taxable possessory interest may be valued by the comparative sales approach using the direct comparison method or the indirect comparison method, as described in subsection (e)(1), but with the following modifications: 
(A) Direct Comparison Method. In the direct comparison method, the present value of the unpaid future contract rent is not added to the sale price of the taxable possessory interest. 
(B) Indirect Comparison Method. In the indirect comparison method, the value of the possessor's rights as if owned in fee is reduced by the present value of the unpaid future contract rent of the taxable possessory interest, as well as by the value of those property rights for the period subsequent to the term of possession. 
(2) Cost Approach to Value. A Pre-De Luz taxable possessory interest may be valued by the cost approach as described in subsection (e)(2), but the present value of any unpaid future contract rent of the taxable possessory interest in land for the term of possession is also deducted. 
(3) Income Approach to Value. A Pre-De Luz taxable possessory interest may be valued by the income approach using the direct income method or the indirect income method, as described in subsection (e)(3), but with the following modifications: 
(A) Direct Income Method. In the direct income method, the net income to be capitalized is reduced by the unpaid future contract rent for the term of possession, as well as by allowed expenses. 
(B) Indirect Income Method. In the indirect income method, the present value of the unpaid future contract rent for the term of possession is deducted from the value of the fee interest, as well as the deduction of the present value of the property rights for the period subsequent to the term of possession. 
NOTE

Authority cited: Section 15606, Government Code. References: Sections 107 and 107.1, Revenue and Taxation Code.
HISTORY

1. New section filed 1-19-71; effective thirtieth day thereafter (Register 71, No. 4).
2. Amendment of subsection (b) filed 12-26-75; effective thirtieth day thereafter (Register 75, No. 52).
3. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
4. Amendment of first paragraph, repealer of subsections (a)-(e)(6), subsection relettering, and amendment of Note filed 4-6-98; operative 5-6-98 (Register 98, No. 15).
5. Amendment of section heading and repealer and new section filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
6. Change without regulatory effect amending subsection (e)(1)(A) filed 1-14-2003  pursuant to section 100, title 1, California Code of Regulations (Register 2003, No. 3).
§22. Continuity of Possessory Interests.
Note     •     History

(a) The continuity of possession or exclusive use necessary to establish a possessory interest will vary according to the location and character of the property. The continuity of use necessary for finding a possessory interest to exist is satisfied when the possessor of the property uses it to substantially the same extent as would an owner engaged in the same activity.
(b) Standards for determining the existence of taxable possessory interests based on continuity are:
(1) Actual or constructive possession or exclusive use of property on the lien date for the current year.
(2) Recurrent possession or exclusive use, whether or not the period extends through the lien date, when there is a history on the lien date of recurring use by the present or former possessors making a similar use of the property.
(3) Infrequent actual possession or exclusive use on a recurrent basis when the continuation of the right to possession or exclusive use is conditioned on or evidenced by the possessor having made a contribution to the value of the property by way of investment on or near the property occupied.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 107, 107.1 and 107.4, Revenue and Taxation Code.
HISTORY

1. New section filed 1-19-71; effective thirtieth day thereafter (Register 71, No. 4).
2. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
§23. Written Agreements As to Term of Possessory Interests.
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 107, 107.1 and 107.4, Revenue and Taxation Code.
HISTORY

1. New section filed 1-19-71; effective thirtieth day thereafter (Register 71, No. 4).
2. Amendment to NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
3. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§24. Possessory Interest Rights to Be Valued.
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 107, 107.1 and 107.4, Revenue and Taxation Code.
HISTORY

1. New section filed 1-19-71; effective thirtieth day thereafter (Register 70, No. 4).
2. Amendment to NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
3. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§25. Valuation of Post-deLuz Possessory Interests.
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 107, 107.1 and 107.4, Revenue and Taxation Code.
HISTORY

1. New section filed 1-19-71; effective thirtieth day thereafter (Register 71, No. 4).
2. Amendment of NOTE filed 10-26-77 effective thirtieth day thereafter (Register 77, No. 44).
3. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§26. Valuation of Pre-deLuz Possessory Interests.
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. Reference: Section 107.1, Revenue and Taxation Code.
HISTORY

1. New section filed 1-19-71; effective thirtieth day thereafter (Register 71, No. 4).
2. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§27. Valuation of Possessory Interests for the Production of Hydrocarbons.
Note     •     History

(a) The taxable value of all possessory interests for the production of gas, petroleum, and other hydrocarbon substances from beneath the surface of the earth shall be determined by application of the comparative sales or income approach in the manner prescribed in subsections (e)(1) or (e)(3) of Regulation 21, except as provided in subsection (b) of this regulation.
(b) The taxable value of a possessory interest for the production of hydrocarbon substances from beneath the surface of the earth shall be determined by application of the comparative sales or income approach in the manner prescribed in subsections (f)(1) or (f)(3) of Regulation 21 if:
(1) the interest was created or last extended or renewed on or before July 26, 1963, and the rate of royalties or other right to share in production was not reduced because of an increase in the assessed value of such interest; or
(2) the interest was created on or before July 26, 1963, and has been extended or renewed thereafter pursuant to authority which prohibits reduction of the rate of royalty or other right to share in production because of an increase in the assessed value of such interest.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 107, 107.2 and 107.3, Revenue and Taxation Code.
HISTORY

1. New section filed 1-19-71; effective thirtieth day thereafter (Register 71, No. 4).
2. Editorial correction deleting footnote filed 7-30-82 (Register 82, No. 31).
3. Change without regulatory effect amending section and Note filed 3-18-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 11).
§28. Examples of Taxable Possessory Interests.
Note     •     History

The following are examples of commonly encountered taxable possessory interests:
(a) The right to explore for, capture, and reduce to possession gas, petroleum, and other hydrocarbons in public lands.
(b) The possession of an employee in housing owned by a public agency, irrespective of whether occupancy of the housing is a condition of employment except when the facility also serves as the employee's work area to which the employer has full access.
(c) The right to cut and remove standing timber on public lands.
(d) The right to graze livestock or raise forage on public lands. 
(e) The possession of public property at harbors, factories, airports, golf courses, marinas, recreation areas, parks, and stadiums. Possessory interests may include land subject to the ultimate grant of a United States patent, commercial and industrial sites, and water rights.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 107, 107.1, 107.2, 107.3 and 107.4, Revenue and Taxation Code.
HISTORY

1. New section filed 1-19-71; effective thirtieth day thereafter (Register 71, No. 4).
2. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
§29. Possessory Interests in Taxable Government-Owned Real Property.
Note     •     History

(a) Definitions. For purposes of this rule:
(1) “Assessed value” is defined in subdivision (a) of section 135 of the Revenue and Taxation Code.
(2) “Improvements” are defined in rule 122.
(3) “Land” is defined in rule 121.
(4) A “lease for agricultural purposes” is a lease for the purpose of the production or husbandry of plants or animals, including gardening, horticulture, fruit growing, and the storage and marketing of agricultural products.
(5) “Other taxable improvements” are improvements owned by a local government outside of its boundaries that are taxable for property tax purposes pursuant to section 11(a), excluding taxable replacement improvements.
(6) “Real property” is the appraisal unit of real property, as defined in section 104 of the Revenue and Taxation Code, that persons in the marketplace commonly buy and sell as a unit or that is normally valued separately.
(7) “Section 11” means section 11 of Article XIII of the California Constitution.
(8) The “section 11 taxable possessory interest limitation amount” means the fair market value of the taxable government-owned real property on the lien date less the section 11 value of the taxable government-owned real property on the lien date.
(9) The “section 11 value of taxable government-owned real property” means the sum of: (i) the section 11 assessment amount for the taxable lands included in the real property on the lien date, computed pursuant to subdivisions (b) and (c) of section 11; (ii) the section 11 assessment amount for any taxable replacement improvements included in the real property on the lien date computed pursuant to the provisions of subdivision (d) of section 11; and (iii) the fair market value of other taxable improvements included in the real property on the lien date, if any.
(10) “Taxable government-owned real property” is real property owned by a local government outside of its boundaries that is taxable for property tax purposes pursuant to section 11(a).
(11) “Taxable lands” are lands owned by a local government outside of its boundaries that are taxable for property tax purposes pursuant to section 11(a).
(12) “Taxable possessory interest” is defined in rule 20.
(13) “Taxable replacement improvements” are improvements owned by a local government outside of its boundaries that are taxable for property tax purposes pursuant to section 11(a) because they were constructed by the local government to replace improvements that were taxable when acquired.
(14) The “total assessed value of all taxable possessory interests” means the aggregate assessed values of all taxable possessory interests in an appraisal unit of taxable government-owned real property on the lien date.
(b) Taxable possessory interests in taxable government-owned real property.
Except as set forth below in subsection (c) of this regulation, taxable possessory interests in taxable government-owned real property, excluding those created as a result of the possessor having a lease for agricultural purposes, shall be assessed and taxed for purposes of property taxation in the same manner as other taxable possessory interests.
(c) Limitation on the assessment of taxable possessory interests in taxable government-owned real property.
On each lien date, the total assessed value of all taxable possessory interests in an appraisal unit of taxable government-owned real property shall be determined. If the total assessed value of all taxable possessory interests on the lien date exceeds the section 11 taxable possessory interest limitation amount on the lien date, then the assessed values of the taxable possessory interests shall be reduced as follows: (i) if there is only one taxable possessory interest in the appraisal unit of taxable government-owned real property on the lien date, then the assessed value of that taxable possessory interest shall be reduced so that it does not exceed the section 11 taxable possessory interest limitation amount; or (ii) if there is more than one taxable possessory interest in the appraisal unit of taxable government-owned real property on the lien date, then the assessed value of each such taxable possessory interest shall be ratably reduced in the proportion that it bears to the total assessed value of all taxable possessory interests until the total assessed value of all taxable possessory interests no longer exceeds the section 11 taxable possessory interest limitation amount.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Article XIII, Section 11, California Constitution.
HISTORY

1. New section filed 1-10-2002; operative 2-9-2002 (Register 2002, No. 2).
§31. Petroleum Products Value Schedule.
Note     •     History

NOTE

Authority cited: Sec. 15606, Gov. Code. Reference: Articles 1 and 1.5, Chapter 1, Part 3, Division 1 and Sections 110, 401 and 401.5, Revenue and Taxation Code.
HISTORY

1. New section filed 12-14-67; effective thirtieth day thereafter (Register 67, No. 50).
2. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
3. Repealer filed 9-22-80; effective thirtieth day thereafter (Register 80, No. 39).
§41. Market Value of Timberland.
Note     •     History

(a) The Timber Appraisal Unit. In determining the timber to be valued as a unit, there shall be combined those parcels having:
(1) The same legal ownership. Timber sale contracts shall not be included in the unit.
(2) Commercial timber production as a dominant use.
(3) Geographical and physical conditions which permit similar treatment and economic removal of the timber to a common processing center. The typical practices of timberland owners and timber purchasers shall be used as a guide to indicate the geographical areas which are suitable for inclusion in the unit. Parcels shall not be excluded from the unit because they are outside the county, or because they are eligible for assessment under section 423.5 of the Revenue and Taxation Code.
(b) Immediate Harvest Value of Timber. The immediate harvest value of the timber on each of the separate parcels in the unit shall be determined. Immediate harvest value is the amount of cash or its equivalent for which timber would be transferred from a willing and informed seller to a willing and informed buyer, both seeking to maximize their incomes, if the timber could be harvested in the forthcoming year. The appraiser must consider all elements of value, such as volume by species, quality, defect, market conditions, volume per acre, size of timber, accessibility, topography, logging conditions, and distance from a processing center capable of utilizing the timber.
(c) Market Value of Timber. This section shall only apply to timber in the unit not eligible for assessment under section 423.5 of the Revenue and Taxation Code. The immediate harvest value of the timber on the timber appraisal unit is synonymous with market value if all the merchantable timber may reasonably be harvested in the forthcoming year. If the immediate harvest value of the timber on the appraisal unit is not synonymous with market value, it shall be converted to market value by application of a valuation factor to the immediate harvest value of the timber on each parcel in the unit. In determining the valuation factor, the appraiser shall consider the effect on market value of the total timber volume on the unit and the length of time over which the owner and knowledgeable prospective purchasers might reasonably be expected to harvest the timber, as indicated by sales of comparable timbered properties.
(d) Market Value of Timberland. This section shall only apply to areas in the unit not eligible for assessment under section 423.5 of the Revenue and Taxation Code. The market value of the timber on each parcel in the appraisal unit shall be added to the market value of the land as determined by the comparative sales approach. When land included within the timber appraisal unit has uses in addition to timber production, the appraiser shall determine its value with consideration for such uses, as evidenced by recent sales of comparable land. Allowances must be made for the value of any trees or improvements included in the sales of properties used as indicators of the value of land in the appraisal unit.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 110, 401, 423.5, 1816.1 and 1816.2, Revenue and Taxation Code.
HISTORY

1. New section filed 3-29-68; effective thirtieth day thereafter (Register 68, No. 13).
2. Correctory amendment filed 5-17-68; effective upon filing (Register 68, No. 19).
3. Amendment filed 12-22-72; effective thirtieth day thereafter (Register 72, No. 52).
4. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
5. Editorial correction of NOTE filed 3-15-83 (Register 83, No. 12).
§45. Separate Determination of Value for Owner-Occupied Residential Dwellings.
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. Reference: Section 401.6, Revenue and Taxation Code.
HISTORY

1. New section filed 4-21-78 as an emergency; effective upon filing (Register 78, No. 16).
2. Correction of adoption date filed 5-12-78 (Register 78, No. 16).
3. Certificate of Noncompliance (Repealer by operation of Section 11422.1, Gov. C.) filed 7-19-78 (Register 78, No. 29).
§51. Agreements Qualifying Land for Assessment As Open-Space Lands.
Note     •     History

An agreement made pursuant to the Land Conservation Act of 1965 prior to November 10, 1969, qualifies for restricted-use assessment pursuant to sections 423 and 426 of the Revenue and Taxation Code if, taken as a whole, it provides restrictions, terms, and conditions which are substantially similar to or more restrictive than those which were required by such act for a contract at the time the agreement became effective or which have subsequently been made less restrictive by the Legislature.
(a) Mandatory Provisions. The agreement must contain provisions at least as restrictive as the following:
(1) An initial term of years sufficient to make the agreement effective for ten successive lien dates and an annual renewal date at which time another year is automatically added to the term unless a notice of nonrenewal is given prior to such date.
(2) An exclusion of uses for the duration of the agreement other than agricultural uses and compatible uses as defined by the Land Conservation Act, the agreement, or the resolution establishing the agricultural preserve in which the property is located.
(3) A provision making the agreement binding upon and inuring to the benefit of all successors in interest of the owner.
(b) Disqualifying Provisions. An agreement in order to qualify for restricted use assessment must not contain any of the following:
(1) A provision purporting to bind the assessor to a particular assessment formula.
(2) A provision nullifying the agreement by reason of the owner's death or factors arising because of his death.
(c) Cancellation. The agreement may contain a cancellation provision as to all or part of the land if the following procedures are required under the terms of the agreement:
(1) Cancellation by mutual agreement, which may consist of a request by the owner and the approval by the board of supervisors or city council of the cancellation.
(2) A public hearing before the board or council.
(3) Notice of hearing by mail to each owner in the agricultural preserve of land under contract or agreement and publication of notice pursuant to section 6061 of the Government Code, provided, however, that a county or city may provide for such notice by ordinance instead of incorporating this requirement in the agreement.
(4) Findings by the board or council that cancellation is not inconsistent with the purposes of the Land Conservation Act of 1965 and is in the public interest.
The existence of an opportunity for another use of the land shall not be sufficient reason for cancellation. A potential alternative use of the land may be considered only if there is no proximate land not subject to a Land Conservation Act contract or agreement suitable for the use to which it is proposed the subject land be put. The uneconomic character of an existing agricultural use shall not be sufficient reason for cancellation. The uneconomic character of the existing use may be considered only if there is no other reasonable or comparable agricultural use to which the land may be put.
(d) Cancellation Fee-Waiver or Deferral. A provision for cancellation of the agreement must carry with it a cancellation fee payable by the owner to the county treasurer as deferred taxes which is at least 50 percent of the full market value of the land when relieved of the restriction, as found by the assessor, multiplied by the latest assessment ratio that had been published pursuant to section 251 of this code when the agreement was initially entered into. The determination of unrestricted value may be made the subject of an equalization hearing.
The agreement may provide for waiver or deferral by the board of supervisors or city council and may authorize the board or council to make the waiver or deferral contingent upon future action of the landowner if the agreement provides for a lien on the subject land securing the performance of the act upon which the waiver or deferral is made contingent. Waiver or deferral of the cancellation fee or a portion thereof may be allowed by the agreement if the waiver is subject to these findings by the board or council:
(1) It is in the public interest and the best interests of the program to conserve agricultural land that such payment be waived or deferred.
(2) The reason for the cancellation is an involuntary transfer or involuntary change in the use of the land and the land is not suitable and will not be immediately used for a purpose which produces a greater economic return to the owner.
(e) Other Provisions. If an agreement contains a clause relating to any of the following subjects, it may do so only under the conditions stated:
(1) A provision nullifying the agreement at or immediately before the time an action in eminent domain is filed or land is acquired in lieu of eminent domain (a) if the fee title, or other interest less than fee which would prevent the land from being used for agricultural or compatible uses, is being condemned and (b) if the agreement is nullified only as to land actually condemned or acquired or as to such land and a remaining portion that is rendered unsuitable for agricultural or compatible uses.
(2) A provision requiring the payment of liquidated damages by the landowner in case of breach of the agreement if this remedy does not impair enforcement of the agreement by injunction or specific performance.
(3) A provision cancelling or terminating an agreement upon annexation of the subject land by a city if the land was within one mile of the city at the time the agreement was initially executed, the city protested the execution of the agreement pursuant to section 51243.5 of the Government Code, and the city states its intent not to succeed in its resolution of intention to annex.
(f) Substantial Similarity. An agreement having a provision which is more restrictive than required by the Land Conservation Act of 1965 for a contract may qualify even though it is deficient in some other respect. The mandatory provisions of subparagraph (a), however, are minimum requirements which if deficient cannot be compensated for from some other source. Similarly, the disqualifying provisions of subparagraph (b) are such a substantial departure from the statutory provisions for a contract that their existence cannot be offset by other more restrictive provisions. A deficiency in the procedures set forth in subparagraphs (c) and (d) or in the conditions in subparagraph (e) may be compensated for by other more restrictive provisions except that, with respect to subparagraphs (c) and (d), an agreement that contains a cancellation provision cannot dispense with basic requirements of (1) a public hearing on a cancellation request of which the public is given notice and (2) findings by the board or council based on the evidence.
An agreement that does not allow a county or city to waive the cancellation fee under any circumstances is more restrictive than the requirements of the Land Conservation Act for a contract. Such an agreement is substantially similar to a contract even though it also allows a reduction of the cancellation fee after notice of nonrenewal has been given by the proportion that the number of whole years remaining until expiration of the agreement bears to ten.
(g) Effective Date. This rule shall be effective from and after March 1, 1971.
NOTE

Authority cited: Section 15606, Government Code. Reference: Article 1.5, Chap. 3, Part 2, Div. 1, Revenue and Taxation Code.
HISTORY

1. New section filed 2-24-70; effective thirtieth day thereafter (Register 70, No. 9).
§52. Restricted Value of Perennials Other Than Timber As Open-Space Lands.
Note     •     History

(a) Minimum Value. The restricted value of land planted to fruit-bearing trees, nut-bearing trees, vines, bushes, or other perennials except timber, and the perennials thereon, pursuant to sections 423 and 429 of the Revenue and Taxation Code, shall be determined by capitalizing the larger of (1) the net income that the land and such perennials can be expected to yield under prudent management and subject to the applicable restrictions or (2) the net income that the land can be expected to yield over a typical rotation period, as evidenced by historic cropping patterns and agricultural commodities grown, if planted to typical annuals grown in the area. “Typical annuals grown in the area” means annual crops that are actually grown in substantial quantities on land that is comparable to the subject property within the meaning of section 402.5 of the Revenue and Taxation Code.
(b) Capitalization of Rental Income. In estimating such net income, property tax appraisers shall consider the rental income from recently consummated leases, negotiated at arm's length, for comparable plantings and the net income from owner-operated comparable plantings, giving more weight, other things equal, to the former than to the latter. Leases, however, must be for the full life of the perennials, or multiples thereof, if the rental income is to be used without adjustment for variations in expected yields as young perennials mature and older perennials decline. Allowance must also be made, when using rental income, for amortization of the landlord's investment in perennials and other depreciable property used in the enterprise.
(c) Capitalization of Owner-Operator's Income. When estimating the value of a planting of perennials by capitalizing the income it is expected to yield a prudent owner-operator, property tax appraisers shall first estimate the annual net income from the total operating unit over and above the income required to provide a fair return on capital invested in operating assets other than the land and perennials and to amortize such investments if they are depreciable. Such net income shall then be segregated into (1) the net income that can be fairly attributed to the land which shall not be less than the net income the land could be expected to yield if planted to typical annual crops grown in the area, and (2) the balance, which shall be considered the income from the perennials. The income attributed to the land shall be capitalized in perpetuity by dividing it by the capitalization rate prescribed in section 423(b) of the Revenue and Taxation Code. The income from perennials shall be capitalized by a method that provides for return of capital utilizing the capitalization rate prescribed in section 423(b). The present worths of the income streams thus imputed to the land and the perennials shall be added to derive the restricted value of the land and perennials.
(d) Estimation of Income. The income attributable to the land shall be estimated by one of the following procedures:
(1) Estimate the amount of net income the land would yield if planted to typical annual crops grown in the area. This procedure is particularly appropriate where comparable lands are commonly planted to annual crops.
(2) Estimate the amount of net income required under current market conditions to justify an investment equal to the replacement cost of the perennials with a life equal to the estimated total economic life of the perennials and subtract this amount of net income from the estimate of the total net income from the land and perennials. This procedure is particularly appropriate where bare land sales are uncommon and comparable land is seldom planted to annuals.
(3) Estimate the market value of the land by the comparative sales approach and multiply this estimate by a market-derived rate of return. Sales used for comparative purposes shall not include those materially influenced by the possibility of non-agricultural uses. The market value thus derived for the land shall be used only for the purpose of allocating income between the land and perennials.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 423 and 429, Revenue and Taxation Code.
HISTORY

1. New section filed 2-24-70; effective thirtieth day thereafter (Register 70, No. 9).
2. Amendment filed 1-19-71; effective thirtieth day thereafter (Register 71, No. 4). 
3. Amendment of section heading, section and Note filed 5-13-98; operative 6-12-98 (Register 98, No. 20).
§53. Open-Space Value of Timberland.
Note     •     History

(a) The Timber Appraisal Unit. The timber appraisal unit shall be as defined in Property Tax Rule No. 41, except that it shall include only properties eligible for assessment under section 423.5 of the Revenue and Taxation Code.
(b) Taxable Value. Land and standing timber used for the production of timber for commercial purposes, whether planted or of natural growth, when eligible for assessment under section 423.5 of the Revenue and Taxation Code, shall be valued by determining the present worth of the net income which the future harvest of timber crops can reasonably be expected to yield and the present worth of the net income attributable to other allowed compatible uses of the land. The value of timber which is exempt under Article XIII, section 3(j) of the State Constitution shall be excluded when determining taxable value of the property, but the value of land supporting exempt timber shall be included and determined in accordance with section (f).
(c) Net Income. The amount of income to be capitalized is the net income which an informed owner or an informed buyer of the timber appraisal unit may anticipate on the lien date that the property assessable under section 423.5 of the Revenue and Taxation Code will yield in the future from the harvest of timber crops and the net income from other allowed compatible uses of the property. Net income shall be estimated as follows:
(1) When computing the expected annual or periodic net income from the harvest of timber crops, the appraiser shall determine the difference between revenue and expenditures. Revenue shall be estimated by multiplying the expected annual or periodic volume of timber to be harvested in the future by the immediate harvest value per unit of volume for similar timber. Revenue shall include all income from all forest products. Expenditures shall include the estimated outlays of money which are ordinary and necessary for the production and maintenance of revenue as defined in section 423 of the Revenue and Taxation Code.
(2) When computing the net income attributable to compatible uses, the appraiser shall determine the difference between revenues and expenditures for each type of compatible use. Revenue shall be estimated on the basis of rents, fees, or charges for the use as provided by recently consummated leases, contracts, or verbal agreements on the subject property or comparable properties. Expenditures shall include any outlays which are ordinary and necessary for the production of revenue from the compatible use.
(d) Income Capitalization. The shape of the future net income stream shall govern the method used to discount the various future incomes.
(1) If the property is capable of producing an equal annual income in perpetuity or may be valued as if it will produce an equal annual income, the expected annual net income shall be divided by the capitalization rate to estimate present worth.
(2) If the property is capable of producing an equal periodic income or an income in perpetuity or may be valued as if it will produce an equal periodic income, the expected net income shall be divided by (1+p)n-1, where n is the number of years between receipt of the periodic incomes and is the capitalization rate.
(3) If the property is not capable of producing perpetually and equal annual income or an equal periodic income, but is capable of producing unequal annual or periodic incomes at regular or irregular intervals, the present worth of the net income stream shall be estimated by computing the sum of the present worths of the individual incomes on a year-by-year or period-by-period basis.
(e) Areas Without Timber Exemption. The appraiser shall estimate the annual or periodic net income from these areas in accordance with section (c). Taxable value will be the present worth of land and timber in accordance with section (d), using the capitalization rate prescribed in section 423(b)(1), (2), and (3) of the Revenue and Taxation Code.
(f) Areas with Timber Exemption. In determining the taxable value for these areas by excluding the value of exempt timber, the appraiser shall:
(1) Derive a total value for the land and exempt timber by:
(A) Estimating the annual or periodic net income from these areas in accordance with section (c).
(B) Computing the present worth of the land and timber in accordance with section (d), using a capitalization rate which is the sum of the bond and risk rate components prescribed in section 423(b)(1) and (2) of the Revenue and Taxation Code.
(2) Allocate the total value derived in (1) between the land and exempt timber by:
(A) Estimating the market value of the property using the comparative sales approach.
(B) Subtracting the estimated market value of the timber. The remainder will be the estimated market value of the land under the exempt timber and is to be used only for purposes of allocating present worth between the exempt timber and the land thereunder.
(C) Multiplying present worth of the property, as determined in (1)(B), by the ration of the market value of the land to the total market value of the property, as determined from (2)(A) and (B), to derive the present worth of the land plus the present worth of the taxes.
(D) Computing the taxable value of the land by multiplying the present worth derived in (2)(C) by a fraction in which the numerator is the sum of the capitalization rate components prescribed in section 423(b)(1) and (2) and the denominator is the sum of the capitalization rate components prescribed in section 423(b)(1), (2), and (3).
(g) Total Taxable Property Value. The taxable value for the nonexempt areas, as determined in section (e), shall be added to the taxable value for the exempt areas, as determined in section (f), to determine the total taxable property value. The value assigned to each parcel in the unit shall reasonably reflect each source of income that is attributable to the parcel.
(h) Effective Date. This rule shall be effective from and after March 1, 1973.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 110, 401 and 423.5, Revenue and Taxation Code.
HISTORY

1. New section filed 12-22-72; effective thirtieth day thereafter (Register 72, No. 52).
2. Amendment of subsection (b) filed 12-26-75; effective thirtieth day thereafter (Register 75, No. 52). 
§54. Valuation of Land Under a Land Conservation Act Agreement That Fails to Qualify Under Rule 51.
Note     •     History

Land (other than timberland), fruit- or nut-bearing trees, and vines subject to an enforceable Land Conservation Act agreement that, according to the criteria set out in section 51 of this chapter, do not qualify for assessment under section 423 of the Revenue and Taxation Code shall be appraised at market value, pursuant to section 402.1 of that Code. Any conflicting assessment provisions in the agreement are unconstitutional and shall be disregarded.
The market value of such land, or of such land and perennials, shall be estimated by using either the comparative sales method or the income method or both.
(a) The Comparative Sales Approach. If the comparative sales method is used and the restrictions imposed by the agreement have more than a minimal effect on the value of the property, the recently sold properties to which the subject property is compared shall be those similarly restricted as to use and preferably so restricted for a similar remaining period. If there is substantial evidence, however, that the restrictions on the subject property will be removed or materially modified in the predictable future, the subject property may also be compared with recently sold properties which have natural limitations on their use that are adjudged to have substantially the same effect as the legal limitations on the subject property. The sold properties shall also have the characteristics described in section 402.5 of the Revenue and Taxation Code.
(b) The Income Approach. If the income method is used and the restrictions imposed by the agreement have more than a minimal effect on the value of the property, the appraiser shall proceed as follows:
(1) Estimate, preferably by reference to sale prices of comparable properties not subject to Land Conservation Act agreements or contracts, the market value that the land, or the land and perennials, would have on the current lien date if the property were not subject to the agreement but were subject to any other applicable restrictions and assume that this will be the value of the land, or of the land and perennials, when free of the agreement restrictions;
(2) Using a market-derived capitalization rate (including an appropriate property tax component), find the present worth of the value derived in step 1 deferred by the number of years or fractions thereof until the land, or the land and perennials, will be freed of the agreement restrictions by a notice of nonrenewal that has already been given or by a notice that could be given prior to the agreement's next anniversary date;
(3) Using the capitalization rate prescribed by section 423(b) of the Revenue and Taxation Code or a capitalization rate otherwise derived that is appropriate for an income stream which does not include capital appreciation, estimate the present worth of the income (including any amenities not represented by money income) from the restricted use of the land, or of the land and perennials, during the period between the lien date and the date to which the value derived in step 1 is deferred:
(4) Add the present worths derived in steps 2 and 3.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 402.1, 402.5 and 421, Revenue and Taxation Code.
HISTORY

1. New section filed 3-26-71; effective thirtieth day thereafter (Register 71, No. 13).
§60. Historical Property Contracts.
Note     •     History

NOTE

Authority cited: Section 15606, Gov. Code. Reference: Sections 402.1, 402.5 and 1161 of Div. 1, Revenue and Taxation Code.
HISTORY

1. New section filed 11-23-73; effective thirtieth day thereafter (Register 73, No. 47).
2. Amendment of subsection (a) filed 12-26-75; effective thirtieth day thereafter (Register 75, No. 52).
3. Repealer filed 2-3-78; effective thirtieth day thereafter (Register 78, No. 5).
Chapter 2. Assessment
Article 1. Prescription of Forms
§101. Board-Prescribed Exemption Forms.
Note     •     History

(a) The procedure and forms prescribed by the board for claiming the exemptions named in Article 2, Chapter 1, Part 2, Division 1, of the Revenue and Taxation Code shall be employed by each assessor in the administration of the laws relating to such exemptions. Except as specifically authorized by the board with respect to heading, name and address of the property owner, location of the property, assessor's use columns, the sequence of questions, and the like, the assessor shall not change, add to, or delete the specific wording of the exemption form prescribed by the board, but the assessor may otherwise arrange the content and alter the size and design of an exemption form to meet the needs of office procedures and facilities. 
(b) Annually, on or before December 1, the assessor shall notify the board, on a checklist provided by the board, of those board-prescribed exemption claim forms, including instructions, which the assessor:
(1) will reproduce from the current prototype forms and instructions distributed by the board for use for the succeeding assessment year; 
(2) will produce by other means for use for that year; and 
(3) will have no need. 
(c) When filing the checklist, the assessor shall submit to the board (either in hard copy or electronically) for approval a copy of each form, including instructions, which the assessor will produce by means other than reproduction of the prototypes. If a form does not conform with the specifications prescribed by the board, as required by section 251 of the Revenue and Taxation Code and this rule, the assessor shall be notified in writing of the variances. The assessor shall submit a revised form within 30 days of the date of the notice. 
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 251, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-7-73; effective thirtieth day thereafter (Register 73, No. 32). For prior history, see Register 69, No. 38.
2. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
3. Editorial correction of NOTE filed 7-30-82 (Register 82, No. 31).
4. Amendment filed 1-23-2008; operative 2-22-2008 (Register 2008, No. 4).
Article 2. Classification of Property
§121. Land.
Note     •     History

Land consists of the possession of, claim to, ownership of, or right to possession of land; mines, quarries, and unextracted mineral products; unsevered vegetation of natural growth; standing timber, whether planted or of natural growth; and other perennial vegetation that is not an improvement (see section 122). Where there is a reshaping of land or an adding to land itself, that portion of the property relating to the reshaping or adding to the land is land. However, where a substantial amount of other materials, such as concrete, is added to an excavation, both the excavation and the added materials are improvements, except that whenever the addition of other materials is solely for the drainage of land to render it arable or for the drainage or reinforcement of land to render it amenable to being built upon, the land, together with the added materials, remains land. In the case of property owned by a county, municipal corporation, or a public district, however, fill that is added to taxable land is an improvement.
NOTE

Authority cited: Section 15606, Gov. Code. References: Sections 110 and 401, Revenue and Taxation Code.
HISTORY

1. New sections (121 through 124) filed 12-19-67; effective thirtieth day thereafter (Register 67, No. 51).
2. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
§122. Improvements.
Note     •     History

Improvements consist of buildings, structures, fixtures, and fences erected on or affixed to land; planted fruit and nut trees and vines that are taxable, other than date palms between four and eight years of age; and planted ornamental trees and vines. Where a substantial amount of materials other than land, such as concrete, is added to an excavation, both the excavation and the added materials are improvements, except that whenever the addition of other materials is solely for the drainage of land to render it arable or for the drainage or reinforcement of land to render it amenable to being built upon, the land, together with the added materials, remains land. In the case of property owned by a county, municipal corporation or a public district, fill that is added to taxable land is an improvement.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 105, 110, 401 and 401.5, Revenue and Taxation Code.
HISTORY

1. New NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
§122.5. Fixtures.
Note     •     History

(a) Definition.
(1) A fixture is an item of tangible property, the nature of which was originally personalty, but which is classified as realty for property tax purposes because it is physically or constructively annexed to realty with the intent that it remain annexed indefinitely.
(2) The manner of annexation, the adaptability of the item to the purpose for which the realty is used, and the intent with which the annexation is made are important elements in deciding whether an item has become a fixture or remains personal property. Proper classification, as a fixture or as personal property, results from a determination made by applying the criteria of this rule to the facts in each case.
(3) The phrase “annexed indefinitely” means the item is intended to remain annexed until worn out, until superseded by a more suitable replacement, or until the purpose to which the realty is devoted has been accomplished or materially altered.
(b) Physical Annexation.
(1) Property is physically annexed if it is attached to, imbedded in, or permanently resting upon land or improvements in accordance with section 660 of the Civil Code, or by other means that are normally used for permanent installation. If the property being classified cannot be removed without substantially damaging it or the real property with which it is being used, it is to be considered physically annexed. If the property can be removed without material damage but is actually attached, it is to be classified as a fixture unless there is an intent, as manifested by outward appearance or historic usage, that the item is to be moved and used at other locations.
(2) Property may be considered physically annexed if the weight, the size, or both are such that relocation or removal of the property would be so difficult that the item appears to be intended to remain in place indefinitely.
(3) Property shall not be considered physically annexed to realty solely because of attachment to the realty by “quick disconnect” attachments, such as simple wiring and conduit connections.
(c) Constructive Annexation.
(1) Property not physically annexed to realty (including fixtures) is constructively annexed if it is a necessary, integral, or working part of the realty. Factors to be considered in determining whether the property is a necessary, integral, or working part of the realty are whether the nonattached item is designed and/or committed for use with specific realty, and/or whether the realty can perform its desired function without the nonattached item.
(2) Property connected to the realty by quick disconnect conduits which contain power or electronic cable, or allow for heating, cooling, or ventilation service to the connected property is constructively annexed only if it satisfies one of the factors in paragraph (c)(1).
(d) Intent.
(1) Intent is the primary test of classification. Intent is measured with--not separately from--the method of attachment or annexation. If the appearance of the item indicates that it is intended to remain annexed indefinitely, the item is a fixture for property tax purposes. Intent must be inferred from what is reasonably manifested by outward appearance. An oral or written agreement between parties, such as a contract between lessor and lessee, is not binding for purposes of determining intent.
(2) The phrase “reasonably manifested by outward appearance” means more than simple visual appearance. A reasonable knowledge of the relationship of the item being classified to the realty with which it is being used is required to determine whether physical or constructive annexation has occurred.
(3) Historic usage of a property may be considered in determining whether or not a property is intended to remain annexed indefinitely. “Historic usage” means the normal and continuing use of the property as an item that is annexed either indefinitely or only temporarily.
(e) Examples. The following examples are illustrative of the foregoing criteria. The classification in each example is based only on the limited description offered. Classification of an actual property must be based on all the relevant facts concerning that property.
(1) A stair and a walkway that are bolted to a large machine (the machine is a fixture) to facilitate operation and routine maintenance of the machine are fixtures because they are physically annexed by the bolts and they are necessary for the normal operation of the machine. A stair and a walkway that are bolted to a machine to facilitate a major overhaul of the machine and that will be removed and used elsewhere after the overhaul is completed are personal property because the physical attachments are clearly temporary.
(2) A printing press that weights several tons, is held in place by gravity, and which because of its size cannot be removed from the building without substantial damage to the building is regarded as physically annexed and is a fixture. A free-standing safe, although of considerable weight, is personal property if it is movable without damage to itself or to the real property wherein it is located and the real property was not designed or constructed specifically to accommodate the safe.
(3) Headsets and special stools designed to be used with a telephone switchboard (the switchboard is a fixture) are not physically annexed, but they are constructively annexed because they are designed specifically for use with the switchboard, the switchboard cannot be used properly without them, and they are not usable or only marginally usable independently of the switchboard. Ordinary office chairs used with a switchboard remain personal property because their design makes them fully usable for other purposes.
(4) A special tool, die, mold, or test device is constructively annexed to a fixture if it is specifically designed for and is in use or has been used on or in conjunction with the particular fixture and the intended use of the fixture would be impaired without the item. A common hand tool or general-purpose test device is personal property even if in practice the item is used only on the fixture.
(5) A crane that operates on rails but is too large or too heavy for ordinary railroad tracks or cannot be operated off the property because the rails are not connected to railroad tracks is constructively annexed to the rails.
(6) A floating dry dock that is designed for use with adjacent shore facilities at a single location is a fixture even though the dry dock is occasionally moved to facilitate dredging under the dry dock. A floating dry dock that is used at several locations is personal property even though it is used primarily at one location in conjunction with special shore facilities.
(7) Computer hardware components are fixtures if extensive improvements, such as a building (or portion of a building), air conditioning, emergency power supply, and a fire suppression system are constructed specifically to accommodate the components, and the improvements are not useful or are only marginally useful other than as housing and support of the components. A computer is personal property if it can be moved without material damage or expense and it is not essential to the intended use of the real estate. A computer is constructively annexed to a fixture if it is dedicated to controlling or monitoring the fixture and is otherwise necessary for the intended use of the fixture.
(8) Machines that are not physically annexed to the realty and that do not operate interdependently with the realty are personal property even though special flooring, conduits, and/or overhead racks are installed to accommodate wiring from a power source to the machines, because special accommodations for wiring are normal features of an industrial building and the building is fully usable for its intended purpose (as an industrial building) without the particular machines.
(9) An automated teller machine (ATM) typically consists of a safe, monitor, keypad, central processing unit, magnetic card reader, cash dispenser, printer/transaction record dispenser, and deposit receptor.  An ATM installed as a free-standing or counter-top unit within a building, such as a bank, supermarket or other retail establishment, is personal property.  However, an ATM installed in a structure that was built primarily for the purpose of housing the ATM is a fixture because the realty cannot perform its desired function without the ATM.  An ATM installed in the wall of a building is a fixture because the portion of the realty containing the ATM was designed or extensively modified for the specific purpose of housing the ATM and cannot perform its desired function without the ATM.
(10) A wind machine consists of a large fan mounted on a tower, a motor to drive the fan, a fuel tank or electrical hookup and related equipment necessary for its operation. Wind machines are used for agricultural purposes in the protection of crops from adverse weather conditions. When a wind machine is physically annexed to the realty with the intent that it be annexed indefinitely as provided in this rule, it is properly classified as real property and assessed as a fixture. A wind machine which is a fixture is an improvement to realty as defined in Revenue and Taxation Code section 105 and Rule 122, but it is not a building, a structure or a fence. In a typical application, a wind machine is physically annexed to the realty because it is attached to, imbedded in or permanently resting upon land or improvements as provided in subsection (b)(1) of this rule with the intent that it remain “annexed indefinitely” as that phrase is defined in subsection (a)(3) of this rule. A wind machine that is attached to or resting on a truck bed or other movable equipment is personal property and not a fixture because it is not intended to remain annexed indefinitely to realty.
For property tax assessment purposes, wind machines that are defined as fixtures shall be appraised in accordance with subsection (e) of Rule 461, which subsection provides that, for purposes of decline in value determinations, fixtures and other machinery and equipment classified as improvements constitute a separate appraisal unit.
NOTE

Authority cited: Section 15606(c), Government Code; and Statutes of 1982, Chapter 1556, Section 5. Reference: Sections 105 and 107, Revenue and Taxation Code; and Statutes of 1982, Chapter 1556, Section 5.
HISTORY

1. New section filed 10-18-83; effective thirtieth day thereafter (Register 83, No. 43).
2. New subsection (e)(9) filed 5-8-97; operative 6-7-97 (Register 97, No. 19).
3. Change without regulatory effect repealing and adding new subsection (e)(9) filed 12-19-97; operative 12-31-97 pursuant to Government Code section 11343.4(d) (Register 97, No. 51).
4. New subsection (e)(10) filed 1-7-2002; operative 2-6-2002 (Register 2002, No. 2).
5. Change without regulatory effect amending subsections (b)(1) and (e)(9)-(10) filed 2-4-2003 pursuant to section 100, title 1, California Code of Regulations (Register 2003, No. 6).
§123. Tangible Personal Property.
Note     •     History

All property that may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses, except land and improvements, is tangible personal property.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 106, 110, 401, 401.5 and 601, Revenue and Taxation Code.
HISTORY

1. New NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
2. Editorial correction of NOTE filed 7-30-82 (Register 82, No. 31).
§124. Examples.
Note     •     History

(a) The listing that follows is illustrative of the application of the foregoing rules to various items of property and is not intended to be inclusive of all items of property required to be classified. For the specific items listed, the classification shown will be followed unless there are persuasive distinguishing facts which warrant other classification. However, nothing herein requires classification of an item of property to be dependent upon anything more than what is reasonably manifested by outward appearances, and nothing herein shall preclude the application, to a value estimate of a combination of properties of more than one class, of a percentage representing the appraiser's determination of the amount attributable to each class.
(b) The foregoing rules of classification, together with the following listing, relate solely to classification of property and not to evaluation thereof. 
(1) Land 
Air rights  
Alfalfa  
Artichokes  
Asparagus  
Bushes  
Contoured Ground  
Date palms, 4 to 8 years old  
Ditches  
Embankments  
Fill (except on property owned by  
 county, municipal corporation or  
 public district)  
 Graded ground 
 Grasses, perennial, natural or planted 
 Levees 
 Leveled ground 
 Minerals 
 Roads, unpaved 
 Shrubs 
 Strawberry plants 
 Timber, standing 
 Water rights 
 Wells, oil and water 
(2) Improvements 
Air conditioner, built-in  
Alarm system  
Awnings  
Back bars  
Beds, wall  
Blast furnaces  
Blinds  
Boilers, built-in  
Booths, restaurant  
Booths, spray paint  
Bowling lanes  
Breakwaters, artificial (above fill)  
Buildings  
Cabinets, built-in  
Carpets, wall-to-wall  
Cash boxes, service station,  
 attached to stands  
Check-out stands, built-in  
Compressors  
Computer components operating an improvement,  
 for example an elevator 
 Concrete flatwork 
 Coolers, built-in 
 Cooler, water evaporator, attached to main line 
 Counters, bank 
 Counters, restaurant 
 Cranes, on fixed ways 
 Dams (except small earthen) 
 Drinking fountains 
 Ducts 
 Elevators 
 Escalators 
 Exhaust systems, built-in 
 Fences 
 Fill (on property owned by county, municipal corporation  
       or public district) 
 Flagpole 
 Floor covering, hard surface 
 Flumes 
 Foundations 
Fruit trees, taxable planted  
 (except date palms under 8  
 years of age)  
Furnishings, built-in  
Grape stakes, in place  
Grape trellises  
Kilns  
Kitchen appliances, built-in  
Laundry machines, launderette  
Lighting fixtures  
Machinery, heavy or attached,  
 inside or outside of building  
Music systems, coin and  
 electric boxes attached to  
 booth or counters  
Nut trees, taxable planted  
Organs, pipe  
Ovens, bake, attached  
Partitions, affixed  
Piling, for support of structure  
Printing press, built-in  
Pumps, fixed  
Radiators, steam  
Railroad spurs  
Refrigerator, built-in  
Roads, paved  
Safe deposit box nests, if attached to building 
Safes, imbedded 
Scales, truck 
Screens, theatre 
Shelves, attached 
Signs attached to buildings 
Signs, on separate supports 
Sink, built-in 
Sprinkler system, lawn 
Sprinkler system, fire 
Sprinkler system, agricultural (except portable) 
Stoves, built-in 
Tanks, buried 
Tanks, butane, propane and water softener, unburied but 
 which remain in place 
Tellers' cages 
Towers, radio and television 
Utilities, on-site 
Vault doors 
Vaults 
Vines, taxable, planted 
Walls 
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 110, 401, 401.5 and 601, Revenue and Taxation Code.
HISTORY

1. New NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
2. Amendment designating first and second paragraphs as subsections (a) and (b), redesignating former sections (a) and (b) as new subsections (b)(1) and (b)(2), and amending subsection (b)(2) filed 5-6-98; operative 6-5-98 (Register 98, No. 19).
§126. Grazing Rights As Possessory Interests.
History

HISTORY

1. Repealer filed 7-3-69; effective thirtieth day thereafter (Register 69, No. 27). For prior history, see Register 67, No. 51.
Article 3. Exemptions and Immunities
§131. Fruit and Nut Tree and Grapevine Exemption.
Note     •     History

(a) “Orchard” or “Vineyard” Defined. An orchard or a vineyard is a systematic planting of fruit and nut-bearing trees or grapevines as opposed to individual plantings for ornamental purposes. The exemption under Section 3(i), Article XIII, California Constitution, applies to such fruit and nut-bearing trees or grapevines planted in orchard or vineyard form. The fruit, nuts, or grapes, until harvested, are growing crops exempt from taxation under Section 3(h), Article XIII, California Constitution.
(b) Length of Exemption. The exemption applies to those trees in an orchard until four years after the season of planting in orchard form, and those vines in a vineyard until three years after the season of planting in vineyard form. The exemption ceases on the fifth lien date after the season of planting trees in orchard form, and on the fourth lien date after the season of planting vines in vineyard form. For example, fruit trees planted in orchard form in the 1995 planting season become assessable on the 2000 lien date. 
(c) Nursery Stock. Trees and vines in existence but unplanted in orchard or vineyard form on the lien date are not at that time within the coverage of the constitutional exemption. Fruit trees and nut trees and vines which are personal property are exempt pursuant to section 223 of the Revenue and Taxation Code, if owned by a grower but held for subsequent planting in orchard or vineyard form provided they are planted during the assessment year by the grower. Section 223 has no application to plant nurseries.
(d) Replacement Plantings. The exemption applies not only to complete new orchard and vineyard plantings, but also to those trees or vines in an orchard or vineyard under the age of four or three years respectively which constitute additions to or replacements of plantings in an orchard or vineyard.
(e) Grafting. Where a previously exempt tree or vine has attained commercial production and there is a grafting which causes a re-occurrence of a nonproducing period (except for nurse limbs), this shall be treated as a new planting which creates a new exemption period. Any other grafting or budding or inarching does not create a new exemption period.
(f) Date Palms. Date palms are subject to all of the foregoing regulations applicable to fruit and nut trees. From the lien date that they become taxable to their eighth year of age their value shall be included in the assessed value of the land. Thereafter they are assessable and taxable as improvements. (See section 105, Revenue and Taxation Code.)
(g) Enrollment. Fruit and nut-bearing trees and grapevines are not improvements while exempt from taxation. If the assessor places a value for such trees and vines on the roll, the entry shall be made in the personal property column. After the exemption expires their value is to be enrolled in the improvement column. (See section 105, Revenue and Taxation Code.)
(h) Structural Improvements. Stakes, trellises, fences, and other structural orchard and vineyard improvements are taxable both during and after the exemption period for trees and vines.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 105, 211 and 223, Revenue and Taxation Code.
HISTORY

1. New NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44). For prior history, see Register 75, No. 52.
2. Amendment of subsection (a) filed 1-11-83; effective thirtieth day thereafter (Register 83, No. 3).
3. Editorial correction of subsection (b) (Register 95, No. 48).
4. Change without regulatory effect amending subsections (a)-(b) filed 8-23-2004 pursuant to section 100, title 1, California Code of Regulations (Register 2004, No. 35).
§132. Cemetery Exemption.
Note     •     History

(a) Scope of Exemption. Upon timely application on the prescribed form, the cemetery exemption is available on property used or held exclusively for the burial or other permanent deposit of the human dead and property used or held exclusively for the care, maintenance or upkeep of such property or such dead, except any such property that is used or held for profit. 
(b) Meaning of “Property Used or Held Exclusively for Burial.” In this regulation “property used or held exclusively for burial” means (1) property in actual use or prepared, made available, sold or offered for sale or use for burial or other permanent deposit of the human dead; (2) property whose use is incidental to such burial purposes, as described in paragraph (c); and (3) passively held property that qualifies for exemption under paragraph (d).
(c) Incidental Use of Property. Property of an established cemetery which is held exclusively for burial purposes may be planted, landscaped, arborized or maintained if such planting, landscaping, arborizing or maintenance is incidental to the burial purpose, does not produce gross receipts for the claimant, and is for the purpose of embellishing adjacent cemetery property, preserving the appearance of the property and the surrounding area, preventing soil erosion or similar purposes.
(d) Passive Holding of Property. Passive holding of large sections of land for future cemetery use by an established cemetery is a basis for exemption only if:
(1) The property is held in good faith and exclusively for burial purposes;
(2) The property is dedicated for cemetery use pursuant to statute or otherwise;
(3) The property is qualified for use as a cemetery under zoning laws if applicable; and
(4) The size of the tract being held is reasonable upon the basis of population and mortality trends and tables for the area, the volume of burial conducted and anticipated by the cemetery organization holding the property, the likelihood of the cemetery organization continuing burial activities in the area during the period of anticipated use for burial purposes, and similar factors.
(e) Nonexempt Property of Profit-Making Cemetery Organizations. In addition to property descried in paragraphs (f) and (g), burial plots, niches or crypts held for sale by profit-making cemetery organizations are taxable. Burial plots, niches or crypts within a cemetery which is operated for profit are exempt from taxation once they are disposed of, provided the owners do not hold them for profit.
(f) Roads, Paths and Embellishment Areas. Roads, paths and embellishment areas in a cemetery, and lobbies, hallways and other common areas in a mausoleum or columbarium, the burial property of which is entirely exempt are also entirely exempt. Roads, paths and embellishment areas in a portion of a cemetery that is held by a profit-making organization and is not entirely exempt are exempt in the proportion that the exempt acreage in that portion bears to the total acreage in that portion. Lobbies, hallways and other common areas in a mausoleum or columbarium held by a profit-making organization, together with the mausoleum or columbarium site, are exempt in the proportion that the exempt burial property in the mausoleum or columbarium bears to the total burial property in the mausoleum or columbarium. The proportion that the exempt burial property bears to total burial property in a mausoleum or columbarium may be determined, at the assessor's option, by reference to either the number or the volume of crypts or niches.
(g) Nonexempt Property of Both Profit-Making and Nonprofit Cemetery Organizations. Property not used or held exclusively for burial or other permanent deposit of the human dead, or for the care, maintenance or upkeep of such property or such dead, such as floral shops, mortuaries, crematoriums, and orchard or cropland which produces gross receipts for the claimant, is not exempt whether owned by a profit-making or a nonprofit cemetery organization.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 204, 251, 254, 255, 256.5, 260, 270 and 271, Revenue and Taxation Code.
HISTORY

1. New NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
2. Editorial correction of NOTE filed 7-30-82 (Register 82, No. 31).
§133. Business Inventory Exemption.
Note     •     History

(a) Scope of Exemption.
(1) “Business inventories” that are eligible for exemption from taxation under Section 129 of the Revenue and Taxation Code include all tangible personal property, whether raw materials, work in process or finished goods, which will become a part of or are themselves items of personalty held for sale or lease in the ordinary course of business.
(A) The phrase “ordinary course of business” does not constitute a limitation on the type of property which may be held for sale or lease, but it does require that the property be intended for sale or lease in accordance with the regular and usual practice and method of the business of the vendor or lessor.
(B) The phrase “goods intended for sale or lease” means property acquired, manufactured, produced, processed, raised or grown which is already the subject of a contract of sale or which is held and openly offered for sale or lease or will be so held and offered for sale or lease at the time it becomes a marketable product. Property which is ready for sale or lease must be displayed, advertised or otherwise brought to the attention of the potential purchasers or lessees by means normally employed by vendors or lessors of the product.
(2) “Business inventories” includes:
(A) Containers or container material such as kegs, bottles, cases, twine and wrapping paper, whether returnable or not, if title thereto will pass to the purchaser or lessee of the product to be sold or leased therein.
(B) New and used oak barrels used in the manufacturing process that physically incorporate the flavor- and aroma-enhancing chemical compounds of the oak into wine or brandy to be sold, when used for this purpose. However, an oak barrel is no longer business inventory once it loses the ability to impart the chemical compounds that enhance the flavor and aroma of the wine or brandy. An “oak barrel” used in the manufacturing process is defined as having a capacity of 212 gallons or less. Oak barrels not used in the manufacturing process but held for sale in the ordinary course of business are also considered business inventory.
(C) Materials such as lumber, cement, nails, steel beams, columns, girders, etc., held by a licensed contractor for incorporation into real property, providing the real property will not be retained for the licensed contractor's use.
(D) Crops and animals held primarily for sale or lease and animals used in the production of food or fiber and feed for animals in either category.
(b) Exclusions. Property eligible for the “business inventories” exemption does not include:
(1) Property of any description in the hands of a vendee, lessee or other recipient on the lien date which has been purchased, leased, rented, or borrowed primarily for use by the vendee, lessee or other recipient of the property rather than for sale or lease or for physical incorporation into a product which is to be sold or leased. Examples of property excluded from business inventories are office supplies, furniture, machines and equipment and manufacturing machinery, equipment and supplies such as dies, patterns, jigs, tooling or chemicals used to produce a chemical or physical reaction, and contractors' supplies, tools, concrete forms, and other items that will not be incorporated into and become a part of the property. Also ineligible are materials that a contractor is holding to incorporate into real property that will be retained for his own use.
(2) Property being used by its owner for any purpose not directly associated with the prospective sale or lease of that property.
(3) Property actually leased or rented on the lien date.
(4) Property which has been used by the holder prior to the lien date, even though held for lease on the lien date.
(5) Property intended to be used by the lessor after being leased or during intervals between leases even though held for lease on the lien date.
(6) Property in the hands of a lessor who, with intent to enjoy the benefits of the inventory exemption, had leased the property for a period that expired shortly before the lien date but who renewed, extended or renegotiated the lease shortly thereafter.
(c) Service Enterprises. Property held by a person in connection with a profession which is primarily a service activity such as medicine, law, architecture or accountancy is not “business inventories” held for sale or lease even though such property may be transferred to a patient or client incidental to the rendition of the professional service. Property held by enterprises rendering services of a nonprofessional type such as dry cleaners, beauty shop operators and swimming pool service companies is to be regarded as “business inventories” held for sale if such property is delivered as an item regularly included in the service.
(d) Repairers and Reconditioners. Persons engaged in repairing or reconditioning tangible personal property with the intent of transferring parts and materials shall be regarded as holding said parts and materials as “business inventories.”
(e) Agricultural Enterprises. Animals, crops and feed held primarily for sale or lease in the ordinary course of business are included in the term “business inventories,” as are animals used in the production of food or fiber and feed for such animals.
(1) “Animals used in the production of food and fiber” includes all animals customarily employed in the raising of crops or for the feeding, breeding and management of livestock, or for dairying, or any other confined animals whose products are normally used as food for human consumption or for the production of fiber useful to man. Excluded are animals held by an owner or lessee principally for sport, recreation or pleasure such as show animals, horses held for racing or horses and other animals kept as pets.
(2) The term “crops” means all products grown, harvested, and held primarily for sale, including seeds held for sale or seeds to be used in the production of a crop which is to be held primarily for sale. It does not include growing crops exempted pursuant to Article XIII, section 3(h), of the California Constitution or fruit trees, nut trees, and grapevines exempted by section 223 of the Revenue and Taxation Code.
(3) The term “food” means property normally considered as food for human consumption.
(4) Feed for animals held primarily for sale or lease or for animals used in the production of food or fiber constitutes “business inventories” subject to exemption. It includes every type of natural-grown or commercial product fed to animals except medicinal commodities intended to prevent or cure disease unless the medicinal commodities are purchased as a component part of feed for such animals.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 129 and 219, Revenue and Taxation Code.
HISTORY

1. New section filed 11-21-68; effective thirtieth day thereafter (Register 68, No. 44).
2. Amendment of subsections (a), (b) and (f) filed 1-9-70; effective thirtieth day thereafter (Register 70, No. 2).
3. Amendment filed 1-19-71; effective thirtieth day thereafter (Register 71, No. 4).
4. Amendment filed 2-18-75; effective thirtieth day thereafter (Register 75, No. 8).
5. Amendment filed 10-15-80; effective thirtieth day thereafter (Register 80, No. 42).
6. Amendment of subsection (b) filed 1-22-85; effective thirtieth day thereafter (Register 85, No. 4).
7. Amendment of subsection (a)(1), redesignation of former subsections (a)(2)-(3) as subsections (a)(1)(A)-(B), and new subsections (a)(2)-(a)(2)(D) filed 6-26-2000; operative 7-26-2000 (Register 2000, No. 26).
8. Change without regulatory effect amending subsection (c) filed 4-6-2001 pursuant to section 100, title 1, California Code of Regulations (Register 2001, No. 14).
9. Editorial correction of subsection (a)(1) (Register 2002, No. 43).
§134. Household Furnishings, Personal Effects, and Pets Exemption.
Note     •     History

Household furnishings, personal effects, and pets, as defined in section 224 of the Revenue and Taxation Code, owned by any individual but not held or used in connection with a trade, profession, or business or for the production of income are exempt from ad valorem taxation. Household furnishings are personal property and include such items as furniture, appliances, rugs, cooking utensils, and art objects. Not included within the definition of household furnishings are items classified as improvements, such as wall-to-wall carpeting, built-in ovens, ranges, and dishwashers.
Personal effects is a category of personal property which includes such items as money kept for household use, clothing, jewelry, tools, hobby equipment and collections, and other recreational equipment. By statute, it does not include boats, aircraft and vehicles.
The term “pets” includes any animals (e.g., fish, birds, insects, cats, dogs, horses) held for noncommercial purposes and not as an investment. A show animal that is awarded ribbons or cups would not be considered as held in connection with a trade, profession, or business. However, when the animal's proficiency gains monetary or other awards of substantial value, or when the animal is used in the production of offspring that are sold or exchanged for items of substantial value, it is no longer considered a pet entitled to the exemption.
Storage in a warehouse or other place of safekeeping in and of itself does not alter the status of such property. No claim for exemption need be filed by an eligible owner, and no entries need be shown on the assessment roll.
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 224, Revenue and Taxation Code.
HISTORY

1. Amendment filed 3-3-72; effective thirtieth day thereafter (Register 72, No. 10). For prior history, see Register 69, No. 50.
2. New NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
3. Editorial correction of NOTE filed 2-2-83 (Register 83, No. 6).
§135. Homeowners' Property Tax Exemption.
Note     •     History

(a) Exemption Claims.
(1) Distributing Forms. In addition to mailing forms to persons acquiring title and recording their ownership of their eligible dwellings, the assessor of each county shall make available to homeowners during the twelve months preceding the lien date for the next succeeding fiscal year, and the twelve months succeeding such lien date, to and including December 10 of the fiscal year, forms on which to claim the exemption for that fiscal year (1) by providing blank forms at the assessor's office, (2) by distributing supplies of blank forms to places throughout the county to which residents of the county have easy access, or (3) by a combination of these methods. The assessor need not send a new claim form upon the transfer of ownership in a property in any instance in which either spouse retains an ownership interest and otherwise continues to qualify for exemption.
(2) When Claims Are Due. A claim is timely filed if, on or before the February 15 immediately preceding the start of the fiscal year, it is delivered to the assessor's office or is properly addressed and mailed with postage prepaid. A post office cancellation mark of February 15 or earlier is conclusive evidence of timely filing by mail. The assessor may accept other proof which satisfies him/her that a claim was mailed on or before February 15, provided such proof is offered on or before February 15 of the following year.
A claim is filed late and an exemption of the lesser of five thousand six hundred dollars ($5,600) or 80 percent of the taxable value of the dwelling shall be granted if the claim is delivered to the assessor's office or is properly addressed and mailed with postage prepaid between February 16 and December 10, inclusive, of the calendar year in which the claim was due. In determining when a claim is filed, Section 166 of the Revenue and Taxation Code may be applicable in some instances. Section 166 provides that a filing shall be deemed to be timely if it is sent by United States mail, properly addressed with postage prepaid, and is post marked on or before the required date, or if other proof satisfactory to the assessor establishes that the mailing occurred on or before the required date.
A veteran including a disabled veteran who is filing for the veteran's exemption or disabled veterans' exemption on his/her principal place of residence for the first time or who was granted a veteran's exemption or disabled veterans' exemption on his/her principal place of residence in the immediately preceding year, may make a timely filing for the homeowner's exemption within 15 days after the assessor finds him/her ineligible for the veteran's exemption or disabled veterans' exemption and notifies him/her thereof. Those veterans not notified shall have until the next lien date to make a timely filing.
(3) Signature of Claimant. The signature of one spouse who is a co-owning occupant is valid for the other co-owning occupant spouse for the year of filing and for subsequent years. The signature of one co-owning occupant (non-spouse) is valid for other co-owning occupants for the year of filing and for subsequent years. The assessor may require the refiling of the claim by the other spouse if the spouse who signed the active claim has died or has established a principal place of residence elsewhere, but the assessor shall require the refiling of the claim by the other co-owner who has occupied the dwelling continuously if the co-owner (non-spouse) who signed the active claim has died or has established a principal place of residence elsewhere.
If a timely filed claim lacks a signature or any required information, the assessor may, for good cause, grant the claimant a single period of measurable length within which to cure the defect. Such period shall not extend beyond October 15 unless the defect is found and the claimant is notified thereof after July 15, in which event it shall not extend beyond three months of such notification. If a claim is filed late, the assessor may allow the claimant up to six months, or three months after the claimant is notified, whichever is later, to cure the defect.
(4) Processing Claims. When a claim for exemption is received, the assessor shall note thereon the fiscal year to which the initial filing relates and the date of filing. He/she shall ascertain:
(A) Whether the claim was filed within the period prescribed by law;
(B) Whether the claimant was,
1. an owner of record, an owner whose title had not yet been recorded, or a purchaser under a contract of sale of the dwelling identified in the claim; or
2. an owner of shares or a membership interest in a cooperative housing corporation; 
(C) Whether more than one claim has been filed on the same dwelling.
If the assessor finds the claimant eligible for the exemption for the initial fiscal year claimed, he/she shall enroll it, provided that he/she cannot then allow a veterans' or another homeowners' exemption against an assessment that relates, in its entirety or in part, to the same dwelling. He/she shall, however, allow the disabled veterans' exemption on the dwelling in place of the homeowners' exemption. If he/she finds that the claimant is not eligible for the initial year claimed, but is or will be eligible for a subsequent year, he/she shall treat the claim as if it had been filed initially for the subsequent year.
(5) Notice of Unapproved Claims.
After determining that an application for exemption is not approved, the assessor shall notify the claimant of the reason or reasons for nonapproval. Failure to receive such notice shall not entitle the claimant to the exemption.
(b) Notice of Circumstances of Ineligibility.
(1) Mailing Forms. The Notice of Circumstances of Ineligibility required by Section 2615.5 of the Revenue and Taxation Code and the Advice of Termination reply form are mailed annually by the county with the tax bill or copy thereof.
(2) When Advice of Termination Is Due. The assessor shall accept a signed Advice of Termination reply form or any signed statement of the claimant, co-owning spouse, or other co-owner, adequately describing the property for which the exemption was previously claimed, indicating that the property no longer qualifies for the exemption. The statement should state the lien date as of which the claimant no longer claims the exemption; but if it does not, the assessor, if otherwise unable to ascertain this information from the claimant, shall treat the statement as first applying to the lien date to which the next succeeding fiscal year from the date of filing the statement relates. Such a statement to the assessor shall be known as an “Advice of Termination,” which satisfies the duty of the claimant to inform the assessor of ineligibility for the exemption.
An Advice of Termination is timely filed if, on or before December 10 of the fiscal year for which the exemption is to be first terminated, it is delivered to the assessor's office or is placed in the mail properly addressed with postage prepaid. A post office cancellation mark of December 10 or earlier is conclusive evidence of timely filing by mail. The assessor may accept other proof which satisfied him/her that an Advice of Termination was mailed on or before December 10, provided such proof is offered on or before December 10 of the following year.
(3) Processing Advices of Termination. When an Advice of Termination is received, the assessor shall ascertain the fiscal year for which it is first effective. The assessor shall determine that the person signing the advice is the claimant or a co-owning spouse, claimant co-owner or other co-owner, or is otherwise authorized to sign the notice as guardian, administrator, or other legal representative.
(4) Termination. After determining that the Advice of Termination is valid, the assessor shall terminate the exemption and, if the Advice of Termination has not been filed by December 10, make an escape assessment including a penalty of 25 percent of the escaped value.
(5) Erroneously Filed Advice of Termination. If an Advice of Termination is filed in error, the assessor shall accept the written request of the person filing it or of an owner or co-owner that it be withdrawn and reinstate the exemption provided the request is received on or before January 1 of the next succeeding calendar year following the erroneous filing.
(c) Verification of Eligibility.
When either the Franchise Tax Board or the State Board of Equalization notifies an assessor that a claimant whose principal place of residence has qualified as of January 1 of any year for an exemption has received the credit for qualified renters under the provisions of the Personal Income Tax Law for the taxable year embracing January 1 of the same year, the assessor shall investigate and, if appropriate, terminate the exemption and make an escape assessment under Section 531.6 of the Revenue and Taxation Code. If the claimant failed to file the Advice of Termination, by December 10, a penalty of 25 percent of the escaped value shall be added to the assessment.
(d) Entry On The Roll--Identity of Claimant. The assessor shall identify the name of each claimant receiving the exemption on the roll or on a subsidiary public record arranged in parcel number order, or in another order, to which the public has access for the purpose of verifying the name of the claimant.
(e) Maintaining Assessor's Records.
(1) Claim File Format. The active and inactive claim files may be maintained in the form of original documents and papers, photocopies thereof, on microfilm, or in an electronic format through the use of electronic imaging technology. For purposes of this section, electronic imaging technology means a read-only access system of microphotography, optical disk, or any other technique that does not permit additions, deletions or changes to the original document. Reproductions from these systems shall be considered true copies of the original documents and associated records. The system may include, but is not limited to, any magnetic media, optical disk media, or other machine readable form.
(2) Active Claim File. The active claim file, which is composed of the claims or a record thereof of properties that received the exemption as of the last preceding lien date, shall be kept in current parcel number order, or in another order that permits ready retrieval of a claim or production of a true copy thereof, including a photocopy, microfilm, or reproduction from electronic imaging systems upon audit of the records. Information from a subsequent investigation pursuant to subsections (c) or (f) of this section shall be indicated on the claim or in other records.
The assessor shall compare each copy of a document transferring ownership to real property, received pursuant to Section 255.7 of the Revenue and Taxation Code, with the active claim file. When this comparison discloses the transfer of an eligible dwelling, the assessor shall:
(A) Retain the reference to the property in the active claim file where the new owner was also a previous co-owning occupant spouse who did not sign the claim but continues to be an owner or where a co-owning occupant who filed a separate claim continues to be an owner, or
(B) Delete the reference to the property from the active claim file and mail a homeowners' exemption claim form to the new owner, as required by Section 255.3 of the Revenue and Taxation Code.
(3) Inactive Claim File. The inactive claims, photocopies, microfilm, or reproduction from electronic imaging systems, shall be kept according to the last year the claim was allowed and arranged within a year's group in parcel number order, or in another order that permits ready retrieval of information or the production of a true copy respecting a claim upon audit of the records. Documents such as the Advice of Termination and information from a subsequent investigation pursuant to subsections (c) or (f) of this section shall be attached to the claim or shall be kept in another order or in an electronic format that permits ready retrieval upon audit.
(4) Claim Not Open to Public Inspection. Homeowners' exemption claims, Advices of Termination, and related homeowners' exemption records containing social security numbers of claimants, both past and present, are not public documents and shall not be open to public inspection.
(5) Destruction of Records. Claims, Advices of Termination, and other records required in the administration of the exemption may be destroyed six years after the lien date for the last year for which the exemption claim was active, provided that when such documents have been photocopied, microfilmed, or stored in an electronic image format pursuant to subsection (e)(1) of this section, the originals may be destroyed three years after the lien date for the tax year for which they were received or made by the assessor.
(f) Cooperative Housing Corporations. Annually prior to January 1 the assessor shall request on a form prescribed by the Board from every cooperative housing corporation containing dwelling units eligible for the exemption (1) a list of owners of shares or memberships entitling them to occupancy of a particular dwelling unit and (2) the apartment numbers or other designations of the dwelling units they are entitled to occupy as shown on the corporate shareholder or membership record for the lien date of the current year. The list shall also indicate which of the shareholders or members resided on the lien date in the designated dwelling units. The assessor shall compare this list with a similar list from the preceding lien date and determine:
1. Those dwelling units in which a newly listed shareholder or member is indicated to be residing on the lien date;
2. Those dwelling units in which a previously listed shareholder or member, who was also indicated to have been a resident, no longer is listed as a shareholder or member or, although so listed, no longer is indicated to be a resident.
With respect to the dwelling units in the first category, the assessor shall provide a claim form for the newly listed shareholders or members by April 1. With respect to dwelling units in the second category the assessor shall investigate to determine whether an active claim by the former shareholder or member in residence should be terminated.
If a cooperative housing corporation fails to respond to the assessor's request by March 15, the assessor immediately shall obtain the information requested by other suitable means and mail claim forms to new shareholders or members by April 1.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 218, 218.5, 229, 253.5, 255, 255.1, 255.2, 255.3, 255.6, 255.7, 255.8, 275, 408, 465, 504, 531.1, 531.6, 2190, 2192, 2611.6, and 2615.5, Revenue and Taxation Code.
HISTORY

1. Amendment filed 12-12-69; effective thirtieth day thereafter (Register 69, No. 50). For prior history, see Register 69, No. 33.
2. Amendment filed 1-19-71; effective thirtieth day thereafter (Register 71, No. 4).
3. Amendment of subsection (a) filed 3-3-72; effective thirtieth day thereafter (Register 72, No. 10).
4. Amendment filed 3-27-75; effective thirtieth day thereafter (Register 75, No. 13).
5. Amendment filed 10-27-80 as an emergency; effective upon filing (Register 80, No. 44). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 2-24-81.
6. Certificate of Compliance transmitted to OAL 2-24-81 and filed 3-27-81 (Register 81, No. 13).
7. Amendment filed 12-6-85; effective thirtieth day thereafter (Register 85, No. 49).
8. Change without regulatory effect amending subsections (a)(1)-(2) filed 2-2-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 5).
9. Editorial correction of subsections (b)(4) and (f)2. (Register 95, No. 48).
10. Amendment of subsections (a)(1), (b)(5) and (c), new subsection (e)(1) and subsection renumbering, amendment of newly designated subsections (e)(2), (e)(3) and (e)(5), amendment of subsection (f), and amendment of Note filed 4-7-97; operative 5-7-97 (Register 97, No. 15).
11. Change without regulatory effect amending subsection (a)(2) filed 3-8-99 pursuant to section 100, title 1, California Code of Regulations (Register 99, No. 11).
12. Change without regulatory effect amending section heading, subsections (a)(4), (a)(4)(C), (e)(2) and (e)(5) and Note filed 6-4-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 23).
§135.5. Homeowners' Property Tax Exemption--Supplemental Assessments.
Note     •     History

Exemption Claims.
(a) Applicability of Section. The provisions of this section apply only to claims for the homeowners' exemption made pursuant to the provisions of Chapter 3.5 (commencing with Section 75) of Part 0.5 of Division 1 of the Revenue and Taxation Code. Except where the context or the specific provisions of the section otherwise require, the provisions of Section 135 also apply to claims for the exemption from the supplemental roll.
(b) Distributing Forms. The assessor of each county shall make forms on which to claim the exemption available in the manner set forth in Section 135(a)(1).
(c) When Claims are Due. A claim is timely filed if it is delivered to the assessor's office or if properly addressed and mailed with postage prepaid on or before the 30th day following the date of notice of a supplemental assessment. A post office cancellation mark of said 30th day or earlier is conclusive evidence of timely filing by mail. The assessor may accept other proof which satisfies him/her that a claim was mailed on or before said 30th day, provided such proof is offered on or before the same date of the following year. In addition to the claim being timely filed, the claimant must meet the requirements for the exemption no later than ninety (90) days after the date of the change in ownership or the completion of new construction.
When a claim is filed late, that portion of tax attributable to 80 percent of the amount of exemption available shall be cancelled or refunded if the claim is delivered to the assessor's office or is properly addressed and mailed with postage prepaid after the 30th day following the date of notice of a supplemental assessment but on or before the date on which the first installment of taxes on the supplemental tax bill becomes delinquent, as provided by Section 75.52 of the Revenue and Taxation Code.
(d) Number of Claims Required. Usually, one claim will suffice. Where a change in ownership or new construction occurs on of after June 1 up to and including December 31, one claim for the single supplemental assessment for the current fiscal year shall apply to that assessment and, if granted, to the following fiscal year and to fiscal years thereafter based upon the one-time filing. For example, where a dwelling changes ownership on July 1, 1987, one claim for the single supplemental assessment for the 1987-88 fiscal year shall apply to that assessment. If the claim is granted, it shall also apply to the regular roll assessment for the 1988-89 fiscal year and for fiscal years thereafter based upon one-time filing. 
Where a change in ownership occurs on or after January 1 up to and including May 31, one claim for the two supplemental assessments, one for the current fiscal year and one for the following fiscal year, can apply to those assessments, but the claim will not apply to the regular roll assessment for that following fiscal year because the claimant did not own and occupy the dwelling on the lien date. For example, where a dwelling changes ownership on May 1, 1987, one claim for the two supplemental assessments, one for the 1986-87 fiscal year and the other for the 1987-88 fiscal year, can apply to those assessments. The claim will not apply to the regular roll assessment for the 1987-88 fiscal year, however.
If the claim does apply to the two supplemental assessments or if it applies only to the supplemental assessment of the following fiscal year, and if the claim is granted, the claim will apply also to a third fiscal year and to fiscal years thereafter based upon the one-time filing. For example, if a claim applies to two supplemental assessments, one for the 1986-87 fiscal year and the other for the 1987-88 fiscal year, or if it applies only to the supplemental assessment for the 1987-88 fiscal year, and if the claim is granted, the claim will apply also to the regular roll assessment for the 1988-89 fiscal year and for fiscal year thereafter. If, however, the claim applies only to the supplemental assessment for the current fiscal year, the claim will not apply to the third fiscal year and to fiscal years thereafter because no claim was in effect for the following (second) fiscal year. For example, if a claim applies only to the supplemental assessment for the 1986-87 fiscal year, the claim will not apply to the regular roll assessment for the 1988-89 fiscal year and for fiscal years thereafter because no claim was in effect for the 1987-88 fiscal year.
Where a claim for a supplemental assessment or assessments is denied, a separate claim for a future regular roll assessment must be filed.
After a change in ownership, additional supplemental assessments may arise from the completion of new construction. A separate claim must be filed for each additional assessment arising from the completion of new construction where less than the full exemption is then in effect. Only one claim is required, however, for a single new construction project completed on or after January 1 up to and including May 31, which results in two supplemental assessments, one for the current fiscal year and one for the following fiscal year. Once the full exemption is in effect, no additional claims need be filed.
(e) Signature of Claimant. Where two or more co-owning occupants, either spouses or non-spouses, reside in a dwelling, the signature of one co-owning occupant is sufficient to claim the exemption for all occupants so long as the person who signed the claim continues to reside at that location. Where a spouse who signed the active claim dies or establishes a principal place of residence elsewhere, the assessor may require refiling of the claim by the other spouse. Where a co-owner (non-spouse) who signed the active claim dies or establishes a principal place of residence elsewhere, the assessor shall require refiling of the claim by one of the other occupant co-owners.
If a timely filed claim lacks a signature or any required information, the assessor may, for good cause, grant the claimant a single period of measurable length within which to cure the defect. Such period shall not extend beyond six (6) months from the date of filing of the claim unless the defect is not found and the claimant is not notified thereof within a reasonable time to cure the defect before expiration of the six-month period, in which event it shall not extend beyond three (3) months of such notification. If a claim is filed late, the assessor may allow the claimant up to six months, or three months after the claimant is notified, whichever is later, to cure the defect.
(f) Processing Claims. The assessor shall process a claim in the manner set forth in Section 135(a)(4) and shall enroll the exemption if the claim--

ant is eligible for the full exemption for the initial fiscal year or years claimed. The assessor shall not approve a claim for property with respect to which the full exemption is already in effect.
(g) Notice of Unapproved Claims. If a claim is not approved, the assessor shall notify the claimant of the reason or reasons for nonapproval. Failure to receive such notice shall not entitle the claimant to the exemption. This notice is not required when the claim is not approved because the property is already receiving the full exemption.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 75.20, 75.21, 75.22, 75.31, 75.51, 75.52, 218, 218.5, 229, 253.5, 255, 255.1, 255.2, 255.3, 255.6, 255.7, 255.8, 275, 408, 531.1, 531.6, 1605, 2190, 2611.5 and 2615.5, Revenue and Taxation Code.
HISTORY

1. New section filed 12-21-87; operative 1-20-88 (Register 87, No. 52).
2. Change without regulatory effect amending subsection (d) and Note filed 9-18-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 38).
§136. Limited Liability Companies As Qualifying Organizations for the Welfare Exemption.
Note     •     History

(a) A limited liability company may be a qualifying entity for welfare exemption purposes, if it is wholly owned by a qualifying organization or organizations and if it meets specific organizational and operating requirements.
(b)(1) Qualifying Organization. A qualifying organization is an organization that is exempt under section 501(c)(3) of the Internal Revenue Code or under section 23701d of the Revenue and Taxation Code and that qualifies for exemption under section 214 of the Revenue and Taxation Code. A limited liability company is a qualifying organization if all of its owner organization(s) (referred to as members) are exempt under section 501(c)(3) of the Internal Revenue Code or under section 23701d of the Revenue and Taxation Code and qualify for exemption under section 214 of the Revenue and Taxation Code. Each member shall have a valid, unrevoked letter from the Internal Revenue Service or the Franchise Tax Board, stating that it qualifies as an exempt organization under section 501(c)(3) of the Internal Revenue Code or under section 23701d of the Revenue and Taxation Code.
(2) Qualifying Organization. A qualifying organization is also a government entity that is exempt from property taxation under section 3 of Article XIII of the California Constitution, as to property owned by the state under subdivision (a), or as to property owned by a local government under subdivision (b), or as to property used exclusively for public schools, community colleges, state colleges and state universities under subdivision (d). A limited liability company is a qualifying organization if one or more of its members is a government entity, as specified, and all other members are exempt under section 501(c)(3) of the Internal Revenue Code or under section 23701d of the Revenue and Taxation Code and qualify for exemption under section 214 of the Revenue and Taxation Code.
(c) Organizational Requirements. A limited liability company wholly owned by qualifying organization(s) may satisfy the organizational requirements for purposes of the exemption, if its articles of organization or the equivalent legally recognized formative document under the laws of the jurisdiction where the entity is formed meets all of the following requirements:
(1) A specific statement shall be included which limits the activities of the limited liability company to one or more exempt purposes, as specified in section 214. This requirement may be satisfied by a clause stating that the limited liability company is organized and operated exclusively for one or more exempt purpose(s) as specified in section 214 [religious, hospital, scientific or charitable].
(2)  The organizational language shall specify that the limited liability company is operated exclusively to further the exempt purpose(s) as specified in section 214, of its member(s).
(3) The organizational language shall require that each member of the limited liability company be a qualifying organization, as specified in subsections (b)(1) or (b)(2) of this rule.
(4) The organizational language shall prohibit any direct or indirect transfer of any membership interest in the limited liability company to any nonqualified person or entity.
(5) The organizational language shall provide an acceptable dedication clause. This requirement may be satisfied by a clause that irrevocably dedicates the property to one or more of the exempt purposes, as specified in sections 214 and 214.01.
(6) The organizational language shall provide an acceptable dissolution clause. This requirement may be satisfied by a clause, which specifies that upon dissolution, all assets shall be distributed to an organization(s) organized and operated exclusively for exempt purposes, as specified in section 214, and which has established its tax exempt status under section 501(c)(3) of the Internal Revenue Code, or under section 23701d of the Revenue and Taxation Code.
(7) The organizational language shall require that any amendments to the limited liability company's articles of organization or the equivalent legally recognized formative document under the laws of the jurisdiction where the entity is formed and to the operating agreement, be consistent with section 214.
(8) The organizational language shall prohibit the limited liability company from merging with, or converting into, a for-profit entity.
(9) The organizational language shall require that the limited liability company not distribute any assets to members who cease to be organizations described in section 214.
(d) The limited liability company shall represent that its articles of organization are consistent with state law governing limited liability companies and are enforceable at law and in equity.
(e) Operating Requirements. A limited liability company wholly owned by qualifying organization(s) may satisfy the operational requirements for purposes of this exemption, by operating in accordance with its articles of organization or the equivalent legally recognized formative document under the laws of the jurisdiction where the entity is formed.
(f) The limited liability company shall file with the Board a copy of certified Articles of Organization or the equivalent legally recognized formative document required under the laws of the jurisdiction where the entity is formed, and any certified amendments and restatements.
(g) In the event that a member of the limited liability company ceases to be a qualifying welfare organization, as described in section 214, the limited liability company shall report this information to the assessor and the Board no later than the next annual filing deadline for the welfare exemption. Such event will serve to disqualify the limited liability company and its property from the welfare exemption.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Sections 214, 214.01, 214.8, 254.5 and 254.6, Revenue and Taxation Code.
HISTORY

1. New section filed 10-18-2004; operative 1-1-2005 (Register 2004, No. 43). For prior history, see Register 96, No. 1.
§137. Application of the Welfare Exemption to Property Used for Housing.
Note     •     History

(a) Housing and related facilities owned and used by community chests, funds, foundations or corporations organized and operated for religious, hospital, scientific or charitable purposes is eligible for the welfare exemption from property taxation as provided in Revenue and Taxation Code section 214. A single uniform statewide standard shall be used to determine whether the welfare exemption applies to housing and related facilities owned and used by qualified organizations. The standard is whether the use of the property by the organization for housing and related facilities is a use that is incidental to and reasonably necessary for the accomplishment of the exempt purposes of the organization. For purposes of applying the uniform statewide standard, the phrase “Use of property that is incidental to and reasonably necessary for the accomplishment of the exempt purposes of the organization” includes the use of property that is institutionally necessary for the operation of the organization as provided in subdivision (i) of section 214 of the Revenue and Taxation Code.
(b) For purposes of determining whether property used for housing and related facilities is eligible for the welfare exemption, the terms “incidental to and reasonably necessary for” and “institutionally necessary” are identical and interchangeable; the term “institutionally necessary” means and includes “incidental to and reasonably necessary for” and vice versa. No distinctions in application of the welfare exemption to housing and related facilities shall be based on any difference or divergence between the terms.
(c) For purposes of determining eligibility for the welfare exemption, it is the use of the housing and related facilities by the organization owning the property that is to be considered, not the use by the occupants. If the organization's use of the property is incidental to and reasonably necessary for the accomplishment of the organization's exempt purposes, the property is eligible for exemption. The occupant's use for personal or residential purposes is secondary to the organization's primary exempt purpose and shall not disqualify the property from exemption either in whole or in part.
(d) The location of the property in relation to other property owned and used by the exempt organization is irrelevant to the application of the exemption. It is the use of the property by the organization which is the determining factor. The fact that the housing is located on property in a remote area may be considered in determining whether the housing is incidental to and reasonably necessary for the operation of the organization.
(e) Examples: The following examples illustrate the application of the welfare exemption to housing and related facilities
Example No. 1
The two-story building with seven completely-furnished apartments is used exclusively to provide temporary low-cost housing to missionaries, clergy, other religious workers and their families on furlough status while in the United States. The articles of incorporation of the nonprofit religious corporation which owns and operates the property provide that its purpose is to provide housing for missionaries, clergymen, other religious workers and their families who work in establishing and furthering its religious purposes throughout the world. This housing is exempt as a facility incidental to and reasonably necessary for the accomplishment of the church's religious and charitable purposes.
Example No. 2
The property of a private school is used to provide board and housing to students. Although most of the school's students were day students, some students relied upon the school for board and lodging. These services provided by the school are reasonably related to the exempt educational activity, and are an exempt use of the property within the school's educational purpose.
Example No. 3
Property owned by a nonprofit corporation is used for housing and related facilities for persons who assemble two weeks each year for purposes of religious instruction and worship. The residential facilities are exempt as within the organization's religious purpose. Housing for caretakers or maintenance workers required to reside at the religious conclave facility is exempt as institutionally necessary.
Example No. 4
A nonprofit religious organization owns housing which it provides to its ministers and their families. Organizational documents require the church to provide housing as part of a system that allows the organization flexibility in assigning the clergy, aids in recruiting and keeping the clergy and provides the clergy with privacy and respite. The property also is used regularly for church functions such as youth meetings and organizational committee meetings. The church's use of its property to provide housing for its clergy is exempt as reasonably necessary for the furtherance of its religious purpose.
Example No. 5
The primary missionary activity of a nonprofit religious organization is to publish and disseminate its religious literature to the general public. The organization owns a complex consisting of a temple and six apartment buildings that provide work areas for about 250 devotees, about one-half of whom are involved in the publishing and distribution of the organization's religious books and magazines. The work areas are frequently used at night as sleeping areas since most of the devotees live in the rooms in which they work. The devotees follow a seven-hour daily regimen of communal and individual daily prayers, meditations, chanting, and attendance at temple services and observe a strict diet which necessitates living in the temple complex. Property used for housing the devotees in the temple complex is exempt as reasonably necessary for the fulfillment of the organization's religious objectives.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Sections 214, 214.01, 214.1., 214.2, 254, 254.5 and 255, Revenue and Taxation Code; and Article XIII, Sections (4)b and (5), California Constitution.
HISTORY

1. New section filed 12-13-99; operative 12-31-99 pursuant to Government Code section 11343.4(d) (Register 99, No. 51). 
§138. Exemption for Aircraft Being Repaired, Overhauled, Modified or Serviced.
Note     •     History

(a) Scope of Exemption. Any aircraft, certificated or noncertificated, which is in California on the lien date solely for the purpose of being repaired, overhauled, modified, or serviced is exempt from personal property taxation. Aircraft operated intrastate in or interstate into California and aircraft normally based in California do not qualify for exemption.
(b) Qualifying Certificated Aircraft. Aircraft that qualify for exemption include certificated aircraft that have been taken out of revenue service by an air carrier:
(1) for the purpose of being repaired, overhauled, modified, or serviced; and,
(2) with an executed contract or a specific written plan for the purposes described in subsection (b)(1).
Aircraft in California solely for the purposes described in subsection (b)(1) include any incidental and attendant storage.
(c) Interstate Operation. Certificated aircraft that have been taken out of revenue service under the provisions of subsection (b) above as of the lien date are not aircraft operated interstate into California for purposes of this rule.
(d) The Valuation of Certificated Aircraft. Certificated aircraft, located in or outside of the state, that have been taken out of revenue service under the provisions of subsection (b) above, shall not be valued pursuant to section 401.15 of the Revenue and Taxation Code nor included in the allocation formula of section 1152 of the Revenue and Taxation Code and rule 202, until the lien date next following the date that such aircraft are returned to revenue service.
(e) Reporting by Air Carriers. When filing business property statements, air carriers shall indicate on the property statement or an attachment to the property statement those certificated aircraft which qualify for exemption pursuant to this section. Air carriers shall maintain records adequate to verify that these aircraft qualify for exemption.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 220, 1150, 1151, 1152 and 1154, Revenue and Taxation Code.
HISTORY

1. New section filed 12-14-2001 as an emergency; operative 12-14-2001 (Register 2001, No. 50). A Certificate of Compliance must be transmitted to OAL by 4-15-2002 or emergency language will be repealed by operation of law on the following day.
2. New section refiled 4-3-2002 as an emergency; operative 4-3-2002 (Register 2002, No. 14). A Certificate of Compliance must be transmitted to OAL by 8-1-2002 or emergency language will be repealed by operation of law on the following day.
3. Certificate of Compliance as to 4-3-2002 order transmitted to OAL 4-8-2002 and filed 5-20-2002 (Register 2002, No. 21).
4. Editorial correction of subsection (d) (Register 2002, No. 35).
§139. Restricted Access as Damage Eligible for Reassessment Relief Pursuant to Revenue and Taxation Code Section 170.
Note     •     History

NOTE

Authority cited: Section 15606(c), Government Code. Reference: Section 170, Revenue and Taxation Code.
HISTORY

1. New section filed 5-16-2002; operative 6-15-2002 (Register 2002, No. 20).
2. Change without regulatory effect repealing section filed 7-11-2006 pursuant to section 100, title 1, California Code of Regulations (Register 2006, No. 28).
§140. Welfare Exemption Requirements for Low-Income Housing Properties.
Note     •     History

(a) Definitions. The definitions set forth in this regulation shall govern the construction of Revenue and Taxation Code section 214, subdivision (g): 
(1) “Low-income housing tax credits” means that the property owner is eligible for and receives state low-income housing tax credits pursuant to Revenue and Taxation Code sections 12205, 12206, 17057.5, 17058, 23610.4 and 23610.5 or federal low-income housing tax credits pursuant to section 42 of the Internal Revenue Code. 
(2) “Government financing” means financing or financial assistance from local, state or federal government used for the acquisition, rehabilitation, construction, development, or operation of a low-income housing property in the form of: (1) tax-exempt mortgage revenue bonds; (2) general obligation bonds; (3) local, state or federal loans; (4) local, state or federal grants; (5) any loan insured, held, or guaranteed by the federal government; or (6) project-based federal funding under section 8 of the Housing Act of 1937. The term “government financing” does not include properties that solely receive federal rental assistance through tenant rent-subsidy vouchers under section 8 of the Housing Act of 1937. 
(3) “Other legal document” means a document that is adopted as a resolution or statement of policy by an organization's board of directors, or executed by an organization's chief executive officer, provided that the board of directors has delegated this authority in writing to the chief executive officer, that restricts the property's use to low-income housing, such that a minimum of 90% of the units of the property are made continuously available to or occupied by lower income households at rent levels that do not exceed those prescribed by section 50053 of the Health and Safety Code. 
(4) “Lower income households” means “lower income households” as defined by section 50079.5 of the Health and Safety Code. 
(5) “Recorded deed restriction” means a deed recorded as an encumbrance against title to the property in the official records of the county in which the property is located, which specifies that all or a portion of the property's usage is restricted to rental to lower income households and identifies the number of units restricted to use as low-income housing. 
(6) “Regulatory agreement” means an enforceable and verifiable agreement with a government agency that has provided low-income housing tax credits or government financing for the acquisition, rehabilitation, construction, development or operation of a low-income housing property that restricts all or a portion of the property's usage for rental to lower income households. The regulatory agreement shall identify the number of units restricted for use as low-income housing, specify the maximum rent allowed for those units, and be recorded in the county in which the property is located. Until such time as the Regulatory Agreement is finalized and recorded, the Preliminary Reservation Letter from the California Tax Credit Allocation Committee or California Debt Limit Allocation Committee Bond Cap Allocation Letter is acceptable. 
(b) Qualified Claimants. Claimants may qualify for the welfare exemption for low-income housing properties provided that the requirements set forth in either (1) or (2) below are met: 
(1) All claimants listed under Revenue and Taxation Code section 214, subdivision (g)(1) as a qualifying organization, including limited partnerships in which the managing general partner is an eligible nonprofit corporation or an eligible limited liability company, may qualify for the exemption for a particular property provided that: 
(A) the claimant receives low-income housing tax credits or government financing for the particular property; and 
(B) the property is subject to a recorded deed restriction or a regulatory agreement which is recorded in the county in which the property is located. 
(2) All low-income housing properties, subject to restrictions imposed by an other legal document, defined in subdivision (a)(3) above, owned by claimants listed under Revenue and Taxation Code section 214, subdivision (g)(1) as a qualifying organization, other than limited partnerships in which the managing general partner is an eligible nonprofit corporation or an eligible limited liability company, qualify for the welfare exemption but the amount of the exemption shall not exceed $20,000 in tax for a single claimant with respect to a single or multiple properties as provided in Revenue and Taxation Code section 214, subdivision (g)(1)(C). 
(c) Low-Income Housing Tax Credits and Government Financing. For purposes of subdivision (b)(1)(A) above, a property has low-income housing tax credits or government financing, as defined in subdivisions (a)(1) and (a)(2), respectively, for the period of time that a regulatory agreement or recorded deed restriction restricts the use of all or any portion of the property for rental to lower income households even if the government financing has been refinanced or has been paid in full, or the allocation of the low-income housing tax credits has terminated or expired, provided that the government agency that is a party to the regulatory agreement continues to monitor and enforce compliance with the terms of the regulatory agreement. 
(d) Percentage of Units and Rent. 
(1) For claims qualifying under subdivision (b)(1) above, an exemption shall be granted equal to that percentage of the value of the property, which is made continuously available for rental to or occupied by lower income households at rents that do not exceed those prescribed by section 50053 of the Health and Safety Code, or, to the extent that the terms of the regulatory agreement or recorded deed restriction conflict with section 50053, rents do not exceed those prescribed by such terms. 
(2) The percentage of the value of the property qualifying for the exemption is based on the actual use of the property for rental to lower income households for the qualifying rent, and is not limited to the percentage designated for use by lower income households in the regulatory agreement, recorded deed restriction, or other legal document. Units reserved for the resident property manager are included in the percentage of units that qualify for the exemption.
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 214, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-23-2006; operative 7-23-2006 (Register 2006, No. 25).
§140.1. Requirements for Managing General Partner of Limited Partnership for Welfare Exemption for Low-Income Housing Properties.
Note     •     History

(a) Definitions. The definitions set forth in this regulation shall govern the construction of Revenue and Taxation Code section 214, subdivision (g), which provides the requirements for the welfare exemption for low-income housing properties owned by a limited partnership in which the managing general partner is an eligible nonprofit corporation or eligible limited liability company. 
(1) “General partner” means “general partner” as defined by section 15611, subdivision (n) of the Corporations Code. 
(2) “Limited partner” means “limited partner” as defined by section 15611, subdivision (q) of the Corporations Code. 
(3) “Limited partnership” means a “limited partnership” as defined by section 15611, subdivision (r) of the Corporations Code, or a “foreign limited partnership” as defined by section 15611, subdivision (l) of the Corporations Code. 
(4) “Limited partnership agreement” means any valid written agreement of the partners as to the affairs of a limited partnership and the conduct of its business, including all amendments thereto. 
(5) “Majority in interest of the general partners” means more than 50 percent of the interests of the general partners, and does not include the interests of any of the limited partners, in the current profits derived from business operations of the limited partnership. 
(6) “Managing general partner” means a general partner that: 
(A) is a nonprofit corporation, or an eligible limited liability company meeting the requirements of Revenue and Taxation Code section 214, designated in the limited partnership agreement as the “managing general partner” of the limited partnership; 
(B) is authorized to receive a partnership management fee, or similar form of compensation, payable in the amount and the manner set forth in the limited partnership agreement or other agreement executed by all of the general partners for performing its duties; 
(C) has “material participation,” as defined in subdivision (a)(7) below, in the control, management, and direction of the limited partnership's business; and 
(D) the officers and directors of the for-profit general partners, for-profit limited partners, or any of its for-profit affiliates, do not, as individuals or collectively, have a controlling vote or majority interest in the nonprofit managing general partner. 
(7) “Material participation” means that the limited partnership agreement or other agreement executed by all of the general partners expressly provides that the managing general partner: 
(A) has a right to vote in all the “major decisions,” defined in subdivision (a)(8) below; 
(B) performs “substantial management duties,” defined in subdivision (a)(10) below; 
(C) directly, or indirectly under its supervision, manages the limited partnership; 
(D) annually conducts a physical inspection of the low-income housing property to ensure that the property is being used as low-income housing and meets all of the requirements set forth in Regulation 140; and 
(E) annually submits a certification to the county assessor for the county in which the property is located that the low-income housing property meets all of the requirements set forth in Regulation 140. 
(8) “Major decisions” means those acts, if any, that require a vote of a majority in interest of the general partners. 
(9) “Partner” means a limited or general partner. 
(10) “Substantial management duties” means that the managing general partner actually performs five or more of the following partnership management duties on behalf of the limited partnership: 
(A) rents, maintains and repairs the low-income housing property, or if such duties are delegated to a property management agent, participates in hiring and overseeing the work of the property management agent; 
(B) participates in hiring and overseeing the work of all persons necessary to provide services for the management and operation of the limited partnership business; 
(C) executes and enforces all contracts executed by the limited partnership; 
(D) executes and delivers all partnership documents on behalf of the limited partnership; 
(E) prepares or causes to be prepared all reports to be provided to the partners or lenders on a monthly, quarterly, or annual basis consistent with the requirements of the limited partnership agreement; 
(F) coordinates all present and future development, construction, or rehabilitation of low-income housing property that is the subject of the limited partnership agreement; 
(G) monitors compliance with all government regulations and files or supervises the filing of all required documents with government agencies; 
(H) acquires, holds, assigns or disposes of property or any interest in property; 
(I) borrows money on behalf of the limited partnership, encumbers limited partnership assets, places title in the name of a nominee to obtain financing, prepays in whole or in part, refinances, increases, modifies or extends any obligation; 
(J) pays organizational expenses incurred in the creation of the partnership and all operational expenses; 
(K) determines the amount and timing of distributions to partners and establishes and maintains all required reserves; and 
(L) ensures that charitable services or benefits, such as vocational training, educational programs, childcare and after-school programs, cultural activities, family counseling, transportation, meals, and linkages to health and/or social services are provided or information regarding charitable services or benefits are made available to the low-income housing tenants. 
(b) The managing general partner must maintain records and documents evidencing the duties performed by the managing general partner. Such records and documents may include, but are not limited to: 
(1) accounting books and records; 
(2) tax returns; 
(3) budgets and financial reports; 
(4) reports required by lenders; 
(5) documents related to the construction or rehabilitation of real property; 
(6) legal documents such as contracts, deeds, notes, leases, and deeds of trust; 
(7) documents related to complying with government regulations and filings; 
(8) documents related to property inspections; 
(9) documents related to charitable services or benefits provided or the information provided regarding such services or benefits; 
(10) reports prepared for the partners; 
(11) bank account records; 
(12) audited annual financial statement of the limited partnership; and 
(13) property management agreement. 
(c) Substitution of Managing General Partner. A limited partnership in which the managing general partner is an eligible nonprofit corporation or an eligible limited liability company that has qualified for the welfare exemption for low-income housing may allow a substitution of its managing general partner by another eligible nonprofit corporation or eligible limited liability company without affecting the organizational qualification for the welfare exemption provided that: 
(1) the limited partnership agreement authorizes the withdrawal or removal of the managing general partner and the admission of a substitute managing general partner on the same effective date and such admission of the substituting managing general partner into the limited partnership is in compliance with the requirements of section 15641 of the Corporations Code; and 
(2) the substitute managing general partner meets all of the requirements of a managing general partner set forth in subdivision (a)(6) above. 
(d) Delegation of Authority Clause. If the limited partnership agreement contains a delegation of authority clause, such clause must provide either that: 
(1) the managing general partner may not delegate any of its substantial management duties defined in (a)(10) above; or 
(2) the managing general partner may delegate its substantial management duties, defined in (a)(10) above, to persons who, under its supervision, may perform such duties for the partnership subject to the supervision by the managing general partner. If the managing general partner elects to delegate one or more of its substantial management duties, the managing general partner must demonstrate that it is actually supervising the performance of the delegated duties. 
(e) Certification Requirements. The limited partnership must file for and receive a supplemental clearance certificate from the Board as provided in Regulation 140.2. 
(f) The provisions of this regulation shall apply prospectively to claims or applications for the welfare exemption under Revenue and Taxation Code section 214 and supplemental clearance certificates under Regulation 140.2, filed on or after the effective date of this regulation. For supplemental clearance certificates issued prior to the effective date of this regulation, claimants shall have until the January 1, 2007 lien date to be in compliance with this regulation unless the Board has issued a written notice of noncompliance. If the Board has issued such notice, claimant shall have 90 days from the date of the notice to comply with this regulation. Upon written request for an extension of time prior to the expiration of the 90-day period to comply, the Board shall grant a reasonable amount of time to comply with this regulation. 
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 214, Revenue and Taxation Code.
HISTORY

1. New section filed 6-23-2006; operative 7-23-2006 (Register 2006, No. 25).
§140.2. Requirements for Supplemental Clearance Certificate for Limited Partnership for Welfare Exemption for Low-Income Housing Properties.
Note     •     History

(a) A limited partnership in which the managing general partner is an eligible nonprofit corporation or eligible limited liability company, meeting the requirements of Regulation 140.1, that owns low-income housing property for which it will claim the welfare exemption shall file with the State Board of Equalization an application for a Supplemental Clearance Certificate for each low-income housing property. 
(b) A Supplemental Clearance Certificate may be granted only if the managing general partner has already been granted an Organizational Clearance Certificate by the State Board of Equalization, as required under Revenue and Taxation Code section 254.6. 
(c) In order to qualify for a Supplemental Clearance Certificate, the general partners of the limited partnership, including the managing general partner, must certify under penalty of perjury under the laws of the State of California, that: 
(1) The acquisition, construction, rehabilitation, development, or operation of the property, or any combination of these factors, is financed with low-income housing tax credits or government financing, as defined in Regulation 140; 
(2) There is an enforceable and verifiable regulatory agreement or recorded deed restriction, as defined in Regulation 140, that restricts all or a portion of the property's usage for rental to lower income households and the units designated for use by lower income households are continuously available to or occupied by lower income households at rents that do not exceed those prescribed by the terms of a regulatory agreement or recorded deed restriction, as defined in Regulation 140 or to the extent that none are provided in the regulatory agreement or recorded deed restriction, at rents that do not exceed those prescribed by section 50053 of the Health and Safety Code; 
(3) Funds that would have been necessary to pay property taxes are used to maintain the affordability of, or reduce rents otherwise necessary for, the units to be occupied by lower income households; 
(4) The managing general partner meets the requirements of Regulation 140.1; and 
(5) All of the information provided as part of the application for the Supplemental Clearance Certificate, including any accompanying statements or documents, is true, correct, and complete to the best of the knowledge and belief of the person(s) signing the application. 
(d) The following information and documents shall be provided in or with the application for a Supplemental Clearance Certificate: 
(1) Legal name of the limited partnership; 
(2) Legal name of the managing general partner of the limited partnership, its corporate identification number and mailing address, and the date that it became the managing general partner of the limited partnership; 
(3) Name, title, telephone number, and e-mail address of person signing the application for the Supplemental Clearance Certificate; 
(4) The Organizational Clearance Certificate number and the date of issuance to the managing general partner. If an Organizational Clearance Certificate has not been issued to the managing general partner, an application for an Organizational Clearance Certificate must be filed by the managing general partner; 
(5) Complete address of the property for which the limited partnership is seeking the welfare exemption, including the zip code, and the date the limited partnership acquired the property; 
(6) Fiscal year for which the application is made; 
(7) List of any additions or deletions of general partners in the limited partnership, if any, after its formation; 
(8) For California limited partnerships, a copy of Secretary of State form LP-1, Certificate of Limited Partnership, and, if applicable, Secretary of State form LP-2, Amendment to Certificate of Limited Partnership; for foreign limited partnerships, a copy of the formation document, and, if applicable, amendment documents, filed in the state or country of formation; 
(9) Copy of the regulatory agreement with a government agency, or a copy of a recorded deed restriction which verifies or evidences the receipt of low-income housing tax credits or government financing, as defined in Regulation 140; and 
(10) Copy of the grant deed, or if the land is not owned by the limited partnership, documents evidencing the limited partnership's ownership of the improvements. 
(e) The limited partnership shall include a copy of the Supplemental Clearance Certificate with its welfare exemption claim filed with the assessor of the county in which the property is located. 
(f) In the event that the general partner designated in the limited partnership agreement no longer meets the definition of managing general partner, as defined in Regulation 140.1, or the managing general partner withdraws from the partnership, the limited partnership shall report such event to the State Board of Equalization and the assessor of the county in which in property is located no later than the next succeeding annual filing deadline for the welfare exemption claim. 
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 214, 214.01, 254.5 and 254.6, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-23-2006; operative 7-23-2006 (Register 2006, No. 25).
§143. Requirements for Irrevocable Dedication Clause and Dissolution Clause for Organizational Clearance Certificate for Welfare Exemption.
Note     •     History

(a) Definitions. For the purposes of this regulation: 
(1) “Dissolution clause” means a statement in the organizational documents of a qualifying organization that upon the liquidation, dissolution, or abandonment of the qualifying organization, the exempt property will not inure to the benefit of any private person except another qualifying organization. 
(2) “Irrevocable dedication clause” means a statement in the organizational documents of a qualifying organization that the property is irrevocably dedicated exclusively to one or more qualifying purposes. 
(3) “Organizational document” means the articles of incorporation of a corporation, or the articles of organization of a limited liability company, or the bylaws, articles of association, constitution or regulations of a community chest, fund, or foundation, or corporation chartered by an act of Congress. 
(4) “Qualifying organization” means a community chest, fund, foundation, nonprofit corporation, or eligible limited liability company, organized and operated exclusively for religious, hospital, scientific, or charitable purposes. Charitable purposes include educational purposes as defined in Revenue and Taxation Code section 214, subdivision (j). 
(5) “Qualifying purpose” means a religious, hospital, scientific or charitable purpose. Charitable purposes include educational purposes as defined in Revenue and Taxation Code section 214, subdivision (j). 
(b) In General. In order to qualify for the welfare exemption provided in Revenue and Taxation Code section 214, among other requirements specified therein, the property owned by a qualifying organization must be irrevocably dedicated exclusively to one or more qualifying purposes, and upon the liquidation, dissolution, or abandonment of the qualifying organization, the property will not inure to the benefit of any private person except another qualifying organization. In order to satisfy these requirements, the organizational document of the qualifying organization must contain both an irrevocable dedication clause, which meets the requirements set forth in subdivision (c) below, and a dissolution clause, which meets the requirements set forth in subdivision (d) below. 
(c) Irrevocable Dedication Clause. Property is deemed to be irrevocably dedicated exclusively to one or more qualifying purposes provided that a qualifying organization's organizational document contains a statement that irrevocably dedicates its property exclusively to one or more qualifying purposes. 
(1) If the organization's charitable purpose is educational purposes as defined in Revenue and Taxation Code section 214, subdivision (j), the irrevocable dedication clause shall state that the property is irrevocably dedicated to educational purposes as defined in section 214, or that the property is irrevocably dedicated to charitable and educational purposes meeting the requirements of Revenue and Taxation Code section 214. 
(2) If the irrevocable dedication clause states that the property is dedicated to purposes other than the qualifying purposes, the property does not qualify for the welfare exemption. 
(3) If the irrevocable dedication clause states that the property is irrevocably dedicated to a “public” or “public benefit” purpose, the property does not qualify for the welfare exemption. 
(4) The following examples illustrate irrevocable dedication clauses as defined in subdivision (a)(2) above: 
Example No. 1: The property owned by this organization is irrevocably dedicated to charitable, scientific, hospital, or religious purposes. 
Example No. 2: The property owned by this organization is irrevocably dedicated to charitable and educational purposes meeting the requirements of Revenue and Taxation Code section 214. 
Example No. 3: The property owned by this organization is irrevocably dedicated to educational purposes as defined in Revenue and Taxation Code section 214, subdivision (j). 
Example No. 4: The property located in California owned by this organization is irrevocably dedicated to charitable, scientific, hospital, or religious purposes. 
Example No. 5: The property owned by this organization is irrevocably dedicated to charitable purposes within the meaning of section 501(c)(3) of the Internal Revenue Code. 
Example No. 6: The property of this corporation is irrevocably dedicated to charitable purposes and no part of the net income or assets of this corporation shall ever inure to the benefit of any director, officer or member thereof or to the benefit of any private person. 
(d) Dissolution Clause. In order to qualify for the welfare exemption, the qualifying organization's organizational document must contain a dissolution clause, which specifically states that its property will be distributed to another qualifying organization entity upon its liquidation, dissolution, or abandonment. 
(1) If the dissolution clause in the organizational document designates a specific organization to receive the distribution, it must state that the designated organization is a qualifying organization that is organized and operated for a qualifying purpose. 
(2) The dissolution clause of the qualifying organization may provide that, upon the liquidation, dissolution, or abandonment of the qualifying organization, the property will inure to the benefit of a governmental entity. 
(3) The following examples illustrate dissolution clauses as defined in subdivision (a)(1) above: 
Example No. 1: Upon the liquidation, dissolution or abandonment of this organization, its assets, remaining after payment or provision of payment of all debts and liabilities of this organization, shall be distributed to an organization organized and operated for a charitable, scientific, hospital, or religious purpose meeting the requirements of Revenue and Taxation Code section 214. 
Example No. 2: Upon the liquidation, dissolution or abandonment of this organization, the proceeds or assets related to property located in California, remaining after payment or provision of payment of all debts and liabilities of this organization, shall be distributed to an organization organized and operated for a charitable, scientific, hospital, or religious purpose meeting the requirements of Revenue and Taxation Code section 214. 
Example No. 3: Upon the liquidation, dissolution or abandonment of this organization, its assets, remaining after payment or provision of payment of all debts and liabilities of this organization, shall be distributed to an organization organized and operated exclusively for charitable and educational purposes meeting the requirements of Revenue and Taxation Code section 214. 
Example No. 4: Upon the liquidation, dissolution or abandonment of this organization, its assets, remaining after payment or provision of payment of all debts and liabilities of this organization, shall be distributed to an organization organized and operated exclusively for educational purposes meeting the requirements of Revenue and Taxation Code section 214, subdivision (j). 
Example No. 5: Upon the dissolution or winding up of the corporation, its assets remaining after payment, or provision for payment, of all debts and liabilities of this corporation shall be distributed to a nonprofit fund, foundation or corporation which is organized and operated exclusively for charitable purposes and which has established its tax exempt status under section 501(c)(3) of the Internal Revenue Code. 
Example No. 6: Upon the dissolution or winding up of the organization, its assets remaining after payment or provision of payment of all debts and liabilities of this organization, shall be distributed to a nonprofit organization which is organized and operated exclusively for charitable purposes. 
(e) Failure to Meet Requirements. 
(1) If, at the time of filing, the applicant's organizational document does not contain an irrevocable dedication clause and/or a dissolution clause which meets the requirements of subdivisions (c) and (d), respectively, the organization does not qualify for the Organizational Clearance Certificate under Revenue and Taxation Code section 254.6. However, the applicant may be issued an Organizational Clearance Certificate for the fiscal year for which the Organizational Clearance Certificate is requested on its application if the applicant amends its organizational document to meet the requirements of subdivisions (c) and (d) and submits a certified copy of the amendment to the State Board of Equalization by the next succeeding lien date. 
(2) If, at the time of filing, applicant's organizational document did not contain an irrevocable dedication clause and/or a dissolution clause which meets the requirements of subdivisions (c) and (d), respectively, and the applicant amends its organizational document to meet the requirements of subdivisions (c) and (d) after the next succeeding lien date, an Organizational Clearance Certificate may be issued under Revenue and Taxation Code section 254.6 for the fiscal year following the lien date by which the applicant amends its organizational document and submits a certified copy of the amendment to the State Board of Equalization. 
(3) If the applicant amends its organizational document, a certified copy of the amendments must be provided to the State Board of Equalization. 
(4) The county assessor may not approve a welfare exemption claim until the State Board of Equalization has issued an Organizational Clearance Certificate under Revenue and Taxation Code section 254.6. 
NOTE

Authority cited: Section 15606, Government Code Reference: Sections 214, 214.01, 254.5 and 254.6, Revenue and Taxation Code.
HISTORY

1. New section filed 6-23-2006; operative 7-23-2006 (Register 2006, No. 25).
Article 3.5. Special Classifications
§151. Vessels Subject to the Four Percent Assessment.
Note     •     History

(a) A vessel which meets the requirements of section 130 of the Revenue and Taxation Code shall be assessed at four percent of full cash value under the provisions of section 227 of said code if it is engaged or employed exclusively in one or more of the following activities:
(1) The taking and possession of fish or other living resource of the sea for commercial purposes.
(2) Instruction or research studies as an oceanographic research vessel.
(3) Carrying or transporting seven or more people for hire for commercial passenger fishing purposes and holds a current certificate of inspection issued by the United States Coast Guard. A vessel shall not be deemed to be engaged or employed in activities other than the carrying or transporting of seven or more persons for hire for commercial passenger fishing purposes by reason of that vessel being used occasionally for dive, tour, or whale watching purposes. For purposes of this subdivision, “occasionally” means 15 percent or less of the total operating time logged for the immediately preceding assessment year.
(b) In determining whether a vessel is engaged or employed exclusively for “commercial purposes” in paragraph (a)(1) above or “commercial passenger fishing purposes” in paragraph (a)(3) the assessor shall consider the design of the vessel and the business engaged in by, or occupation of, the owner and any other person leasing or chartering the vessel. In considering the design of the vessel, the assessor shall determine whether the vessel has adequate carrying capacity, gear, and mechanical equipment sufficient to enable the owner to accomplish his intended commercial purpose. Any pleasure-boat use of the vessel is disqualifying irrespective of whether the vessel is or is not licensed as a commercial vessel.
(c) Prior to approving the claim of a vessel purporting to be engaged or employed exclusively as an oceanographic research vessel in paragraph (a)(2) the assessor shall require supporting documentation. Such documentation shall include one or more of the following:
(1) A statement of the course of study with a recognized college or university.
(2) The contract pursuant to which the vessel engages in research for a governmental agency, private foundation, or other organization.
(3) A statement of the study being made, the procedure being used, and the estimated completion date.
(d) Vessels that may qualify under this rule include those registered with or licensed by the Department of Motor Vehicles as well as those required to have and having a valid marine document issued by the Department of Transportation, Vessel Documentation Branch, U.S. Coast Guard or any federal agency subsequently granted licensing authority. This rule does not apply to vessels exempt from taxation under article XIII, sec. 3(1) of the Constitution of the State of California.
(e) Tangible personal property subject to the four percent assessment shall include the vessel and all equipment and furnishings that are normally required aboard the vessel during the accomplishment of the functions for which the vessel is being utilized.
(1) Equipment includes navigational equipment such as radio transmitters, receivers, and other radio equipment, radar and sonar equipment, winches, anchors, lifeboats, engines, generators, signal systems, and other operational equipment as well as necessary fishing or scientific equipment. It excludes, however, aircraft which is subject to taxation under Part 10 of Division 1 of the Revenue and Taxation Code. Equipment that is necessary for the accomplishment of the vessel's functions and is required aboard during certain seasons or periods is also subject to the four percent assessment while stored ashore during the off-seasons or periods.
(2) Furnishings include stoves, dishes, bunks, chairs, fire extinguishers, tools, athletic or recreational equipment, and other property necessary for the accomplishment of the functions of the vessel or the comfort and convenience of the persons on board. Consumable supplies are not part of the vessel. Leased equipment and furnishings that are normally required aboard the vessel during the accomplishment of its functions are to be assessed at four percent of full cash value.
(3) Tangible personal property that is necessary in maintaining, servicing, or repairing the vessel or its equipment and furnishings but is not normally required aboard the vessel is not subject to the four percent assessment. Examples of this type of property are: cranes affixed to the dock and used in loading or unloading the vessel; communication equipment maintained ashore and used in communicating with the vessel; and scientific equipment maintained ashore and used in processing data compiled by a research vessel.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 130, 135 and 227, Revenue and Taxation Code.
HISTORY

1. New Article 3.5 (Section 151) filed 1-9-70; effective thirtieth day thereafter (Register 70, No. 2).
2. Amendment filed 2-18-75; effective thirtieth day thereafter (Register 75, No. 8).
3. Amendment filed 12-26-75; effective thirtieth day thereafter (Register 75, No. 52).
4. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
5. Amendment filed 5-5-81; effective thirtieth day thereafter (Register 81, No. 19).
6. Amendment filed 1-11-83; effective thirtieth day thereafter (Register 83, No. 3).
7. Change without regulatory effect amending section and Note filed 12-15-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 51).
§152. Computer Programs Storage Media.
Note     •     History

(a) Computer programs shall not be valued for purposes of property taxation, except with respect to the valuation of storage media as provided in section 995 of the Revenue and Taxation Code. A licensor of a computer program who does not own, claim, possess or control the storage media on which the program is embodied or stored shall not be subject to assessment with respect to the value of the licensor's copyright interest in the computer program, or with respect to the value of the license fees charged for the use of the computer programs.
(b) Storage media for computer programs, as defined in section 995 of the Revenue and Taxation Code, shall be valued as if there were no computer program on such media except basic operational programs.
(c) In accordance with Revenue and Taxation Code Section 405, storage media for computer programs shall be assessed to the person owning, claiming, possessing or controlling the storage media on the lien date. Storage media shall not be assessed to the owner of the copyright in the computer program embodied or stored on the media if the owner of the copyright does not also own, claim, possess or control the storage media subject to assessment.
(d) The term “basic operational program” refers to a “control program,” as defined in section 995.2 of the Revenue and Taxation Code, that is included in the sale or lease price of the computer equipment. A program is included in the sale or lease price of computer equipment if (i) the equipment and the program are sold or leased at a single price, or (ii) the purchase or lease documents set forth separate prices for the equipment and the program, but the program may not be accepted or rejected at the option of the customer.
(e) In valuing computer equipment that is sold or leased at a single price not segregated between taxable property and nontaxable programs as defined in section 995.2 of the Revenue and Taxation Code, the assessor, lacking evidence to the contrary, may regard the total amount charged as indicative of the value of taxable tangible property.
(f) A person claiming that a single-price sale or lease includes charges for nontaxable programs and services should be required to identify the nontaxable property and services and supply sale prices, costs or other information that will enable the assessor to make an informed judgment concerning the proper value to be ascribed to taxable and nontaxable components of the contract.
(g) When the nontaxable components of a package composed of computer hardware, basic operational programs and nontaxable programs and services may be accepted or rejected at the option of the customer and the charge for each is itemized, such itemization constitutes evidence of the value of the component. Prices charged, whether at the wholesale or the retail level, for hardware only or hardware and basic operational programs also constitute evidence of the value of such property that may be used in segregating values when taxable and nontaxable properties or services are covered by a single-price contract.
(h) Example 1 (Personal Computers).
Included in the price of every IBM and IBM compatible personal computer and every Apple and every Apple compatible personal computer is a basic input output system (BIOS). BIOS is a copyright computer program that controls basic hardware operations, such as interactions with diskette drives, hard disk drives and the keyboard, that the facilitates the transfer of data and control instructions between the computer and peripherals. The operation of other computer programs, such as the various versions of Disk Operating Systems (DOS), Windows, OS/2, UNIX and similar programs, is possible only through the facilities provided by BIOS, but operational programs other than BIOS are not in themselves fundamental and necessary to the functioning of the computer.
(2) Example 2 (Mainframe Computers).
Included in the price of the IBM mainframe computers is a license to use IBM's Licensed Internal Code (LIC) on the computer. LIC is a set of copyrighted computer programs (commonly referred to in the computer industry as microcode) that include the programs that implement the basic functions of the mainframe computer and operate the control logic necessary to execute user instructions to the computer. Manufacturers of other computers likewise include in the price of their computers the microcode necessary to implement the basic functions of the computer. The operation of other computer programs is possible only through the facilities provided by microcode, but operational programs other than microcode are not in themselves fundamental and necessary to the functioning of the computer.
NOTE

Authority cited: Section 15606, Government Code. Reference: Article XIII, Section 2, California Constitution; Sections 110, 401, 405, 995 and 995.2, Revenue and Taxation Code; and Stats. 1972, Ch. 165, sec 2. (p.385).
HISTORY

1. New section filed 9-19-72; effective thirtieth day thereafter (Register 72, No. 39.)
2. Repealer and new section filed 2-26-74 as an emergency; effective upon filing. Certificate of Compliance included (Register 74, No. 9).
3. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
4. New subsections (a) through (d), amendment of existing text to add subsection designators (e) through (g), new examples 1 and 2, and amendment of Note filed 10-4-96; operative 11-3-96 (Register 96, No. 40).
§153. Liquefied Petroleum Gas Tanks.
Note     •     History

(a) Definition. For purposes of this regulation, the term “liquefied petroleum gas tank” (LPG tank) means and includes a tank used as a means of storage, delivery, or transfer of liquefied petroleum gas products. The term also includes related equipment, apparatus, gauges and meters, attached to or installed on the tank.
(b) An LPG tank shall be considered leased or rented if the purchaser of the liquefied petroleum gas is required to pay: (1) sales or use tax measured by the purchase price or a separately stated lease or rental price of the tank; or (2) installation fees or charges, maintenance fees or charges, rent, or any other separately stated periodic charge on the LPG tank.
(c) The ultimate consumer of an LPG tank is determined as follows:
(1) A lessee or renter of an LPG tank, as defined in subdivision (b), is the ultimate consumer of the tank for the purposes of this regulation if the property is leased or rented for an extended but unspecified period or for a term of more than six months.
(2) The owner of the LPG tank is the ultimate consumer of the tank for purposes of this regulation if the property is leased or rented, as defined in subdivision (b), for a period of six months or less.
(3) The owner of the LPG tank is the ultimate consumer of the tank if: (i) the LPG tank is not considered leased or rented pursuant to subdivision (b) of this regulation; and, (ii) the LPG tank is not considered exempt business inventory in accordance with regulation 133.
(d) LPG tanks shall be valued in the hands of the ultimate consumer as defined in subdivision (c) of this regulation, and in accordance with regulations 4, 6, 8, and 10; provided, however, that in applying regulation 10, the term “loaned” in reference to tanks and references to the tax situs in subdivisions (c) and (d) shall not be factors in valuing the LPG tanks.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Article XIII, Section 1(a), California Constitution; Sections 110 and 401, Revenue and Taxation Code.
HISTORY

1. New section filed 4-28-2000; operative 5-28-2000 (Register 2000, No. 17).
Article 4. Information from Taxpayers and Audits
§171. Board-Prescribed Forms for Property Statements.
Note     •     History

(a) Content, Arrangement, and Approval of Property Statements. Except as specifically authorized by the board with respect to heading, name and address of the taxpayer, location of the property, assessor's use columns, and the like, the assessor shall not change, add to, or delete the specific wording of property statement forms or mineral production report forms prescribed by the board or change the sequence of the questions, but the assessor may otherwise arrange the content and alter the size and design of a property statement or mineral production report form to meet the needs of office procedures and facilities. 
(b) Annually, on or before October 15, the assessor shall notify the board, on a checklist provided by the board, of those board-prescribed property statement and report forms, including instructions, which the assessor: 
(1) will reproduce from the current prototype forms and instructions distributed by the board for use for the succeeding assessment year;
(2) will produce by other means for use for that year; and 
(3) will have no need. 
(c) When filing the checklist, the assessor shall submit to the board (either in hard copy or electronically) for approval a copy of each form, including instructions, which the assessor will produce by means other than reproduction of the prototypes. If a form does not conform with the specifications prescribed by the board, as required by section 452 of the Revenue and Taxation Code, section 15606 of the Government Code, and this rule, the assessor shall be notified in writing of the variances. The assessor shall submit a revised form within 30 days of the date of the notice.
(d) Attachments to Property Statements. The assessor is not required to obtain board approval for instructions pertaining to the format of attachments that an assessee elects to furnish in lieu of entering the information on the prescribed property statement. However, such instructions shall include requirements that at least one copy of the property statement as printed by the assessor must be executed and contain appropriate references to the data on the attachment, and that all information required by the property statement must be furnished on the property statement or the attachments.
(e) Time for Filing Mineral Production Reports. The assessor shall not require the filing of mineral production reports prior to April following the calendar year for which the report is prepared.
(f) Assessor to Furnish Property Statements. The pertinent property statement form and instructions shall be furnished by the assessor to every person required by law or requested by the assessor to file a property statement and the pertinent report form shall be furnished by the assessor to every person requested to file a mineral production report.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 441, 441.5, 452 and 469, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-7-73; effective thirtieth day thereafter (Register 73, No. 32). For prior history, see Register 69, No. 38.
2. Amendment filed 3-4-82; effective thirtieth day thereafter (Register 82, No. 10).
3. Amendment filed 9-29-83; effective thirtieth day thereafter (Register 83, No. 40).
4. Amendment filed 1-23-2008; operative 2-22-2008 (Register 2008, No. 4).
§172. Execution of Property Statements and Mineral Production Reports.
Note     •     History

(a) Property statements and mineral production report forms prescribed by the board and filed with the assessor or the board shall be signed by the assessee, a partner, a duly appointed fiduciary, or an agent. When signed by an agent or employee other than a member of the bar, a certified public accountant, a public accountant, an enrolled agent, or a duly appointed fiduciary, the assessee's written authorization of the agent or employee to sign the statement on behalf of the assessee shall be filed with the assessor. For purposes of this section, “enrolled agent” means any person who is authorized, as of the date the statement or report is signed, to practice before the Internal Revenue Service as an enrolled agent. The assessor may at any time require a person who signs a property statement and who is required by this section to have written authorization to provide proof of his authorization.
(b) In the case of a corporate assessee, the property statement and mineral production report shall be signed by an officer or by an employee or agent whom the board of directors has designated in writing (other than those excepted in (a) above), by name or by title, to sign such statements on behalf of the corporation. The board of directors may appoint a person or persons to designate such employee or agent. A record of the written authorization or the appointment and designation required by this subsection shall be retained by the assessee for a period of six years from the date of its execution.
(c) Property statements and mineral production reports, regardless of where executed, shall be declared to be true and correct and be signed under the penalty of perjury. Property statements and mineral production reports signed by an agent or other representative of the assessee shall include a declaration signed under the penalty of perjury which shall specify that the person signing is authorized to sign on behalf of the assessee.
(d) Neither the assessor nor the board shall knowingly accept any signed property statement or mineral production report that is not executed in accordance with the requirements of this section.
(e) A property statement or a mineral production report that is unsigned does not constitute a valid filing. The penalty imposed by Section 463 of the Revenue and Taxation Code for failure to file shall be applicable to unsigned property statements.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 441, 452 and 463, Revenue and Taxation Code.
HISTORY

1. New section filed 2-13-68; effective thirtieth day thereafter (Register 68, No. 7).
2. Amendment filed 1-23-70; effective thirtieth day thereafter (Register 70, No. 4).
3. Amendment of subsection (c) filed 1-19-71; effective thirtieth day thereafter (Register 71, No. 4).
4. Amendment filed 12-20-71; effective thirtieth day thereafter (Register 71, No. 52).
5. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
6. Amendment of subsections (a) and (c) filed 5-11-94; operative 6-10-94 (Register 94, No. 19).
§173. Who Must File a Property Statement. [Repealed]
History

HISTORY

1. New section filed 3-28-68 as an emergency; effective upon filing. Certificate of Compliance included. (Register 68, No. 13).
2. Repealer filed 12-12-69; effective thirtieth day thereafter (Register 69, No. 50).
§174. Penalty for Late Filing. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606, Government Code.
HISTORY

1. New section filed 3-28-68 as an emergency; effective upon filing; Certificate of Compliance included (Register 68, No. 13).
2. Repealer filed 1-13-69; effective thirtieth day thereafter (Register 69, No. 3).
3. Repealer filed 2-28-69; effective thirtieth day thereafter (Register 69, No. 9).
§181. Board-Prescribed Mineral Production Reports. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 401, 441, 452 and 826, Revenue and Taxation Code.
HISTORY

1. New section filed 10-10-68 as an emergency; effective upon filing. Certificate of Compliance included (Register 68, No. 38).
2. Repealer filed 9-18-69; effective thirtieth day thereafter (Register 69, No. 38).
§191. Property Tax Audits, General.
Note     •     History

The purpose of the audit is to collect data relevant to the determination of taxability, situs, and value of property. When an audit is to be made, the assessor, his deputy, or his authorized agent shall inform the taxpayer and arrange for the time and place to begin the audit. Upon completion of the audit, the taxpayer shall be given the auditor's findings in writing with respect to data which would alter any previously enrolled assessment. The taxpayer shall be given an opportunity to make written and/or oral response thereto, and his written comments shall become part of the audit report.
After having considered the results of the audit, including discussions with and written comments of the taxpayer, the assessor shall inform the taxpayer of his conclusions as to the value of the property and may (1) cause an escape assessment to be made, (2) make an assessment subject to penalty, or (3) inform the taxpayer of his right to a cancellation of assessment or a refund of taxes.
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 469, Revenue and Taxation Code.
HISTORY

1. New section filed 6-23-67; effective thirtieth day thereafter (Register 67, No. 25).
2. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
3. Editorial correction of NOTE filed 7-30-82 (Register 82, No. 31).
§192. Audit Selection.
Note     •     History

(a) Definitions. For purposes of this regulation:
(1) “Personal property” means all property except real property.
(2) “Business tangible personal property” means personal property used in a profession, trade, or business, and shall include vessels and/or aircraft if used in a profession, trade, or business.
(3) “Trade fixtures” means any fixtures that are used in connection with a trade or business.
(4) “Farming” is a business. When conducting an audit pursuant to this section of a farming or ranching operation, the assessor must determine whether any racehorses taxable to the same taxpayer pursuant to Part 12 of Division 1 of the Revenue and Taxation Code have been underreported or escaped assessment.
(5) “Significant number of audits” means at least 75 percent of the fiscal year average of the total number of audits the assessor was required to have conducted from the 2002-03 fiscal year to the 2005-06 fiscal year, inclusive, on those taxpayers in the county that had a full value of four hundred thousand dollars ($400,000) or more of locally assessable trade fixtures and business tangible personal property.
(6) “Taxpayers with largest assessments” means taxpayers that have the largest assessments of locally assessable trade fixtures and business tangible personal property in the county for the applicable year of audit selection.
(b) General Provisions. The assessor must annually conduct a significant number of audits of the books and records of taxpayers engaged in a profession, trade, or business who own, claim, possess, or control locally assessable trade fixtures and business tangible personal property in the county to encourage the accurate and proper reporting of property.
(c) Significant Number of Audits. If the computation of the significant number of audits, as defined in subdivision (a)(5), does not result in a whole number, the number must be rounded before calculating the number of audits that must be performed on taxpayers selected from the pool of taxpayers with the largest assessments and the number of audits that must be performed on taxpayers selected from the pool of all other taxpayers in the county.
(1) Fifty percent of the significant number of audits must be performed on taxpayers selected from the pool of taxpayers with the largest assessments.
(A) This pool of taxpayers must be selected from a list of taxpayers in the county, ranked in descending order by the total locally assessed value of both trade fixtures and business tangible personal property.
(B) The qualified number of those taxpayers for inclusion in the pool must be that number equal to 50 percent of the significant number of audits multiplied by four.
(C) All taxpayers in the pool must be audited at least once within each four-year period following the latest fiscal year covered by a preceding audit and the audit may combine multiple fiscal years.
(D) The assessor is relieved of the requirement to audit the taxpayer at least once every four years if the assessor determines that the taxpayer's assessments are no longer large enough for inclusion in the pool. If such is determined, then the next ranking taxpayer not currently within the pool of taxpayers with the largest assessments must be added to the pool.
(E) The assessor is not required to audit a taxpayer that is fully exempt from property taxation under other provisions of law for purposes of the requirements of this section. Therefore, a taxpayer fully exempt from property taxation must not be included in the pool of taxpayers with the largest assessments.
(2) The remaining 50 percent of the significant number of audits must be selected by the assessor from among the pool of all taxpayers.
(A) These audits must be selected in a fair and equitable manner.
(B) These audits may be based on evidence of underreporting as determined by the assessor.
(3) If the significant number of audits is an odd number, the assessor must determine how to split the odd number audit.
(d) Other Audits. Nothing herein shall be construed to prohibit an assessor from auditing the books and records of any taxpayer more frequently than once every four years.
(e) Examples. The following hypothetical examples illustrate the audit selection process.
Example 1: Prior to January 1, 2009, a county with a total number of mandatory audits of 800 during the 2002-2003 fiscal year to the 2005-2006 fiscal year was required to conduct 200 audits (800 ¸ 4) per year. This county's significant number of audits that must be conducted annually is 150 (75% x 200). Of the 150 annual significant number of audits, 75 (50% x 150) must be from the pool of the taxpayers with the largest assessments, and 75 (50% x 150) must be selected from among the pool of all other taxpayers in the county. The number of taxpayers with the largest assessments that must be audited on a four year cycle is 300 (150 x 50% x 4).
Example 2: Prior to January 1, 2009, a county with a total number of mandatory audits of 61 during the 2002-2003 fiscal year to the 2005-2006 fiscal year was required to conduct 15 audits (61 ¸ 4 = 15.25, rounded) per year. This county's significant number of audits that must be conducted annually is 11 (75% x 15.25 = 11.4375, rounded). Of the 11 annual significant number of audits, 5.5 (50% x 11) must be from the pool of the taxpayers with the largest assessments, and 5.5 (50% x 11) must be selected from among the pool of all other taxpayers in the county. The county assessor must determine how to split the odd number audit. The number of taxpayers with the largest assessments that must be audited on a four-year cycle is 22 (11 x 50% x 4). Therefore, during a four-year cycle, the county assessor would be required to audit five from the pool of taxpayers with the largest assessments in the county and six from among the pool of all other taxpayers in the county each year for two years; and six from the pool of taxpayers with the largest assessments in the county and five from among the pool of all other taxpayers in the county each year for the remaining two years.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 106, 469 and 470, Revenue and Taxation Code.
HISTORY

1. Amendment of subsections (d) and (e) and new subsection (f) filed 10-26-73; effective thirtieth day thereafter (Register 73, No. 43). For prior history, see Register 71, No. 13.
2. Amendment of subsections (a), (b), and (c) filed 12-22-76; effective thirtieth day thereafter (Register 76, No. 52).
3. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
4. Amendment filed 10-20-80; effective thirtieth day thereafter (Register 80, No. 43).
5. Amendment filed 1-11-83; effective thirtieth day thereafter (Register 83, No. 3).
6. Change without regulatory effect amending subsections (a)-(c) filed 4-29-96 pursuant to section 100, title 1, California Code of Regulations (Register 96, No. 18).
7. Change without regulatory effect amending subsection (a)(2) filed 12-22-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 52).
8. Amendment of section heading, section and Note filed 4-14-2010; operative 5-14-2010 (Register 2010, No. 16).
§193. Scope of Audit.
Note     •     History

(a) When auditing a taxpayer under the requirements of Rule 192, an assessor may audit for only one of the fiscal years within the period specified in section 532 of the Revenue and Taxation Code if no discrepancy or irregularity is found in the fiscal year selected for audit unless one of the provisions of subdivision (b) apply. 
(b) When a discrepancy or irregularity is found in the fiscal year first selected for audit, the assessor shall audit the remaining fiscal years for which the statute of limitations has not expired unless the assessor documents in the audit report his/her conclusion both that: 
(1) The discrepancy or irregularity in the fiscal year first selected is peculiar to that fiscal year; and 
(2) The discrepancy or irregularity did not disclose:
(A) an escape assessment under the provisions of Revenue and Taxation Code sections 469, 502, 503, 531.3, or 531.4; or
(B) an error that resulted in property being incorrectly valued or misclassified that caused the property to be assessed at a higher value than would have been on the roll if the error had not occurred. The error that caused the property to be assessed at a higher value than would have been on the roll must be of “material value” as defined in Rule 305.3.
(c) If property of a taxpayer who meets the requirements of Rule 192 is selected by the California State Board of Equalization (Board) as an assessment sample item as part of its assessment practices surveys, the assessor of the county surveyed may consider the Board's audit findings  as the fulfillment of Rule 192, providing no discrepancy or irregularity exists between the findings and the corresponding property statement or report and providing the assessor maintains a copy of such findings in his/her files. If the assessor determines that the findings disclose a discrepancy or irregularity between the taxpayer's books and records and the corresponding property statement or report, the assessor shall ascertain the cause and audit all years within the statute of limitations.
(d) Nothing herein shall be construed to prohibit an assessor from auditing or reauditing any or all statement or reports for which the statute of limitations has not expired or to define the circumstances in which property that has escaped assessment can be added to the roll.
(e) The statute of limitations may be extended through the execution of a mutually agreed upon waiver pursuant to Revenue and Taxation Code section 532.1.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 469, 502, 503, 531, 531.3, 531.4, 532 and 532.1, Revenue and Taxation Code.
HISTORY

1. New section filed 4-12-68; effective thirtieth day thereafter (Register 68, No. 15).
2. Amendment filed 12-12-69; effective thirtieth day thereafter (Register 69, No. 50).
3. Amendment of subsection (b) filed 1-16-85; effective thirtieth day thereafter (Register 85, No. 3).
4. Amendment of section and Note filed 4-14-2010; operative 5-14-2010 (Register 2010, No. 16).
Article 5. Situs
§201. Tax Situs of Air Carriers' Aircraft Components, Repair and Replacement Parts, and Supplies.
Note     •     History

Aircraft components, repair and replacement parts, and supplies owned, claimed, possessed, controlled, or managed by an air carrier shall be assessed at the place where they are situated on the lien date. Items which have been moved temporarily to another location for processing or repair, such as radio equipment being serviced or an engine being overhauled, do not acquire another situs for taxation by reason of temporary removal from the place where they are habitually kept.
Components, parts, and supplies do not acquire more than one taxable situs, although individual items may be rotated between storage and operational use on various aircraft over a period of time.
NOTE

Authority cited: Section 15606, Revenue and Taxation Code. Reference: Sections 443 and 1019, and Article 6, Chapter 5, Part 2, Division 1, Revenue and Taxation Code.
HISTORY

1. New Article 5 (Section 201) filed 2-14-67 as an emergency, effective upon filing. Certificate of Compliance included (Register 67, No. 7).
2. Amendment filed 1-13-69; effective thirtieth day thereafter (Register 69, No. 3).
3. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
§202. Allocation of Aircraft of Certificated Air Carriers and Scheduled Air Taxi Operators.
Note     •     History

(a) Air Taxis. An aircraft whose owner on the lien date used it in scheduled air taxi service at any time during the representative period selected pursuant to subsection (f), or which has been purchased for scheduled air taxi service but not yet put into such service and not yet used in any other service, is assessable under sections 1150 to 1156 of the Revenue and Taxation Code and not under Part 10, Division 1, or under other situs provisions of Part 2, Division 1, of the Revenue and Taxation Code.
(b) Situs. Aircraft of United States registry operated by certificated air carriers (within the meaning of section 1150 of the Revenue and Taxation Code) or scheduled air taxis (within the meaning of subdivisions (a) and (b) of section 1154 of the Revenue and Taxation Code) and flown in intrastate, interstate, or foreign commerce shall be deemed to be situated only in those taxing agencies (within the meaning of section 404 of the Revenue and Taxation Code) in which the aircraft normally make physical contact. The physical contact must be intentional rather than by accident or as the result of an emergency, and it must involve embarking or disembarking of crew, passengers, or freight.
(1) Aircraft flying over the state without landing do not acquire situs for property tax purposes. Conversely, the situs of aircraft that depart from a taxing agency within the state, fly out of the state, and return to the same or another taxing agency within the state without landing outside the state is within the state's taxing jurisdiction throughout the flight.
(2) Situs for property tax purposes is not affected by the legal or commercial domicile of the operator of the aircraft, except that foreign-owned and-based aircraft operated solely in foreign commerce do not acquire a situs within the state for property tax purposes.
(c) Allocation Formula. The allocation formula to be used by each assessor is composed of two factors: (1) ground and flight time and (2) aircraft arrivals and departures.
(1) The ground and flight time factor is the ratio of time allocable to an airport during a representative period to the total time during the representative period.
(A) Time allocable to an airport is the amount of time a certificated aircraft (or scheduled air taxi) is on the ground at the airport, plus the portion of incoming and outgoing flight time computed pursuant to subsection (d). In computing the time allocable to the airport, the following shall be excluded: (1) all ground and flight time prior to the aircraft's first entry into the revenue service of the air carrier in control of the aircraft on the current lien date; and (2) all ground time in excess of 168 hours during each period the aircraft spent 720 or more consecutive hours on the ground.
(B) Total time is the sum of the time allocable to the airport and the time allocable elsewhere during the representative period. In computing the total time, the following shall be excluded: (1) all ground and flight time prior to the aircraft's first entry into the revenue service of the air carrier in control of the aircraft on the current lien date. The ground and flight time factor shall be multiplied by 75 percent to obtain a weighted ground and flight time factor.
(2) The aircraft arrivals and departures factor is the ratio of the number of arrivals at and departures from an airport during a representative period to the total number of arrivals at and departures from all airports during the representative period. This factor shall be multiplied by 25 percent to obtain a weighted arrivals and departures factor.
(3) The weighted ground and flight time factor shall be added to the weighted arrivals and departures factor. The sum of the two weighted factors yields the allocation ratio to be applied to the full cash value of the aircraft to determine the full cash value allocable to the airport.
(d) Allocation of Flight Time. For aircraft flying from one California airport to another California airport, the flight time attributable to each airport is one-half the flight time between the airports. For aircraft arriving from an airport outside the state or leaving for an airport outside the state, the flight time from or to the state boundary shall be allocated to the California airport in which the aircraft first lands or last takes off, as the case may be. The flight time to the state boundary shall be computed as follows: (1) determine the mileage from the airport to the state boundary crossing point on a great circle flight to the first landing point outside the state; (2) divide this mileage by the total great circle mileage from the airport to the first landing point outside the state; (3) multiply this percentage by the total flight time from the airport to the first landing point outside the state. The same procedure shall be used for inbound flights from outside the state. To allow for differences in take-off, landing, and cruising speeds and for varying take-off and landing patterns, the time allocated to an airport shall not be less than five minutes for an incoming or an outgoing flight. In lieu of the actual flight time for a single flight, the average flight time between two ports, or between a port and the state line, for two or more flights of a single carrier or of more than one carrier shall be used when such an average is promulgated by the board unless the assessor has documented evidence which justifies departure from such average time.
(e) Sources of Allocation Data. For scheduled operations, arrivals and departures and ground and flight time shall be derived from the carrier's operating schedules. For nonscheduled operations, including, but not limited to, overhaul, pilot training, charter, military contract flights, and standby services, ground and flight time and arrivals and departures shall be derived from the carrier's recorded operations.
(f) Representative Period. Annually, on or before December 20, the board shall consult with the assessors of the counties in which air carriers' aircraft normally make physical contact. On or before January 15, the board shall designate a representative period to be used by all assessors in assessing the aircraft of each carrier for the forthcoming fiscal year.
(g) Application of Allocation Formula. The aircraft of certificated air carriers and scheduled air taxi operators shall be segregated by type, and a separate allocation ratio shall be computed for each type which has established a taxable situs within the state, excluding those makes within a type which have not established a taxable situs within the state. Each allocation ratio shall then be applied to the total value of the carrier's aircraft of each type to which the allocation ratio applies, excluding those makes within a type which have not established a tax situs within the state. Annually, the types shall be designated by the board in the same manner and at the same time the representative period is designated. Examples of the types are as follows:
(1) Piston-powered
(2) Turboprop-powered
(3) Helicopter
(4) Turbojet and Turbofan powered
(A) Two engine
(B) Three engine
(C) Four engine
(D) DC-8-60 series
(E) Two engine widebody
(F) Three engine widebody
(G) Four engine widebody
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 1150, 1151, 1152, 1153, 1154, 1155 and 1156, Revenue and Taxation Code.
HISTORY

1. Amendment filed 2-24-70; effective thirtieth day thereafter (Register 70, No. 9). For prior history, see Register 69, No. 50.
2. New (g)(4)(F) filed 12-20-71; effective thirtieth day thereafter (Register 71, No. 52).
3. Amendment of subsection (c) filed 2-26-74 as an emergency; effective upon filing. Certificate of Compliance included (Register 74, No. 9).
4. Amendment of subsection (e) filed 12-26-75; effective thirtieth day thereafter (Register 75, No. 52).
5. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
6. Amendment filed 10-20-80; effective thirtieth day thereafter (Register 80, No. 43).
7. Amendment filed 1-11-83; effective thirtieth day thereafter (Register 83, No. 3).
8. Editorial correction of subsection (g)(4) filed 3-15-83 (Register 83, No. 12).
9. Editorial correction of subsection (c) filed 10-31-83 (Register 83, No. 45).
10. Amendment filed 5-13-98; operative 6-12-98 (Register 98, No. 20).
§203. Goods in Transit.
Note     •     History

(a) Property moving in interstate or foreign commerce, whether entering or leaving the state, are not subject to tax while in transit.
Property moving in intrastate commerce on the lien date are taxable and have situs for that purpose as follows:
(1) Property being transported by an owner from one location to another has situs at the point of origin of the shipment regardless of the mode of transportation or the ownership of the means of conveyance.
(2) Property being transported to a buyer has situs at its point of destination unless the buyer demonstrates to the satisfaction of the assessor that the seller had title until delivery. Pursuant to the Uniform Commercial Code, f.o.b. designations, unless otherwise agreed between a seller and buyer, are delivery terms. Title to property remains with a seller until he has completed delivery by making the property available for disposition by the buyer at the f.o.b. point. Retention of security interest by a seller shall be disregarded for purposes of determining situs.
Property is in transit as part of interstate or intrastate commerce, as the case may be, when it has been delivered to a carrier or, if delivery to destination is being made by the owner of the property, when he has actually started transporting the property to its destination. Transportation terminates when the property reaches its destination and is made available for disposition by the consignee of the shipment.
The interruption of transportation for purposes incident to transportation does not remove property from its in-transit status. The interruption of transportation for the business purpose or profit of the owner terminates the transportation and creates a situs for taxation at the place where the property is situated on the lien date.
Thus, property remains in transit if the interruption is caused by a breakdown in the transportation system or equipment, the promotion of safe or convenient transit, or the accumulation by the carrier of sufficient cargo to make a load.
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 1019, Revenue and Taxation Code; and Article XIII, Section 14, California Constitution.
HISTORY

1. New section filed 2-13-68; effective thirtieth day thereafter (Register 68, No. 7).
2. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
3. Amendment filed 1-18-83; effective thirtieth day thereafter (Register 83, No. 3).
§204. Leased Property.
Note     •     History

(a) Property leased or rented on a daily, weekly or other short-term basis has situs at the place where the lessor normally keeps the property. Temporary absences from that location do not change the situs of the property.
(b) The situs of property leased or rented for an extended, but unspecified, period or leased for a term of more than six months shall be determined on the basis of the lessee's use.
(c) The assessor may place a single assessment on the roll for all leased personal property in the county that is assessed to the same taxpayer. Any property assessed pursuant to this subdivision shall, in the absence of evidence establishing otherwise, be deemed to be located at the taxpayer's primary place of business within the county.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 623 and 1019, Revenue and Taxation Code; and Article XIII, Section 14, California Constitution.
HISTORY

1. New section filed 2-13-68; effective thirtieth day thereafter (Register 68, No. 7).
2. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
3. Amendment filed 1-18-83; effective thirtieth day thereafter (Register 83, No. 3).
4. Change without regulatory effect designating first and second paragraphs as subsections (a) and (b), adding subsection (c), and amending Note filed 12-11-97 pursuant to section 100, title1, California Code of Regulations (Register 97, No. 50).
§205. Movable Property.
Note     •     History

(a) General. Movable property is all property which is intended to be, and is, moved from time to time from one location to another. Such property may be in-transit, consigned, or leased, and under such circumstances its situs is to be determined by reference to Section 203 or 204 of this chapter.
Movable property has situs where located on the lien date if it has been in the county for more than 6 of the 12 months immediately preceding the lien date and if it is to remain in or be returned to the county for any substantial period during the 12 months immediately succeeding the lien date. Property which has been in the county for less than 6 of the 12 months immediately preceding the lien date, but which is committed to use in the county for an indeterminate period or for more than six months, has situs there whether the use extends through or commences with the lien date.
Property which does not have situs where located on the lien date pursuant to the previous paragraph has situs at the location where it is normally returned between uses or, if there is no such location, at the principal place of business of the owner.
(b) General Aircraft. Aircraft other than those subject to Revenue and Taxation Code sections 1150 and 1155 have situs for taxation purposes at the airport in which they are habitually situated when not in flight. An aircraft that spends a substantial amount of ground time at each of two or more airports has its tax situs at the airport where it spends the greatest amount of ground time.
(c) This section does not apply to boats or racehorses.
NOTE

Authority cited: Section 15606, Government Code. Reference: Article XIII, Section 14, California Constitution.
HISTORY

1. New section filed 2-13-68; effective thirtieth day thereafter (Register 68, No. 7).
2. Amendment filed 2-28-69; effective thirtieth day thereafter (Register 69, No. 9).
3. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
4. Amendment filed 10-20-80; effective thirtieth day thereafter (Register 80, No. 43).
5. Amendment of subsection (a) filed 1-18-83; effective thirtieth day thereafter (Register 83, No. 3).
§206. Assessment of Artificial Satellites.
Note     •     History

An artificial satellite permanently located in outer space does not have a tax situs in this state.
NOTE

Authority cited: Section 15606, Government Code. Reference: California Constitution, article XIII, Section 14; and Section 201, Revenue and Taxation Code.
HISTORY

1. New section filed 11-8-2001; operative 1-1-2002 (Register 2001, No. 45).
Article 6. Local Roll
§251. Notice and Application of Assessment Ratio.
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. Reference: Section 401, Revenue and Taxation Code.
HISTORY

1. Amendment filed 2-9-73 as an emergency; effective upon filing (Register 73, No. 6). For prior history, see Register 71, No. 4.
2. Certificate of Compliance filed 4-5-73 (Register 73, No. 14).
3. Amendment filed 12-26-75; effective thirtieth day thereafter (Register 75, No. 52).
4. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
5. Repealer filed 3-4-82; effective thirtieth day thereafter (Register 82, No. 10).
§252. Content of Assessment Roll.
Note     •     History

(a) Minimum Contents of “Machine-Prepared” or “Electronic” Local Rolls. “Machine-prepared” roll within the meaning of Revenue and Taxation Code Section 109.5 includes any preparation of the local roll by the assessor of each county by an electronic medium. In accordance with Revenue and Taxation Code Section 601 et seq., each local assessment roll shall contain, at a minimum, the following information:
(1) The name of the county.
(2) Either the calendar year in which the roll is prepared or the fiscal year for which the taxes are levied.
(3) An explanation of abbreviations and legends appearing on the roll.
(4) On the secured roll, the assessor's parcel number or other legal description that identifies each parcel of taxable land, each parcel for which an exemption is enrolled, and each taxable possessory interest in tax-exempt real estate to which the exemption authorized by Section 218 of the Revenue and Taxation Code has been applied. The assessment of the taxable possessory interest shall not be a lien on the tax-exempt real estate and that fact shall be noted on the secured roll. 
(5) On the unsecured portion of the roll, the assessor's parcel number or other legal description that sufficiently identifies the location of each taxable possessory interest, improvement, or personal property.
(6) The name of the assessee, if known.
(7) The latest mailing address (not an e-mail address) of the assessee contained in the assessor's records.
(8) The separately stated assessed values of all land, improvements, and personal property subject to taxation at general property tax rates (or payments in lieu of property tax computed by applying general property tax rates to fixed or variable “assessed values”), and the separately assessed values of any privately owned land, improvements, and personal property of a type that is exempt from taxation, but is subject to ad valorem special assessments when within a district levying such assessments. If real property is situated within a resource conservation district that is levying a special assessment, the assessed value of mineral rights must be separated from the land value.
(9) The tax rate area in which each piece of property assessed is situated. 
(10) The penalties imposed upon such assessments, in the form required by section 261, Title 18 (Rule 261) of this code.
(11) The assessed value of any property that escaped assessment in a prior year, together with the notation required by section 533 of the Revenue and Taxation Code.
(12) The exempt amount of any assessed values required by paragraph (a)(8) to be enrolled, with identifying legends or distinctive positions for amounts allowed pursuant to any reimbursable exemption.
(13) The total net taxable value.
(14) In a separate section of the roll, the assessed value of any personal property for which tax revenues are subject to allocation in a manner different from that provided for general property tax revenues (e.g., general aircraft).
(15) On the secured roll, a cross-reference notation made pursuant to Revenue and Taxation Code section 2190.2 that is adjacent to the assessment of any taxable land when a possessory interest in such land or an improvement thereon is separately assessed to another owner pursuant to section 2188.2 of the Revenue and Taxation Code.
(16) Whenever the assessor determines that a change in ownership or the completion of new construction has occurred, the assessor shall place a notice of the pending supplemental billing on the roll being prepared and shall notify the auditor, who shall place a notation on the current roll or on a separate document accompanying the current roll that a supplemental billing may be forthcoming. 
(17) After each assessment of tax-defaulted property, the assessor shall enter on the roll the fact that it is tax-defaulted and the date of declaration of the default. 
(18) Any other items required by the State Board of Equalization for the purpose of identification and valuation of all locally assessed property and the collection of property taxes thereon. 
(b) Exempt Values Not Required to Be Enrolled. Parcel numbers or other legal descriptions of exempt real property may be entered on the roll without values. Alternatively, such exempt real property may be listed with values shown in a separate column or field (e.g., a comments field) or in the exemption column or field on lines that are coded in such manner as to preclude the addition of the values when the exemption column or field is totaled; the exempt values shall not be shown in land or improvement columns or fields.
(c) Content of Extended Roll. The extended assessment roll or new local assessment roll for the extension of taxes prepared by the county auditor shall contain, in addition to all of the contents required by subsection (a) of this rule at least the following:
(1) The mailing address, if known, of the assessee.
(2) The revenue district for each group if assessments are grouped by revenue district, and for each assessment if assessments are not so grouped.
(3) All tax rates and ad valorem special assessment extensions required by law.
(4) The amount of tax to be paid on the property listed. The amounts due in installments shall be stated separately and shall be totaled. All rates applicable to any assessment may be combined into a single figure for purposes of computation and extension of the roll. 
(5) At the beginning of the roll, or at the beginning of each tax-rate area grouping on the roll, a list of all revenue districts levying taxes within each tax-rate area in the county.
(6) An identification of each tax-defaulted property sold, with the date of sale.
(d) Minimum Contents of Local Rolls Not “Machine-Prepared.”
(1) The local roll of each county utilizing a roll that is not “machine-prepared” within the meaning of Revenue and Taxation Code Section 109.5 shall have the contents specified in subsections (a) and (c) of this rule.
(2) The secured assessments shall be arranged in ascending parcel number order within tax-rate area groupings, with unparcelled properties at the end of each tax-rate area group if there are both parcelled and unparcelled properties in the tax-rate area.
(e) Approval of Roll Forms.
(1) Whenever the local assessment roll is to be prepared in a form other than that previously approved by the board, the assessor shall submit to the board for approval in duplicate by January 1 the forms to be used for the succeeding fiscal year.
(2) Forms to be submitted include, but are not limited to, the following:
(A) Secured roll prepared by the assessor.
(B) Secured roll alphabetical index.
(C) Unsecured roll prepared by the assessor.
(D) Unsecured roll alphabetical index.
(E) Notice of assessment.
(F) Notice of supplemental assessment.
(G) Notice of escape assessment. 
(H) Notice of proposed escape assessment. 
(3) When submitted for approval, each roll form listed in (2) shall be filled out with examples sufficient to illustrate its completed appearance, except that totals and summaries need not be shown.
(f) Nothing in this regulation is meant to alter the intent of Section 109.6 of the Revenue and Taxation Code. 
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 75.30, 75.31, 109, 109.5, 109.6, 601, 602, 618, 619, 1612, 1614, 1646, 2152, 2188.2, 2190, 2190.2 and 2601, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-20-71; effective thirtieth day thereafter (Register 71, No. 30). For prior history, see Register 69, No. 3.
2. Amendment of subsection (f)(1) filed 8-7-73; effective thirtieth day thereafter (Register 73, No. 32).
3. Amendment of subsection (a) filed 2-18-75; effective thirtieth day thereafter (Register 75, No. 8).
4. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
5. Amendment filed 11-15-85; effective thirtieth day thereafter (Register 85, No. 46).
6. Amendment of section and Note filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
7. Editorial correction of subsections (a) and (e)(2)(E) (Register 2002, No. 30).
§253. Machine-Prepared Roll; Controls. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 109, 109.5, 618, 1612, 1614, 1646, 2152 and 2601, Revenue and Taxation Code.
HISTORY

1. Amendment filed 11-21-68 as an emergency; effective upon filing (Register 68, No. 44).
2. Certificate of Compliance--Section 11422.1, Government Code, filed 1-13-69 (Register 69, No. 3).
3. New NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
4. Amendment of subsection (a) filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
5. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§254. Use of Board-Prepared Roll As Unextended Roll.
Note     •     History

Any county utilizing a machine-prepared roll whose county auditor prepares a new assessment roll on which to extend taxes may use the roll prepared by the state board for state-assessed properties as the unextended assessment roll. In such case, the assessments of state-assessed properties shall be kept in a separate section or sections of the extended roll, and the values shall be separately totaled. Prior to delivery of the extended roll to the tax collector the auditor shall affix to the section or sections of the extended roll containing state-assessed property an affidavit subscribed by him or her as follows: 
“I, ________, Auditor of ________ County, swear that the attached roll is a reproduction of the assessments of state-assessed properties in this county as prepared and corrected by the State Board of Equalization, together with the extensions required by law.”
Nothing in this regulation is meant to alter the intent of section 109.6 of the Revenue and Taxation Code. 
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 109, 109.5, 618, 1612, 1614, 1646, 2152 and 2601, Revenue and Taxation Code.
HISTORY

1. New NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
2. Amendment of section and Note filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§255. Enrollment of Supplemental Assessments.
Note     •     History

(a) When the period for claiming exemption has expired, and any exemptions have been processed, the assessor shall transmit the supplemental assessment and the following information to the auditor: 
(1) Name and address, if known, of the assessee. 
(2) The parcel number or legal description of the property. 
(3) The tax rate area in which the property is located. 
(4) The new base year value of the property with the value for the land separated from the value for improvements. 
(5) The value of the property on the current roll, or the roll being prepared, or both. 
(6) The exemption applicable, if any. 
(7) The net supplemental assessment after exemption, or the values required for the the auditor to calculate and bill the supplemental value. 
(8) The date of the change in ownership or completion of new construction. 
(b) The auditor shall apply the current year's tax rate, as defined in Section 75.4 of the Revenue and Taxation Code, to the supplemental assessment or assessments, computing the amount of taxes that would be due for a full year. If the tax rate for the “roll being prepared” is known, the rate may be used with respect to the fiscal year to which it applies, rather than the current year's tax rate as defined in Section 75.4. If the tax rate for the “roll being prepared” is not known, the current year's tax rate as defined in Section 75.4 shall be used. For property on the supplemental roll, the taxes due shall be computed in two equal installments. 
(c) The taxes due shall be adjusted by a proration factor as set forth in Section 75.41 of the Revenue and Taxation Code to reflect the portion of the tax year remaining as determined by the date on which the change in ownership occurred or the new construction was completed. In computing the portion of the tax year remaining, the change in ownership or completion of new construction shall be presumed to have occurred on the first day of the month following the date on which change in ownership or completion of new construction occurred. 
(d) After computing the supplemental taxes due, if the total is twenty dollars ($20) or less, the auditor may cancel the amount as provided by Section 4986.8 of the Revenue and Taxation Code. 
(e) If the supplemental assessment is a negative amount, the auditor shall follow the procedures of section 75.41 of the Revenue and Taxation Code to determine the amount of refund to which the assessee may be entitled. 
(f) No supplemental assessment authorized by this regulation shall be valid, or have any force or effect, unless it is placed on the supplemental roll on or before the applicable date specified in Revenue and Taxation Code section 75.11. 
(g) No limitations period specified in Revenue and Taxation Code section 75.11 shall commence unless the filing or transmittal specified in the relevant paragraph has been completed. 
(h) If, before the expiration of the applicable period specified in subdivision (f) for making a supplemental assessment, the taxpayer and the assessor agree in writing to extend the period for making a supplemental assessment, correction, or claim for refund, a supplemental assessment may be made at any time prior to the expiration of that extended period. The extended period may be further extended by successive written agreements entered into prior to the expiration of the most recent extension. 
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 75.7, 75.11, 75.21, 75.40, 75.41 and 75.42, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24). For prior history, see Register 83, No. 3.
§256. Tape Storage of Roll Data. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 109, 109.5, 618, 1612, 1614, 1646, 2152 and 2601, Revenue and Taxation Code.
HISTORY

1. Amendment filed 11-21-68 as an emergency; effective upon filing (Register 68, No. 44).
2. Certificate of Compliance--Section 11422.1, Government Code, filed 1-13-69 (Register 69, No. 3).
3. New NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
4. Editorial correction filed 11-23-83 (Register 83, No. 48).
5. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§261. Penalties; Form and Manner of Entry.
Note     •     History

(a) A penalty imposed under Sections 463, 503 or 504 of the Revenue and Taxation Code shall be entered on the local roll in any one of the following forms:
(1) By adding 10 percent or 25 percent or the percentage or maximum allowable dollar amount prescribed by statute, as the case may be, to the assessed value of each class of property to which the penalty is applicable and referencing the values so increased to footnotes or entries in the comment field which read: “Includes ________% penalty or the maximum allowable dollar amount penalty added pursuant to Sec. ________, R & T Code,” or words substantially to this effect.
(2) By inserting the amount to be added to the assessed value of each class of property and identifying the penalty by an entry which reads: “Penalty added pursuant to Sec. ________, R & T Code,” or words substantially to this effect.
(3) By entering the amount to be added to the assessed value of each class of property in another part of the roll, together with the name and address of the assessee, the tax-rate area code, the words “Penalty added pursuant to Sec. ____, R & T Code” or words substantially to this effect, and a cross reference to the place on the roll at which the assessed values are entered. When this manner of enrolling penalties is chosen, the assessed value entries shall be cross-referenced to the penalty entries.
(b) A penalty imposed under sections 75.12, 480, 480.1, 480.2, 480.7, and 482 of the Revenue and Taxation Code shall be added to the roll in the same manner as a special assessment and treated, collected, and subject to the same penalties for the delinquency as all other taxes on the roll in which it is entered. 
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 482, 505, 533, 602 and 615, Revenue and Taxation Code.
HISTORY

1. New Sections 261 and 262 filed 10-6-66 as an emergency; designated effective 10-6-66 (Register 66, No. 34).
2. Certificate of Compliance--Section 11422.1, Gov. Code, filed 11-25-66 (Register 66, No. 41).
3. Amendment filed 12-19-67 as an emergency; effective upon filing (Register 67, No. 51).
4. Certificate of Compliance filed 2-13-68 (Register 68, No. 7).
5. Amendment filed 3-28-68 as an emergency; effective upon filing; Certificate of Compliance included (Register 68, No. 13).
6. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
7. Amendment of section and Note filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§262. Indexing Assessments of Escaped Property. [Repealed]
Note     •     History

NOTE

Reference: Sections 505, 533, and 615, Revenue and Taxation Code.
HISTORY

1. New NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
2. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§263. Roll Corrections.
Note     •     History

(a) Any error or omission not involving the exercise of value judgment which results in an incorrect entry or entries on the roll may be corrected after the roll is delivered to the auditor, provided that the correction is made within four years after the making of the assessment that is being corrected. 
If an error or omission not involving the exercise of value judgment is discovered as the result of an audit of a taxpayer's books and records, that error or omission may be corrected at any time prior to the expiration of six months after the completion of the audit. 
(b) Any error or omission involving the exercise of value judgment that arises solely from a failure to reflect a decline in the taxable value of real property, floating homes subject to taxation pursuant to Revenue and Taxation Code section 229, and manufactured homes subject to taxation under Part 13 (commencing with section 5800) of Division 1 of the Revenue and Taxation Code, as required by paragraph (2) of subdivision (a) of Revenue and Taxation Code section 51, shall be corrected within one year after the making of the assessment that is being corrected. 
(c) Any incorrect entry on the roll resulting from a defect of description or clerical error, as determined by the assessor upon audit, made by the assessee in the property statement or in other information or records which causes the assessor to assess taxable tangible property which was not subject to assessment or to assess taxable tangible property at a substantially higher value may be corrected under this article. The correction shall be made after the roll is delivered to the auditor within the time period for making escape assessments as provided in sections 532 and 532.1. The change to be made on the roll shall be certified to the auditor by the assessor. 
(d) If a correction will increase the amount of unpaid taxes, the assessor shall notify the assessee of the procedure for obtaining review by the county board under section 1605 and the procedure for applying for cancellation under section 4986. 
(e) If a correction will decrease the amount of unpaid taxes, the consent of the board of supervisors is necessary to make the correction. 
(f) Corrections authorized under this rule shall be made by the auditor upon delivery of the relevant information by the assessor. 
(g) The provisions of this rule do not apply to escape assessments caused by the assessee's failure to report the information required by Article 2 (commencing with section 441) of Chapter 3 of Part 2 of Division 1 of the Revenue and Taxation Code, and roll corrections are not a prerequisite for escape assessments or base year value corrections. 
(h) If the roll of any taxing agency in the course of preparation is lost or destroyed because of public calamity and is reconstructed from available data, at any time before the declaration of default, the assessor may correct any erroneous assessment. The assessor shall: 
(1) Send certified notices of the correction to the tax collector, the auditor, and the Controller. 
(2) Enter the date and nature of the correction with reference to the property for which the correction is being made 
(i) On receipt of satisfactory, verified, written evidence that taxes have been entered on the secured roll as a lien on real property on which they are not legally a lien, the assessor shall transmit the evidence and his or her cancellation to the auditor. On direction of the board of supervisors, the auditor shall cancel the entry as a lien on that real property and reenter such taxes as follows: 
(1) If the assessee has real property sufficient, in the assessor's opinion, to secure the payment of the taxes, as a lien on real property. 
(2) Where there is not sufficient real property to secure the taxes on locally-assessed property, the taxes shall be placed on the unsecured roll. In the case of state-assessed property, the taxes shall be placed on the secured roll. 
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 4831, 4831.5, 4834, 4835, 4836, 4838 and 4840, Revenue and Taxation Code.
HISTORY

1. New section filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
2. Change without regulatory effect repealing subsection (a)(1) designator and amending subsections (b) and (g) filed 7-3-2012 pursuant to section 100, title 1, California Code of Regulations (Register 2012, No. 27).
§264. Base Year Value Corrections.
Note     •     History

(a) Notwithstanding any other provision of the law, any error or omission in the determination of a base year value pursuant to paragraph (2) of subdivision (a) of Section 110.1 of the Revenue and Taxation Code, including the failure to establish that base year value or the determination of a change in ownership, which does not involve the exercise of an assessor's judgment as to value, shall be corrected in any assessment year in which the error or omission is discovered. 
(1) The existence of a clerical error shall be proved by a preponderance of the evidence, except that if the correction is made more than four years after July 1 of the assessment year for which the base year value was first established, the clerical error shall be proved by clear and convincing evidence, including the papers in the assessor's office. 
(b) An error or an omission described in subdivision (a) which involves the exercise of an assessor's judgment as to value may be corrected only if it is placed on the current roll or roll being prepared, or is otherwise corrected, within four years after July 1 of the assessment year for which the base year value was first established. “The assessment year for which the base year value was first established” means the assessment year during which the assessor actually enrolls the new base year value resulting from a change in ownership or completion of new construction. An error or an omission involving the exercise of an assessor's judgment as to value shall not include errors or omissions resulting from the taxpayer's fraud, concealment, misrepresentation, or failure to comply with any provision of law for furnishing information required by Sections 441, 470, 480, 480.1, and 480.2 of the Revenue and Taxation Code, or from clerical errors. 
(c) If a correction authorized by subdivision (a) or (b) reduces the base year value, the assessor shall transmit the correction to the auditor by means of a notation on the roll and appropriate cancellations or refunds of tax shall be granted in accordance with Division 1, Part 9 of the Revenue and Taxation Code. If the correction increases the base year value, the assessor shall transmit the information regarding the correction to the auditor by means of a notation on the roll and appropriate escape assessments shall be imposed in accordance with Division 1, Part 2, Chapter 3, Article 4 of the Revenue and Taxation Code. 
(d) For purposes of this rule: 
(1) “Assessment year” means an assessment year as defined in Section 118. 
(2) “Clerical errors” means only those defects of a mechanical, mathematical, or clerical nature, not involving judgment as to value, where it can be shown from papers in the assessor's office or other evidence that the defect resulted in a base year value that was not intended by the assessor at the time it was determined. 
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 51.5, Revenue and Taxation Code.
HISTORY

1. New section filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§265. Board Ordered Roll Changes.
Note     •     History

On the second Monday of each month the clerk of the board of equalization shall deliver the statement of all changes made by the county board during the preceding calendar month to the auditor with an affixed affidavit, subscribed by him or her, as follows: 
“I, (clerk's name), swear that, as Clerk of the Board of Equalization of County, I have kept correct minutes of all the acts of the board during the month of _______, _____, touching alterations in the assessment roll, that all alterations agreed to or directed to be made have been included in the attached statement and that no other alterations are included therein.” 
Upon receiving a statement of changes from the clerk, the auditor shall promptly correct the roll to reflect the changes made by the county board. 
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 1614 and 1646.1, Revenue and Taxation Code.
HISTORY

1. New section filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§266. Location of Local Roll for Inspection.
Note     •     History

The local roll or a copy thereof shall be made available for inspection by all interested parties during regular office hours of the officer having custody thereof. Copies may be made available for inspection at other places for the convenience of the public.
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 1602, Revenue and Taxation Code.
HISTORY

1. Renumbering of former section 304 to section 266 filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
Article 7. Qualifications of Appraisers
§281. “Appraiser” Defined.
Note     •     History

An appraiser for property tax purposes within the meaning of sections 670 through 673 of the Revenue and Taxation Code is a person employed by the state, a county, a city and county, or an appraisal commission  who renders value judgments and/or who makes building classification judgments for cost estimating purposes in the administration of the valuation phase of ad valorem property taxation under Article XIII  and Article XIII A of the California Constitution. 
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 670, 673 and 1716, Revenue and Taxation Code.
HISTORY

1. New Article 7 ( 281 through 284) filed 4-12-68; effective thirtieth day thereafter (Register 68, No. 15).
2. Amendment filed 12-26-75; effective thirtieth day thereafter (Register 75, No. 52).
3. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
4. Amendment of section and Note filed 5-28-2003; operative 6-27-2003 (Register 2003, No. 22).
§282. Temporary Certification.
Note     •     History

(a) A person shall not perform the duties of an appraiser, as defined in regulation 281, unless the person has been issued a temporary or permanent certificate by the Board, nor shall the person continue to perform such duties for more than a year (excluding any break in service as an appraiser of less than six months which is reported to the Board) without having been permanently certified.
(b) The Board shall issue a temporary certificate to any other person employed to perform the duties of an appraiser for property tax purposes in the service of the state, a county, a city and county, or an appraisal commission if the person meets the minimum qualifications set out in subsection (a) of regulation 283 or has equivalent qualifications which, in the opinion of both the assessor and the Board, demonstrate that the person is competent to perform the work of an appraiser. The assessor shall submit such qualifications to the Board on a form supplied by the Board.
(c) No later than 30 days after taking office, any person who has been elected or appointed as assessor shall request and the Board shall issue a temporary certificate to such individual.
(d) A temporary certificate is suspended when the person to whom it was issued ceases to perform the duties of an appraiser for property tax purposes but is automatically reinstated when the person again performs such duties with less than a six months' break in service. When there is a break in service of six months or more, another temporary certificate must be issued, under the provisions of subsection (b), and such certificate shall be valid for one year thereafter.
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 24002.5, Government Code; and Sections 670 and 673, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (a) filed 12-26-75; effective thirtieth day thereafter (Register 75, No. 52).
2. Amendment filed 1-14-85; effective thirtieth day thereafter (Register 85, No. 3).
3. Amendment of subsections (a) and (b), new subsection (c), subsection relettering, and amendment of Note filed 6-6-97; operative 7-6-97 (Register 97, No. 23).
4. Amendment of subsections (a)-(c) filed 5-28-2003; operative 6-27-2003 (Register 2003, No. 22).
§283. Permanent Certification.
Note     •     History

(a) The Board shall issue a permanent certificate to any person employed to perform the duties of an appraiser for property tax purposes in the service of the state, a county, a city and county, or an appraisal commission who, within one year of employment, attains a passing grade on a certification examination prepared or approved by the Board and who meets the following minimum qualifications:
(1) The person is currently employed by, or has a bona fide employment offer from, the Board, a county assessor, a city and county assessor, or an appraisal commission, and
(2) Either the person is a graduate of an accredited four-year institution of higher education, or
(3) The person has graduated from high school (or has the equivalent of a high school education as determined by the taking of a general educational development test approved by the California Department of Education) and has four years of relevant experience. “Relevant experience” means employment experience within the last ten years in any of the following occupations:
(A) an accountant, auditor, real property appraiser, building cost estimator, engineer, real estate loan agent, real estate loan underwriter, right-of-way agent, licensed building contractor, or
(B) a real estate licensee, licensed by the California Department of Real Estate, engaged in buying, selling leasing, or managing real estate, or
(C) an appraiser aide or appraiser trainee in an assessor's office or in the property taxes department of the Board, or
(D) an employee, other than an appraiser, appraiser aide, or appraiser trainee, of an assessor's office or of the property taxes department of the Board, except that such employment time shall be limited to qualifying for only 2/3 of the four-year experience requirement. The remaining 1/3 of time shall be accumulated by other relevant experience as described in subparagraphs (A), (B), and (C) above or by education in an accredited institution of higher education.
Four years of relevant experience or any combination of relevant experience and of education in an accredited institution of higher education totaling four years can be substituted for the educational requirement in subsection (a)(2). When fewer than four years of education in an accredited institution of higher education are used to meet the minimal qualifications, the number of qualifying years or fractions thereof shall be determined by the number of units in which passing grades were received. One year of education requirement shall consist of either 30 semester units or 45 quarter units. The qualifications of the person seeking permanent certification in this manner shall be submitted on a form supplied by the Board when the person files the application.
(b) When a person has been temporarily certified under subsection (b) of regulation 282 by reason of equivalent qualifications or under subsection (c) of regulation 282 by reason of election or appointment as assessor, the person shall be admitted to the examination referred to in subsection (a). Upon receiving a passing grade in the examination, the person shall be issued a permanent certificate by the Board.
(c) A permanent certificate is suspended when the person to whom it was issued terminates employment with the Board, a county assessor, a city and county assessor, or an appraisal commission, but it is automatically reinstated when the person is again employed to perform the duties of an appraiser for property tax purposes in the service of any of these offices.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 670 and 673, Revenue and Taxation Code; and Section 24002.5, Government Code.
HISTORY

1. Amendment of subsection (d) filed 1-9-70; effective thirtieth day thereafter (Register 70, No. 2).
2. Amendment of subsection (e) filed 12-20-71; effective thirtieth day thereafter (Register 71, No. 52).
3. Amendment filed 1-14-85; effective thirtieth day thereafter (Register 85, No. 3).
4. Amendment of section and Note filed 6-6-97; operative 7-6-97 (Register 97, No. 23).
5. Amendment filed 5-28-2003; operative 6-27-2003 (Register 2003, No. 22).
§284. Retention and Revocation of Appraiser Certificate.
Note     •     History

(a) A person who holds a permanent certificate to perform the duties of an appraiser for property tax purposes in the service of the state, a county, a city and county, or an appraisal commission shall adhere to the annual training requirements as set forth in section 671 of the Revenue and Taxation Code. The training requirement for an appraiser's certificate or advanced appraiser's certificate shall be met for each fiscal year, commencing July 1 and ending June 30. Failure to obtain such training shall constitute grounds for revocation of the appraiser's certificate or advanced appraiser's certificate.
(b) In calculating the number of training hours completed for the current fiscal year, any excess hours earned from attending training in prior years shall be counted first.
(1) To retain an appraiser's certificate, excess training hours over the 24-hour annual requirement may be carried forward as a credit a maximum of three years, with a maximum of 72 training hours available for carryover into future years.
(2) To retain an advanced appraiser's certificate, excess training hours over the 12-hour annual requirement may be carried forward as a credit a maximum of two years, with a maximum of 24 training hours available for carryover into future years.
Excess training hours carried forward from prior years shall be applied on a first in/first out basis, such that training hours available for the earliest year of carryover shall be credited first.
(c) The Board shall initiate informal revocation procedures if, upon review of an individual's annual training report, the appraiser appears to be deficient in meeting the annual training requirement. The steps of the informal revocation process are as follows:
(1) A letter will be sent to the appraiser who appears to have deficient training hours and to the assessor of the county or the city and county where the appraiser is employed or to the appropriate Board division chief. The assessor or division chief shall indicate whether or not the person is still employed by that office as an appraiser and, if applicable, should note whether the appraiser has transferred to another county, city and county, or Board division or if the person is no longer employed by any of these offices as an appraiser.
(2) The letter sent to the appraiser will be accompanied by a report of the training and respective hours completed by the individual so that the appraiser will have an opportunity to reconcile his or her records with the report. If training has been completed but has not been included on the training report, the name of the course, date and proof of completion, and training hours earned must be submitted. For non-Board provided courses, a course outline or seminar agenda must also be submitted. Written corrections and/or changes to the report must be submitted no later than 30 calendar days after receipt of the letter advising the appraiser of the deficiency in training hours. No later than 30 calendar days after the receipt of this information, Board staff will review the information submitted and make necessary changes to the appraiser's training hours, if warranted, and notify the appraiser whether or not the corrections and/or changes have been accepted. A copy of the revised training report will be sent to the appraiser.
(3) If the appraiser is, in fact, deficient in training hours, a written plan on resolving the deficiency, as well as a plan for meeting the training requirements for the current fiscal year, must be submitted by the appraiser to the Board within 30 calendar days of receiving the above notification. The plan shall be submitted to the Board after the appraiser has consulted with and provided a copy of the plan to the assessor or Board division chief.
(4) If the Board does not receive a response by the specified date, Board staff will contact the appraiser to determine the reason for the lack of a response. If the written plan is not received within 10 calendar days from the follow-up contact date, a certified letter will be mailed to the appraiser advising him or her of a conference call or meeting with a panel of Board staff to remedy the deficiency. This letter will also be sent to the assessor or Board division chief and will indicate the date, time, and location (if applicable) of the conference call or meeting.
(5) During the conference call or meeting, the appraiser and the panel will discuss the training deficiencies and establish a plan to make up the deficiency and to satisfy the annual training requirements for the current fiscal year. The assessor or Board division chief, or their representative, may participate in the conference call or meeting. If the appraiser is unable to participate in the conference call or attend the meeting on the scheduled date, the appraiser must reschedule the conference call or meeting with the panel for a date within 30 calendar days of the originally scheduled date.
(6) If the appraiser presents an acceptable plan to the panel to make up the deficiencies, the Board shall notify the appraiser and the assessor or Board division chief. No further action will be taken unless the appraiser fails to meet the requirements of the plan by the deadline agreed upon by the parties.
(7) If the appraiser fails to participate in the conference call or attend the meeting with the panel or fails to follow the established plan, as set forth in subparagraphs (5) and (6) above, and remains delinquent at the end of the time frame specified, the panel will inform the Deputy Director of the Board's Property and Special Taxes Department, or his or her designee, that proceedings should be initiated to revoke the appraiser's certificate. A certified letter will be sent to the appraiser and the assessor or division chief by the Deputy Director, or his or her designee, regarding the Board's decision to initiate formal revocation proceedings.
(d) Formal revocation proceedings shall be initiated if the foregoing informal revocation process could not satisfactorily resolve the appraiser's deficiency in training hours. Formal revocation proceedings shall be conducted in a hearing before an administrative law judge in accordance with the Administrative Procedure Act contained in Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code.
(e) Holders of certificates shall report to the Board the training and respective hours completed for each fiscal year ending June 30. Reporting required by this subsection shall be effective as of the fiscal year commencing July 1, 2003.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 670 and 671, Revenue and Taxation Code.
HISTORY

1. New section filed 5-28-2003; operative 6-27-2003 (Register 2003, No. 22). For prior history, see Register 71, No. 52.
Chapter 3. Local Equalization
Article 1. Hearing by County Board
§301. Definitions and General Provisions.
Note     •     History

The provisions set forth in this regulation govern the construction of this subchapter.
(a) “County” is the county or city and county wherein the property is located that is the subject of the proceedings under this subchapter.
(b) “Assessor” is the assessor of the county.
(c) “Auditor” is the auditor of the county.
(d) “Board” is the board of equalization or assessment appeals board of the county.
(e) “Chair” is the chair of the county board of equalization or assessment appeals board.
(f) “Clerk” is the clerk of the county board of equalization or assessment appeals board.
(g) “Person affected” or “party affected” is any person or entity having a direct economic interest in the payment of property taxes on the property for the valuation date that is the subject of the proceedings under this subchapter, including the property owner, a lessee required by the property lease to pay the property taxes, and a property owner who acquires an ownership interest after the lien date if the new owner is also responsible for payment of property taxes for the lien date that is the subject of the application.
(h) “Full cash value” or “fair market value” is the value provided in sections 110 and 110.1 of the Revenue and Taxation Code.
(i) “Restricted value” is a value standard other than full cash value prescribed by the Constitution or by statute authorized by the Constitution.
(j) “Full value” is either the full cash value or the restricted value.
(k) “Equalization” is the determination by the board of the correct full value for the property that is the subject of the hearing.
(l) “County legal advisor” is the county counsel of the county, or the district attorney of the county if there is no county counsel, and the City Attorney of the City and County of San Francisco, or outside counsel specifically retained to advise the county board of equalization or assessment appeals board.
(m) “Authorized agent” is one who is directly authorized by the applicant to represent the applicant in an assessment appeals proceeding.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Sections 110, 110.1, 110.5, 1601, 1603 et seq., Revenue and Taxation Code; and Section 31000.6, Government Code.
HISTORY

1. New Subchapter (Sections 301 through 314 and 316 through 326) filed 5-12-67; effective thirtieth day thereafter (Register 67, No. 19).
2. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
3. Amendment filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
4. Amendment of section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§302. The Board's Function and Jurisdiction.
Note     •     History

(a) The functions of the board are:
(1) To lower, sustain, or increase upon application, or to increase after giving notice when no application has been filed, individual assessments in order to equalize assessments on the local tax assessment roll,
(2) To determine the full value and, where appealed, the base year value of the property that is the subject of the hearing,
(3) To hear and decide penalty assessments, and to review, equalize and adjust escaped assessments on that roll except escaped assessments made pursuant to Revenue and Taxation Code section 531.1,
(4) To determine the classification of the property that is the subject of the hearing, including classifications within the general classifications of real property, improvements, and personal property. Such classifications may result in the property so classified being exempt from property taxation.
(5) To determine the allocation of value to property that is the subject of the hearing, and
(6) To exercise the powers specified in section 1605.5 of the Revenue and Taxation Code.
(b) Except as provided in subdivision (a)(4), the board has no jurisdiction to grant or deny exemptions or to consider allegations that claims for exemption from property taxes have been improperly denied.
(c) The board acts in a quasi-judicial capacity and renders its decision only on the basis of proper evidence presented at the hearing.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 531.1, 1603, 1604 and 1605.5, Revenue and Taxation Code.
HISTORY

1. Amendment filed 5-27-68; effective thirtieth day thereafter (Register 68, No. 21).
2. Amendment of subsection (b) filed 6-6-69 as an emergency; effective upon filing. Certificate of Compliance included (Register 69, No. 23).
3. Amendment of subsection (c) filed 5-11-71; effective thirtieth day thereafter (Register 71, No. 20).
4. Amendment filed 12-26-75; effective thirtieth day thereafter (Register 75, No. 52).
5. Editorial correction of NOTE filed 7-30-82 (Register 82, No. 31).
6. Editorial correction of NOTE filed 4-1-83 (Register 83, No. 14).
7. Amendment of section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
8. Change without regulatory effect amending subsection (a)(6) and Note filed 8-25-2004 pursuant to section 100, title 1, California Code of Regulations (Register 2004, No. 35).
§303. Publication of Notice of Board Meeting. [Repealed]
History

HISTORY

1. Repealer filed 6-6-69 as an emergency; effective upon filing. Certificate of Compliance included (Register 69, No. 23).
§304. Location of Local Roll for Inspection. [Renumbered]
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. Reference: Section 1602, Revenue and Taxation Code.
HISTORY

1. Editorial correction adding NOTE filed 4-1-83 (Register 83, No. 14).
2. Renumbering of former section 304 to section 266 filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§305. Application.
Note     •     History

No change in an assessment sought by a person affected shall be made unless the following application procedure is followed.
(a) Eligible Persons. (1) An application is filed by a person affected or the person's agent, or a relative mentioned in regulation 317 of this division. If the application is made by an agent, other than an authorized attorney licensed to practice in this state who has been retained and authorized by the applicant to file the application, written authorization to so act must be filed with the application. For purposes of signing an application on behalf of an applicant, an agent shall be deemed to have been duly authorized if the applicant's written agent authorization is on the application or attached to each application at the time it is filed with the board. The attached authorization shall include the following:
(A) The date the authorization statement is executed;
(B) A statement to the effect that the agent is authorized to sign and file applications in the specific calendar year in which the application is filed;
(C) The specific parcel(s) or assessment(s) covered by the authorization, or a statement that the agent is authorized to represent the applicant on all parcels and assessments located in the specific county;
(D) The name, address, and telephone number of the specific agent who is authorized to represent the applicant;
(E) The applicant's signature and title; and
(F) A statement that the agent will provide the applicant with a copy of the application.
(2) If a photocopy of the original authorization is attached to the application, the agent shall be prepared to submit an original signed authorization if requested by the board. The application form shall show that the agent's authorization was attached to the application. An agent must have authorization to file an application at the time the application is filed; retroactive authorizations are not permitted.
(3) If the applicant is a corporation, limited partnership, or a limited liability company, the agent authorization must be signed by an officer or authorized employee of the business entity.
(4) No application shall be rejected as a duplicate application by the clerk unless it qualifies as a duplicate application within the meaning specified in section 1603.5 of the Revenue and Taxation Code.
(b) Signature and Verification. The application shall be in writing and signed by the applicant or the applicant's agent with declaration under penalty of perjury that the statements made in the application are true and that the person signing the application is one of the following:
(1) The person affected, a relative mentioned in regulation 317 of this division, an officer of a corporation, or an employee of a corporation who has been designated in writing by the board of directors or corporate officer to represent the corporation on property tax matters;
(2) An agent authorized by the applicant as indicated in the agent's authorization portion of the application; or
(3) An attorney licensed to practice law in this state who has been retained by the applicant and who has been authorized by the applicant, prior to the time the application is filed, to file the application.
(c) Form and Contents. The county shall provide, free of charge, forms on which applications are to be made.
(1) The application form shall be prescribed by the State Board of Equalization and shall require that the applicant provide the following information:
(A) The name and address of the applicant.
(B) The name and address of the applicant's agent, if any. If the applicant is represented by an agent, both the applicant's actual mailing address and the agent's mailing address shall be provided on the application.
(C) The applicant's written authorization for an agent, if any, to act on the applicant's behalf.
(D) A description of the property that is the subject of the application sufficient to identify it on the assessment roll.
(E) The applicant's opinion of the value of the property on the valuation date of the assessment year in issue.
(F) The roll value on which the assessment of the property was based.
(G) The facts relied upon to support the claim that the board should order a change in the assessed value, base year value, or classification of the subject property. The amount of the tax or the amount of an assessed value increase shall not constitute facts sufficient to warrant a change in assessed values.
(2) The form shall also include:
(A) A notice that a list of property transfers within the county, that have occurred within the preceding two-year period, is open to inspection at the assessor's office to the applicant upon payment of a fee not to exceed ten dollars ($10). This requirement shall not apply to counties with a population under 50,000 as determined by the 1970 decennial census.
(B) A notice that written findings of fact will be prepared by the board upon request if the applicable fee is paid. An appropriate place for the applicant to make the request shall be provided.
(3) An application may include one or more reasons for filing the application. Unless permitted by local rules, an application shall not include both property on the secured roll and property on the unsecured roll. 
(4) An application that does not include the information required by subsection (c)(1) of this regulation is invalid and shall not be accepted by the board. Prompt notice that an application is invalid shall be given by the clerk to the applicant and, where applicable, the applicant's agent. An applicant or the applicant's agent who has received notice shall be given a reasonable opportunity to correct any errors and/or omissions. Disputes concerning the validity of an application shall be resolved by the board.
(5) An application that includes the correct information required by subdivision (1) is valid and no additional information shall be required of the applicant on the application form. 
(6) If the county has appointed hearing officers as provided for in Revenue and Taxation Code section 1636, the application form shall advise the applicant of the circumstances under which the applicant may request that the application be heard by such an officer.
(7) If an application appeals property subject to an escape assessment resulting from an audit conducted by the county assessor, then all property, both real and personal, of the assessee at the same profession, trade, or business location shall be subject to review, equalization, and adjustment by the appeals board, except when the property has previously been equalized for the year in question.
(d) Time of filing. (1) An application appealing a regular assessment shall be filed with the clerk during the regular filing period. A regular assessment is one placed on the assessment roll for the most recent lien date, prior to the closing of that assessment roll. The regular filing period for all real and personal property located in a county is:
(A) July 2 through September 15 when the county assessor elects to mail assessment notices, as defined in section 619 of the Revenue and Taxation Code, by August 1 to all owners of real property on the secured roll; or
(B) July 2 through November 30 when the county assessor does not elect to mail assessment notices by August 1 to all owners of real property on the secured roll.
Additionally, an application appealing a base year value for the most recent lien date, where that value is not the value currently on the assessment roll, shall be filed with the clerk during the regular filing period beginning July 2 but no later than September 15 or November 30, as applicable.
(2) An application appealing an escape assessment or a supplemental assessment must be filed with the clerk no later than 60 days after the date of mailing printed on the notice of assessment or the postmark date, whichever is later, or no later than 60 days after the date of mailing printed on the tax bill or the postmark date, whichever is later, in the county of Los Angeles and in those counties where the board of supervisors has adopted a resolution to that effect, pursuant to Section 1605 of the Revenue and Taxation Code.
(3) An application appealing a proposed reassessment made for property damaged by misfortune or calamity pursuant to section 170 of the Revenue and Taxation Code must be filed with the clerk no later than six months after the date of mailing of the notice of proposed reassessment by the assessor. The decision of the board regarding the damaged value of property shall be final, however, the decision regarding the reassessment made pursuant to section 170 shall create no presumption regarding the value of the property subsequent to the date of the damage.
(4) An application may be filed within 60 days of receipt of a notice of assessment or within 60 days of the mailing of a tax bill, whichever is earlier, when the taxpayer does not receive the notice of assessment described in section 619 of the Revenue and Taxation Code at least 15 calendar days prior to the close of the regular filing period. The application must be filed with an affidavit from the applicant declaring under penalty of perjury that the notice was not timely received.
(5) An application will be deemed to have been timely filed:
(A) If it is sent by U.S. mail, properly addressed with postage prepaid and is postmarked on the last day of the filing period or earlier within such period; or
(B) If proof satisfactory to the board establishes that the mailing occurred on the last day of the filing period or within such period. Any statement or affidavit made by an applicant asserting such a timely filing must be made within one year of the last day of the filing period.
(6) An application filed by mail that bears a both a private business postage meter postmark date and a U.S. Postal Service postmark date will be deemed to have been filed on the date that is the same as the U.S. Postal Service postmarked date, even if the private business postage meter date is the earlier of the two postmarked dates. If the last day of the filing period falls on Saturday, Sunday, or a legal holiday, an application that is mailed and postmarked on the next business day shall be deemed timely filed. If the county's offices are closed for business prior to 5 p.m. or for the entire day on which the deadline for filing falls, that day shall be considered a legal holiday.
(7) Except as provided in sections 1603 and 1605 of the Revenue and Taxation Code, the board has no jurisdiction to hear an application unless filed within the time periods specified above.
(e) Amendments and Corrections. (1) An applicant or an applicant's agent may amend an application until 5:00 p.m. on the last day upon which the application might have been timely filed.
(2) After the filing period has expired:
(A) An invalid application may be corrected in accordance with subsection (c)(4) of this regulation.
(B) The applicant or the applicant's agent may amend an application provided that the effect of the amendment is not to request relief additional to or different in nature from that originally requested.
(C)(i) Upon request of the applicant or the applicant's agent, the board, in its discretion, may allow the applicant or the applicant's agent to make amendments to the application in addition to those specified in subdivisions (A) and (B) to state additional facts claimed to require a reduction of the assessment that is the subject of the application.
(ii) The applicant or the applicant's agent shall state the reasons for the request, which shall be made in writing and filed with the clerk of the board prior to any scheduled hearing, or may be made orally at the hearing. If made in writing, the clerk shall provide a copy to the assessor upon receipt of the request.
(iii) As a condition to granting a request to amend an application, the board may require the applicant to sign a written agreement extending the two-year period provided in section 1604 of the Revenue and Taxation Code.
(iv) If a request to amend is granted, and upon the request of the assessor, the hearing on the matter shall be continued by the board for no less than 45 days, unless the parties mutually agree to a different period of time.
(3) An applicant or an applicant's agent shall be permitted to present testimony and other evidence at the hearing to support a full value that may be different from the opinion of value stated on the application. The presentation of such testimony or other evidence shall not be considered a request to amend or an amendment to the application.
(f) Claim for Refund. If a valid application is designated as a claim for refund pursuant to section 5097 of the Revenue and Taxation Code, the applicant shall be deemed to have challenged each finding of the board and to have satisfied the requirements of section 5097.02 of the Revenue and Taxation Code.
(g) Retention of Records. The clerk may destroy records consisting of assessment appeal applications when five years have elapsed since the final action on the application. The records may be destroyed three years after the final action on the application if the records have been microfilmed, microfiched, imaged, or otherwise preserved on a medium that provides access to the documents. As used in this subsection, “final action” means the date of the final decision by the board.
(h) Consolidation of Applications. The board, on its own motion or on a timely request of the applicant or applicants or the assessor, may consolidate applications when the applications present the same or substantially related issues of valuation, law, or fact. If applications are consolidated, the board shall notify all parties of the consolidation.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 51, 166, 170, 408.1, 469, 1603, 1603.5, 1604, 1605, 1636, 5097 and 5097.02, Revenue and Taxation Code; and Section 25105.5, Government Code.
HISTORY

1. Amendment of subsection (c) and (d) filed 6-14-74 as an emergency; effective upon filing (Register 74, No. 24). For prior history, see Register 72, No. 16.
2. Certificate of Compliance filed 8-9-74 (Register 74, No. 32).
3. Amendment of subsection (c) filed 4-22-77; effective thirtieth day thereafter (Register 77, No. 17).
4. Repealer of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
5. Amendment filed 10-20-80; effective thirtieth day thereafter (Register 80, No. 43).
6. Amendment of subsection (c) filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
7. Change without regulatory effect amending subsection (d) filed 9-23-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 39).
8. Amendment of section and Note filed 5-25-2000; operative 6-30-2000 (Register 2000, No. 21).
9. Change without regulatory effect amending section and Note filed 8-25-2004 pursuant to section 100, title 1, California Code of Regulations (Register 2004, No. 35).
§305.1. Exchange of Information.
Note     •     History

(a) Request for Information. When the assessed value of the property involved, before deduction of any exemption accorded the property, is $100,000 or less, the applicant may file a written request for an exchange of information with the assessor; and when the assessed value before deduction of any exemption exceeds $100,000, either the applicant or the assessor may request such an exchange. The request may be filed with the clerk at the time an application for hearing is filed or may be submitted to the other party and the clerk at any time prior to 30 days before the commencement of the hearing. For purposes of determining the date upon which the exchange was deemed initiated, the date of postmark as affixed by the United States Postal Service, or the date certified by a bona fide private courier service on the envelope or package containing the information shall control. The clerk shall, at the earliest opportunity, forward any request filed with the application or a copy thereof to the other party. The request shall contain the basis of the requesting party's opinion of value for each valuation date at issue and the following data:
(1) Comparable Sales Data. If the opinion of value is to be supported with evidence of comparable sales, the properties sold shall be described by the assessor's parcel number, street address or legal description sufficient to identify them. With regard to each property sold there shall be presented the approximate date of sale, the price paid, the terms of sale (if known), and the zoning of the property.
(2) Income Data. If the opinion of value is to be supported with evidence based on an income study, there shall be presented: the gross income, the allowable expenses, the capitalization method (direct capitalization or discounted cash flow analysis), and rate or rates employed.
(3) Cost Data. If the opinion of value is to be supported with evidence of replacement cost, there shall be presented:
(A) With regard to improvements to real property: the date of construction, type of construction, and replacement cost of construction. 
(B) With regard to machinery and equipment: the date of installation, replacement cost, and any history of extraordinary use.
(C) With regard to both improvements and machinery and equipment: facts relating to depreciation, including any functional or economic obsolescence, and remaining economic life.
The information exchanged shall provide reasonable notice to the other party concerning the subject matter of the evidence or testimony to be presented at the hearing. There is no requirement that the details of the evidence or testimony to be introduced must be exchanged.
(b) Transmittal of Data to Other Party. If the party requesting an exchange of data under the preceding subsection has submitted the data required therein within the specified time, the other party shall submit a response to the initiating party and to the clerk at least 15 days prior to the hearing. The response shall be supported with the same type of data required of the requesting party. When the assessor is the respondent, he or she shall submit the response to the address shown on the application or on the request for exchange of information, whichever is filed later. The initiating party and the other party shall provide adequate methods of submission to ensure to the best of their ability that the exchange of information process is completed at least 10 days prior to the hearing.
(c) Prohibited Evidence; New Material; Continuance. Whenever information has been exchanged pursuant to this regulation, the parties may introduce evidence only on matters pertaining to the information so exchanged unless the other party consents to introduction of other evidence. However, at the hearing, each party may introduce new material relating to the information received from the other party. If a party introduces such new material at the hearing, the other party, upon request, shall be granted a continuance for a reasonable period of time.
(d) Nonresponse to Request for Information. If one party initiates a request for information and the other party does not comply within the time specified in subsection (b), the board may grant a postponement for a reasonable period of time. The postponement shall extend the time for responding to the request. If the board finds willful noncompliance on the part of the noncomplying party, the hearing will be convened as originally scheduled and the noncomplying party may comment on evidence presented by the other party but shall not be permitted to introduce other evidence unless the other party consents to such introduction.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Sections 408, 441, 1606 and 1609.4, Revenue and Taxation Code.
HISTORY

1. New section filed 5-7-70; effective thirtieth day thereafter (Register 70, No. 19).
2. Amendment of subsection (a)(1) filed 5-11-71; effective thirtieth day thereafter (Register 71, No. 20).
3. Amendment filed 6-14-74 as an emergency; effective upon filing (Register 74, No. 24).
4. Certificate of Compliance filed 8-9-74 (Register 74, No. 32).
5. Repealer of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
6. Amendment of subsections (a) and (c) filed 1-11-83; effective thirtieth day thereafter (Register 83, No. 3).
7. Amendment of section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
8. Change without regulatory effect amending subsections (a), (a)(3)(C) and (b) filed 9-19-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 38).
§305.2. Prehearing Conference.
Note     •     History

(a) A county board of supervisors may establish prehearing conferences. If prehearing conferences are established, the county board of supervisors shall adopt rules of procedure for prehearing conferences. A prehearing conference may be set by the clerk at the request of the applicant or the applicant's agent, the assessor, or at the direction of the appeals board. The purpose of a prehearing conference is to resolve issues such as, but not limited to, clarifying and defining the issues, determining the status of exchange of information requests, stipulating to matters on which agreement has been reached, combining applications into a single hearing, bifurcating the hearing issues, and scheduling a date for a hearing officer or the board to consider evidence on the merits of the application.
(b) The clerk of the board shall set the matter for a prehearing conference and notify the applicant or the applicant's agent and the assessor of the time and date of the conference. Notice of the time, date, and place  of the conference shall be given not less than 30 days prior to the conference, unless the assessor and the applicant stipulate orally or in writing to a shorter notice period.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Article XIII, Section 16, California Constitution; and Section 1601 et seq., Revenue and Taxation Code.
HISTORY

1. New section filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§305.3. Application for Equalization Under Revenue and Taxation Code Section 469.
Note     •     History

(a) General. In addition to any rights of appeal of escape or supplemental assessments as described in Rule 305(d)(2) of this subchapter, if the result of an audit discloses property subject to an escape assessment for any year covered by the audit, then, pursuant to section 1605 of the Revenue and Taxation Code, an application may be filed for review, equalization, and adjustment of the original assessment of all property of the assessee at the location of the profession, trade, or business for that year, except any property that has previously been equalized for the year in question.
(b) Definitions. For purposes of subsection (a) of this regulation:
(1) “Audit” means any audit of the books and records of a taxpayer engaged in a profession, trade, or business who owns, claims, possesses, or controls locally assessable business tangible personal property and trade fixtures within the county.
(2) “Property subject to an escape assessment” means any individual item of the assessee's property that was underassessed or not assessed at all when the assessor made the original assessment of the assessee's property, and which has not been previously equalized by an appeals board, regardless of whether the assessor actually makes or enrolls an escape assessment. Property is subject to an escape assessment even if the audit discloses an overassessment of another portion of an item of the property, and the amount of the underassessment could be offset completely by the amount of overassessment. If the audit discloses that any property was subject to an escape assessment, the assessor shall include that fact as a finding presented to the taxpayer as required by Rule 191. If no such finding is made by the assessor, the taxpayer may file an application and present evidence to the board of the existence and disclosure of property of material value subject to escape assessment. For purposes of this regulation only, “material value” means value of no less than 1 percent of the audited value of the taxpayer's trade fixtures and tangible personal property for the year under audit. If the board determines that property subject to escape assessment was disclosed as a result of an audit, the board shall permit the taxpayer's section 469 appeal.
(3) “Result of an audit” means the final conclusions reached by the assessor during the audit process as described in Rule 191.
(4) “Original assessment” means the assessment and any subsequent roll corrections or roll changes prior to the date of the commencement of the audit for the roll year for which the result of the audit discloses property subject to an escape assessment.
(5) “All property of the assessee” means any property, real or personal, assessed to the assessee, or the assessee's statutory or legal predecessor in interest, at the location of the profession, trade, or business for the year of the audit.
(6) “Location of the profession, trade, or business” means a site, as determined by the board, where the property subject to the escape assessment in located. Site includes all property within the same appraisal unit as the property that is subject to escape assessment.
Site also includes other property not within the same appraisal unit as the property that is subject to escape assessment, when the other property and the property that escaped assessment function as part of the same economic unit of profession, trade, or business. A “location of the profession, trade, or business” may include multiple parcels of real property, noncontiguous parcels, parcels with separate addresses, and parcels in separate revenue districts within the county.
(7) “Property that has been previously equalized for the year in question” means that the board has previously made a final determination of full value for that item, category, or class of property that was the subject of an assessment appeals hearing or was the subject of a stipulated agreement approved by the board. An item, category, or class or property, or portion thereof, shall be deemed to have been the subject of a hearing or of a stipulated agreement only to the extent the board's decision or the stipulated agreement specifically identify the value of such item, category, or class, or portion thereof, as having been contested and resolved at hearing or as having been agreed to by the parties in stipulation.
(c) Notice of Audit Results. Upon completion of an audit of the assessee's books and records, the assessor shall notify the assessee in writing of the results of the audit as defined in subsection (b)(3) of this rule for all property, locations, and years that were the subject of the audit. At the request of the assessee, the assessor shall permit the assessee or his or her designated representative to inspect or copy any information, documents, or records relating to the audit in accordance with the provisions of Revenue and Taxation Code section 408.
(d) Notice for Filing an Application. An application shall be filed with the clerk no later than 60 days after the date of mailing by which the assessee is notified that the result of the audit has disclosed property subject to escape assessment. The notice shall be mailed to the assessee by regular United States mail directed to the assessee at the assessee's latest address known to the assessor, unless, prior to the mailing of the notice, the assessor is notified in writing by the assessee of a change in address. The notice for purposes of filing an application shall be one of the following, depending upon the conclusion(s) of the audit:
(1) Where an escape assessment is enrolled by the assessor, the notice shall be the tax bill based upon the results of the audit and resulting escape assessment(s) for counties of the first class or any county that has adopted a resolution pursuant to Revenue and Taxation Code section 1605, subdivision (c). If the county is not a county of the first class or has not adopted a resolution pursuant to Revenue and Taxation Code section 1605, subdivision (c), the notice of escape assessment pursuant to Revenue and Taxation Code section 534 shall serve as the notice.
(2) Where the assessor does not enroll an escape assessment resulting from the audit or when the escape assessment is enrolled but offset pursuant to Revenue and Taxation Code section 533, the assessor's written notification of the audit results for the property, locations, and each year that were the subject of the audit as described in subsection (c) of this rule shall be the notice. The notice of audit results showing property subject to escape assessment for each year shall indicate that it is the notice of the assessee's right to file an application.
(e) Examples. The following examples are illustrative of the foregoing criteria. Examples 1 and 2 concern “who may file” an application on the assessee's property. Examples 3, 4, and 5 clarify the “location” of the profession, trade, or business.
Example 1. Taxpayer DRK owns and is assessed for land, a building, and business property. DRK leases the entire business to RCJ. The county assessor conducts an audit of DRK and the result of the audit discloses property subject to an escape assessment. DRK, as the assessee, can file an application for equalization for all property, real and personal, where the property subject to the escape assessment is located. In addition, RCJ may file an application for equalization of DRK's property if RCJ qualifies as a person affected pursuant to rule 302 of this subchapter.
Example 2: Taxpayer DRK owns and is assessed for land and a building. DRK leases the land and building to RCJ. RCJ operates a business in DRK's building and is assessed for business tangible personal property and trade fixtures. The county assessor conducts an audit of RCJ, and the result of the audit discloses property subject to an escape assessment. RCJ, as the assessee, can file an application for equalization on his personal property and trade fixtures only. RCJ cannot file an application on DRK's land and building as this is not property of the assessee. In addition, since DRK is not a person affected pursuant to rule 302 of the subchapter, he cannot file an application on either his land and building or RCJ's personal property and fixtures.
Example 3: An assessee conducts a profession, trade, or business on a campus-like setting that is composed of three separate buildings. Each building has its own address and assessor's parcel number and is owned and operated by the same assessee. If an audit discloses any property subject to an escape assessment, then all property of the assessee on the campus is eligible for equalization if the board determines that it functions and is operated as one economic unit of a profession, trade, or business.
Example 4. An assessee operates five grocery stores in a county. Although the stores are owned and operated by one assessee, carry the same type of merchandise, and share in common advertising, each store operates independently. If property subject to an escape assessment is discovered only at one store, the property at that store's location is subject to equalization following an audit. The other four stores are not considered property at the site of the profession, trade, or business where the escape assessment occurred, as the operate independently as separate economic units.
Example 5: An assessee owns and operates a department store with a parking garage on an adjacent parcel. The parcel that houses the parking garage has no personal property or fixtures located on it. If an audit discloses personal property subject to an escape assessment for the department store, the parking garage would also be eligible for equalization if the board determines that the parcels with the garage and the store are part of the same appraisal unit or economic unit of the profession, trade, or business.
(f) Jurisdiction of the Board. Nothing in this rule shall be interpreted to limit or enlarge a board's jurisdiction under specific statutory provisions or other rules of this subchapter.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Sections 23, 408, 469, 531, 531.8, 533, 534, 1603 and 1605, Revenue and Taxation Code.
HISTORY

1. New section filed 4-17-2002; operative 5-17-2002 (Register 2002, No. 16).
2. Editorial correction of typographical errors in subsections (a) and (e) (Register 2002, No. 41).
3. Amendment of subsections (b)(2) and (b)(3) filed 2-18-2005; operative 3-20-2005 (Register 2005, No. 7).
§305.5. Base Year Value Presumption.
Note     •     History

(a) The appeals board decision that the full cash value, as defined in section 110 of the Revenue and Taxation Code, is lower than the adjusted base year value (the base year value adjusted to reflect inflation as prescribed by section 110.1, subdivision (f), of the Revenue and Taxation Code) will not establish a new base year value, unless the base year value is the subject of the appeal.
(b) Any base year value determined by a local board of equalization, an assessment appeals board, or by a court for any 1975 assessment shall be conclusively presumed to be the base year value for the property assessed.
(c) The full cash value determined for property that is purchased, is newly constructed, or changes ownership after the 1975 lien date, shall be conclusively presumed to be the base year value, unless an application for equalization is filed:
(1) Within the time period specified in section 1605 of the Revenue and Taxation Code following a determination of new construction or change in ownership;
(2) During the regular equalization period provided for in section 1603 of the Revenue and Taxation Code for the year in which the assessment is placed on the assessment roll, or is filed during the regular equalization period in any of the three succeeding years. Any determination of full cash value by a local board of equalization, an assessment appeals board, or by a court of law resulting from such filing shall be conclusively presumed to be the base year value beginning with the lien date of the assessment year in which the appeal is filed; or
(3) At any time after the time period specified in (1) or (2) if the applicant claims that an erroneous change in ownership determination occurred.
(d) Any base year value determined pursuant to section 51.5 of the Revenue and Taxation Code shall be conclusively presumed to be the base year value unless an application is filed during the regular equalization period in the year in which the error was corrected or during the regular equalization period in any of the three succeeding years. Once an application is filed, the base year value determined pursuant to that application shall be conclusively presumed to be the base year value for that assessment event.
(e) An application for equalization made pursuant to sections 1603 or 1605 of the Revenue and Taxation Code, when determined, shall be conclusively presumed to be the base year value for that assessment event.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 80, 81, 110.1, 1603 and 1605, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (e) filed 5-11-71; effective thirtieth day thereafter (Register 71, No. 20). For prior history, see Register 70, No. 19.
2. Amendment filed 4-14-72; effective thirtieth day thereafter (Register 72, No. 16).
3. Amendment of subsection (f) filed 12-26-75; effective thirtieth day thereafter (Register 75, No. 52).
4. Amendment filed 10-20-80; effective thirtieth day thereafter (Register 80, No. 43).
5. Editorial correction of NOTE filed 4-1-83 (Register83, No. 14).
6. Amendment of section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§306. Copy of Application, Amendment, and Correction to Assessor.
Note     •     History

The clerk shall transmit to the assessor a copy of each application for a change in assessment and each written request for amendment or correction that is received. A reasonable time shall be allowed before the hearing for the assessor to obtain information relative to the property and the assessment thereof.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 1603 and 1606, Revenue and Taxation Code; and Section 15606, Government Code.
HISTORY

1. Editorial correction adding NOTE filed 4-1-83 (Register 83, No. 14).
2. Amendment of section heading and section filed 5-25-2000; operative 6-30-2000 (Register 2000, No. 21).
§307. Notice of Hearing.
Note     •     History

(a) After the filing of an application for reduction of an assessment, the clerk shall set the matter for hearing and notify the applicant or the applicant's agent in writing by personal delivery or by depositing the notice in the United States mail directed to the address given in the application. If requested by the assessor or the applicant, the clerk of the board may electronically transmit the notice to the requesting party. The notice shall designate the time and place of the hearing. It shall also include a statement that the board is required to find the full value of the property from the evidence presented at the hearing and that the board can raise, under certain circumstances, as well as lower or confirm the assessment being appealed. The notice shall include a statement that an application for a reduction in the assessment of a portion of an improved real property (e.g., land only or improvements only) or a portion of installations which are partly real property and partly personal property (e.g., only the improvement portion or only the personal property portion of machinery and equipment) may result in a reappraisal of all property of the applicant at the site which may result in an increase in the unprotested assessment of the other portion or portions of the property, which increase will offset, in whole or in part, any reduction in the protested assessment.
(b) The notice shall be given no less than forty-five days prior to the hearing unless a shorter notice period has been stipulated to by the assessor and the applicant or the applicant's agent pursuant to section 1605.6 of the Revenue and Taxation Code.
(c) The clerk shall notify the assessor of the time and place of the hearing.
(d) When proposing to raise an assessment on its own motion without an application for reduction pending before it, the board shall give notice of the hearing in the manner provided herein below not less than 20 days prior to the hearing unless notice is waived by the assessee or the assessee's agent in writing in advance of the hearing or orally at the time of the hearing or a shorter notice period is stipulated to by the assessor and assessee or the assessee's agent. The notice shall be given to the assessee as shown on the latest assessment roll by depositing the notice in the United States mail directed to the assessee at the latest address of the assessee available to the assessor on file in the records in the assessor's office. It shall contain:
(1) A statement that a hearing will be held before the local board to determine whether or not the assessment shall be raised;
(2) The time and place of the hearing;
(3) The assessor's parcel number or numbers of the property as shown on the local roll;
(4) A statement that the board is required to find the full value of the property from the evidence presented at the hearing;
(5) The amount by which it is proposed to raise the assessment.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 50, 51, 1601, 1603, 1604, 1605, 1605.6, 1606, 1610.8 and 1620, Revenue and Taxation Code.
HISTORY

1. Amendment of subsections (a) and (d) filed 6-6-69 as an emergency; effective upon filing. Certificate of Compliance included (Register 69, No. 23). For prior history, see Register 69, No. 9.
2. Amendment of subsection (b) filed 5-7-70; effective thirtieth day thereafter (Register 70, No. 19).
3. Amendment of subsection (a) filed 4-14-72; effective thirtieth day thereafter (Register 72, No. 16).
4. Editorial correction adding NOTE filed 4-1-83 (Register 83, No. 14).
5. Amendment of subsections (a) and (d) filed 5-9-84; effective thirtieth day thereafter (Register 84, No. 19).
6. Change without regulatory effect amending subsection (b) filed 12-13-95 pursuant to section 100, title 1, California Code of Regulations (Register 95, No. 50).
7. Change without regulatory effect reinstating subsection (c) filed 7-2-96 pursuant to section 100, title 1, California Code of Regulations (Register 96, No. 27).
8. Amendment of section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§308. Request for Findings.
Note     •     History

(a) If an applicant or the assessor desires written findings of fact, the request must be in writing and submitted to the clerk before commencement of the hearing. The requesting party may abandon the request and waive findings at the conclusion of the hearing. If the requesting party abandons the request at this time, the other party may orally or in writing renew the request at the conclusion of the hearing and accompany the request with payment of the required fee or deposit. The county may impose a reasonable fee, as determined by the board of supervisors, to cover the expense of preparing the findings and conclusions and may require a deposit to be paid prior to the end of the hearing. If, at the conclusion of the hearing, a party requesting written findings has failed to pay the required fee or deposit, the board need not prepare written findings. The board may deny a request made after the conclusion of the hearing that seeks to waive written findings.
(b) The written findings of fact shall fairly disclose the board's findings on all material points raised in the application and at the hearing. The findings shall also include a statement of the methods of valuation used in determining the full value of the property. The county shall provide findings within 45 days after the final determination of the board is entered into the record pursuant to regulation 325 of this subchapter, and shall accompany them with a notice that a request for a transcript of the hearing must be made within 60 days after the final determination.
(c) If the county board fails to make findings upon request, or if findings made are found by a reviewing court to be so deficient that a remand to the county board is ordered to secure reasonable compliance with the elements of findings required by section 1611.5 of the Revenue and Taxation Code, the action of the county board shall be deemed to be arbitrary and capricious within the meaning of section 800 of the Government Code, so as to support an allowance of reasonable attorney's fees against the county for the services necessary to obtain proper findings. The dollar limitation set forth in section 800 of the Government Code shall not apply to an allowance of attorney's fees pursuant to this section.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 1603, 1611.5 and 1611.6, Revenue and Taxation Code.
HISTORY

1. Amendment filed 11-22-68 as an emergency; effective upon filing (Register 68, No. 44).
2. Certificate of Compliance filed 11-26-68 (Register 69, No. 9). Amendment filed 4-14-72; effective thirtieth day thereafter (Register 72, No. 16).
3. Amendment filed 8-20-81; effective thirtieth day thereafter (Register 81, No. 34).
4. Editorial correction of NOTE filed 4-1-83 (Register 83, No. 14).
5. Amendment filed 12-29-87; operative 1-28-88 (Register 88, No. 2).
6. Amendment of section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§308.5. Disqualification of a Board Member or Hearing Officer.
Note     •     History

(a) In those counties having assessment appeals boards or hearing officers, the party affected or the party's agent, or the assessor, may file with the clerk a written statement objecting to the hearing of a matter before a member of the board or a hearing officer. The statement shall set forth the facts constituting the ground of the disqualification of the member or hearing officer and shall be signed by the party affected or the party's agent, or by the assessor, and shall be filed with the clerk at the earliest practicable opportunity after discovery of the facts constituting the ground of the member's or hearing officer's disqualification, and in any event before the commencement of the hearing of any issue of fact in the proceeding before such member or hearing officer. Copies of the statement shall be served by the presenting party on each party to the proceeding and on the board member or hearing officer alleged to be disqualified. Within 10 days after filing of the statement or 10 days after service of it on him or her, whichever is later, the board member or hearing officer may file with the clerk a written answer:
(1) Consenting to the proceeding being heard by another member or hearing officer, in which event the clerk shall appoint a replacement member or hearing officer, or
(2) Denying his or her disqualification, which answer may admit or deny any or all of the facts alleged in the statement and set forth any additional facts relevant to his or her disqualifications.
The clerk shall forthwith transmit a copy of such answer to each party.
Every statement and answer shall be verified by oath in the manner prescribed by section 446 of the Code of Civil Procedure.
(b) The question of the member's or hearing officer's disqualification shall be heard and determined by a board member, other than the member subject to the disqualification challenge, agreed upon by the parties who have appeared in the proceeding, or, in the event of their failing to agree, by a member assigned to act by the clerk. Within five days after the expiration of the time allowed by this regulation for the member to answer, the clerk shall assign a member to hear and determine the matter of the disqualification.
Once the member has been selected pursuant to subsection (b), that member shall determine the qualification of the challenged member or hearing officer.
(c) In a county whose board of supervisors has adopted a resolution implementing the provisions of sections 1640.1 and 1641.1 of the Revenue and Taxation Code, the board may elect to schedule the application before the board in lieu of following the procedures prescribed above.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 1624.4 and 1641.2, Revenue and Taxation Code.
HISTORY

1. New section filed 5-7-70; effective thirtieth day thereafter (Register 70, No. 19).
2. Amendment filed 6-14-74 as an emergency; effective upon filing (Register 74, No. 24).
3. Certificate of Compliance filed 8-9-74 (Register 74, No. 32).
4. Repealer of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
5. Editorial correction adding NOTE filed 4-1-83 (Register 83, No. 14).
6. Amendment of section heading, section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§308.6. Application for Equalization by Member, Alternate Member, or Hearing Officer.
Note     •     History

(a) An application for equalization filed pursuant to sections 1603 or 1605 of the Revenue and Taxation Code by a member or alternate member of an assessment appeals board or an appointed hearing officer shall be heard before an assessment appeals board panel consisting of three special alternate assessment appeals board members appointed by order of the presiding judge of the superior court in the county in which the application is filed.
(b) A special alternate assessment appeals board member may hear only the application or applications for equalization set forth in the superior court order appointing such member.
(c) Any person shall be eligible for appointment as a special alternate assessment appeals board member who meets the qualifications set forth in section 1624 of the Revenue and Taxation Code.
(d) Sections 1624.1 and 1624.2 of the Revenue and Taxation Code shall be applicable to the appointment of a special assessment appeals board member.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 1622.6 and 1636.5, Revenue and Taxation Code.
HISTORY

1. New section filed 6-14-74 as an emergency; effective upon filing (Register 74, No. 24).
2. Certificate of Compliance filed 8-9-74 (Register 74, No. 32).
3. Amendment filed 12-26-75; effective thirtieth day thereafter (Register 75, No. 52).
4. Repealer of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
5. Editorial correction adding NOTE filed 4-1-83 (Register 83, No. 14).
6. Amendment of section heading, section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
7. Change without regulatory effect amending subsection (c) and Note filed 2-13-2001 pursuant to section 100, title 1, California Code of Regulations (Register 2001, No. 7).
§309. Hearing.
Note     •     History

(a) In counties having a population in excess of 4,000,000, on the fourth Monday in September of each year, the board shall meet to equalize the assessment of property on the local roll and shall continue to meet for that purpose from time to time until the business of equalization is disposed of. In all other counties, the board shall meet on the third Monday in July and shall continue to meet until the business of equalization is disposed of. All hearings before the board shall be conducted in the manner provided in this subchapter. Nothing herein requires the board to conduct hearings prior to the final day for filing applications.
(b) A hearing must be held and a final determination made on the application within two years of the timely filing of an application for reduction in assessment submitted pursuant to subdivision (a) of section 1603 of the Revenue and Taxation Code, unless the applicant or the applicant's agent and the board mutually agree in writing or on the record to an extension of time.
(c) If the hearing is not held and a determination is not made within the time specified in subsection (b) of this regulation, the applicant's opinion of value stated in the application shall be conclusively determined by the board to be the basis upon which property taxes are to be levied, except when:
(1) The applicant has not filed a timely and complete application; or,
(2) The applicant has not submitted a full and complete property statement as required by law with respect to the property which is the subject of the application; or,
(3) The applicant has not complied fully with a request for the exchange of information under regulation 305.1 of this subchapter or with the provisions of subdivision (d) of section 441 of the Revenue and Taxation Code; or
(4) Controlling litigation is pending. “Controlling litigation” is litigation which is:
(A) pending in a state or federal court whose jurisdiction includes the county in which the application is filed; and
(B) directly related to an issue involved in the application, the court resolution of which would control the resolution of such issue at the hearing; or,
(5) The applicant has initiated proceedings to disqualify a board member pursuant to Revenue and Taxation Code section 1624.4 within 90 days of the expiration of the two-year period required by Revenue and Taxation Code section 1604; or,
(6) The applicant has requested that the hearing officer's recommendation be heard by the board pursuant to Revenue and Taxation Code section 1641.1, in those counties in which the board of supervisors has adopted a resolution implementing section 1641.1, within 90 days of the expiration of the two-year period required by Revenue and Taxation Code section 1604.
For applications involving base year value appeals that have not been heard and decided by the end of the two-year period provided in section 1604 of the Revenue and Taxation Code and where the two-year period has not been extended pursuant to subsections (b) or (c) of this regulation, the applicant's opinion of value will be entered on the assessment roll for the tax year or years covered by the pending application, and will remain on the roll until the fiscal year in which the board makes a final determination on the application. No increased or escape taxes other than those required by a change in ownership or new construction, or resulting from application of the inflation factor to the applicant's opinion of value shall be levied for the tax years during which the board fails to act.
For applications appealing decline in value and personal property assessments that have not been heard and decided by the end of the two-year period provided in section 1604, the applicant's opinion of value will be enrolled on the assessment roll for the tax year or years covered by the pending application.
(d) If the applicant has initiated proceedings pursuant to subsection (c)(5), or made a request pursuant to subsection (c)(6) of this regulation, the two-year time period described in subsection (b) shall be extended 90 days.
(e) The applicant shall not be denied a timely hearing and determination pursuant to subsection (b) of this regulation, by reason of any of the exceptions enumerated in subsection (c) herein, unless, within two years of the date of the application, the board, or the clerk at the direction of the board, gives the applicant and/or the applicant's agent written notice of such denial. The notice shall indicate the basis for the denial and inform the applicant of his or her right to protest the denial. If requested by the applicant or the applicant's agent, the clerk shall schedule a hearing on the validity of the application and shall so notify the applicant, the applicant's agent, and the assessor.
When a hearing is postponed or not scheduled because controlling litigation is pending, the notice to the applicant shall identify the controlling litigation by the name of the case, the court number or the docket number of the case, and the court in which the litigation is pending. If a hearing is postponed because controlling litigation is pending, the hearing must be held and a final determination made within a period of two years after the application is filed, excluding the period of time between the notice of pending litigation and the date that the litigation becomes final.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Sections 441, 1603, 1604, 1606, 1624.4, 1641.1 and 1641.2, Revenue and Taxation Code.
HISTORY

1. Amendment filed 6-14-74 as an emergency; effective upon filing (Register 74, No. 24).
2. Certificate of Compliance filed 8-9-74 (Register 74, No. 32).
3. Editorial correction of NOTE filed 7-30-82 (Register 82, No. 31).
4. Editorial correction of NOTE filed 4-1-83 (Register 83, No. 14).
5. Amendment filed 5-31-84; effective thirtieth day thereafter (Register 84, No. 22).
6. Amendment of section and Note filed 8-7-97; operative 9-6-97 (Register 97, No. 32).
7. Amendment of section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§310. Selection of Board Chair.
Note     •     History

The board shall select one of its members to act as chair and preside over all hearings. This function may be rotated among board members. The chair shall exercise such control over the hearings as is reasonable and necessary. He or she shall make all rulings regarding procedural matters and regarding the admission or exclusion of evidence.
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 1609, Revenue and Taxation Code.
HISTORY

1. Editorial correction adding NOTE filed 4-1-83 (Register 83, No. 14).
2. Amendment of section heading, section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§311. Quorum and Vote Required.
Note     •     History

(a) No hearing before the board shall be held unless a quorum is present. Except as otherwise provided in regulation 310 of this subchapter, no decision, determination, or order shall be made by the board by less than a majority vote of all the members of the board who have been in attendance throughout the hearing.
(b) If either party so demands, a hearing must be held before the full board or, for assessment appeals boards appointed pursuant to Revenue and Taxation Code section 1622.1, a full three member panel. In the event that only a quorum is present and the applicant demands a hearing before the full board, or full three member panel designated pursuant to Revenue and Taxation Code section 1622.1, the board may request that the applicant extend the two-year period provided in section 1604 of the Revenue and Taxation Code if the demand precludes the matter from being heard and decided before the expiration of the two-year period. If the applicant does not extend the two-year period as requested, the board may deny the applicant's demand for a hearing before a full board or a full three member panel.
(c) If a hearing takes place before a board consisting of an even number of members and they are unable to reach a majority decision, the application shall be reheard before the full board. In any case wherein the hearing takes place before less than the full board, the parties may stipulate that the absent member or members may read or otherwise become familiar with the record and participate in the vote on the decision.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 1601, 1620, 1622.1, 1622.5 and 1622.6, Revenue and Taxation Code.
HISTORY

1. Amendment filed 5-27-68; effective thirtieth day thereafter (Register 68, No. 21).
2. Amendment filed 1-11-83; effective thirtieth day thereafter (Register 83, No. 3).
3. Amendment of section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§312. Hearings Recorded.
Note     •     History

(a) All hearings of the board shall be recorded or reported, or videotaped subject to the conditions set forth in Code of Civil Procedure section 2025.340. 
(b) Any person may purchase a transcript of that portion of a hearings that is open to the public upon payment of a reasonable fee, provided the request to purchase has been made within 60 days after the final determination of the board. 
(c) In a county which does not regularly provide a stenographic reporter, the applicant, at the applicant's own expense, may have the hearing reported by a stenographer. 
(d) In a county which does provide a stenographic reporter, if the applicant desires the clerk to arrange for a stenographer, the applicant must make the request in writing at least 10 days before the hearing.
(e) If a stenographic reporter is present, the county may designate the reporter's transcript as the official record upon being filed with the board.
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 1611, Revenue and Taxation Code.
HISTORY

1. Amendment filed 4-14-72; effective thirtieth day thereafter (Register 72, No. 16).
2. Amendment filed 6-14-74 as an emergency; effective upon filing (Register 74, No. 24).
3. Certificate of Compliance filed 8-9-74 (Register 74, No. 32).
4. Editorial correction adding NOTE filed 4-1-83 (Register 83, No. 14).
5. Amendment of section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
6. Change without regulatory effect amending subsection (a) filed 3-16-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 12).
§313. Hearing Procedure.
Note     •     History

Hearings on applications shall proceed as follows:
(a) The chair or the clerk shall announce the number of the application and the name of the applicant. The chair shall then determine if the applicant or the applicant's agent is present. If neither is present, the chair shall ascertain whether the clerk has notified the applicant of the time and place of the hearing. If the notice has been given and neither the applicant nor the applicant's agent is present, the application shall be denied for lack of appearance, or, for good cause of which the board is timely informed prior to the hearing date, the board may postpone the hearing. If the notice has not been given, the hearing shall be postponed to a later date and the clerk directed to give proper notice thereof to the applicant.
The denial of an application for lack of appearance by the applicant, or the applicant's agent, is not a decision on the merits of the application and is not subject to the provisions of regulation 326 of this subchapter. The board of supervisors may adopt a procedure which authorizes reconsideration of the denial where the applicant furnishes evidence of good cause for the failure to appear or to make a timely request for postponement and files a written request for reconsideration within a period set by the board, not to exceed 60 days from the date of mailing of the notification of denial due to lack of appearance. Applicants who fail to request reconsideration within the period set, or whose requests for reconsideration are denied, may refile an appeal of the base year value during the next regular filing period in accordance with Revenue and Taxation Code section 80.
(b) If the applicant or the applicant's agent is present, the chair or the clerk shall announce the nature of the application, the assessed value as it appears on the local roll and the applicant's opinion of the value of the property. The chair may request that either or both parties briefly describe the subject property, the issues the board will be requested to determine, and any agreements or stipulations agreed to by the parties.
(c) In applications where the applicant has the burden of proof, the board shall require the applicant or the applicant's agent to present his or her evidence first, and then the board shall determine whether the applicant has presented proper evidence supporting his or her position. This is sometimes referred to as the burden of production. In the event the applicant has met the burden of production, the board shall then require the assessor to present his or her evidence. The board shall not require the applicant to present evidence first when the hearing involves:
(1) A penalty portion of an assessment.
(2) The assessment of an owner-occupied single-family dwelling or the appeal of an escape assessment, and the applicant has filed an application that provides all of the information required in regulation 305(c) of this subchapter and has supplied all information as required by law to the assessor. An owner-occupied single-family dwelling means a single-family dwelling that is the owner's principal place of residence and qualifies for a homeowners' property tax exemption pursuant to Revenue and Taxation Code section 218. “Property that qualifies for a homeowners' property tax exemption” also includes property that is the principal place of residence of its owner and qualifies for the disabled veterans' exemption provided by Revenue and Taxation Code section 205.5. In those instances, the chair shall require the assessor to present his or her case to the board first. With respect to escape assessments, the presumption in favor of the applicant provided in regulation 321(d) of this subchapter does not apply to appeals resulting from situations where an applicant failed to file a change in ownership statement, a business property statement, or to obtain a permit for new construction.
(3) A change in ownership and the assessor has not enrolled the purchase price, and the applicant has provided the change of ownership statement required by law. The assessor bears the burden of proving by a preponderance of the evidence that the purchase price, whether paid in money or otherwise, is not the full cash value of the property.
(d) All testimony shall be taken under oath or affirmation.
(e) The hearing need not be conducted according to technical rules relating to evidence and witnesses. Any relevant evidence may be admitted if it is the sort of evidence on which responsible persons are accustomed to rely in the conduct of serious affairs. Failure to enter timely objection to evidence constitutes a waiver of the objection. The board may act only upon the basis of proper evidence admitted into the record. Board members or hearing officers may not act or decide an application based upon consideration of prior knowledge of the subject property, information presented outside of the hearing, or personal research. A full and fair hearing shall be accorded the application. There shall be reasonable opportunity for the presentation of evidence, for cross-examination of all witnesses and materials proffered as evidence, for argument and for rebuttal. The party having the burden of proof shall have the right to open and close the argument.
(f) When the assessor requests the board find a higher assessed value than he or she placed on the roll and offers evidence to support the higher value, the chair shall determine whether or not the assessor gave notice in writing to the applicant or the applicant's agent by personal delivery or by deposit in the United States mail directed to the address given on the application. If notice and a copy of the evidence offered has been supplied at least 10 days prior to the hearing, the assessor may introduce such evidence at the hearing. When the assessor proposes to introduce evidence to support a higher assessed value than the value on the roll, the assessor no longer has the presumption accorded in regulation 321(a) of this subchapter and the assessor shall present evidence first at the hearing, unless the applicant has failed to supply all the information required by law to the assessor. The foregoing notice requirement shall not prohibit the board from a finding of a higher assessed value when it has not been requested by the assessor.
(g) Hearings by boards and hearing officers shall be open, accessible, and audible to the public except that:
(1) Upon conclusion of the evidentiary portion of the hearing, the board or hearing officer may take the matter under submission and deliberate in private in reaching a decision, and
(2) The board or hearing officer may grant a request by the applicant or the assessor to close to the public a portion of the hearing relating to trade secrets. For purposes of this regulation, a “trade secret” is that information defined by section 3426.1 of the Civil Code. Such a request may be made by filing with the clerk a declaration under penalty of perjury that evidence is to be presented by the assessor or the applicant that relates to trade secrets whose disclosure to the public will be detrimental to the business interests of the owner of the trade secrets. The declaration shall state the estimated time it will take to present the evidence. Only evidence relating to the trade secrets may be presented during the time the hearing is closed, and such evidence shall be confidential unless otherwise agreed by the party to whom it relates.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Article XIII A, California Constitution; Sections 110, 167, 205.5, 218, 1605.4, 1607, 1609, 1609.4 and 1637, Revenue and Taxation Code; and Section 664, Evidence Code.
HISTORY

1. Amendment of subsection (h) filed 4-22-77; effective thirtieth day thereafter (Register 77, No. 17). For prior history, see Register 76, No. 47.
2. Amendment filed 2-14-83; effective thirtieth day thereafter (Register 83, No. 8).
3. Amendment filed 1-30-85; effective thirtieth day thereafter (Register 85, No. 5).
4. Amendment of section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
5. Change without regulatory effect amending subsection (c)(2) filed 11-20-2000 pursuant to section 100, title 1, California Code of Regulations (Register 2000, No. 47).
6. Amendment of subsection (c)(2) and Note filed 10-23-2012; operative 11-22-2012 (Register 2012, No. 43).
§314. Legal Counsel for Applicant and Assessor.
Note     •     History

The applicant and the assessor may be represented by legal counsel, except that when an assessment protest is heard by a hearing officer appointed pursuant to section 1636 of the Revenue and Taxation Code, the assessor may have legal counsel only if the applicant is represented by an attorney.
NOTE

Authority and reference cited: Section 15606, Government Code. 
HISTORY

1. Amendment filed 6-14-74 as an emergency; effective upon filing (Register 74, No. 23).
2. Certificate of Compliance filed 8-9-74 (Register 74, No. 32).
3. Editorial correction adding NOTE filed 4-1-83 (Register 83, No. 14).
§316. Examination of Applicant by Board.
Note     •     History

(a) Except as hereinafter provided, no reduction of an assessment or change in ownership or new construction determination shall be made unless the board examines, on oath, the applicant or the applicant's agent concerning the value of the property and/or the facts upon which the change in ownership or new construction determination is based, and the applicant or the applicant's agent attends and answers all questions pertinent to the inquiry.
(b) In the event there is filed with the board a written stipulation, signed by the assessor and county legal advisor on behalf of the county and by the person affected or the authorized agent making the application, as to the full value and assessed value of the property and/or a determination regarding a change in ownership or new construction, which stipulation sets forth the facts upon which the agreed upon value is premised, the board may, at a public hearing, 
(1) accept the stipulation, waive the appearance of the person affected or the agent and change the assessed value in accordance with section 1610.8 of the Revenue and Taxation Code, or,
(2) reject the stipulation or set or reset the application for reduction for hearing.
(c) The board may, in its discretion, waive the examination of the applicant or the applicant's agent if the board and the assessor are satisfied that the issues raised by the application and the facts pertaining thereto have been fully considered by the board in previous years or fully presented in the application, and if the applicant or the applicant's agent requests such waiver in the application. The board shall consult with the assessor and shall act promptly on any request for waiver and given written notice of its decision no less than 30 days before commencement of the hearing on the application. If the board waives the examination of the applicant or the applicant's agent, it shall decide the case on the merits of the application and on the basis of any evidence properly produced at the hearing by the assessor.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 1605.5, 1607, 1608 and 1620-1630, Revenue and Taxation Code.
HISTORY

1. Amendment filed 10-5-67 as an emergency; effective upon filing (Register 67, No. 40).
2. Certificate of Compliance--Sec. 11422.1, Gov. Code, filed 12-14-67 (Register 67, No. 50).
3. Amendment filed 5-27-68; effective thirtieth day thereafter (Register 68, No. 21).
4. Amendment filed 12-26-75; effective thirtieth day thereafter (Register 75, No. 52).
5. Amendment filed 1-11-83; effective thirtieth day thereafter (Register 83, No. 3).
6. Amendment of section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§317. Personal Appearance by Applicant; Appearance by Agent.
Note     •     History

(a) The applicant must appear personally at the hearing or be represented by an agent, unless the applicant's appearance has been waived by the board in accordance with regulation 316 of this subchapter. If the applicant is represented by an agent, the agent shall be thoroughly familiar with the facts pertaining to the matter before the board.
(b)(1) If the application was filed by the applicant, any person (other than a California licensed attorney retained by the applicant or a person mentioned in subsections (c), (d) except an agent, or (e)) who appears at the hearing purporting to act as agent for the applicant shall first file with the clerk a written authorization, signed by the applicant, to represent the applicant at the hearing.
(2) If at the hearing the applicant is represented by a person other than the person who was originally authorized by the applicant to appear at the hearing, that person shall present to the board a written authorization signed by the applicant indicating the applicant's consent to the change in representation.
(3) The written authorization required pursuant to this regulation shall include the information required by regulation 305(a) of this subchapter and shall clearly state that the agent is authorized by the applicant to appear at hearings before the board.
(c) If the property is held in joint or common ownership or in co-ownership, the presence of the applicant or any one of the owners shall constitute a sufficient appearance.
(d) Where the applicant is a corporation, limited partnership, or a limited liability company, the business entity shall make an appearance by the presence of any officer, employee, or an authorized agent, thoroughly familiar with the facts pertaining to the matter before the board.
(e) A husband may appear for his wife, or a wife for her husband, and sons or daughters for parents or vice versa.
(f) If an agent is previously authorized by the applicant to file an application, no further authorization is required for that agent to represent the applicant at the subsequent hearing.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Section 1601, 1607 and 1608, Revenue and Taxation Code.
HISTORY

1. Editorial correction adding NOTE filed 4-1-83 (Register 83, No. 14).
2. Amendment filed 7-16-86; effective thirtieth day thereafter (Register 86, No. 29).
3. Amendment of section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§318. Property in Common Ownership. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 15606, Government Code. 
HISTORY

1. Editorial correction adding NOTE filed 4-1-83 (Register 83, No. 14).
2. Repealer filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§319. Appearance by Corporation. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 15606, Government Code. 
HISTORY

1. Editorial correction adding NOTE filed 4-1-83 (Register 83, No. 14).
2. Repealer filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§320. Appearance by Members of Family. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 15606, Government Code. 
HISTORY

1. Editorial correction adding NOTE filed 4-1-83 (Register 83, No. 14).
2. Repealer filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§321. Burden of Proof.
Note     •     History

(a) Subject to exceptions set by law, it is presumed that the assessor has properly performed his or her duties. The effect of this presumption is to impose upon the applicant the burden of proving that the value on the assessment roll is not correct, or, where applicable, the property in question has not been otherwise correctly assessed. The law requires that the applicant present independent evidence relevant to the full value of the property or other issue presented by the application.
(b) If the applicant has presented evidence, and the assessor has also presented evidence, then the board must weigh all of the evidence to determine whether it has been established by a preponderance of the evidence that the assessor's determination is incorrect. The presumption that the assessor has properly performed his or her duties is not evidence and shall not be considered by the board in its deliberations.
(c) The assessor has the burden of establishing the basis for imposition of a penalty assessment.
(d) Exceptions to subsection (a) apply in any hearing involving the assessment of an owner-occupied single-family dwelling or an escape assessment. An owner-occupied single-family dwelling means a single-family dwelling that is the owner's principal place of residence and qualifies for a homeowners' property tax exemption pursuant to Revenue and Taxation Code section 218. “Property that qualifies for a homeowners' property tax exemption” also includes property that is the principal place of residence of its owner and qualifies for the disabled veterans' exemption provided by Revenue and Taxation Code section 205.5. In such instances, the presumption in section 167 of the Revenue and Taxation Code affecting the burden of proof in favor of the applicant who has supplied all information to the assessor as required by law imposes upon the assessor the duty of rebutting the presumption by the submission of evidence supporting the assessment.
(e) In hearings involving change in ownership, except as provided in section 110 of the Revenue and Taxation Code, the purchase price is rebuttably presumed to be the full cash value. The party seeking to rebut the presumption bears the burden of proof by a preponderance of the evidence.
(f) In weighing evidence, the board shall apply the same evidentiary standard to the testimony and documentary evidence presented by the applicant and the assessor. No greater relief may be granted than is justified by the evidence produced during the hearing.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Sections 110, 167, 205.5, 218 and 1601 et seq., Revenue and Taxation Code; and Section 664, Evidence Code.
HISTORY

1. Amendment filed 11-19-76; designated effective 1-1-77 (Register 76, No. 47). For prior history, see Register 72, No. 16.
2. Repealer of subsection (c) filed 1-11-83; effective thirtieth day thereafter (Register 83, No. 3).
3. Amendment of section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
4. Amendment of subsection (d) and Note filed 10-23-2012; operative 11-22-2012 (Register 2012, No. 43).
§322. Subpoenas.
Note     •     History

(a) At the request of the applicant or the assessor in advance of the hearing or at the time of the hearing the board or the clerk on authorization from the board may issue subpoenas for the attendance of witnesses at the hearing. The board may issue a subpoena on its own motion. A subpoena may be served on any resident of the State of California or any person or business entity found within the state. All subpoenas shall be obtained from the board.
(b) If a subpoena is issued at the request of the applicant, the applicant is responsible for serving it and for the payment of witness fees and mileage.
(c) An application for a subpoena for the production of books, records, maps, and documents shall be supported by an affidavit such as is prescribed by section 1985 of the Code of Civil Procedure.
(d) In the event a State Board of Equalization employee is subpoenaed pursuant to section 1609.5 of the Revenue and Taxation Code at the request of the applicant and the county board grants a reduction in the assessment, the county board may reimburse the applicant in whole or in part for the actual witness fees paid pursuant to section 1609.5.
(e) If a party desires the board to issue a subpoena, the party shall make the written request sufficiently in advance of the scheduled hearing date so that the subpoenaed party has an adequate opportunity to fully comply with the subpoena prior to the commencement of the hearing. Upon such request, the board may, whenever possible, issue subpoenas pursuant to sections 1609.4 and 1609.5 of the Revenue and Taxation Code. Subpoenas shall be restricted to compelling the appearance of a person or the production of things at the hearing and shall not be utilized for purposes of prehearing discovery. A subpoena issued near in time to or after commencement of the hearing should be as limited as possible, and a continuance of the hearing may be granted, if requested, for a reasonable period of time.
(f) No subpoena to take a deposition shall be issued nor shall depositions be considered for any purpose by the board.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 1609, 1609.4 and 1609.5, Revenue and Taxation Code.
HISTORY

1. Amendment filed 10-5-67 as an emergency; effective upon filing (Register 67, No. 40).
2. Certificate of Compliance--Sec. 11422.1, Gov. Code, filed 12-14-67 (Register 67, No. 50).
3. Amendment filed 5-27-68; effective thirtieth day thereafter (Register 68, No. 21).
4. Editorial correction adding NOTE filed 4-1-83 (Register 83, No. 14).
5. Amendment of section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§323. Postponements and Continuances.
Note     •     History

(a) The applicant and/or the assessor shall be allowed one postponement as a matter of right, the request for which must be made not later than 21 days before the hearing is scheduled to commence. If the applicant requests a postponement as a matter of right within 120 days of the expiration of the two-year limitation period provided in section 1604 of the Revenue and Taxation Code, the postponement shall be contingent upon the applicant's written agreement to extend and toll indefinitely the two-year period subject to termination of the agreement by 120 days written notice by the applicant. The assessor is not entitled to a postponement as a matter of right if the request is made within 120 days of the expiration of the two-year period, but the board, in its discretion, may grant such a request. Any subsequent requests for a postponement must be made in writing, and good cause must be shown for the proposed postponement. A stipulation by an applicant and the assessor shall be deemed to constitute good cause, but shall result in extending and tolling indefinitely the two-year limitation period subject to termination of the agreement by 120 days written notice by the applicant. Any information exchange dates remain in effect based on the originally scheduled hearing date notwithstanding the hearing postponement, except as provided in regulation 305.1(d) of this subchapter.
(b) A board of supervisors may delegate decisions concerning postponement to the clerk in accordance with locally adopted rules. Requests for postponement shall be considered as far in advance of the hearing date as is practicable.
(c) At the hearing, the board or a hearing officer may continue a hearing to a later date. If the applicant requests a continuance within 90 days of the expiration of the two-year period specified in section 1604 of the Revenue and Taxation Code, the board may require a written extension signed by the applicant extending and tolling the two-year period indefinitely subject to termination of the agreement by 120 days written notice by the applicant. The clerk shall inform the applicant or the applicant's agent and the assessor in writing of the time and place of the continued hearing not less than 10 days prior to the new hearing date, unless the parties agree in writing or on the record to waive written notice.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 1605.6 and 1606, Revenue and Taxation Code.
HISTORY

1. Amendment filed 5-27-68; effective thirtieth day thereafter (Register 68, No. 21).
2. Amendment filed 11-22-68 as an emergency; effective upon filing (Register 68, No. 44).
3. Certificate of Compliance filed 11-26-68 (Register 69, No. 9).
4. Editorial correction adding NOTE filed 4-1-83 (Register 83, No. 14).
5. Amendment of section heading, section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§324. Decision.
Note     •     History

(a) Determination of Full Value, Classification Change in Ownership, or Other Issues. Acting upon proper evidence before it, the board shall determine the full value of the property, including land, improvements, and personal property, that is the subject of the hearing. The determination of the full value shall be supported by a preponderance of the evidence presented during the hearing. The board shall consider evidence of value derived by the use of any of the valuation methods described in regulation 3 of subchapter 1 of this chapter. It shall determine whether the method(s) used was (were) properly applied, considering the type of property assessed, governmentally imposed land use restrictions, and any recorded conservation easements as described in Civil Code section 815.1 et seq., by examining the factual data, the presumptions, and the estimates relied upon. The board shall also determine the classification, amount, and description of the property that is the subject of the hearing, the existence of a change in ownership or new construction, or any other issue that is properly before the board, or that is necessary to determine the full value of the property. The board shall provide to the clerk such details as are necessary for the implementation of the board's decision.
(b) Jurisdiction. The board's authority to determine the full value of property or other issues, while limited by the laws of this state and the laws of the United States and usually exercised in response to an application for equalization, is not predicated on the filing of an application nor limited by the applicant's request for relief. When an application for review includes only a portion of an appraisal unit, whether real property, personal property, or both, the board may nevertheless determine the full value, classification, or other facts relating to other portions that have undergone a change in ownership, new construction or a change in value. Additionally, the board shall determine the full value of the entire appraisal unit whenever that is necessary to the determination of the full value of any portion thereof.
The board is not required to choose between the opinions of value promoted by the parties to the appeal, but shall make its own determination of value based upon the evidence properly admitted at the hearing.
An appraisal unit of property is a collection of assets that functions together, and that persons in the marketplace commonly buy and sell as a single unit or that is normally valued in the marketplace separately from other property, or that is specifically designated as such by law.
(c) Valuation Principles. The board, the applicant, and appraisal witnesses shall be bound by the same principles of valuation that are legally applicable to the assessor.
(d) Comparable Sales. When valuing a property by a comparison with sales of other properties, the board may consider those sales that, in its judgment, involve properties similar in size, quality, age, condition, utility, amenities, site location, legally permitted use, or other physical attributes to the property being valued. When valuing property for purposes of either the regular roll or the supplemental roll, the board shall not consider a sale if it occurred more than 90 days after the date for which value is being estimated. The provisions for exclusion of any sale occurring more than 90 days after the valuation date do not apply to the sale of the subject property.
The board shall presume that zoning or other legal restrictions, of the types described in Revenue and Taxation Code section 402.1, on the  use of either the property sold or the property being valued will not be removed or substantially modified in the predictable future unless sufficient grounds as set forth in that section are presented to the board to overcome that presumption.
(e) Findings of Fact. When written findings of fact are made, they shall fairly disclose the board's findings on all material points raised in the application and at the hearing. The findings shall also include a statement of the method or methods of valuation used in determining the full value of the property or its components.
NOTE

Authority cited: Section 15606, Government Code. Reference: Article XIIIA, California Constitution; and Sections 402.1, 402.5, 1609, 1610.8 and 1611.5, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (f) and new subsections (g) and (h) filed 5-7-70; effective thirtieth day thereafter (Register 70, No. 19). For prior history, see Register 69, No. 9.
2. Amendment of subsection (e) filed 5-11-71; effective thirtieth day thereafter (Register 71, No. 20).
3. Amendment of subsections (a), (e) and (f) filed 4-14-72; effective thirtieth day thereafter (Register 72, No. 16). 
4. Amendment of subsection (a) filed 12-26-75; effective thirtieth day thereafter (Register 75, No. 52).
5. Amendment filed 1-11-83; effective thirtieth day thereafter (Register 83, No. 3). 
6. Amendment filed 4-23-90; operative 5-23-90 (Register 90, No. 20).
7. Editorial correction of printing error restoring HISTORY notes 1.-5. inadvertently omitted in Register 90, No. 20 (Register 90, No. 41).
8. Amendment of section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§325. Notice and Clarification of Decision.
Note     •     History

(a) A board may announce its decision to the applicant and the assessor at the conclusion of the hearing, or it may take the matter under submission. The decision becomes final when:
(1) The vote is entered into the record at the conclusion of the hearing provided no findings of fact are requested by either party, and all parties are present at the hearing or the hearing is subject to stipulation by both parties. The county may provide a written notice of the decision.
(2) A written notice of the decision is issued provided no findings of fact are requested by either party, and the decision is taken under submission by the board at the conclusion of the hearing. The county shall issue a written notice of the decision no later than 120 days after the conclusion of the hearing. The clerk shall notify the applicant in writing of the decision of the board by United States mail addressed to the applicant or to the applicant's agent at the address given in the application.
(3) A written notice of the decision is issued or the findings of fact are issued, whichever is earlier, provided findings of fact are requested. The county shall issue a written notice of the decision no later than 120 days after the conclusion of the hearing. If so requested by an applicant or an applicant's agent, the determination shall become final upon issuance of the findings of fact which the county shall issue no later than 180 days after the conclusion of the hearing. Such a request must be made by the applicant or the applicant's agent prior to or at the conclusion of the hearing. If the conclusion of the hearing is within 180 days of the expiration of the two-year period specified in section 1604 of the Revenue and Taxation Code, the applicant shall agree in writing to extend the two-year period. The extension shall be for a period equal to 180 days from the date of the conclusion of the hearing.
(b) The board may request any party to submit proposed written findings of fact and shall provide the other party the opportunity to review and comment on the proposed finding submitted. If both parties prepare proposed findings of fact, no opportunity to review and comment need be provided.
(c) When findings of fact have been prepared, either party or the clerk may submit a written request for clarification about the details of the decision, but such clarification shall not alter the final determination of the board.
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 1601 et seq., Revenue and Taxation Code.
HISTORY

1. Editorial correction adding NOTE filed 4-1-83 (Register 83, No. 14).
2. Amendment of section heading, section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
§326. Reconsideration and Rehearing.
Note     •     History

(a) The decision of the board upon an application is final. The board shall not reconsider or rehear an application or modify a decision unless:
(1) The decision reflects a ministerial clerical error; or
(2) The decision was entered as the result of the applicant's failure to appear for the hearing and within the period established pursuant to regulation 313 of this subchapter, the applicant furnishes evidence establishing, to the satisfaction of the board, excusable good cause for the failure to appear.
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 1601 et seq., Revenue and Taxation Code.
HISTORY

1. Editorial correction adding NOTE filed 4-1-83 (Register 83, No. 14).
2. Amendment of section and Note filed 3-23-2000; operative 4-22-2000 (Register 2000, No. 12).
Chapter 4. Equalization by State Board
Article 1. Random Selection of Counties
§370. Random Selection of Counties for Representative Sampling.
Note     •     History

(a) Survey Cycle. The board shall select at random at least three counties from among all except the 10 largest counties and cities and counties for a representative sampling of assessments in accordance with the procedures contained herein. Counties eligible for random selection will be distributed as equally as possible in a five-year rotation commencing with the local assessment roll for the 1997-98 fiscal year.
(b) Random Selection for Assessment Sampling. The counties selected at random will be drawn from the group of counties scheduled in that year for surveys of assessment practices. The scheduled counties will be ranked according to the size of their local assessment rolls for the year prior to the sampling.
(1) If no county has been selected for an assessment sampling on the basis of significant assessment problems as provided in subdivision (c), the counties eligible in that year for random selection will be divided into three groups (small, medium, and large), such that each county has an equal chance of being selected. One county will be selected at random by the board from each of these groups. The board may randomly select an additional county or counties to be included in any survey cycle year. The selection will be done by lot, with a representative of the California Assessors' Association witnessing the selection process.
(2) If one or more counties are scheduled for an assessment sampling in that year because they were found to have significant assessment problems, the counties eligible for random selection will be divided into the same number of groups as there are counties to be randomly selected, such that each county has an equal chance of being selected. For example, if one county is to be sampled because it was found to have significant assessment problems, only two counties will then be randomly selected and the pool of eligible counties will be divided into two groups. If two counties are to be sampled because they were found to have significant assessment problems, only one county will be randomly selected and all counties eligible in that year for random selection will be pooled into one group.
(3) Once random selection has been made, neither the counties selected for an assessment sampling nor the remaining counties in the group for that fiscal year shall again become eligible for random selection until the next fiscal year in which such counties are scheduled for an assessment practices survey, as determined by the five-year rotation. At that time, both the counties selected and the remaining counties in that group shall again be eligible for random selection.
(c) Assessment Sampling of Counties with Significant Assessment Problems. If the board finds during the course of an assessment practices survey that a county has significant assessment problems as defined in Rule 371, the board shall conduct a sampling of assessments in that county in lieu of conducting a sampling in a county selected at random.
(d) Additional Surveys. This regulation shall not be construed to prohibit the Board from conducting additional surveys, samples, or other investigations of any county assessor's office.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Section 75.60, Revenue and Taxation Code; and Sections 15640 and 15643(b), Government Code.
HISTORY

1. Amendment of article heading and new section filed 4-22-97; operative 5-22-97 (Register 97, No. 17). For article 1 prior history, see Register 83, No. 3.
§371. Significant Assessment Problems.
Note     •     History

(a) For purposes of Revenue and Taxation Code section 75.60 and Government Code section 15643, “significant assessment problems” means procedure(s) in one or more areas of an assessor's assessment operation, which alone or in combination, have been found by the Board to indicate a reasonable probability that either:
(1) the average assessment level in the county is less than 95 percent of the assessment level required by statute; or
(2) the sum of all the differences between the Board's appraisals and the assessor's values (without regard to whether the differences are underassessments or overassessments), expanded statistically over the assessor's entire roll, exceeds 7.5 percent of the assessment level required by statute.
(b) For purposes of this regulation, “areas of an assessor's assessment operation” means, but is not limited to, an assessor's programs for:
(1) Uniformity of treatment for all classes of property.
(2) Discovering and assessing newly constructed property.
(3) Discovering and assessing real property that has undergone a change in ownership.
(4) Conducting audits in accordance with Revenue and Taxation Code section 469.
(5) Assessing open-space land subject to enforceable restriction, in accordance with Revenue and Taxation Code section 421 et seq.
(6) Discovering and assessing taxable possessory interests in accordance with Revenue and Taxation Code section 107 et seq.
(7) Discovering and assessing mineral-producing properties in accordance with Property Tax Rule 469.
(8) Discovering and assessing property that has suffered a decline in value.
(9) Reviewing, adjusting, and, if appropriate, defending assessments for which taxpayers have filed applications for reduction with the local assessment appeals board.
(c) A finding of “significant assessment problems,” as defined in this regulation, would be limited to the purposes of Revenue and Taxation Code section 75.60 and Government Code section 15643, and shall not be construed as a generalized conclusion about an assessor's practices.
NOTE

Authority cited: Section 75.60(b)(3), Revenue and Taxation Code; and Sections 15606(a), 15606(c) 15606(g), 15640(f) and 15643(b), Government Code. Reference: Section 75.60, Revenue and Taxation Code; and Section 15643, Government Code.
HISTORY

1. New section filed 4-16-97; operative 5-16-97 (Register 97, No. 16).
2. Amendment of section and Note filed 4-14-2010; operative 5-14-2010 (Register 2010, No. 16).
Article 1.5. Office of Appraisal Appeals [Repealed]
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 1816, 1816.1 and 1816.2, Revenue and Taxation Code; and Section 15605.5, Government Code.
HISTORY

1. New Article 1.5 (Sections 381-394) filed 6-23-67 as procedural and organizational; effective upon filing (Register 67, No. 25).
2. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
3. Repealer of Article 1.5 (Sections 381-394) filed 3-4-82; effective thirtieth day thereafter (Register 82, No. 10). For prior history, see Registers 74, No. 32; 71, No. 24; 71, No. 4; 69, No. 45; 68, No. 44; 68, No. 13; and 67, No. 46.
Article 2. Intercounty Equalization [Repealed]
NOTE

Authority cited for Article 2: Section 15606, Government Code. Reference for Article 2: Chapter 2, Part 3, Division 1, Revenue and Taxation Code.
HISTORY

1. New Subchapter 4, Article 1 (§ 18 401-412) and Article 3 (§ 451-458) filed 4-28-67; effective thirtieth day thereafter (Register 67, No. 17). (For former related regulations, see Register 64, No. 4).
2. Renumbering of Article 1 to Article 2 filed as procedural and organizational; effective upon filing (Register 67, No. 25).
3. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
4. Repealer of Article 2 (Sections 401-412) filed 1-11-83; effective thirtieth day thereafter (Register 83, No. 3).
Article 3. Taxable Property of a County, City or Municipal Corporation [Repealed]
HISTORY

1. Repealer of article 3 (sections 415-458) filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
Article 4. Change in Ownership and New Construction
§460. General Application.
Note     •     History

(a) Sections 1 and 2 of Article XIII A of the Constitution provide for a limitation on property taxes and a procedure for establishing the current taxable value of locally assessed real property by reference to a base year full cash value which is then modified annually to reflect the inflation rate not to exceed two percent per year or declines in value from whatever cause.
(b) The following definitions govern the construction of the terms in the rules pertaining to Sections 1 and 2 of Article XIII A.
(1) Base year. The assessment year 1975-76 serves as the original base year. Thereafter, any assessment year in which real property, or a portion thereof, is purchased, is newly constructed, or changes ownership shall become the base year used in determining the full value for such real property, or a portion thereof.
(2) Full cash value.
(A) The full cash value of real property means:
1. The “full cash value” as defined in Section 110.1 of the Revenue and Taxation Code, as of the lien date 1975 for properties with a 1975-76 base year, or
2. The “full cash value” as defined in Section 110 of the Revenue and Taxation Code as of the date such real property is purchased, is newly constructed, or changes ownership after the 1975 lien date.
Note: The “full cash value” determined pursuant to Section 110 for property, or portions thereof, purchased, newly constructed or which changes ownership shall be enrolled on the next succeeding lien date unless the “full cash value” on that lien date is less, in which case the lien date value shall be enrolled. 
(B) If real property has not been appraised to its appropriate base year full cash value, then the assessor shall reappraise such property to its full cash value for the appropriate base year lien date. Such reappraisals may be made at any time, notwithstanding the provisions of Section 405.6 of the Revenue and Taxation Code, but 1975-76 base year values must be determined prior to July 1, 1980 except in counties over 4,000,000 population the values must be determined prior to July 1, 1981.
(3) Restricted value. Restricted value means a value standard other than full cash value prescribed by the Constitution or by statute authorized by the Constitution.
(4) Full value. Full value (appraised value) means either the full cash value or the restricted value. 
(5) Inflation rate. For each lien date after the lien date in which the base year full value is determined, the full value of real property shall be modified to reflect the percentage change in cost of living, as defined in Section 51 of the Revenue and Taxation Code; provided that such value shall not reflect an increase in excess of 2 percent of the taxable value of the preceding lien date.
(6) Taxable value. Taxable value means the base year full value adjusted for any given lien date as required by law or the full cash value for the same lien date, whichever is less.
(7) Property tax rate. The property tax rate is the rate calculated in accordance with the ad valorem tax limitation prescribed by Section 1 of Article XIII A of the Constitution.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Article XIII A, Sections 1 and 2, California Constitution; and Sections 51 and 110.1, Revenue and Taxation Code.
HISTORY

1. New section filed 7-3-78 as an emergency; effective upon filing (Register 78, No. 27).
2. Amendment filed 10-2-78 as an emergency; effective upon filing. Certificate of Compliance included (Register 78, No. 40).
3. Order which was filed 10-2-78 refiled 10-20-78 as an emergency, to correct date of adoption; effective upon filing. Certificate of Compliance included (Register 78, No. 43).
4. Amendment of subsections (b)(6), (7), and (8) filed 1-31-79; effective thirtieth day thereafter (Register 79, No. 5).
5. Amendment of subsections (b)(6), (b)(7) and (b)(8) refiled 2-7-79 as an emergency; designated effective 3-1-79. Certificate of Compliance included (Register 79, No. 6).
6. Amendment filed 8-22-79 as an emergency; effective upon filing (Register 79, No. 34). A Certificate of Compliance must be filed within 120 days or emergency language will be repealed on 12-20-79.
7. Certificate of Compliance filed 12-6-79 (Register 79, No. 49).
8. Amendment filed 1-11-83; effective thirtieth day thereafter (Register 83, No. 3).
9. Amendment of subsection (b)(5) filed 8-23-85; effective thirtieth day thereafter (Register 85, No. 34).
10. Editorial correction restoring inadvertently omitted article heading (Register 97, No. 7).
§460.1. 1975 Base Year Values. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. Reference: Section 110.1, Revenue and Taxation Code.
HISTORY

1. New section filed as an emergency 5-25-79; effective upon filing (Register 79, No. 21).
2. Certificate of Compliance filed 8-21-79 (Register 79, No. 34).
3. Amendment of subsection (e) filed 1-18-83; effective thirtieth day thereafter (Register 83, No. 3).
4. Repealer filed 5-7-98; operative 6-6-98 (Register 98, No. 19).
§461. Real Property Value Changes.
Note     •     History

(a) Section 2 of article XIII A of the California Constitution provides, with certain exceptions stated therein, that real property shall be reappraised if purchased, newly constructed (regulation 463) or a change in ownership occurs (regulation 462) after the original base year.
(b) Unless otherwise provided for in this chapter or by statute, real property which was not subject to valuation in a prior base year as required by law shall be appraised at full value for each year it should have been so valued and an escape assessment shall be added to the roll for the current fiscal year or to the roll being prepared at the time of discovery in accordance with the provisions of section 531.2 of the Revenue and Taxation Code.
(c) The prior year taxable value of real property, or portion thereof, physically removed from the site shall be deducted from the property's prior year taxable value, provided that such net value shall not be less than zero. The net value shall be appropriately adjusted to reflect the percentage change in the cost of living and then compared to the current lien date full value to determine taxable value which shall be the lesser of the two values.
(d) For the fiscal year 1979-80 and fiscal years thereafter the assessor shall prepare an assessment roll containing the base year value appropriately indexed or the current lien date full value, whichever is less. Increases and decreases in full cash value since the previous lien date shall be reflected on the roll except that taxable value shall never exceed base year value appropriately indexed. In preparing such rolls the assessor is not required to make an annual reappraisal of all assessable property.
(e) Declines in value will be determined by comparing the current lien date full value of the appraisal unit to the indexed base year full value of the same unit for the current lien date. Land and improvements constitute an appraisal unit except when measuring declines in value caused by disaster, in which case land shall constitute a separate unit. For purposes of this subdivision, fixtures and other machinery and equipment classified as improvements constitute a separate appraisal unit.
(f) When the current full value of property is less than its base year full value indexed to the current lien date, the full value shall be enrolled as the current taxable value.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Article XIII A, Sections 1 and 2, California Constitution.
HISTORY

1. New section filed 7-3-78 as an emergency; effective upon filing (Register 78, No. 27).
2. Amendment filed 10-2-78 as an emergency; effective upon filing. Certificate of Compliance included (Register 78, No. 40).
3. Order which was filed 10-2-78 refiled 10-20-78 as an emergency, to correct date of adoption; effective upon filing. Certificate of Compliance included (Register 78, No. 43).
4. Amendment filed 1-31-79; effective thirtieth day thereafter (Register 79, No. 6).
5. Amendment refiled 2-7-79 as an emergency; designated effective 3-1-79. Certificate of Compliance included (Register 79, No. 6).
6. Amendment filed 8-22-79 as an emergency; effective upon filing (Register 79, No. 34). A Certificate of Compliance must be filed within 120 days or emergency language will be repealed on 12-20-79.
7. Certificate of Compliance including amendment filed 12-6-79 (Register 79, No. 49).
8. Amendment of subsections (a) and (d) filed 8-23-85; effective thirtieth day thereafter (Register 85, No. 34).
9. Amendment filed 5-14-98; operative 6-13-98 (Register 98, No. 20).
§462. Change in Ownership. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 60-67, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-13-81; effective thirtieth day thereafter (Register 81, No. 29). for prior history, see Register 79, No. 49.
2. Amendment of subsections (b), (c), (j), (l), (m) and (n) filed 5-11-82; effective thirtieth day thereafter (Register 82, No. 20).
3. Change without regulatory effect renumbering former subsections 462(a)-(h) and (j)-(n) to new sections 462.001-462.260 filed 5-11-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 19).
4. Change without regulatory effect repealing section filed 11-29-94 pursuant to section 100, title 1, California Code of Regulations (Register 94, No. 48).
§462.001. Change in Ownership -- General.
Note     •     History

A “change in ownership” in real property occurs when there is a transfer of a present interest in the property, including the transfer of the right to beneficial use thereof, the value of which is substantially equal to the value of the fee interest. Every transfer of property qualified as a “change in ownership” shall be so regarded whether the transfer is voluntary, involuntary, by operation of law, by grant, gift, devise, inheritance, trust, contract of sale, addition or deletion of an owner, property settlement, or any other means. A change in the name of an owner of property not involving a change in the right to beneficial use is excluded from the term “transfer” as used in this section.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 60-67, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering former subsections 462(a)(1)-(2) to section 462.001 filed 5-11-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 19).
2. Amendment filed 5-12-97; operative 6-11-97 (Register 97, No. 20).
§462.020. Change in Ownership--Tenancies in Common.
Note     •     History

(a) General Rule. The creation, transfer, or termination of a tenancy in common interest is a change in ownership of the undivided interest transferred.
(b) EXCEPTIONS. The following transfers do not constitute a change in ownership:
(1) The transfer is between or among co-owners and results in a change in the method of holding title but does not result in a change in the proportional interests of the co-owners, such as:
(A) a partition,
(B) a transfer from a co-tenancy to a joint tenancy, or
(C) a transfer from a co-tenancy to a legal entity which results solely in a change in the method of holding title and in which the proportional ownership interests in the property remain the same after the transfer. (Such transferees shall be considered to be the “original co-owners” of the property for purposes of determining whether a change in ownership has occurred upon the subsequent transfers of the ownership interests in the property.) 
Example 1: A and B own a parcel of real property as tenants in common each owning a 50% interest. They transfer the property to a newly formed corporation each receiving 50% of the stock. Such a transfer would not be regarded as a change in ownership.
(2) The transfer is of an undivided interest of less than five percent of the value of the total property and has a value of less than $10,000; provided, however, that transfers of such interests during any one assessment year (the period from January 1 through December 31) shall be accumulated for the purpose of determining  the percentage interest and value transferred. When the value of the accumulated interests transferred during any assessment year equals or exceeds five percent of the value of the total property or $10,000, then that percentage of the property represented by the transferred accumulated interests shall be reappraised. For purposes of this subsection, the “accumulated interests transferred” shall not include any transfer of an interest that is otherwise excluded from change in ownership.
Example 2: At the end of the assessment year the value of the accumulated interests transferred equals 3 percent of the value of the total property and the dollar value of these interests is $12,000. There will be a reappraisal of the transferred accumulated interests because their value exceeds $10,000.
Example 3: At the end of the assessment year the value of the accumulated interests transferred equals 7 percent of the value of the total property and the dollar value of these interests is $9,000. There will be a reappraisal of the transferred accumulated interests because they exceed 5 percent of the value of the total property.
(3) The transfer is one to which the interspousal exclusion applies.
(4) The transfer is one to which the parent-child or grandparent-grandchild exclusion applies, and for which a timely claim has been filed as required by law.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 60, 61, 62, 63, 63.1, 65, 65.1 and 67, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering former subsections 462(b)(1)-(2)(E) to section 462.020 filed 5-11-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 19).
2. Amendment of section and Note filed 1-21-98; operative 2-20-98 (Register 98, No. 4).
§462.040. Change in Ownership--Joint Tenancies.
Note     •     History

(a) General Rule. The creation, transfer, or termination of a joint tenancy interest is a change in ownership of the interest transferred. 
Example 1: The purchase of property by A and B, as joint tenants, is a change in ownership of the entire property.
Example 2: The transfer from A and B, as joint tenants, to C and D, as joint tenants, is a change in ownership of the entire property.
Example 3: The subsequent transfer from C and D, as joint tenants, to C, as sole owner, is a change in ownership of 50% of the property.
(b) Exceptions. The following transfers do not constitute a change in ownership:
(1) The transfer creates or transfers any joint tenancy interest, including an interest in a trust, and after such creation or transfer, the transferors is one of the joint tenants. Such a transferor(s) is also a transferee(s) and is, therefore, considered to be an “original transferors” for purposes of determining the property to be reappraised upon subsequent transfers. If a spouse of an original transferor acquires an interest in the joint tenancy property either during the period that the original transferor holds an interest or by means of a transfer from the original transferor, such spouse shall also be considered to be an original transferor. Any joint tenant may also become an original transferor by transferring his or her joint tenancy interest to the other joint tenant(s) through his or her trust if the trust instrument names the other joint tenant(s) as the present beneficiary or beneficiaries. All other initial and subsequent joint tenants are considered to be “other than original transferors.” 
Example 4: A and B own property as tenants in common and transfer the property to A and B as joint tenants. A and B are both “original transferors.” 
Example 4(a): A and B purchase property as joint tenants. Later A and B transfer their property interests to each other as joint tenants through their respective trusts. A and B are transferors who are among the joint tenants and are, therefore, considered to be “original transferors.”
Example 5: A and B, as joint tenants, transfer to A, B, C, and D as joint tenants. No change in ownership because A and B, the transferors, are included among the transferees and are, therefore, “original transferors.” (C and D are “other than original transferors.”) Likewise, if A, as the sole owner, had transferred to A, B, C, and D as joint tenants, no change in ownership. A would be an “original transferor” and B, C, and D would be “other than original transferors”.
Example 6: A and B, as joint tenants, transfer to A, B, C, D and E as joint tenants. E is B's wife. No change in ownership because A and B, the transferors, are included among the transferees and are, therefore, “original transferors.” E is also an “original transferor.” (C and D are “other than original transferors.”)
Example 7-1: A, B, and C are joint tenants and A is an “original transferor”. A dies. B and C transfer to B, C, and D as joint tenants. D is A's husband. D does not become an original transferor because he did not acquire his interest during the period that A held an interest in the joint tenancy.
Example 7-2: A and B, as joint tenants, transfer to B and C, as joint tenants, and C is A's spouse. C is an original transferor because he was the spouse of an original transferor and he acquired an interest by means of a transfer from A.
Example 7-3: A and B are joint tenants and A is an “original transferor”. C is A's spouse. A and B as joint tenants transfer to A, B, and C. C is an original transferor
Example 8: A and B, as joint tenants, transfer to B, C and D, as joint tenants. 66 2/3% change in ownership of the transferred interests because A is not one of the transferees.
Example 9: A and B purchase property as joint tenants and transfer their joint tenancy interests to each other through their respective trusts. A and B become “original transferors”. A and B sell a 50% interest to C and D, with the deed showing A, B, C and D as joint tenants. C and D then transfer their joint tenancy interests to each other through their trusts, so that both become “original transferors”. A and B then sell their remaining 50% to C and D, and go off title. Under circumstances where application of the step-transaction doctrine to disregard the form of the transaction would be appropriate due to their intent to avoid a change in ownership, A, B, C and D do not become “original transferors” as the result of their transfers to each other.
(2) The transfer terminates an original transferor's interest in a joint tenancy described in (b)(1) and the interest vests in whole or in part in the remaining original transferors; except that, upon the termination of the interest of the last surviving original transferor, there shall be a reappraisal of the property as if it had undergone a 100 percent change in ownership.
Example 10: A and B transfer to A, B, C, and D as joint tenants. A dies or grants his interest to the remaining joint tenants, B, C, and D. No change in ownership because B, an original transferor, remains as a joint tenant.
Example 11: Following the example set forth in Example 10 (above), B dies or grants his interest to C and D. 100 percent change in ownership because both A's and B's interests had previously been excluded from reappraisal and B was the last surviving original transferor. 
(3) The transfer terminates a joint tenancy interest held by other than an original transferor in a joint tenancy described in (b)(1) and the interest is transferred either to an original transferor, or to all the remaining joint tenants, provided that one of the remaining joint tenants is an original transferor. The original transferor status of any remaining joint tenants ceases when a joint tenancy is terminated.
Example 12: Following the example set forth in Example 10 (above), C, not an original transferor, grants his interest to B and D. No change in ownership because C grants to the remaining joint tenants, B and D, and B is an original transferor.
Example 13: A owns real property and transfers a 50% interest to B as a tenant in common resulting in a change in ownership of that 50% interest. They subsequently transfer to themselves in joint tenancy and, as a result, become “original transferors”. A dies and A's joint tenancy interest passes to B by operation of law without a change in ownership because B is an “original transferor.” Upon A's death, the joint tenancy is terminated and B ceases to be an “original transferor.”
(4) For other than joint tenancies described in (b)(1), the transfer is between or among co-owners and results in a change in the method of holding title but does not result in a change in the proportional interests of the co-owners, such as:
(A) a transfer terminating the joint tenancy and creating separate ownerships of the property in equal interests.
(B) a transfer terminating the joint tenancy and creating a tenancy in common of equal interests.
(C) a transfer terminating a joint tenancy and creating or transferring to a legal entity when the interests of the transferors and transferees remain the same after the transfer. (Such transferees shall be considered to be the “original co-owners” for purposes of determining whether a change in ownership occurs upon the subsequent transfer of the ownership interests in the property.)
(5) The transfer is one to which the interspousal exclusion applies.
(6) The transfer is of a joint tenancy interest of less than five percent of the value of the total property and has a value of less than $10,000; provided, however, that transfers of such interests during any one assessment year (the period from January 1 through December 31) shall be accumulated for the purpose of determining the percentage interest and value transferred. When the value of the accumulated interests transferred during any assessment year equals or exceeds five percent of the value of the total property or $10,000, then only that percentage of the property represented by the transferred accumulated interests shall be reappraised. For purposes of this subsection, the “accumulated interests transferred” shall not include any transfer of an interest that is otherwise excluded from change in ownership.
(7) The transfer is one to which the parent-child or grandparent-grandchild exclusion applies, and for which a timely claim has been filed as required by law.
(c) For purposes of this section, for joint tenancies created on or before March 1, 1975, it shall be rebuttably presumed that each joint tenant holding an interest in property as of March 1, 1975, is an “original transferor.” This presumption is not applicable to joint tenancies created after March 1, 1975.
(d) For purposes of this section, the assessor may consider persons holding joint title to property, such as tenants in common, to be joint tenants and “original transferors” if there is “reasonable cause” to believe that the parties intended to create a joint tenancy and each person was a transferor among the persons holding title. “Reasonable cause” means a deed, Affidavit of Death of Joint Tenant, a trust, will, or estate plan indicating that a joint tenant was a transferor among the joint tenants, unless circumstances causing the application of the step transaction exist.
Example 14: A and B jointly purchase their primary residence and title is recorded as tenants in common. The sales contract states that A and B intended to take title as joint tenants. Subsequently, A and B each execute revocable living trusts transferring their respective interests in the property to their trusts for the benefit of each other. The assessor may determine that the sales contract and trust instruments establish that A and B intended to hold title as joint tenants upon purchase and that each subsequently became an “original transferor.”
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 60, 61, 62, 63, 63.1, 65, 65.1 and 67, Revenue and Taxation Code; and Section 662, Evidence Code.
HISTORY

1. Change without regulatory effect renumbering and amending former subsections 462(c)(1)-(3) to section 462.040 filed 5-11-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 19).
2. Amendment of section and Note filed 12-30-98; operative 1-29-99 (Register 99, No. 1).
3. Change without regulatory effect amending Example 5 and Example 8 filed 4-3-2001 pursuant to section 100, title 1, California Code of Regulations (Register 2001, No. 14).
4. Amendment of subsections (b)(1) and (b)(3), new subsection (d) and amendment of Note filed 10-14-2003; operative 11-13-2003 (Register 2003, No. 42).
§462.060. Change of Ownership -- Life Estates and Estates for Years.
Note     •     History

(a) Life estates. The creation of a life estate in real property is a change in ownership at the time of transfer unless the instrument creating the life estate reserves such estate in the transferor or the transferor's spouse. However, the subsequent transfer of such a life estate by the transferor or the transferor's spouse to a third party is a change in ownership. Upon termination of such a reserved life estate, the vesting of a right of possession or enjoyment of a remainderman (other than the transferor or the transferor's spouse) is a change in ownership.
(b) Estate for years. The creation of an estate for years for a term of 35 years or more in real property is a change in ownership at the time of transfer unless the instrument creating the estate for years reserves such estate in the transferor or the transferor's spouse. However, the subsequent transfer of such an estate for years by the transferor or the transferor's spouse to a third party is a change in ownership. Upon the termination of a reserved estate for years for any term, the vesting of the right to possession or enjoyment of a remainderman (other than the transferor or the transferor's spouse) is a change in ownership. The creation or transfer of an estate for years for less than 35 years is not a change in ownership.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 60, 61, 62, 63 and 67, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering and amending former subsections 462(d)(1)-(2) to section 462.060 filed 5-11-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 19).
§462.080. Change in Ownership--Possessory Interests.
Note     •     History

(a) General Rule. The creation, renewal, extension, sublease, or assignment of a taxable possessory interest in tax exempt real property for any term is a change in ownership. “Renewal” and “extension” do not include the granting of an option to renew or extend an existing agreement pursuant to which the term of possession of the existing agreement would, upon exercise of the option, be lengthened, whether the option is granted in the original agreement or subsequent thereto. “Assignment” of a possessory interest means the transfer of all rights held by a transferor in a possessory interest.
(b) EXCEPTIONS. The following do not constitute changes in ownership of taxable possessory interests:
(1) An interest, whether an estate for years or an estate for life, created by a reservation in an instrument deeding the property to a tax exempt governmental entity.
(2) An renewal or extension of a taxable possessory interest during the reasonably anticipated term of possession used by the assessor in establishing the initial base year value of the interest, in which case, a change in ownership occurs at the end of the reasonably anticipated term of possession used by the assessor to value that interest.
(3) A sublease of a taxable possessory interest for a term, including renewal options, that does not exceed half the length of the remaining term of the leasehold, including renewal options.
(4) The termination of a sublease of a taxable possessory interest with an original term, including renewal options, that did not exceed half the length of the remaining term of the leasehold, including renewal options, when the sublease was entered into.
(5) Any transfer of a sublessee's interest in a taxable possessory interest, with a remaining term, including renewal options, that does not exceed half of the remaining term of the leasehold.
(6) Any transfer of a taxable possessory interest subject to a sublease with a remaining term, including renewal options, that exceeds half the length of the remaining term of the leasehold, including renewal options.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 60, 61, 62 and 67, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering and amending former subsection 462(e) to section 462.080 filed 5-11-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 19).
2. Amendment of section and Note filed 5-12-97; operative 6-11-97 (Register 97, No. 20).
3. Editorial correction of subsection (b)(5) (Register 2003, No. 43).
§462.5. Change in Ownership of Real Property Acquired to Replace Property Taken by Governmental Action or Eminent Domain Proceedings. [Renumbered]
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. Reference: Article XIIIA, Section 2(d), California Constitution; and Section 68, Revenue and Taxation Code.
HISTORY

1. New section filed 1-17-85; effective thirtieth day thereafter (Register 85, No. 3).
2. Amendment of subsections (d), (f) and (g) filed 1-15-88; operative 2-14-88 (Register 88, No. 5).
3. Change without regulatory effect of subsection (c) filed 7-13-88 pursuant to Section 100, Title 1, California Code of Regulations (Register 88, No. 30).
4. Change without regulatory effect renumbering former section 462.5 to section 462.500 filed 1-27-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 5).
§462.100. Change in Ownership -- Leases.
Note     •     History

(a) The following transfers of either the lessee's interest or the lessor's interest in taxable real property constitute a change in ownership of such real property:
(1) Lessee's Interest:
(A) the creation of a leasehold interest in real property for a term of 35 years or more.
(B) the transfer, sublease, or assignment of a leasehold interest with a remaining term of 35 years or more.
(C) the termination of a leasehold interest which had an original term of 35 years or more.
(2) Lessor's Interest:
(A) The transfer of a lessor's interest in taxable real property subject to a lease with a remaining term of less than 35 years.
(B) The transfer of a lessor's interest in taxable real property subject to multiple leases, one or more of which is for a remaining term of less than 35 years and one or more of which is for a remaining term of 35 years or more, in which case there is a change in ownership of the portion of the property subject to the lease(s) with a remaining term of less than 35 years.
(b) The following transfers of either the lessee's interest or the lessor's interest in taxable real property do not constitute a change in ownership of such real property.
(1) Lessee's interest:
(A) The creation of a leasehold interest in real property for a term of less than 35 years.
(B) The transfer, sublease, or assignment of a leasehold interest with a remaining term of less than 35 years (regardless of the original term of the lease).
(C) The termination of a leasehold interest which had an original term of less than 35 years.
(2) Lessor's interest:
(A) The transfer of a lessor's interest in real property subject to a lease with a remaining term of 35 years or more, whether to the lessee or another party.
(c) Once a change in ownership of taxable real property subject to a lease has been deemed to have occurred, the entire property subject to the lease is reappraised (i.e., the value of both the lessee's interest and the reversion).
(d) The calculation of the term of a lease for all purposes of this section shall include written renewal options.
(e) It shall be conclusively presumed that all homes (other than mobilehomes subject to Part 13 of Division 1 of the Revenue and Taxation Code) eligible for the homeowners' exemption which are on leased land have written renewal options on the lease of such land of at least 35 years, whether or not such renewal options in fact exist in any contract or agreement.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 60, 61, 62 and 67, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering and amending former subsections 462(f)(1)-(5) to section 462.100 filed 5-11-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 19).
§462.120. Change in Ownership -- Foreclosure.
Note     •     History

(a) Mortgage or deed of trust foreclosed by judicial action is a sufficient change in ownership only:
(1) After the period of redemption has passed and property has not been redeemed, or
(2) Upon redemption when title vests in the original debtor's successor in interest.
(b) Deed of trust foreclosed by trustee's sale shall cause a reappraisal as of the date the right of possession vests in the purchaser.
(c) A transfer by a trustor in lieu of a trustee's foreclosure sale constitutes a change in ownership.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 60 and 62, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering and amending former subsections 462(g)(1)-(3) to section 462.120 filed 5-11-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 19).
§462.140. Change in Ownership --  Transfers resulting from tax delinquency.
Note     •     History

Redemption of tax-defaulted property by the assessee shall not be considered as a change in ownership. However, a sale of tax-defaulted property by the tax collector, whether to the former assessee or to any other person, is a change in ownership requiring reappraisal as of the date of the sale.
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 60, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering former subsection 462(h) to section 462.140 filed 5-11-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 19).
2. Amendment filed 5-12-97; operative 6-11-97 (Register 97, No. 20).
§462.160. Change in Ownership--Trusts.
Note     •     History

(a) CREATION. General Rule. The transfer by the trustor, or any other person, of real property into a trust is a change in ownership of such property at the time of the transfer.
(b) EXCEPTIONS. The following transfers do not constitute changes in ownership:
(1) Irrevocable Trusts.
(A) Trustor-Transferor Beneficiary Trusts. The transfer of real property by the trustor to a trust in which the trustor-transferor is the sole present beneficiary of the trust. However, a change in ownership of trust property does occur to the extent that persons other than the trustor-transferor are or become present beneficiaries of the trust unless otherwise excluded from change in ownership.
Example 1: M transfers income-producing real property to revocable living Trust A, in which M is the sole present beneficiary. Trust A provides that upon M's death, Trust A becomes irrevocable, M's brother B becomes a present beneficiary, and income from the trust property is to be distributed to B for his lifetime. Upon M's death, 100% of the property in Trust A, representing B's present beneficial interest, undergoes a change in ownership.
Where a trustee of an irrevocable trust has total discretion (“sprinkle power”) to distribute trust income or property to a number of potential beneficiaries, the property is subject to change in ownership, because the trustee could potentially distribute it to a non-excludable beneficiary, unless all of the potential beneficiaries have an available exclusion from change in ownership.
Example 2: H and W transfer real property interests to the HW Revocable Trust. No change in ownership. HW Trust provides that upon the death of the first spouse the assets of the deceased spouse shall be distributed to “A Trust”, and the assets of the surviving spouse shall be distributed to “B Trust”, of which surviving spouse is the sole present beneficiary. H dies and under the terms of A Trust, W has a “sprinkle” power for the benefit of herself, her two children and her nephew. When H dies, A Trust becomes irrevocable. There is a change in ownership with respect to the interests transferred to the A Trust because the sprinkle power may be exercised so as to omit the spouse and the children as present beneficiaries for whom exclusions from change in ownership may apply, and there are no exclusions applicable to the nephew. However, if the sprinkle power could be exercised only for the benefit of W and her children for whom exclusions are available, the interspousal exclusion and the parent/child exclusion would exclude the interests transferred from change in ownership, provided that all qualifying requirements for those exclusions are met.
Example 3: Same as Example 2 above, except that “A Trust” is without any sprinkle power. When H dies, A Trust becomes irrevocable. Since A Trust holds the assets for the benefit of W, the two children, and the nephew in equal shares, with any of W's share remaining at her death to be distributed to the two children and the nephew in equal shares, there is a change in ownership only to the extent of the interests transferred to the nephew, providing that the parent/child exclusion of Section 63.1 and the interspousal exclusion of Section 63 apply to the interests transferred to the two children and to W respectively. Upon the death of W, there is a change in ownership to the extent of the interests transferred to the nephew, although the parent/child exclusion of Section 63.1 may exclude from change in ownership the interests transferred to the two children. If A Trust had included a sprinkle power, instead of specifying the beneficiaries of the trust income and principal, then as in Example 2, none of the exclusions would apply.
(B) 12 Year Trustor Reversion Trusts. The transfer of real property or ownership interests in a legal entity holding interests in real property by the trustor to a trust in which the trustor-transferor retains the reversion, and the beneficial interest of any person other than the trustor-transferor does not exceed 12 years in duration.
(C) Irrevocable Trusts Holding Interests in Legal Entities. The transfer of an ownership interest in a legal entity holding an interest in real property by the trustor into a trust in which the trustor-transferor is the sole present beneficiary or to a trust in which the trustor-transferor retains the reversion as defined in subdivision (b)(1)(B) of this rule. However, a change in ownership of the real property held by the legal entity does occur if Revenue and Taxation Code section 61(i), 64(c) or 64(d) applies because the change in ownership laws governing interests in legal entities are applicable regardless of whether such interests are held by a trust.
Example 4: Husband and Wife, partners in HW Partnership who are not original coowners, transfer 70 percent of their partnership interests to HW Irrevocable Trust and name their four children as the present beneficiaries of the trust with equal shares. Husband and Wife do not retain the reversion. Under Revenue and Taxation Code section 64(a) the transfer of the partnership interests to HW Irrevocable Trust is excluded from change in ownership because no person or entity obtains a majority ownership interest in the HW Partnership.
(2) Revocable Trusts. The transfer of real property or an ownership interest in a legal entity holding an interest in real property by the trustor to a trust which is revocable by the trustor. However, a change in ownership does occur at the time the revocable trust becomes irrevocable unless the trustor-transferor remains or becomes the sole present beneficiary or unless otherwise excluded from change in ownership. 
(3) Interspousal Trusts. The transfer is one to which the interspousal exclusion applies. However, a change in ownership of trust property does occur to the extent that persons other than the trustor-transferor's spouse are or become present beneficiaries of the trust unless otherwise excluded from change in ownership.
(4) Parent-Child or Grandparent-Grandchild Trusts. The transfer is one to which the parent-child or grandparent-grandchild exclusion applies, and for which a timely claim has been made as required by law. However, a change in ownership of trust property does occur to the extent that persons for whom the parent-child or grandparent-grandchild exclusion is not applicable are or become present beneficiaries of the trust unless otherwise excluded from change in ownership.
(5) Proportional Interests. The transfer is to a trust which results in the proportional interests of the beneficiaries in the property remaining the same before and after the transfer.
(6) Other Trusts. The transfer is from one trust to another and meets the requirements of (1), (2), (3), (4), or (5).
(c) TERMINATION. General Rule. The termination of a trust, or portion thereof, constitutes a change in ownership at the time of the termination of the trust.
(d) EXCEPTIONS. The following transfers do not constitute changes in ownership:
(1) Prior Change in Ownership. Termination results in the distribution of trust property according to the terms of the trust to a person or entity who received a present interest (either use of or income from the property) when the trust was created, when it became irrevocable, or at some other time. However, a change in ownership also occurs when the remainder or reversionary interest becomes possessory if the holder of that interest is a person or entity other than the present beneficiary unless otherwise excluded from change in ownership.
Example 5: B transfers real property to Trust A and is the sole present beneficiary. Trust A provides that when B dies, the Trust terminates and Trust property is to be distributed equally to R and S, who are unrelated to B. B dies, Trust A terminates, and the transfers of the Trust property to R and S result in changes in ownership, allowing for reassessment of 100 percent of the real property.
(2) Revocable Trusts. Termination results from the trustor-transferor's exercise of the power of revocation and the property is transferred by the trustee back to the trustor-transferor.
(3) Trustor Reversion Trusts. The trust term did not exceed 12 years in duration and, on termination, the property reverts to the trustor-transferor.
(4) Interspousal Trusts. Termination results in a transfer to which the interspousal exclusion applies.
(5) Parent-Child or Grandparent-Grandchild Trusts. Termination results in a transfer to which the parent-child or grandparent-grandchild exclusion applies, and for which a timely claim has been filed as required by law.
(6) Proportional Interests. Termination results in the transfer to the beneficiaries who receive the same proportional interests in the property as they held before the termination of the trust.
(7) Other Trusts. Termination results in the transfer from one trust to another and meets the requirements of (1), (2), (3), (4), (5), or (6) of subdivision (b).
(e) For purposes of this rule, the term “trust” does not include a Massachusetts business trust or similar trust, which is taxable as a legal entity and managed for profit for the holders of transferable certificates which, like stock shares in a corporation, entitle the holders to share in the income of the property. For rules applicable to Massachusetts business trusts or similar trusts, see Section 64 of the Revenue and Taxation Code and Rule 462.180, which address legal entities.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 60, 61, 62, 63, 63.1, 63.1 note and 64, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect redesignating subsections and amending subsections (a), (b)(6), (c) and (d)(6) filed 11-16-94 pursuant to section 100, title 1, California Code of Regulations (Register 94, No. 46).
2. Amendment of section and Note filed 1-21-98; operative 2-20-98 (Register 98, No. 4).
§462.180. Change in Ownership--Legal Entities.
Note     •     History

(a) Transfers of Real Property to and by Legal Entities. General Rule. The transfer of any interest in real property to a corporation, partnership, limited liability company, or other legal entity is a change in ownership of the real property interest transferred. For purposes of this rule, “real property” or “interests in real property” includes real property interests and fractional interests thereof, the transfer of which constitute a change in ownership under Sections 60 and following applicable sections of the Revenue and Taxation Code and under the applicable change in ownership provisions of the Property Tax Rules.
(b) Exceptions. The following transfers do not constitute changes in ownership of the real property:
(1) Affiliated Corporation Transfers. Transfers of real property between or among affiliated corporations, including those made to achieve a corporate reorganization if:
(A) the voting stock of the corporation making the transfer and the voting stock of the transferee corporation are each owned 100 percent by one or more corporations related by voting stock ownership to a common parent, and
(B) the common parent corporation owns directly 100 percent of the voting stock of at least one corporation in the chain(s) of related corporations. 

View Graphic
A transfer of real property by P, A, B, or C to any of the other three corporations would not be a change in ownership. 
Example 1: Any transfer by C (wholly owed by A and B) to B (wholly owned by A and P) would not be a change in ownership because of those relationships and because P owns 100% of A.
If real property is transferred between non-affiliated corporations, only the property transferred shall be deemed to have undergone a change in ownership.
(2) Proportional Transfers of Real Property. Transfers of real property between separate legal entities or by an individual to a legal entity (or vice versa), which result solely in a change in the method of holding title and in which the proportional ownership interests in each and every piece of real property transferred remain the same after the transfer. (The holders of the ownership interests in the transferee legal entity, whether such interests are represented by stock, partnership interests, or other types of ownership interest, shall be defined as “original co-owners” for purposes of determining whether a change in ownership has occurred upon the subsequent transfer of the ownership interests in the legal entity.) This subdivision shall not apply to a transfer of real property which is also excluded from change in ownership pursuant to subdivision (b)(1) (transfers between or among affiliated corporations).
Examples of Transfers of Real Property in Legal Entities:
Example 2: A transfer of real property from A and B, as equal co-tenants, to Corporation X where A and B each take back 50 percent of the stock. No change in ownership. However, if A and B each take back 49 percent of the stock and C receives 2 percent of the stock then there will be a change in ownership of the entire property.
Example 3: A transfers Whiteacre to Corporation X and B transfers Blackacre (equal in value to Whiteacre) to Corporation X. A and B each take back 50 percent of the stock. Change in ownership of 100 percent of both Whiteacre and Blackacre.
Example 4: Corporation X owns Blackacre and Whiteacre (both are of equal value). A & B each own 50% of Corporation X's shares. X transfers Whiteacre to A and Blackacre to B. Change in ownership of 100% of both Blackacre and Whiteacre. However, if Corporation X transfers Whiteacre and Blackacre to both A and B as joint tenants or as equal tenants in common, there is no change in ownership.
Example 5: A transfer of real property from Corporation X to its sole shareholder A. No change in ownership, even if A is an “original co-owner”, because interests in real property, and not ownership interests in a legal entity, are being transferred.
(c) Transfers of ownership interests in legal entities. General Rule. The purchase or transfer of corporate stock, partnership interests, or ownership interests in other legal entities is not a change in ownership of the real property of the legal entity, pursuant to Section 64(a) of the Revenue and Taxation Code.
(d) Exceptions. The following transfers constitute changes in ownership, except as provided in (d)(4) which is an exclusion from change in ownership:
(1) Control. When any corporation, partnership, limited liability company, Massachusetts business trust or similar trust, other legal entity or any person:
(A) obtains through a reorganization or any transfer, direct or indirect ownership or control of more than 50 percent of the voting stock in any corporation which is not a member of the same affiliated group of corporations as described in (b)(1), or
(B) obtains through multi-tiering, reorganization, or any transfer direct or indirect ownership of more than 50 percent of the total interest in partnership or LLC capital and more than 50 percent of the total interest in partnership or LLC profits, or
(C) obtains through any transfer direct or indirect ownership of more than 50 percent of the total ownership interest in any other legal entity.
Upon the acquisition of such direct or indirect ownership or control, which may include any purchase or transfer of 50 percent or less of the ownership interest through which control or a majority ownership interest is obtained, all of the property owned directly or indirectly by the acquired legal entity is deemed to have undergone a change in ownership.
(2) Transfers of More than 50 Percent. When on or after March 1, 1975, real property is transferred to a partnership, corporation, limited liability company, or other legal entity and the transfer is excluded from change in ownership under Section 62(a)(2) of the Revenue and Taxation Code, and the “original co-owners” subsequently transfer, in one or more transactions, cumulatively more than 50 percent of the total control or ownership interests, as defined in subdivision (d)(1), in that partnership, corporation, limited liability company or legal entity, there is a change in ownership of only that property owned by the entity which was previously excluded under Section 62(a)(2). However, when such transfer would also result in a change in control under Section 64(c) of the Revenue and Taxation Code, then reappraisal of the property owned by the corporation, partnership, limited liability company, or other legal entity shall be pursuant to Section 64(c) rather than Section 64(d).
For purposes of this subdivision ((d)(2)), interspousal transfers excluded under Section 63 of the Revenue and Taxation Code, transfers into qualifying trusts excluded under Section 62(d) of the Revenue and Taxation Code, and proportional transfers excluded under Section 62(a)(2) of the Revenue and Taxation Code shall not be cumulated or counted to determine a change in ownership.
Examples of Transfers of Interests in Legal Entities:
Example 6: A and B each own 50 percent of the stock of Corporation X. Corporation X acquires Whiteacre from Corporation Y, an unaffiliated corporation in which neither A nor B has interests, and Whiteacre is reappraised upon acquisition. A transfers 30 percent of Corporation X's stock to C, and B later transfers 25 percent of Corporation X's stock to C. Upon C's acquisition of 55 percent of Corporation X's stock, there is a change in control of Corporation X under Section 64(c) and a reappraisal of Whiteacre.
Example 7: Spouses H and W acquire as community property 100% of the capital and profits interests in an LLC which owns Blackacre. Each of H and W is treated as acquiring 50 percent of the ownership interests as defined in subdivision (c) and Revenue and Taxation Code section 64(a). Since the selling members of the LLC are not original co-owners (because they did not transfer the property to the LLC under the Section 62(a)(2) exclusion), no change in control of the LLC would occur under section 64(c) and no change in ownership of Blackacre under section 64(d).
Example 8: A and B, hold equal interests as tenants in common in Greenacre, a parcel of real property. A and B transfer Greenacre to Corporation Y and in exchange A and B each receive 50 percent of the corporate stock. No change in ownership pursuant to Section 62(a)(2). Pursuant to Section 64(d), A and B become original coowners. A transfers 30 percent of Corporation Y's stock to C (A's child), and B then transfers 25 percent of Corporation Y's stock to D (B's grandchild). Change in ownership of Greenacre upon B's transfer to D. Parent/child and grandparent/grandchild exclusions are not applicable to transfers of interests in legal entities. However, if the same transfers were made by A and B to their respective spouses, no change in ownership pursuant to Section 63 and Rule 462.220.
(3) Cooperative Housing Corporation. When the stock transferred in a cooperative housing corporation (“stock cooperative” as defined in subdivision (m) of Section 1351 of the Civil Code) conveys the exclusive right to occupancy of all or part of the corporate property, unless:
(A) the cooperative was financed under one mortgage which was insured under Sections 213, 221(d)(3), 221(d)(4), or 236 of the National Housing Act, as amended, or was financed or assisted pursuant to Sections 514, 515, or 516 of the Housing Act of 1949 or Section 202 of the Housing Act of 1959, or was financed by a direct loan from the California Housing Finance Agency, and
(B) the regulatory and occupancy agreements were approved by the respective insuring or lending agency, and
(C) the transfer is from the housing cooperative to a person or family qualifying for purchase by reason of limited income.
(4) Proportional Interest Transfers. Transfers of stock, partnership interests, limited liability company interests, or any other interests in legal entities between legal entities or by an individual to a legal entity (or vice versa) which result solely in a change in the method of holding title and in which proportional ownership interests of the transferors and transferees, in each and every piece of property represented by the interests transferred, remain the same after the transfer, do not constitute changes in ownership, as provided in subdivision (b)(2) of this rule and Section 62(a)(2) of the Revenue and Taxation Code. This provision shall not apply to a statutory conversion or statutory merger of a partnership into a limited liability company or other partnership (or a limited liability company into a partnership) when the law of the jurisdiction of the converted or surviving entity provides that such entity remains the same entity or succeeds to the assets of the converting or disappearing entity without other act or transfer and the partners or members of the converting or disappearing entity maintain the same ownership interest in profits and capital of the converted or surviving entity that they held in the converting or disappearing entity.
Examples of Excluded Proportional Interest Transfers:
Example 9: General Partnership (GP), which owns Whiteacre and in which A and B hold equal partnership interests, converts to Limited Partnership (LP) under the Revised Uniform Partnership Act of 1994 (California Corporations Code section 16100 et seq.). As a result of the conversion, A and B each hold 50 percent of the LP interests in capital and profits. No change in ownership of Whiteacre upon the conversion, because, under Section 16909 of the Corporations Code, there is no transfer of Whiteacre. Section 62(a)(2) of the Revenue and Taxation Code does not apply. However, if A and B were “original coowners” in GP, they remain “original coowners” in LP.
Example 10: Following the conversion in Example 9, A and B each transfer 30 percent of their capital and profits interests in LP to Limited Liability Company (LLC), which is owned equally by A and B. Each retain an equal 20 percent interest in LP. No change in ownership of Whiteacre pursuant to Section 62(a)(2) because A and B own 100 percent of both LP and LLC and their respective proportional interests remain the same after the transfer. Neither section 64(c) nor section 64(d) of the Revenue and Taxation Code applies to this transfer, although A and B become “original coowners” with respect to their interests in LLC.
Example 11: A limited partnership (LP), which owns Blackacre and in which C and D hold equal partnership interests, changes its form to a limited liability company (LLC), in which C and D hold equal membership interests, by statutory merger under the California Revised Limited Partnership Act (California Corporations Code section 15611 et seq.) and the Beverly-Killea Limited Liability Company Act (California Corporations Code section 17000 et seq.). No change in ownership of Blackacre upon the change in form because under section 17554 of the California Corporations Code, there is not a transfer of property from LP to LLC. Section 62(a)(2) of the Revenue and Taxation Code does not apply. However, if C and D were “original coowners” in LP, they remain “original coowners” in LLC.
(e) Partnerships.
(1) Transfers of Real Property by Partnerships. General Rule. Except as provided by (b)(2) where the proportional ownership interests remain the same, when real property is contributed to a partnership or is acquired, by purchase or otherwise, by the partnership there is a change in ownership of such real property, regardless of whether the title to the property is held in the name of the partnership or in the name of the partners with or without reference to the partnership. Except as provided by (b)(2) where the proportional ownership interests remain the same, the transfer of any interest in real property by a partnership to a partner or any other person or entity constitutes a change in ownership.
(2) Except as provided in (d)(1)(B) and (d)(2), the addition or deletion of partners in a continuing partnership does not constitute a change in ownership of partnership property.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 60, 61, 62, 63, 64 and 67, Revenue and Taxation Code; Sections 16909 and 17554, Corporations Code; and Section 1351, Civil Code.
HISTORY

1. Change without regulatory effect renumbering and amending former subsections 462(j)(1)-(5) to section 462.180 filed 5-11-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 19).
2. Editorial correction deleting outdated chart and amending subsection (b)(2)(C) (Register 95, No. 51).
3. Change without regulatory effect amending chart filed 12-19-95 pursuant to section 100, title 1, California Code of Regulations (Register 95, No. 51).
4. Amendment of section and Note filed 3-9-99; operative 4-8-99 (Register 99, No. 11).
5. Amendment of subsection (d)(1)(B), new Example 7, renumbering of examples, and amendment of newly designated Example 10 filed 9-15-2003; operative 10-15-2003 (Register 2003, No. 38).
§462.200. Change in Ownership -- Miscellaneous Arrangements.
Note     •     History

(a) Security transactions. There are transactions that may be interpreted to be either a conveyance of the property or a mere security interest therein, depending on the facts. There is a rebuttable presumption under Civil Code Section 1105 and Evidence Code Section 662 that a grant of title to real property is a transfer of a present interest in the real property, including the beneficial use thereof, equal to a fee interest. In overcoming this presumption, consideration may be given to, but not limited to, the following factors:
(1) The existence of a debt or promise to pay.
(2) The principal amount to be paid for reconveyance is the same, or substantially the same, as the amount paid for the original deed.
(3) A great inequality between the value of the property and the price alleged to have been paid.
(4) The grantor remaining in possession with the right to reconveyance on payment of the debt; and
(5) A written agreement between the parties to reconvey the property upon payment of the debt. The best evidence of the existence of any factor shall be an adjudication of the existence of the factor reflected in a final  judicial finding, order, or judgment. Proof may also be made by declarations under penalty of perjury (or affidavits) accompanied by such written evidence as may reasonably be available, such as written agreements, cancelled checks, insurance policies, and tax returns.
(b) Deed presumption. When more than one person's name appears on a deed, there is a rebuttable presumption that all persons listed on the deed have ownership interests in property, unless an exclusion from change in ownership applies. In overcoming this presumption, consideration may be given to, but not limited to, the following factors:
(1) The existence of a written document executed prior to or at the time of the conveyance in which all parties agree that one or more of the parties do not have equitable ownership interests.
(2) The monetary contribution of each party. The best evidence of the existence of any factor shall be an adjudication of the existence of the factor reflected in a final judicial finding, order, or judgment. Proof may also be made by declarations under penalty of perjury (or affidavits) accompanied by such written evidence as may reasonably be available, such as written agreements, cancelled checks, insurance policies, and tax returns.
(c) Holding agreements. A holding agreement is an agreement between an owner of the property, hereafter called a principal, and another entity, usually a title company, that the principal will convey property to the other entity merely for the purposes of holding title. The entity receiving title can have no discretionary duties but must act only on explicit instructions of the principal. The transfer of property to the holder of title pursuant to a holding agreement is not a change in ownership. There shall be no change in ownership when the entity holding title pursuant to a holding agreement conveys the property back to the principal.
(1) There shall be a change in ownership for property subject to a holding agreement when there is a change of principals.
(2) There shall be a change in ownership of property subject to a holding agreement if the property is conveyed by the holder of title to a person or entity other than the principal.
(d) Sale and leaseback. There is a rebuttable presumption under Civil Code 1105 and Evidence Code 662 that a sale of real property, coupled with a leaseback, is a transfer of the present interest, including the beneficial use thereof, equal to a fee interest which constitutes a change in ownership of such property. This presumption may be rebutted by a proper written showing by the property owner, such as a written opinion or ruling by the Franchise Tax Board and/or the Internal Revenue Service, to the effect that the transaction is considered to be a financing transaction for state and/or federal income tax purposes.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 60, 62 and 67, Revenue and Taxation Code; Section 1105, Civil Code; and Section 662, Evidence Code.
HISTORY

1. Change without regulatory effect renumbering and amending former subsections 462(k)(1)-(4) to section 462.200 filed 5-11-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 19).
2. Amendment of subsections (a), (a)(5), (b), (b)(2) and (d) and amendment of Note filed 5-12-97; operative 6-11-97 (Register 97, No. 20).
§462.220. Change in Ownership--Interspousal Transfers.
Note     •     History

Notwithstanding any other provision of Rules 460 through 471, a change in ownership shall not include any interspousal transfer, including, but not limited to:
(a) Transfers of ownership interests in legal entities,
(b) Transfers of ownership interests in legal entities resulting in one spouse obtaining control as defined in Section 64(c) of the Revenue and Taxation Code,
Example 1: Husband (H) owns a 30 percent ownership interest in a partnership and wife (W) owns a 30 percent ownership interest in the same partnership. W transfers her interest to H; H now owns a 60 percent ownership interest. There is no change in ownership.
(c) Transfers of ownership interests in legal entities by “original coowners” which would otherwise be cumulated or counted for purposes of Section 64(d) of the Revenue and Taxation Code,
Example 2: Spouses H and W are “original coowners” of a partnership; each originally owned a 50 percent partnership interest. They have previously each transferred a 10 percent interest to X and to Y, leaving H and W each with a 30 percent partnership interest. W transfers a 15 percent interest to H. Although cumulatively more than 50 percent has been transferred, there is no change in ownership.
(d) Transfers to a trustee for the beneficial use of a spouse, or the surviving spouse of a deceased transferor, or by a trustee of such a trust to the spouse of the trustor,
(e) Transfers which take effect upon the death of a spouse,
Example 3: H and W each own a 30 percent interest in General Partnership (GP). H and W transfer their respective partnership interests to the HW Revocable Trust. No change in ownership. Trust provides that upon the death of the first spouse: the assets of the deceased spouse, including partnership interests in GP, shall be distributed to “A Trust”, and the assets of the surviving spouse, including partnership interests in GP, shall be distributed to “B Trust.” Surviving spouse is the sole present beneficiary of both A Trust and B Trust. No change in ownership upon the death of the first spouse.
(f) Transfers to a spouse or former spouse in connection with a property settlement agreement, including post-dissolution amendment thereto, or decree of dissolution of a marriage or legal separation,
(g) The creation, transfer, or termination, solely between spouses, of any co-owner's interest, or
(h) The distribution of property of a corporation, partnership, or other legal entity to a spouse or former spouse having an ownership interest in the entity, in exchange for the interest of such spouse in the legal entity in connection with a property settlement agreement or decree of dissolution of a marriage or legal separation.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 60, 61, 62, 63, 64, 65, 65.1 and 67, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering and amending former subsections 462(l)(1)-(5) to section 462.220 filed 5-11-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 19).
2. Amendment of section and Note filed 1-21-98; operative 2-20-98 (Register 98, No. 4).
§462.240. The Following Transfers Do Not Constitute a Change in Ownership.
Note     •     History

The following transfers do not constitute a change in ownership:
(a) The transfer of bare legal title, e.g.,
(1) Any transfer to an existing assessee for the purpose of perfecting title to the property.
(2) Any transfer resulting in the creation, assignment, or reconveyance of a security interest not coupled with the right to immediate use, occupancy, possession or profits.
(b) Any transfer caused by the substitution of a trustee.
(c) Any purchase, redemption or other transfer of the shares or units of participation of a group trust, pooled fund, common trust fund, or other collective investment fund established by a financial institution.
(d) Any contribution of real property to an employee benefit plan, any acquisition by an employee benefit plan of the stock of the employer corporation pursuant to which the employee benefit plan obtains direct or indirect ownership or control of more than 50 percent of the voting stock in the employer corporation, or the creation, vesting, transfer, distribution, or termination of a participant's or beneficiary's interest in such a plan. The terms used herein shall have the meaning ascribed to them by the Employee Retirement Income Security Act of 1974, which is codified as United States Code annotated, Title 29, Section 1002. (The term “any contribution” as used in Section 66(b) of the Revenue and Taxation Code and this section means only those contributions of real property made to an employee benefit plan by an employer, a group of employees, or both, without any consideration.)
(e) Any transfer of property or an interest therein between a corporation sole, a religious corporation, a public benefit corporation, and a holding corporation as defined in Section 23701h of the Revenue and Taxation Code holding title for the benefit of any of the aforementioned corporations, or any combination thereof (including any transfer from one such entity to the same type of entity), provided that both the transferee and transferor are regulated by laws, rules, regulations, or canons of the same religious denomination.
(f) Any transfer, occurring on or after January 1, 1983, which results from the reformation or correction of a deed which, by mistake, inaccurately describes the property intended to be conveyed, or adds or omits some term not agreed to by the parties, or in some other manner fails to express the true intentions of the parties.
Example 1: A  agrees to sell one acre to B. The deed mistakenly describes a two-acre area. Reformation of the deed to describe the original acre intended to be transferred is not a change in ownership.
(g) Any transfer, occurring on or after January 1, 1983, of an eligible dwelling unit from a parent or legal guardian to a minor child or children or among minor siblings, or to a trust for the sole benefit of such persons, resulting from a court order or judicial decree due to the death of one or both of the parents. An “eligible dwelling unit” means the dwelling which was the principal place of residence of the minor child or children prior to the transfer and remains such after the transfer.
(h) Any transfer of property to a disabled child or ward, whether minor or adult, or to a trust for the sole benefit of such person, upon the death of a parent or guardian pursuant to Section 62(n) of the Revenue and Taxation Code.
(i) Any transfer, on or after January 1, 1985, of a mobilehome park or of rental spaces in a mobilehome park pursuant to Section 62.1 of the Revenue and Taxation Code.
(j) Any transfer of a mobilehome park or of rental spaces in a mobilehome park pursuant to Section 62.2 of the Revenue and Taxation Code.
(k) Any transfer of separate property inherited by a surviving domestic partner, as defined in subdivision (b) of section 37 of the Probate Code, by intestate succession upon the death of a registered domestic partner.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 60, 61, 62, 62.1, 62.2, 64, 66 and 67, Revenue and Taxation Code; and Sections 37, 6401 and 6402, Probate Code.
HISTORY

1. Change without regulatory effect renumbering and amending former subsections 462(m)(1)-(6) to section 462.240 filed 5-11-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 19).
2. Amendment of section heading, section and Note filed 1-21-98; operative 2-20-98 (Register 98, No. 4).
3. New subsection (k) and amendment of Note filed 10-14-2003; operative 11-13-2003 (Register 2003, No. 42).
§462.260. Date of Change in Ownership.
Note     •     History

For purposes of reappraising real property as of the date of change in ownership of real property, the following dates shall be used:
(a) Sales.
(1) Where the transfer is evidenced by recordation of a deed or other document, the date of recordation shall be rebuttably presumed to be the date of ownership change. This presumption may be rebutted by evidence proving a different date to be the date all parties' instructions have been met in escrow or the date the agreement of the parties became specifically enforceable.
(2) Where the transfer is accomplished by an unrecorded document, the date of the transfer document shall be rebuttably presumed to be the date of ownership change. This presumption may be rebutted by evidence proving a different date to be the date all parties' instructions have been met in escrow or the date the agreement of the parties became specifically enforceable.
(b) Leases. The date the lessee has the right to possession.
(c) Inheritance (by will or intestate succession). The date of death of the decedent.
(d) Trusts.
(1) Revocable. The date the trust becomes irrevocable.
Example 1: A creates an inter vivos revocable trust that becomes irrevocable upon A's death. The date of trust in ownership is the date of A's death.
(2) Irrevocable. 
(A) The date the property is placed in trust.
Example 2: A's estate plan provides that upon A's death, property is transferred to an irrevocable testamentary trust. The date of change in ownership is the date of A's death.
Example 3: A transfers to an irrevocable inter vivos trust. The date of change in ownership is the date of the transfer.
(B) The effective date of the immediate right to present possession or enjoyment of a remainder or reversion occurs upon the termination of a life estate or other similar precedent property interest.
Example 4: A creates an irrevocable trust, granting A's wife, B, a life estate in the beneficial use of the property with a remainder to C and D who are unrelated to A and B. The creation of a life estate in B is a transfer subject to the interspousal exclusion from change in ownership. Upon B's death, however, a change in ownership occurs because on that date C and D have an immediate right to the present possession and enjoyment of the remainder.
Note: Refer to Section 462.160 for trust transfer exceptions.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 60, 61, 62, 63 and 67 Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering and amending former subsections 462(n)(1)-(3)(B) to section 462.260 filed 5-11-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 19).
2. Amendment filed 5-12-97; operative 6-11-97 (Register 97, No. 20).
§462.500. Change in Ownership of Real Property Acquired to Replace Property Taken by Governmental Action or Eminent Domain Proceedings.
Note     •     History

(a) General. The term “change in ownership” shall not include the acquisition of comparable real property as replacement for property taken if the person acquiring the replacement real property has been displaced from property in this state by:
(1) Eminent domain proceedings instituted by any entity authorized by statute to exercise the power of eminent domain, or
(2) Acquisition by a public entity, or
(3) Governmental action which has resulted in a judgment of inverse condemnation.
(b) Definitions. The following definitions govern the construction of the words or phrases used in this section.
(1) “Property taken” means real property taken or acquired as provided in (a).
(2) “Replacement property” means real property acquired to replace property taken.
(3) “Award or purchase price” means the amount paid for “property taken” but shall not include amounts paid for relocation assistance or any thing other than the replaced real property. The award or purchase price may not reflect full cash value.
(4) “Displaced” means a property owner is removed, expelled, or forced from property as a result of eminent domain proceedings, acquisition by a public entity in lieu of instituting eminent domain proceedings, or governmental action resulting in a judgment of inverse condemnation.
(5) “Real property” includes land, land improvements, living improvements, manufactured homes, and fixed machinery and equipment. Personal property is not entitled to relief under this section.
(6) “Adjusted base year value” means the base year value, as determined in accordance with Revenue and Taxation Code section 110.1, with the adjustments permitted by subdivision (b) of Section 2 of Article XIII A of the California Constitution and subdivision (f) of Revenue and Taxation Code section 110.1.
(c) Comparability. Replacement property, acquired by a person displaced under circumstances enumerated in (a), shall be deemed comparable to the property taken if it is similar in size, utility, and function.
(1) The size of property is associated with value, not physical characteristics. Property is similar in size if its full cash value does not exceed 120 percent of the award or purchase price paid for the property taken.
A replacement property, or portion thereof, that has a full cash value which exceeds 120 percent of the award or purchase price shall be considered, to the extent of the excess, not similar in size.
(2) Property is similar in function and utility if the replacement property is not is intended to be used in the same manner as the property taken. Property is similar in function and utility if the property taken and the replacement property both fall into the same category:
Catetory A: Single family residence or duplex. Small miscellaneous buildings may be included when used with residence.
Category B: Commercial, investment, income, or vacant property. Single family residences and duplexes that are used as investment property may be considered income property if sufficient proof is provided to the assessor. Proof may include, but is not limited to, rental or lease agreements, cancelled checks, income tax returns, or other investment records.
If property does not fall within Category A or Category C, it falls within Category B.
Category C: Agricultural property. “Agriculture” includes farming in all its branches, and, among other things, includes the cultivation and tillage of the soil, dairying, the production, cultivation, growing, and harvesting of any agricultural or horticultural commodities, the raising of livestock, bees, furbearing animals, or poultry, and any practices (including any forestry or lumbering operations) performed incidental to or in conjunction with such farming operations, including preparation for market and delivery to storage or to market or to carriers for transportation to market.
Agricultural property that is in transition may be considered similar to property described in Category B if property in its vicinity has been changing from historically agricultural use to another use. Factors that may be considered to determine whether agricultural property is in transition include, but are not limited to:
· Restrictions that would prohibit the property taken from converting to property described in Category B such as the general plan, community plan, or special plan. Current zoning restrictions are not such a restriction if the general plan, community plan, or special plan contemplate a zoning change.
· The highest and best use of the property taken;
· The type of comparable property that was used by the acquiring government body to value the property taken.
(3) To the extent that replacement property, or any portion thereof, is not similar in function, size and utility, the property, or portion thereof, shall be considered to have undergone a change in ownership. 
EXAMPLE 1: An owner-occupied single family residence is replaced by a combination dwelling and commercial property. Relief is applicable to only the dwelling portion of the replacement property; the commercial portion shall be considered as having changed ownership. 
EXAMPLE 2: A combination dwelling and commercial property is replaced with an owner-occupied single family residence. Only the dwelling portion of the property taken shall be considered in determining the comparability and the amount of relief. The right to relief on the commercial portion of the property taken is waived unless replacement Category B property is acquired after the date of displacement and a timely request is made for assessment relief. 
EXAMPLE 3: A combination dwelling and commercial property is replaced with a Category A single family residence, and later the displaced person also acquires a separate replacement Category B property. Pro-rata relief shall be granted on both the replacement Category A single family residence and Category B property.
EXAMPLE 4: An owner-occupied single family residence is replaced with an owner-occupied single family residence and a vacation home. Relief is applicable to both properties.
EXAMPLE 5: An owner-occupied single family residence that has a homeowners' exemption is replaced with a single family residence that is to be used as a rental property. The replacement property qualifies for relief because a Category A property is replaced by another Category A property.
EXAMPLE 6: A duplex in which the property owner lived in one unit and rented the other unit is replaced with two single family residences, one of which will be owner occupied. Relief is applicable to both properties.
EXAMPLE 7: Three single family residences that were owned by a taxpayer and used as rental properties were replaced by a small apartment complex. Relief is available under Category B if the taxpayer provides proof to the assessor that the single family residences were held as income property.
EXAMPLE 8: A taxpayer owns a 40-acre vineyard which includes an owner-occupied single family residence. The owner-occupied single family residence is taken along with 5 acres of grapevines. To qualify for relief, the owner-occupied single family residence must be replaced with Category A property; the vineyard must be replaced with other Category C property or, if the property is in transition to another use, it may be replaced with a Category B property.
(d) Base Year Value of Replacement Property. The following procedure shall be used by the assessor in determining the appropriate adjusted base year value of comparable replacement property:
(1) Compare the award or purchase price paid by the acquiring entity for the property taken or acquired with the full cash value of the comparable replacement property.
(2) If the full cash value of the comparable replacement property does not exceed 120 percent of the award or purchase price of the property taken, then the adjusted base year value of the property taken shall become the replacement property's base year value, regardless of the allocation between land and improvements.
(3) If the full cash value of the replacement property exceeds 120 percent of the award or purchase price of the property taken, then the amount of the full cash value over 120 percent of the award or purchase price paid shall be added to the adjusted base year value of the property taken. The sum of these amounts shall become the replacement property's base year value.
(4) If the full cash value of the comparable replacement property is less than the adjusted base year value of the property taken, then that lower value shall become the replacement property's base year value.
(5) If there is no award or purchase price paid by the acquiring entity (i.e., an exchange) for the property taken, then the full cash value of the acquired property and the full cash value of the replacement property shall be determined by the assessor of the county in which each property is located for the purpose of applying the other provisions of this subdivision. The procedure set forth in subdivision (d)(1) through (d)(4) shall then be applied to determine the replacement property's base year value.
(6) A base year value may be reallocated upon the transfer to the replacement property. The appraisal unit that is normally bought and sold in the market place may be used to determine the amount of base year value that is allocated to the property taken.
EXAMPLE 9: A commercial property, consisting of land and improvements, is taken and replaced with a Category B structure that was built on land that the taxpayer already owned. The land is ineligible for relief because it was previously owned. Despite the ineligibility of the land, the base year value of the property taken (land and improvements) may be transferred to the newly constructed improvements to the extent it meets the value and timing requirements.
(e) Ownership Requirements. Only the owner or owners of the property taken, whether one or more individuals, partnerships, corporations, other legal entities, or a combination thereof, shall receive property tax relief under this section. Relief under this section shall be granted to an owner(s) of property taken who obtains title to replacement property. The acquisition of an ownership interest in a legal entity which, directly or indirectly, owns real property is not an acquisition of comparable property. 
EXAMPLE 10: A and B each own an undivided 50 percent interest as joint tenants in a home which is taken through eminent domain proceedings by the state. A purchases a replacement property which is comparable to the property taken. B contributes his share of the award or purchase price to a limited partnership which owns a home which is comparable replacement property. A's relief under this section is limited to 120 percent of one-half of the award or purchase price of the property taken. B is entitled to no relief. 
EXAMPLE 11: A partnership composed of two corporations owns commercial property which is taken through eminent domain proceedings. The partnership uses the award or purchase price to acquire Category B property. The partnership is entitled to relief under this section. 
EXAMPLE 12: A partnership composed of two corporations owns commercial property which is taken through eminent domain proceedings. The partnership distributes the award or purchase price to the partner corporations in the same percentage as their ownership interests and the corporations separately or jointly acquire comparable replacement property retaining the same percentage of ownership interest in the partnership. No tax relief may be granted under this section.
For purposes of this section, owner means the fee owner or life estate owner of the real property taken and excludes the lessee thereof unless the lessee owns improvements located on land owned by another, in which case, the lessee shall be entitled to property tax relief for comparable replacement improvements.
(f) New Construction. Any new construction required to make replacement property comparable to the property taken shall, to that extent, be eligible for property tax relief, if such new construction is completed on or after the earliest of the dates listed in subdivision (g)(3), and if a timely request is made for assessment relief.
(g) Time Limits for Qualification.
(1) The provisions of this section shall apply to property acquired as replacement property for property taken by eminent domain proceedings, public acquisitions, or judgments of inverse condemnation, provided the person acquiring replacement property makes a timely request for such assessment with the assessor. The replacement property must be acquired before a request is made. Reassessments and refunds shall be made retroactively to the date of acquisition of replacement property for property taken, provided a timely request is made therefor.
(2) For purposes of this section, a request shall be deemed timely if made within four years after one of the following dates, whichever is applicable:
(A) The date final order of condemnation is recorded or the date the taxpayer vacates the property taken, whichever is later, for property acquired by eminent domain; 
(B) The date of conveyance or the date the taxpayer vacates the property taken, whichever is later, for property acquired by a public entity by purchase or exchange; or
(C) The date the judgment of inverse condemnation becomes final or the date the taxpayer vacates the property taken, whichever is later, for property taken by inverse condemnation.
(3) Replacement property shall be eligible for property tax relief under this section if it is acquired on or after the earliest of the following dates:
(A) The date the initial written offer is made for the property taken by the acquiring entity;
(B) The date the acquiring entity takes final action to approve a project which results in an offer for or the acquisition of the property taken;
(C) The date the `Notice of Determination,' `Notice of Exemption,' or similar notice, as required by the California Environmental Quality Act (CEQA), is recorded by the public entity acquiring the taxpayer's property and the public project has been approved; or
(D) The date, as declared by the court, that the property was taken.
(4) No property tax relief shall be granted to replacement property, however, prior to the date of displacement. The date of displacement shall be the earliest of the following dates:
(A) The date the conveyance of the property taken to the acquiring entity or the final order of condemnation is recorded;
(B) The date of actual possession by the acquiring entity of the property taken; or
(C) The date upon or after which the acquiring entity may take possession of the property taken as authorized by an order for possession.
(h) Administration.
(1) The assessor shall consider any of the following documents as proof of actual displacement of a taxpayer when a request has been made for the assessment relief provisions under this section:
(A) A certified recorded copy of the final order of condemnation, or, if the final order has not been issued, a certified recorded copy of the order for possession showing the effective date upon or after which the acquiring entity is authorized to take possession of the property taken;
(B) A copy of a recorded deed showing acquisition by a public entity; or
(C) A certified copy of a final judgment of inverse condemnation.
(2) Upon receipt of a taxpayer request and proof of actual displacement, the assessor shall forward to the Board such information regarding the identification of a displaced property as the Board may require. The Board shall review such information to determine whether more than one request for assessment relief has been made as a result of a single taking or governmental acquisition and if so shall advise the appropriate assessor(s).
NOTE

Authority cited: Section 15606, Government Code. Reference: Article XIIIA, Section 2(d), California Constitution; and Section 68, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering former section 462.5 to section 462.500 filed 1-27-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 5).
2. Amendment filed 11-18-2004; operative 12-18-2004 (Register 2004, No. 47).
§463. Newly Constructed Property.
Note     •     History

(a) When real property, or a portion thereof, is newly constructed after the 1975 lien date, the assessor shall ascertain the full value of such “newly constructed property” as of the date of completion. This will establish a new base year full value for only that portion of the property which is newly constructed, whether it is an addition or alteration. The taxable value on the total property shall be determined by adding the full value of new construction to the taxable value of preexisting property reduced to account for the taxable value of property removed during construction. The full value of new construction is only that value resulting from the new construction and does not include value increases not associated with the new construction.
(b) “Newly constructed” or “new construction” means and includes:
(1) Any substantial addition to land or improvements, including fixtures, such as adding land fill, retaining walls, curbs, gutters or sewers to land or constructing a new building or swimming pool or changing an existing improvement so as to add horizontally or vertically to its square footage or to incorporate an additional fixture, as that term is defined in this section.
(2) Any substantial physical alteration of land which constitutes a major rehabilitation of the land or results in a change in the way the property is used. Examples of alterations to land to be considered new construction are: site development of rural land for the purpose of establishing a residential subdivision; altering rolling, dry grazing land to level irrigated crop land; or preparing a vacant lot for use as a parking facility.
(A) In any instance in which an alteration is substantial enough to require reappraisal, only the value of the alteration shall be added to the base year value of the pre-existing land or improvements. Increases in land value caused by appreciation or a zoning change rather than new construction shall not be enrolled, for example: 

1. Land value 1975 	 = $10,000
2. Land value 1978 	 = $20,000
3. Value of alteration 1978 	 =   $5,000
4. Value of structure added 1978 	 = $75,000
 1979 roll value (1+3+4) 	 = $90,000	(must be adjusted to
		reflect appropriate
		indexing)
(B) Alterations to land which do not constitute a major rehabilitation or which do not result in a change in the way the property is used shall not result in reappraisal.
(3) Any physical alteration of any improvement which converts the improvement or any portion thereof to the substantial equivalent of a new structure or portion thereof or changes the way in which the portion of the structure that had been altered is used, e.g., physical alterations to an old structure to make it the substantial equivalent of a new building without any change in the way it is used or alterations to a warehouse that makes it usable as a retail store or a restaurant. Only the value, not necessarily the cost, of the alteration shall be added to the appropriately indexed base year value of the pre-existing structure.
(4) Excluded from alterations that qualify as “newly constructed” is construction or reconstruction performed for the purpose of normal maintenance and repair, e.g., routine annual preparation of agricultural land or interior or exterior painting, replacement of roof coverings or the addition of aluminum siding to improvements or the replacement of worn machine parts.
(5) Any substantial physical rehabilitation, renovation or modernization of any fixture which converts it to the substantial equivalent of a new fixture or any substitution of a new fixture. Substantial equivalency shall be ascertained by comparing the productive capacity, normally expressed in units per hour, of the rehabilitated fixture to its original productive capacity.
(c) For purposes of this regulation, “fixture” is defined as an improvement whose use or purpose directly applies to or augments the process or function of a trade, industry, or profession.
(d) New construction in progress on the lien date shall be appraised at its full value on such date and each lien date thereafter until the date of completion, at which time the entire portion of property which is newly constructed shall be reappraised at its full value. 
(e) For purposes of this regulation, the date of completion is the date the property or portion thereof is available for use. In determining whether the real property or a portion thereof is available for use, consideration shall be given to the date of the final inspection by the appropriate governmental official, or, in the absence of such inspection, the date the prime contractor fulfilled all of his contract obligations, or in the case of fixtures, the date of the completion of testing of machinery and equipment.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Article XIII A, Sections 1 and 2, California Constitution.
HISTORY

1. New section filed 7-3-78 as an emergency; effective upon filing (Register 78, No. 27).
2. Amendment filed 10-2-78 as an emergency; effective upon filing. Certificate of Compliance included (Register 78, No. 40).
3. Order which was filed 10-2-78 refiled 10-20-78 as an emergency, to correct date of adoption; effective upon filing. Certificate of Compliance included (Register 78, No. 43).
4. Amendment of subsection (b) and new subsection (c) filed 1-31-79; effective thirtieth day thereafter (Register 79, No. 6).
5. Amendment of subsection (b) and new subsection (c) refiled 2-7-79 as an emergency; designated effective 3-1-79. Certificate of Compliance included (Register 79, No. 6).
6. Repealer and new section filed 8-22-79 as an emergency; effective upon filing (Register 79, No. 34). A Certificate of Compliance must be filed within 120 days or emergency language will be repealed on 12-20-79.
7. Certificate of Compliance filed 12-6-79 (Register 79, No. 49).
8. Amendment filed 5-13-98; operative 6-12-98 (Register 98, No. 20).
§463.500. Date of Completion of New Construction--Supplemental Assessments.
Note     •     History

(a) Application. The provisions of this section are applicable only to supplemental assessments levied pursuant to Chapter 3.5 (commencing with Section 75) of Part 0.5 of Division 1 of the Revenue and Taxation Code.
(b) Date of Completion of New Construction. The date of completion of new construction resulting from actual physical new construction on the site shall be the earliest of either the date upon which the new construction is available for use by the owner or, if all of the conditions of paragraph (b) (1) are satisfied, the date the property is occupied or used by the owner, or with the owner's consent, after the owner has provided a notice in accordance with paragraph (b) (1).
(1) The date of completion of new construction resulting from actual physical new construction shall not be the date upon which it is available for use if the owner does not intend to occupy or use the property and the owner notifies the assessor in writing prior to, or within 30 days after, the date of commencement of construction that he/she/it does not intend to occupy or use the identified property or a specified portion thereof.
(2) The date of completion of new construction resulting from actual physical new construction shall be conclusively presumed to be the date upon which the new construction is available for use by the owner if the assessor fails to receive notice as provided in paragraph (b) (1).
(c) Definitions.
(1) “Property” means land, improvement(s) including fixtures, and mobilehome(s) subject to taxation under Part 13 (commencing with Section 5800) of Division 1 of the Revenue and Taxation Code.
(2) “New Construction resulting from actual physical new construction” means “new construction” as defined in Section 463, subsections (b) and (f). 
“New construction resulting from actual physical new construction” also includes:
(A) the installation of a new fixture which is an addition or is a replacement of an existing fixture;
(B) the rehabilitation, renovation or modernization of any fixture which converts it to the substantial equivalent of a new fixture;
(C) the severance of improvements, including structures and fixtures, which is associated with new construction;
(D) the severance on, or after, March 1, 1985, of fixtures which qualify for assessment pursuant to Sections 75.15 and 75.16 of the Revenue and Taxation Code, whether or not the severance is associated with other new construction; or
(E) the severance on, or after, July 31, 1985, of structures, whether or not the severance is associated with other new construction.
“New construction resulting from actual physical new construction” does not include:
(A) the severance prior to March 1, 1985, of improvements, including structures and fixtures, which is not associated with other new construction;
(B) the severance on, or after, March 1, 1985 of any improvements, other than structures or fixtures, which is not associated with other new construction;
(C) the severance prior to July 31, 1985, of structures which is not associated with other new construction; or
(D) the discontinued use of improvements, including structures and fixtures, which are not physically severed from the property but which are made redundant by newly installed or erected structures, fixtures, or other improvements.
Examples:
(A) The installation of a multi-level printing press (a fixture) as an addition to existing facilities constitutes actual physical new construction.
(B) The installation of a printing press as the replacement of an existing press is also actual physical new construction.
(C) The complete renovation of an existing press to the substantial equivalent of a new press constitutes actual physical new construction.
(D) The severance of the old press (also a fixture) is actual physical new construction if it is associated with the installation of the new press or other new construction, or if it occurred on or after March 1, 1985.
(3) “Commencement of construction” means the performance of physical activities on the property which results in changes which are visible to any person inspecting the site and are recognizable as the initial steps for the preparation of land or the installation of improvements or fixtures. Such activities include clearing and grading land, layout of foundations, excavation of foundation footing, fencing the site, or installation of temporary structures. Such activities also include the severance of existing improvements or fixtures.
“Commencement of construction” does not include activities preparatory to actual construction such as obtaining architect services, preparing plans and specifications, obtaining building permits or zoning variances or filing subdivision maps or environmental impact reports.
“Commencement of construction” shall be determined solely on the basis of activities which occur and are apparent on the property undergoing new construction. Where several parcels are adjacent and will be used as a single unit by the builder for the construction project, the commencement of construction shall be determined on the basis of the activities which occur on any part of the several parcels comprising the unit. Where a property has been subdivided into separate lots, the commencement of construction shall be determined on the basis of the activities occurring on each separate lot. Where the property has been subdivided into separate lots and several or all of those lots will be used as a single unit by the builder for the construction project, the commencement of construction shall be determined on the basis of the activities which occur on any part of the several parcels comprising the unit.
(4) “Available for use” means that the property, or a portion thereof, has been inspected and approved for occupancy by the appropriate governmental official or, in the absence of such inspection and approval procedures, when the prime contractor has fulfilled all of the contractual obligations. When inspection and approval procedures are non-existent or exist but are not utilized and a prime contractor is not involved, the newly constructed property is available for use when outward appearances clearly indicate it is immediately usable for the purpose intended. Fixtures are available for use when all testing necessary for proper operation or safety is completed.
New construction is not available for use if, on the date it is otherwise available for use, it cannot be functionally used or occupied. In that case, the property is not available for use until the date that any legal or physical impediment to functional use or occupancy is removed.
If a structure is constructed with the expectation that the tenant(s) will have improvements added after a lease(s) is executed, “available for use” means that point in time when the structure is ready to receive tenant improvements, whether or not there are any tenants at that time and regardless of who is to construct the improvements. If a construction project is completed in stages with some portions available for occupancy prior to completion of the total project, any portion of the project ready to receive tenant improvements is available for use even though other portions of the project are not ready for such improvements. In the case of physical alterations to land, such as leveling, “available for use” means that point in time when the land is ready for use by the owner and no further new construction is required for the new use. In the case of fixtures added as part of a larger new construction project, “available for use” means that point in time when the project, including the fixture, is ready for use.
(5) “Occupied or used” means the physical occupancy of the property by the owner or any physical use of the property by the owner, except where such occupancy or use is incidental to an offer for a change of ownership. “Occupied or used” also includes the rental or lease of the property or any occupancy or use of the property by third persons with the owner's consent. The occupancy or use of the property occurs on the earliest date when the property is physically occupied or used, or when the agreed upon term of occupancy commences. “Used” does not include the transfer of legal title to the property as security.
(6) “Functionally used or occupied” means that the property is or can be used or occupied for the purpose for which it was constructed. The purpose for which the property was constructed or improved shall be determined on the basis of the type of property and any special facts or circumstances which affect its use or occupancy. Property shall not be considered “functionally used or occupied” if any legal restriction or physical impediment beyond the owners' control prevents the use of the property for the purpose intended.
Examples:
(A) A building intended for use as a warehouse can be functionally used when physical construction is completed even though the property to be stored has not arrived at the site.
(B) Land improved by leveling and the installation of an irrigation system which converts it from grazing land to farm land can be functionally used when the improvement activity is completed even though the planting season will not commence for several months.
(C) An office or hotel building on which construction is completed cannot be functionally used if it is uninhabitable because of the lack of power, water or sewer service, or if a natural disaster, such as a flood or earth slide, prevents reasonable public access to the facility.
(7) “Owner's consent” means the express or implied agreement of an owner to allow the property, or a portion thereof, to be physically occupied or used by a third person. Where the use or occupancy is visible to, or ascertainable by, the assessor, it shall be rebuttably presumed that the property is occupied or used with the owner's consent. If the owner has received actual or constructive notice of the occupancy or use, failure of the owner to communicate an objection to the user or enforce his rights to remove the occupant within a reasonable time shall be evidence of consent.
(8) “Incidental to an offer for a change of ownership” means that an activity is usual or necessary to the holding of property for sale in the regular course of business. It includes any use or occupancy arising from the demonstration or display of the property for the purpose of selling that property or other property in the vicinity under the same ownership. It includes use of the property by the owner or by any person using the property with the owner's consent. Use of property as a model home, a sales office, or as a temporary storage facility for building materials or furnishings intended to be installed in other property to be held for sale, shall be considered to be incidental to an offer for a change in ownership. Temporary use of the property as lodging by a potential buyer for the purpose of sales promotion shall be considered incidental to an offer for a change of ownership. The use of this property, however, by a potential buyer as a principal residence pending the arrangement or approval of the financing necessary to complete the purchase is not incidental to an offer for a change in ownership.
(9) “Structures” means all improvements subject to supplemental assessment other than living improvements (trees and vines) and fixtures which qualify for assessment pursuant to Sections 75.15 and 75.16 of the Revenue and Taxation Code.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 75.10, 75.11 and 75.12, Revenue and Taxation Code.
HISTORY

1. New section filed 7-21-87; operative 8-20-87 (Register 87, No. 30).
2. Change without regulatory effect amending section number filed 1-27-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 5).
§464. Veterans' Exemptions.
Note     •     History

The sum of 25 percent of the taxable value of taxable assets and 100 percent of the current full cash value as defined in Revenue and Taxation Code section 110 for non-taxable assets will determine the limitation for the veterans' property tax exemption. 
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Sections 110, 110.1 and 205.1, Revenue and Taxation Code.
HISTORY

1. New section filed 7-3-78 as an emergency; effective upon filing (Register 78, No. 27).
2. Certificate of Compliance filed 10-2-78 (Register 78, No. 40).
3. Editorial correction of NOTE filed 2-2-83 (Register 83, No. 6).
4. Amendment of section heading, section and Note filed 5-13-98; operative 6-12-98 (Register 98, No. 20).
§465. Nonprofit Golf Courses.
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. Reference: Art. XIII A, Sections 1 and 2, California Constitution.
HISTORY

1. New section filed 7-3-78 as an emergency; effective upon filing (Register 78, No. 27).
2. Certificate of Compliance filed 10-2-78 (Register 78, No. 40).
3. Repealer and new section filed 8-22-79 as an emergency; effective upon filing (Register 79, No. 34). A Certificate of Compliance must be filed within 120 days or emergency language will be repealed on 12-20-79.
4. Certificate of Compliance filed 12-6-79 (Register 79, No. 49). 
5. Repealer filed 3-4-82; effective thirtieth day thereafter (Register 82, No. 10).
§466. Valuation and Enrollment of Trees and Vines.
Note     •     History

NOTE

Authority cited: Sec. 15606(c) Gov. Code. Reference: Art. XIII A, Secs. 1 and 2, California Constitution.
HISTORY

1. New section filed 7-3-78 as an emergency; effective upon filing (Register 78, No. 27).
2. Amendment filed 10-2-78 as an emergency; effective upon filing. Certificate of Compliance included (Register 78, No. 40).
3. Order which was filed 10-2-78 refiled 10-20-78 as an emergency, to correct date of adoption; effective upon filing. Certificate of Compliance included (Register 78, No. 43).
4. Repealer and new section filed 8-22-79 as an emergency; effective upon filing (Register 79, No. 34). A Certificate of Compliance must be filed within 120 days or emergency language will be repealed on 12-20-79.
5. Certificate of Compliance filed 12-6-79 (Register 79, No. 49).
6. Repealer filed 12-6-99; operative 1-5-2000 (Register 99, No. 50).  
§467. Taxable Possessory Interests.
Note     •     History

NOTE

Authority cited: Section 15606(c), Government Code. Reference: Article XIII A, Sections 1 and 2, California Constitution.
HISTORY

1. New section filed 7-3-78 as an emergency; effective upon filing (Register 78, No. 27).
2. Amendment filed 10-2-78 as an emergency; effective upon filing. Certificate of Compliance included (Register 78, No. 40).
3. Order which was filed 10-2-78 refiled 10-20-78 as an emergency, to correct date of adoption; effective upon filing. Certificate of Compliance included (Register 78, No. 43).
4. Amendment filed 1-31-79; effective thirtieth day thereafter (Register 79, No. 6).
5. Amendment refiled 2-7-79 as an emergency; designated effective 3-1-79. Certificate of Compliance included (Register 79, No. 6).
6. Repealer and new section filed 8-22-79 as an emergency; effective upon filing (Register 79, No. 34). A Certificate of Compliance must be filed within 120 days or emergency language will be repealed on 12-20-79.
7. Certificate of Compliance filed 126-79 (Register 79, No. 49).
8. Repealer filed 11-29-99; operative 12-29-99 (Register 99, No. 49).
§468. Oil and Gas Producing Properties.
Note     •     History

(a) The right to remove petroleum and natural gas from the earth is a taxable real property interest. Increases in recoverable amounts of minerals caused by changed physical or economic conditions constitute additions to such a property interest. Reduction in recoverable amounts of minerals caused by production or changes in the expectation of future production capabilities constitute a reduction in the interest. Whether or not physical changes to the system employed in recovering such minerals qualify as new construction shall be determined by reference to Section 463(a).
(b) The market value of an oil and gas mineral property interest is determined by estimating the value of the volumes of proved reserves. Proved reserves are those reserves which geological and engineering information indicate with reasonable certainty to be recoverable in the future, taking into account reasonably projected physical and economic operating conditions. Present and projected economic conditions shall be determined by reference to all economic factors considered by knowledgeable and informed persons engaged in the operation and buying or selling of such properties, e.g., capitalization rates, product prices and operation expenses.
(c) The unique nature of oil and gas property interests requires the application of specialized appraisal techniques designed to satisfy the requirements of Article XIII, Section 1, and Article XIII A, Section 2, of the California Constitution. To this end, the valuation of such properties and other real property associated therewith shall be pursuant to the following principles and procedures:
(1) A base year value (market value) of the property shall be estimated as of lien date 1975 or as of the date a change in ownership occurs subsequent to lien date 1975. Newly constructed improvements and additions in reserves shall be valued as of the lien date of the year for which the roll is being prepared. Improvements removed from the site shall be deducted from taxable value. Base year values shall be determined using factual market data such as prices and expenses ordinarily considered by knowledgeable and informed persons engaged in the operation, buying and selling of oil, gas and other mineral-producing properties and the production therefrom. Once determined, a base year value may be increased no more than two percent per year.
(2) Base year reserve values must be adjusted annually for the value of depleted reserves caused by production or changes in the expectation of future production.
(3) Additions to reserves established in a given year by discovery, construction of improvements, or changes in economic conditions shall be quantified and appraised at market value.
(4) The current year's lien date taxable value of mineral reserves shall be calculated as follows:
(A) The total unit market value and the volume of reserves using current market data shall be estimated.
(B) The current value of taxable reserves is determined by segregating the value of wells, casings, and parts thereof, land (other than mineral rights) and improvements from the property unit value by an allocation based on the value of such properties.
(C) The volume of new reserves shall be determined by subtracting the prior year's reserves, less depletions, from the estimated current total reserves.
(D) The value of removed reserves shall be calculated by multiplying the volume of the reserves removed in the prior year by the weighted average value, for reserves only, per unit of minerals for all prior base years. The prior year's taxable value of the reserves remaining from prior years shall be found by subtracting the value of removed reserves from the prior year's taxable value.
(E) The new reserves are valued by multiplying the new volume by the current market value per unit of the total reserves.
(F) The current taxable value for reserves only is the sum of the value of the prior year's reserves, net of depletions as calculated in (D) above, factored by the appropriate percentage change in the Consumer Price Index (CPI) added to the value of the new reserves, as calculated in (E) above.
(5) Valuation of land (other than mineral reserves) and improvements.
(A) A base year value (market value) of land (including wells, casings and parts thereof) and improvements shall be estimated as of lien date 1975, the date of new construction after 1975, or the date a change of ownership occurs subsequent to lien date 1975.
(B) The value of land (wells, casings and parts thereof) and improvements shall remain at their factored base year value except as provided in (6) below.
(6) Value declines shall be recognized when the market value of the appraisal unit, i.e., land, improvements and reserves, is less than the current taxable value base of the same unit.
NOTE

Authority cited: Section 15606(c), Government Code, Reference: Article XIII A, Sections 1 and 2, California Constitution.
HISTORY

1. New section filed 7-3-78 as an emergency; effective upon filing (Register 78, No. 27).
2. Certificate of Compliance filed 10-2-78 (Register 78, No. 40).
3. Amendment filed 4-2-79 as an emergency; effective upon filing (Register 79, No. 14).
4. Amendment filed 7-2-79 as an emergency; effective upon filing (Register 79, No. 27). Certificate of Compliance included.
5. Change without regulatory effect amending subsections (c)(1) and (c)(5)(A) filed 6-6-2001 pursuant to section 100, title 1, California Code of Regulations (Register 2001, No. 23).
§469. Mining Properties.
Note     •     History

(a) The provisions of this rule apply to the valuation of the rights to explore, develop and produce minerals, other than oil, gas and geothermal resources, and the real property associated with these rights.
(b) General.
(1) Rights to enter in or upon land for the purpose of exploration, development or production of minerals are taxable real property interests to the extent they individually or collectively have ascertainable value.
(2) It is the right to explore, develop and produce that is being valued and not the physical quantity of resources present on the valuation date.
(3) The unique nature of mineral property interests requires the application of specialized appraisal techniques designed to satisfy the requirements of article XIII, section 1, and article XIII A, section 2, of the California Constitution. To this end, mineral property interests and other real property associated therewith shall be valued pursuant to the principles and procedures set forth in this section.
(4) Notwithstanding any other provision in this section, any appropriate valuation method described in section 3 of title 18 of this code may be applied in the event of a transfer of an ownership interest in the right to explore, develop or produce a mineral property.
(c) Definitions. For the purposes of this section:
(1) “Minerals” means organic and inorganic earth material including rock but excluding oil, gas, and geothermal resources.
(2) “Proved reserves” means those minerals measured by volume or weight which geological and engineering information indicate with reasonable certainty to be recoverable in the future, taking into account reasonably projected physical and economic operating conditions. “Proved reserves” includes all minerals that satisfy the conditions of the preceding sentence without regard to how the term is used in industry.
(3) “Exploration” means the searching for and determining the location, quantity, nature, shape, and quality of mineral deposits.
(4) “Development” means the preparation of minerals for production including the removal of waste rock or overburden, and the construction of improvements or improvements to land related to the production of minerals.
(5) “Production” means the removal or processing of minerals.
(6) “Appraisal unit” consists of a mineral property that persons in the marketplace commonly buy and sell as a unit or that is normally valued separately. However, for assessments made on or after January 1, 1999, each leach pad, tailings facility, and settling pond shall be a separate appraisal unit.
(d) Valuation of Mineral Properties Prior to Production.
(1) Exploration. The right to explore for minerals is taxable to the extent it has value separate from the rights to develop and produce any discovered minerals. The right to explore shall be valued by any appropriate method or methods as prescribed in section 3 of title 18 of this code taking into consideration appropriate risks; however, in no event shall the right be considered to be under construction. While the construction of structures or the physical alterations to land, e.g., access roads, fencing, drainage or water systems, land clearing, etc., during exploration constitutes assessable new construction (subject to the provisions of section 463 of title 18 of this code), it does not add to or diminish the value of the right to explore. Costs associated with obtaining government approval related to new construction should be considered when valuing new construction. Costs of obtaining governmental approval to operate, taking ore samples, assaying for mineral content or testing processing methods, shall not be considered for purposes of valuing the right to explore. These latter elements of cost may appear in the value of the mineral rights when production starts. Once the base-year value of the right to explore is determined and enrolled, it shall not be changed except to reflect diminution in value from all causes as well as any increase in value resulting from the annual rate of inflation as prescribed by section 460 of title 18 of this code or to reflect a change in ownership, or as provided in subdivision (g) of this rule.
(2) Development. 
(A) Although the right to develop and the right to produce minerals are separate rights, the value of the right to develop is virtually unascertainable separate from the right to produce. Therefore no separate value shall be established for the right to develop unless there is an intervening change in ownership at which time the right to develop may have an assessable value as reflected in the purchase price. Any value attributable thereto shall be deemed to be included in the base-year value of the mineral rights established in accordance with subdivisions (e) and (f) of this rule. In no event shall the right to develop or produce minerals be treated as being under construction.
(B) Whether the construction of improvements or alteration to land during development qualify as new construction shall be determined by reference to sections 463 and 463.5 of title 18 of this code and sections 70, 71, and 73 of the Revenue and Taxation Code.
(e) Valuation of Mineral Properties During Production. 
(1) General.
(A) The base-year value of mineral rights associated with producing mineral properties shall be established as of March 1, 1975 or thereafter when such rights undergo a change in ownership or as of the date production commences. The market value of such mineral rights is determined by valuing the estimated quantity of proved reserves that can reasonably be expected to be produced during the time period these rights are exercisable. The valuation of the proved reserves shall be based on present and reasonably projected economic conditions (e.g., capitalization rates, product prices and operating expenses, etc.) normally considered by knowledgeable and informed people engaged in operating, buying, or selling of such properties or the marketing of the production therefrom. While the assessor has full discretion to select the appropriate appraisal method, the income approach will generally be the most relevant appraisal method employed in establishing a value for the total property.
(B) Increases in proved reserves that occur following commencement of production and that are caused by changed physical, technological or economic conditions constitute additions to the mineral rights which have not been assessed and which shall be assessed on the regular roll as of the lien date following the date they become proved reserves. The increased quantity of proved reserves shall be used to establish the value of the addition to the property interest which value shall be added to the adjusted base-year value of the reserves remaining from prior years as the separate base-year value of the addition. Reductions in recoverable amounts of minerals caused by production or by changed physical, technological or economic conditions or a change in the expectation of future production capabilities constitute reductions in the measure of the mineral rights and shall correspondingly reduce value on the subsequent lien date.
(2) Value Calculation.
(A) The base-year value or the adjusted base-year value of mineral rights as quantified by proved reserves for the current year's lien date shall be calculated as follows:
1. Estimate the market value of the total property and estimate the physical quantity of proved reserves that may be reasonably expected to be produced during the time the right to produce is exercisable using current market data.
2. Estimate the current value of proved reserves by segregating the value of land (other than proved reserves), improvements to land constructed during the exploration, development, and production stages (e.g., roads, ditches, trenches, excavations, pits, drifts, stopes, etc.), other improvements and personal property (including any resources severed from the land except for inventory already excluded from the market value of the unit) from the unit value by an allocation based on the current market value of the component parts.
3. Estimate the quantity of additions to proved reserves by subtracting the prior year's proved reserves, less depletion, from the estimated current proved reserves.
4. Estimate the value of reserves removed (depletion) by multiplying the quantity of the reserves removed in the prior year by the weighted average value, for reserves only, per unit of minerals for all prior base years. The adjusted base-year value of the reserves remaining from prior years shall be found by subtracting the value of removed reserves from the prior year's adjusted base-year value.
5. Value the added proved reserves by determining the current market value of all of the proved reserves less the current market value of proved reserves existing prior to adding new proved reserves.
6. The current adjusted base-year value for proved reserves only is the sum of the value of the prior year's proved reserves, less the depletion calculated in 4. above, factored for inflation as prescribed by section 460 of title 18 of this code added to the value of the new reserves, as calculated in 5. above.
(B) The base-year value or adjusted base-year value of land (other than mineral rights, leach pads, tailings facilities, and settling ponds) and improvements for the current year's lien date shall be calculated as follows:
1. Determine the adjusted base-year value of land, improvements to land constructed during the exploration, development and production stages (including roads, ditches, trenches, excavations, pits, drifts, stopes, etc.), and other improvements in accordance with sections 51 and 110.1 of the Revenue and Taxation Code.
2. Add the current market value of any construction in progress, excluding leach pads, tailings facilities, and settling ponds, on the lien date.
(C) Declines in the value of the mineral property shall be recognized when the market value of the appraisal unit, (i.e., land, improvements including fixtures, and reserves), is less than the current adjusted base-year value of the same unit, except for a leach pad, tailings facility, or settling pond. Each leach pad, tailings facility, or settling pond shall be considered a separate appraisal unit for purposes of determining its taxable value on each lien date subsequent to the lien date upon which its initial base year value was determined.
(f) Valuation of Mineral Producing Properties Without Proved Reserves. Where proved reserves cannot be estimated or are not usually estimated, the value of the mineral property shall be estimated in accordance with the provisions of section 3 of title 18 of this code.
(g) Taxable Value of the Right to Produce Minerals. The value of the right to produce minerals shall be established as of the date that the production of minerals commences and the value shall be placed on the roll as provided by law. When the value of the right to produce minerals is enrolled, the roll value of the exploration or development rights for the same reserves shall be reduced to zero.
NOTE

Authority cited: Section 15606, Government Code. Reference: Article XIII, Section 1, California Constitution; Article XIIIA, Section 2, California Constitution; and Sections 51, 53.5 and 110.1, Revenue and Taxation Code.
HISTORY

1. New section filed 7-3-78 as an emergency; effective upon filing (Register 78, No. 27).
2. Amendment filed 10-2-78 as an emergency; effective upon filing. Certificate of Compliance included (Register 78, No. 40).
3. Order which was filed 10-2-78 refiled 10-20-78, as an emergency, to correct date of adoption; effective upon filing. Certificate of Compliance included (Register 78, No. 43).
4. Editorial correction of NOTE filed 2-2-83 (Register 83, No. 6).
5. Amendment filed 7-26-90; operative 8-25-90 (Register 90, No. 39).
6. Change without regulatory effect amending section filed 5-20-91 pursuant to section 100, title 1, California Code of Regulations (Register 91, No. 27).
7. Amendment of section and Note filed 7-14-99; operative 8-13-99 (Register 99, No. 29).
8. Change without regulatory effect amending subsection (e)(2)(B) filed 6-7-2001 pursuant to section 100, title 1, California Code of Regulations (Register 2001, No. 23).
§470. Enforceably Restricted Property. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606(c), Government Code. Reference: Article XIII A, Sections 1 and 2, California Constitution.
HISTORY

1. New section filed 7-3-78 as an emergency; effective upon filing (Register 78, No. 27).
2. Amendment filed 10-2-78 as an emergency; effective upon filing. Certificate of Compliance included (Register 78, No. 40).
3. Order which was filed 10-2-78 refiled 10-20-78 as an emergency, to correct date of adoption; effective upon filing. Certificate of Compliance included (Register 78, No. 43).
4. Repealer and new section filed 8-22-79 as an emergency; effective upon filing (Register 79, No. 34). A Certificate of Compliance must be filed within 120 days or emergency language will be repealed on 12-20-79.
5. Certificate of Compliance including amendment filed 12-6-79 (Register 79, No. 49).
6. Repealer filed 12-13-99; operative 1-12-2000 (Register 99, No. 51).  
§471. Timberland. [Repealed]
Note     •     History

NOTE

Authority cited: Sec. 15606(c) Gov. Code Reference: Art. XIII A, Secs. 1 and 2, California Constitution.
HISTORY

1. New section filed 7-3-78 as an emergency; effective upon filing (Register 78, No. 27).
2. Amendment filed 10-2-78 as an emergency; effective upon filing. Certificate of Compliance included (Register 78, No. 40).
3. Order which was filed 10-2-78 refiled 10-20-78 as an emergency, to correct date of adoption; effective upon filing. Certificate of Compliance included (Register 78, No. 43).
4. Repealer and new section filed 8-22-79 as an emergency; effective upon filing (Register 79, No. 34). A Certificate of Compliance must be filed within 120 days or emergency language will be repealed on 12-20-79.
5. Certificate of Compliance filed 12-6-79 (Register 79, No. 49).
6. Repealer filed 10-18-2010; operative 11-17-2010 (Register 2010, No. 43).
§472. Valuation of Real Property Interests in Timeshare Estates and Timeshare Uses.
Note     •     History

(a) The full value of the real property interest of a timeshare estate or a timeshare use, as defined in Section 11003.5 of the Business and Professions Code, shall be determined in accordance with the provisions of this section.
(b) In determining the value of the real property interest of a timeshare estate or use, consideration shall be given to the following factors which are unique to such interests:
(1) The fact that the timeshare estate or use is marketed in increments of time.
(2) The season of the year during which the owner is entitled to the right to use or possession of the property.
(c) The full value of the real property interest of a timeshare estate or use shall not include the value of any personal property or other nonreal property items. Such items include, but are not limited to, vacation exchange rights, vacation conveniences and services, and club memberships, as defined in subdivisions (d), (e), and (f).
The value of any nonreal property items included in the purchase price of a timeshare estate or use which are provided to the timeshare interest owner in exchange for a periodic fee or charge which is separate from the purchase price of the timeshare estate or use shall not be considered in the determination of the full value of the real property of the timeshare estate or use.
(d) “Nonreal property vacation exchange rights” shall include, but not be limited to, internal and external exchanges. An internal exchange means an exchange arranged by the timeshare project developer or operator for a timeshare estate or use owner between two or more resorts owned by the same developer or operator. An external exchange means an exchange arranged by an independent exchange network, which has a contractual relationship with either the timeshare project development or the individual timeshare owner.
(e) “Nonreal property vacation conveniences and services” shall include, but not be limited to:
(1) The owner's right to participate in exchange network.
(2) Maintenance and repair of buildings (interior and exterior) and grounds.
(3) Maid, meal, linen, and security guard services.
(4) Transportation, scheduling, and reservation services.
(5) Management services necessary for the administration of the operation of the property.
(6) The services of personnel charged with providing social or recreational instruction and planned activities.
(f) “Nonreal property club memberships” shall include memberships in recreational enterprises that are in the nature of licenses or permits to use real property but do not grant ownership interests in that property. Evidence that a membership grants a license or permit rather than an ownership interest includes, but is not limited to, the fact that the membership is offered as an option to timeshare purchases and that such memberships are also offered to others who do not own timeshare estates or uses.
(g) In determining the full value of the real property interest of a timeshare estate or use, the assessor shall consider the value concepts and approaches set forth in Sections 2, 3, 4, 6, and 8 of this chapter.
(h) The assessor may determine the value of the timeshare appraisal unit by the following method:
(1) Determine the full value of resort properties, condominiums, cooperatives, or other properties not marketed in increments of time but which are comparable to the subject property in terms of size, type, and location. Divide such full value by a unit of time equal to the timeshare interest being valued.
(2) Add to or subtract from the non-timeshare value quotient determined in (1), an amount necessary to reflect any increase or decrease in such value attributable to the fact that the subject property is marketed in increments of time and, if applicable, for a particular season.
(i) In addition to the method set forth in subdivision (h), the assessor may utilize any generally recognized alternative method of valuation to determine the full value of the real property of a timeshare estate or use.
(j) Nothing in this section shall be construed as requiring the assessment of a timeshare appraisal unit at less than full value as required by Section 401 of the Revenue and Taxation Code and as defined in Section 2 of this chapter.
(k) The provisions of this section are declaratory of, and not a change in existing law and are therefore applicable to the determination of all base year values for the real property interest of timeshare estates and uses.
NOTE

Authority cited: Section 15606, Government Code; and Section 998(e), Revenue and Taxation Code. Reference: Section 998, Revenue and Taxation Code.
HISTORY

1. New section filed 1-10-85; effective thirtieth day thereafter (Register 85, No. 2).
§473. Geothermal Properties.
Note     •     History

(a) The provisions of this rule apply to the valuation of the rights to explore for, develop, and produce useful geothermal energy (hereafter, “proved reserves”), and the real property associated with these rights. The provisions of this rule apply only to the valuation of property for lien dates, including lien dates for both the regular and the supplemental assessment rolls, that occur on or after January 1, 1996.
(b) GENERAL
(1) Rights to enter in or upon land for the purpose of exploration, development, or production of proved reserves are taxable real property interests to the extent they individually or collectively have ascertainable value.
(2) It is the right to explore, develop, and produce that is being valued and not the physical quantity of resources present on the valuation date.
(3) The unique nature of geothermal property interests requires the application of specialized appraisal techniques designed to satisfy the requirements of Article XIII, Section 1, and Article XIIIA, Section 2, of the California Constitution. To this end, the valuation of such properties and other real property associated therewith shall be pursuant to the principles and procedures in this section.
(4) Notwithstanding any other provision in this section, any appropriate valuation method described in Section 3 of Title 18 of this code may be applied in the event of a transfer of an ownership interest in the right to explore, develop, or produce a geothermal property.
(c) DEFINITIONS
For the purposes of this section:
(1) “Geothermal energy” means heat generated by natural processes beneath the earth's surface.
(2) “Proved reserves” means that quantity of geothermal energy capable of supporting the economic life of the geothermal project or geothermal projects to which it is assigned, reassigned, or which is otherwise marketable and which geological and engineering information indicate with reasonable certainty to be recoverable in the future, taking into account reasonably projected physical and economic operating conditions.
(3) “Geothermal project” means the integrated operation involving the right to develop and/or produce proved reserves, the delivery systems, the energy conversion plant(s), and all associated supporting assets or holdings.
(4) “Energy Conversion Plant” means a facility designed to convert geothermal energy to a useful application or transportable energy form.
(5) “Exploration” means searching for and determining the location, quantity, nature, and quality of proved reserves.
(6) “Development” means preparing geothermal energy for production, including the process of securing the necessary approvals from government agencies and the construction of improvements and improvements to land necessary to begin the production of proved reserves.
(7) “Production” means the removal of proved reserves from the earth for economic purposes after completion of construction and initial testing.
(d) VALUATION OF GEOTHERMAL PROPERTIES PRIOR TO PRODUCTION
(1) Exploration
The right to explore for geothermal energy is taxable to the extent it has value separate from the rights to develop and produce any discovered proved reserves. The right to explore shall be valued by any appropriate method or methods as prescribed in Section 3 of Title 18 of this code taking into consideration appropriate risks; however, in no event shall the right be considered to be under construction.
(A) While the construction of improvements or physical alterations to land, e.g., access roads, fencing, drill pad preparation, drainage or water systems, land clearing, etc., during exploration constitutes assessable new construction (subject to the provisions of Section 463 of Title 18 of this code), it does not add to or diminish the value of the right to explore.
(B) Costs associated with obtaining government approval related to new construction shall be considered when valuing new construction. Costs associated with obtaining government approval to operate, (e.g., expenditures for zoning variances, environmental impact studies, and operating permits) and costs of drilling and testing exploratory wells, and performing seismic surveys, shall not be considered for purposes of valuing the right to explore. These latter elements of cost may appear in the value of the right to produce when production starts.
(C) Once the base year value of the right to explore is determined and enrolled, it shall not be changed except to reflect diminution in value from all causes as well as any increase in value resulting from the annual rate of inflation as prescribed by Section 460 of Title 18 of this code, or to reflect a change in ownership, or as provided in subdivision (f) of this rule.
(2) Development
(A) Although the right to develop and the right to produce proved reserves are separate rights, the value of the right to develop is virtually unascertainable separate from the right to produce. Therefore, no separate value shall be established for the right to develop. Any value attributable thereto shall be deemed to be included in the base year value of the right to produce proved reserves established in accordance with subsection (e) of this rule. In no event shall the right to develop or produce proved reserves be treated as being under construction.
(B) Whether the construction of improvements or alteration to land during development qualifies as new construction shall be determined by reference to Sections 463 and 463.5 of Title 18 of this code and Section 70 and following of the Revenue and Taxation Code.
(C) If there is a change in ownership during development, the base year value of the right to produce proved reserves shall be established as of the date of the change in ownership. Increases and decreases in the quantity of proved reserves following a change in ownership shall be assessed in accordance with subsection (e) of this rule.
(e) VALUATION OF GEOTHERMAL PROPERTIES DURING PRODUCTION
(1) The base year value of the right to produce proved reserves shall be established as of March 1, 1975, or thereafter, when such right undergoes a change in ownership. If there is no change in ownership of the right to produce during development, then the base year value of the right to produce proved reserves shall be established as of the date production commences after completion of construction and initial testing. The market value of such rights is determined by valuing the estimated quantity of proved reserves that can reasonably be expected to be produced during the time period these rights are exercisable.
(A) The valuation of the proved reserves shall be based on present and reasonably projected economic conditions (e.g., capitalization rates, product prices, operating expenses, and future capital expenditures required to maintain the income stream, etc.) normally considered by knowledgeable and informed people engaged in operating, buying, or selling geothermal properties or marketing the production therefrom.
(B) While the assessor has full discretion to select the appropriate appraisal method, the income approach will generally be the most relevant appraisal method employed in establishing a value for the total property.
(2)(A) Increases in proved reserves that occur following establishment of the base year value of the right to produce proved reserves and that are caused by changed physical, technological, or economic conditions constitute additions to the right to produce which have not been assessed and which shall be assessed on the regular roll as of the lien date following the date they become proved reserves. The increased quantity of proved reserves shall be used to establish the value of the addition to the property interest, which value shall be added to the adjusted base year value of the proved reserves remaining from prior years as the separate base year value of the addition.
(B) Reduction in recoverable amounts of proved reserves caused by production or changed physical, technological, or economic conditions, or a change in the expectation of future production capabilities, constitute reductions in the value of the right to produce and shall correspondingly reduce the adjusted base year value on the subsequent lien date.
(3) The valuation of the new construction of wells (including, but not limited to replacement wells), and improvements shall be in accordance with this Section and Sections 463 and 463.5 of Title 18 of this code.
(4) Value Calculation
(A) The base year value or the adjusted base year value of the right to produce as quantified by proved reserves for the current year's lien date shall be calculated as follows:
1. Estimate the market value of the total property and estimate the quantity of proved reserves that may reasonably be expected to be consumed, using current market data. (The quantity of proved reserves may be converted to units appropriate for the project being valued, such as megawatt hours of electrical energy, British Thermal Units, pounds of steam, etc.)
2. Estimate the current value of proved reserves by segregating the value of land (other than proved reserves), improvements to land constructed during the exploration, development and production stages (e.g., roads, drill pads, energy delivery systems, drainage channels, etc.), and other improvements and personal property from the unit value by an allocation based on the current market value of the component parts.
3. Estimate the quantity of additions to proved reserves by subtracting the prior year's proved reserves, less depletion, from the estimated current proved reserves.
4. Estimate the value of proved reserves removed (depletion) by multiplying the quantity of the proved reserves removed in the prior year by the weighted average value, for proved reserves only, per unit of proved reserves for all prior base years. The adjusted base year value of the proved reserves remaining from prior years shall be found by subtracting the value of removed proved reserves from the prior year's adjusted base year value.
5. Value the additions to proved reserves by multiplying the quantity of proved reserves found in 3. above by the current market value per unit of total proved reserves, calculated using the values found in 1. and 2., above.
6. The current adjusted base year value for proved reserves only is the value of the prior year's proved reserves, less the depletion calculated in 4. above, factored for inflation as prescribed by Section 460 of Title 18 of this code, and added to the value of the new proved reserves, as calculated in 5. above.
(B) The base year value or adjusted base year value of land (other than the mineral rights) and improvements for the current year's lien date shall be calculated as follows:
1. Determine adjusted base year value of land, improvements to land constructed during the exploration, development, and production stages (including roads, drill pads, energy delivery systems, drainage channels, etc.), and other improvements in accordance with Sections 51 and 110.1 of the Revenue and Taxation Code.
2. Add the current market value of any construction in progress on the lien date.
(C) Declines in the value of the mineral property shall be recognized when the market value of the appraisal unit, (i.e., land, improvements including fixtures, and proved reserves), is less than the current adjusted base year value of the same unit.
(f) TAXABLE VALUE OF THE RIGHT TO PRODUCE
Unless the value of the right to produce was established on March 1, 1975 or when such right changed ownership, it shall be established as of the date that production of proved reserves commences and the value shall be placed on the roll as provided by law. When the value of the right to produce proved reserves is enrolled, the roll value of the exploration rights for the same proved reserves shall be reduced to zero.
NOTE

Authority cited: Section 15606, Government Code. Reference: California Constitution, Article XIII, Section 1; California Constitution, Article XIIIA, Section 2; Sections 51 and 110.1, Revenue and Taxation Code; and Phillips Petroleum Co. v. County of Lake (1993) 15 Cal.App.4th 180.
HISTORY

1. New section filed 10-6-95; operative 11-5-95 (Register 95, No. 40).
2. Editorial correction of subsection (e)(4)(A)6. (Register 2001, No. 23).
3. Change without regulatory effect amending subsection (e)(4)(B)1. filed 6-6-2001 pursuant to section 100, title 1, California Code of Regulations (Register 2001, No. 23).
§474. Petroleum Refining Properties.
Note     •     History

(a) The provisions of this rule apply to the valuation of the real property, personal property, and fixtures used for the refining of petroleum. 
(b) General.
(1) The unique nature of property used for the refining of petroleum requires the application of specialized appraisal techniques designed to satisfy the requirements of article XIII, section 1, and article XIII A, section 2, of the California Constitution. To this end, petroleum refineries and other real and personal property associated therewith shall be valued pursuant to the principles and procedures set forth in this section. 
(2) Notwithstanding any other provision in this section, any appropriate valuation method described in section 3 of title 18 of this code may be applied in the event of a change in ownership in a petroleum refining property. 
(c) Definitions. For the purposes of this section:
(1) “Petroleum refining property” means any industrial plant, including real property, personal property, and fixtures, used for the refining of petroleum, as identified in Standard Industrial Classification (SIC) System Codes 2911 and 2992, or North American Industry Classification System (NAICS) Codes 32411 and 324191. 
(2) “Appraisal unit” consists of the real and personal property that persons in the marketplace commonly buy and sell as a unit. 
(d) Declines in Value. For the purposes of this section:
(1) Declines in value of petroleum refining properties will be determined by comparing the current lien date full value of the appraisal unit to the indexed base year full value of the same unit. 
(2) The land, improvements, and fixtures and other machinery and equipment classified as improvements for a petroleum refining property are rebuttably presumed to constitute a single appraisal unit, except when measuring declines in value caused by disaster, in which case land shall constitute a separate unit. 
(3) In rebutting this presumption, the assessor may consider evidence that: 
(A) The land and improvements including fixtures and other machinery and equipment classified as improvements are not under common ownership or control and do not typically transfer in the marketplace as one economic unit; or, 
(B) When the fixtures and other machinery and equipment classified as improvements are not functionally and physically integrated with the realty and do not operate together as one economic unit.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Article XIII Section 1, and Article XIII A, Section 2, California Constitution; and Sections 51 and 110.1, Revenue and Taxation Code. 
HISTORY

1. New section filed 11-8-2007; operative 12-8-2007 (Register 2007, No. 45).
Chapter 6. Collection
Article 1. Tax Bills
§601. Penalties; Form and Manner of Entry. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. Reference: Chap. 147, Stats. 1966, 1st Extra Session and 505, 533 and 615, Revenue and Taxation Code.
HISTORY

1. Repealer of Subchapter 6, Article 1 (Section 601) filed 12-19-67 as an emergency; effective upon filing (Register 67, No. 51). For prior history, see Register 66, No. 41.
2. Certificate of Compliance filed 2-13-68 (Register 68, No. 7).
Chapter 9. State Assessees
Article 1. General Provisions
§901. Property Statement.
Note     •     History

The property statement pertaining to state-assessed property provided for in Section 826 of the Revenue and Taxation Code shall be filed with the board between the lien date and 5 p.m. on March 1; provided that, on a showing of good cause and pursuant to a request made prior to March 1, the due date may be extended by the board for a period not exceeding 30 days.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections  826, 830, Revenue and Taxation Code and 15620, Government Code.
HISTORY

1. New Subchapter 9 (Section 901) filed 10-10-68 as an emergency; effective upon filing. Certificate of Compliance included (Register 68, No. 38).
2. Amendment of Note filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
3. Change without regulatory effect amending section and Note filed 12-19-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 51).
§901.5. Board Schedule.
Note     •     History

No later than November 30 each year the Executive Director shall provide to the Board a proposed schedule of dates that will govern the actions to be taken pursuant to sections 902 through 905 for the following calendar year. On Board approval, but no later than January 30 next following, the Executive Director shall inform all state assesses of the schedule adopted by the Board.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Sections 721, 731, 732, 741, 742, 743, 744, 747, 748, 749, 11338, 11339 and 11353, Revenue and Taxation Code.
HISTORY

1. New section filed 2-23-79; effective thirtieth day thereafter (Register 79, No. 8).
2. Change without regulatory effect filed 7-13-88 pursuant to Section 100, Title 1, California Code of Regulations (Register 88, No. 30).
3. Amendment of Note filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
§902. Unitary Property Value Indicators and Staff Discussions.
Note     •     History

Each year the Valuation Division shall make capitalization rate studies and develop value indicators applicable to the unitary property of each state assessee. A copy of the appropriate capitalization rate study and a summary of the calculations of the value indicators shall be provided by the Chief, Valuation Division, to the affected assessee on request. The assessee shall be informed that the staff will be available to discuss the data supplied.
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 721, Revenue and Taxation Code.
HISTORY

1. New section filed 1-9-76; effective thirtieth day thereafter (Register 76, No. 2).
2. Editorial correction of NOTE filed 4-19-83 (Register 83, No. 16).
3. Amendment of Note filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
§903. Discussion with Board of Unitary Property Value Indicators.
Note     •     History

State assessees will, at the discretion of the Board, be afforded an opportunity to discuss the value of their unitary property at a public meeting. The discussion may relate to any information bearing on the value of the property as well as the staff-calculated value indicators. For the purposes of this discussion, the staff will not be required to provide value recommendations.
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 721, Revenue and Taxation Code.
HISTORY

1. New section filed 1-9-76; effective thirtieth day thereafter (Register 76, No. 2).
2. Editorial correction of NOTE filed 4-19-83 (Register 83, No. 16).
3. Amendment of Note filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
§904. Unitary and Nonunitary Property Value Determinations and Petitions for Reassessment.
Note     •     History

(a) As soon as practical, the staff shall transmit unitary-value recommendations to the Board. Following this, but no later than May 31 each year, the Board will make and publicly announce individual value determinations. The Chief of the Valuation Division shall notify the state assessees of the values determined by the Board and the fact that a petition for reassessment of the unitary property must be filed, if at all, not later then July 20 of the year of the notice. The notice shall be accompanied by a copy of an appraisal data sheet containing the staff value indicators and value recommendation to the Board.
(b) On or before the last day of July, the Chief of the Valuation Division shall notify the state assessees of the values of nonunitary property. This notice shall inform the assessees that a petition for reassessment of nonunitary property must be filed, if at all, not later than September 20 of the year of the notice.
(c) On or before June 15, the Chief of the Valuation Division shall transmit notices of allocated assessed unitary values to each assessee. This notice will inform each assessee that a petition for a correction of an allocated assessment must be filed, if at all,  no later than July 20 of the year of the notice.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 731, 732, and 746, Revenue and Taxation Code.
HISTORY

1. New section filed 1-9-76; effective thirtieth day thereafter (Register 76, No. 2).
2. Amendment filed 7-7-78; effective thirtieth day thereafter (Register 78, No. 27).
3. Amendment filed 1-11-83; effective thirtieth day thereafter (Register 83, No. 3).
4. Editorial correction of NOTE filed 4-19-83 (Register 83, No. 16).
5. Amendment of subsections (a), (b) and (c) filed 6-21-90; operative 7-21-90 (Register 90, No. 33).
6. Amendment of Note filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
7. Change without regulatory effect amending section filed 1-15-2003 pursuant to section 100, title 1, California Code of Regulations (Register 2003, No. 3).
§905. Assessment Electric Generation Facilities [This version effective through 12-30-2002].
Note     •     History

An electric generation facility shall be state assessed property for purposes of article XIII, section 19 of the California Constitution if: (1) the facility was constructed pursuant to a certificate of public convenience and necessity issued by the California Public Utilities Commission to the company that presently owns the facility; or, (2) the company owning the facility is a state assessee for reasons other than its ownership of the generation facility or its ownership of pipelines, flumes, canals, ditches, or aqueducts lying within two or more counties.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: California Constitution, article XIII, section 19; and Section 721, Revenue and Taxation Code.
HISTORY

1. New section filed 10-28-99; operative 11-27-99 (Register 99, No. 44). For prior history, see Register 96, No. 1. Text of version effective through 12-30-2002 retained for reference.
§905. Assessment of Electric Generation Facilities [This version effective 12-31-2002].
Note     •     History

(a) Commencing with the assessment for the lien date for the 2003 assessment year, an electric generation facility shall be state assessed property for purposes of article XIII, section 19 of the California Constitution if: (1) the facility has a generating capacity of 50 megawatts or more; and (2) is owned or used by a company which is an electrical corporation as defined in subdivisions (a) and (b) of section 218 of the Public Utilities Code; or, the facility is owned or used by a company which is a state assessee for reasons other than its ownership of the electric generation facility or its ownership of pipelines, flumes, canals, ditches, or aqueducts lying within two or more counties.
(b) “Electric generation facility” does not include a qualifying small power production facility or a qualifying cogeneration facility within the meaning of Sections 201 and 210 of Title II of the Public Utility Regulatory Policies Act of 1978 (16 U.S.C. §§796(17), (18) and 824a-3) and the regulations adopted for those sections under that act by the Federal Energy Regulatory Commission (18 C.F.R. 292.101-292.602).
(c) For purposes of this section, “company” means:
(1) A person as defined in Revenue and Taxation Code section 19;
(2) A separate division or other functional unit of a business enterprise which is created and maintained to operate any electric generation facility, where the business enterprise is engaged in a primary business other than generating, transmitting, distributing or selling electricity to the public.
(d) If an electric generation facility is operated by a separate division or other functional unit of a business enterprise, as described in this rule, the business enterprise must maintain accounting and other records sufficient to distinguish the costs and revenues of the separate division or unit from other divisions and units of the business enterprise.
(e) As adopted on September 1, 1999 and effective November 27, 1999, this rule is applicable to define electric generation facilities subject to state assessment to and including December 30, 2002. As amended on November 28, 2001, and filed with the Secretary of State on May 14, 2002, this rule is applicable to define electric generation facilities subject to state assessment as of December 31, 2002 and thereafter.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: California Constitution, article XIII, section 19; and Sections 118, 721 and 722.5, Revenue and Taxation Code.
HISTORY

1. New section filed 10-28-99; operative 11-27-99 (Register 99, No. 44). For prior history, see Register 96, No. 1.  
2. Amendment of section heading, section and Note filed 5-14-2002; operative 6-13-2002 (Register 2002, No. 20). 
§906. Filing of Petitions. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. References: Sections 731, 732, 741, 742, 743, 744, 747, 748, 749, 11338, 11339, and 11353, Revenue and Taxation Code.
HISTORY

1. New section filed 1-9-76; effective thirtieth day thereafter (Register 76, No. 2).
2. Repealer and new section filed 2-23-79; effective thirtieth day thereafter (Register 79, No. 8).
3. Change without regulatory effect filed 7-13-88 pursuant to Section 100, Title 1, California Code of Regulations (Register 88, No. 30).
4. Change without regulatory effect amending section filed 1-27-94 pursuant to section 100, title 1, California Code of Regulations (Register 94, No. 4).
5. Repealer filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
§907. Timeliness. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606(c), Government Code. References: Sections 731, 732, 741, 742, 743, 744, 747, 748, 749, 11338, 11339, and 11353, Revenue and Taxation Code.
HISTORY

1. New section filed 2-23-79; effective thirtieth day thereafter (Register 79, No. 8).
2. Repealer filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
§908. Oral Hearing: Waiver. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606(c), Government Code. References: Sections 731, 732, 741, 742, 743, 744, 747, 748, 749, 11338, 11339, and 11353, Revenue and Taxation Code.
HISTORY

1. New section filed 2-23-79; effective thirtieth day thereafter (Register 79, No. 8).
2. Repealer filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
§909. Scope of Hearing. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606(c), Government Code. References: Sections 731, 732, 741, 742, 743, 744, 747, 748, 749, 11338, 11339, and 11353, Revenue and Taxation Code.
HISTORY

1. New section filed 2-23-79; effective thirtieth day thereafter (Register 79, No. 8).
2. Repealer filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
§910. Place of Hearing: Time Allowed. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606(c), Government Code. References: Sections 731, 732, 741, 742, 743, 744, 747, 748, 749, 11338, 11339, and 11353, Revenue and Taxation Code.
HISTORY

1. New section filed 2-23-79; effective thirtieth day thereafter (Register 79, No. 8).
2. Amendment filed 6-7-79 as procedural and organizational; effective upon filing (Register 79, No. 23).
3. Repealer filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
§911. Hearing Procedure. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606(c), Government Code. References: Sections 731, 732, 741, 742, 743, 744, 747, 748, 749, 11338, 11339, and 11353, Revenue and Taxation Code.
HISTORY

1. New section filed 2-23-79; effective thirtieth day thereafter (Register 79, No. 8).
2. Repealer filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
§912. Examination of Petitioner. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606(c), Government Code. References: Sections 731, 732, 741, 742, 743, 744, 747, 748, 749, 11338, 11339, and 11353, Revenue and Taxation Code.
HISTORY

1. New section filed 2-23-79; effective thirtieth day thereafter (Register 79, No. 8).
2. Repealer filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
§913. Evidence. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606(c), Government Code. References: Sections 731, 732, 741, 742, 743, 744, 747, 748, 749, 11338, 11339, and 11353, Revenue and Taxation Code.
HISTORY

1. New section filed 2-23-79; effective thirtieth day thereafter (Register 79, No. 8).
2. Repealer filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
§914. Burden of Proof. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606(c), Government Code. References: Sections 731, 732, 741, 742, 743, 744, 747, 748, 749, 11338, 11339, and 11353, Revenue and Taxation Code.
HISTORY

1. New section filed 2-23-79; effective thirtieth day thereafter (Register 79, No. 8).
2. Repealer filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
§915. Decision. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606(c), Government Code. References: Sections 731, 732, 741, 742, 743, 744, 747, 748, 749, 11338, 11339, and 11353, Revenue and Taxation Code.
HISTORY

1. New section filed 2-23-79; effective thirtieth day thereafter (Register 79, No. 8).
2. Repealer filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
§916. Reconsideration and Rehearing. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606(c), Government Code. References: Sections 731, 732, 741, 742, 743, 744, 747, 748, 749, 11338, 11339, and 11353, Revenue and Taxation Code.
HISTORY

1. New section filed 2-23-79; effective thirtieth day thereafter (Register 79, No. 8).
2. Repealer filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 96, No. 1).
Chapter 10. Private Car Tax

(Originally Printed 12-4-48)
Article 1. General Provisions
§1001. Annual Report.
Note     •     History

The report required by Section 11271 of the Revenue and Taxation Code of all persons whose private railroad cars are operated upon the railroads in this State at any time during a calendar year shall be filed on or before the thirtieth day of April of the following year.
NOTE

Authority cited: Section 15606(a), Government Code. Reference: Section 11271, Revenue and Taxation Code.
HISTORY

1. Filed 12-13-45 (Register 14, No. 6).
2. Renumbered from Section 2300, Subchapter 5, Chapter 2; filed 3-29-68; effective thirtieth day thereafter (Register 68, No. 13).
3. Amendment of NOTE filed 10-6-77; effective thirtieth day thereafter (Register 77, No. 44).
4. Amendment filed 3-30-79 as an emergency; effective upon filing (Register 79, No. 13).
5. Certificate of Compliance filed 7-12-79 (Register 79, No. 28).
§1002. Petitions for Reassessment, Private Railroad Cars. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606(c), Government Code. Reference: Sections 11338, 11339, 11340 and 11353, Revenue and Taxation Code.
HISTORY

1. New section filed 2-23-79; effective thirtieth day thereafter (Register 79, No. 8).
2. Amendment filed 1-11-83; effective thirtieth day thereafter (Register 83, No. 3).
3. Repealer filed 12-29-95; operative 12-31-95 pursuant to Government Code section 11343.4(d) (Register 95, No. 52).
4. Change without regulatory effect striking out repealed text filed 2-6-97 (Register 97, No. 6).
§1003. Missing Private Railroad Car Count Data.
Note     •     History

In determining the private railroad car count averages required by statute the Board may substitute for missing border crossing information the average length of stay in the state experienced by private railroad cars of the same class and assessee during the calendar year immediately preceding the year in which the tax is imposed. Border crossing information shall be deemed missing only when it cannot be submitted by the assessee.
NOTE

Authority cited: Section 15606(a), Government Code. Reference: Section 11293, Revenue & Taxation Code.
HISTORY

1. New section filed 3-30-79 as an emergency; effective upon filing (Register 79, No. 13).
2. Certificate of Compliance filed 7-12-79 (Register 79, No. 28).
§1004. Innocent Spouse or Registered Domestic Partner Relief from Liability.
Note     •     History

A spouse or registered domestic partner claiming relief from liability for the private railroad car tax, interest, penalties, and other amounts shall be relieved from such liability where all the requirements set forth in California Code of Regulations, title 18, section 4903 are met.
NOTE

Authority cited: Section 11651, Revenue and Taxation Code. Reference: Sections 11408.5 and 11551-11555, Revenue and Taxation Code; and Sections 297, 297.5 and 308, Family Code.
HISTORY

1. New section filed 5-18-2010; operative 6-17-2010 (Register 2010, No. 21).
Chapter 11. Timber Yield Tax
Article 1. Valuation of Timberland and Timber
§1020. Timber Value Areas.
Note     •     History

The following nine designated areas contain timber having similar growing, harvesting and marketing conditions and shall be used as timber value areas in the preparation and application of immediate harvest values:

Area 1
Del Norte County
Humboldt County

Area 2
Marin County
Mendocino County
Napa County
Sonoma County

Area 3
Alameda County
Contra Costa County
Monterey County
San Francisco City and County
San Mateo County
Santa Clara County
Santa Cruz County

Area 4
Colusa County
Glenn County
Lake County
Shasta County west of Interstate Highway No. 5
Solano County
Siskiyou County west of Interstate Highway No. 5
Tehama County east of Interstate Highway No. 5
Trinity County
Yolo County

Area 5
Shasta County east of Interstate Highway No. 5
Siskiyou County east of Interstate Highway No. 5

Area 6
Lassen County
Modoc County

Area 7
Butte County
Nevada County
Placer County
Plumas County
Sierra County
Sutter County
Tehama County east of Interstate Highway No. 5
Yuba County

Area 8
Alpine County
Amador County
Calaveras County
El Dorado County
Sacramento County
San Joaquin County
Stanislaus County
Tuolumne County

Area 9
Fresno County
Imperial County
Inyo County
Kern County
Kings County
Los Angeles County
Madera County
Mariposa County
Merced County
Mono County
Orange County
Riverside County
San Benito County
San Bernardino County
San Diego County
San Luis Obispo County
Santa Barbara County
Tulare County
Ventura County
NOTE

Authority cited: Sections 38204 and 38701, Revenue and Taxation Code. Reference: Sections 38109 and 38204, Revenue and Taxation Code.
HISTORY

1. Renumbering of Subchapter 11 (Sections 1040-1051, not consecutive) to Subchapter 12, and new Subchapter 11 (Sections 1020 to 1024, not consecutive) filed 11-19-76; designated effective 1-1-77 (Register 76, No. 47).
2. Amendment filed 2-1-77 as an emergency; effective upon filing. Certificate of Compliance included (Register 77, No. 6).
3. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
4. Amendment of section and Note filed 10-18-2010; operative 11-17-2010 (Register 2010, No. 43).
§1021. Timberland Grading Rule.
Note     •     History

(a) General. Beginning with the 1977-78 fiscal year, privately owned land and land acquired for state forest purposes which is primarily devoted to and used for growing and harvesting timber and is zoned for a minimum 10-year period as timberland production zone (TPZ) will be valued for property taxation on the basis of its use for growing and harvesting timber, plus the value, if any, attributable to existing, compatible, nonexclusive uses of the land. 
(b) Site Quality. Timberland is rated for productivity based upon its ability to produce wood growth on trees. Five general site classes are established wherein Site I denotes areas of highest productivity, Site II and Site III denote areas of intermediate productivity, and Site IV and Site V denote areas of lowest productivity. The five site quality classes are set forth within each of three general forest types: redwood, Douglas fir, and mixed conifers.
Land zoned as timberland production zone (TPZ) shall be graded by the assessor using the following site classification table as a measure of land productivity. 

View Graphic

YOUNG-GROWTH REDWOOD
Site index based on average height of dominant trees at breast height age of 100 years. Use in young-growth redwood stands in which more than 20 percent of the stand by basal area is redwood and when sufficient dominant redwood trees are available to determine site index.

DOUGLAS FIR
Site index based on average height of dominant trees at age 100 years. Use in young-growth redwood stands in which 20 percent or less of the stand by basal area is redwood or when sufficient dominant redwood trees are not available to determine site index. Use also in old-growth redwood stands. In such cases, measure Douglas fir trees for determining site index. Also use for Sitka spruce, grand fir, hemlock, bishop's pine, and Monterey pine stands. 

PONDEROSA PINE, JEFFREY PINE, MIXED CONIFER, 
AND TRUE FIR
Site index based on average height of dominant trees at age 100 and 300 years. Use also for lodgepole pine stands. For old-growth stands, use height of dominants at age 300 years.
(c) Operability. Timberland shall be rated for operability based upon such factors as accessibility, topography, and legislative or administrative restraints. On or before December 31, 1979, two classes of operability shall be used by the assessor and designated as operable or inoperable. Areas of inoperable land must be identified by the assessor. For the purpose of land site classification, inoperable means that any of the following circumstances are applicable:
(1) Extreme physical barriers prevent access.
(2) Legal or administrative restraints prevent access or harvest.
(3) Rocky ground, steep slopes, or sterile soil prevent growing or harvesting merchantable timber.
NOTE

Authority cited: Section 15606, Government Code; Section 38701, Revenue and Taxation Code. Reference: Sections 434.1 and 38204, Revenue and Taxation Code.
HISTORY

1. New section filed 2-1-77; effective thirtieth day thereafter (Register 77, No. 6).
2. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
3. Amendment filed 9-7-83; effective thirtieth day thereafter (Register 83, No. 37).
§1022. Standard Unit of Measure.
Note     •     History

(a) General. In determining quantities of timber for purposes of the timber yield tax the Scribner Decimal C Log Rule based on a maximum scaling length of 20 (Scribner Decimal C (short log) Scale) feet shall be used as the standard board foot log rule for timber that is measurable by the net board foot method. This standard board foot log rule for such timber is to be used in all instances, except that in those rare instances when circumstances preclude the use of this standard board foot log rule for such timber, conversion factors as specified herein shall be employed for reporting harvested timber originally scaled using other than the standard board foot log rule.
Timber that is not normally scaled by the net board foot method shall be measured using the unit commonly employed by those dealing the wood products to which the timber is to be converted, e.g.

Intended wood product 	Measurement Unit

Fuel Wood 	 Cord

Christmas trees, poles 	 Lineal foot
 and pilings

Chip wood 	 Gross scale of

	 usable wood
(b) Definitions. When used in this section the terms board foot and board foot log rule shall have the following meaning:
(1) Board foot--a solid piece of wood, 12 inches wide, 12 inches long and 1 inch thick.
2) Board foot log rule--a method for estimating the volume in board feet of a log with a known diameter and length.
(c) Conversion Factors. When board foot volumes are not scaled using the standard board foot log rule the following factors shall be used to convert the scale employed to the standard scale.
(1) The Humboldt Log Scale shall be converted to gross Scribner Decimal C (Short Log) Scale by the application of a multiplier factor of 1.45. The actual defect in board feet as determined by the difference between that scale and the mill tally records shall be deducted from the gross Scribner scale. Until January 1, 1978, the Humboldt Log Scale when applied to old growth redwood shall be converted to net Scribner Decimal C (Short Log) Scale by the application of a multiplier factor of 1.15.
(2) The Spaulding Log Scale (Short Log) shall be converted to Scribner Decimal C (Short Log) Scale by the application of a multiplier factor of 1.02.
(3) When logs harvested in California are scaled outside California, and only when circumstances preclude the use of the Scribner Decimal C Log Rule based on a maximum scaling length of 20 feet (Scribner Decimal C (Short Log) Scale), the Scribner Decimal C Log Rule volumes attributable to long log scaling shall be converted to Scribner Decimal C (Short Log) Scale by the application of a multiplier factor of 1.20.
NOTE

Authority cited: Section 15606, Government Code; Sections 38109, 38204, and 38701, Revenue and Taxation Code. Reference: Sections 38109 and 38204, Revenue and Taxation Code.
HISTORY

1. Amendment filed 12-1-80; effective thirtieth day thereafter (Register 80, No. 49).
§1023. Immediate Harvest Value.
Note     •     History

(a) Definitions. Immediate harvest value is the amount that each species or subclassification of timber would sell for on the stump at a voluntary sale made in the ordinary course of business for purposes of immediate harvest. Such value shall be expressed to the nearest dollar per standard unit of measure applicable pursuant to Rule No. 1022, except that the immediate harvest value of Christmas trees shall be the sale price of such trees in quantities of 100 or more in the market area nearest to the place where the trees are cut and adjusted to reflect the value of the trees immediately prior to severance.
Timber value areas are those areas containing timber having similar growing, harvesting, and marketing conditions.
Harvest value is the immediate harvest value in a timber value area as of the first day of the period specified by the applicable harvest value schedule.
“Timber at similar locations” means timber in an area of comparable elevation and topography, and subject to comparable logging conditions and accessibility to the point of conversion.
(b) Harvest Value Schedules. The timber owner shall determine the taxable value of the timber harvested for each harvest operation by the use of the Board harvest value schedule applicable to the tax reporting period.
The harvest value schedules adopted by the Board provide estimates of harvest values by considering gross proceeds from sales on the stump of similar timber of like quality and character at similar locations, or gross proceeds from sales of logs, or of finished products, adjusted to reflect only the portion of such proceeds attributable to value on the stump immediately prior to harvest, or a combination of both. Allowance is made for differences in age, size, quality, cost of removal, accessibility to point of conversion, market conditions, and other relevant factors.
Each value schedule provides harvest values for a timber value area taking into account species and average tree or log size. Appropriate allowances for costs of removal have been calculated by consideration of the most common logging systems used within the area, the actual methods of harvesting the timber, the volume per acre, the total volume removed per harvest operation, the typical haul range distances to a conversion point and any excessive required costs of removal.
(c) Damaged Timber. The Board, either on its own motion after consultation with the Timber Advisory Committee or in response to an application from a timber owner may specify a modification of immediate harvest value to reflect material changes in timber values that result from fire, blowdown, ice storm, flood, disease, insect damage, or other cause, for any area in which damaged timber is located. Whenever a timber owner uses such modified immediate harvest values for reporting damaged timber, he shall maintain appropriate accounting records as specified by the Board.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 434.1, 38701, and 38204, Revenue and Taxation Code.
HISTORY

1. New section filed 2-1-77; effective thirtieth day thereafter (Register 77, No. 6).
2. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
3. Change without regulatory effect amending subsection (c) filed 6-24-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 26).
§1024. Exempt Timber.
Note     •     History

(a) General. There is exempt from timber yield tax timber whose immediate harvest value is so low that, if not exempt, the tax on the timber would amount to less than the cost of administering and collecting the tax.
(b) Exempt Harvest. Timber, removed from a timber harvest operation whose immediate harvest value does not exceed $3,000 within a quarter, is exempt from timber yield tax pursuant to the authority granted by section 38116 of the Revenue and Taxation Code. For the purpose of this rule, immediate harvest value shall be that value described in sections 38109 and 38204 of the Revenue and Taxation Code, and in Rule 1023. The Board harvest value schedule applicable to the tax reporting period at the time of harvest shall define the timber harvest operation, and shall be the basis for determining the immediate harvest value thereof.
(c) Nothing in this rule shall authorize the exemption of timber whose immediate harvest value exceeds $3,000.
NOTE

Authority cited: Section 15606(c), Government Code. Reference: Section 38116, Revenue and Taxation Code.
HISTORY

1. New section filed 3-9-99; operative 4-8-99 (Register 99, No. 11). For prior history, see Register 83, No. 37.
§1025. Value of Timberland. [Repealed]
Note     •     History

NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 434 and 434.5, Revenue and Taxation Code.
HISTORY

1. New section filed 1-18-80; effective thirtieth day thereafter (Register 80, No. 3).
2. Amendment filed 4-5-82; effective upon filing pursuant to Government Code Section 11346.2(d) (Register 82, No. 15).
3. Amendment filed 2-15-83; designated effective 2-15-83 pursuant to Government Code Section 11346.2(d) (Register 83, No. 8).
4. Repealer filed 5-31-85; effective thirtieth day thereafter (Register 85, No. 22).
§1026. Timber Owner.
Note     •     History

Exempt person or agency. The timber yield tax is imposed not only on every timber owner who harvests his or her timber or causes it to be harvested but also on every timber owner of felled or downed timber who acquires title to such felled or downed timber in the state from a person or agency exempt from property taxation under the Constitution or laws of the United States or under the Constitution or laws of the State of California. In some instances, such timber owners may acquire title to felled or downed timber directly from the exempt person or agency. In other instances, however, such timber owners may acquire title to felled or downed timber from an exempt person or agency which itself has previously acquired title to the timber from another exempt person or agency.
Where timber owners of felled or downed timber have acquired title to the timber in the state from an exempt person or agency, “first person who acquires either the legal title or beneficial title to timber after it has been felled” means the first non-exempt person who acquires such title from an exempt person or agency, and such a person is a timber owner liable for applicable timber yield tax (e.g., where the person initially felling timber is exempt from property taxation and the person acquiring the felled timber is also exempt from property taxation, the first non-exempt person who thereafter acquires title to the felled timber is liable for applicable timber yield tax).
As used in Sections 38104 and 38115 of the Revenue and Taxation Code, “timber owner” does not include, however, any person who harvests timber, causes it to be harvested, or acquires title to felled or downed timber derived from Indian lands held in trust by the United States for an Indian Tribe or Band or for any Individual Indian member thereof; and no timber yield tax shall be imposed with respect to that timber upon any person who thereafter acquires title to the timber.
NOTE

Authority cited: Section 15606, Government Code; and Section 38701, Revenue and Taxation Code. Reference: Sections 38104, 38106 and 38115, Revenue and Taxation Code; Hoopa Valley Tribe v. Nevins, et al. (1989) 881 F.2d 657.
HISTORY

1. New section filed 12-1-80; effective thirtieth day thereafter (Register 80, No. 49).
2. Editorial correction of NOTE filed 9-6-83 (Register 83, No. 37).
3. Amendment of text and Note filed 8-13-92; operative 9-14-92 (Register 92, No. 33).
§1027. U. S. Forest Service Timber Volumes.
Note     •     History

(a) General. U. S. Forest Service timber sale contract holders shall report timber volumes harvested as hereinafter provided.
(b) Scaled Volume Billings. The Timber Sale Statement of Account (TSSA) is the basis for most U. S. Forest Service billing statements. Timber volumes shall be reported for the quarters reflected by the Timber Sale Statements of Account (e.g., April, May, and June, 1980 TSSA volumes shall be reported for the second quarter of 1980).
(c) Lump-Sum Billings. Timber volumes actually harvested, regardless of the volume purchased from, and billed for by the U. S. Forest Service, shall be reported for the quarters in which scaled. Timber sale contract holders must get and retain scaling data for such volumes.
(d) Other Methods of Reporting. Timber harvested pursuant to U. S. Forest Service timber sale contracts may be reported on a basis other than (b) or (c), above, only if a written description of the reporting basis to be used is submitted to and is authorized by the Timber Tax Division prior to the due date of the return and prior to reporting.
NOTE

Authority cited: Section 15606, Government Code; Sections 38108 and 38701, Revenue and Taxation Code. Reference: Sections 38108 and 38115, Revenue and Taxation Code.
HISTORY

1. New section filed 10-17-80; effective thirtieth day thereafter (Register 80, No. 42).
2. Editorial correction of NOTE filed 9-6-83 (Register 83, No. 37).
Article 2. Timber Yield Tax--Administration
§1031. Records.
Note     •     History

(a) General. Every timber owner, timberland owner, timber operator, and person harvesting timber for forest products purposes, shall keep adequate and complete records showing:
(1) Contractual or financial agreements relative to the ownership and harvest of timber for forest products.
(2) Harvest locations for logged timber.
(3) The basis for adjustments to harvest values.
These records shall include the books of account ordinarily maintained by the average prudent businessman engaged in the activity, together with all bills, receipts, invoices, scaling records, tapes, or other documents of original entry supporting the entries in the books of account as well as all schedules or working papers used in connection with the preparation of tax returns.
(b) Microfilm Records. Microfilm reproductions of general books of account, such as cash books, journals, voucher registers, ledgers, etc., are acceptable in lieu of original records, and microfilm reproductions of supporting data such as sales invoices, purchase invoices, credit memoranda, scale tickets, trip tickets, etc., are acceptable providing the following conditions are met:
(1) Appropriate facilities are provided for the preservation of the films for periods required under subparagraph (d).
(2) Microfilm rolls are indexed, cross-referenced, labeled to show beginning and ending numbers or beginning and ending alphabetical listing of documents included, and are systematically filed.
(3) The taxpayer agrees to provide transcriptions of any information contained on microfilm which may be required for purposes of verification of tax liability.
(4) Proper facilities are provided for the ready inspection and location of the particular records, including modern projectors for viewing and copying the records.
A posting reference must be on each invoice. Credit memoranda must carry a reference to the document evidencing the original transaction. Documents necessary to support a claimed adjustment for immediate harvest value, such as scaling tickets and trip records, must be maintained in an order by which they can be readily related to the harvesting for which the value adjustment is sought.
(c) Records Prepared by Automated Data Processing Systems. An ADP tax accounting system shall include a method of producing visible and legible records that will provide the necessary information for verification of the taxpayer's tax liability.
(1) Recorded or Reconstructible Data. ADP shall make possible the tracing of any transaction back to the original source or forward to a final total. If detail printouts are not made of transactions at the time they are processed, then the system must have the ability to reconstruct these transactions.
(2) General and Subsidiary Books of Account. A general ledger, with source references, shall be maintained to coincide with financial reports for tax reporting periods. Subsidiary ledgers used to support the general ledger accounts shall also be in printout form, or the system be capable of producing a printout for any appropriate calendar or fiscal period.
(3) Supporting Documents and Audit Trail. Records shall be kept in such a manner as to provide an audit trail that allows for ready identification of details underlying the summary accounting data. The system should be so designed that supporting documents, such as sales invoices, purchase invoices, scaling tickets, credit memoranda, etc., are readily available.
(4) Program Documentation. A description of the ADP portion of the accounting system shall be available. The statements and illustrations of the scope of operations should be sufficiently detailed to indicate, (a) the application being performed, (b) the procedures employed in each application (supported by flow charts, block diagrams or other satisfactory description of the input or output procedures), and (c) the controls used to insure accurate and reliable processing. Important changes, together with their effective dates, should be noted in order to preserve an accurate chronological record.
(d) Records Retention. All records pertaining to transactions subject to the timber yield tax must be preserved for a period of not less than four years unless the State Board of Equalization authorizes in writing their destruction within a lesser period.
(e) Examination of Records. All of the above-described records shall be made available for examination on request by the Board or its authorized representatives.
(f) Failure to Maintain Records. Failure to maintain and keep complete accurate records shall be considered evidence of negligence or intent to evade the tax and may result in penalties or other appropriate administrative action.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 434.1, 38701, and 38204, Revenue and Taxation Code.
HISTORY

1. New Article 2 (Section 1031) filed 2-1-77; effective thirtieth day thereafter (Register 77, No. 6).
2. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
§1032. Innocent Spouse or Registered Domestic Partner Relief from Liability.
Note     •     History

A spouse or registered domestic partner claiming relief from liability for the timber yield tax, interest, penalties, and other amounts shall be relieved from such liability where all the requirements set forth in California Code of Regulations, title 18, section 4903 are met.
NOTE

Authority cited: Section 38701, Revenue and Taxation Code. Reference: Sections 38454.5 and 38601-38607, Revenue and Taxation Code; and Sections 297, 297.5 and 308, Family Code.
HISTORY

1. New section filed 5-18-2010; operative 6-17-2010 (Register 2010, No. 21).
Chapter 12. Miscellaneous
§1042. Livestock Head-Day Tax: Administration. [Repealed]
Note     •     History

NOTE

Authority cited for Subchapter12: Section 15606, Government Code. Reference for Subchapter 12: Part 11 (Sec. 5501 et seq.) and Part 12 (Sec. 5701 et seq.) of Division 1, Revenue and Taxation Code.
HISTORY

1. Amendment of subsections (a) and (b) filed 11-1-72; effective thirtieth day thereafter (Register 72, No. 45). For prior history, see Register 71, No. 46.
2. Amendment of subsection (a) filed 10-27-73; effective thirtieth day thereafter (Register 73, No. 43).
3. Amendment of NOTE filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
4. Repealer filed 9-22-80; effective thirtieth day thereafter (Register 80, No. 39).
§1045. Administration of the Annual Racehorse Tax.
Note     •     History

(a) The annual tax imposed by section 5721 of the Revenue and Taxation Code on the privilege of breeding, training, caring for, or racing racehorses in this state shall be administered as provided herein.
(b) Submission of Forms for Board Approval. 
(1) Annually, on or before October 15, the assessor shall notify the board, on a form provided by the board:
(i) of the assessor's intent to reproduce (a) the Annual Racehorse Tax Return form BOE-571-J (8-03) and (b) the Annual Report of Boarded Racehorses form BOE-571-J1 (8-03) by a photocopy process from the current prototype forms and instructions distributed by the board for use for the succeeding reporting period; or
(ii) of the forms and/or instructions which the assessor will produce by means other than a photocopy of the prototype for use for that period; or
(iii) that the assessor will have no need for the forms. 
(2) When filing a notification that the assessor will use a form and/or instructions which the assessor will produce by means other than a photocopy of the prototype, the assessor shall submit to the board in duplicate for approval a draft copy of each form and/or instructions. The copies shall be submitted together with the board-prescribed property statement forms required to be submitted by Regulation 171 of this title. The provisions of Regulation 171 relative to arrangement and variation of content of such property statement forms shall also be applicable to these forms.
(c) Distribution of Forms and Retention of Reports. 
(1) Copies of the forms prescribed by the board for reporting the tax due and for reporting the names of persons whose racehorses are boarded with others shall be furnished by the assessor no later than December 15 prior to the calendar year in which the tax is due by mailing them to persons believed to be required to use them and by making them available at the assessor's office to any person requesting them.
(2) The assessor shall maintain a record of those persons believed to be liable for the annual racehorse tax to whom the assessor has furnished copies of the forms. A copy of the record shall be delivered to the tax collector within 10 days of the date when copies of the forms are furnished so that the tax collector can be cognizant of the taxpayers who can reasonably be expected to file returns.
(3) The assessor shall retain a copy of all tax returns filed by taxpayers for a period of five years from the date the returns became due. They shall be arranged or identified so as to indicate whether or not an audit is required under subsection (d) of this regulation.
(d) Audits. (1) The assessor shall audit the tax records relative to his or her county of any racehorse owner who, according to the assessor's records, had a gross tax liability (before addition of any penalties) that exceeds $4,000 for each of four consecutive calendar years. This audit shall be performed within five years of the date on which the annual racehorse tax first became due and shall include, but not be limited to, a comparison of the annual racehorse tax return with records maintained by the taxpayer. The assessor, when performing an audit pursuant to this regulation of a taxpayer's records of racehorses taxable at a home ranch or other business location, may also audit records of the same taxpayer pertaining to personal property and fixtures on property having tax situs at the same location.
(2) When an assessor schedules an audit of the records of any racehorse owner, whether as part of an audit required by section 469 of the Revenue and Taxation Code or independently thereof, the assessor shall advise the assessor of any other county in which racehorses of the taxpayer were taxable, as shown in the Annual Racehorse Tax Return or in any other source, of the date on which the audit will be performed. Upon completion of the audit, the assessor shall make that portion of the audit findings relevant to the annual racehorse tax available to the assessor of any other county in which racehorses of the taxpayer were taxable.
(3) On discovery that horses escaped taxation, the assessor shall determine whether they were subject to the annual racehorse tax, were subject to the property tax, or were exempt. If determined taxable, the assessor shall either provide the tax collector with copies of the audit workpapers so that a determination of additional racehorse tax due can be calculated, or enroll an ad valorem assessment of escaped personal property.
(e) Nothing herein shall be construed to prohibit the assessor from auditing the records of taxpayers for which audits are not required by this regulation.
NOTE

Authority cited: Section 15606, Government Code; and Section 5781, Revenue and Taxation Code. Reference: Section 15606, Government Code; and Sections 469, 5701, 5721, 5765, 5768, 5781 and 5790, Revenue and Taxation Code.
HISTORY

1. New section filed 11-1-72; effective thirtieth day thereafter (Register 72, No. 45).
2. Amendment of subsection (a) filed 10-26-73; effective thirtieth day thereafter (Register 73, No. 43).
3. Amendment of subsections (a)(3) and (c) filed 2-2-83; effective thirtieth day thereafter (Register 83, No. 6).
4. Amendment of section and Note filed 2-17-2005; operative 3-19-2005 (Register 2005, No. 7).
§1046. Horses Subject to Ad Valorem Taxation.
Note     •     History

A horse over three years of age, or over four years of age in the case of an Arabian horse, that, in the two previous calendar years, has neither participated in a horserace contest on which parimutuel wagering is permitted nor been used for breeding purposes in order to produce a racehorse eligible to participate in a horse race contest on which parimutuel wagering is permitted is not a racehorse within the meaning of part 12 of division 1 of the Revenue and Taxation Code. Any such horse is subject to ad valorem taxation unless otherwise exempt.
(a) A horse used for breeding purposes means a registered male animal that has serviced three or more registered females for the purpose of producing a racehorse during the two previous calendar years or a registered female animal that has been bred to a registered male for the purpose of producing a racehorse during the two previous calendar years.
(b) In order to qualify as a racehorse a horse must be registered or eligible to be registered with an agency recognized by the California Horse Racing Board. Agencies currently recognized are as follows:

Agency 	Breed

The Jockey Club 	 Thoroughbred

The American Quarter Horse Association 	 Quarter Horse

The United States Trotting Association 	 Standardbred

The Appaloosa Horse Club 	 Appaloosa Horse

The Arabian Horse Registry of America 	 Arabian Horse
NOTE

Authority cited: Section 15606, Government Code; and Section 5781, Revenue and Taxation Code. Reference: Sections 5703, 5710, 5711 and Part 12, Division 1, Revenue and Taxation Code; and Sections 19409, 19413.5, 19416, 19416.5 and 19416.7, Business and Professions Code.
HISTORY

1. New section filed 11-1-72; effective thirtieth day thereafter (Register 72, No. 45).
2. Amendment to subsection (b) filed 5-2-74; effective thirtieth day thereafter (Register 74, No. 18).
3. Amendment filed 8-27-87; operative 9-26-87 (Register 87, No. 35).
§1047. Proper Classification of Racehorses.
History

(a) If during the previous calendar year a racehorse subject to the tax imposed by section 5721 of the Revenue and Taxation Code falls into categories both as an animal used for breeding and as an active racehorse, the use producing the higher tax is controlling.
(b) If during the previous calendar year a stallion is used by the owner exclusively for purposes of servicing the owner's mares, the highest stud fee for such year shall be determined by reference to the highest stud fee charged by owners of comparable stallions on the open market.
HISTORY

1. New section filed 11-1-72; effective thirtieth day thereafter (Register 72, No. 45).
§1051. Extension of Time for Acts Required by Regulation.
Note     •     History

When any regulation of the board fixes the time for the performance of any act by the assessor, board of equalization, assessment appeals board or other board, officer, or employee of a county or local governmental entity, the time may be extended by the board or its secretary in the same manner and for the same periods as provided by Section 155 of the Revenue and Taxation Code for extension of a time fixed by statute.
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 155, Revenue and Taxation Code.
HISTORY

1. New Subchapter (Section 1051) filed 1-4-67 as procedural and organizational; effective upon filing (Register 67, No. 1).
2. Repealer of NOTE filed 10-27-77; effective thirtieth day thereafter (Register 77, No. 44).
3. Amendment filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
Division 2. State Board of Equalization--Business Taxes
Chapter 1. Motor Vehicle Fuel Tax

(Originally Printed 3-20-48)
§1100. Foreword. [Repealed]
Note     •     History

NOTE

§§ 1100 to 1177, inclusive, issued under the authority of Section 8251, Revenue and Taxation Code.
HISTORY

1. §§ 1100 to 1176, inclusive, filed 3-15-48 as an emergency (Register 11, No. 8).
2. Amendment filed 7-20-71 as procedural and organizational; effective upon filing (Register 71, No. 30).
3. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
Article 1. General Provisions and Definitions
§1101. Motor Vehicle Fuel.
Note     •     History

(a) “Motor vehicle fuel” includes aviation gasoline, gasohol, finished gasoline, gasoline, gasoline blendstocks, and blended motor vehicle fuel. 
“Motor vehicle fuel” does not include diesel fuel, jet fuel, kerosene, liquefied petroleum gas, natural gas in liquid or gaseous form, or racing fuel. “Motor vehicle fuel” does not include ethanol (ethyl alcohol), methanol (methyl alcohol), or blends of gasoline and alcohol (including any denaturant) containing 15 percent, or less, gasoline. 
(b) “Aviation gasoline” means all special grades of gasoline that are suitable for use in aviation reciprocating engines and covered by ASTM specification D 910 or military specification MIL-G-5572. 
(c) “Finished gasoline” means all products (including gasohol) that are commonly or commercially known or sold as gasoline and are suitable for use as a motor fuel, other than products that have an ASTM octane number of less than 75 as determined by the motor method. 
(d) “Gasohol” means all blends of gasoline and alcohol (including any denaturant) containing more than 15 percent gasoline. 
(e) “Gasoline” means finished gasoline and gasoline blendstocks. 
(f) “Gasoline Blendstocks” 
(1) “Gasoline blendstocks” includes: 
(A) Alkylate; 
(B) Butane; 
(C) Butene; 
(D) Catalytically cracked gasoline; 
(E) Coker gasoline; 
(F) Ethyl tertiary butyl ether (ETBE); 
(G) Hexane; 
(H) Hydrocrackate; 
(I) Isomerate; 
(J) Light naphtha; 
(K) Methyl tertiary butyl ether (MTBE); 
(L) Mixed xylene (not including any separated isomer of xylene); 
(M) Naphtha; 
(N) Natural gasoline; 
(O) Pentane; 
(P) Pentane mixture; 
(Q) Polymer gasoline; 
(R) Raffinate; 
(S) Reformate; 
(T) Straight-run gasoline; 
(U) Straight-run naphtha; 
(V) Tertiary amyl methyl ether (TAME); 
(W) Tertiary butyl alcohol (gasoline grade) (TBA); 
(X) Thermally cracked gasoline; 
(Y) Toluene; and 
(Z) Transmix containing gasoline. 
(2) “Gasoline blendstocks” does not include any product that cannot, without further processing, be used in the production of finished gasoline. For example, a mixed hydrocarbon stream that is produced in a natural gas processing plant is not a gasoline blendstock if the stream cannot be used to produce finished gasoline without further processing. 
(g) “Blended motor vehicle fuel” means any mixture of motor vehicle fuel with respect to which tax has been imposed and any other liquid on which tax has not been imposed. “Blended motor vehicle fuel” also means any conversion of a liquid into motor vehicle fuel. “Conversion of a liquid into motor vehicle fuel” occurs when any liquid that is not included in the definition of motor vehicle fuel and that is outside the bulk transfer/terminal system is sold as motor vehicle fuel, delivered as motor vehicle fuel, or represented to be motor vehicle fuel. “Blended motor vehicle fuel” does not include racing fuel. 
(h) “Racing fuel” means a fuel that meets all of the criteria for leaded racing fuel set forth in subdivision (1) or all of the criteria for unleaded racing fuel set forth in subdivision (2). 
(1) Leaded Racing Fuel 
(A) Generally is used in vehicles not eligible to be registered for highway use in any state; 
(B) Is not diesel fuel, kerosene, or gasoline blendstock; 
(C) Has an octane rating of 100 or higher; 
(D) Contains 1.0 gram of lead per gallon or more; 
(E) Does not meet the ASTM specification (D 4814) for gasoline. 
(2) Unleaded Racing Fuel 
(A) Is not diesel fuel, kerosene, or gasoline blendstock; 
(B) Has an octane rating of 100 or higher; 
(C) Does not meet the California Air Resources Board specification for gasoline. 
NOTE

Authority cited: Section 8251 Revenue and Taxation Code Reference: Sections 7304, 7306, 7307, 7313, 7316, 7317, 7318 and 7326, Revenue and Taxation Code Regulation 1103. 
HISTORY

1. Amendment filed 7-25-53; designated to be effective 9-1-53 (Register 53, No. 12).
2. Amendment filed 8-9-62; effective thirtieth day thereafter (Register 62, No. 16).
3. Amendment filed 12-16-70; effective thirtieth day thereafter (Register 70, No. 51).
4. Amendment filed 11-5-82; effective thirtieth day thereafter (Register 82, No. 45).
5. Amendment filed 6-18-86; effective thirtieth day thereafter (Register 86, No. 25).
6. Amendment of chapter 1 heading, new article 1 heading, repealer and new section and amendment of Note filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1102. Liquefied Petroleum Gases. [Repealed]
Note     •     History

NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Chapter 438, Stats, 1963, and Sections 7355 and 7356, Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-17-59 as an emergency; designated effective 10-1-59 (Register 59, No. 16). Certificate of compliance - Section 11422.1, Government Code, filed 9-17-59.
2. Repealer filed 11-12-63; effective thirtieth day thereafter (Register 63, No. 22).
§1103. Blending or Compounding. [Repealed]
History

HISTORY

1. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1104. Consignment for Sale. [Repealed]
Note     •     History

NOTE

Additional authority cited: Section 7305, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-20-71 as procedural and organizational; effective upon filing (Register 71, No. 30). For prior history, see Register 69, No. 23.
2. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1105. Tax-Paid Fuel and Ex-Tax Fuel.
Note     •     History

(a) “Tax-paid fuel” is the gallonage of motor vehicle fuel acquired with the California motor vehicle fuel tax paid. An acquisition of motor vehicle fuel will be considered tax-paid only if it can be supported by one of the following:
(1) A sales invoice or a contract which clearly states that the motor vehicle fuel tax is included in the invoice or contract and proof that the amount representing motor vehicle fuel tax has been paid, or
(2) A motor vehicle fuel purchase receipt showing that the amount paid for the fuel included the motor vehicle fuel tax, or
(3) Other documentation showing that the motor vehicle fuel tax has been paid to the state.
(b) “Ex-tax fuel” is the gallonage of motor vehicle fuel acquired without the California motor vehicle fuel tax paid.
NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7345, 7401, 7653, 8101 and 8106, Revenue and Taxation Code.
HISTORY

1. New section filed 4-4-86; effective thirtieth day thereafter (Register 86, No. 14). For history of former section, see Register 82, No. 30.
2. Amendment of section heading, section and Note filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
3. Change without regulatory effect amending Note filed 7-10-2012 pursuant to section 100, title 1, California Code of Regulations (Register 2012, No. 28).
§1106. Tax-Paid Fuel Distributed. [Repealed]
Note     •     History

NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7305, 7354, 7356, 7356.5, 7401, 7651, 8106, 8126, 8128 and 8129, Revenue and Taxation code.
HISTORY

1. New section filed 4-1-86; effective thirtieth day thereafter (Register 86, No. 14). For history of former section, see Register 82, No. 30.
2. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1107. Drip Gasoline Producer. [Repealed]
History

HISTORY

1. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1108. Qualified Distributor. [Repealed]
Note     •     History

NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7306, 7401, 7451, 7486, 7487, 7671 and 7872, Revenue and Taxation Code.
HISTORY

1. New section filed 8-26-99; operative 9-25-99 (Register 99, No. 35). For prior history see Register 59, No. 16.
2. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1109. Status of Limited Distributor's License. [Repealed]
History

HISTORY

1. Repealer filed 9-17-59 as an emergency; designated effective 10-1-59 (Register 59, No. 16). Certificate of Compliance - Section 11422.1, Government Code, filed 9-17-59.
§1110. Issuance of a Limited Distributor's License. [Repealed]
Note     •     History

NOTE

Additional authority cited: Chapters 1180, 1859 and 1968, Stats. 1959.
HISTORY

1. Amendment filed 9-17-59 as an emergency; designated effective 10-1-59 (Register 59, No. 16). Certificate of Compliance - Section 11422.1, Government Code, filed 9-17-59.
2. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§1111. Highway.
Note     •     History

A highway includes a way or place, of whatever nature, within the exterior boundaries of the State including a way or place within a federal area, publicly maintained an open to the use of the public for purposes of vehicular travel, notwithstanding private participation in the maintenance of the way or place.
A way or place within a national or state forest which is entirely privately maintained, or a road over which forest products are transported in a national or state forest privately constructed or maintained pursuant to an existing agreement with the public authority having jurisdiction thereof will not be considered a highway notwithstanding the fact that it may be declared by the public authority to be a part of its road system.
A way or place under the jurisdiction of the United States Department of Agriculture within a national forest including private property within or adjacent thereto, which way or place is open to public use, is a highway but the tax is refundable on the fuel used in the operation of a motor vehicle thereon by any person who for the use of such highway pays, or contributes to, the cost of construction or maintenance of the way or place pursuant to an agreement with, or permission of, the United States Department of Agriculture. (See Section 8101.1, Revenue and Taxation Code.)
A way or place is not a highway within the meaning of Section 7319 of the Revenue and Taxation code, during such times as it is closed by the governmental authority to the use of the public regardless of the purpose for which it is closed. A highway is open to the use of the public if vehicular travel is permitted although subject to traffic controls.
NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Section 7319, Revenue and Taxation Code.
HISTORY

1. New section filed 2-19-58; effective thirtieth day thereafter (Register 58, No. 3).
2. Amendment filed 12-9-68; effective thirtieth day thereafter (Register 68, No. 47).
3. Change without regulatory effect amending last paragraph and amending Note filed 6-5-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 23).
§1112. Off-Highway Use of Fuel. [Repealed]
Note     •     History

NOTE

Authority cited: Section 8251, Revenue and Taxation Code.
HISTORY

1. New section filed 9-15-61 as an emergency; designated effective 9-15-61. Certificate of Compliance included (Register 61, No. 18).
2. Repealer filed 12-9-68; effective thirtieth day thereafter (Register 68, No. 47).
§1113. Confines and Limits of a Construction Project. [Repealed]
History

HISTORY

1. New section filed 3-23-62; effective thirtieth day thereafter (Register 62, No. 6).
2. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§1114. Book Transfers, In-Tank Transfers, Physical Exchanges and Settlements. [Repealed]
Note     •     History

NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7305, 7651, 7652, 8301 and 8304, Revenue and Taxation Code.
HISTORY

1. New section filed 11-4-97; operative 1-1-98 (Register 97, No. 45).
2. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1115. Pipeline Overages and Shortages. [Repealed]
Note     •     History

NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7352, 7354, 7356, 7356.5, 7651, 7652, 8126, 8128, 8129, 8301 and 8304, Revenue and Taxation Code.
HISTORY

1. New section filed 9-15-92; operative 10-15-92 (Register 92, No. 38).
2. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
Article 2. Imposition of Tax
§1116. Losses Prior to Distribution [Repealed]
Note     •     History

NOTE

Additional authority cited: Section 7352, Revenue and Taxation Code.
HISTORY

1. Amendment filed 2-26-69; designated effective 4-1-69 (Register 69, No. 9).
2. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1117. Allowable Losses of Commission Agents. [Repealed]
Note     •     History

NOTE

Additional authority cited: Section 7352, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-20-71 as procedural and organizational; effective upon filing (Register 71, No. 30).
2. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1118. Distribution of Commingled Fuel. [Repealed]
Note     •     History

NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7304, 7354, 7401, 7651, 8301 and 8305, Revenue and Taxation code.
HISTORY

1. Amendment filed 4-1-86; effective thirtieth day thereafter (Register 86, No. 14).
2. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1119. Tax-Paid Motor Vehicle Fuel Blended, Compounded or Redistilled. [Repealed]
Note     •     History

NOTE

Additional authority cited: Section 7354, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-20-71 as procedural and organizational; effective upon filing (Register 71, No. 30).
2. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1120. Returned Sales.
Note     •     History

(a) When motor vehicle fuel included in a supplier's taxable removals, entries or sales is returned to the supplier by the customer to whom it was sold and is delivered into a refinery or an approved terminal's storage tank, the supplier may either file a claim for refund with the State Controller or in lieu of the refund take a credit on its tax return. The credit memorandum covering the return of the motor vehicle fuel shall identify the gallonage returned as either volumetric gallons or temperature corrected gallons based upon how the tax was originally invoiced to the customer and shall separately state the motor vehicle fuel tax.
(b) It shall be presumed that the supplier purchased the motor vehicle fuel that was returned as tax-paid motor vehicle fuel if the credit memorandum includes motor vehicle fuel tax. For purposes of a refund or credit, it also shall be presumed that the subsequent removal of the motor vehicle fuel from a terminal rack by the supplier that received the returned motor vehicle fuel is made in the month that the motor vehicle fuel was returned. 
(c) Conditions to Allow a Credit on a Tax Return. 
The credit will be allowed only if: 
(1) The returned motor vehicle fuel was delivered into a refinery or an approved terminal storage tank. 
(2) The credit is taken on a tax return filed within three months after the close of the calendar month in which the motor vehicle fuel is returned. 
(3) The supplier prepares a first taxpayer's report (as identified in Regulation 1161) when the motor vehicle fuel is returned. 
(4) A copy of the first taxpayer's report and the credit memorandum must be retained for inspection by the Board with the tax return on which the credit is claimed. 
(d) If the supplier fails to take credit on a tax return filed within three months after the close of the calendar month in which the motor vehicle fuel was returned, the supplier may only file a claim for refund with the State Controller to recover the tax. The claim for refund must be filed with the State Controller within three years from the date of return of the fuel. 
Each claim for a refund must contain the following information with respect to the motor vehicle fuel covered by the claim: 
(1) The information required in Revenue and Taxation Code Section 8102. 
(2) Volume and type of motor vehicle fuel. 
(3) Date on which the claimant received the returned motor vehicle fuel. 
(4) A copy of the first taxpayer's report that relates to the motor vehicle fuel covered by the claim. 
(5) A copy of the credit memorandum that returned the motor vehicle fuel. 
NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7315, 8101, 8102, 8105 and 8106, Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-17-59; effective thirtieth day thereafter (Register 59, No. 16).
2. Amendment filed 2-26-69; designated effective 4-1-69 (Register 69, No. 9).
3. Amendment filed 7-20-71 as procedural and organizational; effective upon filing (Register 71, No. 30).
4. Amendment of section heading, section and Note filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
5. Change without regulatory effect amending subsection (c) and Note filed 7-10-2012 pursuant to section 100, title 1, California Code of Regulations (Register 2012, No. 28).
§1121. Temperature-Corrected Distributions. [Repealed]
Note     •     History

NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7354, 7355, 7356 and 7356.5, Revenue and Taxation Code.
HISTORY

1. New section filed 9-15-61 as an emergency; designated effective 9-15-61. Certificate of Compliance included (Register 61, No. 18).
2. Amendment filed 5-14-65; effective thirtieth day thereafter (Register 65, No. 7).
3. Amendment of subsection (a) filed 7-20-71 as procedural and organizational; effective upon filing (Register 71, No. 30).
4. Amendment filed 12-26-75; effective thirtieth day thereafter. Note: Filing designates 1-1-76 as effective date (Register 75, No 52).
5. Amendment of subsections (a) (3), (a) (4) and (d), and new subsection (a) (7) filed 12-29-78; effective thirtieth day thereafter. Pursuant to Section 7051, Revenue and Taxation Code, order establishes an operative date of 1-1-79 (Register 78, No 52).
6. Editorial correction of subsection (c) (1) filed 12-16-83 (Register 83, No. 51).
7. Change without regulatory effect deleting subsection (a) (7) filed 4-4-86; effective thirtieth day thereafter (Register 86, No. 14).
8. Amendment of subsections (c) and (d), and repealer of subsection (e) filed 5-5-89; operative 6-4-89 (Register 89, No. 19).
9. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1122. Conversion Factor.
Note     •     History

For reporting purposes, all measurements must be in terms of gallons. To convert liters to gallons, the quantity of liters shall be multiplied by .26417 to determine the equivalent quantity in gallons. The resulting figure shall be rounded to the nearest tenth of a gallon.
NOTE

Authority cited: Section 8251, Revenue and Taxation Code. References: Sections 7315, 7360, 7392, 7651, 7652.5 and 7652.7, Revenue and Taxation Code.
HISTORY

1. New section filed 5-20-80; effective thirtieth day thereafter (Register 80, No. 21). For technical reasons, printed in Registered 80, No. 23.
2. Change without regulatory effect amending Note filed 6-5-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 23).
§1123. Supplier.
Note     •     History

(a) Returns. All suppliers must prepare and file returns with the Board to report tax on motor vehicle fuel. Returns are due at the end of the month following the calendar month in which the motor vehicle fuel was removed, entered, or sold, unless the Board requires that a return be filed for a different period. A terminal operator who also is a position holder in motor vehicle fuel within the terminal or is jointly and severally liable for the tax is required to file both the terminal operator report and the supplier return. 
(b) Imposition of Tax. Tax applies to each supplier as follows: 
(1) Blender. A blender is required to pay the tax on the removal or sale of motor vehicle fuel blended outside the bulk transfer/terminal system. The number of gallons of blended motor vehicle fuel subject to the tax is the difference between the total number of gallons of blended motor vehicle fuel removed or sold and the number of gallons of tax-paid motor vehicle fuel used to produce the blended motor vehicle fuel. 
(2) Enterer. 
(A) An enterer is required to pay the tax when the enterer imports motor vehicle fuel into the state by means outside of the bulk transfer/terminal system 
(B) An enterer is required to pay the tax when the enterer removes or sells motor vehicle fuel within a pipeline or terminal to an unlicensed person. 
(C) An enterer is required to pay the tax when the entry is by bulk transfer and the enterer is not a licensed supplier. 
(D) For purposes of proper imposition of tax, entry occurs when fuel is brought into the state, provided, however, that when entry is by bulk transfer, entry occurs as follows: 
1. When fuel is received at a marine terminal, entry occurs at the landside of the flange. 
2. When fuel is removed from a vessel in this state to a lighter for the purpose of lightering, entry occurs at the vessel side of the flange upon the removal of fuel from a vessel in this state to the lighter; provided, however, that if the lighter unloads or discharges the fuel at a marine terminal, then entry occurs at the land side of the flange as to the fuel received at the marine terminal. As used herein, “lightering” is the use of small, shallow-draft boats in transshipment to shore of oil or other fuel from a large, deep-draft vessel unable to dock at shore facilities because of shallow water. The small boats are called lighters. 
3. When fuel is removed from a vessel in this state to another vessel in this state, and the fuel is not unloaded or discharged at a marine terminal, then entry occurs when the fuel is brought into the state. 
(3) Position Holder. 
(A) A position holder that holds an inventory position in the motor vehicle fuel as reflected on the records of the terminal operator is required to pay the tax when the motor vehicle fuel is removed from the terminal rack. 
(B) A position holder is required to pay the tax when the position holder removes or sells motor vehicle fuel within or without the bulk transfer/terminal system to an unlicensed person. 
(C) For reporting periods commencing on or after January 1, 2007, a position holder that delivers motor vehicle fuel to a receiving supplier under a two-party exchange contract shall remain liable for the tax due on the removal of motor vehicle fuel from the terminal rack unless all Regulation 1125 requirements are met. 
(4) Refiner. 
(A) A refiner is required to pay the tax when the motor vehicle fuel is removed at a terminal rack located at a refinery. 
(B) A refiner is also required to pay the tax when the removal of motor vehicle fuel is by bulk transfer (e.g., transfer by pipeline or vessel) and the refiner or the owner of the motor vehicle fuel immediately before the removal is not a licensed supplier. 
(C) A refiner is required to pay the tax when the refiner removes or sells motor vehicle fuel within or without the bulk transfer/terminal system to an unlicensed person. 
(D) For reporting periods commencing on or after January 1, 2007, a refiner that delivers motor vehicle fuel to a receiving supplier under a two-party exchange contract shall remain liable for the tax due on the removal of motor vehicle fuel from the terminal rack located at a refinery unless all Regulation 1125 requirements are met. 
(5) Terminal Operator. A terminal operator is jointly and severally liable for and may be required to pay the tax when the motor vehicle fuel is removed at the rack if both subsections (A) and (B) below apply: 
(A) The position holder with respect to the motor vehicle fuel is a person other than the terminal operator and is not a licensed supplier. 
(B) The terminal operator is not a licensed supplier and either (i) does not have an unexpired notification certificate from the position holder as required by the Internal Revenue Service or (ii) has an unexpired notification certificate from the position holder, but has reason to believe or knows that any information in the certificate is false. 
(6) Throughputter. A throughputter is required to pay the tax when the throughputter removes or sells motor vehicle fuel within or without the bulk transfer/terminal system to a person who is not a licensed supplier. 
NOTE

Authority cited: Sections 7372 and 8251, Revenue and Taxation Code. Reference: Sections 7307, 7308, 7309, 7310, 7311, 7312, 7324, 7326, 7329, 7332, 7333, 7334, 7335, 7336, 7338, 7339, 7340, 7341, 7360, 7362, 7363, 7365, 7366, 7368, 7369, 7370, 7371, 7372, 7451, 7651 and 7652.5, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
2. New subsections (b)(3)(C) and (b)(4)(D) and amendment of Note filed 9-8-2006; operative 10-8-2006 (Register 2006, No. 36).
§1124. Relief from Liability.
Note     •     History

A person may be relieved from the liability for the payment of the motor vehicle fuel tax and aircraft jet fuel tax, including any penalties and interest added to those taxes, when that liability resulted from the failure to make a timely return or a payment and such failure was found by the board to be due to reasonable reliance on written advice given by the board as described in California Code of Regulations, Title 18, Section 4902.
NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Section 7657.1, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
2. Amendment filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§1124.1. Innocent Spouse or Registered Domestic Partner Relief from Liability.
Note     •     History

A spouse or registered domestic partner claiming relief from liability for the motor vehicle fuel tax, interest, penalties, and other amounts shall be relieved from such liability where all the requirements set forth in California Code of Regulations, title 18, section 4903 are met.
NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7657.5 and 8101-8131, Revenue and Taxation Code; and Sections 297, 297.5 and 308, Family Code.
HISTORY

1. New section filed 5-18-2010; operative 6-17-2010 (Register 2010, No. 21).
§1125. Two-Party Exchange.
Note     •     History

(a) General. In a typical two-party exchange, two suppliers who own motor vehicle fuel in terminals, i.e., who are position holders (pursuant to Section 7332 of the Revenue and Taxation Code), agree to give each other access to the motor vehicle fuel each owns. Both suppliers have customers in the same terminal areas. One supplier (the delivering supplier) owns fuel in one terminal, and the other supplier (the receiving supplier) owns fuel, usually in a different terminal. Each supplier agrees to exchange fuel it owns for fuel the other supplier owns. A two-party exchange contract allows each supplier to have rack removal capability at a terminal where the other supplier is a position holder, in order to supply fuel to its customers in that terminal area. The receiving supplier takes the place of the delivering supplier when the motor vehicle fuel is removed from the terminal at the rack. A two-party exchange may involve fuel held in terminals located in one or more states and may involve one or more types of fuel. For purposes of this regulation, however, at least one of the terminals involved in a two-party exchange must be located in this state, and the requirements for reporting transactions to the Board pursuant to this regulation pertain only to transactions involving terminals located in this state. 
(b) Definitions. 
(1) Notwithstanding Section 7337 of the Revenue and Taxation Code, “two-party exchange” means a transaction, other than a sale, that occurs at the time of removal of motor vehicle fuel across the rack and that meets all the following conditions: 
(A) The terminal operator, delivering supplier, and the receiving supplier are each registered with the Board to file electronically and have filed electronically with respect to the subject two-party exchange; and 
(B) The terminal operator treats the receiving supplier in its books and records as the person that removes the motor vehicle fuel across a terminal rack for purposes of reporting the two-party exchange to the Board; and 
(C) The two-party exchange is the subject of a written contract between the delivering supplier and the receiving supplier, acceptable evidence of which includes, but is not limited to, exchange statements, exchange differential invoices, exchange reconciliations, or any other similar writing between the parties; and 
(D) All of the reporting requirements set forth in subdivisions (d) and (e) of this section are met. 
(2) “Delivering supplier” means a supplier, licensed pursuant to Section 7451 of the Revenue and Taxation Code, who is the position holder of the motor vehicle fuel in the terminal on whom the motor vehicle fuel tax is imposed on removal of motor vehicle fuel from the rack for all purposes other than for a two-party exchange. 
(3) “Receiving supplier” means a supplier, licensed pursuant to Section 7451 of the Revenue and Taxation Code, on whom the motor vehicle fuel tax is imposed only on removal of motor vehicle fuel from the rack as the receiving supplier under a two-party exchange. 
(4) “Terminal,” as defined in Section 7339 of the Revenue and Taxation Code, includes, for purposes of this regulation, a terminal located at a refinery. 
(c) Liability for Tax. 
(1) The delivering supplier is primarily liable for taxes imposed under Section 7362 or Section 7363(a) of the Revenue and Taxation Code, except, when a transaction satisfies the conditions and requirements for a two-party exchange, the delivering supplier shall be relieved of motor vehicle fuel tax liability and the receiving supplier shall become primarily liable for payment of motor vehicle fuel taxes on the motor vehicle fuel removed pursuant to the two-party exchange. 
(2) The receiving supplier must report the two-party exchange and remit any tax due on a tax return filed within three months after the close of the calendar month in which the motor vehicle fuel was received. The receiving supplier may claim a refund for any amounts applied by the Board to the account of the receiving supplier under a two-party exchange contract. When all parties report a transaction as a two-party exchange, the receiving supplier may not file a claim for refund of the tax on the grounds that the transaction was not a two-party exchange. 
(3) If the receiving supplier fails to report or remit taxes in conformity with this regulation, then the delivering supplier shall remain primarily liable for taxes due on the removal of the motor vehicle fuel from the rack. 
(d) Reporting Requirements -- Generally. 
(1) The terminal operator must report to the Board the two-party exchange of motor vehicle fuel between the delivering supplier and the receiving supplier. 
(2) The terminal operator, the delivering supplier, and the receiving supplier must each use the same identifying information (e.g., bill of lading number) to refer to or otherwise report the subject two-party exchange. 
(3) The terminal operator, the delivering supplier, and the receiving supplier must each enter the same fuel type on any report that includes a two-party exchange. 
(e) Reporting Requirements -- Delivering and Receiving Suppliers. The following reporting requirements must be met in order for an exchange of motor vehicle fuel to qualify as a two-party exchange and to shift imposition of the motor vehicle fuel tax liability from the delivering supplier to the receiving supplier. 
(1) The delivering supplier must report the two-party exchange and identify the receiving supplier to the terminal operator; and 
(2) The delivering supplier must report to the Board a tax-free delivery of motor vehicle fuel to the receiving supplier; and 
(3) The receiving supplier must report to the Board a tax-free receipt of motor vehicle fuel from the delivering supplier; and 
(4) The receiving supplier must report to the Board the rack removal of motor vehicle fuel to its customers and the amount of tax due. 
(f) Operative Date. The provisions of this regulation are operative January 1, 2007. 
NOTE

Authority cited: Sections 7372 and 8251, Revenue and Taxation Code. Reference: Sections 7362, 7363, 7368, 7369, 7372, 7451, 7651, 7652.5, 8301 and 8302, Revenue and Taxation Code. 
HISTORY

1. New section filed 9-8-2006; operative 10-8-2006 (Register 2006, No. 36).
Article 3. Exemptions
§1131. Natural Gasoline Sales to Licensed Distributors. [Repealed]
Note     •     History

NOTE

Additional authority cited: Chapters 1180, 1859 and 1968, Stats. 1959.
HISTORY

1. Originally published 3-20-48 (Register 11, No. 8).
2. Amendment filed 10-24-49 as an emergency (Register 18, No. 4).
3. Amendment filed 9-17-59 as an emergency; designated effective 10-1-59 (Register 59, No. 16). Certificate of Compliance - Section 11422.1, Government Code, filed 9-17-59.
4. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1132. Shipments out of the State.
Note     •     History

(a) Definitions. 
(1) Export. An export of motor vehicle fuel is the delivery or shipment of fuel by the supplier from a point in this state to a point outside of this state. The fuel is not exported if it is diverted in transit or for any reason is not actually delivered out of this state, regardless of documentary evidence held by the supplier respecting delivery of the fuel to a carrier for out-of-state shipment or to a vessel clearing for an out-of-state port.
(2) Carrier. A carrier means a person or firm who is regularly engaged in the business of transporting for compensation property owned by other persons and includes both common and contract carriers. The carrier may be hired by either the purchaser or the supplier.
(b) Requirements. A supplier may not claim an export exemption from motor vehicle fuel tax under Revenue and Taxation Code Section 7401(a)(3) unless the motor vehicle fuel is in fact exported and the export is accomplished in the manner specified in either (1) or (2) below:
(1) The supplier claiming the exemption from tax shows that it delivered the motor vehicle fuel to any vessel clearing from a port of this state for a port outside of this state and the fuel was actually exported from this state in the vessel; or
(2) The supplier claiming the exemption from tax shows that it exported the motor vehicle fuel from this state pursuant to a written contract requiring delivery by the supplier of the fuel to:
(A) the out-of-state point by facilities operated by the supplier,
(B) a carrier for shipment to a consignee at the out-of-state point, or
(C) a customs broker or forwarding agent for shipment to a location outside of this state.
(c) Exports of Ex-tax Fuel. The tax does not apply to the export of ex-tax motor vehicle fuel actually exported.
A supplier must claim the exemption for the export of ex-tax fuel on the return filed for the period in which the export was made. If a supplier  fails to claim the exemption on the return and tax is erroneously paid on ex-tax export of fuel, a timely claim for refund must be filed with the Board pursuant to Section 8128 of the Motor Vehicle Fuel Tax Law in order to obtain a refund of the amount of taxes so overpaid.
(d) Exports of Tax-paid Fuel. In lieu of claiming a refund of tax for exports of tax-paid fuel with the State Controller as provided by section 8101(b) of the Revenue and Taxation Code, a supplier may take a credit on its return for tax-paid fuel when the fuel is exported to a point outside the state. The credit must be claimed on a return filed within three months after the close of the calendar month in which the tax-paid fuel is exported. If the credit exceeds the taxable gallons of motor vehicle fuel for the period in which the credit may be taken, refund of the tax on the excess gallonage can only be obtained by filing a claim for refund with the State Controller.
Failure to take credit on a return filed within three months after the close of the calendar month in which the tax-paid fuel is exported does not give rise to a right to file a claim for refund with the Board pursuant to section 8126 of the Revenue and Taxation Code. Instead, claims for refund for tax-paid fuel exported must be filed with the State Controller within three years from the date of purchase of the fuel.
(e) Documentation required for support. All shipments of motor vehicle fuel to points outside of the state for which tax exemption is claimed on a tax return shall be reported on a schedule accompanying the return for the period for which the exemption or credit is claimed.
The supplier must retain documentation to support the delivery of the fuel by the supplier at an out-of-state location for all exemptions or credits. Documentation may include, but is not limited to, contracts, bills of lading, delivery tickets, or meter readings. The supplier has the burden of providing the proper substantiation and documentation to support the exemption or credit.
NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7338, 7401, 7651, 8101, 8102, 8105, 8106, 8126, 8128, 8129, 8301 and 8303, Revenue and Taxation Code.
HISTORY

1. New section filed 3-15-48 as an emergency; effective upon filing (Register 11, No. 8).
2. Amendment filed 1-17-56; effective thirtieth day thereafter (Register 56, No. 2).
3. Amendment filed 9-17-59 as an emergency; designated effective 10-1-59 (Register 59, No. 16). Certificate of Compliance - section 11422.1, Government Code, filed 9-17-59.
4. Amendment filed 11-12-63; effective thirtieth day thereafter (Register 63, No. 22)
5. Amendment filed 5-20-80; effective thirtieth day thereafter (Register 80, No. 21). For technical reasons, printed in Register 80, No. 23.
6. Amendment filed 4-1-86; effective thirtieth day thereafter (Register 86, No. 14).
7. Amendment filed 2-15-91; operative 3-17-91 (Register 91, No. 11).
8. Amendment of section and Note filed 1-21-2000; operative 2-20-2000 (Register 2000, No. 3).  
9. Amendment of section and Note filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
10. Change without regulatory effect amending Note filed 7-10-2012 pursuant to section 100, title 1, California Code of Regulations (Register 2012, No. 28).
§1133. Exempt Distributions to Qualified Distributor. [Repealed]
Note     •     History

NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7305 and 7401, Revenue and Taxation Code. 
HISTORY

1. Amendment filed 5-25-62; effective thirtieth day thereafter (Register 62, No. 10).
2. Editorial correction filed 5-2-83 (Register 83, No. 19).
3. Amendment filed 4-1-86; effective thirtieth day thereafter (Register 86, No. 14).
4. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1134. Sales to the United States.
Note     •     History

Sales of motor vehicle fuel to the United States, its agencies and instrumentalities are taxable, except when the motor vehicle fuel is sold to the United States armed forces for use in ships or aircraft, or for use outside this State. “Armed forces” include the Army, Navy, Air Force, Marines, and Coast Guard.
To establish that a sale to the armed forces is exempt the seller must obtain a certificate from the agency of the armed forces purchasing the fuel that it is acquired for use (a) in ships, (b) in aircraft or (c) outside the state. This certificate may be incorporated in the purchase order or contract relating to the acquisition of the fuel by the governmental agency. All such certificates should be retained by the seller for audit purposes.
(b) Sales of Ex-Tax Motor Vehicle Fuel. 
A supplier licensed under the Motor Vehicle Fuel Tax Law that makes sales of ex-tax motor vehicle fuel to the United States armed forces for use in ships or aircraft, or for use outside this State, may claim an exemption on its motor vehicle fuel tax return. 
(c) Sales of Tax-Paid Motor Vehicle Fuel. 
Any person who makes sales of tax-paid motor vehicle fuel to the United States armed forces for use in ships or aircraft, or for use outside this State, may file a claim for refund of the tax with the State Controller. 
NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7401 and 8101, Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-17-59; effective thirtieth day thereafter (Register 59, No. 16).
2. Amendment filed 9-15-61 as an emergency; designated effective 9-15-61. Certificate of Compliance included (Register 61, No. 18).
3. Amendment filed 11-12-63; effective thirtieth day thereafter (Register 63, No. 22).
4. Amendment filed 7-20-71 as procedural and organizational; effective upon filing (Register 71, No. 30).
5. Editorial correction filed 5-2-83 (Register 83, No. 19).
6. Amendment of section heading, section and Note filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1135. Distributions to Representatives of Foreign Governments. [Repealed]
History

HISTORY

1. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§1136. Distributions to the State and Its Political Subdivisions. [Repealed]
History

HISTORY

1. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§1137. Exempt Sales of Jet Fuel.
Note     •     History

(a) In General. Sales of aircraft jet fuel for propulsion of aircraft are subject to tax except sales to the following:
(1) A common carrier by air engaged in the business of transporting persons or property for hire or compensation under a certificate of public convenience and necessity issued pursuant to the authority of the laws of this state, of the United States or of any foreign government.
(2) A person engaged in the business of constructing or reconstructing by manufacture or assembly of completed aircraft or modifying, overhauling, repairing, maintaining or servicing of aircraft.
(3) The armed forces of the United States.
(b) Evidence to Support Exemption.

(1) Exempt sales to common carriers and aircraft manufacturers must be supported by an exemption certificate as prescribed below.
	
            Name of Aircraft Jet Fuel Purchaser
	
            Address of Aircraft Jet Fuel Purchaser

This is to certify that all aircraft jet fuel purchased from
	 is exempt from aircraft
jet fuel tax as a sale to:
Check one
This certificate is valid until revoked in writing.

	Purchaser 	

	By 	

	Date 	
(2) Exempt sales to the armed forces must be supported by a government purchase order or other evidence of sale to the armed forces of the United States.
(3) It is necessary to obtain only one certificate to cover all sales. The certificate is valid until revoked in writing.
(c) Liability of Person Giving Certificate. Any person who certifies in writing to a jet fuel dealer that the sale or use of the aircraft jet fuel purchased by him is not subject to the jet fuel tax and who uses such fuel as an aircraft jet fuel user is liable for the tax with respect to such fuel at the time of such use. Such person shall report and pay the tax to the board as though he were an aircraft jet fuel dealer who made a taxable sale of the fuel at the time of the use.
NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7385-7398, Revenue and Taxation Code.
HISTORY

1. New section filed 11-7-69 as an emergency; designated effective 11-10-69 (Register 69, No. 45).
2. Certificate of Compliance - Section 11422.1, Government Code, filed 1-8-70 (Register 70, No. 2).
3. Amendment filed 1-8-70; effective thirtieth day thereafter (Register 70, No. 2).
4. Amendment filed 12-16-70; effective thirtieth day thereafter (Register 70, No. 51).
5. Change without regulatory effect amending Note filed 6-5-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 23).
Article 4. Deposits
§1146. Deposits in Lieu of Security Bonds. [Repealed]
Note     •     History

NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Section 7489, Revenue and Taxation Code.
HISTORY

1. Amendment filed 12-9-68; effective thirtieth day thereafter (Register 68, No. 47).
2. Amendment filed 11-5-82; effective thirtieth day thereafter. (Register 82, No. 45).
3. Repealer of Article 4 (Section 1146) filed 5-9-84; effective thirtieth day thereafter (Register 84, No. 19).
Article 5. Returns and Payments
§1151. Monthly Return of Distributor. [Repealed]
Note     •     History

NOTE

Reference cited: Sections 7651 and 7702, Revenue and Taxation Code.
HISTORY

1. New section filed 3-15-48 as an emergency; effective upon filing (Register 11, No. 8).
2. Amendment filed 8-9-56 as an emergency; effective upon filing (Register 56, No. 16).
3. Amendment filed 12-9-68; effective thirtieth day thereafter (Register 68, No. 47).
4. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1152. Weekly Return of Distributor. [Repealed]
Note     •     History

NOTE

Reference cited: Section 7701, Revenue and Taxation Code.
HISTORY

1. New section filed 3-15-48 as an emergency; effective upon filing (Register 11, No. 8).
2. Amendment filed 8-9-56 as an emergency; effective upon filing (Register 56, No. 16).
3. Amendment filed 12-9-68; effective thirtieth day thereafter (Register 68, No. 47).
4. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1153. Processor's Return of Distribution. [Repealed]
Note     •     History

NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Section 7651, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-20-71 as procedural and organizational; effective upon filing (Register 71, No. 30).
2. Editorial correction of subsection (a) filed 12-16-83 (Register 83, No. 51).
3. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1154. Owner's Return of Processing Transactions. [Repealed]
Note     •     History

NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7305, 7354 and 7401, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-20-71 as procedural and organizational; effective upon filing (Register 71, No. 30).
2. Editorial correction of subsection (a) filed 12-16-83 (Register 83, No. 51). 
3. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1155. Recipient's Return of Processing Transactions. [Repealed]
Note     •     History

NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7305, 7354 and 7401, Revenue and Taxation Code.
HISTORY

1. Editorial correction filed 12-16-83 (Register 83, No. 51).
2. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1156. Monthly Report of Producer. [Repealed]
History

HISTORY

1. Repealer filed 4-14-72; effective thirtieth day thereafter (Register 72, No. 16).
§1157. Monthly Report of Broker. [Repealed]
History

HISTORY

1. Repealer filed 4-14-72; effective thirtieth day thereafter (Register 72, No. 16).
§1160. Payment by Electronic Funds Transfer.
Note     •     History

Payments by electronic funds transfer shall be made in accordance with California Code of Regulations, Title 18, Section 4905. 
NOTE

Authority cited: Section 7659.9, Revenue and Taxation Code. Reference: Sections 7659.9 and 7659.92, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-7-2005; operative 7-7-2005 (Register 2005, No. 23).
§1161. Tax Paid Twice on Motor Vehicle Fuel.
Note     •     History

(a) A supplier who removes motor vehicle fuel from a terminal rack on which a prior tax was paid to the state may either file a claim for refund with the State Controller or in lieu of a refund take a credit on its tax return. 
(b) Conditions to Allow a Credit on a Tax Return. 
The credit will be allowed only if: 
(1) A tax imposed on the motor vehicle fuel by Revenue and Taxation Code Sections 7362 and 7363 was paid to the state by reporting the gallons on a tax return and was not credited or refunded (the “first tax” or “first taxpayer”); 
(2) After imposition of the first tax, another tax was imposed on the motor vehicle fuel by Revenue and Taxation Code Sections 7362 and 7363 and was paid to the state by reporting the gallons on a tax return (the “second tax” or “second taxpayer”); 
(3) The person that paid the second tax to the state claims a credit on a tax return filed within three months after the close of the calendar month in which the second tax was reported to the state; 
(4) The person that paid the first tax to the State has met the reporting requirements of paragraph (c) of this section; and 
(5) A copy of the first taxpayer's report and any copies of statements of subsequent seller must be retained for inspection by the Board with the tax return on which the credit is claimed. 
(c) Reporting Requirements. 
(1) Reporting by persons paying the first tax. 
Except as provided in paragraph (c)(2) of this section, the person that paid the first tax under Revenue and Taxation Code Section 7362 and 7363 (the first taxpayer) must file a report that is in substantially the same form as the model report provided in Exhibit A and contains all information necessary to complete such model report (the first taxpayer's report). A first taxpayer's report must be retained for inspection by the Board with the tax return on which the first tax was paid or reported. 
(2) Optional reporting for certain taxable events. 
Paragraph (c)(1) does not apply with respect to a tax imposed under Revenue and Taxation Code Section 7362 (removal at a terminal rack), Revenue and Taxation Code Section 7363(b)(2) (nonbulk entries into the state), or Revenue and Taxation Code Section 7363(d) (removals or sales by blenders). However, if the person liable for the tax expects that another tax will be imposed under Sections 7362 and 7363 with respect to the fuel, that person should file a first taxpayer's report. 
(3) Information provided to subsequent owners, etc. 
(A) By Person Required to File First Taxpayer's Report. 
A first taxpayer required to file a first taxpayer's report under paragraph (c)(1) of this section must give a copy of the report to: 
1. The person to whom the first taxpayer sells the motor vehicle fuel within the bulk transfer/terminal system; or 
2. The owner of the motor vehicle fuel immediately before the imposition of the first tax, if the first taxpayer is not the owner at that time. 
(B) By Person Filing Optional First Taxpayer's Report. 
A first taxpayer filing a first taxpayer's report under paragraph (c)(2) of this section should give a copy of the report to: 
1. The person to whom the first taxpayer sells the motor vehicle fuel; or 
2. The owner of the motor vehicle fuel immediately before the imposition of the first tax, if the first taxpayer is not the owner at that time. 
(C) By Person Receiving First Taxpayer's Report. 
1. Bulk Transfer/Terminal System Transaction 
A person that receives a copy of the first taxpayer's report and subsequently sells the motor vehicle fuel within the bulk transfer/terminal system must give the copy and a statement that satisfies the requirements of paragraph (c)(3)(D) of this section to the buyer. 
2. Rack and Below Rack Transaction 
A person that receives a copy of the first taxpayer's report and subsequently sells the motor vehicle fuel outside the bulk transfer/terminal system should give the copy and a statement that satisfies the requirements of paragraph (c)(3)(D) of this section to the buyer, if that person expects that another tax will be imposed under Revenue and Taxation Code Sections 7362 and 7363 with respect to the motor vehicle fuel. 
(D) Form of Statement. 
A statement satisfies the requirements of this paragraph (c)(3)(D) if it is provided at the bottom or on the back of the copy of the first taxpayer' s report (or in an attached document). This statement must contain all information necessary to complete the model statement provided in Exhibit B but need not be in the same format. 
(E) Sale to Multiple Buyers. 
If the first taxpayer's report relates to motor vehicle fuel divided among more than one buyer, multiple copies of the first taxpayer's report must be made at the stage that the motor vehicle fuel is divided and each buyer must be given a copy of the report. 
(d) Claim For Refund. 
If the supplier fails to take a credit on a tax return filed within three months after the close of the calendar month in which the second tax was imposed, the supplier may only file a claim for refund with the State Controller to recover the tax. The claim for refund must be filed with the State Controller within three years from the date of purchase of the motor vehicle fuel. 
Each claim for a refund must contain the following information with respect to the fuel covered by the claim: 
(1) The information required in Revenue and Taxation Code Section 8102. 
(2) Volume and type of motor vehicle fuel. 
(3) Date on which the claimant incurred the tax liability to which this claim relates (the second tax). 
(4) Amount of second tax that claimant paid or reported to the state and the tax return on which it was paid or reported. 
(5) A statement that claimant has not separately stated on the sales invoice reimbursement for both the first tax and the second tax or has not included in the sales price of the motor vehicle fuel reimbursement for both the first tax and the second tax. The second taxpayer can only receive reimbursement for one tax from the customer. 
(6) A copy of the first taxpayer's report that relates to the motor vehicle fuel covered by the claim. 
(7) If the motor vehicle fuel covered by the claim was bought other than from the first taxpayer, a copy of the statement of subsequent seller that the claimant received with respect to that motor vehicle fuel. 

EXHIBIT A 

First Taxpayer's Report 

1. First Taxpayer's Board of Equalization supplier account number 		

2. 		
  First Taxpayer's name, address, and employer identification number 

3. 		
  Name, address, and employer identification number of the buyer of the motor vehicle fuel subject to tax 

4. 		
  Date and location of removal, entry, or sale and document number 

5. Volume and type of motor vehicle fuel removed, entered, or sold 		

6. Check type of taxable event:

___ Removal from refinery 

___ Entry into United States or state 

___ Bulk transfer from terminal by unregistered position holder 

___ Bulk transfer not received at an approved terminal 

___ Sale within the bulk transfer/terminal system 

___ Removal at the terminal rack 

___ Removal or sale by the blender 

7. 		
  Amount of Federal excise tax paid and State motor vehicle fuel tax paid on account of the removal, entry, or sale 

8. Location of IRS service center where this report is filed 		and State reporting period of payment 		

The undersigned taxpayer (the “Taxpayer”) has not received, and will not claim, a credit with respect to, or a refund of, the tax on the motor vehicle fuel to which this form relates. 

Under penalties of perjury, the Taxpayer declares that Taxpayer has examined this statement, including any accompanying schedules and statements, and, to the best of Taxpayer's knowledge and belief, they are true, correct and complete. 

Signature and date signed 

Printed or typed name of person signing this report 

	Title 

EXHIBIT B 

Statement of Subsequent Seller 

1. 		
  Board of Equalization supplier account number or prepaid sales tax account number 

2. 		
  Name, address, and employer identification number of seller in subsequent sale 

3. 		
  Name, address, and employer identification number of buyer in subsequent sale 

4. 		
  Date and location of subsequent sale and document number 

5. 		
  Volume and type of motor vehicle fuel sold 

The undersigned seller (the “Seller”) has received the copy of the first taxpayer's report provided with this statement in connection with Seller's purchase of the motor vehicle fuel described in this statement. 

Under penalties of perjury, Seller declares that Seller has examined this statement, including any accompanying schedules and statements, and, to the best of Seller's knowledge and belief, they are true, correct and complete.

Signature and date signed 

Printed or typed name of person signing this statement 

	 Title 
NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7362, 7363, 8101, 8102, 8105, 8106 and 8127.5, Revenue and Taxation Code.
HISTORY

1. New section filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
2. Change without regulatory effect amending Note filed 7-10-2012 pursuant to section 100, title 1, California Code of Regulations (Register 2012, No. 28).
Article 6. Records
§1171. Distributor's Inventory and Stock Record. [Repealed]
History

HISTORY

1. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1172. Producer's Stock Record. [Repealed]
History

HISTORY

1. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1173. Producer's Purchase Record. [Repealed]
History

HISTORY

1. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1174. Producer's Sales Record. [Repealed]
History

HISTORY

1. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1175. Broker's Purchase Record. [Repealed]
History

HISTORY

1. Amendment filed 9-15-61 as an emergency; designated effective 9-15-61. Certificate of Compliance included (Register 61, No. 18).
2. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1176. Broker's Sales Record. [Repealed]
Note     •     History

NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Section 8304, Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-15-61 as an emergency; designated effective 9-15-61. Certificate of Compliance included (Register 61, No. 18).
2. Editorial correction filed 12-16-83 (Register 83, No. 51).
3. Repealer filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1177. Records of Aircraft Jet Fuel Dealer.
Note     •     History

(a) General. An aircraft jet fuel dealer shall maintain and make available for examination on request by the board or its authorized representatives, records in the manner set forth at California Code of Regulations, Title 18, Section 4901. 
(b) Specific Applications. In addition to the record keeping requirements set forth in subdivision (a), aircraft jet fuel dealers shall comply with the following requirements. 
Aircraft jet fuel dealers shall maintain the following: 
(1) A complete record of all sales or other dispositions of jet fuel including fuel used by the aircraft jet fuel dealer. 
(2) A record of inventories, purchases, and tank gaugings or meter readings of jet fuel. 
(3) Sales Invoices. 
(A) The aircraft jet fuel dealer shall prepare a serially numbered paper or electronic invoice for each sale of jet fuel. A single invoice covering multiple deliveries of fuel to the same purchaser made during a period of time not to exceed a calendar month shall constitute an invoice for each sale.
(B) If a multiple delivery invoice includes both taxable and nontaxable sales, the invoice must show a segregation of the taxable and nontaxable gallonage sold.
(C) A copy of the invoice shall be delivered to the purchaser, and a copy retained by the aircraft jet fuel dealer.
(D) A sales invoice shall contain the following information:
1. The name and address of the aircraft jet fuel dealer,
2. The name of the purchaser,
3. The date of the sale,
4. The number of gallons sold, the price per gallon and the total amount of the sale, and
5. The amount of jet fuel tax, in the case of a taxable delivery. The tax need not be separately stated if the invoice bears the notation that the price includes tax.
NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7385-7398 and 8301, Revenue and Taxation Code.
HISTORY

1. New section filed 11-7-69 as an emergency; designated effective 11-10-69 (Register 69, No. 45).
2. Certificate of Compliance--Section 11422.1, Government Code, filed 1-8-70 (Register 70, No. 2).
3. Change without regulatory effect amending Note filed 6-5-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 23).
4. Amendment of section and Note filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§1178. Records.
Note     •     History

(a) General. A taxpayer shall maintain and make available for examination on request by the board or its authorized representatives, records in the manner set forth at California Code of Regulations, Title 18, Section 4901
(b) Specific Applications. In addition to the record keeping requirements set forth in subdivision (a), suppliers shall comply with the following requirements. A supplier shall maintain complete records of all rack removals, sales, imports and exempt dispositions including exemption certificates, self-consumed fuel, inventories, purchases, receipts, and tank gaugings or meter readings, of motor vehicle and any other fuel that is required to be accounted for on the supplier's return or report. Such records include but are not limited to: 
(1) Refinery Reports related to the production of motor vehicle fuel. 
(2) Inventory reconciliation by location. 
(3) Storage inventory reports. 
(4) List of storage locations. 
(5) Tax returns from other states to support export claims. 
(6) Cardlock statements. 
(7) Calculations or formulas to support off-highway exempt usage. 
(8) First Taxpayer Reports. 
NOTE

Authority cited: Section 8251, Revenue and Taxation Code. Reference: Sections 7403.2, 7651, 7652.5, 7652.7, 8253, 8301, 8302 and 8303, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
2. Amendment of section and Note filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
Chapter 1.5. Underground Storage Tank Maintenance Fee
Article 1. General Provisions and Definitions
§1201. Definitions.
Note     •     History

(a) “Gallon” means the United States gallon of 231 cubic inches, without adjustment of the volumetric gallonage for temperature correction of the petroleum delivered into the underground storage tank, except that temperature corrected gallonage to 60 degrees Fahrenheit will be accepted as the gallonage delivered when all of the following conditions are met:
(1) The quantity of petroleum delivered in a single delivery to a single location is 1,000 or more gallons; and
(2) The delivery of the petroleum is invoiced to the purchaser, and settlement is made by the purchaser, based on the temperature corrected gallonage of the petroleum delivered; or, if the delivery is to a tank location operated by the manufacturer of the petroleum, the gallonage accounted for in the inventory records of the manufacturer for the delivery location is maintained on a temperature corrected basis; and
(3) Temperature correction is consistently applied to all deliveries to the location over a period of 12 or more consecutive months.
(b) “Operator” means any person who is in control of, or has responsibility for, the daily operation of an underground storage tank. The operator is not liable for the fee unless the operator is also the owner of the underground storage tank.
(c) “Petroleum” means crude oil, or any fraction thereof, which is liquid at standard conditions of temperature and pressure, which means at 60 degrees Fahrenheit and 14.7 pounds per square inch absolute. Petroleum includes products that are blends of hydrocarbons derived from crude oil through processes such as separation, conversion, upgrading, or finishing.
(d) “Underground Storage Tank” means a tank or combination of tanks, including any attached piping, that is used for the accumulation of petroleum, and the volume of which is 10 percent or more beneath the surface of the ground. The term “underground storage tank” does not include any of the following:
(1) A tank of 1,100 gallons or less capacity which is located on a farm or on property used primarily for dwelling purposes and which is used for storing motor vehicle fuel for purposes other than for resale.
(2) A tank used for storing heating oil for consumptive use on the premises where stored.
(3) A tank which meets all of the following conditions:
(A) All exterior surfaces of the tank, including connected piping, and the floor directly beneath the tank, can be monitored by direct viewing.
(B) The structure in which the tank is located is constructed in such a manner that the structure provides for secondary containment of the contents of the tank, as determined by the local agency designated pursuant to Section 25283 of the Health and Safety Code.
(C) The owner or operator of the underground storage tank conducts daily inspections of the tank and maintains a log of inspection results for review by the local agency designated pursuant to Section 25283 of the Health and Safety Code, as requested by the local agency.
(D) The local agency designated pursuant to Section 25283 of the Health and Safety Code determines without objection from the State Water Resources Control Board that the underground storage tank meets requirements which are equal to or more stringent than those imposed by Division 20, Chapter 6.7 of the Health and Safety Code, commencing with Section 25280.
NOTE

Authority cited: Section 50152, Revenue and Taxation Code; and Section 25299.42, Health and Safety Code. Reference: Sections 50107, 50108.1, 50109 and 7355, Revenue and Taxation Code; Sections 25281, 25283.5, 25299.20, 25299.22, 25299.24, 25299.41 and 25299.43, Health and Safety Code; Title 18, Section 1121, California Code of Regulations; and Section 280.12, 40 Code of Federal Regulations.
HISTORY

1. New section filed 12-9-99; operative 1-8-2000 (Register 99, No. 50).  
2. New chapter 1.5 heading and relocation of sections 1201-1271 from chapter 2 to chapter 1.5 filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§1205. Feepayer; Rebuttable Presumption.
Note     •     History

The fee is due from the owner of an underground storage tank for which a permit is required pursuant to Section 25284 of the Health and Safety Code. There is a rebuttable presumption that the owner of the real property is the owner of the underground storage tank located on the property, even if the property is leased to another person. This presumption may be overcome by showing that ownership of the tank rests with someone other than the real property owner. Evidence to rebut the presumption may include, but is not limited to, the following:
(a) The lessee installed the underground storage tank at the location, and the lease agreement gives the lessee the right to remove the tank at the termination of the lease, regardless of whether the lessor's approval of the removal is required.
(b) The lessee installed the underground storage tank at the location, and the lease agreement states that any improvements installed by the lessee are the property of the lessee during the term of the lease.
(c) Documentation, such as a bill of sale, shows the transfer of ownership of the tank to a person other than the real property owner.
(d) The underground storage tank is depreciated on the state or federal income tax returns of a person other than the real property owner.
(e) The underground storage tank existed at the premises at the time the lease agreement was signed, and the lease agreement specifies that the underground storage tank is owned by and title thereto is vested in the lessee during the term of the lease.
NOTE

Authority cited: Section 50152, Revenue and Taxation Code; and Section 25299.42, Health and Safety Code. Reference: Section 50107, Revenue and Taxation Code; and Sections 25299.21, 25299.41 and 25299.43, Health and Safety Code.
HISTORY

1. New section filed 1-9-2001; operative 2-8-2001 (Register 2001, No. 2).  
2. Change without regulatory effect amending section heading filed 7-10-2012 pursuant to section 100, title 1, California Code of Regulations (Register 2012, No. 28).
§1212. Liability for Fee.
Note     •     History

(a) The fee is imposed upon the owner of an underground storage tank for each gallon of petroleum placed into the tank. The owner of the tank is liable for payment of the fee regardless of whether the owner is the operator of the underground storage tank and is liable for the fee even if the owner and operator have entered into an agreement that requires the operator to pay the fee to the board.
(b) The fee is due regardless of whether the fee has previously been paid for gallons of petroleum that were removed from an underground storage tank and placed into another underground storage tank or redeposited into the same tank in which they were previously stored.
(c) An owner is liable for the fee on all gallons placed in the underground storage tank(s) he or she owns. Where the owner requires a certain brand of fuel to be placed in a tank and the operator also places a different brand of fuel in the tank, the owner is liable for the fee on the gallons of both brands of fuel, even if placing fuel of a different brand in the tank violates the lease between the operator and owner.
(d) An owner is liable for the fee even though the owner claims he or she did not know the fee was due or was unable to obtain information from an operator as to the gallons placed into the underground storage tank(s). As provided by subdivision (c) of Section 50159 of the Revenue and Taxation Code, the board may provide to the feepayer otherwise confidential information obtained from the operator of an underground storage tank to the extent that this information is necessary for assessment, administration, and verification of the fee.
NOTE

Authority cited: Section 50142, Revenue and Taxation Code; and Section 25299.42, Health and Safety Code. Reference: Sections 50107, 50109 and 50159, Revenue and Taxation Code; and Sections 25299.41 and 25299.43, Health and Safety Code.
HISTORY

1. New section filed 12-9-99; operative 1-8-2000 (Register 99, No. 50).  
2. Change without regulatory effect amending subsection (d) filed 7-10-2012 pursuant to section 100, title 1, California Code of Regulations (Register 2012, No. 28).
§1213. Payment of Fee by Operator.
Note     •     History

(a) If the board discovers that the fee has been paid by the operator, but the notarized documents described in subdivisions (b)(1) and (b)(2) below have not been filed with the board, the owner and operator will be given an opportunity to request in writing that fee payments made by the operator be transferred to the owner's account. Until such request is made, the owner remains liable for payment of the fee, penalties, and interest without credit for fees paid by the operator, and the operator may request a refund of the amounts paid pursuant to Section 50140 of the Revenue and Taxation Code.
(b) For the convenience of the owner and operator, and to facilitate payment of the fee by the operator on behalf of the owner, the board shall mail fee returns and any notices for the owner's account to the operator if both of the following conditions are met:
(1) The owner executes a notarized document in the form shown below, requesting that the fee returns and all notices for the owner's account be mailed to the operator. The owner must acknowledge in the form that he or she is responsible for the fee if, for example, the operator fails to make payment, pays the fee late, or underreports the gallons on which the fee is based. The documents will remain in effect until the owner advises the board and operator in writing of any change.
(2) The operator executes a notarized document in the form shown below, acknowledging that he or she will pay the fee and any related interest and penalty on behalf of the owner and will not file a claim for refund of the fee based on the grounds that he or she was the operator rather than the owner of the tank and, therefore, did not owe the fee. The document will remain in effect until the operator advises the board and owner in writing of any change.
Exhibits A and B are samples of the documents described in (b)(1) and (b)(2) above.
NOTE

Authority cited: Section 50152, Revenue and Taxation Code; and Section 25299.42, Health and Safety Code. Reference: Sections 50107, 50109, 50139 and 50140, Revenue and Taxation Code; and Sections 25299.41 and 25299.43, Health and Safety Code.
HISTORY

1. New section and Exhibits A and B filed 12-9-99; operative 1-8-2000 (Register 99, No. 50).  

Exhibit A

STATEMENT OF UNDERGROUND STORAGE TANK OWNER
(Title 18, California Code of Regulations, Section 1213)

	Account No.: TK MT 44-	
I hereby authorize the Board of Equalization to send all notices and returns concerning the identified Underground Storage Tank Maintenance Fee (Part 26, Division 2 of the Revenue and Taxation Code, commencing with Section 50101) Account to the following:

Location of tanks(s) STREET	CITY	COUNTY

Name of Tank Operator		Area Code and Phone Number

Mailing Address of Tank Operator
By executing this document, I/we understand that all returns and notices regarding the above Underground Storage Tank Maintenance Fee Account will be mailed to the tank operator identified above, but that I/we am/are responsible for payment of all Underground Storage Tank Maintenance Fees, penalties and interest due based on the gallons of petroleum placed in the underground storage tank(s). I/we also acknowledge receipt of a copy of the Board's Publication 88, Underground Storage Tank Fee.

Name of Tank Operator (Please Print)		Area Code and Telephone Number

Mailing Address of Tank Owner

Signature of Tank Owner		Date

Title (owner, partner, corporate officer)

Signature of Tank Owner		Date

Title (owner, partner, corporate officer)
Attach Notary Statement Here

Exhibit B

STATEMENT OF UNDERGROUND STORAGE TANK OPERATOR
(Title 18, California Code of Regulations, Section 1213)

	Account No.: TK MT 44-	

Location of tanks(s) STREET	CITY	COUNTY

Name of Tank Owner		Area Code and Telephone Number

Mailing Address of Tank Owner
By executing this document, I/we understand that all returns and notices regarding the above Underground Storage Tank Maintenance Fee Account will be mailed to me/us, as the tank operator identified below. As the operator of the underground storage tank, I/we acknowledge I/we am/are paying the Underground Storage Tank Maintenance Fee on behalf of the tank owner and will not apply for a refund of the fees on the basis that I/we am/are not the owner of the tank and, therefore, do not owe the fees. I/we will notify both the Board of Equalization and the tank owner of any changes affecting this account. I also acknowledge receipt of a copy of the Board's Publication 88, Underground Storage Tank Fee.

Name of Tank Operator (Please Print)		Area Code and Telephone Number

Mailing Address of Tank Operator

Signature of Tank Operator		Date

Title (owner, partner, corporate officer)

Signature of Tank Operator		Date

Title (owner, partner, corporate officer)
Attach Notary Statement Here
§1214. Payment by Electronic Funds Transfer.
Note     •     History

Payments by electronic funds transfer shall be made in accordance with California Code of Regulations, Title 18, Section 4905. 
NOTE

Authority cited: Section 50112.7, Revenue and Taxation Code. Reference: Sections 50112.7 and 50112.9, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-7-2005; operative 7-7-2005 (Register 2005, No. 23).
§1220. Exemption from Fee.
Note     •     History

The fee does not apply to:
(a) The State of California, or any agency or department thereof.
(b) The United States, its unincorporated agencies and instrumentalities.
(c) Any incorporated agency or instrumentality of the United States wholly owned by the United States or by a corporation wholly owned by the United States.
(d) Banks and other financial institutions.
(e) Insurance companies.
(f) Any person of Indian descent who is entitled to receive services as an Indian from the United States Department of the Interior when the underground storage tank is located upon an Indian reservation, including rancherias, or any land held by the United States in trust for any Indian tribe or individual Indian.
NOTE

Authority cited: Section 50152, Revenue and Taxation Code; and Section 25299.42, Health and Safety Code. Reference: Sections 50107 and 50108, Revenue and Taxation Code; and Sections 25299.20 and 25299.21, Health and Safety Code.
HISTORY

1. New section filed 12-9-99; operative 1-8-2000 (Register 99, No. 50).  
§1248. Relief from Liability.
Note     •     History

A person may be relieved from the liability for the payment of the fee, including any penalties and interest added to those fees, when that liability resulted from the failure to make a timely return or a payment and such failure was found by the board to be due to reasonable reliance on written advice given by the board as described in California Code of Regulations, Title 18, Section 4902. 
NOTE

Authority cited: Section 50152, Revenue and Taxation Code; and Section 25299.42, Health and Safety Code. Reference: Section 50112.5, Revenue and Taxation Code.
HISTORY

1. New section filed 12-9-99; operative 1-8-2000 (Register 99, No. 50).  
2. Amendment filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§1249. Innocent Spouse or Registered Domestic Partner Relief from Liability.
Note     •     History

A spouse or registered domestic partner claiming relief from liability for the underground storage tank maintenance fee, interest, penalties, and other amounts shall be relieved from such liability where all the requirements set forth in California Code of Regulations, title 18, section 4903 are met.
NOTE

Authority cited: Section 50152, Revenue and Taxation Code. Reference: Sections 50112.6 and 50139-50142.2, Revenue and Taxation Code; and Sections 297, 297.5 and 308, Family Code.
HISTORY

1. New section filed 5-18-2010; operative 6-17-2010 (Register 2010, No. 21).
§1271. Records.
Note     •     History

(a) General. A feepayer shall maintain and make available for examination on request by the board or its authorized representatives, records in the manner set forth at California Code of Regulations, Title 18, Section 4901.
(b) Specific Applications. In addition to the record keeping requirements set forth in subdivision (a), owners of underground storage tanks shall comply with the following requirements. 
An owner of underground storage tanks shall maintain complete records of all tanks owned and all purchases of petroleum products placed into underground storage tanks. Such records include but are not limited to: 
(1) Federal Income Tax Return Depreciation Schedules or fixed asset and improvement listing. 
(2) Property Tax Statements. 
(3) Underground storage tank installation records. 
(4) Lease agreements. 
(5) Petroleum products purchase invoices. 
(6) Copy of local agency permit and application for permit filed with the local agency. 
NOTE

Authority cited: Section 50152, Revenue and Taxation Code. Reference: Sections 50109 and 50153, Revenue and Taxation Code.
HISTORY

1. New section filed 12-9-99; operative 1-8-2000 (Register 99, No. 50).  
2. Amendment of section and Note filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
3. Change without regulatory effect amending subsection (a) filed 7-10-2012 pursuant to section 100, title 1, California Code of Regulations (Register 2012, No. 28).
Chapter 2. Use Fuel Tax
§1300. Foreword. [Repealed]
Note     •     History

NOTE

1300 to 1335, inclusive, issued under authority of Section 9251, Revenue and Taxation Code.
HISTORY

1. 1300 to 1335, inclusive, filed 11-17-48, designated to be effective January 1, 1949 (Register 14, No. 6).
2. Amendment filed 7-20-71 as procedural and organizational; effective upon filing (Register 71, No. 30).
3. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
4. Relocation of sections 1201-1271 from chapter 2 to chapter 1.5 filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§1301. Fuel.
Note     •     History

Fuel includes any combustible gas or liquid, by whatever name the gas or liquid may be known or sold, of a kind used in an internal combustion engine for the generation of power to propel a motor vehicle on the highways, except fuel that is subject to the tax imposed by the Motor Vehicle Fuel License Tax Law and the Diesel Fuel Tax Law. For example, fuel includes, but is not limited to, liquefied petroleum gases, kerosene, distillate, stove oil, natural gas in liquid or gaseous form, and alcohol fuels. “Alcohol fuel” includes: ethanol (ethyl alcohol), methanol (methyl alcohol), or blends of gasoline and alcohol (including any denaturant) containing 15 percent, or less, gasoline by volume measured at 60 degrees Fahrenheit.
“Natural gas” means naturally occurring mixtures of hydrocarbon gases and vapors consisting principally of methane whether in gaseous or liquid form.
The taxable unit for compressed natural gas (gaseous form) is 100 cubic feet of gas measured at 14.73 pounds of pressure per square inch at 60 degrees Fahrenheit.
The taxable unit for liquid natural gas and other liquid fuels is the United States gallon, which is 231 cubic inches. To convert liters to gallons, the quantity of liters shall be multiplied by .26417 to determine the equivalent quantity in gallons. The resulting figure should be rounded to the nearest tenth of a gallon. 
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Sections 7304, 8604, 8607, 8613, 8615 and 8651.6, Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-12-66; effective thirtieth day thereafter (Register 66, No. 31).
2. Amendment filed 12-16-70; effective thirtieth day thereafter (Register 70, No. 51).
3. Amendment filed 5-20-80; effective thirtieth day thereafter (Register 80, No. 21). For technical reasons, printed in Register 80, No. 23.
4. Amendment filed 11-5-82; effective thirtieth day thereafter (Register 82, No. 45).
5. Amendment of section and Note filed 4-20-99; operative 5-20-99 (Register 99, No. 17).
§1302. Motor Vehicle.
Note     •     History

Motor vehicle includes every self-propelled vehicle operated or suitable for operation on the highways, including an overweight or oversize vehicle operated on the highway under permit and a vehicle exempt from vehicle registration under the Vehicle Code, except vehicles used exclusively upon stationary rails or tracks.
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Section 8603, Revenue and Taxation Code.
HISTORY

1. New section filed 11-17-48; designated effective 1-1-49 (Register 14, No. 6).
2. Amendment filed 1-17-56; effective thirtieth day thereafter (Register 56, No. 2).
3. Amendment filed 9-12-66; effective thirtieth day thereafter (Register 66, No. 31).
4. Amendment filed 12-9-68; effective thirtieth day thereafter (Register 68, No. 47).
§1303. Highway.
Note     •     History

A highway includes a way or place, of whatever nature, within the exterior boundaries of the state including a way or place within a federal area, publicly maintained and open to the use of the public for purposes of vehicular travel, notwithstanding private participation in the maintenance of the way or place. It shall be presumed that a way or place is dedicated and accepted as a highway when it is recognized as a part of its maintained highway system by a proper public authority.
A way or place within a national or state forest which is entirely privately maintained, or a road over which forest products are transported in a national or state forest privately constructed or maintained pursuant to an existing agreement with the public authority having jurisdiction thereof will not be considered a highway notwithstanding the fact that it may be declared by the public authority to be a part of its road system. (See regulation 1316--Exempt Uses of Fuel in Motor Vehicles.)
A way or place is not a highway within the meaning of section 8605 of the Revenue and Taxation Code, during such times as it is closed by the governmental authority to the use of the public regardless of the purpose for which it is closed. A highway is open to the use of the public if vehicular travel is permitted although subject to traffic controls.
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: 8605, Revenue and Taxation Code.
HISTORY

1. New section filed 2-19-58; effective thirtieth day thereafter (Register 58, No. 3).
2. Amendment filed 5-8-69; effective thirtieth day thereafter (Register 69, No. 19).
3. Amendment filed 7-20-71 as procedural and organizational; effective upon filing (Register 71, No. 30).
§1304. User.
Note     •     History

The term “user” includes:
(a) a subhaul operator who uses his vehicle in the performance of subcontract services for another contract operator, 
(b) the lessee of a vehicle who purchases and supplies fuel used in the operation of the vehicle,
(c) the lessee of a vehicle who is qualified in writing by the board as a user of fuel which is purchased and supplied by the lessor of the vehicle, or 
(d) the lessor of a vehicle who purchases and supplies the fuel used in the operation of that vehicle by the lessee unless the lessee is qualified as the user under (c) above.
The term “user” does not include the Government of the United States or an instrumentality thereof
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Section 8608, Revenue and Taxation Code.
HISTORY

1. New section filed 8-23-57 as an emergency; designated effective 10-1-57 (Register 57, No.13).
2. Relettering and amendment of former subsection(c) to subsection(d), and new subsection(c) filed 12-29-89; operative 1-28-90 (Register 90, No. 1). 
§1305. Fuel Tank.
Note     •     History

A fuel tank includes a separate compartment of a cargo tank used as a fuel tank and any auxiliary tank or receptacle of any kind from which fuel is supplied for the propulsion of the vehicle whether or not such tank or receptacle is directly connected to the fuel supply line of the vehicle.
NOTE

Authority cited: Sections 9251 and 8612, Revenue and Taxation Code.
HISTORY

1. New section filed 8-23-57 as an emergency; designated effective 10-1-57 (Register 57, No. 13).
§1306. Vendor.
Note     •     History

“Vendor” includes a service station dealer, a broker or distributor as defined under the Motor Vehicle Fuel License Tax Law, and a user who sells fuel to others. “Vendor” also includes any person who sells fuel delivered into the fuel tank of a motor vehicle through a pump equipped with a key-lock meter which he supplies when he retains ownership of the fuel until it is withdrawn and placed in the fuel tank, notwithstanding that the fuel is placed in the fuel tank by the user. “Vendor” does not include a commission agent who makes no sales of fuel to users on his own account, who sells fuel title to which remains in the agent's principal until the fuel is delivered to the user, and who bills the user in the name, and on the invoice, of the principal for whom the agent sells the fuel. In such instances the agent's principal is the vendor.
NOTE

Authority cited for Sections 1306 and 1307: Section 9251, Revenue and Taxation Code, and Chapters 1180, 1859 and 1968, Stats. 1959. Reference: Section 8610, Revenue and Taxation Code.
HISTORY

1. New Sections 1306 and 1307 filed 9-17-59; effective thirtieth day thereafter (Register 59, No. 16).
2. Amendment filed 10-30-75; effective thirtieth day thereafter (Register 75, No. 44).
§1307. Vendor's Permit.
Note     •     History

(a) General. A vendor who wishes to conduct business separately at different locations will be issued a permit for each place of business upon the filing of an application for a permit for each location. The permit shall be conspicuously displayed at the place of business of the vendor where fuel is sold and delivered to users. If a vendor is the holder of a single permit and has more than one such place of business but does not wish to conduct business separately at each location, duplicate copies of the permit will be supplied by the board so that the vendor may display the permit as required.
(b) Inactive Permits. Any person operating as a vendor of fuel in this State under the Use Fuel Tax Law must hold a valid vendor use fuel tax permit. Any person who is not operating as a vendor of fuel but who is holding a vendor use fuel tax permit must surrender the permit to the board for cancellation. The board may revoke the permit of any person found not to be operating as a vendor of fuel.
Upon either the discontinuance of operations as a vendor or the sale of the business, a permit holder shall notify the board of such discontinuance or sale and physically deliver the permit to the board for cancellation. To be acceptable, the notice of the discontinuance or sale of the business must be received by the board in one of the following ways:
(1) Either an oral or a written statement given to a board representative accompanied by delivery of the permit. If the permit is lost, destroyed, or otherwise unavailable for delivery to the board, the notice of discontinuance or sale must be in writing.
(2) Receipt by the board of the application for a vendor's permit from the successor of the business. Such application will serve to put the board on notice of the discontinuance of operations as a vendor by the predecessor.
Notice to another state agency of the discontinuance of operations or the sale of a business does not constitute notice to the board.
(c) Predecessor Liability. Unless the permit holder who sells, donates, trades or otherwise transfers a business notifies the board of such transfer and delivers the permit to the board for cancellation as provided in paragraph (b) above, he or she will be liable for taxes, interest, and penalties (excluding penalties for fraud or intent to evade the tax) incurred by the successor who, with the transferor's actual or constructive knowledge, uses the permit in any way, e.g., displays the permit in the successor's place of business or files returns with the board in the name of the predecessor. The amount of the liability of the predecessor shall include all taxes, interest, and penalties incurred by the successor up to the time the board receives notice of the sale as provided herein. However, at its discretion, the board may relieve the predecessor from liability for penalties incurred by the successor.
A successor may, under certain conditions, be liable for tax, interest, and penalties incurred by a predecessor as explained in Regulation 1334, Successor's Liability (18 CCR 1334).
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Sections 8711, 8712, 8713, and 8716, Revenue and Taxation Code.
HISTORY

1. Amendment of section and new subsections (b) and (c) filed 9-19-91; operative 10-21-91 (Register 91, No. 52).
§1308. Wholesaler.
Note     •     History

NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Section 8616, Revenue and Taxation Code.
HISTORY

1. New section filed 3-1-95; operative 3-31-95 (Register 95, No. 9).
2. Repealer filed 4-20-99; operative 5-20-99 (Register 99, No. 17).
Article 2. Imposition of Tax
§1316. Exempt Uses of Fuel in Motor Vehicle.
Note     •     History

The tax does not apply with respect to that fuel which the user establishes to the satisfaction of the Board is used:
(a) In the operation of a motor vehicle off the highway. “Off the highway” includes private property, a way or place permanently or temporarily closed to public use for the purpose of vehicular travel, or any way or place used for vehicular travel which is not a highway as defined in Regulation 1303.
A vehicle is operated upon a highway if it moves any distance in the general direction of the highway, whether upon the paved or unpaved portion thereof. An operation is not conducted upon a highway when a vehicle is operated thereon only for the purpose of crossing the highway from private property on one side to private property directly on the other and the vehicle is not operated for any distance in the general direction of the highway in making the crossing.
(b) In the operation of a motor vehicle on any highway which is under the jurisdiction of the United States Department of Agriculture and with respect to the use of such highway the user pays, or contributes to, the cost of construction or maintenance thereof pursuant to an agreement with, or permission of, that agency. “Highway which is under the jurisdiction of the United States Department of Agriculture” (hereafter referred to as U.S.D.A.) includes a way or place in the Forest Service road system with--in a National Forest, or partly within the National Forest and partly on private property, but does not include a state or county highway traversing the National Forest.
A user who “pays, or contributes to the cost of construction or maintenance” includes any user who shares in the cost of construction or maintenance of a highway with respect to the use of which the exemption is claimed, either directly as a party to a joint construction or maintenance agreement with U.S.D.A., or indirectly through any person who is a party to such an agreement. “Pays or contributes,” in addition to monetary payments or contributions, includes: (1) the bearing in whole or in part of the cost of construction or maintenance by the user who performs the work himself or by his employment of others to perform the work; or (2) the sharing of the cost of construction or maintenance indirectly by any person who contracts with a party to such an agreement to perform transportation by motor vehicle upon such U.S.D.A. highway, or any subcontractor of such contractor who makes a like use of the highway, when the share amount of the contribution is specified in the contract between the respective contracting parties, notwithstanding that such amount may be reflected in a lump sum rate of compensation for the transportation service or transportation and logging or other services.
Any user claiming exemption from tax with respect to fuel used on a highway which is under the jurisdiction of the U.S.D.A. shall also keep records to show a description of the highway and route traveled thereon, and the amounts paid or contributed directly or indirectly for the cost of construction or maintenance of the highway pursuant to an agreement with the U.S.D.A. When a motor vehicle is operated partly on such highway and partly on a highway of this state or any political subdivision thereof, the gallonage of fuel used in operations on the U.S.D.A. highway for which exemption is claimed may be determined: (1) in the proportion that the miles operated on such highway bears to the sum of the miles operated thereon and the miles operated upon any other highway; or (2) by computing the gallonage of fuel used on the U.S.D.A. highway by dividing a miles per gallon rate into the total miles operated on the U.S.D.A. highway. The miles per gallon rate shall be determined by a fuel consumption test made under typical operating conditions and subject to approval of the Board.
(c) In the operation of an implement of husbandry, truck or farm tractor which is used in agricultural operations off the highway and only incidentally operated upon a highway in moving between farms or parts of farms which are in close proximity and which vehicles are exempt from registration under the Vehicle Code.
(d) In the operation of any construction equipment while operated within the confines or limits of a construction project and only incidentally operated on the highway within such confines or limits and which equipment is exempt from registration under the Vehicle Code. As used in this subsection and in subsection (c), above, “incidentally operated” does not include the use of agricultural vehicles or special construction equipment for the transportation of persons or property upon the highways in an operation which would require registration of the vehicle under the Vehicle Code.
(e) For a purpose other than the generation of power to propel a motor vehicle on a highway, including fuel used to drive power take-off equipment to turn a rotary cement mixer, or to operate an air conditioner or garbage compressor.
(f) Any user claiming exemption from tax under this regulation shall accurately maintain adequate records to show the operations claimed to be exempt including the miles traveled and fuel used in order to establish to the satisfaction of the Board that the user is entitled to the exemption.
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Sections 8605, 8651, 8652, 8653 and 8653.1, Revenue and Taxation Code.
HISTORY

1. Amendment filed 11-17-78; effective thirtieth day thereafter (Register 78, No. 46). For prior history, see Registers 71, No. 30; 69, No. 19; 61, No. 18;57, No. 13.
2. Amendment of subsection (e) and Note filed 4-20-99; operative 5-20-99 (Register 99, No. 17).
§1316.5. Exemption Certificates.
Note     •     History

NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Sections 8740, 8741 and 9354.5, Revenue and Taxation Code.
HISTORY

1. New section filed 3-1-95; operative 3-31-95 (Register 95, No. 9).
2. Repealer filed 4-20-99; operative 5-20-99 (Register 99, No. 17).
§1317. Allowance of Credit or Refund of Tax Paid to Vendor.
Note     •     History

The tax paid to a vendor in this State may be applied by the purchaser as a credit against the tax due from the purchaser on all fuel used in this State in the reporting period in which the fuel, with respect to which the tax was paid to the vendor, was used.
The amount of credit allowable is the amount of tax separately stated or included in the selling price on the receipts (invoices) issued by the vendor to the purchaser for purchases of fuel delivered into vehicle fuel tanks. No tax credit may be taken for unauthorized payments of the tax on fuel delivered into a storage facility other than a vehicle fuel tank. To be entitled to the credit, a purchaser shall retain for inspection by the Board all receipts (invoices) given by vendors showing the amount of tax paid or included in the selling price, together with evidence of payment.
If within a reasonable period of time the purchaser has accumulated surplus credits which have not been applied to payment of tax liability under Section 8651 of the Revenue and Taxation Code, or if the purchaser ceases to be a user in this State, a claim for refund as provided in Sections 9152 and 9153 of said code should be filed. All claims for refund of overpayments shall be accompanied by the receipts (invoices) obtained by the purchaser from the vendor and evidence of payment.
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Sections 8651, 8751.5, 9151, 9152 and 9153, Revenue and Taxation Code.
HISTORY

1. New section filed 8-23-57 as an emergency; designated effective 10-1-57 (Register 57, No. 13).
2. Amendment filed 11-12-63; effective thirtieth day thereafter (Register 63, No. 22).
3. Amendment filed 9-12-66; effective thirtieth day thereafter (Register 66, No. 31).
4. Amendment of section heading, text and Note filed 10-24-94; operative 11-23-94 (Register 94, No. 43).
5. Amendment of section heading, section and Note filed 4-20-99; operative 5-20-99 (Register 99, No. 17).
§1318. Vendor's Liability for the Tax.
Note     •     History

(a) General. The vendor is required to collect and is liable for the amount of the tax on fuel sold and delivered into fuel tanks of motor vehicles, except any vehicle (a) operated by the Government of the United States or any instrumentality thereof, (b) operated interstate as authorized by regulation 1319, (c) operated by a user who qualifies for the exemption provided in Revenue and Taxation Code section 8655 as authorized by regulation 1319, or (d) operated exclusively on private property as authorized by regulation 1320. A vendor is not authorized to collect the tax on fuel delivered into a storage container other than a vehicle fuel tank. The amount of tax required to be collected constitutes a debt owed by the vendor to the state.
Except as may otherwise be provided by the board, a vendor who sells and delivers fuel into the fuel tank of a motor vehicle shall collect the tax notwithstanding that the user may claim exemption from the tax in his returns to the board for any nontaxable use of the fuel.
As respects a vendor's tax reporting, the tax is deemed to have been collected at the time of the sale irrespective of when payment for the amount of the invoice, including the tax, is received by the vendor. Failure to collect the tax from the purchaser (user) does not relieve the vendor from his liability to pay to the state the amount of the tax required to be collected, except that bad debt losses are deductible under circumstances described in section 8732.5 of the Revenue and Taxation Code and regulation 1331.6.
(b) Fuel Sold Through Keylock or Other Unattended Mechanisms. When fuel is sold through a keylock mechanism or other unattended mechanism it shall be presumed that the vendor delivered the fuel into the fuel tank of a motor vehicle and the vendor must collect the tax from the user. Farm and construction equipment are motor vehicles if they are suitable for operation on the highway. This includes most equipment running on rubber tires. Section 8652 of the Revenue and Taxation Code provides an exemption to farm and construction equipment users, but not to vendors delivering fuel into the fuel tanks of such vehicles. Customers fueling such equipment as rubber-tired backhoes, road graders, or farm tractors must pay the use fuel tax to the vendor when delivery is made through keylock pumps even if the equipment is hauled into the station on a trailer and the ultimate use of the fuel is exempt.
The presumption that fuel sold through a keylock or other unattended mechanism is delivered into the fuel tank of a motor vehicle shall be rebutted and the vendor shall not collect the tax if the user certifies in writing to the vendor that all fuel delivered to him through a specific mechanism will be delivered into bulk containers. If a customer puts fuel into the fuel tank of a motor vehicle and places fuel into drums or other bulk containers at the same keylock station, the vendor should assign the customer two meter registers. The customer then may furnish the vendor with a certificate that all fuel delivered through a specified meter register will be delivered into bulk containers. Regulation 1320 may not be applied to fuel deliveries through keylock or other unattended mechanisms unless the mechanism is located where the vehicle is operated exclusively off the highway. Regulation 1319 is applicable to keylock deliveries only in situations specified in that regulation and to the same extent as if the vendor made the delivery into the fuel tank of the vehicle personally.
(c) Sales to Persons Who Paid the Annual Flat Rate Tax. Any vendor who sells and delivers liquefied petroleum gas, liquid natural gas or compressed natural gas into the fuel tank of a vehicle with respect to which the owner or operator has paid the annual flat rate fuel tax and which bears the current year's identification emblem provided for in regulation 1325 is not required to collect the tax with respect to such fuel. The vendor must retain for each sale or delivery claimed to be exempt records showing (a) the type and quantity of fuel sold or delivered, (b) the date of the sale or delivery, (c) the serial number of the identification emblem affixed to the vehicle pursuant to regulation 1325 and (d) and license number of the vehicle.
(d) Overcollections by Vendor. If with respect to fuel tank deliveries the vendor collects from any user a greater amount of tax than that which is required to be collected, he shall remit the full amount collected to the board, since the user is entitled to a credit or a refund from the state. If the vendor improperly collects the tax on deliveries of fuel into storage facilities other than vehicle fuel tanks, the amount of tax so collected shall be refunded by the vendor to the user purchasing the fuel.
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Sections 8651, 8652, 8732, 8732.5, 8733, Revenue and Taxation Code.
HISTORY

1. Amendment filed 12-2-75; designated effective 1-1-76 (Register 75, No. 49). For prior history, see Register 70, No. 51.
2. Amendment filed 2-28-80; effective thirtieth day thereafter (Register 80, No. 9).
§1319. Vehicle Fuel Tank Deliveries Without Payment of Tax.
Note     •     History

A user who:
(a) holds a valid use fuel tax permit,
(b) operates a motor vehicle within and without the state, or qualifies for the exemption provided in Revenue and Taxation Code section 8655, and
(c) purchases in the state for such operation fuel delivered into the fuel tank of such vehicle in quantities that would result consistently in payment of substantially more tax to vendors than the tax that would be imposed with respect to fuel used in the operation of the vehicle within this state may secure from the board an authorization which will permit the vendor of the fuel so purchased to sell and deliver such fuel into the fuel tank of the vehicle without collecting the tax from the user.
To secure the authorization the user shall apply to the board therefore, furnishing a description of his operations sufficiently detailed to demonstrate to the board that, in the absence of such authorization, the amount of tax which would be paid by the user to vendors would exceed that measured by the fuel consumed in the operation of the vehicle in this state so that an overpayment of fuel tax by the user may be expected to occur consistently.
Each user purchasing fuel in pursuance of this rule without payment of the tax to his vendor shall certify to the vendor that the user has complied with this rule and has secured authorization from the board so to purchase the fuel. The certificate shall contain the use fuel tax permit number of the user, together with his name and address. A single certificate may cover transactions occurring after it has been furnished to the vendor so long as the authorization remains in full force and effect.
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Sections 8607 and 8732, Revenue and Taxation Code.
HISTORY

1. New section filed 9-20-57 as an emergency; designated effective 10-1-57 (Register 57, No. 16).
2. Certificate of Compliance--Section 11422.1, Government Code, filed 1-9-58 (Register 58, No. 1).
3. Amendment filed 12-16-70; effective thirtieth day thereafter (Register 70, No. 51).
§1320. Vehicle Fuel Tank Deliveries for Off-Highway Use.
Note     •     History

A user whose use of fuel is exempt from the tax under Section 8653 because of the operation of his vehicle exclusively off the highway, may be authorized by the board to purchase fuel without payment of the tax to the vendor when the vendor delivers the fuel into the fuel tank of the user's vehicle at the location where the vehicle is operated exclusively off the highway. The user shall submit evidence satisfactory to the board that he is eligible for the exemption and the authorization.
The user shall execute and furnish to each vendor from whom fuel is purchased a certificate for all fuel purchased without payment of the tax to the vendor pursuant to the authorization of the board. The certificate shall be in form substantially as follows:
“The purchaser hereby certifies that he is the holder of valid California Use Fuel Tax Permit Number ________; that he has been issued authorization by the State Board of Equalization permitting the purchase of fuel delivered into the fuel tanks of vehicles operated by him exclusively off the highway without paying the tax to the vendor; that the use of the fuel so purchased is exempt from the Use Fuel Tax under Section 8607 of the Revenue and Taxation Code.

	Name of Vendor 	
	Purchaser 	
	Address 	
Date________.”
NOTE

Authority cited: Sections 8651, 8732.5 and 9251, Revenue and Taxation Code, and Chapters 1180, 1859 and 1968, Stats. 1959.
HISTORY

1. New section filed 9-17-59; effective thirtieth day thereafter (Register 59, No. 16).
§1321. Allowances for Pumping Liquefied Petroleum Gas.
Note     •     History

Liquefied petroleum gas dealers who operate motor vehicles propelled by liquefied petroleum gas subject to the use fuel tax shall be allowed exemption from the tax under the provisions of Sections 8607 or 8652 of the Revenue and Taxation Code for the gallons of fuel used in pumping operations involved in unloading liquefied petroleum gas from the cargo tanks of the vehicles.
If a pump is operated by power take-off from the engine of a motor vehicle which is propelled by liquefied petroleum gas and the cargo tank of the vehicle has a water capacity of not greater than 2,500 gallons, the allowance for the fuel used in pumping shall be at the rate of 1 1/2 gallons per 1,000 gallons of fuel pumped.
If the user establishes to the satisfaction of the Board by test checks of fuel used in pumping made under typical operating conditions that rates of fuel consumption for the operation of his pumps are greater per 1,000 gallons of fuel pumped than the rate herein provided, the Board may allow deductions for pumping at the greater rates so determined.
If the pump is operated by power take-off from the engine of the motor vehicle propelled by liquefied petroleum gas and the cargo tank of the vehicle has a water capacity greater than 2,500 gallons, the user shall establish the pumping allowance by test checks made under typical operating conditions.
All tests made by the user will be subject to review by the Board. All detail and test data should be retained for inspection by the Board.
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Sections 8607 and 8652, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-62; effective 30th day thereafter; (Register 62, No. 4).
2. Amendment of first and fourth paragraphs filed 4-20-99; operative 5-20-99 (Register 99, No. 17).
§1322. Consumption of Liquefied Petroleum Gas in Vehicles Fueled from Cargo Tanks.
Note     •     History

Users who operate motor vehicles powered by liquefied petroleum gas supplied directly to the engine from the cargo tank of the motor vehicle are authorized for the purpose of making tax returns to compute the gallons used on a mile-per-gallon basis. The mile-per-gallon basis will be determined by tests. The tests will be made by the user and will be subject to review by the board. All detail and test data should be retained for inspection by the board. This method of computing use is authorized only for the purpose of making tax returns. Determinations may be imposed or refunds granted, if the board upon audit of the user's accounts and records, or upon the basis of tests made or other information determines that the return did not disclose the proper amount of tax due.
See regulation 1332 with respect to records on those motor vehicles powered by fuel not supplied directly to the engine from the cargo tank.
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Section 8607, Revenue and Taxation Code.
HISTORY

1. New sections filed 2-20-62; effective thirtieth day thereafter (Register 62, No. 4).
2. Amendment filed 11-12-63; effective thirtieth day thereafter (Register 63, No. 22).
3. Amendment filed 7-20-71 as procedural and organizational; effective upon filing (Register 71, No. 30).
§1323. Passenger Carriers--Transit Partial Exemption.
Note     •     History

(a) Definitions. Except where the context otherwise requires, the following definitions govern the construction of this regulation:
(1) “Transit service” means and is limited to:
(A) The common carriage of passengers by motor vehicle for compensation on an individual fare basis between fixed termini, or over a regular route on any line or lines in urban and suburban areas, or between cities in close proximity, or on any line or lines owned and operated by a transit district, transit authority, or city.
(B) The carriage of passengers by motor vehicle by a transit district, transit authority, or city in conformance with a demand-responsive transportation service.
(C) The carriage of persons by motor vehicle by any private entity providing transportation services as a transit operator as defined in subdivision (a)(2)(B) or (a)(2)(F) of this regulation.
(2) “Transit operator” includes the following:
(A) Any transit district, transit authority, or city owning and operating a transit system and engaging in transit services itself or through a wholly-owned nonprofit corporation.
(B) Any private entity providing transportation service under a contract or agreement, other than a general franchise agreement, entered into after September 26, 1978, with a public agency authorized to provide public transportation services. The provisions of subdivision (b) of this regulation shall apply only with respect to fuels consumed by that private entity while providing service under such contract or agreement.
(C) Any passenger stage corporation as defined in Section 226 of the Public Utilities Code, engaging in transit service subject to the jurisdiction of the Public Utilities Commission, when the motor vehicles of such passenger stage corporation are exclusively operated in urban or suburban areas or between cities in close proximity for the transportation of persons for hire, compensation, or profit; provided, however, that the exemption is not extended to any line or lines operated by such passenger stage corporation which shall exceed 50 miles of one-way route mileage. As defined in Section 226 of the Public Utilities Code, “passenger stage corporation” includes every person engaged as a common carrier for compensation, in the ownership, control, operation or management of a passenger stage over any public highway in this state between fixed termini or over a regular route except:
1. those whose operations are 98 percent or more exclusively within the limits of a city; or
2. those whose operations consist solely in the transportation of bona fide pupils attending an institution of learning between their homes and such institutions; or
3. that part of the passenger stage operations of any person, whether between fixed termini or over a regular route or otherwise, engaged in the transportation of any pupils or students to or from a public or private school, college or university, or to or from activities of a public or private school, college or university, where the rate, charge or fare for such transportation is not computed, collected or demanded on an individual fare basis.
(D) Any common carrier of passengers operating exclusively on any line or lines within the limits of a single city between fixed termini or over a regular route, 98 percent or more of whose operations, as measured by total route mileage operated, are exclusively within the limits of a single city, and who by reason thereof is not a passenger stage corporation subject to the jurisdiction of the Public Utilities Commission.
(E) Any school district, community college district, or county superintendent of schools owning, leasing, or operating buses for the purpose of transporting pupils to and from school and for other school or college activities involving pupils, including, but not limited to, field trips and athletic contests.
(F) Any private entity providing transportation services for the purposes specified in (a)(2)(E) under contract or agreement entered into after October 1, 1984, with a school district, community college district, or county superintendent of schools. The provisions of subdivision (b) of this regulation shall apply only with respect to fuels consumed by that private entity while providing service under such contract or agreement.
(3) “City” includes and is limited to a chartered city, or a general law city incorporated or organized under laws of this state.
(4) “Urban area” means any area which lies within a city, or within an unincorporated residential, commercial, or industrial area, and which does not fall within the definition of a suburban area as herein defined.
(5) “Suburban area” means any unincorporated residential commercial, or industrial area contiguous to, adjacent to, or adjoining a city.
(6) “Close proximity” as applied to cities means that they, or their suburban areas, are contiguous to, adjacent to, in the immediate vicinity of, or adjoining each other. It is unnecessary that the city boundaries or their suburban areas touch in order for the cities to be in close proximity.
(7) “Public agency” includes any transit district, transit authority, county, city, city and county, this state and any agency of this state.
(b) Application of Tax. A transit operator is exempt from use fuel tax with respect to fuel used for the propulsion of motor vehicles when operated in transit service. The operator must pay one cent for each gallon of such exempt fuel used. These payments shall be treated as a tax imposed under the use fuel tax law. The full rate of tax applies to the use of such fuels for the propulsion of motor vehicles in operations other than in transit service. The exemption does not apply to fuel used by a passenger stage corporation in passenger stage operations over any line or lines:
(1) The one-way mileage of which exceeds fifty miles, or
(2) The one-way mileage of which is less than fifty miles, if the operations are not exclusively within urban or suburban areas or between cities in close proximity.
(c) Records. A transit operator claiming the partial exemption from the use fuel tax under (a)(2)(B) or (a)(2)(F) above, must retain all relevant contracts and other documentary evidence to support the claimed exemption. The operator shall maintain records of fuel consumed in contract operations. If the same vehicles are used for charter or any other purpose when not required for contract runs, the operator shall maintain records sufficiently detailed to support the exempt portion of the fuel consumed. For example, if the operator computes the exemption based upon mileage driven, the operator shall maintain records of each trip, total mileage, and the mileage the vehicle is operated while providing services under such contracts or agreements.
If an overpayment of use fuel tax is expected to occur consistently, a transit operator may apply for authorization from the Board to purchase fuel without payment of tax to vendors as specified in Regulation 1319.
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Section 8655, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (a)(1) filed 7-22-77; effective thirtieth day thereafter (Register 77, No. 30). For prior history, see Register 73, No. 51.
2. Amendment filed 12-6-79; effective thirtieth day thereafter (Register 79, No. 49).
3. Amendment of subsections (a) and (c) filed 11-23-87; operative 12-23-87 (Register 87, No. 48).
4. Amendment filed 4-20-99; operative 5-20-99 (Register 99, No. 17).
§1324. Fuel Used with Systems Approved by the Air Resources Board.
Note     •     History

NOTE

Authority cited: Section 9251, Revenue and Taxation Code. References: Sections 8604, 8613, 8615, 8651.6, 8657, Revenue and Taxation Code.
HISTORY

1. New section filed 12-16-70; effective thirtieth day thereafter (Register 70, No. 51).
2. Repealer filed 12-2-75; designated effective 1-1-76 (Register 75, No. 49).
§1325. Annual Flat Rate Fuel Tax.
Note     •     History

(a) In General. In lieu of paying the use fuel tax on the basis of the number of gallons used, the owner or operator, except an interstate user, of a motor vehicle propelled by a system using liquefied petroleum gas, liquid natural gas, or compressed natural gas, who operates the motor vehicle exclusively within the State, may elect to pay the fuel tax for the use of such fuels on an annual flat rate basis according to the following fee schedule:

Unladen weight 	Annual Fee
All passenger cars and other vehicles 4,000 lbs. or less. 	 $36
More than 4,000 lbs. but less than 8,001 lbs 	 72
More than 8,000 lbs. but less than 12,001 lbs 	 120
12,001 lbs. or more 	 168
The flat rate fee is an annual tax. The annual period shall be that period from the end of the month in which the tax was paid to the end of the month prior in the following calendar year. When an owner or operator elects to pay the annual flat rate fuel tax on more than one vehicle, the owner or operator may request that the board prorate the tax due on a vehicle added during the annual period, so that all vehicles have the same annual period. In the year a vehicle is added, the annual flat rate fuel tax for that vehicle shall be calculated by dividing the fee by 12 and multiplying the resulting amount by the number of months remaining before the beginning of the next annual period.
(b) Identification Decal. Any person who desires to pay the annual flat rate tax under this regulation must secure a use fuel tax permit, pay the required tax to the board, and obtain from the board an identification decal for each vehicle with respect to which the annual flat rate tax has been paid. The decal shall be affixed to the vehicle by an agency or person authorized by the board. The decal shall not be transferred to another vehicle.
(c) Annual Returns. Any person may file annual use fuel tax returns if the only use of fuel of a kind taxable under the Use Fuel Tax Law is in vehicles with respect to which the annual flat rate fuel tax fee has been paid for the period during which the vehicle is operated. Any person authorized under this regulation to file returns on an annual basis and who uses fuel subject to the tax (other than fuel purchased tax paid and used in a private passenger automobile) shall advise the board of such use prior to the last day of the month following the month in which the taxable use occurred. The board may require such person to file returns on other than an annual basis.
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Sections 8604, 8613, 8619, 8651, 8651.5 and 8651.7, Revenue and Taxation Code.
HISTORY

1. New section filed 12-2-75; designated effective 1-1-76 (Register 75, No 49). For prior history, see Register 66, No. 31.
2. Amendment of subsections (a) and (c) filed 10-12-88; operative 11-11-88 (Register 88, No. 42).
3. Amendment filed 4-20-99; operative 5-20-99 (Register 99, No. 17).
Article 3. Reports and Records
§1331. Return of User.
Note     •     History

Each user of fuel except a user whose sole use of fuel is for the propulsion of a privately operated passenger automobile as provided in regulation 1331.1 is required to file a return for each calendar quarter (or each reporting period if required by the board to make a return and payment of tax for other than quarterly periods) on a form prescribed by the Board. A return shall be filed with the board for each quarter (or reporting period) even though no fuel was used during, or tax is due for, the quarter (or reporting period).
Failure to receive a return form does not relieve the user from the obligation of making a return to the board on or before the due date. If a return form is not received, a user may make a written return to the board setting forth the name, address, permit number, number of gallons of fuel used, and quarter for which the return is due. The return together with a remittance payable to “State Board of Equalization” for the amount of tax due shall be filed with the board on or before the due date and will be accepted in lieu of a return on the prescribed form.
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Sections 8751, 8752, 8753 and 8755, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-20-71 as procedural and organizational; effective upon filing (Register 71, No. 30). For prior history, see Register 66, No. 31.
2. Amendment of section heading, section and Note filed 4-20-99; operative 5-20-99 (Register 99, No. 17).
§1331.1. Privately Operated Passenger Automobile and Small Commercial Vehicles--When User's Permit and Tax Returns Are Not Required.
Note     •     History

(a) General. Any person whose sole use of fuel is for the propulsion of a privately operated passenger automobile, a commercial vehicle with unladen weight of less than 7,000 pounds, a privately operated two-axle truck which the user has leased for a period of 30-days or less or a motor vehicle that is not a qualified motor vehicle operated by an interstate user in this State, in connection with an interstate trip is not required to secure a use fuel tax permit and is excused from the filing of a use fuel tax return with the board when either of the following conditions is met:
(1) all fuel used in this state, except fuel brought in to the state in the fuel tank of the vehicle, is purchased from a vendor in California who collects the tax from the user when delivering the fuel into the fuel tank of the user's vehicle, or 
(2) that the flat rate fuel tax described in Regulation 1325 has been paid.
(b) Definitions. 
(1) “Privately operated passenger automobile” includes a station wagon, but does not include a motor vehicle used for the transportation of persons for hire or compensation or designed, used, or maintained primarily for the transportation of property. A pickup truck used as an automobile for the private transportation of persons without the owner receiving compensation or profit for the transportation, is deemed to be a privately operated passenger automobile within the meaning of Section 8608 and Section 8752 of the Revenue and Taxation Code.
(2) “Commercial vehicle with unladen weight of less than 7,000 pounds” includes pickup trucks and other vehicles with an unladen weight of less than 7,000 pounds licensed as commercial vehicles.
(3) “Privately operated two-axle truck” means a two-axle truck in which the user does not transport persons or property for hire or compensation. 
In determining whether a two-axle truck is leased for 30-days or less, the total number of consecutive days for which the same or a comparable vehicle is leased to the same lessee shall be counted. If the total number of such days exceeds 30, the truck, or trucks, shall be deemed leased for more than 30-days.
(c) Use of Fuel in More Than One Privately Operated Vehicle. If the conditions set forth in subdivision (a) of this regulation are met the user is not required to secure a use fuel tax permit and is relieved of filing of the use fuel tax returns even though the user operates more than one such vehicle using fuel subject to the use fuel tax. This is true whether or not the vehicle is, or the vehicles are, used for pleasure or in a business or profession, providing that the user is not also using such fuel in other motor vehicles which are not of the kind described in subdivision (a) of this regulation.
(d) Permit and Returns Required if Fuel from Bulk Storage is Used. Notwithstanding that a user's sole use of such fuel is in a vehicle of the kind described in subdivision (a) of this regulation or in a vehicle for which the flat rate fuel tax has been paid, the user must secure a permit and file use fuel tax returns if he is using such fuels from bulk storage acquired exempt from the use fuel tax.
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Sections 8603, 8608, 8619, 8620 and 8752, Revenue and Taxation Code.
HISTORY

1. New section filed 9-12-66; effective thirtieth day thereafter (Register 66, No. 31).
2. Amendment filed 12-16-70; effective thirtieth day thereafter (Register 70, No. 51).
3. Amendment filed 6-12-74; effective thirtieth day thereafter (Register 74, No. 24).
4. Amendment filed 12-2-75; designated effective 1-1-75 (Register 75, No. 49).
5. Amendment filed 12-29-78; effective thirtieth day thereafter. Pursuant to Section 7051, Revenue and Taxation Code, order establishes operative date of 1-1-79 (Register 78, No. 52).
6. Amendment filed 10-13-83; effective thirtieth day thereafter (Register 83, No. 42).
7. Amendment of subsections (a) and (b) filed 5-1-85; effective thirtieth day thereafter (Register 85, No. 18).
8. Amendment of subsection (a) and new subsection (b)(4) filed 5-29-87; operative 6-28-87 (Register 87, No. 23).
9. Amendment of section and Note filed 4-20-99; operative 5-20-99 (Register 99, No. 17).
§1331.2. Payment by Electronic Funds Transfer.
Note     •     History

Payments by electronic funds transfer shall be made in accordance with California Code of Regulations, Title 18, Section 4905. 
NOTE

Authority cited: Section 8760, Revenue and Taxation Code. Reference: Sections 8760 and 8762, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-7-2005; operative 7-7-2005 (Register 2005, No. 23).
§1331.5. Weekly Returns and Payments of Vendor.
Note     •     History

If a vendor is required to make returns and pay weekly the tax required to be collected, he shall make his weekly return on Form BT-401-V5, Vendor Use Fuel Tax Weekly Return.
The return for each calendar week shall be filed with the Board on or before Wednesday of the following week and shall be accompanied by a remittance for the amount of tax due.
The making of weekly returns and payments does not relieve the vendor of the obligation to make a monthly return of all tax which he has been required to collect during the month. To the extent that the tax liability shown by the monthly return has been prepaid by payments accompanying weekly returns, no further payment need accompany the monthly return.
Whenever a week falls in two calendar months the amount of the tax collected during the portion of the week falling in each calendar month shall be stated separately in the return, but the return may be accompanied by a single remittance for the total tax collected during the week.
NOTE

Authority cited: Sections 9251 and 8755 Revenue and Taxation Code. Reference: Chapter 556, Stats. 1963.
HISTORY

1. New section filed 8-23-57 as an emergency; designated effective 10-1-57 (Register 57, No. 13).
2. Amendment filed 11-12-33; effective thirtieth day thereafter (Register 63, No. 22).
§1331.6. Credit for Bad Debt Losses of Vendors.
Note     •     History

The amount of tax reported and paid by a vendor which is included in an account found to be worthless and charged off for income tax purposes, may be taken as a credit against the tax due on the use fuel tax return of the vendor. Allowance of this credit is subject to the limitation period prescribed in Section 8782 of the Revenue and Taxation Code and the other provisions of this regulation.
The right to the tax credit arises in the month in which the account is found to be worthless and charged off for income tax purposes. The credit should be taken on the return for the period in which the right to the credit arose. Failure to take this credit in the proper period will not prevent the allowance of a credit of the amount of tax for which the vendor was entitled to credit under this section.
A vendor using the reserve method to account for bad debts for income tax purposes should take the credit on the return for the period in which the account is found to be worthless and charged against the reserve.
No tax credit is allowable for any portion of a debt recovered that is retained by or paid to any person as compensation for his or her services or expenses in collecting the account.
If any account with respect to which credit has been taken is subsequently collected, in whole or in part, the vendor shall apply the amount collected ratably to the charges for the fuel and the tax thereon. If the purchaser is indebted to the vendor with respect to other items also charged off as bad debts, payments made on account thereof shall first be credited to the charges for the fuel and the tax thereon unless the purchaser shall specify otherwise. The tax thus collected shall be included in the return due for the period in which the collection is made and must be remitted to the Board within the time prescribed for payment of the tax due for that period.
Whenever any charge arising from the sale of fuel remains unpaid for a period of 90 days after the close of the calendar month in which the sale is made, or the account is found to be uncollectible prior to 90 days after the close of the calendar month in which the sale is made, that indebtedness is a delinquent account as to which the vendor shall report to the Board as herein specified. For the purpose hereof the date of the delivery invoice is deemed the date of sale.
The vendor shall file with each use fuel tax return a schedule listing the names and addresses of all purchasers whose accounts became delinquent within the meaning of the preceding paragraph as of the close of the reporting period for which the return is filed and remain unpaid at the time of such filing. The listing shall be accompanied by a notice of delinquent account on a form prescribed by the Board.
When the account of the purchaser is no longer delinquent or amounts remaining unpaid for over 60 days have been cleared and the vendor is satisfied that the remainder of the account will be paid, the vendor should complete the triplicate and quadruplicate of the Notice of Worthless Account (Bad Debts) form (BOE-120 Rev. 1 (7-98)) (incorporated by reference) by indicating the payments received. The triplicate (pink) of the Notice of Worthless Account (Bad Debts) form should be forwarded promptly to the Board.
Failure to list a delinquent account as herein required shall constitute a waiver of the credit that might otherwise be allowable for the amount of the delinquency under Section 8732.5 of the Revenue and Taxation Code in the event that the account is later found to be worthless.
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Sections 8732.5, 8737 and 8782, Revenue and Taxation Code.
HISTORY

1. Amendment filed 12-9-68; effective thirtieth day thereafter (Register 68, No. 47). For prior history, see Register 66, No. 31.
2. Amendment of section and Note filed 10-21-94; operative 11-21-94 (Register 94, No. 42).
3. Amendment of section heading and section filed 8-30-99; operative 9-29-99 (Register 99, No. 36). 
§1332. Records.
Note     •     History

(a) General. A taxpayer shall maintain and make available for examination on request by the board or its authorized representatives, records in the manner set forth at California Code of Regulations, Title 18, Section 4901.
(b) Specific Applications. In addition to the record keeping requirements set forth in subdivision (a), vendors and users of use fuel shall comply with the following requirements.
(1) Vendor's Records. A vendor shall maintain complete records of all sales or other dispositions including self-consumed fuel, inventories, purchases, receipts, and tank gaugings or meter readings, of liquefied petroleum gas, and any other fuel the use of which is subject to the use fuel tax.
(2) Vendor's Sales Invoices. The vendor shall prepare a serially numbered invoice for each sale of fuel whether the fuel is sold for use in motor vehicles or for other uses. A single invoice covering multiple deliveries of fuel made during a period of time not to exceed a calendar month shall constitute an invoice for each sale. If the multiple delivery invoice includes tax-exempt deliveries either into a bulk storage facility or into fuel tanks of motor vehicles with respect to which the vendor is excused from collecting the tax as provided in Regulations 1319 and 1320, and deliveries into fuel tanks of motor vehicles upon which the tax is required to be collected, the invoice shall contain or be accompanied by a statement showing separately the deliveries and gallonage upon which the tax is collected and the tax-exempt deliveries and gallonage. The invoice shall be delivered to the purchaser, and a copy thereof shall be retained by the vendor.
A sales invoice shall contain the following information:
(A) The name and address of the vendor.
(B) The date of sale.
(C) The number of gallons or units of fuel sold, the price per gallon or unit and the total amount of the sale.
(D) The amount of the use fuel tax collected, if delivery is into a fuel tank of a motor vehicle; however, the amount of the tax collected need not be separately stated if the invoice bears the notation that the price includes the tax.
(E) For single deliveries of less than 250 gallons or units, the type of receptacle, other than a fuel tank of a motor vehicle, into which the vendor delivered fuel without collecting the use fuel tax (e.g., storage tank, crawler tractor, drum, stationary generator). On machine-prepared invoices, reasonable code designations will be acceptable in lieu of such description.
The sales invoice shall upon payment by the purchaser constitute a receipt for the amount of use fuel tax included therein collected by the vendor.
(3) User's Records. Users of fuel subject to the tax shall obtain from the vendor of the fuel and retain in their files an invoice for each delivery of such fuel into the fuel tank or tanks of each vehicle operated by them and for each delivery into their bulk storage tank or tanks. These invoices shall set forth the information specified in subsection (b)(2) of this regulation and shall be filed or identified in a systematic manner so that they may readily be traced into their purchase or expense records and into their returns to the board.
Users should keep as part of their records a detail of figures upon which are based the totals set forth on their returns to the board. When fuel is placed into the fuel tank of a qualified motor vehicle, either the user or the vendor should indentify on the invoice the qualified motor vehicle into which the fuel was placed. All individual invoices supporting charge accounts which include purchases of fuel shall be retained by the user in such manner as to enable the representatives of the board to establish the identity of all the merchandise or service included in the total charge and the specific gallonage of fuel purchased.
In addition to the records prescribed above, a lessor of a vehicle who is a user as defined under regulation 1304(d) (18 CCR 1304(d) shall maintain records of each trip or the mileage the vehicle is operated by the lessee.
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Sections 8732, 8752, 9253 and 9254, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-20-71 as procedural and organizational; effective upon filing (Register 71, No. 30). For prior history, see Register 63, No. 22.
2. Change without regulatory effect amending section filed 5-11-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 19).
3. Amendment of section heading, new subsections (a)-(l)(2)(F), designation and amendment of former first paragraph as subsection (l)(3) and repealer of former third paragraph filed 8-30-99; operative 9-29-99 (Register 99, No. 36). 
4. Amendment of section and Note filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§1333. Records of Vendors, Invoices and Receipts.
Note     •     History

NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Sections 8732 and 9253, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-20-71 as procedural and organizational; effective upon filing (Register 71, No. 30). For prior history, see Register 64, No. 9.
2. Amendment filed 12-2-75; effective thirtieth day thereafter (Register 75, No. 49).
3. Repealer filed 4-20-99; operative 5-20-99 (Register 99, No. 17).
§1334. Successor's Liability.
Note     •     History

(a) When Duty to Withhold Purchase Price Arises. The requirement that a successor or purchaser of a business or stock of goods withhold a sufficient amount of the purchase price to cover the tax liability of the seller arises only in the case of  the purchase and sale of a business or stock of goods under a contract which provides for the payment to be made to the seller or to a person designated by the seller of a purchase price consisting of money, property or the assumption of liabilities or a combination of forms of consideration. The liability of the successor can be no more than the amount of the purchase price. This requirement does not arise in connection with other transfers of a business such as assignments for the benefit of creditors, foreclosures of mortgages, or sales by trustees in bankruptcy.
(b) Amounts to Which Liability Extends. The liability of the successor or purchaser of a business or stock of goods extends to taxes incurred with reference to the operation of the business by the predecessor or any former owner, including the sale thereof, even though not then determined against the former owner, to interest thereon to the date of payment of the taxes, to penalties for nonpayment of taxes, and to penalties for negligence or intentional disregard of the Use Fuel Tax Law or authorized rules and regulations, or for fraud or an intent to evade the tax determined and unpaid at the time of sale.
(c) Release from Obligation. The purchaser of the business or stock of goods will be released from further obligation to withhold the purchase price if the purchaser obtains a certificate from the board stating that no taxes, interest, or penalties are due from a predecessor. The purchaser will also be released if he or she makes a written request to the board for a certificate and if the board does not issue the certificate or mails to the purchaser a notice of the amount of the tax, interest, and penalties that must be paid as a condition of issuing the certificate within 60 days after the latest of the following dates:
(1) The date the board receives a written request from the purchaser for a certificate. 
(2) The date of the sale of the business or stock of goods.
(3) The date the former owner's records are made available for audit.
The certificate may be issued after the payment of all amounts due under the Use Fuel Tax Law, according to the records of the board as of the date of the certificate, or after the payment of the amounts, including amounts not yet ascertained, is secured to the satisfaction of the board. 
(d) Enforcement of Obligation. The liability is enforced by service of a notice of successor liability not later than three years after the date the board receives written notice of the purchase of the business or stock of goods. The successor may petition the Board for reconsideration of the liability within 30 days after service. The liability becomes final, and the amount due and payable, in the same manner as determinations and redeterminations of other use fuel tax liability.
(e) Separate Business Locations. Where one person operates several business establishments, each at a separate location, each establishment is a separate “business” and has a separate “stock of goods” for purposes of determining the liability of a successor. A purchaser of the business or stock of goods of any such establishment is subject to liability as a successor with respect to that establishment even if he or she does not purchase the business or stock of goods of all the establishments.
(f) Purchase of a Portion of a Business. A person who purchases a portion of a business or stock of goods may become liable as successor. For example, the purchaser may be liable where he or she purchases substantially all of the business or stock of goods or where the business or stock of goods is purchased by two or more persons. In cases of doubt as to possible liability, the purchaser should obtain a certificate as provided in (c) above.
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Sections 9021, 9022, 9023 and 9024, Revenue and Taxation Code.
HISTORY

1. New section filed 3-16-89; operative 4-15-89 (Register 89, No. 11). For history of former section, see Register 63, No. 22.
2. Amendment filed 7-1-92; operative 7-31-92 (Register 92, No. 28).
3. Editorial correction of subsection (a) (Register 95, No. 48).
§1335. Relief of Liability.
Note     •     History

A person may be relieved from the liability for the payment of the use fuel tax, including any penalties and interest added to those use fuel taxes, when that liability resulted from the failure to make a timely return or a payment and such failure was found by the board to be due to reasonable reliance on written advice given by the board as described in California Code of Regulations, Title 18, Section 4902. 
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Section 8879, Revenue and Taxation Code.
HISTORY

1. New section filed 4-20-99; operative 5-20-99 (Register 99, No. 17). For prior history, see Register 57, No. 13.
2. Amendment of section and Note filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§1336. Innocent Spouse or Registered Domestic Partner Relief from Liability.
Note     •     History

A spouse or registered domestic partner claiming relief from liability for the use fuel tax, interest, penalties, and other amounts shall be relieved from such liability where all the requirements set forth in California Code of Regulations, title 18, section 4903 are met.
NOTE

Authority cited: Section 9251, Revenue and Taxation Code. Reference: Sections 8880 and 9151-9156, Revenue and Taxation Code; and Sections 297, 297.5 and 308, Family Code.
HISTORY

1. New section filed 5-18-2010; operative 6-17-2010 (Register 2010, No. 21).
Chapter 3. Diesel Fuel Tax
Article 1. Definitions
§1411. Highway.
Note     •     History

(a) “Highway” means a way or place, of whatever nature, within the exterior boundaries of the State including a way or place within a Federal area, publicly maintained and open to the use of the public for purposes of vehicular travel, including, but not limited to, the shoulder and rest stops, notwithstanding private participation in the maintenance of the way or place. It shall be presumed that a way or place is dedicated and accepted as a highway when it is recognized as a part of a maintained highway system by a public authority.
(b) A way or place within a national or state forest which is entirely privately maintained, or a road over which forest products are transported in a national or state forest privately constructed or maintained pursuant to an existing agreement with the public authority having jurisdiction thereof, shall not be considered a highway notwithstanding the fact that it may be declared by the public authority to be a part of its road system.
(c) A way or place is not a highway within the meaning of Revenue and Taxation Code Section 60016, during such times as it is closed by the governmental authority to the use of the public regardless of the purpose for which it is closed. A highway is open to the use of the public if vehicular travel is permitted although subject to traffic controls.
NOTE

Authority cited: Section 60601, Revenue and Taxation Code. Reference: Section 60016, Revenue and Taxation Code.
HISTORY

1. New chapter 3 (articles 1-7), article 1 (sections 1411-1413) and section filed 3-1-99; operative 3-31-99 (Register 99, No. 10). For prior history, see Register 83, No. 16.
§1413. Tax-Paid Diesel Fuel and Ex-Tax Diesel Fuel.
Note     •     History

(a) “Tax-paid diesel fuel” is the gallonage of diesel fuel acquired with the California diesel fuel tax paid. An acquisition of diesel fuel will be considered tax-paid only if it can be supported by one of the following:
(1) A sales invoice or contract which clearly states that the diesel fuel tax is included in the invoice or contract and proof that the amount representing diesel fuel tax has been paid, or
(2) A diesel fuel purchase receipt showing that the amount paid for the fuel included the diesel fuel tax, or
(3) Other documentation showing that the diesel fuel tax has been paid to the state.
(b) “Ex-tax diesel fuel” is the gallonage of diesel fuel acquired which is not tax-paid diesel fuel.
NOTE

Authority cited: Section 60601, Revenue and Taxation Code. Reference: Sections 60048.1, 60050, 60050.1, 60051, 60052, 60053, 60054, 60055, 60056, 60057, 60058, 60059, 60060, 60061, 60062, 60100 and 60106, Revenue and Taxation Code.
HISTORY

1. New section filed 3-1-99; operative 3-31-99 (Register 99, No. 10).
2. Change without regulatory effect amending Note filed 6-5-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 23).
Article 2. Imposition of Tax
§1420. Supplier.
Note     •     History

(a) Returns. All suppliers must prepare and file returns with the Board to report tax on diesel fuel. Returns are due at the end of the month following the calendar month in which the diesel fuel was removed, entered, or sold, unless the Board requires that a return be filed for a different period. A terminal operator who also is a position holder in diesel fuel within the terminal or is jointly and severally liable for the tax is required to file both the terminal operator return and the supplier return.
(b) Imposition of Tax. Tax applies to each supplier as follows:
(1) Blender. A blender is required to pay the tax on the removal or sale of diesel fuel blended outside the bulk transfer/terminal system. The number of gallons of blended diesel fuel subject to the tax is the difference between the total number of gallons of blended diesel fuel removed or sold and the number of gallons of tax-paid diesel fuel used to produce the blended fuel.
(2) Enterer. 
(A) An enterer is required to pay the tax when the enterer imports diesel fuel into the state by means outside of the bulk transfer/terminal system.
(B) An enterer is required to pay the tax when the enterer removes or sells diesel fuel within a pipeline or terminal to an unlicensed person.
(C) An enterer is required to pay the tax when the entry is by bulk transfer and the enterer is not a licensed supplier.
(D) For purposes of proper imposition of tax, entry occurs when fuel is brought into the state, provided, however, that when entry is by bulk transfer, entry occurs as follows:
(1) When fuel is received at a marine terminal, entry occurs at the landslide of the flange.
(2) When fuel is removed from a vessel in this state to a lighter for the purpose of lightering, entry occurs at the vessel side of the flange upon the removal of fuel from a vessel in this state to the lighter; provided, however, that if the lighter unloads or discharges the fuel at a marine terminal, then entry occurs at the land side of the flange as to the fuel received at the marine terminal. As used herein, “lightering” is the use of small, shallow-draft boats in transshipment to shore of oil or other fuel from a large, deep-draft vessel unable to dock at shore facilities because of shallow water. The small boats are called lighters. 
(3) When fuel is removed from a vessel in this state to another vessel in this state, and the fuel is not unloaded or discharged at a marine terminal, then entry occurs when the fuel is brought into the state. 
(3) Position Holder. 
(A) A position holder that holds an inventory position in the diesel fuel as reflected on the records of the terminal operator is required to pay the tax when the diesel fuel is removed from the terminal rack.
(B) A position holder is required to pay the tax when the position holder removes or sells diesel fuel within or without the bulk transfer/terminal system to an unlicensed person. 
(C) For reporting periods commencing on or after January 1, 2007, a position holder that delivers diesel fuel to a receiving supplier under a two-party exchange contract shall remain liable for the tax due on the removal of diesel fuel from the terminal rack unless all Regulation 1423 requirements are met. 
(4) Refiner. 
(A) A refiner is required to pay the tax when the diesel fuel is removed at a terminal rack located at a refinery. 
(B) A refiner is required to pay the tax when the removal of diesel fuel is by bulk transfer (e.g., transfer by pipeline or vessel) and the refiner or the owner of the diesel fuel immediately before the removal is not a licensed supplier.
(C) A refiner is required to pay the tax when the refiner removes or sells diesel fuel within or without the bulk transfer/terminal system to an unlicensed person. 
(D) For reporting periods commencing on or after January 1, 2007, a refiner that delivers diesel fuel to a receiving supplier under a two-party exchange contract shall remain liable for the tax due on the removal of diesel fuel from the terminal rack located at a refinery unless all Regulation 1423 requirements are met. 
(5) Terminal Operator. A terminal operator is jointly and severally liable for and may be required to pay the tax when the diesel fuel is removed at the rack if both subsections (A) and (B) below apply, or if subsection (C) applies:
(A) The position holder with respect to the diesel fuel is a person other than the terminal operator and is not a licensed supplier.
(B) The terminal operator is not a licensed supplier and either (i) does not have an unexpired notification certificate from the position holder as required by the Internal Revenue Service or (ii) has an unexpired notification certificate from the position holder, but has reason to believe or knows that any information in the certificate is false.
(C) The terminal operator provides any person with a bill of lading, shipping paper, or similar document which falsely indicates that the undyed or unmarked diesel fuel which is removed from the terminal is dyed or marked in accordance with the United States Environmental Protection Agency or the Internal Revenue Service requirements.
(6) Throughputter. A throughputter is required to pay the tax when the throughputter removes or sells diesel fuel within or without the bulk transfer/terminal system to a person who is not a licensed supplier.
NOTE

Authority cited: Sections 60063 and 60601, Revenue and Taxation Code. Reference: Sections 60003, 60004, 60006, 60007, 60008, 60009, 60010, 60011, 60012, 60013, 60015, 60021, 60022, 60023, 60029, 60030, 60031, 60032, 60033, 60035, 60050, 60051, 60052, 60053, 60054, 60055, 60059, 60060, 60061, 60062, 60063, 60131 and 60201, Revenue and Taxation Code.
HISTORY

1. New article 2 (sections 1420-1422) and section filed 3-1-99; operative 3-31-99 (Register 99, No. 10).
2. Amendment of section and Note filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
3. New subsections (b)(3)(C) and (b)(4)(D) and amendment of Note filed 9-8-2006; operative 10-8-2006 (Register 2006, No. 36).
§1421. Successor's Liability.
Note     •     History

(a) Duty to Withhold from the Purchase Price. The requirement that a successor or purchaser of a business or stock of goods withhold a sufficient amount of the purchase price to cover the tax liability of the seller, arises only in the case of the purchase and sale of a business or stock of goods under a contract, which provides for the payment to be made to the seller or to a person designated by the seller of a purchase price consisting of money or property or the assumption of liabilities and only to the extent thereof, and does not arise in connection with other transfers of a business such as assignments for the benefit of creditors, foreclosures of mortgages, or sales by trustees in bankruptcy.
(b) Amounts to Which Liability Extends. The liability of the successor or purchaser of a business or stock of goods extends to amounts incurred with reference to the operation of the business by the predecessor or any former owner, including the sale thereof, even though not then determined against the former owner, which include taxes, interest thereon to the date of payment of the taxes, and penalties, including penalties for nonpayment of taxes, negligence, intentional disregard, fraud, or intent to evade the tax.
(c) Release From Obligation. The purchaser of the business or stock of goods will be released from further obligation to withhold from the purchase price if the purchaser obtains a certificate from the Board stating that no taxes, interest, or penalties are due from a predecessor. The purchaser will also be released if he or she makes a written request to the Board for a certificate and if the Board does not issue the certificate or mail to the purchaser a notice of the amount of the tax, interest, and penalties that must be paid as a condition of issuing the certificate within 60 days after the later of the following dates:
(1) The date the Board receives a written request from the purchaser for a certificate.
(2) The date the former owner's records are made available for audit.
The certificate may be issued after the payment of all amounts due, including taxes, interest, and penalties, according to the records of the Board as of the date of the certificate, or after the payment of the amounts, including amounts not yet ascertained, is secured to the satisfaction of the Board.
(d) Enforcement of Obligation. 
(1) The obligation is enforced by service of a notice of successor liability not later than three years after the date the Board receives written notice of the purchase of the business or stock of goods. The successor may petition the Board for reconsideration of the liability within 30 days after service. The liability becomes final, and the amount is due and payable, in the same manner as determinations and redeterminations of other diesel fuel tax liability. 
(2) A successor may be relieved of any penalty included in the notice of successor liability regardless of when the notice was issued, if it is determined by the Board that failure by the successor to withhold a sufficient amount of the purchase price to cover the liability of the former owner was due to reasonable causes and circumstances beyond the control of the successor and occurred even though the successor exercised ordinary care and was not willfully negligent. A successor seeking relief of a penalty must file a written statement with the Board under penalty of perjury stating the facts upon which he or she bases the claim for relief.
(e) Separate Business Locations. Where one person operates several business establishments, each at a separate location, each establishment is a separate “business” and has a separate “stock of goods” for purposes of determining the liability of a successor. A purchaser of the business or stock of goods of any such establishment is subject to liability as a successor with respect to that establishment even if he or she does not purchase the business or stock of goods of all the establishments.
(f) Purchase of a Portion of a Business. A person who purchases a portion of a business or stock of goods may become liable as a successor as, for example, where the purchaser purchases substantially all of the business or stock of goods or where the business or stock of goods is purchased by two or more persons. In cases of doubt as to possible liability, the purchaser should obtain a certificate as provided in (c) above.
NOTE

Authority cited: Section 60601, Revenue and Taxation Code. Reference: Sections 60471, 60472, 60473 and 60474, Revenue and Taxation Code.
HISTORY

1. New section filed 3-1-99; operative 3-31-99 (Register 99, No. 10).
§1422. Relief from Liability.
Note     •     History

A person may be relieved from the liability for the payment of the diesel fuel tax, including any penalties and interest added to those taxes, when that liability resulted from the failure to make a timely return or a payment and such failure was found by the board to be due to reasonable reliance on written advice given by the board as described in California Code of Regulations, Title 18, Section 4902. 
NOTE

Authority cited: Section 60601, Revenue and Taxation Code. Reference: Section 60210, Revenue and Taxation Code.
HISTORY

1. New section filed 3-1-99; operative 3-31-99 (Register 99, No. 10).
2. Amendment of section and Note filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
3. Amendment filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§1422.1. Innocent Spouse or Registered Domestic Partner Relief from Liability.
Note     •     History

A spouse or registered domestic partner claiming relief from liability for the diesel fuel tax, interest, penalties, and other amounts shall be relieved from such liability where all the requirements set forth in California Code of Regulations, title 18, section 4903 are met.
NOTE

Authority cited: Section 60601, Revenue and Taxation Code. Reference: Sections 60210.5 and 60501-60512, Revenue and Taxation Code; and Sections 297, 297.5 and 308, Family Code.
HISTORY

1. New section filed 5-18-2010; operative 6-17-2010 (Register 2010, No. 21).
§1423. Two-Party Exchange.
Note     •     History

(a) General. In a typical two-party exchange, two suppliers who own diesel fuel in terminals, i.e., who are position holders (pursuant to Section 60010 of the Revenue and Taxation Code), agree to give each other access to the diesel fuel each owns. Both suppliers have customers in the same terminal areas. One supplier (the delivering supplier) owns fuel in one terminal, and the other supplier (the receiving supplier) owns fuel, usually in a different terminal. Each supplier agrees to exchange fuel it owns for fuel the other supplier owns. A two-party exchange contract allows each supplier to have rack removal capability at a terminal where the other supplier is a position holder, in order to supply fuel to its customers in that terminal area. The receiving supplier takes the place of the delivering supplier when the diesel fuel is removed from the terminal at the rack. A two-party exchange may involve fuel held in terminals located in one or more states and may involve one or more types of fuel. For purposes of this regulation, however, at least one of the terminals involved in a two-party exchange must be located in this state, and the requirements for reporting transactions to the Board pursuant to this regulation pertain only to transactions involving terminals located in this state. 
(b) Definitions. 
(1) Notwithstanding Section 60048 of the Revenue and Taxation Code, “two-party exchange” means a transaction, other than a sale, that occurs at the time of removal of diesel fuel across the rack and that meets all the following conditions: 
(A) The terminal operator, delivering supplier, and the receiving supplier are each registered with the Board to file electronically and have filed electronically with respect to the subject two-party exchange; and 
(B) The terminal operator treats the receiving supplier in its books and records as the person that removes the diesel fuel across a terminal rack for purposes of reporting the two-party exchange to the Board: and 
(C) The two-party exchange is the subject of a written contract between the delivering supplier and the receiving supplier, acceptable evidence of which includes, but is not limited to, exchange statements, exchange differential invoices, exchange reconciliations, or any other similar writing between the parties; and 
(D) All of the reporting requirements set forth in subdivisions (d) and (e) of this section are met. 
(2) “Delivering supplier” means a supplier licensed pursuant to Section 60131 of the Revenue and Taxation Code, who is the position holder of the diesel fuel in the terminal on whom the diesel fuel tax is imposed on removal of diesel fuel from the rack for all purposes other than for a two-party exchange. 
(3) “Receiving supplier” means a supplier licensed pursuant to Section 60131 of the Revenue and Taxation Code, on whom the diesel fuel tax is imposed only on removal of diesel fuel from the rack as the receiving supplier under a two-party exchange. 
(4) “Terminal” as defined in Section 60033 of the Revenue and Taxation Code, includes, for purposes of this regulation, a terminal located at a refinery. 
(c) Liability for Tax. 
(1) The delivering supplier is primarily liable for taxes imposed under Section 60051 or Section 60052(a) of the Revenue and Taxation Code, except, when a transaction satisfies the conditions and requirements for a two-party exchange, the delivering supplier shall be relieved of diesel fuel tax liability and the receiving supplier shall be liable for payment of diesel fuel taxes on the diesel fuel removed pursuant to the two-party exchange. 
(2) The receiving supplier must report the two-party exchange and remit any tax due on a tax return filed within three months after the close of the calendar month in which the diesel fuel was received. The receiving supplier may claim a refund for any amounts applied by the Board to the account of the receiving supplier under a two-party exchange contract. When all parties report a transaction as a two-party exchange, the receiving supplier may not file a claim for refund of the tax on the grounds that the transaction was not a two-party exchange. 
(3) If the receiving supplier fails to report or remit taxes in conformity with this regulation, then the delivering supplier shall remain primarily liable for taxes due on the removal of the diesel fuel from the rack. 
(d) Reporting Requirements -- Generally. 
(1) The terminal operator must report to the Board the two-party exchange of diesel fuel between the delivering supplier and the receiving supplier. 
(2) The terminal operator, the delivering supplier, and the receiving supplier must each use the same identifying information (e.g., bill of lading number) to refer to or otherwise report the subject two-party exchange. 
(3) The terminal operator, the delivering supplier, and the receiving supplier must each enter the same fuel type on any report that includes a two-party exchange. 
(e) Reporting Requirements -- Delivering and Receiving Suppliers. The following reporting requirements must be met in order for an exchange of diesel fuel to qualify as a two-party exchange and to shift the diesel fuel tax liability from the delivering supplier to the receiving supplier. 
(1) The delivering supplier must report the two-party exchange and identify the receiving supplier to the terminal operator; and 
(2) The delivering supplier must report to the Board a tax-free delivery of diesel fuel to the receiving supplier; and 
(3) The receiving supplier must report to the Board a tax-free receipt of diesel fuel from the delivering supplier; and 
(4) The receiving supplier must report to the Board the rack removal of diesel fuel to its customers and the amount of tax due. 
(f) Operative Date. The provisions of this regulation are operative January 1, 2007. 
NOTE

Authority cited: Sections 60063 and 60601, Revenue and Taxation Code. Reference: Section 60051, 60052, 60053, 60054, 60063, 60131, 60201, 60204, 60604 and 60605, Revenue and Taxation Code. 
HISTORY

1. New section filed 9-8-2006; operative 10-8-2006 (Register 2006, No. 36).
§1425. Payment by Electronic Funds Transfer.
Note     •     History

Payments by electronic funds transfer shall be made in accordance with California Code of Regulations, Title 18, Section 4905. 
NOTE

Authority cited: Section 60250, Revenue and Taxation Code. Reference: Sections 60250 and 60252, Revenue and Taxation Code.
HISTORY

1. New section filed 6-7-2005; operative 7-7-2005 (Register 2005, No. 23).
Article 3. Exemptions and Refunds
§1430. Shipments out of State.
Note     •     History

(a) Exports of Ex-Tax Diesel Fuel. The diesel fuel tax does not apply to the export of ex-tax diesel fuel. To qualify for an exemption from diesel fuel tax on the export of ex-tax diesel fuel, the supplier must claim the exemption on the return filed for the period in which the export occurred. Suppliers who erroneously pay tax on exports of ex-tax diesel fuel may file a claim for refund with the Board pursuant to Revenue and Taxation Code Sections 60521 through 60524 in order to obtain a refund of or credit for the amount of tax so paid.
(1) For purposes of this subdivision, “export” means the delivery or shipment from a point in this state to a point outside of the state when pursuant to the contract of sale the diesel fuel is shipped by a supplier by any of the following means:
(A) Facilities operated by the supplier.
(B) Delivery by the supplier to a carrier, customs broker, or forwarding agent, whether hired by the purchaser or not, for shipment to the out-of-state point.
(C) Delivery by the supplier to any vessel clearing from a port of this state for a port outside of this state and actually exported from this state in the vessel.
(2) For purposes of this subdivision, “carrier” means a person who is regularly engaged in the business of transporting for compensation property owned by other persons and includes both common and contract carriers. An individual or firm does not become a “carrier” simply by being designated by a purchaser to receive and ship goods to a point outside this state.
(3) For purposes of this subdivision, “forwarding agent” means a person or firm regularly engaged in the business of preparing property for shipment or arranging for its shipment. An individual or firm does not become a “forwarding agent” simply by being designated by a purchaser to receive and ship goods to a point outside this state.
(b) Exports of Tax-Paid Diesel Fuel. A person who exports diesel fuel on which tax has been paid may file a claim for refund with the Board pursuant to Revenue and Taxation Code Sections 60501 through 60512 in order to obtain a refund of the amount of tax so paid. For purposes of this subdivision, the seller is deemed to be the exporter of diesel fuel when the diesel fuel is delivered to an out-of-state location by facilities of the seller or by common carrier on behalf of the seller, and the purchaser is deemed to be the exporter of diesel fuel when the diesel fuel is delivered to an out-of-state location by facilities of the purchaser or by common carrier on behalf of the purchaser.
(1) All claims for refund of tax paid on exported diesel fuel must be supported by, and the claim for refund covering the export must contain the following:
(A) The name, address, telephone number, and permit number of the person that sold the diesel fuel to the claimant.
(B) The date the diesel fuel was purchased.
(C) A statement by the claimant that the diesel fuel covered by the claim did not contain visible evidence of dye.
(D) A statement, which may appear on the invoice or similar document, by the person that sold the diesel fuel to the claimant that the diesel fuel sold did not contain visible evidence of dye.
(E) The total amount of diesel fuel covered by the claim.
(F) A properly executed bill of lading or similar document furnishing proof of exportation by the claimant.
(2) In lieu of claiming a refund of tax for export of tax-paid diesel fuel, if the claimant is a supplier, the claimant may take a credit on its diesel fuel tax return for tax-paid diesel fuel when, pursuant to the contract of sale, the diesel fuel is required to be shipped and is shipped to a point outside of this state by the supplier claiming the credit by any of the means described in subdivision (a)(1) above. The credit must be claimed on a return filed within three months after the close of the calendar month in which the export occurred. If the credit is not claimed on a return filed within three months after the close of the calendar month in which the export occurred, the supplier must file a claim for refund pursuant to Revenue and Taxation Code Sections 60501 through 60512 and this subdivision in order to obtain a refund of the amount of taxes paid.
(c) Documentation. Any person claiming an exemption, refund or credit under this regulation must retain documentation to support the obligation to deliver diesel fuel out of state and to support the actual delivery of diesel fuel at an out of state location. Documentation may include, but is not limited to, contracts, bills of lading, delivery tickets, invoices and rack meter readings. The person claiming the exemption, refund or credit has the burden of proving that the diesel fuel was exported.
(d) Diversion of Diesel Fuel. Diesel fuel is not exported if it is diverted in transit or for any reason it is not actually delivered outside of the state, regardless of documentary evidence held by the person exporting the diesel fuel respecting delivery of the diesel fuel to a carrier for out-of-state shipment or to a vessel clearing for an out-of- state port.
NOTE

Authority cited: Section 60601, Revenue and Taxation Code. Reference: Sections 60033, 60100, 60201, 60501- 60512, 60521-60524 and 60604, Revenue and Taxation Code.
HISTORY

1. New article 3 (sections 1430-1433) and section filed 3-1-99; operative 3-31-99 (Register 99, No. 10).
2. Amendment of subsection (b)(2) filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
§1431. Diesel Fuel Used on a Farm for Farming Purposes.
Note     •     History

The following provisions and definitions apply for purposes of the exemption from the backup tax pursuant to Revenue and Taxation Code Section 60100(a)(5)(A), and the refund of tax to the ultimate vendor pursuant to Revenue and Taxation Code Section 60502.
(a) The term “used on a farm for farming purposes” applies only to diesel fuel which is used (i) in carrying on a trade or business of farming, (ii) on a farm in California, and (iii) for farming purposes.
(b) A person will be considered to be engaged in the “trade or business of farming” if the person cultivates, operates, or manages a farm for gain or profit, either as an owner or a tenant. A person engaged in forestry or the growing of timber is not thereby engaged in the trade or business of farming. A person who operates a garden plot, orchard, or farm for the primary purpose of growing produce for the person's own use is not considered to be engaged in the trade or business of farming. Generally, the operation of a farm does not constitute the carrying on of a trade or business if the farm is occupied by a person primarily for residential purposes or is used primarily for pleasure, such as for the entertainment of guests or as a hobby.
(c) The term “farm” is used in its ordinary and accepted sense, and generally means land used for the production of crops, fruits, or other agricultural products or for the sustenance of livestock or poultry. The term “livestock” includes cattle, hogs, horses, mules, donkeys, sheep, goats, and captive fur-bearing animals. The term “poultry” includes chickens, turkeys, geese, ducks, and pigeons. Thus, a farm includes livestock, dairy, poultry, fish, fruit, fur-bearing animals, and truck farms, plantations, ranches, nurseries, ranges, orchards, feed yards for fattening cattle, and greenhouses and other similar structures used primarily for the raising of agricultural or horticultural commodities. Greenhouses and other similar structures that are used primarily for purposes other than the raising of agricultural or horticultural commodities do not constitute farms, as for example, structures that are used primarily for the display, storage, fabrication, or sale of wreaths, corsages, and bouquets. A fish farm is an area where fish are grown or raised, as opposed to merely caught or harvested.
(d) Diesel fuel will be considered to be used for “farming purposes” when it is used on a farm by the owner, tenant, or operator of the farm in connection with the activities described in this subdivision. Diesel fuel will be considered to be used for “farming purposes” when it is used on a farm by a person other than the owner, tenant, or operator of the farm for any of the purposes described in subdivision (d)(1).
(1) Cultivating the soil, raising or harvesting any agricultural or horticultural commodity, or raising, shearing, feeding, caring for, training, or managing livestock, poultry, bees, or wildlife. Examples of operations which are considered to be operations for “farming purposes” within the meaning of this paragraph include plowing, seeding, fertilizing, weed killing, corn or cotton picking, threshing, combining, baling, silo filling, and chopping silage.
(2) Handling, drying, packing, grading, or storing any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant, or operator produced more than one-half of the commodity which was so treated during the year covered by the exemption certificate described in Revenue and Taxation Code Section 60503 which supports the claim for refund.
(3) Planting, cultivating, caring for, or cutting of trees that is incidental to the farming operations of the farm on which it is performed or incidental to the farming operations of the owner, tenant, or operator of the farm, or in connection with the preparation (other than milling) of trees for market that is incidental to these farming operations. These operations include the felling of trees and cutting them into logs or firewood but do not include sawing logs into lumber, chipping, or other milling operations. Operations of the prescribed character will be considered incidental to farming operations only if they are of a minor nature in comparison with the total farming operations involved. Therefore, a tree farmer or timber grower may not claim a refund under Revenue and Taxation Code Section 60502 with respect to diesel fuel used in connection with the trade or business of tree farming or timber growing.
(4) Operation, management, conservation, improvement, or maintenance of the farm and its tools and equipment. The activities included are those which contribute in any way to the conduct of the farm as such, as distinguished from any other enterprise in which the owner, tenant, or operator may be engaged. Examples of included operations are clearing land, repairing fences and farm buildings, building terraces or irrigation ditches, cleaning tools or farm machinery, and painting farm buildings. Since the diesel fuel must be used by the owner, tenant, or operator of the farm to which the operations relate, diesel fuel used by an organization which contracts with a farmer to renovate his farm properties is not used for farming purposes. Diesel fuel used in a lawn mower for maintaining a lawn is not used for farming purposes.
(e) Diesel fuel used in connection with the following operations which may occur on a farm will not be considered to be used for farming purposes:
(1) Canning, freezing, packaging, or processing operations. Thus, for example, although diesel fuel used on a farm in connection with the production or harvesting of maple sap or oleoresin from a living tree is considered to be used for farming purposes under paragraph (d)(1) above, diesel fuel used in the processing of maple sap into maple syrup or maple sugar or used in the processing of oleoresin into gum spirits of turpentine or gum resin is not used for farming purposes, even though these processing operations are conducted on a farm.
(2) Processing operations which change a commodity from its raw or natural state, or operations performed with respect to a commodity after its character has been changed from its raw or natural state by a processing operation. For example, diesel fuel used for the extraction of juices from fruits or vegetables is used in a processing operation which changes the character of the fruits or vegetables from their raw or natural state and will not be considered to be used for “farming purposes.”
(f) The diesel fuel tax does not apply to diesel fuel used in the operation of an implement of husbandry, truck or farm tractor which does not require registration under the Vehicle Code, which is used on a farm for farming purposes and which only incidentally is operated upon a highway in moving between farms or parts of farms which are in close proximity. For purposes of this subdivision, “incidentally operated” does not include the use of agricultural vehicles for the transportation of persons or property upon the highways in an operation which requires registration of the vehicle under the Vehicle Code.
NOTE

Authority cited: Section 60601, Revenue and Taxation Code. Reference: Sections 60036, 60037, 60038, 60058, 60100, 60151, 60501, 60502 and 60512, Revenue and Taxation Code.
HISTORY

1. New section filed 3-1-99; operative 3-31-99 (Register 99, No. 10).
§1432. Other Nontaxable Uses of Diesel Fuel in a Motor Vehicle.
Note     •     History

(a) Power Take-Off Equipment.
(1) A person may claim a refund for tax paid on diesel fuel used to operate power take-off equipment. Power take-off equipment is generally defined to be an accessory which is mounted onto a transmission allowing power to be transferred outside the transmission to a shaft or driveline. The accessory is usually either a small gearbox with an external shaft, or a short shaft with a driveline yoke assembly for attaching an external driveline. The vehicle's transmission must be specially designed for a power take-off.
(2) Power take-off equipment may be found, for example, on boom trucks (block boom), bulk feed trucks, car carriers or trucks with hydraulic winches, carpet cleaning vans, cement mixers, distribution trucks (hot asphalt), dump trailers, dump trucks, fire trucks, leaf trucks, lime spreaders, line trucks (digger/derrick), aerial lift trucks, milk tank trucks, mobile cranes, pneumatic tank trucks, refrigeration trucks, salt spreaders (dump with spreader), sanitation trucks, seeder trucks, semi-wreckers, service trucks with jackhammers, pneumatic drills, sewer cleaning trucks (sewer jet, sewer vactor), snow plows, spray trucks, sweeper trucks, tank trucks, tank transports and wreckers.
(b) Off-Highway Use. 
(1) A person may claim a refund for tax paid on diesel fuel used off the highway. “Off the highway” includes private property, a way or place permanently or temporarily closed to public use for the purpose of vehicular travel, or any way or place used for vehicular travel which is not a highway as defined in Regulation 1411.
(2) If the diesel fuel is used in the operation of construction equipment which is exempt from registration under the Vehicle Code, the user must establish to the satisfaction of the Board that the diesel fuel is used in the operation of the construction equipment while operated within the confines or limits of a construction project and only incidentally operated on the highway within such confines or limits.
(3) As used in subdivision (2), “incidentally operated” does not include the use of special construction equipment for the transportation of persons or property upon the highways in an operation which requires registration of the vehicle under the Vehicle Code.
(c) Refunds. Persons who acquire diesel fuel tax paid and subsequently use the diesel fuel in power take-off equipment or off the highway are entitled to a refund of the diesel fuel tax paid for that fuel. Persons claiming a refund may use any method to calculate the amount of refund, including computing a percentage of the fuel used for nontaxable purposes. It is the responsibility of the person claiming the refund to document and support the amount claimed.
(d) Idle Time. Diesel fuel consumed in motor vehicles on the highway is subject to the diesel fuel tax whether the motor vehicle is moving or idling, and no refunds will be allowed for diesel fuel tax paid on diesel fuel which is used to idle a vehicle on the highway. If the vehicle is idling on the highway while power take-off equipment is in use, a refund will be allowed for the diesel fuel tax paid on that portion of the diesel fuel which is used to operate the power take-off equipment; however, no refund will be allowed for the diesel fuel tax paid on that portion of the diesel fuel which is used for idling.
NOTE

Authority cited: Section 60601, Revenue and Taxation Code. Reference: Sections 60016, 60019, 60026, 60501 and 60502, Revenue and Taxation Code.
HISTORY

1. New section filed 3-1-99; operative 3-31-99 (Register 99, No. 10).
§1433. Refund of Tax on Diesel Fuel Lost in the Course of Handling, Transportation, or Storage.
Note     •     History

(a) The Board will refund the tax paid on diesel fuel which is lost in the course of handling, transportation or storage provided that:
(1) The tax-paid diesel fuel was lost under circumstances beyond the claimant's control such as fire, flood, accidental spillage or leakage, or natural catastrophe; or
(2) The tax-paid diesel fuel was lost through the accidental conversion of undyed diesel fuel to dyed diesel fuel; or
(3) The tax-paid diesel fuel was lost through the intentional conversion of undyed diesel fuel to dyed diesel fuel in the ordinary course of handling (such as purging hoses).
(b) Tax-paid diesel fuel will qualify as lost under subsections (a)(2) or (3) above only if the fuel that was converted from undyed fuel to dyed fuel is sold as dyed diesel fuel.
(c) No refund will be made based on losses of diesel fuel which occur due to evaporation or shrinkage.
(d) A person who loses fuel in the course of handling, transportation or storage may file a claim for refund with the Board pursuant to Revenue and Taxation Code Sections 60501 through 60512 in order to obtain a refund of the diesel fuel tax paid on the lost fuel.
NOTE

Authority cited: Section 60601, Revenue and Taxation Code. Reference: Sections 60501-60512, Revenue and Taxation Code.
HISTORY

1. New section filed 3-1-99; operative 3-31-99 (Register 99, No. 10).
§1434. Sales of Diesel Fuel to the United States and its Agencies and Instrumentalities.
Note     •     History

(a) In General. The diesel fuel tax does not apply to the sale of diesel fuel to the United States and its agencies and instrumentalities. Examples of the United States and its agencies and instrumentalities include, but are not limited to, the American Red Cross, U.S. Postal Service, branches of the armed services, military exchanges, and agencies such as the USDA Forest Service and the Department of Housing and Urban Development.
(b) Sales of Ex-Tax Diesel Fuel. A supplier licensed under the Diesel Fuel Tax Law that makes sales of ex-tax diesel fuel to the United States and its agencies and instrumentalities, may claim an exemption on its diesel fuel tax return.
(c) Sales of Tax-Paid Diesel Fuel.
(1) A supplier licensed under the Diesel Fuel Tax Law that makes sales of tax-paid diesel fuel to the United States and its agencies and instrumentalities may claim a credit on its diesel fuel tax return. The tax-paid fuel may be sold in bulk or through any company-owned retail service station.
(2) A person licensed as an ultimate vendor under the Diesel Fuel Tax Law who makes a sale of tax-paid fuel to the United States and its agencies and instrumentalities may claim a refund on its diesel fuel tax claim for refund referenced in subdivision (d).
(3) A diesel fuel seller not required to be licensed under the Diesel Fuel Tax Law, including, but not limited to, a wholesaler, access card issuer or service station operator may file a claim for refund of tax on its sales of tax-paid diesel fuel to the United States and its agencies and instrumentalities as to those gallons of diesel fuel it sells ex-tax to the United States and its agencies and instrumentalities. The claim for refund may only be filed by the person that owned the tax-paid diesel fuel and directly sold the tax-paid diesel fuel to the United States and its agencies and instrumentalities.
“Access card issuer” means a person that issues to a customer an access card or code or similar access device which entitles the customer to obtain fuel owned by the access card issuer at participating fuel dispensing sites. As used in this regulation “fuel owned by the access card issuer” means fuel owned by the access card issuer at its own fuel dispensing site or fuel purchased by the access card issuer from an operator of a fuel dispensing site at the time that the fuel is dispensed to the United States and its agencies and instrumentalities.
(d) Contents of Claim for Refund. A claim for refund filed by a diesel fuel seller who is not an ultimate vendor shall contain the information required by Revenue and Taxation Code § 60501(b). A claim for refund filed by an ultimate vendor shall contain the information required by Revenue and Taxation Code § 60502(c).
(e) Documentation for Bulk Transactions. Any person claiming an exemption, credit, or refund for bulk sales of diesel fuel to the United States and its agencies and instrumentalities, must retain supporting documentation. Documentation may include, but is not limited to:
(1) A copy of the United States government purchase order or order documentation authorizing the purchase of the diesel fuel.
(2) A copy of the billing invoice or other documents identifying the United States and its agencies and instrumentalities as the purchaser of the diesel fuel, the invoice billing date, the invoice billing number, the number of diesel fuel gallons sold to the United States and its agencies and instrumentalities and a clear indication that no diesel fuel tax reimbursement was collected from the United States and its agencies and instrumentalities.
(3) Documentation showing that the diesel fuel in question was acquired ex-tax by a licensed supplier claiming the exemption.
(4) Documentation showing that the diesel fuel in question was acquired tax-paid by a person claiming the credit or refund.
(f) Documentation for Non-Bulk Transactions. Any person claiming a credit or filing a claim for refund on retail sales of tax-paid fuel sold in non-bulk quantities, including credit card sales to the United States and its agencies and instrumentalities, must retain supporting documentation. Documentation may include, but is not limited to:
(1) A copy of the billing invoice or other documentation identifying the United States and its agencies and instrumentalities as the purchaser of the diesel fuel, the invoice billing date, the invoice billing number, the number of diesel fuel gallons sold to the United States and its agencies and instrumentalities and a clear indication that no diesel fuel tax reimbursement was collected from the United States and its agencies and instrumentalities.
(2) Documentation showing that the diesel fuel in question was acquired tax-paid by a person claiming the credit or refund.
(3) A copy of the credit card receipt or listing of credit card transactions provided by the card processor, identifying the United States and its agencies and instrumentalities as the purchaser of the diesel fuel, the date of the transaction, the record number of the receipt, and the number of diesel fuel gallons sold to the purchaser.
(4) A copy of the charge back of the tax to the retailer by the credit card processor.
NOTE

Authority cited: Section 60601, Revenue and Taxation Code. Reference: Sections 60100, 60501, 60502 and 60508, Revenue and Taxation Code.
HISTORY

1. New section filed 5-13-2002; operative 6-12-2002 (Register 2002, No. 20).
§1435. Tax Paid Twice on Diesel Fuel.
Note     •     History

(a) A supplier who removes diesel fuel from a terminal rack on which a prior tax was paid to the state may either file a claim for refund with the Board or in lieu of a refund take a credit on its tax return. 
(b) Conditions to Allow a Credit on a Tax Return. 
The credit will be allowed only if: 
(1) A tax imposed on the diesel fuel by Revenue and Taxation Code Sections 60051 and 60052 was paid to the state by reporting the gallons on a tax return and was not credited or refunded (the “first tax” or “first taxpayer”); 
(2) After imposition of the first tax, another tax was imposed on the diesel fuel by Revenue and Taxation Code Sections 60051 and 60052 and was paid to the state by reporting the gallons on a tax return (the “second tax” or “second taxpayer”); 
(3) The person that paid the second tax to the state claims a credit on a tax return filed within three months after the close of the calendar month in which the second tax was reported to the state; 
(4) The person that paid the first tax to the State has met the reporting requirements of paragraph (c) of this section; and 
(5) A copy of the first taxpayer's report and any copies of statements of subsequent seller must be retained for inspection by the Board with the tax return on which the credit is claimed. 
(c) Reporting Requirements. 
(1) Reporting by persons paying the first tax. 
Except as provided in paragraph (c)(2) of this section, the person that paid the first tax under Revenue and Taxation Code Section 60051 and 60052 (the first taxpayer) must file a report that is in substantially the same form as the model report provided in Exhibit A and contains all information necessary to complete such model report (the first taxpayer's report). A first taxpayer's report must be retained for inspection by the Board with the tax return on which the first tax was paid or reported. 
(2) Optional reporting for certain taxable events. 
Paragraph (c)(1) does not apply with respect to a tax imposed under Revenue and Taxation Code Section 60051 (removal at a terminal rack), Revenue and Taxation Code Section 60052(b)(2) (nonbulk entries into the state), or Revenue and Taxation Code Section 60052(d) (removals or sales by blenders). However, if the person liable for the tax expects that another tax will be imposed under Revenue and Taxation Code Sections 60051 and 60052 with respect to the fuel, that person should file a first taxpayer's report. 
(3) Information provided to subsequent owners, etc. 
(A) By Person Required to File First Taxpayer's Report. 
A first taxpayer required to file a first taxpayer's report under paragraph (c)(1) of this section must give a copy of the report to: 
1. The person to whom the first taxpayer sells the diesel fuel within the bulk transfer/terminal system; or 
2. The owner of the diesel fuel immediately before the imposition of the first tax, if the first taxpayer is not the owner at that time. 
(B) By Person Filing Optional First Taxpayer's Report. 
A first taxpayer filing a first taxpayer's report under paragraph (c)(2) of this section should give a copy of the report to: 
1. The person to whom the first taxpayer sells the diesel fuel; or 
2. The owner of the diesel fuel immediately before the imposition of the first tax, if the first taxpayer is not the owner at that time. 
(C) By Person Receiving First Taxpayer's Report. 
1. Bulk Transfer/Terminal System Transaction 
A person that receives a copy of the first taxpayer's report and subsequently sells the diesel fuel within the bulk transfer/terminal system must give the copy and a statement that satisfies the requirements of paragraph (c)(3)(D) of this section to the buyer. 
2. Rack and Below Rack Transaction 
A person that receives a copy of the first taxpayer's report and subsequently sells the diesel fuel outside the bulk transfer/terminal system should give the copy and a statement that satisfies the requirements of paragraph (c)(3)(D) of this section to the buyer, if that person expects that another tax will be imposed under Revenue and Taxation Code Sections 60051 and 60052 with respect to the diesel fuel. 
(D) Form of Statement. 
A statement satisfies the requirements of this paragraph (c)(3)(D) if it is provided at the bottom or on the back of the copy of the first taxpayer' s report (or in an attached document). This statement must contain all information necessary to complete the model statement provided in Exhibit B but need not be in the same format. 
(E) Sale to Multiple Buyers. 
If the first taxpayer's report relates to diesel fuel divided among more than one buyer, multiple copies of the first taxpayer's report must be made at the stage that the diesel fuel is divided and each buyer must be given a copy of the report. 
(d) Claim for Refund. 
If the supplier fails to take a credit on a tax return filed within three months after the close of the calendar month in which the second tax was imposed, the supplier may only file a claim for refund with the Board to recover the tax. 
Each claim for a refund must contain the following information with respect to the fuel covered by the claim: 
(1) The information required in Revenue and Taxation Code Section 60501. 
(2) Volume and type of diesel fuel. 
(3) Date on which the claimant incurred the tax liability to which this claim relates (the second tax). 
(4) Amount of second tax that claimant paid or reported to the state and the tax return on which it was paid or reported. 
(5) A statement that claimant has not separately stated on the sales invoice reimbursement for both the first tax and the second tax or has not included in the sales price of the diesel fuel reimbursement for both the first tax and the second tax. The second taxpayer can only receive reimbursement for one tax from the customer. 
(6) A copy of the first taxpayer's report that relates to the diesel fuel covered by the claim. 
(7) If the diesel fuel covered by the claim was bought other than from the first taxpayer, a copy of the statement of subsequent seller that the claimant received with respect to that diesel fuel. 

EXHIBIT A 

First Taxpayer's Report 

1. First Taxpayer's Board of Equalization supplier account number 		

2. 		
  First Taxpayer's name, address, and employer identification number 

3. 		
  Name, address, and employer identification number of the buyer of the diesel fuel subject to tax 

4. 		
  Date and location of removal, entry, or sale and document number 

5. Volume and type of diesel fuel removed, entered, or sold 		

6. Check type of taxable event:

___ Removal from refinery 

___ Entry into United States or state 

___ Bulk transfer from terminal by unregistered position holder 

___ Bulk transfer not received at an approved terminal 

___ Sale within the bulk transfer/terminal system 

___ Removal at the terminal rack 

___ Removal or sale by the blender 

7. 		
  Amount of Federal excise tax paid and State motor vehicle fuel tax paid on account of the removal, entry, or sale 

8. Location of IRS service center where this report is filed 		and State reporting period of payment 		

The undersigned taxpayer (the “Taxpayer”) has not received, and will not claim, a credit with respect to, or a refund of, the tax on the diesel fuel to which this form relates. 

Under penalties of perjury, the Taxpayer declares that Taxpayer has examined this statement, including any accompanying schedules and statements, and, to the best of Taxpayer's knowledge and belief, they are true, correct and complete. 

Signature and date signed 

Printed or typed name of person signing this report 

	Title 

EXHIBIT B 

Statement of Subsequent Seller 

1. 		
  Board of Equalization supplier account number or prepaid sales tax account number 

2. 		
  Name, address, and employer identification number of seller in subsequent sale 

3. 		
  Name, address, and employer identification number of buyer in subsequent sale 

4. 		
  Date and location of subsequent sale and document number 

5. 		
  Volume and type of diesel fuel sold 

The undersigned seller (the “Seller”) has received the copy of the first taxpayer's report provided with this statement in connection with Seller's purchase of the diesel fuel described in this statement. 

Under penalties of perjury, Seller declares that Seller has examined this statement, including any accompanying schedules and statements, and, to the best of Seller's knowledge and belief, they are true, correct and complete.

Signature and date signed 

Printed or typed name of person signing this statement 

	 Title 
NOTE

Authority cited: Section 60601, Revenue and Taxation Code. Reference: Sections 60051, 60052, 60501, 60507, 60508 and 60521.5, Revenue and Taxation Code.
HISTORY

1. New section filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
2. Change without regulatory effect amending Note filed 7-10-2012 pursuant to section 100, title 1, California Code of Regulations (Register 2012, No. 28).
§1436. Returned Sales.
Note     •     History

(a) When diesel fuel included in a supplier's taxable removals, entries or sales is returned to the supplier by the customer to whom it was sold and is delivered into a refinery or an approved terminal's storage tank, the supplier may either file a claim for refund with the Board or in lieu of the refund take a credit on its tax return. The credit memorandum covering the return of the diesel fuel shall identify the gallonage returned as either volumetric gallons or temperature corrected gallons based upon how the tax was originally invoiced to the customer and shall separately state the diesel fuel tax. 
(b) It shall be presumed that the supplier purchased the diesel fuel that was returned as tax-paid diesel fuel if the credit memorandum includes diesel fuel tax. For the purpose of a refund or credit, it also shall be presumed that the subsequent removal of the diesel fuel from a terminal rack by the supplier that received the returned diesel fuel is made in the month that the diesel fuel was returned. 
(c) Conditions to Allow a Credit on a Tax Return. 
The credit will be allowed only if: 
(1) The returned diesel fuel was delivered into a refinery or an approved terminal storage tank. 
(2) The credit is taken on a tax return filed within three months after the close of the calendar month in which the diesel fuel is returned. 
(3) The supplier prepares a first taxpayer's report (as identified in Regulation 1435) when the diesel fuel is returned. 
(4) A copy of the first taxpayer's report and the credit memorandum must be retained for inspection by the Board with the tax return on which the credit is claimed. 
(d) If the supplier fails to take a credit on a tax return filed within three months after the close of the calendar month in which the diesel fuel was returned, the supplier may only file a claim for refund with the Board to recover the tax. Each claim for a refund must contain the following information with respect to the diesel fuel covered by the claim: 
(1) The information required in Revenue and Taxation Code Section 60501. 
(2) Volume and type of diesel fuel. 
(3) Date on which the claimant received the returned diesel fuel. 
(4) A copy of the first taxpayer's report that relates to the diesel fuel covered by the claim. 
(5) A copy of the credit memorandum that returned the diesel fuel. 
NOTE

Authority cited: Section 60601, Revenue and Taxation Code. Reference: Sections 60025, 60501 and 60508, Revenue and Taxation Code.
HISTORY

1. New section filed 6-11-2002; operative 7-11-2002 (Register 2002, No. 24).
2. Change without regulatory effect amending Note filed 7-10-2012 pursuant to section 100, title 1, California Code of Regulations (Register 2012, No. 28).
Article 7. Records
§1470. Records.
Note     •     History

(a) General. A taxpayer shall maintain and make available for examination on request by the board or its authorized representatives, records in the manner set forth at California Code of Regulations, Title 18, Section 4901.
(b) Specific Applications. In addition to the record keeping requirements set forth in subdivision (a), suppliers, ultimate vendors, retail vendors, and users shall comply with the following requirements. 
(1) Supplier's Records. A supplier shall maintain complete records of all rack removals, sales, imports, and exempt dispositions including exemption certificates, self-consumed diesel fuel, inventories, purchases, receipts, and tank gaugings or meter readings, of diesel and any other fuel that is required to be accounted for on the supplier's return or report. Such records include but are not limited to: 
(A) Refinery Reports related to the production of diesel fuel. 
(B) Inventory reconciliation by location. 
(C) Storage inventory reports. 
(D) List of storage locations. 
(E) Tax returns from other states to support export claims. 
(F) Cardlock statements. 
(G) Calculations or formulas to support off-highway exempt usage. 
(H) First Taxpayer Reports. 
(I) Support for claimed Supplier bad debts. 
(2) Ultimate Vendor's Records. An ultimate vendor shall maintain complete records of all sales, exports, or other dispositions of tax-paid diesel fuel for which a claim for refund is being made, including exemption certificates, self-consumed fuel, inventories, purchases, receipts, and tank gaugings or meter readings, of diesel fuel and any other fuel the use of which is accounted for on the ultimate vendor's claim for refund. Such records may include but are not limited to: 
(A) Purchase invoices for undyed tax-paid diesel fuel. 
(B) Purchase invoices for dyed ex-tax diesel fuel. 
(C) Delivery tickets for diesel fuel exported. 
(D) Tax returns from other states to support diesel fuel export claims. 
(E) Copies of United States Government purchase orders or United States Government credit card receipts. 
(F) Cardlock statements. 
(G) Calculations or formulas to support off-highway exempt usage of diesel fuel. 
(3) Ultimate Vendor's Sales Invoices. The ultimate vendor shall prepare a serially numbered invoice for each sale of diesel fuel. A single invoice or a single cardlock statement covering multiple deliveries of diesel fuel made during a period of time not to exceed a calendar month shall constitute an invoice for each sale. If the multiple delivery invoice or cardlock statement includes both tax-exempt deliveries with respect to which the ultimate vendor is excused from collecting the tax and deliveries upon which the tax is required to be collected, the invoice or cardlock statement shall contain or be accompanied by a statement showing separately the deliveries and gallonage upon which the tax is collected and the tax-exempt deliveries and gallonage. The invoice or cardlock statement shall be delivered to the purchaser, and a copy thereof shall be retained by the ultimate vendor. 
A sales invoice or cardlock statement shall contain the following information: 
(A) The name and address of the ultimate vendor. 
(B) The name of the purchaser. 
(C) The date of sale. 
(D) The number of gallons of diesel fuel sold, the price per gallon and the total amount of the sale. 
(E) The amount of the diesel fuel tax collected, however, the amount of the tax collected need not be separately stated if the invoice bears the notation that the price includes the tax. 
(F) A statement that there is no evidence of dye in the undyed diesel fuel included in the invoice or cardlock statement. 
(G) The dyed diesel fuel notice for dyed diesel fuel included in the invoice or cardlock statement. 
(4) Receipt for Tax Paid to a Retail Vendor. The sales invoice shall upon payment by the purchaser constitute a receipt for the amount of diesel fuel tax included therein collected by the retail vendor. 
The sales invoice shall contain the information in (A), (B), (C) and (D). The sales invoice or similar document shall also include the information in (E) and (F). 
(A) The name and address of the retail vendor. 
(B) The date of sale. 
(C) The number of gallons of diesel fuel sold, the price per gallon and the total amount of the sale. 
(D) The amount of the diesel fuel tax collected, however, the amount of the tax collected need not be separately stated if the invoice bears the notation that the price includes the tax. 
(E) A statement that there is no evidence of dye in the undyed diesel fuel included in the invoice. 
(F) The dyed diesel fuel notice for dyed diesel fuel included in the invoice. 
(5) User's Records. The user shall maintain complete records of self-consumed diesel fuel, inventories, purchases, receipts, and tank gaugings or meter readings, of diesel fuel and any other fuel the use of which is subject to the diesel fuel tax. Records shall also support any calculations or formulas used to claim exempt percentages of exempt usage of diesel fuel. 
(6) User's Invoices. Users of diesel fuel subject to the tax shall obtain from the retail vendor of the diesel fuel and retain in their files an invoice for each delivery of such diesel fuel into the fuel tank or tanks of each vehicle operated by them and for each delivery into their bulk storage tank or tanks. These invoices shall set forth the information specified in subsection (b)(4) of this regulation and shall be filed or identified in a systematic manner so that they may readily be traced into their purchase or expense records and into their tax returns or claims for refund to the board. 
Users should keep as part of their records a detail of figures upon which are based the totals set forth on their tax returns or claims for refund to the board. When diesel fuel is placed into the fuel tank of a qualified motor vehicle, either the user or the retail vendor should indentify on the invoice the qualified motor vehicle into which the diesel fuel was placed. All individual invoices supporting charge accounts which include purchases of diesel fuel shall be retained by the user in such manner as to enable the representatives of the board to establish the identity of all the merchandise or service included in the total charge and the specific gallonage of diesel fuel purchased. 
NOTE

Authority cited: Section 60601, Revenue and Taxation Code. Reference: Sections 60044, 60107, 60201, 60202, 60204, 60204.5, 60205, 60205.5, 60206, 60604, 60605 and 60606, Revenue and Taxation Code.
HISTORY

1. New article 7 (section 1470) and section filed 3-1-99; operative 3-31-99 (Register 99, No. 10).
2. Amendment of section and Note filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
Chapter 4. Sales and Use Tax*

(Originally Printed 2-2-45)

* EDITORIAL NOTE: The articles listed below are proposed for Chapter 4 revision which is not yet completed (see Section 1500--Foreword). In the course of revision existing regulations may be renumbered, amended or repealed, or new regulations may be adopted, all of which will then appear in the appropriate article.
§1500. Foreword.
Note     •     History

(a) General. These regulations are issued by the State Board of Equalization pursuant to section 7051 of the Revenue and Taxation Code, to implement, interpret or make specific provisions of the California Sales and Use Tax Law and to aid in the administration and enforcement of that law, which is contained in Part 1 of Division 2 of the Revenue and Taxation Code. Also included in Subchapter 4 are regulations pertaining to the Bradley-Burns Uniform Local Sales and Use Tax Law (Part 1.5 of Division 2 of the Revenue and Taxation Code) and to local transit district transactions (sales) and use taxes (Part 1.6 of Division 2 of the Revenue and Taxation Code). The local sales and use taxes are collected by the board with state sales and use taxes but are imposed under uniform local ordinances authorized by state law.
(b) Revision. The State Board of Equalization beginning in 1969, undertook a complete revision and restructuring of the sales and use tax regulations. The series numbered as sections 1900 through 2206 have been replaced by a new series of sections numbered between 1500 and 1899. The provisions of the new codification insofar as they are substantially the same as previous rulings (regulations) relating to the same subject matter shall be construed as restatements and continuations and not a new interpretations.
(c) Use of Terms. (1) The term “tax applies” as used in these regulations in reference to a sale or to an amount included in a sale, means, unless otherwise indicated, that either:
(A) The sales tax applies, measured by the gross receipts from the sale, or
(B) The use tax applies to the storage, use, or other consumption of the property sold, measured by the sales price.
(2) When it is stated that certain persons are “retailers” of tangible personal property, it should be understood that they must comply with all requirements imposed upon retailers, including:
(A) Obtaining a seller's permit for each place of business in this state.
(B) Filing returns and paying tax.
(C) Collecting use tax when applicable and remitting the tax with returns.
(D) Keeping records and giving resale certificates.
(3) When it is stated that certain persons are “consumers” of tangible personal property under stated conditions, it should be understood that the sales to such persons are retail sales in respect to which either the sales or use tax applies and that resale certificates should not be given by such consumers in purchasing the property.
(d) Violations. Violation of any of the rules and regulations issued by the board may subject a violator to the revocation or suspension of his seller's permit. A person who engages as a seller without a permit or after a permit has been suspended is guilty of a misdemeanor.
NOTE

Authority cited for Sections 1500-2206: Section 7051, Revenue and Taxation Code. Reference: Sections 6006-7176, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former Section 1900 filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Amendment of subsection (b) filed 11-3-71; effective thirtieth day thereafter (Register 71, No. 45).
3. Amendment of subsection (c) filed 1-19-79; effective thirtieth day thereafter (Register 79, No. 3).
4. Amendment of subsection (c)(2)(D) and new subsection (c)(3) filed 2-9-79; effective thirtieth day thereafter (Register 79, No. 6).
Article 1. Service Enterprises

(Also See Article 21)
§1501. Service Enterprises Generally.
Note     •     History

Persons engaged in the business of rendering service are consumers, not retailers, of the tangible personal property which they use incidentally in rendering the service. Tax, accordingly, applies to the sale of the property to them. If in addition to rendering service they regularly sell tangible personal property to consumers, they are retailers with respect to such sales and they must obtain permits, file returns and remit tax measured by such sales. If their purchases of tangible personal property are predominantly for consumption rather than for resale, they should not give resale certificates covering such purchases but should follow the procedure prescribed in the regulation governing “Tax-Paid Purchases Resold.”
The basic distinction in determining whether a particular transaction involves a sale of tangible personal property or the transfer of tangible personal property incidental to the performance of a service is one of the true objects of the contract; that is, is the real object sought by the buyer the service per se or the property produced by the service. If the true object of the contract is the service per se, the transaction is not subject to tax even though some tangible personal property is transferred. For example, a firm which performs business advisory, record keeping, payroll and tax services for small businesses and furnishes forms, binders, and other property to its clients as an incident to the rendition of its services is the consumer and not the retailer of such tangible personal property. The true object of the contract between the firm and its client is the performance of a service and not the furnishing of tangible personal property. Similarly, an idea may be expressed in the form of tangible personal property and that property may be transferred for a consideration from one person to another; however, the person transferring the property may still be regarded as the consumer of the property. Thus, the transfer to a publisher of an original manuscript by the author thereof for the purpose of publication is not subject to taxation. The author is the consumer of the paper on which he has recorded the text of his creation. However, the tax would apply to the sale of mere copies of an author's works or the sale of manuscripts written by other authors where the manuscript itself is of particular value as an item of tangible personal property and the purchaser's primary interest is in the physical property. Tax would also apply to the sale of artistic expressions in the form of paintings and sculptures even though the work of art may express an original idea since the purchaser desires the tangible object itself; that is, since the true object of the contract is the work of art in its physical form. 
When a transaction is regarded as a sale of tangible personal property, tax applies to the gross receipts from the furnishing thereof, without any deduction on account of the work, labor, skill, thought, time spent, or other expense of producing the property.
Examples of service enterprises and regulations pertaining thereto will be found in regulations which follow.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006 and 6015, Revenue and Taxation Code. Advertising Agencies, Commercial Artists and Designers, see regulation 1540 (unrevised series 1902). Installers, Repairers and Reconditioners, see regulation 1546, et seq. Occasional Sale exemption, application to Service Enterprises, see regulation 1595. Tax-Paid Purchases Resold, see regulation 1701. X-ray Laboratories, see regulation 1528 (unrevised series 1933).
HISTORY

1. Amendment and renumbering of former Section 1901 filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
§1501.1. Research and Development Contracts.
Note     •     History

(a) Definitions.
(1) Qualified Research and Development Contract. A qualified research and development contract is a contract for a service where:
a. the service provided under the contract is undertaken for the purpose of discovering information which is technological in nature, the results of which are intended to be useful in the development of a new or improved product, process, technique, or invention, and
b. the contract calls for the delivery of a report detailing information developed by the contractor or other tangible personal property incidental to the true object of the contract, as defined in Regulation 1501 (18 CCR 1501).
A qualified research and development contract shall not include a contract for research for the purpose of improving a commercial product if the improvements relate to style, taste, cosmetic or seasonal design factors. A qualified research and development contract shall also not include a contract for the design and production of a custom-made item as defined in subdivision (a)(5).
(2) Research. A planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service (product) or a new process or technique (process) or in bringing about a significant improvement to an existing product or process.
(3) Development. The translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.
“Development” includes the conceptual formulation, design, and testing of product alternatives, and construction of prototypes but does not include:
a. routine or periodic alterations to existing products, production lines, manufacturing processes, and other on-going operations even though those alterations may represent improvements, and
b. market research or market testing activities.
(4) Tangible Personal Property. Tangible personal property transferred in a qualified research and development contract includes, but is not limited to the following:
a. Appearance model -- a non-operating model of a design that is a physical representation of the design which is used to convey the image, texture and appearance of the design.
b. Prototype model -- an operating model of a design the purpose of which includes:
1. validating design concepts,
2. validating design specifications,
3. demonstrating design integrity, or
4. demonstrating manufacturability of the design.
c. Prototype or temporary tooling -- tooling produced and used in the development of prototypes.
(5) Custom-Made Items. A custom-made item includes, but is not limited to the following:
a. Property the purchaser wants for its intrinsic value as an item, and for which the purchaser is not interested in the data developed in the course of the manufacture of the custom-made item.
b. Property the purchaser will use for purposes other than informational and testing purposes as defined in subdivision (a)(7).
c. Property purchased for use by the purchaser or for resale.
d. Production tooling -- tooling produced and used for the manufacture of final production units.
(6) Functional Use -- Use for which the property was designed which occurs after completion of the research and development. Custom-made items normally are intended for functional use and not for informational and testing use. Informational and testing use of a prototype by the contractor or its customer does not qualify as a functional use.
Examples of functional use include:
1. Use as test fixtures in manufacturing equipment.
2. Use in production tooling.
(7) Informational and Testing Use -- Use by either the contractor or its customers including, but not limited to:
1. Testing for verification of a design to specifications.
2. Developing data, algorithms, ideas and/or knowledge to improve or perfect a design.
3. Determining alternative design features and implementations.
4. Validating testing of software and firmware embodied within a design.
5. Demonstrating operation of a design for approval by a customer.
6. Quality assurance and performance testing to determine limitations and failure modes of the design.
7. Determining or improving interfaces to other equipment during the design process.
8. Determining or improving the processes for manufacture of the design.
9. Testing to design failure.
10. Evaluating numerous prototypes for the acceptability of the design and the manufacturability of such design. Qualifying evaluation does not include any functional use of the property in a normal business operations capacity.
11. Testing prototypes to assure that the design works to the specifications desired.
(8) Phased Contracts. A phased contract is a contract which provides for separate phases wherein the purchaser has the specific right to terminate the contract prior to commencement of the next phase without the delivery of tangible personal property required to be delivered in any subsequent phase specified in the contract and without further obligation except for compensation for work completed or cancellation fees.
A contract for the design and manufacture of a custom-made item shall be considered a “phased contract” when:
1. the purchaser has the specific right to terminate the contract prior to or upon completion of the design phase, or
2. there are two separate contracts: one for the design service and the other for the manufacture of the custom-made item.
(b) Application of Tax.
(1) General. Persons engaged in the business of rendering services pursuant to a qualified research and development contract are consumers of tangible personal property which they use incidentally in rendering the service. Tax applies to the sale of the property to them. Tax does not apply to receipts derived from qualified research and development contracts except as provided below.
(2) Prototypes. Prototypes transferred in a qualified research and development contract for informational and testing purposes, as defined in subdivision (a)(7), are not subject to tax regardless of the fact the research contract may place a value on the prototype. Prototypes transferred are for verification that a design meets the required technical specifications of the contract. No functional use, as defined in subdivision (a)(6), of the prototypes is made. Either the sales tax or the use tax applies with respect to sales of such tangible personal property to the contractor.
Sales of additional prototypes transferred in a qualified research and development contract for purposes other than informational and testing use, where a functional use occurs, are subject to tax. This includes prototypes transferred for the purpose of testing the aesthetic features of the product by independent third parties for marketing purposes, or used for the purpose for which the property was designed. The measure of tax is the stated value for such property in the contract, or if none is stated, at the computed fair market value as determined by applying a factor of three to the cost of direct materials used in the production of the prototype.
Tax applies to the transfer of title or possession of prototype tooling, in a qualified research and development contract, for functional use as defined in subdivision (a)(6), regardless of the form of the media, even if a separate charge is not made for these properties. The measure of tax is the amount provided for in the contract for duplicate or replacement sets of the property, or if no such amount is provided, the measure of tax will be equal to fair market value as determined by applying a factor of three to the cost of direct materials used in the production of the prototype tooling.
(3) Custom-Made Items. A contract to design, develop, and manufacture a custom-made item is a contract to sell tangible personal property. Generally, custom-made items are intended for functional use and not for informational and testing use. Unless the sale of the property is a sale for resale, tax applies to the gross receipts from the sale of the property. Gross receipts includes the entire amount of the contract price, including charges related to research, design, and development activities. Tax applies to the entire contract price without regard to the fact that the research, design, and development charges may be separately stated. See subdivision (b)(4) if the contract qualifies as a phased contract.
(4) Phased Contracts. The research and development phase and the production phase of a phased contract shall remain as two separate contracts and shall be taxed as such. Items produced for functional use in the production phase of the contract shall be subject to tax unless the purchaser provides the contractor with a resale certificate or the transfer is otherwise exempt.
(5) Application to Semiconductor Industry. Production tooling, including a mask to be used in production, is a custom-made item and tax applies as outlined in subdivision (b)(3) or (b)(4) as applicable.
Pattern generation tapes, wafer probe test tapes, final test tapes, schematic diagrams for the probe board, and schematic diagrams for the final test load board are informational items, if transferred for archival or other informational purposes not involving a functional use. The contractor is the consumer of the direct materials.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6009, 6010, 6011, and 6012, Revenue and Taxation Code.
HISTORY

1. New section filed 2-21-96; operative 3-22-96 (Register 96, No. 8).
2. Editorial correction (Register 97, No. 15).
§1502. Computers, Programs, and Data Processing.
Note     •     History

(a) In General. “Automatic data processing services” are those rendered in performing all or part of a series of data processing operations through an interacting assembly of procedures, processes, methods, personnel, and computers.
Automatic data processing services may be provided by manufacturers of computers, data processing centers, systems designers, consultants, software companies, etc. In addition, there are banks and other businesses which own or lease computers and use them primarily for their own purposes but occasionally provide services to others. Businesses rendering automatic data processing services will be referred to herein as “data processing firms.” 
(b) Definition of Terms.
(1) Application. The specific job performance by an automatic data processing installation. For example, data processing for a payroll may be referred to as a payroll application.
(2) Coding. The list, in computer code, of the successive computer instructions representing successive computer operations for solving a specific problem.
(3) Computer. A computer is an electronic device (including word processing equipment and testing equipment) or combination of components, which is programmable and which includes a processor (central processing unit or microprocessor), internal memory, and input and output connections. Manufacturing equipment which incorporates a computer is a computer for purposes of this regulation. However, the term does not include manufacturing equipment which operates under the control of mechanical or electronic accessories, the attachment to the equipment of which is required for the machine to operate. An electronic device otherwise qualifying as a computer remains a computer even though it may be used for information processing, data acquisition, process control or for the control of manufacturing machinery or equipment.
(4) Custom Computer Program and Programming. A computer program prepared to the special order of the customer. A program prepared to the special order of the customer qualifies as a custom program even though it may incorporate preexisting routines, utilities or similar program components. It includes those services represented by separately stated charges for modifications to an existing prewritten program which are prepared to the special order of the customer.
(5) Data Entry (including Encoding). Recording information in or on storage media by punching the holes or inserting magnetic bits to represent letters, digits, and special characters.
(6) Digital Pre-Press Instruction. The creation of original information in electronic form by combining more than one computer program into specific instructions or information necessary to prepare and link files for electronic transmission for output, within the printing industry, to film, plate, or direct to press, which is then transferred on electronic media such as tape or compact disc.
(7) Input. The information or data transferred, or to be transferred, from storage media into the internal storage of the computer.
(8) Output. The information transferred from the internal storage of the computer to storage media or tabulated listing.
(9) Prewritten Program. A program held or existing for general or repeated sale or lease. The term also includes a program developed for in-house use which is subsequently offered for sale or lease as a product.
(10) Program. “Program” is the complete plan for the solution of a problem, i.e., the complete sequence of automatic data processing equipment instructions necessary to solve a problem, and includes both systems and application programs and subdivisions thereof. “Subdivision” includes, without limitation, assemblers, compilers, generators, procedures, functions, routines, and utility programs. “Problem” means and includes any problem that may be addressed or resolved by a program or subdivision; and the “problem” addressed need not constitute the full array of a purchaser's or user's problems, requirements, and desired features. “Problem” further includes, without limitation, any problem associated with: information processing; the manipulation or storage of data; the input or output of data; the transfer of data or programs, including subdivisions; the translation of programs, including subdivisions, into machine code; defining procedures, functions, or routines; executing programs or subdivisions that may be invoked within a program; and the control of equipment, mechanisms, or special purpose hardware.
(11) Proof Listing. A tabulated listing of input.
(12) Source Documents. A document supplied by a customer of a data processing firm from which basic data are extracted (e.g., sales invoice).
(13) Storage Media. Includes hard disks, floppy disks, diskettes, magnetic tape, cards, paper tape, drums and other devices upon which information is recorded.
(c) Basic Applications of Tax.
(1) The transfer of title, for a consideration, of tangible personal property, including property on which or into which information has been recorded or incorporated, is a sale subject to tax.
(2) Charges for producing, fabricating, processing, printing, imprinting or otherwise physically altering, modifying or treating consumer-furnished tangible personal property (cards, tapes, disks, etc.), including charges for recording or otherwise incorporating information on or into such tangible personal property, are generally subject to tax.
(3) A transfer for a consideration of the title or possession of tangible personal property which has been produced, fabricated, or printed to the special order of the customer, including property on which or into which information has been recorded or incorporated, is generally a sale subject to tax. However, if the contract is for the service of researching and developing original information for a customer, tax does not apply to the charges for the service. The tangible personal property used to transmit the original information is merely incidental to the service.
(4) Charges for the transfer of computer-generated output are subject to tax where the true object of the contract is the output and not the services rendered in producing the output. Examples include artwork, graphics, and designs. However, the transfer by the seller of the original information created by digital pre-press instruction is not subject to tax if the original information is a custom computer program as explained in subdivision (f)(2)(F).
(5) Charges for processing customer-furnished information (sales data, payroll data, etc.) are generally not subject to tax. (For explanation and specific application of tax, see subdivision (d).)
(6) Leases of tangible personal property may be subject to tax under certain conditions. (See Regulation 1660 for application of tax to leases.)
(7) Charges made for the use of a computer, on a time-sharing basis, where access to the computer is by means of remote telecommunication, are not subject to tax (See subdivision (i).)
(8) Generally, data processing firms are consumers of all tangible personal property, including cards and forms, which they use in providing nontaxable services unless a separate charge is made to customers for the materials, in which case tax applies to the charge made for the materials.
(d) Manipulation of Customer-Furnished Information as Sale or Service.
(1) General. Generally tax applies to the conversion of customer-furnished data from one physical form of recordation to another physical form of recordation. However, if the contract is for the service of developing original information from customer-furnished data, tax does not apply to the charges for the service. The tangible personal property used to transmit the original information is merely incidental to the service.
(2) Data Entry and Verification. This covers situations where a data processing firm's agreement provides only for data entry, data verification, and proof listing of data, or any combination of these operations. It does not include contracts under which these services are performed as steps in processing of customer-furnished information as discussed under subdivision (d)(5).
Agreements providing solely for date entry and verification, or data entry providing a proof list and/or verifying of data are regarded as contracts for the fabrication of storage media and sale of proof lists. Charges therefor are taxable, whether the storage media are furnished by the customer or by the data processing firm. Tax also applies to charges for the imprinting of characters on a document to be used as the input medium in an optical character recognition system. The tax application is the same regardless of which type of storage media is used in the operation.
(3) Addressing (Including Labels) for Mailing. Where the data processing firm addresses, through the use of its computer or otherwise, material to be mailed, with names and addresses furnished by the customer or maintained by the data processing firm for the customer, tax does not apply to the charge for addressing. Similarly, where the data processing firm prepares, through the use of its computer or otherwise, labels to be affixed to material to be mailed, with names and addresses furnished by the customer or maintained by the data processing firm for the customer, tax does not apply to the charge for producing the labels, whether or not the data processing firm itself affixes the labels to the material to be mailed. (For the sale of mailing list by the proprietor or such list as a sale of tangible personal property or as a nontaxable addressing, see Regulation 1504 “Mailing-Services.”)
(4) Microfilming and Photorecording. Tax applies to charges for microfilming or photorecording except, as provided in subdivision (d)(5), where the microfilming or photorecording is done under a contract for the processing of customer-furnished information. Tax applies to a contract where data on magnetic tape are converted into combinations of alphanumeric printing, curve plotting and/or line drawings, and put on microfilm or photorecording paper.
(5) Processing of Customer-Furnished Information.
(A) “Processing of customer-furnished information” means the developing of original information from data furnished by the customer. Examples of automatic data processing processes which result in original information are summarizing, computing, extracting, sorting and sequencing. Such processes also include the updating of a continuous file of information maintained by the customer with the data processing firm.
(B) “Processing of customer-furnished information” does not include: (1) an agreement providing solely for the reformatting of data or for the preparation of a proof listing or the performance of an edit routine or other pre-processing, (2) the using of a computer as a mere printing instrument, as in the preparation of personalized computer-printed letters, (3) the mere converting of data from one medium to another, or (4) an agreement under which a person undertakes to prepare artwork, drawings illustrations, or other graphic material unless the provisions of subdivision (f)(2)(F) apply regarding digital pre-press instruction and custom computer programs. Additionally, graphic material furnished incidentally to the performance of a service is not subject to tax. For example, graphics furnished in connection with the performance of architectural, engineering, accounting, or similar professional services are not subject to tax. With respect to typography, clip art combined with text on the same page is considered composed type as explained in Regulation 1541.
(C) Contracts for the processing of customer-furnished information usually provide that the data processing firm will receive the customer's source documents, record data on storage media, make necessary corrections, process the information, and then record and transfer the output to the customer.
Where a data processing firm enters into a contract for the processing of customer-furnished information, the transfer of the original information to the customer is considered to be the rendering of a service. Except as described in subdivisions (c)(8) and (d)(5)(E), tax does not apply to the charges made under contracts providing for the transfer of the original information whether the original information is transferred on storage media, microfilm, microfiche, photorecording paper, input media for an optical character recognition system, punched cards, preprinted forms, or tabulated listing. The breakdown of the total charge into separate charges for each operation involved in processing the customer-furnished information will not change the application of tax.
(D) The furnishing of computer programs and data by the customer for processing under direction and control of the data processing firm will not alter the application of tax, notwithstanding that charges are based on computer time.
(E) Taxable Items. Where a data processing firm has entered into a contract which is regarded as a service contract under subdivision (d)(5)(C) and the data processing firm, pursuant to the contract, transfers to its customer tangible property other than property containing the original information, such as duplicate copies of storage media: inventory control cards for use by the customer; membership cards for distribution by the customer; labels (other than address labels); microfiche duplicates; or similar items for use, tax applies to the charges made for such items. If no separate charge is made, tax applies to that portion of the charge made by the data processing firm which the cost of the additional computer time (if and), cost of materials, and labor cost to produce the items bear to the total job cost.
(F) Additional Copies. When additional copies of records, reports, tabulation, etc., are provided, tax applies to the charges made for the additional copies. “Additional copies” are all copies (other than carbon copies), whether the copies are prepared by rerunning the same program, by using multiple simultaneous printers, by looping a program such that the program is run continuously, by using different programs to produce the same output product, or by other means. Where additional copies are prepared, the tax will be measured by the charge made by the data processing firm to the customer. If no separate charge is made for the additional copies, tax applies to that portion of the gross receipts which the cost of the additional computer time (if any), the cost of materials and labor cost to produce the additional copies bear to the total job cost. Charges for copies produced by means of photocopying, multilithing, or by other means are subject to tax.
(e) Training Services and Materials. Data processing firms provide a number of training services, such as data entry and verification, programming, and specialized training in systems design.
(1) Charges for training services are nontaxable, except as provided in subdivision (g) where the training services are provided as part of the sale of tangible personal property. The data processing firm is the consumer of tangible personal property which is used in training others, or provided to trainees without a separate charge as a part of the training services.
(2) Tax applies to charges for training materials, including books, furnished to trainees for a charge separate from the charge for training services.
(3) Where a person sells tangible personal property, such as computers or programs, and provides training materials to the customer without making an additional charge for the training materials, this is a sale of the training materials. The selling price of the training materials is considered to be included in the sales price of the tangible personal property.
(f) Computer Programs.
(1) Prewritten (Canned) Programs. Prewritten programs may be transferred to the customer in the form of storage media, or by listing the program instructions on coding sheets. In some cases they are usable as written; however, in other cases it is necessary that the program be modified, adapted, and tested to meet the customer's particular needs. Tax applies to the sale or lease of the storage media or coding sheets on which or into which such prewritten (canned) programs have been recorded, coded, or punched.
(A) Tax applies whether title to the storage media on which the program is recorded, coded, or punched, passes to the customer, or the program is recorded, coded, or punched on storage media furnished by the customer. The temporary transfer of possession of a program, for a consideration, for the purpose of direct use or to be recorded or punched by the customer, or by the lessor on the customer's premises, is a lease of tangible personal property. The tax applies unless the property is leased in substantially the same form as acquired by the lessor and the lessor has paid sales tax reimbursement or use tax with respect to the property.
(B) Tax applies to the entire amount charged to the customer. Where the consideration consists of license fees, all license fees, including site licensing and other end users fees, are includable in the measure of tax. Tax does not apply, however, to license fees or royalty payments that are made for the right to reproduce or copy a program to which a federal copyright attaches in order for the program to be published and distributed for a consideration to third parties, even if a tangible copy of the program is transferred concurrently with the granting of such right. Any storage media used to transmit the program is merely incidental.
(C) Maintenance contracts sold in connection with the sale or lease of prewritten computer programs generally provide that the purchaser will be entitled to receive, during the contract period, storage media on which the prewritten program improvements or error corrections have been recorded. The maintenance contract also may provide that the purchaser will be entitled to receive, during the contract period, telephone or on-site consultation services.
If the purchase of the maintenance contract is not optional with the purchaser, that is, if the purchaser must purchase the maintenance contract in order to purchase or lease a prewritten computer program, then the charges for the maintenance contract are taxable as part of the sale or lease of the prewritten program. Tax applies to any charge for consultation services provided in connection with a maintenance contract except as provided below.
For reporting periods commencing on or after January 1, 2003, if the purchase of the maintenance contract is optional with the purchaser, that is, if the purchaser may purchase the prewritten software without also purchasing the maintenance contract, and there is a single lump sum charge for the maintenance contract, 50 percent of the lump sum charge for the maintenance contract is for the sale of tangible personal property and tax applies to that amount; the remaining 50 percent of the lump sum charge is nontaxable charges for repair.
If no tangible personal property whatsoever is transferred to the customer during the period of the maintenance contract, tax does not apply to any portion of the charge. Tax does not apply to a separately stated charge for consultation services if the purchaser is not required to purchase those services in order to purchase or lease any tangible personal property, such as a prewritten computer program or a maintenance contract.
(D) The sale or lease of a prewritten program is not a taxable transaction if the program is transferred by remote telecommunications from the seller's place of business, to or through the purchaser's computer, and the purchaser does not obtain possession of any tangible personal property, such as storage media, in the transaction. Likewise, the sale of a prewritten program is not a taxable transaction if the program is installed by the seller on the customer's computer except when the seller transfers title to or possession of storage media or the installation of the program is a part of the sale of the computer. 
If the transfer of a prewritten program is a nontaxable transaction, then the seller is the consumer of tangible personal property used to produce written documentation or manuals (including documentation or manuals in machine-readable form) designed to facilitate the use of the program and transferred to the purchaser for no additional charge. If a separate charge is made for the documentation or manuals, then tax applies to the separate charge.
(E) The transfer of a prewritten program on storage media is not a sale for resale when the storage media, or an exact copy, will be used to produce additional copies of the program.
Charges for testing a prewritten program on the purchaser's computer to insure that such a program operates as required are installation charges and are nontaxable
(2) Custom Programs.
(A) Tax does not apply to the sale or lease of a custom computer program, other than a basic operational program, regardless of the form in which the program is transferred. Nor does the tax apply to the transfer of a custom program, or custom programming services performed, in connection with the sale or lease of computer equipment, whether or not the charges for the custom program or programming are separately stated.
(B) However, charges for custom modifications to prewritten program are nontaxable only if the charges for the modifications are separately stated. Otherwise, the charges are taxable as part of the sale of the prewritten program.
When the charges for modification of a prewritten program are not separately stated, tax applies to the entire charge made to the customer for the modified program unless the modification is so significant that the new program qualifies as a custom program. If the prewritten program was previously marketed, the new program will qualify as a custom program, if the price of the prewritten program was 50 percent or less of the price of the new program. If the prewritten program was not previously marketed, the new program will qualify as a custom program if the charge made to the customer for custom programming services, as evidenced in the records of the seller, is more than 50 percent of the contract price to the customer.
(C) Charges for any written documentation or manuals designed to facilitate the use of a custom computer program by the customer are nontaxable, whether separately stated or not. The vendor of the custom computer program is the consumer of the written documentation or manuals, or of any tangible personal property used by the vendor in producing the written documentation or manuals.
(D) A custom computer program includes a program prepared to the special order of a customer who will use the program to produce and sell or lease copies of the program, and the charge for such custom computer program is not subject to tax. Sales or leases of the copies, however, are taxable as sales of prewritten computer programs.
(E) A computer program prepared to the special order of a customer to operate for the first time in connection with a particular basic operating system is a custom computer program even though a different version currently operates in connection with an incompatible basic operating system.
(F) Digital pre-press instruction is a custom computer program under section 6010.9 of the Revenue and Taxation Code, the sale of which is not subject to tax, provided the digital pre-press instruction is prepared to the special order of the purchaser. Digital pre-press instruction shall not, however, be regarded as a custom computer program if it is a “canned” or prewritten computer program which is held or existing for general or repeated sale or lease, even if the digital pre-press instruction was initially developed on a custom basis or for in-house use. The sale of such canned or prewritten digital pre-press instruction in tangible form is a sale of tangible personal property, the retail sale of which is subject to tax.
(g) Service Charges. The following activities are service activities. Charges for the performance of such services are nontaxable unless the services are performed as a part of the sale of tangible personal property.
(1) Designing and implementing computer systems (e.g., determining equipment and personnel required and how they will be utilized).
(2) Designing storage and data retrieval systems (e.g., determining what data communications and high-speed input-output terminals are required).
(3) Consulting services (e.g., study of all or part of a data processing system).
(4) Feasibility studies (e.g., studies to determine what benefits would be derived if procedures were automated).
(5) Evaluation of bids (e.g., studies to determine which manufacturer's proposal for computer equipment would be most beneficial).
(6) Providing technical help, analysts, and programmers, usually on an hourly basis.
(7) Training Services.
(8) Maintenance of equipment. (See Regulation 1546 for application of tax to maintenance contracts.)
(9) Consultation as to use of equipment.
(h) Pick-up and Delivery Charges. If the data processing firm's billing is for nontaxable processing of customer-furnished information, the tax will not apply to pick-up and delivery charges. If pick-up and delivery charges are made in conjunction with the sale of tangible personal property or the processing of customer-furnished tangible personal property, the tax will apply to the pick-up charges. Tax will apply to the delivery charges to the extent specified in regulation 1628, “Transportation Charges.”
(i) Rental of Computers. A lease includes a contract by which a person secures for a consideration the use of a computer which is not on his or her premises, if the person or his or her employees, while on the premises where the computer is located operate the computer, or direct and control its operation. A lease does not include a contract whereby a person secures access by means of remote telecommunication to a computer which is not on his or her premises, if the person or his or her employees operate the computer or direct and control its operation by means of remote telecommunication. (See Regulation 1660 for application of tax to leases.)
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 995.2, 6006, 6007, 6010, 6010.9, 6011, 6012, 6015 and 6016, Revenue and Taxation Code.
HISTORY

1. New section filed 2-24-72; effective thirtieth day thereafter (Register 72, No. 9).
2. Amendment filed 2-3-88; operative 3-4-88 (Register 88, No. 7). 
3. Amendment of subsection (b) (definition of “Computer”) and subsection (f)(1)(D) filed 12-30-98; operative 1-29-99 (Register 99, No. 1).
4. Amendment of subsection (b) (providing new definition of ``Electronic or Digital Pre-Press Instruction”), amendment of subsections (c)(4) and (d)(5)(B) and new subsection (f)(2)(F) filed 11-3-99; operative 12-3-99 (Register 99, No. 45).
5. Amendment filed 12-10-2002; operative 1-1-2003 pursuant to Government Code section 11343.4 (Register 2002, No. 50).
6. Amendment of subsection (b)(10) filed 5-12-2009; operative 6-11-2009 (Register 2009, No. 20).
§1502.1. Word Processing.
Note     •     History

(a) General. Tax does not apply to charges for furnishing original letters or documents, or carbon copies produced simultaneously with the original, prepared by using a typewriter or word processing equipment. Where the word processing company provides only an original letter or document, or carbon copies produced simultaneously with the original, the true object of the contract is the performance of a service and not the furnishing of tangible personal property. The word processing company is the consumer of tangible personal property used in providing the service.
Tax applies to charges for producing multiple copies of letters, manuscripts, or other documents using word processing equipment. Multiple copies include form letters produced with a slight variation which personalizes essentially the same letter. Tax applies to the entire charge without deduction for charges for setting up the machine, keyboarding, or assembling the material. Charges for providing additional copies are subject to tax regardless of whether the original was prepared using a typewriter or word processing equipment and regardless of whether the copies are produced by computers, word processors, copying machines, or other methods.
Tax does not apply to charges made by a word processing company for keyboarding original names and address, setting up and sorting, and for printing the names and addresses onto mailing labels. (See Regulation 1504 for an explanation of how tax applies to mailing services.)
Tax does not apply to charges made when a word processor is used to produce copy which is acquired and used exclusively for reproduction purposes since Revenue and Taxation Code Section 6010.3 excludes typography from the definition of sale or purchase.
(b) Examples of the Application of Tax under Specific Circumstances.
(1) Preparation of Standard Letters and Envelopes for Mailing. A word processing operator keyboards and records an address list and standard letter on magnetic media. The letter is then automatically typed to each person on the address list. The prerecorded address list is then used to address envelopes inserted into the machine. The charges made for setting up the machine, keyboarding the material and typing out the letters are taxable. The charges made for addressing the envelopes are nontaxable if separately stated (See Regulation 1504.)
(2) Manuscripts. An author brings a manuscript to a word processing company. The operator keyboards the material and records it on magnetic media. A draft copy of each page of the recorded material is printed out (typed automatically) and given to the author to proofread. The author makes corrections and changes on the draft and returns it to the operator. The operator makes the necessary changes using a word processor. A final copy is then printed out for the author to submit to a publisher. The charges made for the original keyboarding of the manuscript, printing out the draft copy, editing, and printing out a final copy are nontaxable. Tax does not apply to charges for carbon copies prepared at the same time as the original copy; however charges for photocopies are taxable.
(3) Assembling Final Product From a Paragraph Library. An attorney brings several paragraphs to a word processing company which uses word processing equipment to keyboard and record the paragraphs on magnetic media to form a “paragraph library.” The attorney then notifies the company to select certain stock paragraphs, for example paragraphs 1, 8, 11, 29, 16, 12, 87, 100, 56, and 57 in that order, to create a will for his client. The attorney provides variable information to be inserted into proper position in the paragraphs, such as: maker of the will, maker's spouse, maker's children and their date of birth, city and county of residence. The operator instructs the machine (with keyboard commands) to assemble those specified paragraphs with the necessary variable client information and to print out (automatically type) a will. All of the charges made for keyboarding original paragraphs, printing out a draft of all paragraphs for the attorney's use, assembling the paragraphs as requested, and printing out individual wills (and any carbon copies of the original) are nontaxable. Charges for photocopies are taxable.
(4) Addressing Mailing Labels. A client has a list of 2,000 names that he is going to use monthly for a mailing. Every month the list has to be sorted into ZIP code sequence, typed on labels to be applied to envelopes which are then mailed. The word processing company keyboards the names and addresses and records them on magnetic media. The machine is instructed (using keyboard commands) to sort the names into correct ZIP code sequence before the list is finally stored on the magnetic media. Each month the equipment is set up and, with an operator in attendance (giving keyboard commands), the names are printed (automatically typed) onto continuous form labels. The charges made by the word processing company for keyboarding original names and addresses, for setting up and sorting, and for the monthly setting up and printing of names onto labels are all nontaxable charges for addressing.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6010, 6011, 6012, 6015 and 6016, Revenue and Taxation Code.
HISTORY

1. New section filed 5-9-85; effective thirtieth day thereafter (Register 85, No. 19).
§1503. Hospitals and Other Medical Service Facilities, Institutions and Homes for the Care of Persons.
Note     •     History

(a) Meals.
(1) There are exempt from sales and use tax the sale of meals and food products to and the use of meals and food products by the following institutions when furnished or served to and consumed by their residents or patients:
(A) A health facility as defined in section 1250 of the Health and Safety Code, which holds the license required pursuant to section 1253, or is exempt from the license requirement pursuant to subdivision (a) of section 1270, or is operated by the United States.
(B) A community care facility as defined in section 1502 of the Health and Safety Code, which holds the license required by section 1508, or is a residential facility selected by a licensee pursuant to section 1506 and exclusively used for the reception and care of persons placed by such licensee, or is exempt from the license requirement pursuant to subdivision (f) of section 1505, or is operated by the United States.
(C) A residential care facility for the elderly, as defined in Section 1569.2 of the Health and Safety Code, that holds the license required by Section 1569.10 of the Health and Safety Code or is exempt from the license requirements pursuant to Section 1569.145 of the Health and Safety Code, or is operated by the United States.
(D) Any house, retirement home or similar establishment supplying board and room for a flat monthly rate and serving as a principal residence exclusively for persons 62 years of age or older, and any housing that primarily serves older persons and that is financed by state or federal programs. For purposes of this regulation, the term “exclusively” is defined to mean that no more than four persons under 62 years of age are in residence during any calendar quarter.
(E) An alcoholism or drug abuse recovery or treatment facility, as defined in section 11834.02 of the Health and Safety Code, which holds the license required by section 11834.30 of the Health and Safety Code.
(2) “Meals,” for purpose of this subdivision, include any of the following:
(A) Carbonated beverages furnished or served as part of the meals.
(B) Food provided to the patient or resident by way of enteral feeding, Total Parenteral Nutrition (also called TPN), and Intradialytic Parenteral Nutrition (also called IDPN), as each is defined in Regulation 1591, provided these forms of nutrition are furnished or served to and consumed by a resident or patient of an institution specified in this subdivision (a).
(C) Nonreusable items that become components of the meals. These include straws, paper napkins, and plastic eating utensils. These also include bags and tubing, as well as filters, locks, tape, clamps, and connectors which are integral to the tubing, each of which is used to dispense enteral feeding as meals to the patient or resident including: gastrostomy tubes (also called G tubes) which are used to deliver the nutrition directly into the stomach; jejunostomy tubes (also called J tubes) which are used to deliver the nutrition directly into the intestinal tract; and nasogastric tubes (also called NG tubes) which are used to deliver the nutrition directly through the nasal passage to the stomach. Needles, syringes, cannulas, bags, and tubing, as well as filters, locks, tape, clamps, and connectors which are integral to the tubing, used to dispense TPN or IDPN as meals to the patient or resident are also regarded as components of those meals provided each of these items is used primarily to dispense the TPN or IDPN.
(b) General.
(1) Sales to Medical Service Facilities. “Medical service facilities” for purposes of this subdivision are those institutions specified in subdivision (a) of this regulation as well as surgery centers and similar medical service facilities whether patients are accepted for periods of less than or more than twenty-four hours. For example, dialysis centers, AIDS centers, and cancer centers are medical service facilities. [Operative April 1, 2001, e]xcept as provided in subdivisions (b)(2) of this regulation, medical service facilities are service providers to their patients and residents and are the consumers of tangible personal property furnished in connection with those services, whether separately itemizing charges for the services and for the tangible personal property or billing in lump sum, and sales of that tangible personal property to the medical service facilities are taxable retail sales unless specifically exempted.
(2) Sales by Medical Service Facilities. When a medical service facility is the retailer of property furnished, tax applies to its charge for that property unless the sale is exempt from tax. A medical service facility is the retailer of property furnished for a charge to persons other than residents and patients.
A medical service facility is the retailer of tangible personal property for which it makes a separately itemized charge if the property is furnished to a patient or resident with the intent that the patient or resident remove the property from the premises of the medical service facility for use by the patient or resident. Examples of such items include crutches or a wheelchair provided upon release from the medical service facility and discharge kits for new mothers (which might include formula, diapers, etc.). Notwithstanding subdivision (b)(1) of this regulation, a medical service facility is the retailer of any property furnished in connection with its medical services if its contract with the medical service facility's resident or patient or other customer specifically provides that title to the subject tangible personal property passes to the resident or patient or other customer. When the contract has a provision passing title to the subject tangible personal property to the resident or patient or other customer, the medical services facility may purchase such property for resale, and tax applies to the charge by the medical services facility unless its sale is otherwise exempt from tax.
(3) Laboratory Charges. Laboratory charges, such as charges for blood-counts, are not taxable. Tax does not apply with respect to purchases, sales or donations of whole blood or blood plasma for use in transfusions.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6007, 6015, 6016, 6051, 6359 and 6363.6, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (a)(3) filed 5-19-72; effective thirtieth day thereafter (Register 72, No. 21). For prior history, see Register 72, No. 9.
2. Amendment of subsection (b)(1) filed 2-26-74; effective thirtieth day thereafter (Register 74, No. 9).
3. Amendment of subsection (a) and new Appendix filed 10-10-74 as an emergency; effective upon filing (Register 74, No. 41).
4. Certificate of Compliance filed 12-26-74 (Register 74, No. 52).
5. Amendment of subsection (b)(2) and Appendix sections 1250, 1502 and 1505 filed 1-19-79; effective thirtieth day thereafter (Register 79, No. 3).
6. Amendment filed 12-6-79; effective thirtieth day thereafter (Register 79, No. 49).
7. Amendment of Appendix filed 12-14-79; effective thirtieth day thereafter (Register 79, No. 49).
8. Repealer of Appendix filed 7-20-81; effective thirtieth day thereafter (Register 81, No. 30).
9. Amendment of subsection (a) filed 7-15-88; operative 8-14-88 (Register 88, No. 30).
10. Amendment of subsections (a)(3) and (b)(2) filed 9-15-89; operative 10-15-89 (Register 89, No. 38).
11. Amendment of subsection (a) and reference citation filed 6-13-90; operative 7-13-90 (Register 90, No. 31).
12. Amendment of subsection (b) and Note filed 8-30-91 as an emergency; operative 8-30-91 (Register 91, No. 51). A Certificate of Compliance must be transmitted to OAL by 12-30-91 or emergency language will be repealed by operation of law on the following day.
13. Certificate of Compliance as to 8-30-91 order transmitted to OAL 12-12-91 and filed 1-7-92 (Register 92, No. 11).
14. Amendment of subsection (b)(1) filed 10-4-93; operative 11-3-93 (Register 93, No. 41).
15. Change without regulatory effect adding new subsection (a)(3), subsection renumbering and amendment of newly designated subsection (a)(4) filed 6-20-95 pursuant to section 100, title 1, California Code of Regulations (Register 95, No. 25).
16. Amendment of section heading and section filed 5-2-2001; operative 6-1-2001 (Register 2001, No. 18).
§1504. Mailing Lists and Services.
Note     •     History

(a) Transactions in Mailing Lists.
(1) Definition. A “mailing list” as used herein means a written or printed list, series, set, group, aggregation, etc., of names and addresses of, and occasionally, other information concerning persons, such as potential customers or donors, which is intended for use in circulating material by mail. Such a list may be in the form of a manuscript list, directory, Cheshire tape, Dick tape, gummed labels, index cards, or other similar means of communication. Operative January 1, 1994, “mailing list” includes a magnetic tape or similar device used to produce written or printed names and addresses by electronic or mechanical means.
(2) Application of Tax Generally. Except as otherwise provided in (a)(3) below, tax applies to receipts from the transfer of title or possession, rental or granting of a license for use of mailing lists, to the same extent as to receipts from sales or rentals of tangible personal property generally.
(3) Limited Use. Tax does not apply to charges for the transfer or use of mailing lists, where a contract restricts the transferee or user to use of the mailing list one time only. The charges in such cases are considered to be for information or addressing services.
(4) Magnetic Tapes. Where the names and addresses are recorded on magnetic tapes or similar devices used to produce written or printed names and addresses by electronic or mechanical means, charges for the transfer or use of the tape or similar device are subject to tax to the same extent as receipts from sales or rentals of tangible personal property generally regardless of any contractual restrictions on the frequency of use. Operative January 1, 1994, such magnetic tapes or similar devices are considered a mailing list and charges for their transfer and use under (a)(3) above are exempt from tax.
(5) Application of Tax to Materials Used, Persons engaged in the business of selling, renting or licensing mailing lists are consumers of tangible personal property used in producing lists the transfer of which is not subject to tax, and tax applies to the sale to them of such property. Tangible personal property which becomes a component part of lists, the transfer of which is taxable may be purchased for resale.
(b) Mailing Services.
(1) General. Tax does not apply to charges for services rendered in preparing material for mailing, such as addressing, enclosing, sealing, collating, affixing labels, blocking out, tucking or clasping envelope flaps, metering, affixing stamps, edging seal or edging with stamp, addressing permit indicia, and sorting, typing and sacking in compliance with postal rules and regulations, nor to charges for the handling or wrapping of material left over after preparation of material for mailing, which is to be returned to the customer.
(2) Addressing Defined. “Addressing” means the actual writing, typewriting, printing, imprinting or affixing of names and addresses or addresses only on property to be mailed. The mailing may be done by the person doing the addressing or by another person. The process may include the preparation of Cheshire tapes, Dick tapes, cards, gummed labels, etc., to be affixed to, or enclosed in, the property so as to serve as  addresses for that property and not to be used for any other purpose such as reproduction or reference.
(3) Consumers of Materials. Persons engaged in the business of providing mailing services are consumers of materials used in performing those services.
(c) Printing Related to Mailing.
(1) Sales of Printed Matter. Tax applies to charges for printed matter furnished to a customer by a person engaged in the business of providing mailing services to the same extent as to charges for printing matter generally, even though the printed matter is to be mailed. If such matter is printed by another person, it may be purchased for resale by giving a resale certificate. If the mailing service has reimbursed its vendor for tax which the vendor is required to pay to the state or has paid use tax with respect to the purchase of such matter, a “tax-paid purchases resold” deduction will be allowed.
(2) Separate Statement of Printing Charges. Charges for printed matter should be separately stated on the invoice to the customer. If not separately stated, the amount subject to tax will be determined by the board based on information available to it.
NOTE

Authority cited: 7051, Revenue and Taxation Code. Reference: Sections 6006, 6006.3, 6009, 6012, 6015, 6016 and 6379.8, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering from Section 1907.5 filed 2-24-72; effective thirtieth day thereafter (Register 72, No. 9).
2. Amendment of subsection (c) filed 1 -19-79; effective thirtieth day thereafter (Register 79, No. 3). 
3. Amendment of subsections (a)(1), (a)(2), (a)(4), (b)(1), (c)(1) and Note filed 6-12-95; operative 1-1-94 (Register 95, No. 24).
§1505. Morticians.
Note     •     History

(a) In General.
(1) Morticians as Retailers. Morticians are retailers of caskets, boxes, vaults, and clothing. They also are retailers of any other tangible personal property furnished in connection with rendering their services if a separate charge is made for such property. Unless otherwise exempt, tax applies to the sales price of all tangible personal property sold by morticians.1 
(2) Morticians as Consumers. Morticians are consumers of acknowledgment cards, memorial folders, registration books, embalming fluid, cosmetics, eye caps, morgue supplies, car stickers, and prayer books which are furnished by them in connection with services they render unless a separate charge is made for such property. Tax applies to the sales price to the mortician of all tangible personal property consumed by him.
(b) Application of Tax to Specific Types of Transactions.
(1) Sales in Interstate or Foreign Commerce. The sale of a casket and other tangible personal property by a mortician, which he delivers or ships to an out-of-state point pursuant to the agreement of sale is regarded as a sale in interstate or foreign commerce and is exempt from the tax. The facts that the death of the deceased occurred in this state, that the contracting parties are residents of this state, and that services are held in this state prior to the shipment, are immaterial. 
(2) Sales to the United States. All or a portion of charges for funerals of veterans and other persons may be paid by the United States Veterans Administration or by the Social Security Administration. Effective August 1, 1973, the United States Veterans Administration will pay an interment allowance, up to $150, in addition to the regular funeral and burial allowance for veterans. Morticians may take a deduction for sales to the United States Government when claims filed by them with federal agencies are paid directly to the morticians regardless of method of billing. If funeral charges are paid by another person, there is no tax exemption even though such person may receive reimbursement from a federal agency and even though the amount received as reimbursement is assigned or endorsed over to the mortician as a credit against those charges.
In computing the allowable exemption, the funeral allowance and the interment allowance must be treated separately.
(A) Funeral allowance payments received directly from a federal agency are to be prorated between funeral charges for sales or tangible personal property and charges for exempt services. None are to be allocated to accommodation cash advances. The only exception will be when a portion of a payment is clearly identified as applying to something for which a mortician has made a specific charge.
(B) Payments received directly from the United States Veterans Administration which are identified as interment allowances are to be prorated between sales of tangible personal property used in actual interment and charges or advances for services in connection with the interment. The only exception will be when a portion of the payment is clearly identified as applying to something pertaining to interment for which the mortician has made a specific charge.
(3) Examples of Application of Amounts Received by Morticians Directly From a Federal Agency (Examples are at 6 percent rate).

Mortician's invoice to client:
Charges
Services	 $400.00
Casket	 355.00
Vault	 200.00
Suit	  45.00
   Subtotal	 $1,000.00
Accommodation Cash Advances
Cemetery Space and Opening	 $50.00
Clergy	 25.00
Music	   15.00
   Subtotal	 $90.00
   Total	 $1,090.00
Sales Tax (6% of $355, $200 & $45)	     36.00
Total	 $1,126.00

Example 1. Funeral allowance only.
Cash received by the mortician directly from a federal agency as a funeral allowance, and not allocated by the United States Government to any specific portion of the above charges, was $300. No interment allowance was received.
Since $600 of the $1,000 charged the client (exclude the cash advances) was for tangible personal property, 60% of the amount received from the federal agency (60% of ____ equals ____) is considered a sale of such property to the United States Government and is exempt from sales tax.

Computation of Tax:
Total Charges		 $1,090.00
Less:	Accommodation Advances	 $90.00
	Exempt Services	 400.00
	Sale to United States	 180.00	670.00
Taxable Sale		 $ 420.00
Tax at 6%			      25.20
Taxable Sale Including Tax		 $ 445.20

Example 2. Funeral allowance and interment allowance received by mortician.
Cash received by the mortician directly from a federal agency, and not allocated by the United States Government to any specific portion of the above charges, was $300 as a funeral allowance and $150 as an interment allowance.
Since the total charges by the mortician related to interment were $250 (vault $200 plus cemetery space and opening $50), and the charge for tangible personal property related to interment was $200 (vault), 80% of the amount received from the federal agency as an interment allowance (80% of $150 equals $120) is considered a sale of such property to the United States Government and is exempt from sales tax.
Since $400 (casket $355 and suit $45) of the $800 charged the client for the funeral (exclude the cash advances and the vault) was for tangible personal property, 50% of the amount received from the federal agency as a funeral allowance (50% of $300 equals $150) is considered a sale of such property to the United States Government and is exempt from sales tax.

Computation of Tax:
Total Charges		 $1,090.00
Less:	Accommodation Advances	$ 90.00
	Exempt Services	 400.00
	Sale to United States Government
	($120 plus $150)	 270.00	760.00
Taxable Sale		$ 330.00
Tax at 6%			     19.80
Taxable Sale Including Tax		 $ 349.80

(4) Accommodation Cash Advances. Tax does not apply to accommodation cash advances for such items as cemetery charges, newspaper notices, railroad tickets, ministerial fees and flowers.
(5) Tax-paid Purchases Resold. A mortician may claim a “tax-paid purchases resold” deduction if the mortician reimbursed the vendor for tax which the vendor is required to pay to the state or has paid use tax with respect to the property and has resold the property prior to making any use of it.
(c) “Pre-Need” Agreements. Where a mortician, cemetery association or other person enters into an agreement with a customer to provide services upon the death of the customer, no sale occurs for sales and use tax purposes until the services are rendered.
An amount designated as “sales tax” in the agreement will be considered an estimate of tax which may become due when the services are rendered. No sales tax should be paid to the board in connection with “pre-need” agreements until the services are rendered.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6015 and 681, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former Section 1908 filed 9-18-70; effective thirtieth day thereafter (Register 70, No. 38).
2. Amendment filed 10-31-72; effective thirtieth day thereafter (Register 72, No. 45).
3. Amendment of subsection (b) filed 5-6-74; effective thirtieth day thereafter (Register 74, No. 18).
4. Amendment of subsection (b) filed 6-21-74; effective thirtieth day thereafter (Register 74, No. 25).
5. Amendment of subsections (b)(3), (b)(5), and (c) filed 1-19-79; effective thirtieth day thereafter (Register 79, No. 3).
6. Amendment of subsection (b)(3) filed 5-20-80; effective thirtieth day thereafter (Register 80, No. 21). For technical reasons, printed in Register 80, No. 23.

1 On October 25, 1972, the board adopted an amendment to the regulation by which the 50 percent standard service reporting procedure in effect until October 18, 1970, and the 45 percent standard service reporting procedure in effect thereafter, are no longer allowable.
§1506. Miscellaneous Service Enterprises.
Note     •     History

(a) Licensed Architects.
(1) In General. Fees paid to licensed architects for their ability to design, conceive or communicate ideas, concepts, designs, and specifications are not subject to tax. Any plans, specifications, renderings or models or other instruments of service provided by a licensed architect under a licensed architect's contract or commission are integral to the licensed architect's services and are not subject to tax. The licensed architect is the consumer of any tangible personal property, including plans, specifications, renderings or models, used or transferred in the performance of professional services notwithstanding the fact that a fee may be added to the cost of the property and separately stated on a billing to the customer. If after the completion of the contract or commission the licensed architect provides additional copies of the original plans or specifications, or any models or renderings of an existing structure, the architect is regarded as making a sale of such copies, models or renderings.
(2) Licensed Architect. A “licensed architect” is defined under the Business and Professions Code Chapter 3, Division 3, Section 5500 as follows:
“As used in this chapter, architect means a person who is licensed to practice architecture in this state under the authority of this chapter.”
A licensed architect preparing or being in responsible control of plans, specifications, and instruments of service is required to affix to those plans, specifications, and instruments of service their stamp or seal which bears the licensee's name, his or her license number, the legend “Licensed Architect” and the legend “State of California,” and which shall provide a means of indicating the renewal date of the license.
(3) Architectural Perspectivists and Modelers. Architectural perspectivists do not act as “licensed architects.” Architectural perspectivists are the retailers of renderings, prints and drawings they provide to architects or other consumers and tax applies to their entire charge for such items. Modelers do not act as “licensed architects.” Modelers are the retailers of models they provide to architects or other consumers, and tax applies to their entire charge for such items.
(4) Licensed architects who produce renderings, prints, drawings or models pursuant to a contract that includes professional architectural services are not retailers of the renderings, prints, drawings or models they provide pursuant to that contract for architectural services. Tax does not apply to their charge for such items.
(b) Barbers, Beauty Shop Operators, and Shoe Polishers. Barbers, beauty shop operators, and shoe polishers are the consumers of the supplies and other property used in performing their services, and tax applies with respect to the sale to them of the supplies and other property. They are retailers, however, of supplies, used articles, or other tangible personal property, which they sell to customers in the regular course of business, and tax applies to the gross receipts from such sales.
(c) Clothes Cleaners and Dyers
(1) Clothes Cleaning -- In General. Persons who provide clothes-cleaning services are consumers of the supplies and other materials used in performing their cleaning services, and tax applies to the sale to them of the supplies and other materials and not to their charges for such services. 
(2) Rentals. Clothes cleaners are the consumers of linen supplies and similar articles, including towels, uniforms, coveralls, shop coats, dust cloths, and similar items, rented to others when an essential part of the rental contract is the furnishing of the recurring service of laundering or cleaning of the articles rented, and tax applies with respect to the sale to them of such articles. 
(3) Clothes Dyeing -- In General. Persons who provide dyeing services are retailers, not consumers, when their charges are for the dyeing of new fabrics, garments, or other such items and tax applies to their gross receipts from such sales. Persons who dye new items are required to hold a seller's permit. 
Dyers are consumers of the supplies and other materials used in dyeing used fabrics, garments, or other such items and tax applies to the sale to them of the supplies and other materials and not to their charges for their dyeing services. 
(4) Alteration of Garments -- In General. For the purposes of this subdivision (c), alteration of garments means and includes any work performed upon new or used men's, women's and children's clothing to meet the requirements of the customer whether the work involves the addition of material to the garment, removal of material, refitting, or repairing. Alteration of garments does not mean or include the process of dyeing garments. Alteration of garments also does not mean or include work performed upon new or used personal and household items such as handbags, stuffed animals, bedding, and draperies. The application of tax to a clothes cleaner's or a dyer's charges for the alteration of personal or household items is explained in Regulation 1524. 
(A) Alteration of Garments by Clothes Cleaning or Dyeing Establishments. A clothes cleaning or dyeing establishment, including wet cleaners (e.g., launderers) and dry cleaners, means and includes a clothes cleaner or dyer who (1) operates a location or locations as a pickup and delivery point for garment cleaning, or (2) provides spotting and pressing services on the premises, but not garment cleaning, or (3) operates a garment cleaning or dyeing plant on the premises. 
A clothes cleaner or dyeing establishment described above is the consumer of property used or furnished in the alteration of new or used garments provided that: 
1. Seventy-five percent (75%) or more of the establishment's total gross receipts represent charges for garment cleaning or dyeing services, and 
2. No more than twenty percent (20%) of the establishment's total gross receipts during the preceding calendar year were from the alteration of garments. 
If a clothes cleaner or dyer is not an establishment as described or does not meet the requirements of this paragraph (A), tax applies to the clothes cleaner's or the dyer's charges for the alteration of garments as explained in Regulation 1524.
(B) Alteration of Garments by a Third Party. When a clothes cleaner or dyer who meets the requirements of subdivision (c)(4)(A) contracts with a third party such as a tailor for the alteration of garments instead of performing such alterations itself, the clothes cleaner or dyer is a consumer, not a retailer, of the alterations provided by the third party and may not issue a resale certificate to the third party for such alterations. Tax applies to the third party's charges to the clothes cleaner or dyer for such alterations as explained in Regulation 1524. 
(5) Miscellaneous Sale of Items. Clothes cleaners and dyers, whether or not they meet the requirements of subdivision (c)(4)(A), are retailers of any supplies, used items, or other tangible personal property such as lint brushes, abandoned garments, wood hangers, or novelty items, which they sell to customers in the regular course of business, and tax applies to the gross receipts from such sales. As retailers of tangible personal property, such persons are required to hold a seller's permit. 
(d) Circulating Libraries. When circulating libraries, which are engaged in the business of renting books to others, pay tax measured by the purchase price of such books either to the person from whom the books are purchased or to the board, tax does not apply to the amount charged for the rental of such books. Such libraries are retailers of new or used books which they sell to consumers in the regular course of business, and tax applies to the gross receipts from such sales.
(e) Dentists and Dental Laboratories. Dentists are consumers of the materials, supplies, dental laboratory products and other tangible personal property which they use in performing their services. Tax, accordingly, applies to the sale of the tangible personal property to them.
Dental laboratories are the retailers of the plates, inlays and other products which they manufacture for dentists or other consumers. Tax applies to their entire charges for such products regardless of whether a separate charge or billing is made for materials and manufacturing services.
(f) Gun Clubs. Gun clubs are consumers, not retailers, of clay pigeons or blue rocks furnished to members or patrons in connection with trapshooting or similar sports even though the charge for the service is measured by the number of clay pigeons or blue rocks used. The tax applies with respect to the sale of such property to the clubs.
(g) Licensed Hearing Aid Dispensers. Persons licensed as hearing aid dispensers by the Department of Consumer Affairs, Hearing Aid Dispensers Examining Committee, are consumers of hearing aids furnished or sold by them. The term “hearing aid” includes any necessary accessory or component part of the hearing aid which is fully worn on the body of the user such as cords, connector tubing, ear molds, or batteries, whether the part is sold or furnished separately or in conjunction with the hearing aid. The term also includes replacement and repair parts. Tax applies with respect to the sale of such products to licensed hearing aid dispensers.
Tax applies to the retail sale of such products by persons who are not licensed hearing aid dispensers.
(h) Organized Camps. 
(1) Camps in General. The tax applies to gross receipts from the sale of meals or other tangible personal property at camps, whether operated by municipal or private corporations, or other parties. 
(2) Camps Qualifying as Schools or Educational Institutions. When a camp qualifies as a school or educational institution, the camp's sales of student meals are not subject to tax. If a camp meets all of the following conditions, the camp will qualify as a school or educational institution for purposes of this regulation:
(A) The camp conducts regularly scheduled classes,
(B) Students are required to attend the classes,
(C) Qualified instructors are in charge of the classes, and
(D) The camp is an “organized camp” as defined in California Health and Safety Code section 18897.
An example of a camp that qualifies as a school or education institution includes, but is not limited to the following: A camp offers a session where campers have a schedule of daily activities they are required to attend. These activities include team-building exercises, guided nature hikes, and wilderness survival techniques. The activities are led by staff that the camp determined to have sufficient training and experience to lead the activities.
An example of a camp that does not qualify as a school or educational institution includes, but is not limited to the following: A camp offers a session that includes activities that are regularly scheduled. Participants are required to attend a camp orientation on the first day, but during the rest of the camp they can attend as many of the scheduled activities as they want, or they can elect to attend no activities.
If a single charge is made for all of the privileges extended by the camp, a segregation must be made on that portion of the total charge representing taxable receipts from the sale of meals or other tangible personal property. In the absence of such a segregation, the taxable receipts from the sale of meals or other tangible personal property shall be determined by the board based on information available to it.
(i) Taxidermists. Taxidermists are consumers of the materials used in repairing, stuffing and mounting skins, heads, etc., of animals, birds, fish, and the like furnished by their customers, and tax applies with respect to the sale of such property to them. If, however, a separate charge for such property is made on the invoices to the customers at the fair retail selling price, the taxidermist is the retailer of the property and tax applies to such separate charge.
Tax applies to retail sales by taxidermists of skins, heads, mountings or other tangible personal property.
(j) Licensed Veterinarians.
(1) Definitions. As used herein:
(A) The term “licensed veterinarian” means any person licensed as a veterinarian by the California Department of Consumer Affairs, Board of Examiners in Veterinary Medicine.
(B) The term “drugs and medicines” includes substances or preparations intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in animals and which is commonly recognized as a substance or preparation intended for this use. The term includes legend drugs, pills and capsules (other than vitamins), liquid medications, injected drugs, ointments, vaccines, intravenous fluids, and medicated soaps if those soaps are available only to veterinarians. The term does not include vitamins, shampoos, pet foods, prescription diet foods, artificial diets, flea powders, and flea sprays.
(C) The term “professional services” includes the diagnosis and treatment of disease or trauma in animal life. It also includes the administration of drugs and medicines by means of, for example, injection, intravenous solution, or oral or bodily application.
(2) Application of Tax.
(A) Licensed veterinarians are consumers of drugs and medicines which they use or furnish in the performance of their professional services. Accordingly, tax does not apply to a licensed veterinarian's charges to clients for such drugs and medicines, whether or not separately stated. Licensed veterinarians are also consumers of tangible personal property, other than drugs and medicines, which they use or which they furnish to clients without a separately stated charge. Tax applies to the sale of such drugs, medicines and other items to licensed veterinarians except:
1. Operative April 1, 1996, drugs or medicines which are purchased to be administered to animal life as an additive to feed or drinking water of food animals (as defined in Regulation 1587 (18 CCR 1587), “Animal Life, Feed, Drugs and Medicines”) or of non-food animals which are being held for sale in the regular course of business, and the primary purpose of the drugs or medicines is the prevention and control of disease, or
2. Operative January 1, 1997, drugs or medicines which are purchased to be administered directly (e.g., orally, by injection, or by application to the body) to food animals and the primary purpose of the drugs or medicines is the prevention or control of disease of the food animals. Veterinarians remain consumers of drugs and medicines administered directly to non-food animals.
(B) Licensed veterinarians are retailers of drugs and medicines which they furnish for a consideration without performing specific related professional services. Licensed veterinarians are also retailers of tangible personal property, other than drugs and medicines, which they furnish to clients for a separately stated charge. Unless otherwise exempt, tax applies to charges made by licensed veterinarians to clients for such drugs, medicines and other items. See Regulation 1587 (18 CCR 1587), “Animal Life, Feed, Drugs and Medicines” for exemption for sales of feed, drugs, or medicines for certain animals. Tax applies to separately stated charges made for X-rays if the X-rays are delivered to clients.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6007, 6015, 6018.1, 6018.7, 6358, 6358.4 and 6363, Revenue and Taxation Code. 
HISTORY

1. New section filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
2. Amendment filed 9-7-83; effective thirtieth day thereafter (Register 83, No. 37).
3. Relettering of former subsections (e) (f) to (f)-(g) and new subsection (e) filed 5-1-85; effective thirtieth day thereafter (Register 85, No. 18).
4. New subsection (h) filed 10-8-86; effective thirtieth day thereafter (Register 86, No. 41).
5. Change without regulatory effect amending subsections (a), (a)(1), (e), (h)(1)(A), (h)(1)(C), (h)(2)(A) and (h)(2)(B), adding new subsections (h)(2)(A)1. and 2., and amending Note filed 6-9-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 24).
6. New subsections (a)-(a)(4), subsection relettering and amendment of newly designated subsections (i)(2)(A)1.-(i)(2)(B) filed 8-16-2000; operative 9-15-2000 (Register 2000, No. 33).
7. Amendment of subsection (b), repealer of subsections (b)(1)-(b)(2), new subsections (c)-(c)(5) and subsection relettering filed 3-11-2009; operative 4-10-2009 (Register 2009, No. 11).
8. Amendment of subsection (h) and new subsections (h)(1)-(h)(2)(D) filed 1-31-2011; operative 3-2-2011 (Register 2011, No. 5).
§1507. Technology Transfer Agreements.
Note     •     History

(a) Definitions. 
(1) “Technology transfer agreement” means an agreement evidenced by a writing (e.g., invoice, purchase order, contract, etc.) that assigns or licenses a copyright interest in tangible personal property for the purpose of reproducing and selling other property subject to the copyright interest. A technology transfer agreement also means a written agreement that assigns or licenses a patent interest for the right to manufacture and sell property subject to the patent interest, or a written agreement that assigns or licenses the right to use a process subject to a patent interest. 
A technology transfer agreement does not mean an agreement for the transfer of any tangible personal property manufactured pursuant to a technology transfer agreement, nor an agreement for the transfer of any property derived, created, manufactured, or otherwise processed by property manufactured pursuant to technology transfer agreement.
Example No. 1: Company X holds a copyright in certain tangible artwork. Company X transfers (temporarily or otherwise) its artwork to Company Y and, in writing, transfers (temporarily or otherwise) a copyright interest to Company Y authorizing it to reproduce and sell tangible personal property subject to Company X's copyright interest in the artwork. Company X's transfer of artwork and a copyright interest to Company Y constitutes a technology transfer agreement. Company Y's sales of tangible personal property containing reproductions of Company X's artwork do not constitute a technology transfer agreement. 
Example No. 2: Company X holds patents for widgets and the process for manufacturing such widgets. Company X, in writing, transfers (temporarily or otherwise) its patent interests to sell widgets and the process used to manufacture such widgets to Company Y. Company X's transfer of its patent interests to Company Y constitutes a technology transfer agreement. Company Y's sale or storage, use, or other consumption of any widgets that it manufactures does not constitute a technology transfer agreement. Company Y's sale or storage, use, or other consumption of any tangible personal property used to manufacture widgets also does not constitute a technology transfer agreement. 
Example No. 3: Company X manufactures and leases a patented medical device to Company Y. As part of the lease of the medical device, Company X also transfers to Company Y, in writing, a separate patent interest in a process external to the medical device that involves the use, application or manipulation of the medical device. Company X charges a monthly rentals payable for the equipment as well as a separate charge for each time the separate patented process external to the medical device is performed by Company Y. Company X's lease of the medical device to Company Y to perform the separately patented process is not a technology transfer agreement and tax applies to the entire rentals payable for the medical equipment. Company X's transfer of its separate patent interest for the right to perform the separate patented process external to the medical device is a technology transfer agreement. Company X's separate charges to Company Y for the right to perform the separate patented process external to the medical device are not subject to tax provided they relate to the right to perform the separate patented process, are not for the lease of the medical device, and represent a reasonable charge for the right to perform the separate patented process external to the medical device. Where the separate charges for the right to perform the separate patented process relate to the patented technology embedded in the internal design, assembly or operation of the medical device, Company X's separate charges for the right to perform the separate patented process are not pursuant to a technology transfer agreement and are instead part of the rentals payable from the lease of the medical device. 
(2) “Copyright interest” means the exclusive right held by the author of an original work of authorship fixed in any tangible medium to do and to authorize any of the following: to reproduce a work in copies or phonorecords; to prepare derivative works based upon a work; to distribute copies or phonorecords of a work to the public by sale or other transfer of ownership, or by rental, lease, or lending; to perform a work publicly, in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works; to display a copyrighted work publicly, in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work; and in the case of sound recordings, to perform the work publicly by means of a digital audio transmission. For purposes of this regulation, an “original work of authorship” includes any literary, musical, and dramatic works; pictorial, graphic, and sculptural works; motion pictures and other audiovisual works; sound recordings, including phonograph and tape recordings; and architectural works represented or contained in tangible personal property. 
(3) “Patent interest” means the exclusive right held by the owner of a patent issued by the United States Patent and Trademark Office to make, use, offer to sell, or sell a patented process, machine, manufacture, composition of matter, or material. “Process” means one or more acts or steps that produce a concrete, tangible and useful result that is patented by the United States Patent and Trademark Office, such as the means of manufacturing tangible personal property. Process may include a patented process performed with an item of tangible personal property, but does not mean or include the mere use of tangible personal property subject to a patent interest. 
(4) “Assign or license” means to transfer in writing a patent or copyright interest to a person who is not the original holder of the patent or copyright interest where, absent the assignment or license, the assignee or licensee would be prohibited from making any use of the copyright or patent provided in the technology transfer agreement. 
(b) Application of Tax 
(1) Tax applies to amounts received for any tangible personal property transferred in a technology transfer agreement. Tax does not apply to amounts received for the assignment or licensing of a patent or copyright interest as part of a technology transfer agreement. The gross receipts or sales price attributable to any tangible personal property transferred as part of a technology transfer agreement shall be: 
(A) The separately stated sale price for the tangible personal property, provided the separately stated price represents a reasonable fair market value of the tangible personal property; 
(B) Where there is no such separately stated price, the separate price at which the tangible personal property or like (similar) tangible personal property was previously sold, leased, or offered for sale or lease, to an unrelated third party; or, 
(C) If there is no such separately stated price and the tangible personal property, or like (similar) tangible personal property, has not been previously sold or leased, or offered for sale or lease to an unrelated third party, 200 percent of the combined cost of materials and labor used to produce the tangible personal property. “Cost of materials” consists of those materials used or otherwise physically incorporated into any tangible personal property transferred as part of a technology transfer agreement. “Cost of labor” includes any charges or value of labor used to create the tangible personal property whether the transferor of the tangible personal property contributes such labor, a third party contributes the labor, or the labor is contributed through some combination thereof. The value of labor provided by the transferor of the tangible personal property shall equal the separately stated, reasonable charge for such labor. Where no separately stated charge for labor is made, the value of labor shall equal the lower of the taxpayer's normal and customary charges for labor made to third persons, or the fair market value of such labor performed. 
(2) Tax applies to all amounts received from the sale or storage, use, or other consumption of tangible personal property transferred with a patent or copyright interest, where the transfer is not pursuant to a technology transfer agreement. 
(3) Specific Applications. Tax applies to the sale or storage, use, or other consumption of artwork and commercial photography pursuant to a technology transfer agreement as set forth in Regulation 1540, Advertising Agencies, Commercial Artists and Designers.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6011 and 6012, Revenue and Taxation Code; Preston v. State Board of Equalization (2001) 25 Cal. 4th 197, 105 Cal. Rptr. 2d 407.
HISTORY

1. New section filed 6-6-2002; operative 7-6-2002 (Register 2002, No. 23).
2. Editorial correction of History 1 (Register 2002, No. 25).
3. Change without regulatory effect amending subsection (a)(1) filed 6-22-2011 pursuant to section 100, title 1, California Code of Regulations (Register 2011, No. 25).
Article 2. Contractors and Subcontractors
§1521. Construction Contractors.

(a) Definitions.
(1) Construction Contract.
(A) “Construction contract” means and includes a contract, whether on a lump sum, time and material, cost plus, or other basis, to:
1. Erect, construct, alter, or repair any building or other structure, project, development, or other improvement on or to real property, or
2. Erect, construct, alter, or repair any fixed works such as waterways and hydroelectric plants, steam and atomic electric generating plants, electrical transmission and distribution lines, telephone and telegraph lines, railroads, highways, airports, sewers and sewage disposal plants and systems, waterworks and water distribution systems, gas transmission and distribution systems, pipelines and other systems for the transmission of petroleum and other liquid or gaseous substances, refineries and chemical plants, or
3. Pave surfaces separately or in connection with any of the above works or projects, or
4. Furnish and install the property becoming a part of a central heating, air-conditioning, or electrical system of a building or other structure, and furnish and install wires, ducts, pipes, vents, and other conduit imbedded in or securely affixed to the land or a structure thereon.
(B) “Construction contract” does not include:
1. A contract for the sale or for the sale and installation of tangible personal property such as machinery and equipment, or
2. The furnishing of tangible personal property under what is otherwise a construction contract if the person furnishing the property is not responsible under the construction contract for the final affixation or installation of the property furnished.
(2) Construction Contractor. “Construction contractor” means any person who for himself or herself, in conjunction with, or by or through others, agrees to perform and does perform a construction contract. “Construction contractor” includes subcontractors and specialty contractors and those engaged in such building trades as carpentry, bricklaying, cement work, steel work, plastering, drywall installation, sheet metal work, roofing, tile and terrazzo work, electrical work, plumbing, heating, air-conditioning, elevator installation and construction, painting, and persons installing floor coverings, including linoleum, floor tile, and wall-to-wall carpeting, by permanently affixing such coverings to a floor. “Construction contractor” includes any person required to be licensed under the California Contractors' State License Law (Business & Professions Code Sections 7000 et seq.), and any person contracting with the United States to perform a construction contract, whether such persons are formed or organized under the laws of this state, or another state or country.
(3) United States Construction Contractor. “United States construction contractor” means a construction contractor who for himself or herself, in conjunction with, or by or through others, agrees to perform and does perform a construction contract for the United States Government.
(4) Materials. “Materials” means and includes construction materials and components, and other tangible personal property incorporated into, attached to, or affixed to, real property by contractors in the performance of a construction contract and which, when combined with other tangible personal property, loses its identity to become an integral and inseparable part of the real property. A list of typical items regarded as materials is set forth in Appendix A.
(5) Fixtures. “Fixtures” means and includes items which are accessory to a building or other structure and do not lose their identity as accessories when installed. A list of typical items regarded as fixtures is set forth in Appendix B.
(6) Machinery and Equipment. “Machinery and equipment” means and includes property intended to be used in the production, manufacturing or processing of tangible personal property, the performance of services or for other purposes (e.g., research, testing, experimentation) not essential to the fixed works, building, or structure itself, but which property incidentally may, on account of its nature, be attached to the realty without losing its identity as a particular piece of machinery or equipment and, if attached, is readily removable without damage to the unit or to the realty. “Machinery and equipment” does not include junction boxes, switches, conduit and wiring, or valves, pipes, and tubing incorporated into fixed works, buildings, or other structures, whether or not such items are used solely or partially in connection with the operation of machinery and equipment, nor does it include items of tangible personal property such as power shovels, cranes, trucks, and hand or power tools used to perform the construction contract. A list of typical items regarded as machinery and equipment together with a list of typical items not regarded as machinery and equipment is set forth in Appendix C.
(7) Time and Material Contract. “Time and material contract” means a contract under which the contractor agrees to furnish and install materials or fixtures, or both, and which sets forth separately a charge for the materials or fixtures and a charge for their installation or fabrication.
(8) Lump Sum Contract. “Lump sum contract” means a contract under which the contractor for a stated lump sum agrees to furnish and install materials or fixtures, or both. A lump sum contract does not become a time and material contract when the amounts attributable to materials, fixtures, labor, or tax are separately stated in the invoice.
(b) Application of Tax.
(1) United States Construction Contractors.
(A) Materials and Fixtures. United States construction contractors are consumers of materials and fixtures which they furnish and install in the performance of contracts with the United States Government. Either the sales tax or the use tax applies with respect to sales of tangible personal property (including materials, fixtures, supplies, and equipment) to contractors for use in the performance of such contracts with the United States for the construction of improvements on or to real property in this state. The fact that the contract may provide principally for the manufacture or acquisition of tangible personal property is immaterial. The sales tax, but not the use tax, applies even though the contractor purchases the property as the agent of the United States.
(B) Machinery and Equipment. United States contractors are retailers of machinery and equipment furnished in connection with the performance of a construction contract with the United States Government. Tax does not apply to sales of machinery and equipment to United States contractors or subcontractors, provided title to the property passes to the United States before the contractor makes any use of it. Such sales are sales for resale, and the purchasing contractor may issue a resale certificate. A contractor who uses the machinery or equipment before title passes to the United States is the consumer of that machinery or equipment and either sales tax or use tax applies with respect to the sale to or the use by the contractor.
(2) Construction Contractors Other than United States Construction Contractors.
(A) Materials.
1. In General. Construction contractors are consumers of materials which they furnish and install in the performance of construction contracts. Either sales tax or use tax applies with respect to the sale of the materials to or the use of the materials by the construction contractor.
2. When Contractor is Seller. A construction contractor may contract to sell materials and also to install the materials sold. If the contract explicitly provides for the transfer of title to the materials prior to the time the materials are installed, and separately states the sale price of the materials, exclusive of the charge for installation, the contractor will be deemed to be the retailer of the materials.
In the case of a time and material contract, if the contractor bills his or her customer an amount for “sales tax” computed upon his or her marked up billing for materials, it will be assumed, in the absence of convincing evidence to the contrary, that he or she is the retailer of the materials.
If the sale occurs in this state, the sales tax applies to the contractor's (retailer's) gross receipts from the sale of the materials. If the sale occurs prior to the time the property is brought into this state, the contractor's (retailer's) customer is the consumer and his or her use (unless otherwise exempt) is subject to use tax measured by the sales price. The contractor must collect the use tax and pay it to this state.
(B) Fixtures.
1. In General. Construction contractors are retailers of fixtures which they furnish and install in the performance of construction contracts and tax applies to their sales of the fixtures.
2. Measure of Tax.
a. In General. If the contract states the sale price at which the fixture is sold, tax applies to that price. If the contract does not state the sale price of the fixture, the sale price shall be deemed to be the cost price of the fixture to the contractor.
b. Determining Cost Price.
If the contractor purchases the fixtures in a completed condition, the cost price is deemed to be the sale price of the fixture to him or her and shall include any manufacturer's excise tax or import duty imposed with respect to the fixture prior to its sale by the contractor.
If the contractor is the manufacturer of the fixture, the cost price is deemed to be the price at which similar fixtures in similar quantities ready for installation are sold by him or her to other contractors.
If similar fixtures are not sold to other contractors ready for installation, then the cost price shall be deemed to be the amount stated in the price lists, bid sheets or other records of the contractor.
If the sale price cannot be established in the above manner and the fixture is manufactured by the contractor, the cost price shall be deemed to be the aggregate of the following:
[1] Cost of materials, including such items as freight-in and import duties,
[2] Direct labor, including fringe benefits and payroll taxes,
[3] Specific factory costs attributable to the fixture,
[4] Any manufacturer's excise tax,
[5] Pro rata share of all overhead attributable to the manufacture of the fixture, and
[6] Reasonable profit from the manufacturing operation which, in the absence of evidence to the contrary, shall be deemed to be 5 percent of the sum of the preceding factors.
Jobsite fabrication labor and its prorated share of manufacturing overhead must be included in the sale price of the fixture. Jobsite fabrication labor includes assembly labor performed prior to attachment of a component or a fixture to a structure or other real property.
3. Exceptions-Leased Fixtures. In some instances the construction contractor may furnish and install a fixture for a person, other than the owner of the realty, who intends to lease the fixture in place as tangible personal property as provided in section 6016.3 of the Revenue and Taxation Code and pay tax measured by rental receipts.
In this case the construction contractor may take a resale certificate from the lessor at the time of the transaction and the sale to the lessor will be considered to be a sale for resale. The resale certificate should indicate that the fixture is purchased for resale by the purchaser as tangible personal property under section 6016.3 of the Revenue and Taxation Code.
(C) Machinery and Equipment.
1. In General. Construction contractors are retailers of machinery and equipment even though the machinery and equipment is furnished in connection with a construction contract. Tax applies to the contractor's gross receipts from such sales.
2. Measure of Tax.
a. In General. Tax applies to the gross receipts from the sale of machinery and equipment furnished and installed by a construction contractor. If the contract calls only for the furnishing and installation of machinery and equipment, tax applies to the total contract price less those charges excludible from gross receipts under Section 6012 of the Revenue and Taxation Code.
b. Lump Sum Contracts-Determining Gross Receipts. If the contract is for a lump sum and includes the furnishing and installation of materials, fixtures, and machinery and equipment, the gross receipts from the sale of the machinery and equipment shall be the price at which similar quantities ready for installation are sold at retail delivered in the market area where the installation takes place.
If there is no such retail price for the machinery and equipment, then the gross receipts shall be determined from the contracts, price lists, bid sheets, or other records of the contractor.
If the gross receipts cannot be established in the above manner and the machinery and equipment is manufactured by the contractor, the gross receipts from the sale shall be the aggregate of the following:
[1] Cost of materials, including such items as freight-in and import duties,
[2] Direct labor, including fringe benefits and payroll taxes,
[3] Specific factory costs attributable to the machinery or equipment,
[4] Any manufacturer's excise tax,
[5] Pro rata share of all overhead attributable to the machinery or equipment, including overhead attributable to manufacturing, selling, contracting, and administration, and
[6] Reasonable profit from the manufacture and sale of the machinery or equipment which, in the absence of evidence to the contrary, shall be deemed to be 5 percent of the sum of the preceding factors.
Jobsite fabrication labor and its prorated share of manufacturing overhead must be included in the sale price of the machinery or equipment. Jobsite fabrication labor includes assembly labor performed prior to attachment of a component or the machinery or equipment to a structure or other real property.
(D) Cost Plus A Fee Contracts. When a contractor enters into a construction contract for a cost plus a fee or time and materials plus a fee,  whether the fee is a lump sum or a percentage of costs, the fee is not included in the measure of tax. When the contractor is the manufacturer of the fixtures or machinery and equipment, the “cost price” of the fixtures and the gross receipts from the sale of the machinery and equipment shall be determined in accordance with (B) and (C) above.
(3) Miscellaneous Sales by Contractors. In addition to sales of fixtures and machinery and equipment, tax applies to all retail sales by contractors of tangible personal property, including parts, supplies, tools, construction equipment, buildings severed or to be severed by the contractor, and furniture, including furniture sold with a building, even though the building is sold “in place.”
(4) Permits. Contractors engaged solely in performing construction contracts which do not involve the sale and installation of fixtures and who do not also engage in business as sellers or retailers are not required to hold seller's permits. However, if a contractor is a seller or retailer because he or she makes sales of fixtures, materials, or machinery and equipment, or other tangible personal property either in connection with or as part of a construction contract, or otherwise, he or she is required to hold a seller's permit.
(5) Supplies and Tools for Self-Use. Contractors are the consumers of supplies such as oxygen, acetylene, gasoline, acid, thread-cutting oil, and tools and parts for tools, which they use in their business, and the tax applies to the sale of such supplies and tools to contractors.
(6) Exemption Certificates.
(A) Resale Certificates. Contractors holding valid seller's permits may purchase fixtures and machinery and equipment for resale by issuing resale certificates to their suppliers. They may not purchase materials for resale unless they are also in the business of selling materials.
A contractor cannot avoid liability for sales or use tax on materials or fixtures furnished and installed by him or her by taking a resale certificate from the prime contractor, interior decorators, designers, department stores, or others. However, under the circumstances described in subsection (b) (2) (B)3., a contractor may take a resale certificate for fixtures furnished and installed by him or her for a person other than the owner of the realty.
(B) Exemption Certificates for Out-of-State Use. Sales tax does not apply to sales of tangible personal property to a construction contractor who holds a valid California seller's permit when the property is used by the contractor outside this state in his or her performance of a contract to improve real property and as a result of such use the property is incorporated into and becomes a part of real property located outside this state. This exemption is available only if at the time of the purchase the contractor certifies in writing to the seller that he or she holds a valid California seller's permit (giving the number of that permit and identifying the property purchased) and states that the property will be used in the manner stated above. The certificate must be signed by the contractor or an authorized employee. Such a certification may appear in the body of a purchase order which bears the signature of the purchaser. Any certificate given subsequent to the time of purchase will not be recognized.
If the property purchased under a certificate is used by the contractor in any other manner or for any other purpose than stated in the certificate, the contractor shall be liable for sales tax as if he or she were a retailer making a retail sale of the property at the time of such use, and the sale price of the property to him or her shall be deemed the gross receipts from the sale.
(C) Deductions for Tax-Paid Purchases Resold. A contractor may claim a “tax-paid purchases resold” deduction for any property of which he or she is the retailer when he or she has reimbursed his or her vendor for tax which the vendor is required to pay to the State or has paid the use tax with respect to the property, and has resold the property prior to making any use of it. In the event that the contractor sells short ends or pieces which are not used other than in severing them from larger units purchased by him or her and as to which he or she has paid sales tax reimbursement or use tax, he or she may claim the deduction for tax-paid purchases resold, but the amount of the deduction shall not exceed the price at which he or she sells such short ends or pieces.
(c) Particular Applications.
(1) Draperies and Drapery Hardware. Persons who contract to sell and install draperies including drapery hardware, such as brackets, rods, tracks, etc., are retailers of the items which they furnish and install. Tax applies to the entire contract price exclusive of the charge for installation which charge should be separately stated. Installers who furnish drapery hardware or other tangible personal property may accept resale certificates from department stores or other sellers to furnish and install the draperies and drapery hardware.
The department stores or other sellers furnishing resale certificates are required to pay the tax to the state upon their selling price of the draperies and drapery hardware, exclusive of installation charges. The installer should segregate his or her installation charge in order that the department store or other seller may properly segregate its charge attributable to installation for purposes of determining its taxable gross receipts.
(2) Prefabricated Cabinets. A cabinet will be considered to be “prefabricated” and a “fixture” when 90 percent of the total direct cost of labor and material in fabricating and installing the cabinet is incurred prior to affixation to the realty. In determining this 90 percent, the total direct cost of all labor and materials in fabricating the cabinet to the point of installation will be compared to the total direct cost of all labor and materials in completely fabricating and installing the cabinet. If more than one cabinet is fabricated and installed under the contract, each cabinet will be considered separately in determining whether the cabinet is prefabricated.
(3) Prefabricated Buildings. Prefabricated units such as commercial coaches, house trailers, etc., registered with the Department of Motor Vehicles or the Department of Housing and Community Development, are tangible personal property even though they may be connected to plumbing and utilities. A mobilehome which meets or is modified to meet, all applicable building codes and regulations and which is permanently affixed to realty, is an improvement to realty and is not personal property.
A contract to furnish and install a prefabricated or modular building which is not a factory-built school building (relocatable classroom) is a construction contract whether the building rests in place by its own weight or is physically attached to realty. It is immaterial whether the building is erected upon or affixed to land owned by the owner of the building or is leased to the landowner or lessee of the land.
Generally, a contract to furnish and install a small prefabricated building, such as a shed or kiosk, which is movable as a unit from its site of installation, is a construction contract only if the building is required to be physically attached to real property by the seller, upon a concrete foundation or otherwise. The sale of such a unit to rest in place by its own weight, whether upon the ground, a concrete slab, or sills or piers, is not a construction contract even though the seller may deliver the unit to its site of use.
Prefabricated or modular buildings which are “factory-built housing” where permanently affixed to the realty are improvements to realty. The manufacturer of factory-built housing who contracts to furnish and install the factory-built housing manufactured by him or her is the consumer of the materials used in building and installing the factory-built housing and the retailer of the fixtures. Tax applies as provided in (b) above.
(4) Factory-built School Buildings.
(A) General. On and after September 26, 1989, a contract to furnish and install a factory-built school building is not a construction contract but rather is a sale of tangible personal property.
(B) Definitions.
1. “Factory-built School Building.” The term “factory-built school building” (relocatable classroom) means and includes:
a. for the period September 26, 1989 through September 12, 1990, any building designed to be used as a school building as defined in sections 39214 and 81165 of the Education Code and so used. A factory-built school building must be designed in compliance with state laws for school construction and approved by the structural safety section in the office of the State Architect. It must be wholly or substantially manufactured at an offsite location for the purpose of being assembled, erected, or installed on a school site.
b. effective September 13, 1990, any building which is designed or intended for use as a school building and is wholly or substantially manufactured at an offsite location for the purpose of being assembled, erected, or installed on a site owned or leased by a school district or a community college district. A factory-built school building must be designed and manufactured in accordance with building standards adapted and approved pursuant to chapter 4 (commencing with section 18935) of part 2.5 of division 13 of the Health and Safety Code and must be approved by the structural safety section in the office of the State Architect.
The term does not include buildings licensed by either the Department of Motor Vehicles or the Department of Housing and Community Development. The term also does not include prefabricated or modular buildings which are similar in size to, but which are not, “factory-built school buildings”. It is immaterial whether the building is erected upon or affixed to land owned by the owner of the building or is leased to the landowner or lessee of the land.
2. “Consumer.”
a. For the period September 26, 1989 through September 12, 1990, the term “consumer” as used herein means either
(1) a school or a school district or
(2) a contractor who purchases a factory-built school building for the purpose of fulfilling the requirements of an existing contract with a school or school district to furnish and install such building.
b. Effective September 13, 1990, the term “consumer” as used herein means either
(1) a school district or a community college district or
(2) a contractor who purchases a factory-built school building for the purpose of fulfilling the requirements of an existing contract with a school district or a community college district to furnish and install such building.
(C) Place of Sale. The place of sale or purchase of a factory built school building is the place of business of the retailer regardless of whether the sale of the building includes installation or whether the building is placed upon a permanent foundation.
(D) Application of Tax.
1. Tax applies to 40 percent of the sales price of the building to the consumer excluding any charges for placing the completed building on the site. The sales price of the building shall include amounts representing tangible personal property installed in the building by a subcontractor, whether prior to or after installation of the building at the site, provided such installation is called for in the prime contract for the building.
A separate contract to furnish and install tangible personal property in a factory-built school building after installation of the building at the site is a construction contract and the tax applies as in (b) above. Any contract or subcontract for site preparation (e.g., foundation) is a construction contract and tax applies as in (b) above.
2. The sale of a factory-built school building to a purchaser who will resell the building without installation is a sale for resale and the seller may accept a resale certificate from the purchaser. If the purchaser then sells to a contractor who has an existing contract to install the building on a school site, tax will apply as in (c)(4)(D)1 above. If tax has been paid on the purchase price of a factory-built school building which is subsequently resold for installation, a tax-paid purchases resold deduction may be taken as provided in Regulation 1701 (18 CCR 1701).
E. Exclusion Certificate. For the period September 26, 1989, through September 12, 1990, if the purchaser certifies in writing to the retailer that the factory built school building purchased will be consumed in a manner or for a purpose entitling the retailer to exclude 60% of the gross receipts or sales price from the measure of tax and uses the property in some other manner or for some other purpose, the purchaser shall be liable for payment of tax measured by 60% of the sales price. For the above stated period, all retailers who make retail sales of “factory-built school buildings” claimed to be subject to tax measured by 40 percent of the sales price must obtain from the “consumer” a signed certificate substantially in the form set forth below.

CLAIM FOR 60% EXCLUSION FROM TAX ON
PURCHASE OF FACTORY-BUILT SCHOOL BUILDINGS
(Sec. 6012.6. Rev. & Tax. Code)
I hereby certify that the factory-built school building that I 

(Name of Purchaser-Consumer)
am purchasing under the authority of this certificate from

(Name of Retailer) 

will be used as a school building as defined in Sales and Use Tax Regulation 1521. My seller's permit number, if any, is ____________.
I further certify that I understand and agree that if the property purchased under the authority of this certificate is used by the purchaser for any purpose other than indicated above, the purchaser shall be liable for payment of tax to the State Board of Equalization at the time of such use measured by 60% of the sales price of the factory-built school building.

Signed by 	
                      (Name of Purchaser) 

As: 	
      (Owner, Partner, Purchasing Agent, etc.)

Date 	

(5) Mobilehomes Installed for Occupancy as Residences.
Operative July 1, 1980, a special measure of sales or use tax is provided for a mobilehome sold to be affixed to realty for occupancy as a residence.
A mobilehome dealer who sells a new mobilehome to a construction contractor to be affixed to land for occupancy as a residence is the “retailer-consumer” of the property and is required to pay tax for the period in which the sale was made by the dealer measured by an amount equal to 75 percent of the retailer-consumer's purchase price of the mobilehome.
A construction contractor who withdraws a new mobilehome from an inventory purchased for resale to be affixed to realty for occupancy as a residence in the performance of a construction contract is required to pay tax measured by 75 percent of the purchase price by his or her mobilehome vendor except where the purchase is made directly from a mobilehome manufacturer. In the absence of satisfactory evidence of the vendor's purchase price it shall be presumed that the measure of tax for the transaction is an amount equivalent to 60 percent of the sales price of the mobilehome to the construction contractor.
A mobilehome manufacturer who sells a new mobilehome directly to a construction contractor for installation to real property for occupancy as a residence is required to pay tax measured by 75 percent of the sales price at which a similar mobilehome ready for installation would be sold by the manufacturer to a retailer-consumer in this state. A construction contractor who withdraws a new mobilehome from an inventory purchased from a manufacturer for resale must pay tax measured by 75 percent of his or her purchase price.
A mobilehome manufacturer who performs a construction contract by permanently affixing a new mobilehome to real property is the consumer of the material and the retailer of fixtures installed by him or her and the tax applies as set forth in paragraph (b) above.
Reference should also be made to the provisions of Regulation 1610.2 for additional interpretative rules relating to custom additions to the mobilehome prior to sale, transfers of nonvehicle items, and the application of the tax to a purchase made from an out-of-state retailer.
(6) Repair Contracts. A contract to repair a fixture in place or a fixture the contractor is required by the contract to reaffix to the realty is a construction contract. Sales or use tax applies to the gross receipts or sales price of the parts sold by a contractor who is a retailer under this provision. Either sales tax or use tax applies to the sales price of the parts sold to or used by a contractor who is a consumer under this provision.
(A) United States Construction Contractors. A United States construction contractor is the consumer of the parts furnished in the performance of a construction contract to repair a fixture.
(B) Construction Contractors Other Than United States Construction Contractors.
1. A contractor is the retailer of the parts furnished in the performance of a construction contract to repair a fixture when the sale price of the parts is billed separately from the repair labor.
2. A contractor is the consumer of the parts furnished in the performance of a lump sum construction contract to repair a fixture.
(7) Elevator Installations. A large number of components are included in the installation of an elevator system. Those portions constituting the cage or platform and its hoisting machinery are fixtures. The balance of the installation, if attached to a structure or other real property will generally be “materials.”
Similarly, installation of escalators and moving sidewalks are in part fixtures and in part materials.
Following are examples of components constituting part of the cage or platform and its hoisting machinery, and which are fixtures:
alarm bell
cab or car
car doors
car platform and sling
door hanger on cab
door openers
door operator on cab or car
door safety edge on cab
door sills on cab
electronic door protector
jack assembly
motors
power units and control boxes
pumps
pushbuttons on cab
wire and piping (which are components of a fixture)
Following are examples of components constituting “materials” when attached to realty:
car guides
casing section of jack assembly
guide rails
hoistway doors
hoistway door frames
hoistway door safety edge
hoistway door sills and jambs
hoistway door supports
hoistway entrance
pushbuttons on hoistway
rail brackets
sill, struts
sound insulating panels on “materials”
structural steel (unless part of cab, car, or other “fixture”)
valve strainer
wire and piping attached to “materials”
Following are examples of components constituting parts of escalators or moving sidewalks which are fixtures:
staircase
moving sidewalk
moving handrails
chains
sprockets
motors
other operating mechanisms
(8) Telephone Switchboards and Instruments. Telephone switching equipment installed in a building specifically designed to accommodate the equipment or attached to a building or structure in a manner such that its removal would cause damage to the equipment or building in which it is installed will be considered to be “fixtures” under paragraph (a)(5) of this regulation.
Telephone handsets, modular switching equipment and standardized, off-shelf, general purpose switching equipment sold for use in general purpose office buildings constitute machinery and equipment under paragraph (a)(6) of this regulation. Handsets, modular switching equipment and standardized equipment were previously classified as fixtures.
This change in classification shall be applied prospectively only with respect to construction contracts entered into on and after July 1, 1988, by contractors other than United States construction contractors.
(9) Deep-Well Agricultural Pumps. A deep-well agricultural pump is tangible personal property if installed so that it rests in position by force of gravity and is not otherwise affixed to the land.
The pump is a fixture if:
(A) It is affixed to the land such as by concrete, bolts or screws,
(B) It is physically connected to an irrigation system such as by pipes or couplings so as to become an integral part of the system, or
(C) It is enclosed by a pump house or other building or structure.
(10) Remote Control Garage Door Openers. Remote control garage door opening units are fixtures. Portable transmitter units furnished pursuant to a construction contract are deemed to be fixtures and are taxable as provided in subdivision (b)(2)(B). Sales of portable transmitter units not a part of a construction contract, as, for example, sales of replacement units, are retail sales of tangible personal property and subject to tax as such.
(11) Excess Reimbursement.
The excess tax reimbursement provisions of Regulation 1700 apply to construction contractors.
(12) On-Premise Electric Signs
(A) An on-premise electric sign is an electrically powered or illuminated structure, housing, sign, device, figure, statuary, painting, display, message, placard, or other contrivance or any part thereof affixed to real property and intended or used to advertise, or to provide data or information in the nature of advertising, for any of the following purposes: 1) To designate, identify, or indicate the name or business of the owner or occupant of the premises upon which the advertising display is located, or 2) To advertise the business conducted, services available or rendered, or the goods produced, sold, or available for sale, upon the property where the advertising display has been erected.
(B) Application of Tax. An on-premise electric sign is a fixture and tax applies to the sale price of the sign. Notwithstanding the provisions of 1521(b)(2)(B), operative October 1, 2000, if the contract does not state the sale price of the sign, tax applies to 33 percent of the contract price of on-premise electric signs that are furnished and installed by the seller. “Contract price” includes charges for materials, fabrication labor, installation labor, overhead, profit, and other charges associated with the sale and installation of the sign. If a contract provides that a contractor is to install an on-premise electric sign furnished by a third party, the charges for installation are not taxable. If a seller furnishes but does not install an on-premise electric sign, the seller is a retailer of the sign and tax applies to the total contract price.
Separately stated charges for transportation are subject to tax as defined in Regulation 1628, Transportation Charges.
(13) Solar Cells, Solar Panels and Solar Modules. A contract to furnish and install a solar energy system onto a structure or realty is a construction contract which involves furnishing and installing both materials and fixtures. A solar energy system is defined as any solar collector or other solar energy device that provides for the collection and distribution of solar energy and, where applicable, the storage of solar energy.
(A) Materials. Photovoltaic (PV) cells, solar panels and solar modules, including both solar thermal panels and solar electric PV panels, are considered materials when they function in the same manner as other materials such as roofing, windows, or walls and are incorporated into, attached to, or affixed to real property and, as such, lose their identity to become an integral and inseparable part of the real property. Examples of these types of solar panels include, but are not limited to, PV integrated skylights, PV panels used to function as a roof on a parking lot shade structure, and PV integrated roofing tiles.
Other materials include, but are not limited to, wiring, wiring harnesses, strapping, piping, and mounting systems. Mounting systems include rack framing brackets that are installed on roofs.
(B) Fixtures. Photovoltaic (PV) cells, solar panels and solar modules, including both solar thermal panels and solar electric PV panels, are considered fixtures when they are necessary to a building or other structure and do not lose their identity as accessories when installed. Examples of these types of solar panels include, but are not limited to, rack mounted solar panels installed on roofs and solar panels used in free-standing solar arrays.
Other items included in the solar energy system which are considered fixtures include, but are not limited to, terminal boxes, DC and AC disconnect boxes, inverters, transformers, batteries and pumps.
Contractors furnishing and installing solar energy systems that include fixtures are required to hold seller's permits as described in subdivision (b)(4).
(C) For the purposes of subdivisions (c)(13)(A) and (c)(13)(B), a charge for labor to affix solar panels purchased in a completed condition to a mounting system is not subject to tax.

Appendix A
The following is a list of typical items regarded as materials:
Asphalt
Bricks
Builders' hardware
Caulking material
Cement
Conduit
Doors
Ducts
Electric wiring and connections
Flooring
Glass
Gravel
Insulation
Lath
Lead
Lime
Linoleum
Lumber
Macadam
Millwork
Mortar
Oil
Paint
Paper
Photovoltaic (solar) integrated roofing tiles and skylights
Piping, valves, and pipe fittings
Plaster
Power poles, towers, and lines
Putty
Reinforcing mesh
Roofing
Sand
Sheet metal
Steel
Stone
Stucco
Tile
Wall coping
Wallboard
Wallpaper
Wall-to-wall carpeting (when affixed to the floor)
Weather stripping
Windows
Window screens
Wire netting and screen
Wood preserver 

Appendix B
The following is a list of typical items regarded as fixtures: 
Air conditioning units
Awnings
Burglar alarm and fire alarm fixtures
Cabinets, counters, and lockers (prefabricated)
Cranes1 (including moving parts of cranes) affixed or annexed to a building, structure or fixed work
Electric generators (affixed to and accessory to a building, structure or fixed works)
Elevators, hoists, and conveying units
Furnaces, boilers, and heating units
Lighting fixtures
Plumbing fixtures
Refrigeration units
Signs
Television antennas
Transformers and switchgear
Vault doors and equipment
Venetian blinds

Appendix C
The following are lists of typical items regarded as: 

Machinery and Equipment
Drill presses
Electric generators (unaffixed, or, if affixed, which meet the requirements of subparagraph (a)(6))
Lathes
Machine tools
Printing presses 

Not Machinery or Equipment
Fixtures and materials as defined in this regulation
Wiring, piping, etc., used as a source of power, water, etc., for machinery and equipment
Radio transmission antennas
Large tanks (i.e., over 500 barrel capacity)
Fire alarm systems
Street light standards
Cooling towers other than small prefabricated cooling units
________

1 Moving parts of cranes are classified as machinery and equipment when furnished and installed pursuant to fixed price construction contracts entered into prior to July 1, 1985. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006-6010, 6012, 6012.2, 6012.6, 6012.8, 6012.9, 6015, 6016, 6016.3, 6016.5, 6055, 6091-6095, 6203.5, 6241-6246, 6276.1, 6379, 6384, 6386, 6421 and 6901.5, Revenue and Taxation Code.
HISTORY

1. Renumbering from former section 1921 and amendment of subsections (f) and (g) filed 11-3-71; effective thirtieth day thereafter (Register 71, No. 45). For prior history see Register 65, No. 23.
2. Amendment of subsection (g) filed 11-12-71; effective thirtieth day thereafter (Register 71, No. 46).
3. Amendment filed 2-25-76; designated effective 4-1-76 (Register 76, No. 9).
4. Amendment filed 8-20-76; effective thirtieth day thereafter (Register 76, No. 34).
5. Amendment of subsections (a)(3), (b)(1)(A), (b)(1)(B), (b)(6)(C), (c)(7) and (d) filed 1-19-79; effective thirtieth day thereafter. Pursuant to Chapter 1211, Statutes of 1978, the order designates an operative date of 1-1-79 (Register 79, No. 3).
6. Amendment of subsection (c) filed 8-22-80 as an emergency; effective upon filing (Register 80, No. 34). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 12-22-80.
7. Certificate of Compliance including amendment of subsection (b) transmitted to OAL 12-19-80 and filed 1-16-81 (Register 81, No. 3).
8. Amendment of subsections (c)(3), (8) and (9) filed 3-15-84; effective thirtieth day thereafter (Register 84, No. 11).
9. Amendment of subsections (c)(4) and Appendices B and C filed 4-11-86; effective thirtieth day thereafter (Register 86, No. 15).
10. Amendment of subsections (b)(1)(A), (c)(4), (c)(7)-(10) and Appendices B and C filed 6-2-88; operative 7-2-88 (Register 88, No. 24).
11. Amendment of subsections (a), (c)(3) and Appendix C filed 5-18-89; operative 6-17-89 (Register 89, No. 20).
12. Amendment of subsection (c) filed 7-19-91; operative 8-17-91 (Register 91, No. 49).
13. Amendment filed 6-16-95; operative 7-17-95 (Register 95, No. 24).
14. Amendment of subsection (a)(2) filed 1-14-99; operative 2-13-99 (Register 99, No. 3).
15. New subsections (c)(12)-(c)(12)(B) filed 5-18-2000; operative 6-17-2000 (Register 2000, No. 20).
16. New subsections (c)(13)-(c)(13)(C) and amendment of Appendix A and Note filed 1-4-2008; operative 2-3-2008 (Register 2008, No. 1).
§1521.2. Factory Built Housing.
Note     •     History

NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6012.7, Revenue and Taxation Code.
HISTORY

1. New section filed 6-11-73; effective thirtieth day thereafter (Register 73, No. 24).
2. Amendment of subsection (b) filed 12-20-77; effective thirtieth day thereafter (Register 77, No. 52).
3. Repealer filed 12-24-79 as an emergency; designated effective 12-31-79 (Register 79, No. 52). A Certificate of Compliance must be filed within 120 days or emergency language will be repealed on 4-30-80.
4. Certificate of Compliance filed 3-21-80 (Register 80, No. 12).
§1521.4. Factory-Built Housing.
Note     •     History

(a) General. “Gross receipts” from the sale of factory-built housing, and the “sales price” of factory-built housing, sold or stored, used, or otherwise consumed in this state shall be 40 percent of the sales price of the factory-built housing to the consumer.
(b) Definitions.
(1) Factory-built housing includes only those particular models or units that are approved by the Department of Housing and Community Development of the State of California (Department) or by the local building authority under contract with the Department as factory-built housing within Section 19971 of the Health and Safety Code. Those models or units approved as factory-built housing by the Department or local building authority bear an insignia of approval issued by the Department under Section 19980 of the Health and Safety Code and attached at the factory before shipment.
Such models or units include:
(A) A residential building, dwelling unit, or an individual dwelling room or combination of rooms thereof, or building component, assembly, or system, so manufactured that all of its parts cannot be inspected prior to affixation to realty without disassembly, damage, or destruction, including units designed for use as part of an institution for resident or patient care, which is either wholly manufactured or is in substantial part manufactured at an offsite location to be wholly or partially assembled onsite in accordance with regulations adopted by the Commissioner of Housing and Community Development of the State of California or in accordance with applicable local building requirements if such factory-built housing is inspected and approved by the local enforcement agency at the place and time of manufacture pursuant to Section 19990 of the Health and Safety Code.
(B) “Modular housing,” which is a three dimensional box or cube-shaped structure or structures making up one or more rooms of a residential building, or an institution or part thereof for resident or patient care.
(C) “Sectionalized housing,” which generally consists of two modules which form a total living unit of a residential building, or an institution or part thereof for resident or patient care.
(D) “Modular,” “utility,” or “wet cores,” which are three-dimensional habitable rooms or modules and which are generally comprised of a kitchen or a bathroom or bathrooms of a residential building, or an institution or part thereof for resident or patient care.
(E) “Fixtures” and “materials,” as defined in regulation 1521, which were included as items sold or purchased as a part of the factory-built housing package and installed in the resulting structure.
(2) Factory-built housing does not include:
(A) A “mobilehome,” as defined in Sections 18008 and 18211 of the Health and Safety Code, which provide that a mobilehome is a structure transportable in one or more sections designed and equipped to contain not more than two dwelling units to be used with or without a foundation system.
(B) “Precut housing packages” where more than 50 percent of the package consists of precut lumber only. This percentage is determined by using the ratio of direct labor and material costs applicable to the precut lumber to the total direct labor and material costs applicable to the housing package.
(C) “Panelized construction,” such as walls or components that may become one or more rooms of a building. However, “factory-built housing” does include panelized construction sold by the builder or manufacturer of the panelized construction and which consists of a package including wall panels, floors, and a roof that will form a complete housing structure.
(D) Porches, awnings, materials, fixtures, or components which are not purchased as a part of the factory-built housing package.
(E) Freestanding appliances, such as freestanding refrigerators, stoves, washers, and dryers, which are included in the sales or purchase price of, and installed as part of, the factory-built housing package.
(F) Rugs (except wall-to-wall carpets), draperies, free-standing cabinets, furniture, or other furnishings.
(3) The term “consumer” as used herein means any person who purchases factory-built housing for use in erecting or remodeling a building or other structure on land to be used for residential dwelling purposes or as an institution or part thereof for resident or patient care.
(c) Application of Tax.
(1) Tax applies to 40 percent of the sales price at which factory-built housing is sold to a “consumer” as defined herein. If factory-built housing is purchased free of tax for resale and is subsequently installed and assembled into buildings by the purchaser or on his behalf, tax applies to 40 percent of the sales price of the factory-built housing provided such buildings are to be used for residential dwelling purposes, or as an institution or part thereof for resident or patient care. If any other use is made of the factory-built housing, tax applies to the full sales price, or to 60 percent of the sales price if purchased tax paid with tax measured by 40 percent of the sales price. Taxable use of property purchased free of tax occurs when the property is allocated for use in construction and tax should be reported and paid with the return for that period.
(2) Tax applies as in regulation 1521 to:
(A) “Factory-built housing” furnished and installed by the manufacturer thereof.
(B) Materials used at the jobsite to construct foundations, rough plumbing, or other improvements to realty which are installed preparatory to installing or affixing the factory-built housing and which were not sold or purchased as a part of the factory-built housing package.
(C) Fixtures and other items installed in the structure and which are not sold or purchased as a part of the factory-built housing package.
(d) Exclusion Certificate. All retailers who make retail sales of “factory-built housing” claimed to be subject to tax measured by 40 percent of the purchase price must obtain from the “consumer” a signed certificate substantially in the form set forth below. Each person using a certificate of this nature must provide his own forms. They will not be supplied by this board.
The form of certificate prescribed by the board is: 

CLAIM FOR 60% EXCLUSION FROM TAX ON
PURCHASE OF FACTORY-BUILT HOUSING
(Sec. 6012.7, Rev. & Tax. Code) 

I hereby certify that the factory-built housing that I 

(Name of Purchaser-Consumer)

am purchasing under the authority of this certificate from 

(Name of Supplier) 

will be consumed by me in erecting or remodeling a building or other structure on land to be used for residential purposes or as an institution or part thereof for resident or patient care. My seller's permit number if any is_____________. I further certify that I understand and agree that if the property purchased under the authority of this certificate is used by the purchaser for any purpose other than indicated above, the purchaser shall be liable for payment of tax to the State Board of Equalization measured by 60% of the sales price of the factory-built housing at the time of such use. 

Date Certificate Given  	

Signed by 	
                      (Name of Purchaser) 

As: 	
      (Owner, Partner, Purchasing Agent, etc.)
(e) Books and Records. All retailers who claim that their gross receipts from the sale of factory-built housing by reason of the provisions of this regulation is limited to 40 percent of the sales price of such housing must keep adequate and complete records in accordance with regulation 1698.
The certificates must be attached to or filed in such a manner that they may readily be checked against purchase orders or any document evidencing a sale to the persons claiming that the tax due is limited to 40 percent of the sales price of the factory-built housing.
All purchasers must keep adequate and complete records in accordance with regulation 1698 and such additional records as will clearly support that all property purchased under the certificate was used exclusively under conditions set forth in this regulation.
(f) Operative Date. The provisions of this regulation are operative on and after January 1, 1981.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6012.7, Revenue and Taxation Code.
HISTORY

1. New section filed 12-22-80 as an emergency; effective upon filing (Register 80, No. 52). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 4-21-81.
2. Order of Repeal of 12-22-80 order filed 12-26-80 by OAL pursuant to Government Code Section 11349.6 (Register 80, No. 52).
3. New section filed 7-20-81; effective thirtieth day thereafter (Register 81, No. 30).
§1521.5. Construction Contractor Exemption from Increase in Rate of State Sales and Use Taxes. [Repealed]
Note     •     History

NOTE

Authority cited: 7051, Revenue and Taxation Code. Reference: Sections 6051, 6201, Revenue and Taxation Code; Section 36, Statutes 1972, Chapter 1406; and Statutes 1973, Chapter 208, as amended by Statutes 1974, Chapter 259. Construction Contractors, see Regulation 1521. United States Contractors, see Regulation 1615. Records, see Regulation 1698.
HISTORY

1. Amendment of subsections (a), (b), and (c) filed 6-14-74 as an emergency; effective upon filing (Register 74, No. 24). For prior history, see Register 73, No. 39.
2. Amendment of subsections (a), (b) and (c) refiled 6-18-74 as an emergency; effective upon filing (Register 74, No. 4).
3. Certificate of Compliance filed 8-7-74 (Register 74, No. 32).
4. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
Article 3. Manufacturers, Producers, Processors
§1524. Manufacturers of Personal Property.
Note     •     History

(a) In General. Tax applies to the gross receipts from retail sales (i.e., sales to consumers) by manufacturers, producers, processors, and fabricators of tangible personal property the sale of which is not otherwise exempted. The measure of the tax is the gross receipts of, or sales price charged by, the manufacturer, producer, processor, or fabricator, from which no deduction may be taken on account of the cost of the raw materials or other components purchased, or labor or service costs to create or produce the tangible personal property, or of any step in the manufacturing, producing, processing, or fabricating, including work performed to fit he customer's specific requirements, whether or not performed at the customer's specific request, or any other services that are a part of the sale. In addition, no deduction may be taken on account of interest paid, losses, or any other expense.
(b) Particular Applications.
(1) Alteration of New and Used Items.
(A) Alteration of New Items means and includes any work performed upon new items such as garments, bedding, draperies, or other personal and household items to meet the requirements of the customer, whether the work involves the addition of material to the item, the removal of material from the item, the rearranging or restyling of the item, or otherwise altering the item, when such alterations result in the creation or production of a new item or constitute a step in the creation or production of a new item for the customer. 
Charges for the alteration of new items are subject to tax, except as provided in subdivision (c)(4) of Regulation 1506, regardless of whether the charges for the alterations are separately stated or included in the price of the item, or whether the alterations are performed by the seller of the item or by another person. Persons engaged in the producing, processing or fabricating of new items are retailers, not consumers, of the alterations provided to the customer and are required to hold a seller's permit. 
(B) Alteration of Used Items means and includes the mending, shortening or lengthening, taking in or letting out, or otherwise altering used items such as garments, bedding, draperies, or other personal and household items when such alterations merely refit or repair the item for the use for which it was created or produced. 
Charges for the alteration of used items are not subject to tax. Generally, persons performing the alteration of used items are consumers, not retailers, of the supplies and materials furnished in connection with the alterations, and tax applies to the sale of the supplies and materials to such persons. 
Except as provided in subdivision (c)(4) of Regulation 1506, persons performing the alteration of used items are retailers, not consumers, of the supplies and materials furnished in connection with the alterations when the retail value of the supplies and materials is more than 10 percent of the total charge for the alterations, or if the invoice to the customer includes a separate charge for such property. When such persons are retailers, not consumers, tax applies to the fair retail selling price of the supplies and materials to the customer. 
When the retail value of the supplies and materials is more than 10 percent of the total charge to the customer, the person performing the alterations must segregate on the invoice to the customer and in its records, the fair retail selling price of the supplies and materials from the charge for the alterations. “Total charge” means the combined total of the retail value of the supplies and materials furnished or consumed as part of the alterations and the labor charges for the alterations. 
(2) Painting, Polishing, Finishing. Tax applies to charges for painting, polishing, and otherwise finishing tangible personal property in connection with the production of a finished product for consumers, whether the article to be finished is supplied by the customer or by the finisher. Tax does not apply to charges for painting or finishing real property.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6011, 6012 and 6018.6, Revenue and Taxation Code. Bad debts, see regulation 1642; Tax Paid Purchases Resold, see regulation 1701.
HISTORY

1. Renumbering and amendment of former Section 1931 filed 8-6-70; effective thirtieth day thereafter (Register 70, No. 32). For prior history see Register 70, No. 32.
2. Amendment filed 7-9-87; operative 8-8-87 (Register 87, No. 29).
3. Amendment filed 3-11-2009; operative 4-10-2009 (Register 2009, No. 11).
§1525. Property Used in Manufacturing.
Note     •     History

(a) Tax applies to the sale of tangible personal property to persons who purchase it for the purpose of use in manufacturing, producing or processing tangible personal property and not for the purpose of physically incorporating it into the manufactured article to be sold. Examples of such property are machinery, tools, furniture, office equipment, and chemicals used as catalysts or otherwise to produce a chemical or physical reaction such as the production of heat or the removal of impurities.
(b) Tax does not apply to sales of tangible personal property to persons who purchase it for the purpose of incorporating it into the manufactured article to be sold, as, for example, any raw material becoming an ingredient or component part of the manufactured article. 
(c) Particular Application of Oak Wine Barrels. Tax does not apply to sales of new, used, or re-coopered oak barrels to persons who purchase the barrels for the purpose of physically incorporating oak into wine to be sold. Re-coopered barrels have the inner surface shaved off to expose new wood. The use of oak wine barrels as a container during the manufacturing process is incidental to the primary purpose of incorporating oak into the wine.
(d) Particular Application of Brandy Barrels. Tax does not apply to sales of new or used oak barrels to persons who purchase the barrels for the purpose of physically incorporating oak into brandy to be sold. The use of the barrels as containers during the manufacturing process is incidental to the primary purpose of incorporating oak into the brandy.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6007-6009.1, Revenue and Taxation Code.
HISTORY

1. Effective August 1, 1933. Adopted as of January 1, 1945, as a restatement of previous rulings.
2. Renumbering from Section 1924 filed 11-3-71; effective thirtieth day thereafter (Register 71, No. 45).
3. Amendment of section heading, new subsection (c), repealer of effective date and authority language,  new  Note and new History 1 and History  renumbering filed 3-4-96; operative 4-3-96 (Register 96, No. 10).
4. Amendment of subsection (c) and new subsection (d) filed 3-5-98; operative 4-4-98 (Register 98, No. 10).
5. Amendment of subsection (c) filed 4-1-99; operative 5-1-99 (Register 99, No. 14).
§1525.1. Manufacturing Aids.
Note     •     History

Tax applies to the sale of manufacturing aids such as dies, patterns, jigs and tooling used in the manufacturing process notwithstanding the fact that the property used in manufacturing may subsequently be delivered to or held as property of the person to whom the manufactured product is sold. If the contract of sale between the manufacturer and the customer provides that title to the manufacturing aid passes to the purchaser prior to physical use of the property in the manufacturing process, then the manufacturing aid or its raw materials, if the manufacturing aid is fabricated by the manufacturer, may be purchased for resale. Tax then applies, unless otherwise exempt, to the sale of the manufacturing aid by the manufacturer to the customer, and not also with respect to the sale to the manufacturer. If the contract provides that title to the manufacturing aid passes to the customer in this state prior to use, then a retail sale subject to tax occurs in this state even though the manufacturing aid may subsequently be shipped to a point outside this state.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6007-6009.1 and 6010.5, Revenue and Taxation Code.
HISTORY

1. New section filed 10-23-85; effective thirtieth day thereafter (Register 85, No. 43).
§1525.2. Manufacturing Equipment.
Note     •     History

(a) Partial Exemption for Property Purchased for Use in the Manufacturing Process. Section 6377 of the Revenue and Taxation Code provides a partial exemption from sales and use tax for certain properties described in this regulation. 
For the period commencing on January 1, 1994, and ending on December 31, 1994, the partial exemption applies to the taxes imposed by the state (6%), but does not apply to the taxes imposed by counties, cities, and districts pursuant to the Bradley-Burns Uniform Local Sales and Use Tax Law (Rev. & Tax. Code §§ 7200, et seq.) or the Transactions and Use Tax Law (Rev. & Tax. Code §§ 7251, et seq.). 
For the period commencing on January 1, 1995, and ending on December 31, 2000, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. 
For the period commencing on January 1, 2001, and ending on December 31, 2001, the partial exemption applies to the taxes imposed by sections 6051 and 6201 of the Revenue and Taxation Code (4.75%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.
For the period commencing on January 1, 2002, and ending on December 31, 2003, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.
Pursuant to the provisions of the Revenue and Taxation Code section 6377(g), the partial exemption from tax on the sale and use of property used in manufacturing and related activities as described in this regulation expired on December 31, 2003.
Subject to the limitations set forth above, this partial exemption applies to gross receipts from the sale, storage, use, or other consumption in this state of the following items:
(1) Tangible personal property purchased for use by a qualified person to be used primarily in any stage of the manufacturing, processing, refining, fabricating, or recycling of property, beginning at the point that raw materials are received by the qualified person and introduced into the process and ending at the point at which the property has been altered to its completed form, including packaging, if required. For purposes of this regulation:
(A) Raw materials will be considered to have been introduced into the process when the raw materials are stored on the same premises where the qualified person's manufacturing activities are conducted. Raw materials that are stored on premises other than where the qualified person's manufacturing activities are conducted, however, will not be considered to have been introduced into the process for purposes of this regulation. (B) For purposes of this regulation, the term “packaging” includes only that packaging necessary to prepare the goods for delivery to and placement in the qualified person's finished goods inventory, or to prepare the goods so that they are suitable for delivery to and placement in finished goods inventory. Any additional packaging, such as that packaging necessary to consolidate the goods prior to shipping or to protect them during transportation, shall not be considered to be “packaging” for purposes of this regulation.
(2) Tangible personal property purchased for use by a qualified person to be used primarily in research and development as defined in subdivision (c)(8).
(3) Tangible personal property purchased for use by a qualified person to be used primarily to maintain, repair, measure, or test any property described in subdivision (a)(1) or (a)(2).
(4) Tangible personal property purchased for use by a contractor purchasing that property either as an agent of a qualified person or for the contractor's own account and subsequent resale to a qualified person for use in the performance of a construction contract for the qualified person who will use the tangible personal property as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or as a research or storage facility for use in connection with the manufacturing process.
(b) Property Used Primarily in Administration, General Management, or Marketing. Notwithstanding any other provision of this regulation, this partial exemption shall not apply to any tangible personal property that is used primarily in administration, general management, or marketing. For purposes of this subdivision:
(1) Tangible personal property is used primarily in administration, general management, or marketing when it is used 50 percent or more of the time in one or more of those activities.
(2) Tangible personal property used primarily to clean and maintain the factory floor of a manufacturing facility is used primarily in a stage of the manufacturing of property and is not used primarily in administration, general management, or marketing.
(3) Fire safety equipment that is tangible personal property and that is used primarily at and in connection with the factory floor of a manufacturing facility is used primarily in a stage of the manufacturing of property and is not used primarily in administration, general management, or marketing.
(c) Definitions. For purposes of this regulation:
(1) “Fabricating” means to make, build, create, produce, or assemble components or property to work in a new or different manner.
(2) “Manufacturing” means the activity of converting or conditioning property by changing the form, composition, quality, or character of the property for ultimate sale at retail or for use in the manufacturing of a product to be ultimately sold at retail. Manufacturing includes any improvements to tangible personal property that result in a greater service life or greater functionality than that of the original property. For purposes of this regulation, “greater functionality” means that the tangible personal property has been improved so that it can perform new or different functions than the original property. Manufacturing includes logging, that is, the felling of timber, but does not include tree farming. Manufacturing does not include crop harvesting. Provided that the activity constitutes a “sale” as that term is used in subdivision (b) of section 6006 of the Revenue and Taxation Code, the tangible personal property need not be owned by the qualified person in order for the activity to qualify as manufacturing for purposes of this regulation.
(3) “Primarily” means that the tangible personal property is used 50 percent or more of the time in the designated activity or activities.
(4) “Process” means the period beginning at the point at which any raw materials are received by the qualified person and are introduced into the manufacturing, processing, refining, fabricating, or recycling activity of the qualified person and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling activity of the qualified person has altered tangible personal property to its completed form including packaging, if required. Raw materials shall be considered to have been introduced into the process when the raw materials are stored on the same premises where the qualified person's manufacturing, processing, refining, or recycling activity is conducted. Raw materials that are stored on premises other than where the qualified person's manufacturing, processing, refining, fabricating, or recycling activity is conducted, shall not be considered to have been introduced into the manufacturing, processing, refining, fabricating, or recycling process.
(5) “Processing” means the physical application of materials and labor to modify or change the characteristics of property.
(6) “Qualified person” means any person that satisfies the requirements of both subdivisions (c)(6)(A) and (c)(6)(B) below with regard to the trade or business in which the property will be placed into service in the use qualifying the property for this partial exemption:
(A) A “qualified person” must have first commenced trade or business activities in a new trade or business in this state on or after January 1, 1994. For purposes of this subdivision, the term “activities” means trade or business activities. In determining whether or not a person is qualified within the meaning of this subdivision, the following rules apply:
1. The term “trade or business activities” does not mean the mere formation or organization of a corporation or other business entity that is intended to conduct a trade or business. Instead, a corporation or business entity first conducts activities when it first starts or commences the trade or business for which it was organized. The acquisition of operating assets that are necessary to the type of business contemplated, however, will constitute commencing activities. The term “operating assets” as used in this subdivision means assets that are in a state of readiness to be placed in service within a reasonable time period following their acquisition.
2. Notwithstanding any other provision of this subdivision, a person will not be considered to have first commenced activities in a new trade or business in this state on or after January 1, 1994, if, at any time within the 36 months preceding that date, that person, or any related person, was required to have secured a seller's permit under section 6066 of the Revenue and Taxation Code for that trade or business, or any other trade or business classified under the same division of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition (the “Manual”). For purposes of this regulation, the term “division” means a division as that term is used in the Manual.
3. A trade or business is not a new trade or business in this state if, within the 36 months preceding the date that activities were first commenced in that trade or business in this state, either the person claiming the partial exemption, or any related person, had conducted any activities in this state in any trade or business classified under the same division of the Manual as that trade or business.
4. Where a person, or any related person, is engaged in one or more trade or business activities in this state, or has been engaged in one or more trade or business activities in this state within the preceding 36 months (a “prior trade or business activity”), and thereafter commences an additional trade or business activity in this state, the additional trade or business activity shall only be treated as a new trade or business if the additional trade or business activity is classified under a different division of the Manual than are any of the person's (or any related person's) current or prior trade or business activities in this state within the preceding 36 months.
5. Where a person, including all related persons, is engaged in trade or business activities wholly outside of this state and that person first commences doing business in this state (within the meaning of section 23101 of the Revenue and Taxation Code) after December 31, 1993 (other than by purchase or other acquisition described in subdivision (c)(6)(A)6., the newly commenced trade or business activity in this state shall be treated as a new trade or business for purposes of this subdivision.
6. On or after January 1, 1995, notwithstanding anything else set forth in this subdivision, in any case where a person purchases or otherwise acquires all or any portion of the assets of an existing trade or business (irrespective of the form of the entity) that is doing business in this state (within the meaning of section 23101 of the Revenue and Taxation Code), the trade or business thereafter conducted by that person (or any related person) shall not be treated as a new trade or business if the aggregate fair market value of the acquired assets (including real, personal, tangible, and intangible property) used by that person (or any related person) in the conduct of his or her trade or business exceeds 20 percent of the aggregate fair market value of the total assets of the person (or any related person) being used in the same trade or business both within and without this state. For purposes of this subdivision only:
a. The determination of the relative fair market values of the acquired assets and the total assets shall be made as of the last day of the month following the quarterly period in which the person (or any related person) first uses any of the acquired trade or business assets in his or her business activity.
b. Any acquired assets that constitute property described in section 1221(a)(1) of the Internal Revenue Code in the hands of the transferor shall not be treated as assets acquired from an existing trade or business, unless those assets also constitute property described in section 1221(a)(1) of the Internal Revenue Code in the hands of the acquiring person (or any related person).
c. The trade or business conducted in this state by the acquiring person after the asset acquisition date shall be considered to be the same as an out-of-state trade or business conducted or previously conducted by the acquiring person (or any related person) only if the trade or business activities of both companies are or would be classified in the same division of the Manual.
d. An acquired trade or business will not be considered to have been acquired as an existing trade or business for purposes of this subdivision if it is acquired either: (1) from a liquidation sale of assets pursuant to a bankruptcy filed under Chapter 7 of the United States Bankruptcy Code; or (2) pursuant to a creditor's execution or foreclosure sale of a secured interest in the assets of the trade or business.
e. Example No. 1: Corporation X is doing business wholly outside of this state in the trade or business of manufacturing automobiles. The total fair market value of the total assets of this trade or business is $100,000,000. Then, on or after January 1, 1994, Corporation X acquires all of the assets of an automobile manufacturing business in this state with a fair market value of $5,000,000 and immediately uses the acquired assets in its automobile manufacturing trade or business. Thereafter, between the date of acquisition and the last day of the month following the quarterly period during which the acquisition occurred, Corporation X acquires another $1,000,000 in assets for use in the automobile manufacturing business in this state. Under these assumed facts, the conditions set forth in this subparagraph will not serve to disqualify Corporation X from the partial exemption since the fair market value of the acquired assets does not exceed 20 percent ($5,000,000/$106,000,000) of the aggregate fair market value of the total assets of the trade or business being conducted by Corporation X; and neither Corporation X nor any related person had conducted any trade or business activities in this state within the preceding 36 months. 
f. Example No. 2: Assume the same facts as in Example No. 1 above, but in this case, prior to acquiring the assets of the automobile manufacturing business in this state, Corporation X was solely and exclusively in the trade or business of providing data processing services. After the acquisition of the assets by Corporation X, however, the acquired assets will continue to be used in the automobile manufacturing business in this state. Assume further that no additional purchases are made after the date of acquisition. Under these assumed facts, since data processing services and automobile manufacturing are classified in different divisions of the Manual, the partial exemption will not be available to Corporation X because the fair market value of the acquired assets exceeds 20 percent ($5,000,000/$5,000,000) of the aggregate fair market value of the total assets held by Corporation X in the same trade or business.
7. In any case where the legal form under which a trade or business activity is being conducted is changed, the change in form shall be disregarded and the determination of whether the trade or business activity is a new business shall be made by treating the person as having purchased or otherwise acquired all or any portion of the assets of an existing trade or business. For purposes of this subdivision only:
a. Example No. 1: Corporation X is doing business in this state. One of its trade or business activities in this state is manufacturing automobiles. After January 1, 1994, for consideration, Corporation X transfers all of the assets used in the trade or business of manufacturing automobiles to a newly-formed, wholly-owned subsidiary known as Corporation Y. For purposes of applying this regulation, this transaction shall be treated as an acquisition of an existing trade or business by Corporation Y.
b. Example No. 2: Partnership A is a manufacturer doing business in this state. After January 1, 1994, for consideration, Partnership A transfers all of its assets to a newly-formed corporation known as Corporation B. Corporation B is owned by the partners of Partnership A in the same proportionate ownership interests as their respective ownership interests in the partnership. For purposes of applying this regulation, this transaction shall be treated as an acquisition of an existing trade or business by Corporation B.
8. For purposes of this subdivision, a person is a “related person” if that person is or previously was related to the qualified person within the meaning of either section 267 or 318 of the Internal Revenue Code.
9. The term “acquire” shall include any gift, inheritance, transfer incident to divorce, or any other transfer, whether or not for consideration.
(B) A qualified person must be engaged in those manufacturing lines of business described in Codes 2011 to 3999, inclusive, of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition. For purposes of this subdivision:
1. For purposes of classifying a line or lines of business, the economic unit shall be the “establishment” and the classification of the line or lines of business will be based on the establishment's single most predominant activity based upon value of production. The term “establishment” means an economic unit, generally at a single physical location, where business is conducted or where services or manufacturing or other industrial operations are performed. The following will generally constitute an “establishment”: a factory, mill, store, hotel, movie theater, mine, farm, ranch, bank, railroad depot, airline terminal, sales office, warehouse, or central administrative office.
2. For purposes of determining the “establishment” or “establishments” of a trade or business:
a. Where distinct and separate economic activities are performed at a single physical location, such as construction activities operated out of the same physical location as a lumber yard, each activity should be treated as a separate establishment where: (i) no one industry description in the classification includes such combined activities; (ii) the employment in each such economic activity is significant; and (iii) separate reports are prepared on the number of employees, their wages and salaries, sales or receipts, property and equipment, and other types of financial data, such as financial statements, job costing, and profit center accounting. For purposes of this paragraph, whether or not employment in an economic activity is significant shall be based upon all of the facts and circumstances. Nevertheless, employment in an economic activity will be considered to be “significant” for purposes of this paragraph whenever more than 25 percent of the taxpayer's total number of employees at a single physical location, or more than 25 percent of the taxpayer's total dollar value of payroll at a single physical location, is attributable to the economic activity being tested for separate establishment status.
b. An establishment is not necessarily identical with the enterprise or company which may consist of one or more establishments. Also, an establishment is to be distinguished from subunits of the establishment such as departments.
c. Where a person conducts business at more than one establishment within the meaning of this subdivision, then that person shall be considered to be a “qualified person” for purposes of this regulation only as to those purchases that are intended to be used and are actually used in those lines of business that are described in Codes 2011 to 3999, inclusive, of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition.
(7) “Refining” means the process of converting a natural resource to an intermediate or finished product.
(8) “Research and development” means those activities that are described in section 174 of the Internal Revenue Code or in any regulations thereunder.
(9) “Tangible personal property” does not include any of the following:
(A) Real property, including tangible personal property to be incorporated into an improvement to real property, except for “special purpose buildings and foundations” as defined in subdivision (c)(10)(D) and conveyance systems and assembly lines as provided in subdivision (c)(10)(A).
(B) Consumables with a normal useful life of less than one year, except as provided in subdivision (c)(10)(E). For purposes of this regulation, it shall be presumed tangible personal property that the qualified person treats as having a normal useful life of less than one year for state income or franchise tax purposes is tangible personal property with a normal useful life of less than one year. This presumption may be rebutted by evidence satisfactory to the Board.
(C) Furniture, inventory, equipment used in the extraction process, equipment used to store raw materials that have not yet entered or commenced the manufacturing process, or equipment used to store finished products that have completed the manufacturing process. The extraction process includes such severance activities as mining, oil and gas extraction.
(D) Any property for which a credit is claimed under either section 17053.49 or 23649 of the Revenue and Taxation Code.
(10) “Tangible personal property” includes but is not limited to the following:
(A) Machinery and equipment within the meaning of subdivision (a)(6) of Regulation 1521 of the Sales and Use Tax Regulations, including component parts and contrivances such as belts, shafts, moving parts, and operating structures. The term also includes conveyance systems and assembly lines without regard to the manner of affixation to real property.
(B) All equipment or devices used or required to operate, control, regulate, or maintain the machinery, including, without limitation, computers, data processing equipment, and computer software, including both operating programs and application programs, together with all repair and replacement parts with a useful life of one or more years therefor, whether purchased separately or in conjunction with a complete machine and regardless of whether the machine or component parts are assembled by the taxpayer or another party. Any repair and replacement parts that the qualified person treats as having a useful life of less than one year for state income or franchise tax purposes shall be presumed to have a useful life of less than one year for purposes of this regulation. This presumption may be rebutted by evidence satisfactory to the Board.
(C) Property used in pollution control that meets or exceed standards established by this state or any local or regional governmental agency within this state.
(D) Special purpose buildings and foundations that (i) are used as an integral part of the manufacturing, processing, refining, or fabricating process, or (ii) constitute a research facility used during the manufacturing process as an integral part of a manufacturing, processing, refining, or fabricating activity, or (iii) constitute a storage facility used during the manufacturing process as an integral part of a manufacturing, processing, refining, or fabricating activity. For purposes of this subdivision:
1. For purposes of this subdivision, “special purpose building and foundation” means only a building and the foundation immediately underlying the building that is specifically designed and constructed or reconstructed for the installation, operation, and use of specific machinery and equipment with a special purpose, which machinery and equipment, after installation, will become affixed to or a fixture of the real property, and the construction or reconstruction of which is specifically designed and used exclusively for the specified purposes as set forth in subdivision (a)(1) of this regulation (the qualified purpose).
2. A building is specifically designed and constructed or modified for a qualified purpose if it is not economic to design and construct the building for the intended purpose and then use the structure for a different purpose.
3. A building is used exclusively for a qualified purpose only if its use does not include a use for which it was not specifically designed and constructed or modified. Incidental use of a building for non-qualified purposes does not preclude the building from being a special purpose building. “Incidental use” means a use which is both related and subordinate to the qualified purpose. A use is not subordinate if more than one-third of the total usable volume of the building is devoted to a use which is not a qualifying purpose.
4. In the event an entire building does not qualify as a special purpose building, a taxpayer may establish that a portion of a building, and the foundation immediately underlying the portion, qualifies for treatment as a special purpose building and foundation if the portion satisfies all of the definitional provisions in this subdivision.
5. Buildings and foundations that do not meet the definition of a special purpose building and foundation set forth above include, but are not limited to, buildings designed and constructed or reconstructed principally to function as a general purpose manufacturing, industrial, or commercial building; research facilities that are used primarily prior to or after, or prior to and after, the manufacturing process; or storage facilities that are used primarily prior to or after, or prior to and after, completion of the manufacturing process.
6. For purposes of this subdivision, the term “integral part” means that the special purpose building or foundation (i) is used directly in the activity qualifying for the partial exemption from sales and use tax and (ii) is essential to the completeness of that activity. In determining whether property is used as an integral part of manufacturing, all properties used by the qualified person in processing the raw materials into the final product are properties used as an integral part of manufacturing.
(E) Fuels used or consumed in the manufacturing process.
(F) Property used in recycling.
(11) “Standard Industrial Classification” means a Standard Industrial Classification in the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition.
(d) Three-Year Limitation. Notwithstanding any other provision of this regulation, once a person has conducted business activities in a new trade or business for three or more years, that person will no longer be considered to be in a “new trade or business,” nor “qualified” for this partial exemption.
(e) Taxes as to Which the Partial Exemption Does Not Apply. This partial exemption does not apply to any tax levied by a county, city, or district pursuant to, or in accordance with, either the Bradley-Burns Uniform Local Sales and Use Tax Law (Rev. & Tax. Code §§7200 et seq.) or the Transactions and Use Tax Law (Rev. & Tax Code §§7251 et seq.).
On or after January 1, 1995, this partial exemption shall not apply to any tax levied pursuant to section 6051.2 and 6201.2 of the Revenue and Taxation Code, or pursuant to section 35 of article XIII of the California Constitution.
(f) Exemption Certificates. Except as otherwise set forth in subdivision (f)(3), to claim the partial exemption provided by this regulation, a person must be both pre-qualified by the Board and either registered to hold a seller's permit or maintain a consumer use tax account. Exemption certificates issued to qualified persons will contain a control number and expiration date for verifying a person's status as a qualified person. An exemption certificate is not valid if it has not been issued by the Board or if it is accepted after the expiration date on the certificate. Qualified persons who have been pre-qualified may reproduce the issued certificates as needed for their qualifying purchases.
The exemption certificates issued by the Board will be in substantially the same form as they appear in Appendices A and B of this regulation. Qualified persons who purchase or lease tangible personal property from an in-state retailer or an out-of-state retailer obligated to collect the use tax must provide the retailer with a manufacturer's exemption certificate in order to claim the partial exemption. The manufacturer's use tax declaration must be completed by a qualified person to claim a partial exemption from use tax on purchases of tangible personal property from an out-of-state retailer not obligated to collect the use tax.
Solely for the purposes of this regulation, it is presumed that a seller accepts a manufacturer's exemption certificate from a prequalified purchaser in good faith in the absence of evidence to the contrary. A retailer's direct knowledge that the purchaser is not purchasing tangible personal property for use in a manufacturing activity, that the purchaser intends the tangible personal property for his or her own use, or that the tangible personal property does not have a normal useful life of one year or more constitutes evidence to the contrary. A purchaser providing a manufacturer's exemption certificate accepted in good faith by the seller for tangible personal property that does not qualify for this exemption is liable for the payment of tax as set forth in subdivision (h).
(1) Manufacturer's Exemption Certificates.
(A) In General. Except as otherwise provided in subdivisions (f)(1)(B) or (f)(3) of this regulation, or in section 6902.2 of the Revenue and Taxation Code, a partial exemption from sales or use tax shall not be allowed unless:
1. The qualified person furnishes the retailer with a manufacturer's exemption certificate no later than 60 days after the date of the purchase; and
2. The retailer timely files a sales and use tax return claiming the partial exemption and, together with that timely return, provides the Board with a copy of the manufacturer's exemption certificate.
(B) Exclusions. Except as provided in subdivision (f)(1)(C) below, retailers claiming the partial exemption in timely filed returns will not be required to furnish the Board with copies of manufacturer's exemption certificates for sales or leases of tangible personal property made by a retailer at any single physical location to a single qualified purchaser that do not exceed an aggregate total of $25,000 during a single calendar quarter. Regardless of the total quarterly sales per purchaser, however, when necessary for the efficient administration of the sales and use tax law, the Board may, on 30 days' written notice, require a retailer to commence furnishing the Board with copies of all certificates on a quarterly basis pursuant to subdivision (f)(1)(A)2.
(C) Retention and Availability of Certificates. A retailer must retain each manufacturer's exemption certificate received from a qualified person for a period of four years from the date on which the retailer claims a partial exemption based on the exemption certificate.
Within 45 days of the Board's request, retailers must furnish to the Board any and all manufacturer's exemption certificates, or copies thereof, received from qualified persons, including exemption certificates for aggregate sales or leases of $25,000 or less to a single qualified person made at any single physical location of the retailer during a single calendar quarter.
(2) Manufacturer's Use Tax Declaration. Except as provided in section 6902.2 of the Revenue and Taxation Code, a partial exemption from the use tax shall not be allowed unless the qualified person:
(A) Timely files a sales and use tax return or consumer use tax return for the period in which the purchase occurs and timely pays any applicable tax in full that is excluded from this partial exemption as provided in subdivision (e) of this regulation; and
(B) Attaches a completed manufacturer's use tax declaration to the sales and use tax return or consumer use tax return that is timely filed with the Board.
(3) Refund of Partial Exemption.
(A) For the period commencing on January 1, 1994, and ending on December 31, 1994, a qualified person may claim the partial exemption on qualified purchases from an in-state retailer or an out-of-state retailer obligated to collect the use tax by furnishing the retailer with a manufacturer's exemption certificate on or before March 31, 1995. The retailer must refund the tax directly to the purchaser or, at the purchaser's sole option, the purchaser may be credited with such amount. In the event that the retailer has already reported and paid the tax to the Board, the retailer must file a written claim for refund on or before April 30, 1995.
(B) A person who paid sales tax on a qualified sale or paid use tax on a qualified purchase and who failed to claim the partial exemption as provided by this regulation may file a claim for refund equal to the amount of the partial exemption that he or she could have claimed pursuant to this regulation. The procedure for such a claim shall be the same as for other claims for refund filed pursuant to Revenue and Taxation Code section 6901. For transactions subject to use tax, a person filing a claim for refund of the partial exemption has the burden of establishing that he or she was entitled to claim the partial exemption with respect to the amount of refund claimed under this part. For transactions subject to sales tax, a person filing a claim for refund of the partial exemption has the burden of establishing that the purchaser of the qualified property otherwise met all the requirements of a qualified person at the time of the purchase subject to the refund claimed under this part.
(4) Construction Contractors. In the case of a contractor who purchases property as an agent of a qualified person or for subsequent resale to a qualified person, the qualified person is deemed to be the purchaser for purposes of this subdivision.
(g) Conversion of Property to a Use Not Qualifying for the Partial Exemption. Notwithstanding subdivision (a), this partial exemption shall not apply to any sale of, or the storage, use, or other consumption in this state of property that, within one year from the later of the date of purchase of the property or the date that the property was first placed into service by the purchaser in an exempt use, is: (i) removed from this state, (ii) converted from an exempt use under this regulation to some other use not qualifying for the partial exemption, or (iii) used in a manner not qualifying for the partial exemption under this regulation. For purposes of this subdivision, property is converted to a use not qualifying for the partial exemption if, without limitation, the property, or any interest in the property, or possession or control of the property, is either directly or indirectly sold, transferred, leased, or assigned to a person who is not a qualified person on the date the property is sold, transferred, leased, or assigned to such non-qualified person. In the case of a corporation that, as a qualified person, purchases tangible personal property under this partial exemption and then, within one year from the later of the date of purchase of the property or the date that the property was first placed into service by that corporation in an exempt use, either directly or indirectly transfers that property to its parent corporation that is not a qualified person on the date of the transfer of property to the parent corporation, that property has been converted to a use not qualifying for the partial exemption.
(h) Purchaser's Liability for the Payment of Sales Tax. If a purchaser submits a copy of a manufacturer's exemption certificate to the seller, and then within one year from the later of the date of purchase of the property or the date that the property was first placed into service by the purchaser in an exempt use, the purchaser either (i) removes that property from this state, (ii) converts that property from an exempt use under this regulation to some other use not qualifying for the partial exemption, or (iii) uses that property in a manner not qualifying for the partial exemption under this regulation, then, in that event, the purchaser shall be liable for payment of sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the property at the time the property was so removed, converted, or used; and the sales price of the property to the purchaser shall be deemed to be the gross receipts from that retail sale. For purposes of this subdivision, property is converted to a use not qualifying for the partial exemption if, without limitation, the property, or any interest in the property, or possession or control of the property, is either directly or indirectly sold, transferred, leased, or assigned to a person who is not a qualified person on the date the property is sold, transferred, leased, or assigned to such nonqualified person.
(i) Leases to Qualifying Persons.
(1) Leases--In General. Subject to all the limitations and conditions set forth in this regulation and regulation 1525.3, this partial exemption may apply to rental receipts paid by a qualified person with respect to a lease of tangible personal property to the qualified person, which tangible personal property is used as set forth in subdivisions (a)(1), (a)(2), (a)(3), or (a)(4) of this regulation.
(2) Leases--Acquisition Sale and Leaseback. A person will be regarded as having paid sales tax reimbursement or use tax with respect to that person's purchase of property, within the meaning of those words as they are used in section 6010.65 of the Revenue and Taxation Code, if the person has paid all applicable taxes with respect to the acquisition of the property, notwithstanding the fact that the sale and purchase of the property may have been subject to the partial exemption from tax provided by this regulation.
(3) Subsequent Lease of Property Acquired Subject to Partial Exemption. If a person has acquired property subject to the partial exemption provided by this regulation and has paid all applicable taxes at that acquisition, the property will be regarded as property as to which sales tax reimbursement or use tax has been paid, and the subsequent lease of that property will not be subject to tax measured by rental receipts.
(j) Operative Date. Except as expressly set forth otherwise in subdivisions (c)(6)(A)6. and (e) of this regulation, this regulation is operative as of January 1, 1994. All provisions of this regulation cease to be operative as of January 1, 2004, as provided by Revenue and Taxation Code section 6377(g). Retailers and qualified persons may not accept or claim any Section 6377 Manufacturer's Exemption Certificates for a sale or a use made after December 31, 2003.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6377, Revenue and Taxation Code.
HISTORY

1. New section and forms filed 7-19-95; operative 8-18-95 (Register 95, No. 29).
2. Change without regulatory effect amending section and appendices A and B filed 11-7-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 45).
3. Amendment of subsections (f) and (f)(3)(B) and new subsection (f)(3)(C) filed 3-4-99; operative 4-3-99 (Register 99, No. 10).
4. Amendment of subsection (f)(3), repealer of subsection (f)(3)(A) and first paragraph of subsection (f)(3)(B), subsection relettering, and amendment of newly designated subsection (f)(3)(B) filed 6-7-2000; operative 7-7-2000 (Register 2000, No. 23).
5. Change without regulatory effect amending section and appendices A and B filed 12-29-2000 pursuant to section 100, title 1, California Code of Regulations (Register 2000, No. 52).
6. Amendment of section and appendices A and B filed 6-5-2001; operative 7-5-2001 (Register 2001, No. 23).
7. Change without regulatory effect amending subsection (a) and Appendices A and B filed 4-16-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 16).
8. Change without regulatory effect amending subsection (j) and Appendices A and B filed 12-3-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 49).
9. Change without regulatory effect amending subsections (a) and (j) and Appendices A and B filed 2-16-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 7).

Appendix A

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Appendix B

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§1525.3. Manufacturing Equipment--Leases of Tangible Personal Property.
Note     •     History

(a) General Application to Leases. Leases of tangible personal property which are classified as “continuing sales” and “continuing purchases” of tangible personal property, in accordance with Regulation 1660, “Leases of Tangible Personal Property--In General,” may qualify for the partial exemption from tax for manufacturing equipment, under the conditions set forth in paragraph (i)(1) of Regulation 1525.2, “Manufacturing Equipment.” Lease transactions which qualify for the partial exemption are taxed at the rate specified in Regulation 1525.2, paragraph (a).
(b) Recharacterization. With respect to transactions which the parties denominate as a “lease,” but which are recharacterized for sales and use tax purposes either as sales at their inception, pursuant to Regulation 1641, “Credit Sales and Repossessions,” paragraph (b), or as sales under a security agreement, Regulation 1660, “Leases of Tangible Personal Property--In General,” paragraph (a)(2), the transactions may qualify for the partial exemption, in accordance with Regulation 1525.2.
(c) Continuation of Partial Exemption. Where possession of tangible personal property is transferred to a qualified person as defined in paragraphs (c) and (d) of Regulation 1525.2 and pursuant to a lease agreement classified as a continuing sale and continuing purchase, lease receipts shall remain partially exempt for a period of six years from the date of the inception of the lease whether or not the lessee remains as a qualified person throughout the six year period. At the close of the six year period from the date of the inception of the lease, lease receipts are subject to tax without exemption.
(d) Leases of Tax-Paid Property. The partial exemption is not available to lessors who lease to qualified persons or to vendors to such lessors when the lessor elects to pay sales tax reimbursement at the time of acquisition of the property or pays use tax measured by the purchase price of the property.
(e) Manufacturers Who Lease Qualified Property. A lease of tangible personal property by the manufacturer of that property is ordinarily regarded as a “continuing sale” and “continuing purchase” in accordance with Regulation 1660, “Leases of Tangible Personal Property -- In General.” Nevertheless, beginning January 1, 1997, a lessor of tangible personal property described in sections 17053.49 or 23649 of the Revenue and Taxation Code, who is the manufacturer of that property and who leases that property to a qualified person, as defined in section 17053.49 or 23649 of the Revenue and Taxation Code, in a form that is not substantially the same form as acquired, may, in lieu of reporting tax measured by the rentals payable, elect to pay tax measured by the cost price of that property where the election is made on or before the due date of the return for the period in which the property is first leased to the qualified person. The election shall be made by reporting use tax measured by the cost price of that property on the return for that period. The election shall not be revoked with respect to the property as to which it is made. The lease of that property for which an election is made to report and pay tax on the cost price of that property shall thereafter be excluded from the classification of a “continuing sale” and “continuing purchase.”
For purposes of this subdivision, “cost price” means the price at which similar property has been previously sold or offered for sale. If that property has not been previously sold or offered for sale, then the cost price shall be deemed to be the aggregate of the following:
(1) Cost of materials.
(2) Direct labor.
(3) The pro rata share of all overhead costs attributable to the manufacturer of the property.
(4) Reasonable profit from the manufacturing operations which, in the absence of evidence to the contrary, shall be deemed to be 5 percent of the sum of the factors listed in subsections (1) to (3), inclusive.
(f) Operative Date. All provisions of this regulation cease to be operative as of January 1, 2004, as provided by Revenue and Taxation Code section 6377(g). Retailers and qualified persons may not accept or claim any Section 6377 Manufacturer's Exemption Certificates for a sale or use made after December 31, 2003.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6244.5 and 6377, Revenue and Taxation Code.
HISTORY

1. New section filed 3-5-96; operative 4-4-96 (Register 96, No. 10).
2. Change without regulatory effect amending subsections (a) and (c), adding new subsections (e)-(e)(4), and amending Note filed 11-4-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 45).
3. Change without regulatory effect adding subsection (f) filed 2-15-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 7).
§1525.5. Manufacturing By-Products and Joint-Products.
Note     •     History

(a) In general. Manufacturers and refiners are consumers of tangible personal property purchased for the purpose of use and consumed in the manufacturing or refining process, including that portion of purchased raw materials that comprise by-products that are produced and consumed during the manufacturing or refining process, or subsequent thereto.
(b) Definitions.
(1) Property Purchased. As used herein the term “property purchased” means materials that have been acquired in a transaction defined as a “purchase” pursuant to Section 6010 of the Revenue and Taxation Code and includes property acquired by purchase from a joint venture of which the manufacturer or refiner is a member.
(2) Split-Off Point. The point at which joint products being manufactured or refined become separately identifiable.
(3) Separable Costs. All costs incurred to further process and dispose of products and by-products after split-off point.
(4) By-Products. As used herein the term “by-products” means products simultaneously produced from the manufacturing process, including joint-products.
(5) Net Realizable Value. The market value or sales value of a product or by-product less costs of completion and disposal after split-off point, if any.
(c) Commingled goods. When a manufacturer or refiner purchases property for resale, and prior to or during the refining or manufacturing process, physically commingles these materials with property not so purchased of such similarity that the identity of the materials that comprise this commingled mass cannot be determined, by-products that are produced from the mass of commingled goods and consumed shall be deemed to be first consumed from the property not purchased for resale until a quantity of commingled goods equal to the quantity of property not purchased for resale has been consumed.
Any manufacturer or refiner that claims its consumed by-products are not subject to tax, because of the physical commingling of property purchased and property not so purchased, must establish by its records that this commingling occurred prior to such consumption.
(d) Reporting methods.
(1) Manufacturers or refiners that consume by-products that are produced during the manufacturing or refining process from purchased raw material may use any method of cost allocation consistent with generally accepted accounting principles that accurately computes the purchased cost of the consumed raw materials to report their tax liability for the reporting period in which the use was made. The manufacturer or refiner must be prepared to demonstrate by records which can be verified by audit that the method used properly reflects their tax liability.
(2) The following is a description of an approved method that manufacturers and refiners that consume by-products from purchased materials may utilize to compute their tax liability:
(A) Determine the split-off point for by-products that are used.
(B) Determine the net realized values of all products and by-products.
(C) Determine the net realizable value(s) of by-product(s) used.
(D) Divide the net realizable value(s) of by-product(s) used (Step C) by the net realizable values of all products and by-products (Step B) to obtain a taxable ratio.
(E) Multiply the purchase cost of all raw materials added to the manufacturing or refining process prior to the split-off by the taxable ratio (Step D) to find the measure of the tax liability resulting from the use of by-products.
The following formulas summarize the above steps:
MV = Market Value
PC = Purchase Cost
SC = Separable Costs Beyond Split-Off
bp = By-Products Used
tp = Total Products and By-Products
Where no processing is necessary beyond split-off to obtain market value so that MV equals market or sales value at split-off:

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Note: MV - SC = Net Realizable Value at Split-Off
(e) To ensure compliance with the provisions of this regulation, manufacturers and refiners are encouraged to obtain approval by the Board prior to adopting a method of calculating their tax liability incurred as a result of the consumption of purchased raw materials produced and consumed during the manufacturing or refining process. 
(f) Audits. Taxpayers using the suggested method or an alternate method that has been approved by the Board will normally be audited by application of the same approved procedure in the audit to verify the accuracy of reported amounts. Determinations may be imposed or refunds granted if the Board, upon audit of the books and records, determines that the amounts reported by return did not accurately disclose the amount of tax due.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6094 and 6244, Revenue and Taxation Code.
HISTORY

1. New section filed 2-25-85; effective thirtieth day thereafter (Register 85, No. 9).
§1525.7. Rural Investment Tax Exemption. [Repealed]
Note     •     History

NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6378.1, Revenue and Taxation Code. 
HISTORY

1. New section and appendices A and B filed 6-7-2002; effective 7-7-2002; operative 1-1-2001 pursuant to Revenue and Taxation Code sections 7051 and 6378.1 (Register 2002, No. 23).
2. Change without regulatory effect amending subsection (a) and appendices A and B filed 8-19-2004 pursuant to section 100, title 1, California Code of Regulations (Register 2004, No. 34).
3. Change without regulatory effect repealing section and appendices A and B filed 5-11-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 20).
§1526. Producing, Fabricating and Processing Property Furnished by Consumers--General Rules.
Note     •     History

(a) In General. Tax applies to charges for producing, fabricating, processing, printing, or imprinting of tangible personal property for a consideration for consumers who furnish either directly or indirectly the materials used in the producing, fabricating, processing, printing or imprinting.
(b) Operations Included--Repairing and Reconditioning Distinguished. Producing, fabricating, and processing include any operation which results in the creation or production of tangible personal property or which is a step in a process or series of operations resulting in the creation or production of tangible personal property. The terms do not include operations which do not result in the creation or production of tangible personal property or which do not constitute a step in a process or series of operations resulting in the creation or production of tangible personal property, but which constitute merely the repair or reconditioning of tangible personal property to refit it for the use for which it was originally produced.
(c) Operations Included--Stretch Limousines. Producing, fabricating, and processing include any operation which results in the creation or production of a stretch limousine. The following rules apply in determining the measure of tax for converting a vehicle into a stretch limousine:
(1) When a vehicle dealer, at the request of a consumer, has a conversion company convert (i.e., stretch) a vehicle into a limousine, the tax does not apply to the conversion company's charge to the dealer, but the tax does apply to the entire charge made to the consumer by the dealer for the conversion.
(2) When a consumer provides the conversion company with a vehicle for conversion into a stretch limousine, the tax applies to the entire charge made to the consumer by the conversion company.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6006, Revenue and Taxation Code. Alterations of new garments, see regulation 1524 (Section 1524 of Title 18). Printing and imprinting, see regulation 1541 (Section 1541 of Title 18). Repairing and reconditioning generally, see regulation 1546 (Section 1546 of Title 18).
HISTORY

1. Amendment and renumbering of former Section 1925 filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
2. New subsection (c) filed 12-12-88; operative 1-11-89 (Register 88, No. 52).
§1527. Sound Recording.
Note     •     History

(a) Recording Studios.
(1) Tax does not apply to the charges for the making of an original recording on recording media if the recording media is not delivered to the customer or to any person at the direction of the customer, and title is retained by the studio. If, however, the recording studio agrees to furnish finished records, acetates, or other recording media, tax applies to the sale of such tangible personal property but, effective January 1, 1976, the measure of tax is limited to the sale price of the unprocessed recording media. Recording media includes wax, tape, wire, or other material used to embody sound.
(2) Rental of Studio Facilities. To the extent that the studio which is making the recording rents tangible personal property to the customer, tax applies in the same manner as it does to rentals generally.
(b) Master Tapes and Records.
(1) “Master tapes and master records embodying sound” means tapes, records, and other devices, not including mothers, stampers or finished records, utilized by the recording industry in making recordings embodying sound. The term includes, but is not limited to tapes or records which are produced for the immediate purpose of auditioning or demonstrating the particular artistic talents contained therein. The term includes tapes or records which are produced for use as radio commercials or other advertising, syndicated radio programs or for educational purposes. The term does not include recordings for video games or seismic surveys.
(2) Measure of Tax. Effective January 1, 1976, the measure of tax with respect to the retail sale of master tapes or master records embodying sound is limited to the sale price of the unprocessed recording media. The measure of tax does not include charges for labor in recording sound, services rendered in producing, fabricating, processing or imprinting the master tapes, any other services or production expenses or amounts paid for the copyrightable, artistic, or intangible elements of master tapes or master records, whether designated as royalties or otherwise. Tax applies to subsequent retail sales of master records and tapes in the same manner as tax applies to the original retail sale. (See Regulation 1529 for application of tax to recording sound for motion pictures.)
(3) Intermediate Working Products. The recording of sound on intermediate recording media used to produce a master tape or master record is included within the exemption for master tapes and records under (b)(2). For example, studio charges for recording on multi-track tape which is to be mixed down and transferred to two-track tape are not subject to tax. Tax applies only to the sale of the unprocessed recording media.
(4) Safety Tapes. Charges for the production of a safety copy of the master tape or master record exempt under (b)(2) are not subject to tax. Charges for the unprocessed recording media are subject to tax.
(c) Processors. The furnishing of “mothers,” “stampers,” and finished records by a processor to a record manufacturer constitutes a sale of tangible personal property and tax applies thereto.
(d) Library Producers. Tax applies to rentals of records and other tangible personal property by library producers in the same manner as it does to rentals generally whether designated as a license to use or otherwise.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6010-6012 and 6362.5, Revenue and Taxation Code.
HISTORY

1. Renumbering from former Section 1926 and amendments of subsections (a) and (c) filed 11-3-71; effective thirtieth day thereafter (Register 71, No. 45). For prior history see Register 65, No. 23.
2. Amendment of subsections (a) and (c) filed 11-22-74; effective thirtieth day thereafter (Register 74, No. 47).
3. Amendment of subsection (a)(4) and new subsections (a)(5) and (a)(6) filed 12-26-75; effective thirtieth day thereafter. Note: Filing designates 1-1-76 as effective date (Register 75, No. 52).
4. Amendment filed 7-15-85; effective thirtieth day thereafter (Register 85, No. 29).
5. Editorial correction of section heading and History 5 (Register 2000, No. 13).
§1528. Photographers, Photocopiers, Photo Finishers and X-Ray Laboratories.
Note     •     History

(a) Photographers and Photocopiers.
Tax applies to sales of photographs, whether or not produced to the special order of the customer. Tax applies to sales of photocopies, whether or not produced to the special order of the customer, and to charges for the making of photographs or photocopies out of materials furnished by the customer or others. Except as provided in subdivision (b)(2), no deduction is allowable on account of expenses such as travel time, telephone calls, rental of equipment, or salaries or wages paid to assistants or models, whether or not such expenses are itemized in billings to customers.
Tax does not apply to sales to photographers and persons who make photocopies of tangible personal property which becomes an ingredient or component part of photographs or photocopies sold, such as mounts, frames, sensitized paper, and toner but does apply to sales to the photographer or producer of materials used in the process of making the photographs or photocopies and not becoming an ingredient or component part thereof, such as chemicals, trays, films, plates, proof paper, cameras, and copy machine drums.
See Regulation 1540, Advertising Agencies and Commercial Artists, for transfers of photographic images by commercial artists.
(b) Photocopying of Records.
(1) General Rules. Tax applies to sales of photocopies of records. Persons who make and sell, or obtain and sell, photocopies of records to consumers are retailers of the photocopies whether they make the photocopies themselves, hire a subcontractor to make the photocopies, or acquire the photocopies for resale from the person who owns or maintains the records. Tax applies whether or not the copies are made at the business location of the retailer or at the location of the person who owns or maintains the records. The tax applies to the entire charge for making and selling, or obtaining and selling, photocopies, without deduction for expenses incurred in obtaining access to the records, travel time, time spent in selecting the particular records desired, the field service of photocopying or microfilming the records, telephone calls, file setup charges, basic fees, typing fees, document handling fees, or any other costs or expenses of filling the customer's order.
(2) Service Transactions. Merely because a fee is charged in connection with the transfer of a photocopy of a record does not mean that the transaction is a sale transaction under the Sales and Use Tax Law. If a person who owns or maintains the records (recordholder) is required by law to furnish the photocopy upon tender and payment of a fee, the transfer of the photocopies by that person is not a sale. For sales and use tax purposes, that person is the consumer of the photocopies transferred and charges by a photocopy company to the recordholder for the photocopies are subject to tax.
(A) Medical Records. Ordinarily tax does not apply to charges made by a hospital or other health care provider (recordholder) for photocopying of medical records. The transaction is regarded as a service transaction, and the fees are nontaxable if the photocopies are furnished to the patient, or to someone acting on behalf of the patient, or to the patient's representative, as provided in Health and Safety Code section 123110(b). Likewise, the fees are nontaxable if the photocopies are furnished in response to a written authorization presented by an attorney or the attorney's representative as provided in Evidence Code section 1158, or if the photocopies are furnished as provided in subdivision (b)(2)(C) below. Tax does apply, however, if the hospital or other health care provider is not required by law to furnish photocopies but otherwise sells photocopies of records for a price. Charges made by a photocopy company directly to the requesting party for photocopies which, by agreement with the recordholder, were made and furnished directly to the requesting party are taxable in their entirety.
The preparation and service of a written authorization as provided in California Evidence Code Section 1158 is a nontaxable service. The tax does not apply to separately stated charges for this service even though the written authorization is served in connection with the performance of a contract to produce and deliver photocopies of records.
(B) Public Records. Tax does not apply to charges made by a public agency for photocopies of records furnished pursuant to the California Public Records Act or local law, ordinance, or resolution. Persons who obtain photocopies of public records from public agencies and sell the photocopies are making retail sales and must pay sales tax measured by their entire charge, including reimbursement of legally required fees.
(C) Witness Fees. Copying, witness, mileage or other fees which are charged by a person who furnishes copies of records in response to a subpoena as provided in California Evidence Code Section 1563 are not subject to tax. Separately stated charges by a photocopy company for the reimbursement of witness fees which were paid to the recordholder are not subject to tax. Tax does not apply to separately stated fees, made by a person who makes or acquires records for another for advancing payment of statutory witness fees. Such fees, commonly identified as “check charges, are made to cover the cost of providing the check, advancing moneys, and associated bookkeeping costs. When a witness fee is charged, the “check charge” will be regarded as part of the charge for a nontaxable service and not as a part of the charge made for the tangible personal property.
(3) Preparation of Subpoena Duces Tecum. The preparation and service of a subpoena duces tecum is a nontaxable service. The tax does not apply to separately stated charges made for the service even though the subpoena is served in connection with the performance of a contract to produce and deliver photocopies of records.
(4) Typewritten Transcriptions and Interpretation of Medical Records. The tax does not apply to a separately stated charge made for providing a typewritten transcription of a medical report or an interpretation of the contents of a medical record. However, the tax applies to the fair retail value of any photocopies produced for the customer in connection with the nontaxable service.
(c) Photo Finishers.
(1) Prints and Enlargements. Tax applies to charges for printing pictures or making enlargements from negatives or slides furnished by the customer.
Tax applies to sales to photo finishers of all tangible personal property used by them in printing pictures or making enlargements except property becoming an ingredient or component part of the prints, enlargements and other items sold by them.
(2) Coloring and Tinting. Tax applies to charges for coloring and tinting new pictures.
Tax does not apply to sales of colors and tints to photo finishers for use by them in coloring and tinting new pictures.
(3) Film Processing.
(A) Negative Development of Customer Furnished Film. Tax does not apply to separately stated charges for the negative development of customer furnished film. Development of film by the reverse process method is not the negative development of film.
Tax applies to sales of chemicals for use in such negative development whether or not the chemicals become a component part of the negative.
(B) Other Film Processing. Tax applies to all film processing charges other than separately stated charges for the negative development of customer furnished film. For example, tax applies to charges for development of film by the reverse process method.
Tax applies to sales of chemicals for use in such film processing if the chemicals do not become a component part of the processed film transferred to customers. Tax does not apply to sales of chemicals which do become a component part of film sold to customers before use.
(d) X-Ray Laboratories. Producers of X-Ray films or photographs for the purpose of diagnosing medical or dental conditions of humans, excluding such films and photographs used only for cosmetic purposes, are the consumers of materials and supplies used in the production thereof. Thus, the tax applies to the sale of such materials and supplies to laboratories producing X-Ray films or photographs for the purpose of such diagnoses. Whether the laboratory is a “lay laboratory” or is operated by a physician, surgeon, dentist or hospital is immaterial. Producers of X-Ray films or photographs for any other purpose such as use for purely cosmetic purposes, diagnosis of medical or dental conditions of animals, inspection of metals, welds and similar purposes are retailers of the films or pictures and the tax applies to the gross receipts from the retail sale thereof. If, however, an X-Ray laboratory contracts to furnish an X-Ray inspection service, retaining title to and possession of the X-Ray or pictures produced, charges for the performance of such an inspection service are not subject to tax.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6009, 6015 and 6020, Revenue and Taxation Code.
HISTORY

1. Renumbering from former section 1933 filed 11-3-71; effective thirtieth day thereafter (Register 71, No. 45). For prior history, see Register 69, No. 45.
2. Amendment filed 11-22-74; effective thirtieth day thereafter (Register 74, No. 47).
3. Amendment filed 10-14-83; effective thirtieth day thereafter (Register 83, No. 42).
4. Amendment of subsection (a)(2) filed 5-3-85; effective thirtieth day thereafter (Register 85, No. 18).
5. Amendment of subsection (a)(1) filed 8-27-91 as an emergency; operative 8-27-91 (Register 92, No. 1). A Certificate of Compliance must be transmitted to OAL 12-26-91 or emergency language will be repealed by operation of law on the following day.
6. Certificate of Compliance as to 8-27-91 order transmitted to OAL 12-12-91 and filed 1-9-92 (Register 92, No. 11).
7. Amendment of section heading and section filed 9-4-97; operative 10-4-97 (Register 97, No. 36).
8. Amendment of subsection (a) filed 8-20-2002; operative 9-19-2002 (Register 2002, No. 34).
§1529. Motion Pictures.
Note     •     History

(a) General.
(1) A person who produces a motion picture or performs “qualified production services” is the consumer of, and tax applies to the sale to such persons of raw film, sound tape, or videotape stock; paintings; models; artwork; and other tangible personal property for such use.
(2) Tax does not apply to amounts charged for the right to exploit a qualified motion picture.
(3) Tax does not apply to charges for “qualified production services” performed by any person in any capacity (employee, agent, independent contractor or otherwise) in connection with the production of all or any part of a “qualified motion picture.”
(4) Tax does not apply to charges for services performed by persons who do not fabricate or process tangible personal property, such as directors and lighting technicians. (See Regulation 1501 for a more detailed discussion.)
(b) Application of Tax.
(1) Qualified Motion Picture. A “qualified motion picture” is any motion picture or portion thereof, whether finished or not, which is produced, adapted, or altered for exploitation in, on, or through any medium or by any device for any purpose, including, but not limited to, any entertainment, commercial, advertising, promotional, industrial, or educational purpose.
(A) Qualified motion picture includes, but is not limited to:
1. Motion pictures produced for display at theaters, amusement parks or on commercial carriers; television shows including closed circuit and broadcast; commercials; trailers; television spots; specials; featurettes; “promos”; “sneaks”; corporate training and sales presentations; video press kits; music videos; and special effects, titles, and credits which are embodied on film, tape, or other motion picture media.
2. Original and adapted versions including, but not limited to, adaptation to another language or another medium.
3. Motion pictures produced for the federal government or its instrumentalities, foreign governments, state and local governments, or political subdivisions thereof.
(B) Qualified motion picture does not include motion pictures produced for private noncommercial use, such as motion pictures of weddings or graduations to be used as family mementos, accident reconstruction videotapes to be used for legal analysis, or student films to be used for class projects.
(C) Tax does not apply to the transfer of all or part of, or any interest in, a qualified motion picture if either:
1. The transfer is prior to the date that the qualified motion picture is exhibited or broadcast to its general audience, or
2. The transfer is to any person holding either directly or indirectly, or by affiliation, any exploitation rights obtained prior to the date that the qualified motion picture is exhibited or broadcast to its general audience. For example, a transfer to any entity that has control over or is under the control of another entity that held any exploitation rights directly would not be subject to tax. Further, a transfer to an entity which is under common control with another entity which held exploitation rights directly would not be subject to tax. Control, as used herein, is the ability of any person, such as a corporate parent or other entity, to direct the policies or actions of another entity through stock or other ownership.
(2) Qualified Production Services. “Qualified production services” are any fabrication performed by any person in any capacity (including, but not limited to, an employee, agent, or independent contractor) on film, tape, or other audiovisual embodiment in connection with the production of all or any part of any qualified motion picture. Qualified production services include, but are not limited to, photography; sound or music recording; creation of special effects or animation on film, tape or other audiovisual embodiment, including animation drawings, inkings, paintings, tracings and celluloid “cels”; technological modification, including colorizing; adaptation; alteration; computer graphics, including transfers of computer graphics on computer-generated media; sound dubbing or sound mixing; sound or music or effect transferring; film or tape editing or cutting; developing or processing of negatives or positives; timing; coding or encoding; creation of opticals, titles, main or end credits; captioning; and medium transfers (e.g., film to tape, tape to tape).
The term includes any such fabrication whether performed on the qualified motion picture before or after the release date. The term does not include work to manufacture release prints.
Qualified production services include processing performed on a qualified motion picture, except for processing to produce release prints. Processing includes film developing and processing; film to tape transfers; and sound transferring, rerecording, dubbing, and mixing.
(A) Performance of Services. Tax does not apply to charges for qualified production services. For example, tax does not apply to charges for photography, film developing other than of release prints, editing, or negative cutting performed on a qualified motion picture.
(B) Tangible Personal Property. A person who performs qualified production services is the consumer of, and tax applies to the sale to that person of, tangible personal property which that person uses in the performance of the services. For example, persons who perform nontaxable film and tape processing work are consumers of all chemicals and raw stock used in the process regardless that the final film or tape product is transferred to a customer.
Tax does not apply to the charge for the following tangible personal property transferred in connection with the performance of qualified production services:
1. Film, tape, or other embodiment upon which sound, visual images, or computer-generated graphics are created or recorded. See subdivision (d)(11)(B) for a list of film prints and tapes which are considered to be the product of qualified production services and distinguishable from release prints.
2. Paintings, models, and artwork (including drawings, inkings, tracings, celluloid “cels,” or photostats used in the animation process) used by those filming special effects, titles, or credits regardless that title to the property may be transferred to the customer.
Sales of tangible personal property to persons who perform qualified production services are subject to tax. The person performing the services shall not issue a resale certificate when purchasing such property. The application of tax is the same regardless of whether the person contracts to furnish the services and the tangible personal property for one price or separately itemizes such charges and whether the product of the service is transferred in California or is shipped out of state.
(C) Retail Sales of Tangible Personal Property. Tax applies to other retail sales of tangible personal property by a person who performs qualified production services. For example, if a person who performs qualified production services purchases costumes or props to include in a scene and transfers title to the property to the customer in California, the retail sale of the costumes or props is subject to sales tax.
(D) Services In General.
1. Tax does not apply to charges for services which are not fabrication or processing of tangible personal property. Such nontaxable services commonly found in the motion picture industry include writing, acting, directing, casting, music composing, management, production consulting and services rendered by stage personnel not performing fabrication or processing labor; such as grips, property personnel, lighting technicians or transportation drivers. Persons rendering services are consumers of any tangible personal property which may be incidentally used in rendering the services. (See Reg. 1501.)
2. Charges for repairing, reconditioning, or restoring a qualified motion picture are not subject to tax. Such nontaxable services include the retiming, remounting, or laboratory splicing of negative or positive film, tape, or other audiovisual embodiment.
3. Appliance Make-up. A person who fabricates and applies expendable appliance make-up is the consumer of materials and make-up used. Tax does not apply to charges made to the customer.
4. Storyboards. The preparation of storyboards for either animation or live photography is a service, and tax does not apply to the charge.
5. Creative Art Services. Tax does not apply to charges or buyout fees for creative art services in connection with the production, distribution or exploitation of a qualified motion picture. A person who provides creative art services is the consumer of tangible personal property used in the performance of such services and tax applies to the sale of property to the service provider. Tax does not apply to the charges for tangible personal property transferred in connection with the performance of creative art services.
However, if the service recipient subsequently displays the property as a work of art (for example, frames it and hangs it on a wall), the service recipient would owe use tax based on their purchase price. In addition, if the property is subsequently physically incorporated into finished art for reproduction by photomechanical processes, the service recipient would owe use tax based on their purchase price.
(3) Release Prints.
(A) The manufacturing of release prints is not the performance of qualified production services. The application of sales tax to sales of release prints is the same as the application of tax to other sales of tangible personal property; that is, the sale of a release print to a person for exhibition or broadcast is a retail sale subject to sales tax. The sale of a release print for resale is not subject to tax. See subdivision (d)(11)(A) for a list of film and tape products which are release prints.
(B) When a contract calls for production or sale of a qualified motion picture, but only requires delivery of one or more release prints, the first film or tape delivered which is of a quality suitable for exhibition will be considered the principal release print. The person required to deliver the principal release print under the contract is the consumer of, and tax applies to the sale to that person of, the principal release print. For the application of tax to all other sales of release prints, whether called for in the original contract or not, see paragraph (A) of this subdivision.
(4) Stock Shots.
(A) The production of a stock shot, whether by the owner at its own facility or by a subcontractor, is a qualified production service. The person producing the stock shot is the consumer of, and tax applies to the sale to that person of, tangible personal property which such person uses to produce the stock shot. The transfer, either outright or by lease, of such stock shot by the owner of the stock shot or subcontractor is nontaxable.
(B) The outright sale of a stock shot library consisting of negative and/or positive materials is a sale subject to tax unless otherwise exempt.
(5) Special Production Partnerships. If two or more persons engaged in the production and distribution of motion pictures for use in any media form a partnership for the purpose of reducing the cost of producing motion pictures through the sharing of the use of equipment, studio facilities, and the services of personnel, the furnishing (without transferring title to tangible personal property) of such equipment, facilities, and services by the partnership to its members for the purpose of the production of motion pictures by its members does not constitute a “sale” or “purchase.” Refer to subdivision (b)(2)(B) for the application of tax to charges for tangible personal property transferred along with the sale of qualified production services.
(6) Rentals Generally.
(A) Rentals of Equipment. Tax applies to rentals of tangible personal property as explained in Regulation 1660. A person who contracts to provide qualified production services and provides equipment, such as an editing machine or a camera, together with an operator of the equipment to perform the services, does not thereby rent out the equipment but uses the equipment in performing the qualified production services. Such person may not purchase the equipment under a resale certificate but should pay sales tax reimbursement or timely pay use tax on the purchase of the equipment.
(B) Rentals Under A Studio Facilities Contract. Under a studio facilities contract, a studio provides the use of certain property and services for a facilities fee. Included within the property made available are items of tangible personal property, the furnishing of which constitutes a rental.
In addition, billings are made for additional costs of materials and labor for sets, props and wardrobes. Such costs include the labor of persons such as carpenters, electricians, painters, plasterers, to fabricate flats, to revamp and change existing flats, and to assemble the components into a set (flats are portable components of sets and are usually prefabricated). Usually the facilities contract provides that title to these items remains in the studio. Under these circumstances, charges billed out as the cost of materials and labor are considered rentals.
In view of the difficulty of determining the amount of taxable rentals included within the facilities fee and the additional costs billed for sets, props, and wardrobes, the taxable rental so included will be deemed to be 55 percent of the actual set designing, set construction, and set striking costs billed to the lessee. The 55 percent factor covers set rentals and rentals of all other items furnished under a studio facilities contract whether charged to production cost or included as a portion of the facilities fee.
If title to any particular item is actually transferred, e.g., an item of wardrobe to an actress, the entire charge for the item is taxable.
Rentals of tangible personal property by motion picture and television studios which do not have a studio facilities contract with the lessee are taxable in the same manner as rentals generally.
Charges involving rentals of permanent standing sets, which are real property rather than personal property, are not taxable where the transactions are clearly identifiable in the lessor's records.
(C) Distribution or Rental of Motion Pictures. Rental receipts from any motion picture such as release prints or stock shots are not subject to tax. Tax applies to leases of videocassettes, videotapes, and videodiscs for private use under which the lessee or renter does not obtain or acquire the right to license, broadcast, exhibit, or reproduce the videocassette, videotape, or videodisc. (Reg. 1660, subd. (d)(2).)
(D) Rentals of Still Photographs and Photographic Slide Films. Leases of still photographs or photographic slides are subject to tax unless the lessor leases the property in substantially the same form as acquired by the lessor, or by his or her transferor, and the lessor or transferor has paid sales tax reimbursement or has timely paid use tax measured by the purchase price. (Reg. 1660, subd. (b)(1)(E).)
(c) Miscellaneous.
(1) Slide films. Still slide films and filmstrips are not motion pictures. A person who makes such films or filmstrips for customers is a retailer, and tax applies to charges made to the customers.
(d) Definitions.
(1) “Adapt.” To make suitable for a different use.
(2) “Animation.” A process by which the portrayal of action is created by a computer or by the recording of a series of images of drawings or models, each image representing an advancement in the action.
(3) “Cutting services.” All labor involved in cutting and splicing film, tape or other embodiment.
(4) “Exploit” or “Exploitation.” Any use of all or any part of a qualified motion picture, including exhibiting, broadcasting, telecasting, displaying, projecting, transmitting, duplicating, reproducing, distributing, promoting, advertising, commercializing, merchandising, marketing, in any or all media markets and territories and by any or all means, methods, modes, processes, and devices or delivery systems of every kind and character. “Exploitation” includes each and every act comprising part of any phase of the process of exploiting all or any qualified motion picture, whether before or after commencement of principal photography.
(5) “Facilities fee.” An amount charged by the studio to a person who works on any part of a motion picture under a studio facilities contract which entitles the person to the use of basic facilities, such as stage space, projection room, sound facilities, cutting room, dressing rooms, office space, parking, grip equipment, props, set dressings, drapes, and backings, and to services, such as accounting, budgeting, and janitors. Items provided by studios are usually divided into “below-the-line” elements and “above-the-line” elements. The term “below-the-line” includes all elements related to production other than basic format, scripts, directors, talent, and writers, (including persons such as secretaries, production or administrative assistants, and script secretaries).
(6) “Model.” Any three dimensional representation including, but not limited to landscape or other miniatures, creatures, puppets, sculptures, or non-real life objects or structures.
(7) “Motion picture.” Any audiovisual work (at any stage of the production thereof) consisting of a series of related images, either on film, tape, or other embodiment, whether photographic, or otherwise, and for these purposes, includes all physical materials comprising part of, or synchronized with, the motion picture, including the original, duplicate, and other negatives, intermediary film products, tapes, prints and original, duplicate and other sound or visual recordings created to accompany the pictorial material depicted in the motion picture.
(8) “Produce or production of any qualified motion picture.” To originate, create, invent, design, devise, develop, photograph, edit, record, imprint, adapt, alter, make, process, fabricate, assemble, construct, or manufacture all or any part of that qualified motion picture by any means, method, or devise of any kind or character, whether before or after commencement of principal photography.
(9) “Qualified motion picture.” See subdivision (b)(1).
(10) “Qualified production services.” See subdivision (b)(2).
(11) “Release print.” A copy of a qualified motion picture complete in all respects, which is of a quality suitable for exhibition or broadcast.
(A) The following film and tape products, if complete in all respects and suitable for exhibition or broadcast, qualify as release prints:

	FILM 		TAPE

Screening Copy (Complete) 	Promo/Marketing Videotape 

	A print used for 		A copy used for 
	marketing, goodwill 		marketing, goodwill 
	or other promotional 		or other promotional 
	purposes.		purposes.

Release Print 		Broadcast/Air Dub

	A print produced on 		A broadcast quality
	high quality stock 		copy made from an
	and used for exhibition 		edited or safety
	to the public.		master.

Show Print

	A high quality
	print used for industry
	screening and major
	market exhibition.
(B) The following film and tape products are not considered release prints but rather are the product of qualified production services:

	FILM 		TAPE

Work Print/Rush/Daily 	Master

	A positive print made 		An original tape of
	from a developed negative		filmed action.
	and used for editing.
	The negative may be the
	embodiment of elements
	including, but not limited
	to, original photography,
	leaders, opticals,
	intermediates, sound tracks,
	overlay titles, or mattes.

Fine Grain/Interpositive 		Window Dub/Submaster/ 

Answer Print/First 	Safety Master
Trial/Composite Print	Protection Copy

	A print produced from 		A back-up copy of a
	an original or dupe 		sub or edited master.
	negative for evaluation
	of color balance and
	used to generate an
	interpositive or
	internegative.

YCM - (Yellow, Cyan and 	Work Print Videotape
	Magenta)

	A black and white fine 		An intermediate copy
	copy or primary 		made from film and
	colors produced for 		used for reviewing
	archival purposes. 		dailies, preliminary
				editing or network
				approvals.

Contrast Prints 		Technical Check Videotape

	A print manufactured		A broadcast quality
	on special low		copy used for technical
	contrast film emulsion 		and internal review.
	designed to be used 
	for transferring a
	motion picture from 
	film medium to tape.

Stock Shot			Stock Shot

	A clip from a motion 		A clip from a motion
	picture which has been		 picture which has been
	exhibited or broadcasted 		exhibited or broadcasted
	to its general audience. 		to its general audience.

One Light Print 		Approval Copy

	An untimed color 		A copy of the director's
	positive print used 		final version which is
	for editing purposes. 		prepared for client
				review.

Black and White (“Blue”) Dupes 	Viewing/Screening
				Videotape
				(Incomplete)
	A positive print
	generally without 		A non-broadcast quality 
	sound used for		copy of the finished
	various types of editing.		version used for review
				purposes which may
				include visual time
				codes or overt
				anti-piracy protection
				or lack title or end
				credits.
Check Print

	A print produced for
	purposes of checking the 
	quality of the internegative 
	and to assure that 
	subsequent prints conform 
	to the answer print.

Edited Work Print/Edited Daily

	A print used for
	internal review prior
	to a final version.

Preview Print

	An edited work print
	which represents the
	director's final
	version as required
	by guild agreement.

Bid Print

	An interim edited
	preview print used
	for evaluating
	market potential.

Screening Copy (Incomplete)

	A print used for review
	purposes which may include 
	visual time codes or overt 
	anti-piracy protection or 
	lack title or end credits.

Approval Copy

	A preview print used for
	customer review purposes.
(12) “Sets.” Artificial settings for scenes of motion pictures. They may be either of a temporary or portable nature, such as interiors, or of a permanent nature erected on real property, such as Western streets or city streets.
(13) “Special effects.” A visual representation, on film, tape, or other audiovisual embodiment of illusory live action produced through photographic, electronic, mechanical, or other means, which comprises all or part of a motion picture.
(14) “Technological modifications.” Alteration of a motion picture through computer, electromagnetic or other processes or means including color imaging and color enhancing.
(15) “Creative Art Services.” Creative art services are services performed by persons such as advertising agencies, commercial artists and designers to convey ideas, concepts, looks or messages in connection with production, distribution or exploitation of a qualified motion picture. Creative art services may result in a transfer, enhancement or revision on any medium including, without limitation, the following: roughs, visualizations, drawings, sketches, renderings, illustrations, layouts, comprehensives, photographs, negatives, transparencies, prints, copies, chromatics, stats, logo types, scans, lasergraphics, visual prototypes and electronic imagery. Creative art services do not include services for the preparation of finished art for use in reproduction by photomechanical processes.
(16) “Buyout Fees.” Buyout fees are amounts paid for the right to use an idea, concept, look or message previously presented during any phase of creative art services.
NOTE

Authority: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6006.1, 6006.3, 6007, 6010, 6010.4 and 6010.6, Revenue and Taxation Code.
HISTORY

1. Renumbering from former section 1929 filed 11-3-71; effective thirtieth day thereafter (Register 71, No. 45).
2. Amendment filed 11-22-74; effective thirtieth day thereafter (Register 74, No. 47).
3. Editorial correction (Register 75, No. 52).
4. Amendment filed 11-17-83 as an emergency; effective upon filing (Register 83, No. 47). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 3-17-84.
5. Certificate of Compliance as to 11-17-83 order transmitted to OAL 3-16-84 and filed 4-12-84 (Register 84, No. 15).
6. Amendment filed 12-29-87; operative 1-1-88 (Register 88, No.2).
7. Amendment filed 4-12-90; operative 5-12-90 (Register 90, No. 18).
8. New subsections (b)(2)(D)5., (d)(15) and (d)(16) and repealer of subsection (e) filed 1-17-97; operative 2-16-97 (Register 97, No. 3).
§1530. Foundries.
Note     •     History

Tax applies to 55 percent of the receipts from the sale of coke to foundries for use in the manufacture of castings by the cupola process, which percentage represents that portion of the coke that is consumed in the process. Tax does not apply to the remaining 45 per cent, which percentage represents that portion of the coke that is purchased by the foundries for resale. 
Effective August 1, 1933. Adopted as of January 1, 1945, as a restatement of previous rulings. 
NOTE

(Sections 6007-6009, Revenue and Taxation Code)
HISTORY

1. Renumbering from former Section 1927 filed 11-3-71; effective thirtieth day thereafter (Register 71, No. 45.)
§1531. Fur Dressers and Dyers.
Note     •     History

Tax does not apply to sales of dyestuffs and the following chemicals to fur dressers and dyers engaged in processing and dyeing skins and furs of which they are the owners and which they will sell:
(a) Chemicals used in the pickling and tanning process:

	Aluminum sulphate	Ammonium sulphate
	Sodium chloride*	Potassium aluminum sulphate
	Ammonium chloride 	Sulfuric acid
	Chrome alum	Formaldehyde

* Sodium chloride is also used in “fleshing,” i.e., the process of removing the residue of the flesh from the skin, in which case it does not become a component part of the finished product. In the event that a fur dyer purchases under resale certificates sodium chloride, a portion of which he uses in fleshing, he will be required to pay sales tax on the cost of the total amount purchased, unless he keeps accurate records showing the respective amounts used in each process.
(b) Chemicals used in mordanting:

	Potassium dichromate 	Potassium tartrate
	Copper sulphate 	Acetic acid
	Ferrous sulphate 	Antimonium potassium tartrate
	Sodium dichromate 	Formic acid
	Lead acetate
(c) Dyes:

	Universal D 	E G
	N Z A 	D M G--Gray
	B C A 	D B
	“P” Base 	Aniline Hydrochloride
	Fur Brown 	Universal P S
	Fur Black 	” P H C L
	Acid Red 	” A
	Acid Blue 	” 2 G S
		” 2 G E
(d) Intermediates:

	Hydrogen peroxide* 	Ammonium chloride
	Potassium chlorate 	Copper sulphate
	Ammonium hydroxide 	Pyrogallic acid

* Hydrogen peroxide is also commonly used as a bleaching agent, in which case the person so using it is the consumer thereof, and the same comments are applicable to it as have been made above in connection with sodium chloride.
(e) Processing oils used to produce softness and flexibility:

	Glycerine 	Sulphonated nutracod
	Nutramented cod oil 	Sulphonate cod oil
	Shellacol
(f) It is possible that other chemicals than those listed may be used in the above processes and may also be regarded as being purchased by fur dyers for the purpose of resale. All chemicals, however, which are not listed above and which are not used in a manner comparable to those which are listed, must be regarded as being purchased by fur dyers for their own consumption rather than for the purpose of resale.
(g) Included among the products which are commonly used by fur dressers and dyers and which should not be purchased under resale certificates are the following:

	Sodium carbonate (soda ash) 	French chalk
	Sodium sulphate (glauber salts) 	Sierra white talc
	Trisodium phosphate 	Chloride of lime
	Fibrin talc
(h) Fur dressers and dyers sometimes process and dye furs belonging to others, as distinguished from furs which they have purchased and will resell. Unless their operations amount to producing, processing, or fabricating within the meaning of regulation 1526, they are the consumers of all products used in connection with such work, including dyestuffs and other chemicals which combine with the fur and become a component part of the finished article. 
Effective August 1, 1933. Adopted as of January 1, 1945, as a restatement of previous rulings. 
NOTE

(Sections 6007-6009, Revenue and Taxation Code; altering, repairing and remodeling furs. See Ruling 1949)
HISTORY

1. Renumbering from former Section 1928 and amendment of subsection (h) filed 11-3-71; effective thirtieth day thereafter (Register 71, No. 45).
§1532. Teleproduction or Other Postproduction Service Equipment.
Note     •     History

(a) Partial Exemption for Property Purchased for Use in Teleproduction or Other Postproduction Services. Commencing on January 1, 1999, section 6378 of the Revenue and Taxation Code provides a partial exemption from sales and use tax for certain properties described in this regulation. 
For the period commencing on January 1, 1999, and ending on December 31, 2000, the partial exemption applies to the taxes imposed by Sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. 
For the period commencing on January 1, 2001, and ending on December 31, 2001, the partial exemption applies to the taxes imposed by sections 6051 and 6201 of the Revenue and Taxation Code (4.75%), but does not apply to the taxes imposed pursuant to section 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.
For the period commencing on January 1, 2002, and ending on June 30, 2004, the partial exemption applies to the taxes imposed by Sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to Section 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or Section 35 of article XIII of the California Constitution.
For the period commencing on July 1, 2004, and ending on March 31, 2009, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6201, 6201.3, and 6201.5 of the Revenue and Taxation Code (5.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. 
For the period commencing on April 1, 2009, and ending on June 30, 2011, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6051.7, 6201, 6201.3, 6201.5, and 6201.7 of the Revenue and Taxation Code (6.25%) but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. 
For the period commencing on July 1, 2011, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6201, 6201.3, and 6201.5 of the Revenue and Taxation Code (5.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. 
Subject to the limitations set forth above, this partial exemption applies to sales or use taxes imposed on the gross receipts from the sale of, and the storage, use, or other consumption in this state of, any of the following items: 
(1) Tangible personal property as defined in subdivision (c)(5) purchased for use by a qualified person to be used primarily in teleproduction or other postproduction services. 
(2) Tangible personal property as defined in subdivision (c)(5) purchased for use by a qualified person to be used primarily to maintain, repair, measure, or test any property described in subdivision (a)(1). 
(b) Property Used Primarily in Administration, General Management, or Marketing. Notwithstanding any other provision of this regulation, this partial exemption shall not apply to any tangible personal property that is used primarily in administration, general management, or marketing. For purposes of this subdivision, tangible personal property is used primarily in administration, general management, or marketing when it is used 50 percent or more of the time in one or more of those activities for the one year period following the date of purchase of the property. 
(c) Definitions. For purposes of this regulation: 
(1) “Primarily” means tangible personal property as defined in subdivision (c)(5) of this regulation used 50 percent or more of the time in an activity described in subdivision (a) for the one-year period following the date of purchase of the property. Tangible personal property shall not be considered used in such activities for any period of time that the property is located outside the state, regardless of how the property is used while outside the state. 
(2) “Qualified person” means any person whose line of business is primarily engaged in teleproduction or other postproduction activities, including postproduction audio services for film, television, and video productions, described in Code 512191 of the North American Industry Classification System (NAICS) Manual published by the United States Office of Management and Budget, 1997 edition, and as further defined in (c)(4) of this regulation. The term “qualified person” does not include persons whose line of business is primarily engaged in portrait studios providing still, video, or digital portrait photography services (NAICS Code 541921, incorporated herein by reference), or commercial photography services (NAICS Code 541922, incorporated herein by reference). For the purposes of this subdivision: 
(A) “Primarily engaged” means 50 percent or more of gross revenues, including intra-company charges, are derived from teleproduction or other postproduction activities for the financial year of the purchaser preceding the purchase of the property. In cases where the purchaser was not primarily engaged in “teleproduction or other postproduction services” for the financial year preceding the purchase of the property, the one year period following the date of purchase of the property will be used. In the case of a nonprofit teleproduction or other postproduction establishment, “primarily engaged” means 50 percent or more of the funds allocated to the establishment are attributable to teleproduction or other postproduction services. 
(B) For purposes of classifying a line of business, the economic unit shall be the “establishment” and the classification of the line or lines of business will be based on the establishment's primary activity based upon gross revenues. 
(C) “Establishment” is defined as the smallest operating unit for which records provide information on the revenues and cost of operations incurred to perform the teleproduction or postproduction services. 
1. The services may be provided to other divisions within the same entity or to related parties with or without direct compensation. 
2. Establishments may include, but are not limited to, departments, divisions, subdivisions and product lines. 
(3) “Sale” includes the producing, fabricating or processing of tangible personal property for a consideration for consumers who furnish either directly or indirectly the materials used in the producing, fabricating or processing. When performed outside this state or when the customer issues a resale certificate, a “purchase” includes the producing, fabricating or processing of tangible personal property for a consideration for consumers who furnish either directly or indirectly the materials used in the producing, fabricating or processing. If such producing, fabricating or processing is performed on property described in subdivision (a)(1) or (a)(2) of this regulation for a qualified person and the other requirements for the partial exemption in this regulation are met, the partial exemption applies to the gross receipts or sales price for such producing, fabricating, or processing. 
(4) “Teleproduction or other postproduction services” means services for film, video, or digital multimedia formats (audio or visual) that include editing, film and video transfers, transcoding, dubbing, subtitling, credits, close captioning, audio production, special effects (visual or sound), graphics, or animation. For the purposes of this regulation, “teleproduction or other postproduction services” includes postproduction services and does not include production services or activities. “Teleproduction or other postproduction services” include the duplicating of film for postproduction purposes. However, the duplication of film to make release prints does not qualify as a “teleproduction or other postproduction service.” 
The term “teleproduction or other postproduction services” also includes, but is not limited to: 
(A) Services performed to transform, manipulate, assemble, and duplicate visual moving images and synchronous sound previously captured on film, video, or digital formats (audio or visual) or as data during principal photography. 
(B) Services to create digital images, models, miniatures or sounds that may be, but are not required to be combined with live action images. Teleproduction or other postproduction services does not include the recording of music except music recorded with synchronous visual images. 
(C) Film processing; film to tape transfers; tape to tape transfers; DVD or digital audiovisual multimedia format authoring and encoding; color correction; digitizing; on-line and off-line editing; negative cutting; assembling; animation, creating 2d images, creating 3d images (CGI), visual effects; compositing; digital video image manipulation; dirt fixes; motion control visual effects capture; scanning and recording to or from film, video or data; transform; standards or format conversion; transcoding; duplication (except as provided); titles; subtitling; credits; closed captioning; creating graphics; audio scoring; automated dialogue replacement; foley; audio mixing; audio editing; audio laybacks; audio laydowns; audio special effects; management of visual or audio assets and related files stored as data; film, video or audio (dialogue, music and effects) restoration and preservation; archiving, format transfer utilizing compression standards; film cleaning; quality control processes performed in conjunction with any other postproduction process; and creation of data files related to a service defined above. 
Definitions of the terms used in this subdivision are provided in Appendix C. 
(D) The providing of postproduction facilities, such as personnel and scoring stages or equipment where the provider is deemed to be providing a qualified teleproduction or other postproduction service, is not a lease of tangible personal property. 
The providing of special configured equipment to be used in (A) through (D) above with 24 hour a day, 7-day a week available on site technical support where the provider is deemed to be providing a qualified teleproduction or other postproduction service, is not a lease of tangible personal property. 
(5) “Tangible personal property” includes, but is not limited to, all of the following: 
(A) Machinery and equipment, including component parts. Machinery and equipment includes, but is not limited to, duplication equipment used for postproduction purposes and any property used to provide teleproduction or other postproduction services that is mounted or installed in a vehicle. 
(B) All equipment or devices used or required to operate, control, regulate, or maintain the machinery, including, without limitation, audio and visual monitoring equipment, scopes, computers, data processing equipment, electronic data storage equipment, including both internal and external devices, consoles which are custom built, which have open compartments in which tangible personal property described in subdivisions (a)(1) and (a)(2) is placed and which are not suitable for use for other purposes, equipment racks and computer software, including both operating programs and application programs. This also includes all repair and replacement parts with a useful life of one or more years whether purchased separately or in conjunction with a complete machine and regardless of whether the machine or component parts are assembled by the taxpayer or another party. Repair and replacement parts that are treated as a depreciable asset for financial purposes will be treated as having a useful life of more than one year for the purposes of this regulation, even when such items are expensed for income tax purposes under the special provisions of Internal Revenue Code Section 179. 
(C) Materials (as defined in Regulation 1521), only when purchased by a qualified person as tangible personal property and not pursuant to a construction contract, unless the construction contractor is the retailer of materials under Regulation 1521(b)(2)(A)(2); fixtures; or other tangible personal property used to operate, control, regulate, or maintain the property described in subdivisions (a)(1) and (a)(2) which may subsequently be incorporated into real property, including but not limited to items such as air conditioning units dedicated to cooling equipment, electrical UPS (uninterrupted power source) units, sub-flooring, specialized lighting, sound insulation, hydraulics, cabling, routers, patch bays, hubs, robotic storage and retrieval equipment, switchers, satellite and/or other telecommunications equipment used to facilitate the distribution or movement of elements (in either video or data form) between all the various parties collaborating in the completion of a film or video project as part of the postproduction process. 
(6) “Tangible personal property” does not include any of the following: 
(A) Furniture, inventory, meals, vehicles (including those in or on which qualifying property is mounted or installed,) or equipment used to store products. The term “furniture” includes, but is not limited to, tables, chairs, desks or consoles other than those described in subdivision (c)(5)(B). 
(B) Real property. 
(d) Taxes as to Which the Partial Exemption Does Not Apply. This partial exemption does not apply to any tax levied by a county, city, or district pursuant to, or in accordance with, either the Bradley-Burns Uniform Local Sales and Use Tax Law (Rev. & Tax. Code §§ 7200 et seq.) or the Transactions and Use Tax Law (Rev. & Tax Code §§ 7251 et seq.). 
This partial exemption also does not apply to any tax levied pursuant to section 6051.2 and 6201.2 of the Revenue and Taxation Code, or pursuant to section 35 of article XIII of the California Constitution. 
(e) Section 6378 Exemption Certificate. 
(1) Qualified persons who purchase or lease tangible personal property from an in-state seller, or an out-of-state seller obligated to collect use tax, must provide the seller with a section 6378 exemption certificate in order for the seller to claim the partial exemption. If the seller takes a complete section 6378 exemption certificate timely and in good faith, the certificate relieves the seller from the liability for the sales tax subject to exemption under this regulation or the duty of collecting the use tax subject to exemption under this regulation. A certificate will be considered timely if it is taken any time before the seller bills the purchaser for the property, any time within the seller's normal billing or payment cycle, or any time at or prior to delivery of the property to the purchaser. 
A section 6378 exemption certificate which is not taken timely will not relieve the seller of the liability for tax excluded by the partial exemption unless the seller presents satisfactory evidence to the Board that the specific property was sold to a qualified person and primarily used in a qualifying manner. 
The exemption certificate form set forth in Appendix A may be used as an exemption certificate. 
(2) Blanket Certificates. In lieu of requiring an exemption certificate for each transaction, a qualified person may issue a blanket exemption certificate. The blanket exemption certificate form set forth in Appendix B may be used as an exemption certificate. Qualified persons claiming the partial exemption through a blanket exemption certificate must make a clear reference to the blanket exemption certificate in documents such as their written purchase orders, sales agreements, leases, or contracts. Qualified persons claiming the partial exemption must also include in the document referencing the blanket exemption certificate a description of the property. 
(3) Form of Certificate. Any document, such as a letter or purchase order, timely provided by the purchaser to the seller will be regarded as an exemption certificate with respect to the sale of the property described in the document if it contains all of the following essential elements: 
(A) The signature of the purchaser or an agent or employee of the purchaser. 
(B) The name and address of the purchaser 
(C) The seller's permit number held by the purchaser, or a notation to the effect that the purchaser is not required to hold a permit. 
(D) A statement that the property acquired is to be used primarily in teleproduction or other postproduction services or to be used primarily to maintain, repair, measure, or test any such property. 
(E) A statement that the purchaser is a qualified person primarily engaged in teleproduction or other postproduction services as described in Regulation 1532. 
(F) Description of property purchased, including sales price or rentals payable. 
(G) Date executed. 
(4) Retention and Availability of Certificates. A seller must retain each exemption certificate, including a blanket exemption certificate, received from a qualified person for a period of not less than four years from the date on which the seller claims a partial exemption based on the exemption certificate. If a qualified person issues a blanket exemption certificate, the seller must also retain all documents, such as purchase orders, sales agreements, lease agreements, or contracts referencing the blanket exemption certificate and all invoices containing the sales price of the property that the qualified person claims is partially exempt by reference to the blanket exemption certificate. Such documents shall be retained for a period of not less than four years from the date on which the seller claims a partial exemption based on the reference to the blanket exemption certificate. 
While the Board will not normally require the filing of the Section 6378 exemption certificate with a sales and use tax return, when necessary for the efficient administration of the Sales and Use Tax Laws, the Board may, on 30 days' written notice, require a seller to commence filing with its sales and use tax returns copies of all certificates. The Board may also require that, within 45 days of the Board's request, sellers furnish to the Board any and all exemption certificates, or copies thereof, accepted for the purpose of supporting the partial exemption. 
(5) If a purchaser who issues a section 6378 exemption certificate pursuant to subdivision (e)(1), (2), or (3) subsequently does not meet the requirements of a qualified person as set forth in subdivision (c)(2) or does not use the property in a manner or for the purpose which entitles the purchaser to the partial exemption, or if a purchaser issues a section 6378 exemption certificate pursuant to subdivision (e)(1), (2), or (3) for property that does not qualify for the partial exemption, the purchaser shall be liable for payment of the sales tax excluded by the partial exemption, with applicable interest, to the same extent as if the purchaser were a seller making a retail sale of the property at the time of conversion. The sales price of the property to the purchaser shall be deemed to be the gross receipts from that retail sale. 
(f) Use Tax. With respect to tangible personal property the use of which is subject to use tax, any purchaser claiming the partial exemption pursuant to Section 6378 of the Revenue and Taxation Code must file a sales and use tax return or consumer use tax return for the period in which the property is first stored, used, or consumed in California unless the seller holds a valid California seller's permit or a Certificate of Registration -- Use Tax and collects the use tax. The purchaser will not be relieved of his or her liability to pay any applicable use tax that is excluded from the partial exemption as provided in subdivision (d) of this regulation until such tax is remitted either to a vendor who issues a receipt which meets the requirements of Regulation 1686 or directly to the Board. 
(g) Conversion of Property to a Use Not Qualifying for the Partial Exemption. Property that, within one year from the date of purchase, is removed from California, converted from an exempt use under this regulation to some other use not qualifying for the partial exemption, or used in a manner not qualifying for the partial exemption under this regulation, such as a lease to a non-qualified person, is used in a non-qualifying manner. If, as a result of the total non-qualifying use, the property is not primarily used, as defined in subdivision (c)(1), in a qualifying activity, the partial exemption shall not apply. In determining the non-qualifying use, two or more non-qualifying uses that occur at the same time shall be counted as one. For example, a lease to a non-qualified person of property that is removed from California shall be considered as one non-qualifying use for the period it was removed from California and leased to a non-qualified person. 
The property shall not, however, be regarded as converted to a use not qualifying for the partial exemption if the qualified person sells or leases the property to a qualified person for qualified use in California. 
For purposes of this subdivision, tangible personal property shall not be regarded as being converted to a non-qualifying use if such property is used for teleproduction or other postproduction services in this state for more than one half of the one year period from the date of purchase of the property. 
(h) Purchaser's Liability for the Payment of Sales Tax. If a purchaser submits a Section 6378 exemption certificate to the seller, and then within one year of the date of purchase of the property converts that property as described in subdivision (g) from an exempt use pursuant to this regulation to some other use not qualifying for the partial exemption, the purchaser shall be liable for payment of sales tax excluded by the partial exemption, with applicable interest, to the same extent as if the purchaser were a seller making a retail sale of the property at the time the property was so removed, converted, or used; and the sales price of the property to the purchaser shall be deemed to be the gross receipts from that retail sale. In the case of a non-qualifying lease, the payment of sales tax by a purchaser when included on the return for the period covering the date of conversion shall be deemed to be a timely election to pay tax based on the purchase price. 
(i) Leases. 
(1) Leases -- In General. Leases of tangible personal property which are classified as “continuing sales” and “continuing purchases” of tangible personal property, in accordance with Regulation 1660, “Leases of Tangible Personal Property -- In General,” may qualify for the partial exemption subject to all the limitations and conditions set forth in this regulation. This partial exemption may apply to rental receipts paid by a qualified person with respect to a lease of tangible personal property to the qualified person, which tangible personal property is used as set forth in subdivisions (a)(1) and (a)(2) of this regulation, notwithstanding the fact that the lease was entered into prior to the operative date of this regulation. For purposes of this subdivision, a non-qualified person may purchase property for resale and subsequently lease the property to a qualified person subject to the partial exemption. 
A lessee is a qualified person if the lessee is “primarily engaged” in teleproduction or other postproduction activities and meets the requirements of a qualified person set forth in subdivision (c)(2). 
(2) Leases of Tax-Paid Property. The partial exemption does not apply to the sale of property to, or the storage, use, or other consumption of property by, a person who is not a qualified person even if that person subsequently leases the property to a qualified person. 
(3) Lease of Property By a Qualified Person. If a qualified person has acquired property subject to the partial exemption provided by this regulation, the subsequent lease of that property will not be subject to tax measured by rental receipts. A lease of property to a qualified person for use in a qualified manner constitutes a qualifying use of the property by the lessor. If, however, the property is used in a manner not qualifying for the exemption, such as being leased to a non-qualified person in the aggregate for more than one half of the one year period following the date of purchase by the qualified person, such property is not considered to be primarily used in “teleproduction or other postproduction services.” Therefore, the lessor will be liable for tax in accordance with subdivision (e)(5). 
For example, if a qualified person purchases property under the partial exemption, and then leases the property to a non-qualified person, the lease receipts will not be subject to tax as the purchaser has elected to pay tax on their cost. However, if the qualified person who purchases the property leases the property to a non-qualified person for more than one half of the one year period following the date of purchase, the lessor is not using the property in a qualifying manner and is responsible for the tax excluded by the partial exemption based upon the purchase price of the property. 
(4) Leases -- Recharacterization. With respect to transactions which the parties denominate as a “lease,” but which are recharacterized for sales and use tax purposes either as sales at their inception, pursuant to Regulation 1641, “Credit Sales and Repossessions,” subdivision (b), or as sales under a security agreement, Regulation 1660, “Leases of Tangible Personal Property -- In General,” subdivision (a)(2), the transactions may qualify for the partial exemption, in accordance with this regulation. 
(5) Leases -- Acquisition Sale and Leaseback. A qualified person will be regarded as having paid sales tax reimbursement or use tax with respect to that person's purchase of property, within the meaning of those words as they are used in section 6010.65 of the Revenue and Taxation Code, if the qualified person has paid all applicable taxes with respect to the acquisition of the property, notwithstanding the fact that the sale and purchase of the property may have been subject to the partial exemption from tax provided by this regulation. 
(j) Records. Adequate and complete records must be maintained by the purchaser to support that the property purchased was used primarily in the performance of teleproduction or other postproduction services for a period of no less than one year prior to conversion of the property to a non-qualifying use or use by a non qualifying party. 
(k) Operative Date. This regulation is operative as of January 1, 1999. The partial exemption under section 6378 of the Revenue and Taxation Code only applies to qualifying tangible personal property that is sold or first stored, used, or consumed in California on or after the operative date. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6378, Revenue and Taxation Code. 
HISTORY

1. New section and appendices A-C filed 12-9-99; operative 1-8-2000 (Register 99, No. 50).  
2. Change without regulatory effect amending subsection (a) and appendices A and B filed 2-13-2001 pursuant to section 100, title 1, California Code of Regulations (Register 2001, No. 7).
3. Change without regulatory effect amending subsection (a) and Appendices A and B filed 4-16-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 16).
4. Relocation of article 4 heading formerly preceding section 1532 to precede section 1540 filed 6-7-2002; operative 7-7-2002 (Register 2002, No. 23).
5. Change without regulatory effect amending subsection (a) and appendices A and B filed 11-12-2004 pursuant to section 100, title 1, California Code of Regulations (Register 2004, No. 46).
6. Editorial correction of Appendix A and History 5 (Register 2009, No. 23).
7. Change without regulatory effect amending subsection (a) and appendices A and B filed 6-4-2009 pursuant to section 100, title 1, California Code of Regulations (Register 2009, No. 23).
8. Change without regulatory effect amending subsection (a) and appendices A and B filed 1-9-2012 pursuant to section 100, title 1, California Code of Regulations (Register 2012, No. 2).

Appendix A

Section 6378 Exemption Certificate 

View Graphic

Appendix B

Section 6378 Blanket Exemption Certificate 

View Graphic

Appendix C

Technical Definitions

View Graphic
§1533. Liquefied Petroleum Gas.
Note     •     History

(a) General. Commencing on and after September 1, 2001, Section 6353(b) of the Revenue and Taxation Code exempts from sales and use tax the sale of, and the storage, use, or other consumption in this state, of qualified LPG used by a qualified person in an agricultural activity, or used in a qualified residence for a household activity. The terms “qualified LPG,” “qualified person,” “agricultural activity,” “qualified residence,” and “household activity” are defined below. 
(b) Definitions. For purposes of this regulation: 
(1) “Agricultural activity” means the producing and harvesting of agricultural products as defined in subdivision (b)(4), by a qualified person as defined in subdivision (b)(5). 
(2) “Household activity” means those activities normally undertaken in a qualified residence as defined in subdivision (b)(7), such as cooking, heating and lighting. 
(3) “Person that assists a qualified person” means a person employed by a qualified person, or engaged on a contract or fee basis to perform activities described in Major Group 07 of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition (hereafter SIC Manual) which include soil preparation services, crop services, veterinary services, animal services, landscape and horticultural services, and farm labor and management services, that uses qualified LPG in assisting a person engaged in a line of business described in subdivision (b)(5). A person that assists a qualified person may perform a construction contract only if the person performing the contract is engaged in farm management services as described in Code 0762 of the SIC Manual and the construction is integral to the producing and harvesting of an agricultural product as defined in (b)(4). A person that assists a qualified person must provide physical aid or assistance in the actual producing and harvesting of agricultural products owned by the qualified person and not merely provide aid in administrative, managerial, or marketing activities. A person that assists a qualified person does not include persons performing services such as an attorney, accountant, consultant, or other similar activity. Except as otherwise provided above, a person that assists a qualified person also does not include persons who perform construction contracts or who perform repairs to farm equipment and machinery, or a person who assists such persons. 
(4) “Producing and harvesting agricultural products” means those activities described in Major Groups 01, 02 and 07 of the SIC Manual. Major Group 01 includes establishments engaged in the production of crops, plants, vines, and trees (excluding forestry operations). This major group also includes establishments engaged in the operation of sod farms; in the production of mushrooms, bulbs, flower seeds, and vegetable seeds; and in the growing of hydroponic crops. Major Group 02 includes establishments engaged in the keeping, grazing, or feeding of livestock for the sale of livestock or livestock products (including serums), for livestock increase, or for value increase. Livestock, as specified in Major Group 02, includes cattle, hogs, sheep, goats, and poultry of all kinds; also included are animal specialties, such as horses, rabbits, bees, pets, fish in captivity, and fur-bearing animals in captivity. Major Group 07 includes establishments engaged in performing soil preparation services, crop services, veterinary services, animal services, landscape and horticultural services, and farm labor and management services. Producing and harvesting agricultural products involves the cultivation of land or the growing, raising, or gathering of the commodities described in Codes 0111 to 0291 of the SIC Manual and integral activities thereto described in Codes 0711 to 0783 of the SIC Manual. Such activities include, but are not limited to, flame weeding, pest control, nut hulling and shelling, crop drying, cotton ginning, poultry and pig brooding, livestock breeding, water heating, crop heating, and fruit ripening. Producing and harvesting agricultural products also includes the washing of agricultural products, the inspection and grading of agricultural products or livestock, or the packaging of agricultural products for shipment. Except as otherwise provided under Major Groups 01, 02 or 07 of the SIC Manual, producing and harvesting activities do not include post harvesting activities nor those activities described or otherwise designated in Major Group 20 - Food and Kindred Products of the SIC Manual. Nevertheless, the specific activities of sun drying or artificially dehydrating fruits and vegetables as described in Code 2034 of the SIC Manual qualify as producing and harvesting activities where those activities are performed by a qualified person as defined in (b)(5) or a person who assists a qualified person as defined in (b)(3). 
Example A: Grower A farms raisins and uses qualified LPG to dry Grower A's raisins. Grower A is a qualified person (Code 0172 of the SIC Manual) and uses qualified LPG in the producing and harvesting of an agricultural commodity. The sale of qualified LPG to Grower A for use in this activity is exempt from tax. 
Example B: Grower B farms plums and contracts with ABC, Inc. to dry the plums owned by Grower B in preparation for sale. ABC, Inc. uses qualified LPG to dry the plums. ABC, Inc. is a person assisting a qualified person (Code 0723 of the SIC Manual) such that the sale of qualified LPG to ABC for use in this activity is exempt from tax. 
Example C: Grower C farms corn. Grower C sells the “wet” corn to a food processor based on the net dry weight of the product. The food processor uses qualified LPG to dry the corn. The food processor's use of qualified LPG to dry the commodity is not a qualified use since the food processor owns the commodity and thereby only performs a non-qualified, post harvesting activity. The sale of qualified LPG to the food processor for use in this activity is not exempt from tax. 
(5) “Qualified person” means a person who purchases qualified LPG that is engaged in a line of business described in Codes 0111 to 0291 of the SIC Manual or performs activities described in Codes 0711 to 0783 in addition to being engaged in a line of business described in Codes 0111 to 0291, which includes cash grains, field crops, vegetables and melons, fruits and tree nuts, horticultural specialties, livestock, dairy, poultry and eggs, and animal specialties and who sells such commodities to others. A qualified person also includes any person conducting activities, as defined in subdivision (b)(3), that uses qualified LPG to assist a person engaged in a line of business described herein in producing and harvesting agricultural products owned by the qualified person. A qualified person is not required to be engaged 50 percent or more of the time in a line of business described in Codes 0111 to 0291. A qualified person does not include a person operating a garden plot, orchard, or farm for the purpose of growing produce or animals for that person's own use. 
(6) “Qualified LPG” means liquefied petroleum gas delivered into a tank with a storage capacity that is equal to or greater than 30 gallons. Liquefied petroleum gas is a mixture of light hydrocarbons which are gaseous at atmospheric temperature and pressure. Liquefied petroleum gas occurs naturally in crude oil and natural gas production fields and is also produced in the oil refining process. Its main components are Propane (C3H8) at a boiling point of -42.07oC and Butane (C4H10) at a boiling point of 0oC. Delivery into tanks smaller than 30 gallons do not qualify for the exemption even if the total delivery exceeds 30 gallons. 
(7) “Qualified residence” means a primary residence not serviced by gas mains and pipes, to which qualified LPG is delivered by a seller. A primary residence means a person's domicile where that person spends the greatest portion of his or her time during a calendar year. A person may change his or her primary residence only when that person moves from and otherwise abandons his or her previous residence and has no intent to return to that previous residence. In no event shall a primary residence include multiple residences maintained simultaneously such as a second, or vacation home. 
Solely for purposes of this regulation, a qualified residence also includes a residence where qualified LPG is purchased by a qualified person for use in a household activity at the primary residence of: 
(A) A person that assists a qualified person; or 
(B) An employee of a qualified person 

where such person that assists a qualified person or employee of a qualified person performs an agricultural service described in Codes 0711 to 0783 of the SIC Manual for the qualified person. In addition, solely for purposes of this regulation, a qualified residence includes a residence where qualified LPG is purchased by a landlord or management company on behalf of a renter or tenant for use in a household activity at the primary residence of the renter or tenant. 
(c) Exemption Certificates. 
(1) In General. A person who purchases qualified LPG for use in an agricultural or household activity from an in-state retailer, or an out-of state retailer obligated to collect use tax, must provide the retailer with an exemption certificate in order for the retailer to claim the exemption. If the retailer takes an exemption certificate timely and in good faith, as defined in subdivision (c)(5), from a purchaser, the exemption certificate relieves the retailer from the liability for the sales tax subject to exemption under this regulation or the duty of collecting the use tax subject to exemption under this regulation. An exemption certificate will be considered timely if it is taken any time before the retailer bills the purchaser for the qualified LPG, any time within the retailer's normal billing or payment cycle, any time at or prior to delivery of the qualified LPG to the purchaser, or no later than 15 days after the date of purchase. An exemption certificate which is not taken timely will not relieve the retailer of the tax liability; however the retailer may present satisfactory evidence to the Board that the retailer sold the qualified LPG to a purchaser for use in an agricultural or household activity. An exemption from the sales and use tax under this part shall not be allowed unless the retailer claims the exemption on its sales and use tax return for the reporting period during which the transaction subject to the exemption occurred. Where the retailer fails to claim the exemption as set forth above, the retailer may file a claim for refund as set forth in subdivision (e). 
The exemption certificate form set forth in Appendix A may be used to claim the exemption. 
(2) Blanket Exemption Certificates. In lieu of requiring an exemption certificate for each transaction, a person who purchases qualified LPG for use in an agricultural or household activity may issue a blanket exemption certificate. The exemption certificate form set forth in Appendix A may be used as a blanket exemption certificate. Appendix A may also be used as a specific exemption certificate if the purchaser provides the purchase order or sales invoice number and a precise description of the property being purchased. A person who purchases qualified LPG for use in an agricultural or household activity must include in the exemption certificate how much or what percentage of the qualified LPG will be used in the agricultural or household activity. If purchasing liquefied petroleum gas not qualifying for the exemption, the purchaser must clearly state in documents such as a written purchase order, sales agreement, lease, or contract that the sale or purchase is not subject to the blanket exemption certificate. 
(3) Form of Exemption Certificate. Any document, such as a letter or purchase order, timely provided by the purchaser to the seller will be regarded as an exemption certificate with respect to the sale or purchase of the liquefied petroleum gas if it contains all of the following essential elements: 
(A) The signature of the purchaser, purchaser's employee, or authorized representative of the purchaser. 
(B) The name, address and telephone number of the purchaser. 
(C) The number of the seller's permit held by the purchaser. Except as otherwise provided in subdivision (b)(7), if the purchaser is not required to hold a permit because the purchaser sells only property of a kind the retail sale of which is not taxable, e.g., food products for human consumption, or because the purchaser makes no sales in this state, the purchaser must include on the certificate a sufficient explanation as to the reason the purchaser is not required to hold a California seller's permit in lieu of a seller's permit number. 
(D) A statement that: 
1. Of the liquefied petroleum gas purchased, how much or what percentage will be delivered by the seller into a tank with a storage capacity equal to or greater than 30 gallons for use in a household activity at the primary residence, which is not serviced by gas mains and pipes, of: 
a. The purchaser; 
b. A person described in Codes 0711 to 0783 of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, that assists a person engaged in an agricultural business described in Codes 0111 to 0291 of the SIC Manual (“qualified person”) or an employee of a qualified person where the LPG is purchased by such qualified person on behalf of the person that assists that qualified person in producing and harvesting agricultural products or on behalf of the employee that assists a qualified person in producing and harvesting agricultural products; or 
c. A renter or tenant where the LPG is purchased by a landlord or management company on behalf of the renter or tenant. 
2. Of the liquefied petroleum gas purchased, how much or what percentage will be delivered into a tank with a storage capacity equal to or greater than 30 gallons for use in producing and harvesting agricultural products, and will be purchased by: 
a. A person engaged in an agricultural business described in Codes 0111 to 0291 of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, (“qualified person”); 
b. A person described in Codes 0711 to 0783 of the SIC Manual, that assists a qualified person; or 
c. An employee of a qualified person. 
(E) Date of execution of document. 
(4) Retention and Availability of Exemption Certificates. A retailer must retain each exemption certificate received from a qualified person for a period of not less than four years from the date on which the retailer claims an exemption based on the exemption certificate. 
While the Board will not normally require the filing of the exemption certificate with a sales and use tax return, when necessary for the efficient administration of the Sales and Use Tax Law, the Board may on 30 days' written notice, require a retailer to commence filing with its sales and use tax returns copies of all exemption certificates. The Board may also require, within 45 days of the Board's request, retailers provide the Board access to any and all exemption certificates, or copies thereof, accepted for the purposes of supporting the exemption. 
(5) Good Faith. A seller will be presumed to have taken an exemption certificate in good faith in the absence of evidence to the contrary. A seller, without knowledge to the contrary, may accept an exemption certificate in good faith where the purchaser states that the qualified LPG will be used in a qualified residence for a household activity or in which a qualified person states that the qualified LPG will be used for an agricultural activity. However, an exemption certificate cannot be accepted in good faith where the seller has knowledge that the LPG is not subject to an exemption, will not be otherwise used in an exempt manner, or where a person is not a qualified person when purchasing qualified LPG for an agricultural activity. 
(d) Exemption Certificate for Use Tax. The exemption certificate must be completed by a purchaser to claim an exemption from use tax on purchases of qualified LPG for use in an agricultural or household activity from an out-of-state retailer not obligated to collect the use tax. An exemption from the use tax shall not be allowed unless the purchaser or retailer claims the exemption on its individual use tax return, sales and use tax return, or consumer use tax return for the reporting period during which the transaction subject to the exemption occurred. Where the purchaser or retailer fails to claim the exemption as set forth above, the purchaser or retailer may file a claim for refund as set forth in subdivision (e). 
The purchaser who files an individual use tax return must attach a completed exemption certificate to the return. The purchaser who is registered with the Board as a retailer or consumer and files a sales and use tax return or consumer use tax return must, within 45 days of the Board's request, provide the Board access to any and all documents that support the claimed exemption. 
The exemption certificate form set forth in Appendix A may be used to claim the exemption. 
(e) Refund of Tax. 
(1) For the period commencing on September 1, 2001, and ending on April 30, 2002, a purchaser may claim the exemption on qualified purchases from an in-state retailer or an out-of-state retailer obligated to collect the use tax by furnishing the retailer with an exemption certificate on or before July 31, 2002. The retailer must refund the tax or tax reimbursement directly to a qualified purchaser of qualified LPG or, at the purchaser's sole option, the purchaser may be credited with such amount. 
(2) A retailer who paid sales tax on a qualified sale or a person who paid use tax on a qualified purchase and who failed to claim the exemption as provided by this regulation may file a claim for refund equal to the amount of the exemption that he or she could have claimed pursuant to this regulation. The procedure for filing a claim shall be the same as for other claims for refund filed pursuant to Revenue and Taxation Code section 6901. For transactions subject to use tax, a purchaser filing a claim for refund of the exemption has the burden of establishing that he or she was entitled to claim the exemption with respect to the amount of refund claimed under this part. For transactions subject to sales tax, a person filing a claim for refund of the exemption has the burden of establishing that the purchaser of qualified LPG for use in an agricultural or household activity otherwise met all the requirements of a qualified sale at the time of the purchase subject to the refund claimed under this part. 
(f) Improper Use of Exemption. 
(1) Property Used or Delivered in a Manner Not Qualifying for the Exemption. Tax applies to any sale of, and the storage, use, or other consumption in this state of liquefied petroleum gas that is used or delivered in a manner not qualifying for the exemption under this regulation. 
(2) Purchases by Non-Qualified Persons. Tax applies to any sale of, and the storage, use, or other consumption in this state of qualified LPG for use in an agricultural activity if the purchaser is not a qualified person. 
(g) Purchaser's Liability for the Payment of Sales Tax. 
(1) If a purchaser timely submits a copy of an exemption certificate to the retailer or exemption certificate for use tax to the Board, and then uses or takes delivery of the liquefied petroleum gas in a manner not qualifying for the exemption, the purchaser shall be liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the liquefied petroleum gas at the time the liquefied petroleum gas was so removed, converted, or used. 
(2) A purchaser providing an exemption certificate accepted in good faith by the retailer or an exemption certificate for use tax to the Board for liquefied petroleum gas that does not qualify for the exemption is liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the liquefied petroleum gas at the time the liquefied petroleum gas was purchased. 
(h) Records. Adequate and complete records must be maintained by the purchaser as evidence that the qualified LPG purchased was used in an agricultural or household activity. 
(i) Effective Date. This regulation is effective as of September 1, 2001. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6353, Revenue and Taxation Code.
HISTORY

1. New section filed 6-7-2002; operative 9-1-2001 (Register 2002, No. 23).

Appendix A
EXEMPTION CERTIFICATE STATE BOARD OF EQUALIZATION
Qualified Sales and Purchases of Liquefied Petroleum Gas (LPG) 

View Graphic
§1533.1. Farm Equipment and Machinery.
Note     •     History

(a) General. Commencing on and after September 1, 2001, Section 6356.5 of the Revenue and Taxation Code partially exempts from sales and use tax the sale of, and the storage, use, or other consumption in this state, of farm equipment and machinery, and parts of farm equipment and machinery purchased for use by a qualified person to be used primarily in producing and harvesting agricultural products. The terms “farm equipment and machinery,” “parts of farm equipment and machinery,” “qualified person,” and “producing and harvesting agricultural products” are defined below. 
For the period commencing on September 1, 2001, and ending on December 31, 2001, the partial exemption applies to the taxes imposed by Sections 6051 and 6201 of the Revenue and Taxation Code (4.75%), but does not apply to the taxes imposed pursuant to Sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or Section 35 of article XIII of the California Constitution. 
For the period commencing on January 1, 2002, and ending on June 30, 2004, the partial exemption applies to the taxes imposed by Sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to Sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or Section 35 of article XIII of the California Constitution. 
For the period commencing on July 1, 2004, and ending on March 31, 2009, the partial exemption applies to the taxes imposed by Sections 6051, 6051.3, 6051.5, 6201, 6201.3, and 6201.5 of the Revenue and Taxation Code (5.25%), but does not apply to the taxes imposed or administered pursuant to Sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or Section 35 of article XIII of the California Constitution.
For the period commencing on April 1, 2009, and ending on June 30, 2011, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6051.7, 6201, 6201.3, 6201.5, and 6201.7 of the Revenue and Taxation Code (6.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. 
For the period commencing on July 1, 2011, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6201, 6201.3, and 6201.5 of the Revenue and Taxation Code (5.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. 
(b) Definitions. For purposes of this regulation: 
(1) “Farm equipment and machinery” means implements of husbandry, which include: 
(A) Any new or used tool, machine, equipment, appliance, device or apparatus used in the conduct of agricultural operations, except where such items are intended for sale in the ordinary course of business. Such items include, but are not limited to, combines, harrows, tractor implements, agricultural heating and cooling equipment, fuel storage equipment, wind machines, handling and packing equipment and conveyors, ginning equipment, feeding, watering and waste disposal systems for livestock, incubators and equipment used for egg and poultry production, harvesting trays and bins, farm tools such as rakes and hoes, plant support equipment such as trellis systems, irrigation systems, fencing systems, milking systems, agricultural operating structures, squeeze chutes, portable panels, corrals, loading chutes, veterinary instruments, free stalls, cages and tack items such as saddles and rope. Farm equipment and machinery also includes any equipment or device used or required to operate, control, or regulate machinery not limited to computers, data processing equipment, and computer software, including both operating programs and application programs. Farm equipment and machinery may be attached to realty. 
Agricultural operating structures include single purpose agricultural or horticultural structures as defined in Treasury Regulation 1.48-10 (26 CFR 1.48-10). Such structures must be specifically designed and constructed for the permitted purposes of housing, raising and feeding of livestock or the commercial production of plants. A structure is specifically designed and constructed if it is not economic to design and construct the structure for the intended qualifying purpose and then use the structure for a different purpose. A structure qualifies as single purpose agricultural or horticultural structure only if it is used exclusively for a permitted purpose. The structure may not be used for any nonpermissible purposes such as processing, marketing, or more than incidental use for storing feed and equipment. A single purpose agricultural structure also houses equipment necessary to house, raise and feed livestock including, but not limited to, equipment necessary to contain livestock, to provide them with feed or water, and to control the temperature, lighting, and humidity of the interior structure. Examples of structures that qualify as a single purpose agricultural or horticultural structure include, but are not limited to, a farrowing barn, greenhouse, free stall barn, milking parlor, and egg production or poultry brooding facility. Single purpose agricultural or horticultural structures do not include general purpose farm buildings. 
Farm equipment and machinery does not include tangible personal property primarily used in the administration, management, or marketing of a qualified person's operations or that of another who assists a qualified person. Farm equipment and machinery also does not include tangible personal property that is, without limitation, a supply item not used in producing or harvesting agricultural products such as shop towels, cleaning agents, hand cleaners, chemicals, and articles of clothing, except clothing designed primarily to protect a commodity or to apply agricultural chemicals as described in 3 CCR 6738. 
(B) Any new or used vehicle, as defined in Chapter 1, Division 16 of the Vehicle Code, which is used exclusively in the conduct of agricultural operations such as a farm tractor, but not including a vehicle whose existing design is primarily for the transportation of persons or property on a highway, unless such vehicle is otherwise specified as an implement of husbandry in some other provision of the Vehicle Code. 
A list of typical vehicles regarded as farm equipment and machinery is set forth in Appendix A. 
(2) “Parts of farm equipment and machinery” means: 
(A) All component parts and contrivances such as belts, shafts, pipes, hoses and moving parts, that are parts of farm equipment and machinery as defined in subdivision (b)(1) which can be separated from the farm equipment and machinery and replaced. Parts of farm equipment and machinery do not include items that are consumed (e.g., burned, evaporate, dissolve, dissipate) through the regular use of the farm equipment and machinery (e.g., gasoline, cleaning agents, solutions, chemicals) which are ordinarily supplies; however, engine oil not consumed (i.e., not consumed as part of fuel for a two-stroke engine) is regarded as a component part. 
(B) All repair and replacement parts for farm equipment and machinery as defined in subdivision (b)(1), which replace previous parts and can include parts that are identical to the parts they replace as well as parts that are different from the ones they replace, such as replacement parts added for the purpose of improving or modifying the farm equipment and machinery, whether purchased separately or in conjunction with a complete machine and regardless of whether the machine or component parts are assembled by a qualified person, a person that assists a qualified person, or another person. 
(3) “Person that assists a qualified person” means a person employed by a qualified person, or engaged on a contract or fee basis to perform activities described in Major Group 07 of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition (hereafter SIC Manual) which include soil preparation services, crop services, veterinary services, animal services, landscape and horticultural services, and farm labor and management services, that uses farm equipment and machinery in assisting a person engaged in a line of business described in subdivision (b)(6) below. A person that assists a qualified person may perform a construction contract only if the person performing the contract is engaged in farm management services as described in Code 0762 of the SIC Manual and the construction is integral to the producing and harvesting of an agricultural product as defined in (b)(5). A person that assists a qualified person must provide physical aid or assistance in the actual producing and harvesting of agricultural products owned by the qualified person and not merely provide aid in administrative, managerial, or marketing activities. A person that assists a qualified person does not include persons performing services such as an attorney, accountant, consultant, or other similar activity. Except as otherwise provided above, a person that assists a qualified person also does not include persons who perform construction contracts or who perform repairs to farm equipment and machinery, or a person that assists such persons. 
(4) “Primarily” means used 50 percent or more of the time in producing and harvesting agricultural products as defined in subdivision (b)(5). 
(5) “Producing and harvesting agricultural products” means those activities described in Major Groups 01, 02 and 07 of the SIC Manual. Major Group 01 includes establishments engaged in the production of crops, plants, vines, and trees (excluding forestry operations). This major group also includes establishments engaged in the operation of sod farms; in the production of mushrooms, bulbs, flower seeds, and vegetable seeds; and in the growing of hydroponic crops. Major Group 02 includes establishments engaged in the keeping, grazing, or feeding of livestock for the sale of livestock or livestock products (including serums), for livestock increase, or for value increase. Livestock, as specified in Major Group 02, includes cattle, hogs, sheep, goats, and poultry of all kinds; also included are animal specialties, such as horses, rabbits, bees, pets, fish in captivity, and fur-bearing animals in captivity. Major Group 07 includes establishments engaged in performing soil preparation services, crop services, veterinary services, animal services, landscape and horticultural services, and farm labor and management services. Producing and harvesting agricultural products involves the cultivation of land or the growing, raising, or gathering of the commodities described in Codes 0111 to 0291 of the SIC Manual and integral activities thereto described in Code 0711 to 0783 of the SIC Manual. Such activities include, but are not limited to, flame weeding, pest control, nut hulling and shelling, crop drying, cotton ginning, poultry and pig brooding, livestock breeding, water heating, crop heating, and fruit ripening. Producing and harvesting agricultural products also includes the washing of agricultural products, the inspection and grading of agricultural products or livestock, or the packaging of agricultural products for shipment. Except as otherwise provided under Major Groups 01, 02 or 07 of the SIC Manual, producing and harvesting activities do not include post harvesting activities nor those activities described or otherwise designated in Major Group 20 -- Food and Kindred Products of the SIC Manual. Nevertheless, the specific activities of sun drying or artificially dehydrating fruits and vegetables as described in Code 2034 of the SIC Manual qualify as producing and harvesting activities where those activities are performed by a qualified person as defined in (b)(6) or a person who assists a qualified person as defined in (b)(3). 
For example, a person engaged in a SIC Code 0172 establishment that performs activities such as producing grapes on a grape farm or vineyard, who uses crop drying equipment primarily to remove moisture from the grapes to prevent mold, will qualify for the partial exemption if the grapes are owned by a qualified person engaged in an establishment described in SIC Code 0111 to 0291. However, a person who is exclusively engaged in a SIC Code 2034 establishment that sun dries or artificially dehydrates fruits and vegetables such as dates, prunes or raisins, that purchases grapes from a grape farm, and uses crop drying equipment primarily to change the character of the commodity from a grape to a raisin, will not qualify for the partial exemption since he or she is not engaged in a qualified SIC Code activity. A person engaged in a qualified SIC Code that performs a harvest activity will qualify for the partial exemption to the extent the qualified property is used primarily in such qualified activity despite the fact that the property may otherwise be used less than 50% of the time in post-harvest activities by a person undertaking activities described in SIC Code 2034. 
(6) “Qualified person” means a person engaged in a line of business described in Codes 0111 to 0291 of the SIC Manual or performs activities described in Codes 0711 to 0783 in addition to being engaged in a line of business described in Codes 0111 to 0291, which includes cash grains, field crops, vegetables and melons, fruits and tree nuts, horticultural specialties, livestock, dairy, poultry and eggs, and animal specialties and who sells such commodities to others. A qualified person also includes any person conducting activities, as defined in (b)(3) above, that uses qualified property to assist a person engaged in a line of business described herein in producing and harvesting agricultural products owned by the qualified person. A qualified person is not required to be engaged 50 percent or more of the time in a line of business described in Codes 0111 to 0291. A qualified person does not include a person operating a garden plot, orchard, or farm for the purpose of growing produce or animals for that person's own use. 
(7) “Qualified property” means farm equipment and machinery, and the parts thereof, as defined in subdivision (b)(1)-(2) used primarily in producing and harvesting agricultural products. 
(c) Partial Exemption Certificates. 
(1) In General. Qualified persons who purchase or lease qualified property from an in-state retailer, or an out-of state retailer obligated to collect use tax, must provide the retailer with a partial exemption certificate in order for the retailer to claim the partial exemption. If the retailer takes a partial exemption certificate timely and in good faith, as defined in subdivision (c)(5), from a qualified person, the partial exemption certificate relieves the retailer from the liability for the sales tax subject to exemption under this regulation or the duty of collecting the use tax subject to exemption under this regulation. A partial exemption certificate will be considered timely if it is taken any time before the retailer bills the purchaser for the qualified property, any time within the retailer's normal billing or payment cycle, any time at or prior to delivery of the qualified property to the purchaser, or no later than 15 days after the date of purchase. A partial exemption certificate which is not taken timely will not relieve the retailer of the liability for tax excluded by the partial exemption; however the retailer may present satisfactory evidence to the Board that the retailer sold the specific property to a qualified person and the property was primarily used in a qualifying manner. A partial exemption from the sales and use tax under this part shall not be allowed unless the retailer claims the partial exemption on its sales and use tax return for the reporting period during which the transaction subject to the partial exemption occurred. Where the retailer fails to claim the partial exemption as set forth above, the retailer may file a claim for refund as set forth in subdivision (e). 
The partial exemption certificate form set forth in Appendix B may be used to claim the partial exemption. 
(2) Blanket Partial Exemption Certificates. In lieu of requiring a partial exemption certificate for each transaction, a qualified person may issue a blanket partial exemption certificate. The partial exemption certificate form set forth in Appendix B may be used as a blanket partial exemption certificate. Appendix B may also be used as a specific partial exemption certificate if the purchaser provides the purchase order or sales invoice number and a precise description of the property being purchased. Qualified persons must include in the partial exemption certificate a description of the qualified property. If purchasing tangible personal property not qualifying for the partial exemption, the qualified person must clearly state in documents such as a written purchase order, sales agreement, lease, or contract that the sale or purchase is not subject to the blanket partial exemption certificate. 
(3) Form of Partial Exemption Certificate. Any document, such as a letter or purchase order, timely provided by the purchaser to the seller will be regarded as a partial exemption certificate with respect to the sale or purchase of the property described in the document if it contains all of the following essential elements: 
(A) The signature of the purchaser, purchaser's employee, or authorized representative of the purchaser. 
(B) The name, address and telephone number of the purchaser. 
(C) The number of the seller's permit held by the purchaser. If the purchaser is not required to hold a permit because the purchaser sells only property of a kind the retail sale of which is not taxable, e.g., food products for human consumption, or because the purchaser makes no sales in this state, the purchaser must include on the certificate a sufficient explanation as to the reason the purchaser is not required to hold a California seller's permit in lieu of a seller's permit number. 
(D) A statement that the property purchased is to be used primarily, or exclusively as to qualifying vehicles, in producing and harvesting agricultural products. 
(E) A statement that the purchaser is a person engaged in an agricultural business described in Codes 0111 to 0291 of the SIC Manual or is a person that assists such classified person by performing an agricultural service described in Codes 0711 to 0783 of the SIC Manual. 
(F) Description of property purchased. 
(G) Date of execution of document. 
(4) Retention and Availability of Partial Exemption Certificates. A retailer must retain each partial exemption certificate received from a qualified person for a period of not less than four years from the date on which the retailer claims a partial exemption based on the partial exemption certificate. 
While the Board will not normally require the filing of the partial exemption certificate with a sales and use tax return, when necessary for the efficient administration of the Sales and Use Tax Law, the Board may on 30 days' written notice, require a retailer to commence filing with its sales and use tax returns copies of all partial exemption certificates. The Board may also require, within 45 days of the Board's request, retailers provide the Board access to any and all partial exemption certificates, or copies thereof, accepted for the purposes of supporting the partial exemption. 
(5) Good Faith. A seller will be presumed to have taken a partial exemption certificate in good faith in the absence of evidence to the contrary. A seller, without knowledge to the contrary, may accept a partial exemption certificate in good faith where a qualified person states that he or she is engaged in an agricultural business described in Codes 0111 to 0291 of the SIC Manual or in which a person that assists a qualified person states that he or she performs an agricultural service described in Codes 0711 to 0783 of the SIC Manual and states that the property purchased is to be used primarily, or exclusively as to qualifying vehicles, in producing and harvesting agricultural products. If the qualified person or person that assists a qualified person is buying property of a kind not normally used in producing and harvesting agricultural products, the seller should require a statement as to how the specific property purchased will be used. However, an exemption certificate cannot be accepted in good faith where the seller has knowledge that the property is not subject to a partial exemption, or will not be otherwise used in a partially exempt manner. 
(d) Partial Exemption Certificate for Use Tax. The partial exemption certificate must be completed by a qualified person to claim a partial exemption from use tax on purchases of qualified property from an out-of-state retailer not obligated to collect the use tax. A partial exemption from the use tax shall not be allowed unless the purchaser or retailer claims the partial exemption on its individual use tax return, sales and use tax return, or consumer use tax return for the reporting period during which the transaction subject to the partial exemption occurred. Where the purchaser or retailer fails to claim the partial exemption as set forth above, the purchaser or retailer may file a claim for refund as set forth in subdivision (e). 
The purchaser who files an individual use tax return must attach a completed partial exemption certificate to the return. The purchaser who is registered with the Board as a retailer or consumer and files a sales and use tax return or consumer use tax return must, within 45 days of the Board's request, provide the Board access to any and all documents that support the claimed partial exemption. 
The partial exemption certificate form set forth in Appendix B may be used to claim the partial exemption. 
(e) Refund of Partial Exemption. 
(1) For the period commencing on September 1, 2001, and ending on April 30, 2002, a qualified person may claim the partial exemption on qualified purchases from an in-state retailer or an out-of-state retailer obligated to collect the use tax by furnishing the retailer with a partial exemption certificate on or before July 31, 2002. The retailer must refund the tax or tax reimbursement directly to a qualified purchaser of qualified property or, at the purchaser's sole option, the purchaser may be credited with such amount. 
(2) A retailer who paid sales tax on a qualified sale or a person who paid use tax on a qualified purchase and who failed to claim the partial exemption as provided by this regulation may file a claim for refund equal to the amount of the partial exemption that he or she could have claimed pursuant to this regulation. The procedure for filing a claim shall be the same as for other claims for refund filed pursuant to Revenue and Taxation Code section 6901. For transactions subject to use tax, a qualified person filing a claim for refund of the partial exemption has the burden of establishing that he or she was entitled to claim the partial exemption with respect to the amount of refund claimed under this part. For transactions subject to sales tax, a person filing a claim for refund of the partial exemption has the burden of establishing that the purchaser of the qualified property otherwise met all the requirements of a qualified person at the time of the purchase subject to the refund claimed under this part. 
(f) Improper Use of Partial Exemption. 
(1) Property Used in a Manner Not Qualifying for the Partial Exemption. Notwithstanding subdivision (a), tax applies to any sale of, and the storage, use, or other consumption in this state of tangible personal property that is used in a manner not qualifying for the partial exemption under this regulation. 
(2) Purchases by Non-Qualified Persons. Notwithstanding subdivision (a), tax applies to any sale of, and the storage, use, or other consumption in this state of tangible personal property if a purchaser is not a qualified person. 
(g) Purchaser's Liability for the Payment of Sales Tax. 
(1) If a purchaser timely submits a copy of a partial exemption certificate to the retailer or partial exemption certificate for use tax to the Board, and then uses that tangible personal property in a manner not qualifying for the partial exemption, the purchaser shall be liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the property at the time the property was so removed, converted, or used. 
(2) A purchaser providing a partial exemption certificate accepted in good faith by the retailer or a partial exemption certificate for use tax to the Board for tangible personal property that does not qualify for the partial exemption is liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the property at the time the property was purchased. 
(h) Leases to Qualifying Persons. 
(1) Leases--In General. Leases of tangible personal property which are classified as “continuing sales” and “continuing purchases” of tangible personal property, in accordance with Regulation 1660, “Leases of Tangible Personal Property -- In General,” may qualify for the partial exemption subject to all the limitations and conditions set forth in this regulation. This partial exemption may apply to rentals payable paid by a qualified person on or after September 1, 2001 with respect to a lease of qualified property to the qualified person, which qualified property is used in producing and harvesting agricultural products, notwithstanding the fact that the lease was entered into prior to the effective date of this regulation. For purposes of this subdivision, a non-qualified person may purchase property for resale and subsequently lease the property to a qualified person subject to the partial exemption. 
(2) Leases--Acquisition Sale and Leaseback. A qualified person will be regarded as having paid sales tax reimbursement or use tax with respect to that qualified person's purchase of property, within the meaning of those words as they are used in section 6010.65 of the Revenue and Taxation Code, if the qualified person has paid all applicable taxes with respect to the acquisition of the property, notwithstanding the fact that the sale and purchase of the property may have been subject to the partial exemption from tax provided by this regulation. 
(3) Subsequent Lease of Property Acquired Subject to Partial Exemption. If a qualified person has acquired property subject to the partial exemption provided by this regulation and has paid all applicable taxes at that acquisition, the property will be regarded as property as to which sales tax reimbursement or use tax has been paid, and the subsequent lease of that property will not be subject to tax measured by rentals payable. 
(i) Records. Adequate and complete records must be maintained by the qualified person as evidence that the qualified property purchased was used by the qualified person primarily in producing and harvesting agricultural products. 
(j) Operative Date. This regulation is operative as of September 1, 2001. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6356.5, Revenue and Taxation Code.
HISTORY

1. New section and Appendix A and B filed 6-7-2002; operative 7-7-2002 (Register 2002, No. 23).
2. Change without regulatory effect amending subsections (a) and (j) filed 8-19-2004 pursuant to section 100, title 1, California Code of Regulations (Register 2004, No. 34).
3. Change without regulatory effect amending subsection (a) filed 6-4-2009 pursuant to section 100, title 1, California Code of Regulations (Register 2009, No. 23).
4. Change without regulatory effect amending subsection (b)(5) filed 1-10-2011 pursuant to section 100, title 1, California Code of Regulations (Register 2011, No. 2).
5. Change without regulatory effect amending subsection (a) filed 1-9-2012 pursuant to section 100, title 1, California Code of Regulations (Register 2012, No. 2).

Appendix A
The following is a list of typical vehicles regarded as farm equipment and machinery: 
1. A lift carrier or other vehicle designed and used exclusively for the lifting and carrying of implements of husbandry or tools used exclusively for the production or harvesting of agricultural products, when operated or moved upon a highway. 
2. A trailer of the tip-bed type when used exclusively in the transportation of other implements of husbandry or tools used exclusively for the production or harvesting of agricultural products. 
3. A trailer or semi-trailer having no bed, and designed and used solely for transporting a hay loader or swather. 
4. A spray or fertilizer applicator rig used exclusively for spraying or fertilizing in the conduct of agricultural operations, except anhydrous ammonia fertilizer applicator rigs which have a transportation capacity in excess of 500 gallons. 
5. A trailer or semi-trailer which has a maximum transportation capacity in excess of 500 gallons, but not more than 1,000 gallons, used exclusively for the transportation and application of anhydrous ammonia, if the vehicle is either equipped with operating brakes or is towed upon a highway by a motor truck that is assigned a manufacturer's gross vehicle weight rating of 3/4 ton or more. 
6. A nurse rig or equipment auxiliary to the use of and designed or modified for the fueling, repairing, or loading of an applicator rig or an airplane used for the dusting, spraying, fertilizing, or seeding of crops. 
7. A row duster. 
8. A wagon or van used exclusively for carrying products of farming from one part of a farm to another part thereof, or from one farm to another farm, and used solely for agricultural purposes, including any van used in harvesting alfalfa or cotton, which is only incidentally operated or moved on a highway as a trailer. 
9. A wagon or portable house on wheels used solely by shepherds as a permanent residence in connection with sheep raising operations and moved from one part of a ranch to another part thereof or from one ranch to another ranch, which is only incidentally operated or moved on a highway as a trailer. 
10. A trap wagon, as defined in Vehicle Code Section 36016, moved from one part of a ranch to another part of the same ranch or from one ranch to another, which is only operated or moved on a highway incidental to agricultural operations. The fuel tank or tanks of the trap wagon shall not exceed 1,000 gallons total capacity. 
11. Any vehicle which is operated upon a highway only for the purpose of transporting agricultural products and is in no event operated along a highway for a total distance greater than one mile from the point of origin of the trip. 
12. A portable honey-extracting trailer or semi-trailer. 
13. A fertilizer nurse tank or trailer that is not self-propelled and which is moved unladen on the highway and auxiliary to the use of a spray or fertilizer applicator rig. 
14. Any cotton trailer when used on the highways for the exclusive purpose of transporting cotton from a farm to a cotton gin, and returning the empty trailer to such farm. 
15. A truck tractor or truck tractor and semi-trailer combination which is owned by a farmer and operated on the highways, (1) only incidental to a farming operation, (2) not for compensation, and (3) for a distance of not more than two miles (on the highway) each way. This subdivision applies only to truck tractors with a manufacturer's gross vehicle weight rating over 10,000 pounds that are equipped with all-wheel drive and off-highway traction tires on all wheels, and only to semi-trailers used in combination with such a truck tractor and exclusively in production or harvesting of tomatoes. The vehicles specified in this subdivision shall not be operated in excess of 25 miles per hour on the highways. 
16. Any farm tractor used upon a highway to draw a farm trailer carrying farm produce, or to draw any trailer or semi-trailer carrying other implements of husbandry, between farms, or from a farm to a processing or handling point and returning with or without the trailer. 

Appendix B
PARTIAL EXEMPTION CERTIFICATE STATE BOARD OF EQUALIZATION

Qualified Sales and Purchases of Farm Equipment and Machinery 

View Graphic
§1533.2. Diesel Fuel Used in Farming Activities or Food Processing.
Note     •     History

(a) General. Commencing on and after September 1, 2001, Section 6357.1 of the Revenue and Taxation Code partially exempts from sales and use tax the sale of, and the storage, use, or other consumption in this state, of diesel fuel used in farming activities or food processing. The terms “farming activities” and “food processing” are defined below. 
For the period commencing on September 1, 2001, and ending on December 31, 2001, the partial exemption applies to the taxes imposed by Sections 6051 and 6201 of the Revenue and Taxation Code (4.75%), but does not apply to the taxes imposed pursuant to Sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or Section 35 of article XIII of the California Constitution. 
For the period commencing on January 1, 2002, and ending on June 30, 2004, the partial exemption applies to the taxes imposed by Sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to Sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or Section 35 of article XIII of the California Constitution. 
For the period commencing on July 1, 2004, and ending on March 31, 2009, the partial exemption applies to the taxes imposed by Sections 6051, 6051.3, 6051.5, 6201, 6201.3, and 6201.5 of the Revenue and Taxation Code (5.25%), but does not apply to the taxes imposed or administered pursuant to Sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or Section 35 of article XIII of the California Constitution.
For the period commencing on April 1, 2009, and ending on June 30, 2011, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6051.7, 6201, 6201.3, 6201.5, and 6201.7 of the Revenue and Taxation Code (6.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. 
For the period commencing on July 1, 2011, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6051.8, 6201, 6201.3, 6201.5, and 6201.8 of the Revenue and Taxation Code, but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. Given the varying rates of the taxes imposed by sections 6051.8 and 6201.8, the partial exemption applies to the following cumulative sales and use tax rates: 
(1) 7.12 percent for the period July 1, 2011, through June 30, 2012;
(2) 7.42 percent for the period July 1, 2012, through June 30, 2013;
(3) 7.19 percent for the period July 1, 2013, through June 30, 2014; and
(4) 7.00 percent on or after July 1, 2014. 
(b) Definitions. For purposes of this regulation: 
(1) “Farming activities” mean a trade or business involving the cultivation of land or the raising or harvesting of any agricultural or horticultural commodity that may be legally sold to or offered for sale to others. These include the trade or business of operating a nursery or sod farm; the raising or harvesting of trees bearing fruit or nuts, or of other crops (e.g., grains, vegetables, or cotton); the raising of ornamental trees (other than evergreen trees that are more than six years old at the time they are severed from their roots); and the raising, shearing, feeding, caring for, training, and management of animals. The raising of animals includes the delivery of feed to the animal feeding operation, whether by the owner or the supplier of the feed. Operating a garden plot, orchard, or farm for the purpose of growing plants or animals for a person's own use shall not be considered a farming activity. Harvesting involves the gathering of any agricultural or horticultural commodity and includes activities such as crop drying, cotton ginning, and fruit ripening. Harvesting an agricultural commodity also includes the washing of the agricultural commodity, the inspection and grading of the agricultural commodity or livestock, and the packaging of the agricultural commodity for shipment as well as those activities delineated in Codes 0723 and 0724 of the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition (hereafter SIC Manual). For purposes of this regulation, merely buying and reselling plants or animals grown or raised entirely by another is not raising an agricultural or horticultural commodity. A person is engaged in raising a plant or animal, rather than the mere selling of a plant or animal, if the plant or animal is held for further cultivation and development prior to sale. In determining whether a plant or animal is held for further cultivation and development prior to sale, consideration will be given to all of the facts and circumstances, including: the value added by a person to the plant or animal through agricultural or horticultural processes; the length of time between the person's acquisition of the plant or animal and the time that the person makes the plant or animal available for sale; and in the case of a plant, whether the plant is kept in the container in which purchased, replanted in the ground, or replanted in a series of larger containers as it is grown to a larger size. 
Farming activities also include the transportation and delivery of the agricultural or horticultural commodity, as described herein, from the trade or business that cultivated, raised or harvested the commodity to the marketplace, as described in subdivision (b)(5), and any empty haul related to the transportation of that agricultural or horticultural commodity. 
Farming activities do not include food processing or transportation and delivery of processed food products to the marketplace. 
Example A: A commercial hauler travels from its company yard to Grower A's field to pick up a load of tomatoes. The tomatoes are hauled to a processing plant. The hauler returns to the field with empty trailers. The sale of diesel fuel to the commercial hauler for use in this activity is partially exempt from tax. 
Example B: A commercial hauler travels from its company yard to Grower A's field to pick up a load of fresh bell peppers. The bell peppers are sold to a grocery store and are delivered to the grocery store's distribution center. At the distribution center, the hauler picks up a load of pallets to deliver to another customer. The sale of diesel fuel to the commercial hauler for use from the yard the field and to the grocery store's distribution center is partially exempt from tax. The sale of diesel fuel to the commercial hauler for use in delivering the pallets is not partially exempt from tax. 
Example C: A nursery owner transports its horticultural products to a distribution center. After delivering the product, the nursery owner makes two stops. The first stop is to pick up fertilizer for use at the nursery. The second stop is personal business unrelated to the nursery operation. The sale of diesel fuel to the nursery owner for use in this example is partially exempt from tax up to and including the first stop. 
(2) “Plants” mean an agricultural or horticultural commodity produced in a farming activity which includes, but is not limited to, trees bearing fruit or nuts, other crops, an ornamental tree, a vine, a bush, or sod. Sea plants are produced in a farming activity if they are tended and cultivated as opposed to merely harvested. 
(3) “Animals” mean a life form produced in a farming activity which includes, but is not limited to, any livestock, poultry or other bird, and fish or other sea life. Fish and other sea life are produced in a farming activity if they are raised on a fish farm. A fish farm is an area where fish or other sea life are grown or raised as opposed to merely caught or harvested. 
(4) “Food processing” means the activities described in Industry Groups 201, 202, 203, 204, and 207, or Codes 2068 and 2084 of the SIC Manual. Food processing activities also includes transporting raw product, supplies and materials to the processing facility, transporting partially processed food products between various divisions of the same food processing entity for further processing operations, and any empty hauls related to the transportation of that product. Food processing does not include transportation and delivery of processed food products to the marketplace. A food processor is not required to be engaged 50 percent or more of the time in such activities as described herein. 
Example A: A for-hire carrier, contracted for by a cheese plant, transports unprocessed milk from a dairy farm to the cheese plant for processing and then returns to the carrier's truck yard. The diesel used in this example is eligible for the partial sales tax exemption. 
Example B: A flour mill transports flour sacks from a bag manufacturer to the mill's facility, and then transports those sacks to other flour mills owned by the same entity. The diesel used to transport the sacks in this example is eligible for the partial sales tax exemption, but the transportation of flour is not. 
Example C: Cannery A and Cannery B are different divisions of the same food processing entity. Cannery A processes unprocessed tomatoes into tomato paste and then transports the paste to Cannery B for further processing. Cannery B processes the paste into tomato soup which is then transported to a grocery distribution warehouse. From the distribution warehouse the processed product is transported by the buyer to individual grocery stores and other distribution warehouses. Only the movement of paste from Cannery A to Cannery B is eligible for the partial sales tax exemption. The subsequent movement of product to the first distribution center and to retail stores and other warehouses is not eligible for the exemption. 
(5) “Marketplace” means the place where a commodity is sold for resale, at retail or for consumption at an animal feeding operation, notwithstanding any intervening activities to prepare the product for sale in the marketplace. Such preparation activities include, but are not limited to, cooling, sorting, inspection, grading, drying, packing, handling, washing, slaughtering and butchering (except as otherwise described in Codes 2011 and 2015 of the SIC Manual), candling, sterilizing, freezing, pasteurizing, homogenizing, and packaging. Producers of agricultural or horticultural products may prepare and market their products through a cooperative, joint venture, corporation or partnership in which they have a financial interest, or other such enterprises, and the diesel used in these enterprises to transport products to the marketplace is eligible for the sales tax exemption. 
(6) “Diesel fuel” means, for purposes of this regulation only, any fuel that is commonly or commercially known, sold or represented as diesel fuel No. 1-D or No. 2-D, pursuant to the specifications in American Society for Testing and Materials Standard Specification for Diesel Fuel Oils (“ASTM”) D 975-81, which is incorporated herein by reference. Diesel fuel, for purposes of this regulation only, also includes Environmental Protection Agency rated diesel fuel commonly known as “federal fuel” sold for use in locomotives, or which is used in generators, pumps, dehydrators and any other equipment used in the conduct of farming and food processing activities. “Diesel fuel” does not include gasoline, kerosene, liquefied petroleum gas, natural gas in liquid or gaseous form, alcohol, aviation fuel, except diesel fuel sold for use in aircraft designed for agricultural aerial applications that meets the specifications of ASTM D 1655, jet fuel, bunker fuel, or other like substance used as a fuel. Qualifying diesel fuel shall be identified accordingly on the invoice of sale. 
(7) “Qualified activity” means farming activities as defined in subdivision (b)(1) or food processing, as defined in subdivision (b)(4). 
(c) Partial Exemption Certificates. 
(1) In General. A person who purchases diesel fuel for use in a qualified activity from an in-state retailer, or an out-of state retailer obligated to collect use tax, must provide the retailer with a partial exemption certificate in order for the retailer to claim the partial exemption. If the retailer takes a partial exemption certificate timely and in good faith, as defined in subdivision (c)(5), from a person who purchases diesel fuel for use in a qualified activity, the partial exemption certificate relieves the retailer from the liability for the sales tax subject to partial exemption under this regulation or the duty of collecting the use tax subject to partial exemption under this regulation. A partial exemption certificate will be considered timely if it is taken any time before the retailer bills the purchaser for the diesel fuel, any time within the retailer's normal billing or payment cycle, any time at or prior to delivery of the diesel fuel to the purchaser, or no later than 15 days after the date of purchase. A partial exemption certificate which is not taken timely will not relieve the retailer of the liability for tax excluded by the partial exemption; however the retailer may present satisfactory evidence to the Board that the retailer sold the diesel fuel to a person that used it in a qualified activity. A partial exemption from the sales and use tax under this part shall not be allowed unless the retailer claims the partial exemption on its sales and use tax return for the reporting period during which the transaction subject to the partial exemption occurred. Where the retailer fails to claim the partial exemption as set forth above, the retailer may file a claim for refund as set forth in subdivision (e). 
The partial exemption certificate form set forth in Appendix A may be used to claim the partial exemption. 
(2) Blanket Partial Exemption Certificates. In lieu of requiring a partial exemption certificate for each transaction, a person who purchases diesel fuel for use in a qualified activity may issue a blanket partial exemption certificate. The partial exemption certificate form set forth in Appendix A may be used as a blanket partial exemption certificate. Appendix A may also be used as a specific partial exemption certificate if the purchaser provides the purchase order or sales invoice number and a precise description of the property being purchased. A person who purchases diesel fuel for use in a qualified activity must include in the partial exemption certificate how much or what percentage of the diesel fuel purchased will be used in a qualified activity. If purchasing diesel fuel not qualifying for the partial exemption, the purchaser must clearly state in documents such as a written purchase order, sales agreement, or contract that the sale or purchase is not subject to the blanket partial exemption certificate. 
(3) Form of Partial Exemption Certificate. Any document, such as a letter or purchase order, timely provided by the purchaser to the seller will be regarded as a partial exemption certificate with respect to the sale or purchase of diesel fuel if it contains all of the following essential elements: 
(A) The signature of the purchaser, purchaser's employee, or authorized representative of the purchaser. 
(B) The name, address and telephone number of the purchaser. 
(C) The number of the seller's permit held by the purchaser. If the purchaser is not required to hold a permit because the purchaser sells only property of a kind the retail sale of which is not taxable, e.g., food products for human consumption, or because the purchaser makes no sales in this state, the purchaser must include on the certificate a sufficient explanation as to the reason the purchaser is not required to hold a California seller's permit in lieu of a seller's permit number. 
(D) A statement of how much or what percentage of the diesel fuel purchased will be used in a qualified farming or food processing activity. 
(E) Date of execution of document. 
(4) Retention and Availability of Partial Exemption Certificates. A retailer must retain each partial exemption certificate received from a person who purchases diesel fuel for use in a qualified activity for a period of not less than four years from the date on which the retailer claims a partial exemption based on the partial exemption certificate. 
While the Board will not normally require the filing of the partial exemption certificate with a sales and use tax return, when necessary for the efficient administration of the Sales and Use Tax Law, the Board may, on 30 days' written notice, require a retailer to commence filing with its sales and use tax returns copies of all partial exemption certificates. The Board may also require, within 45 days of the Board's request, retailers provide the Board access to any and all partial exemption certificates, or copies thereof, accepted for the purposes of supporting the partial exemption. 
(5) Good Faith. A seller will be presumed to have taken a partial exemption certificate in good faith in the absence of evidence to the contrary. A seller, without knowledge to the contrary, may accept a partial exemption certificate in good faith where the purchaser states that a certain percentage of the diesel fuel purchased will be used in farming activities or food processing. However, a partial exemption certificate cannot be accepted in good faith where the seller has knowledge that the diesel fuel is not subject to a partial exemption, or will not be otherwise used in a partially exempt manner. 
(d) Partial Exemption Certificate for Use Tax. The partial exemption certificate must be completed by a person who purchases diesel fuel for use in a qualified activity to claim a partial exemption from use tax from an out-of-state retailer not obligated to collect the use tax. A partial exemption from the use tax shall not be allowed unless the purchaser or retailer claims the partial exemption on its individual use tax return, sales and use tax return, or consumer use tax return for the reporting period during which the transaction subject to the partial exemption occurred. Where the purchaser or retailer fails to claim the partial exemption as set forth above, the purchaser or retailer may file a claim for refund as set forth in subdivision (e). 
The purchaser who files an individual use tax return must attach a completed partial exemption certificate to the return. The purchaser who is registered with the Board as a retailer or consumer and files a sales and use tax return or consumer use tax return must, within 45 days of the Board's request, provide the Board access to any and all documents that support the claimed partial exemption. 
The partial exemption certificate form set forth in Appendix A may be used to claim the partial exemption. 
(e) Refund of Partial Exemption. 
(1) For the period commencing on September 1, 2001, and ending on April 30, 2002, a person who purchases diesel fuel for use in a qualified activity may claim the partial exemption on qualified purchases from an in-state retailer or an out-of-state retailer obligated to collect the use tax by furnishing the retailer with a partial exemption certificate on or before July 31, 2002. The retailer must refund the tax or tax reimbursement directly to a purchaser of diesel fuel for use in a qualified activity or, at the purchaser's sole option, the purchaser may be credited with such amount. 
(2) A retailer who paid sales tax on a qualified sale or a person who paid use tax on a qualified purchase and who failed to claim the partial exemption as provided by this regulation may file a claim for refund equal to the amount of the partial exemption that he or she could have claimed pursuant to this regulation. The procedure for filing a claim shall be the same as for other claims for refund filed pursuant to Revenue and Taxation Code section 6901. For transactions subject to use tax, a person who purchases diesel fuel for use in a qualified activity filing a claim for refund of the partial exemption has the burden of establishing that he or she was entitled to claim the partial exemption with respect to the amount of refund claimed under this part. For transactions subject to sales tax, a person filing a claim for refund of the partial exemption has the burden of establishing that the purchaser of the diesel fuel otherwise met all the requirements of a person who purchases diesel fuel for use in a qualified activity at the time of the purchase subject to the refund claimed under this part. 
(f) Improper Use of Partial Exemption. Notwithstanding subdivision (a), tax applies to any sale of, and the storage, use, or other consumption in this state of diesel fuel that is used in a manner not qualifying for the partial exemption under this regulation. 
(g) Purchaser's Liability for the Payment of Sales Tax. 
(1) If a purchaser timely submits a copy of a partial exemption certificate to the retailer or partial exemption certificate for use tax to the Board, and then uses the diesel fuel in a manner not qualifying for the partial exemption, the purchaser shall be liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the diesel fuel at the time the diesel fuel was so removed, converted, or used. 
(2) A purchaser providing a partial exemption certificate accepted in good faith by the retailer or a partial exemption certificate for use tax to the Board for diesel fuel that does not qualify for the partial exemption is liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the diesel fuel at the time the diesel fuel was purchased. 
(h) Records. Adequate and complete records must be maintained by the person who purchases diesel fuel for use in a qualified activity as evidence that the diesel fuel purchased was used in a qualified activity. 
(i) Operative Date. This regulation is operative as of September 1, 2001.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6357.1, Revenue and Taxation Code.
HISTORY

1. New section and Appendix A filed 7-3-2002; operative 9-1-2001 (Register 2002, No. 27).
2. Change without regulatory effect amending subsections (a), (g) and (i) filed 8-17-2004 pursuant to section 100, title 1, California Code of Regulations (Register 2004, No. 34).
3. Change without regulatory effect amending subsection (a) filed 6-4-2009 pursuant to section 100, title 1, California Code of Regulations (Register 2009, No. 23).
4. Amendment of subsection (a) and new subsections (a)(1)-(4) filed 9-26-2011; operative 10-26-2011 (Register 2011, No. 39).

Appendix A
PARTIAL EXEMPTION CERTIFICATE STATE BOARD OF EQUALIZATION

View Graphic
§1534. Timber Harvesting Equipment and Machinery.
Note     •     History

(a) General. Commencing on and after September 1, 2001, section 6356.6 of the Revenue and Taxation Code partially exempts from sales and use tax the sale of, and the storage, use, or other consumption in this state, of off-road commercial timber harvesting equipment and machinery, and parts of off-road commercial timber harvesting equipment and machinery, that are purchased by a qualified person for use primarily in timber harvesting. The terms “off-road commercial timber harvesting equipment and machinery,” “parts of off-road commercial timber harvesting equipment and machinery,” “qualified person,” and “commercial timber harvesting operations” are defined below. 
For the period commencing on September 1, 2001, and ending on December 31, 2001, the partial exemption applies to the taxes imposed by sections 6051 and 6201 of the Revenue and Taxation Code (4.75%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. 
For the period commencing on January 1, 2002, and ending on June 30, 2004, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. 
For the period commencing on July 1, 2004, and ending on March 31, 2009. the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6201, 6201.3, and 6201.5 of the Revenue and Taxation Code (5.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.
For the period commencing on April 1, 2009, and ending on June 30, 2011, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6051.7, 6201, 6201.3, 6201.5, and 6201.7 of the Revenue and Taxation Code (6.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. 
For the period commencing on July 1, 2011, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6201, 6201.3, and 6201.5 of the Revenue and Taxation Code (5.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. 
(b) Definitions. For purposes of this regulation: 
(1) “Commercial timber harvesting operations” means the cutting or removal or both of timber or other solid wood forest products, from timberlands for commercial purposes, together with all the work incidental thereto, including but not limited to, construction and maintenance of roads, fuel breaks, firebreaks, stream crossings, landings, skid trails, beds for the falling of trees, fire hazard abatement, reforestation, and site preparation that involves disturbance of soil or burning of vegetation following timber harvesting activities. Such activities include, but are not limited to, bucking, bunching, chipping, debarking, delimbing, felling, forwarding, loading, piling, skidding, slashing, topping and yarding operations performed on timber. Commercial timber harvesting operations do not include the use of timber in processing activities or other activities resulting in the creation of other commercial wood products for sale to others, including, without limitation, milling, planing, carving, paper manufacturing, the treating of wood with creosote or other preservatives to prevent decay or protect against fire, or the packaging of wood chips for use in preparing food. 
(2) “Off-road commercial timber harvesting equipment and machinery” means any new or used device, that may be powered by an internal combustion engine, electric motor, or otherwise, that is necessary in complying with any operational requirements of federal, state, or local government laws and regulations and is designed primarily for use off the highways, to propel, move, draw or cut timber in commercial timber harvesting operations. Such items include, but are not limited to, chainsaws, slashers, debarkers, harvesters, forwarders, feller-bunchers, cable yarding equipment, yarders, loading helicopters, chippers, bulldozers; loading equipment used to lift and move the equipment; graders; water trucks and similar logging road building and maintenance equipment; fuel storage equipment, site preparation equipment; all-terrain vehicles; fire fighting and safety equipment; timber harvest preparation equipment; reforestation tools and equipment; loaders; carriages; skidders; mobile metal spars; delimbers; chokers; steel cables; grapples; front-end loaders, and tractors or rubber tire skidders and other equipment used to fell, delimb, cross-cut, measure, sort, bunch, move and load timber for transport to roadside. 
Off-road commercial timber harvesting equipment and machinery does not include junction boxes, switches, conduit and wiring, valves, pipes, tubing incorporated into fixed works, buildings, or other structures, whether or not such items are used solely or partially in connection with the operation of equipment and machinery. Off-road commercial timber harvesting equipment and machinery also does not include supplies such as articles of clothing, fuels, real property, materials or fixtures within the meaning of subdivisions (a)(4) and (a)(5), respectively, of Regulation 1521, Construction Contractors, including such items set forth in Appendix A and B of Regulation 1521. 
(3) “Parts of off-road commercial timber harvesting equipment and machinery” means: 
(A) All component parts and contrivances include, but are not limited to, belts, shafts, pipes, hoses and moving parts, that are parts of off-road commercial timber harvesting equipment and machinery as defined in subdivision (b)(2) that can be separated from the off-road commercial timber harvesting equipment and machinery and replaced. Parts of off-road commercial timber harvesting equipment and machinery do not include items that are consumed (e.g., burned, evaporate, dissolve, dissipate) through the regular use of the off-road commercial timber harvesting equipment and machinery (e.g., gasoline, cleaning agents, solutions, chemicals) which are ordinarily supplies; however, lubricants and fluids not consumed (e.g., engine oil not consumed as part of fuel for a two-stroke engine) is regarded as a component part. 
(B) All repair and replacement parts for off-road commercial timber harvesting equipment and machinery as defined in subdivision (b)(2) which replace previous parts and can include parts that are identical to the parts they replace as well as parts that are different from the ones they replace, such as replacement parts added for the purpose of improving or modifying the off-road commercial timber harvesting equipment and machinery, whether purchased separately or in conjunction with a complete machine and regardless of whether the machine or component parts are assembled by a qualified person or another person. Parts of off-road commercial timber harvesting equipment and machinery do not include tangible personal property used in effectuating the repair of any timber harvesting equipment and machinery such as a wrench used to replace a spark plug, except tools used for repair that are designed exclusively for specific off-road commercial timber harvesting equipment and machinery. 
(C) All equipment or devices used or required to operate, control, regulate, or maintain the machinery including, without limitation, computers, data processing equipment, and computer software, including both operating programs and application programs. Parts of off-road commercial timber harvesting equipment and machinery do not include tangible personal property used primarily in the administration, management, or marketing of timber harvesting operations. 
(4) “Primarily” means used 50 percent or more of the time. As used herein, the qualified property has to be designed for use 50 percent or more of the time off-road in commercial timber harvesting operations and be used 50 percent or more of the time in timber harvesting. 
(5) “Qualified person” means a person engaged in commercial timber harvesting operations. A qualified person is not required to be engaged 50 percent or more of the time in commercial timber harvesting operations. 
(6) “Qualified property” means off-road commercial timber harvesting equipment and machinery, and the parts thereof, as defined in subdivisions (b)(2) and (b)(3) used primarily in timber harvesting. 
(7) “Timber” means trees of any species maintained for eventual harvest for forest products or other forest purposes, whether planted or of natural growth, standing or down, including Christmas trees, on privately or publicly owned land, but does not mean nursery stock. 
(8) “Timberland” means privately or publicly owned land which is devoted to and used for growing or timber harvesting, or for growing and timber harvesting and compatible uses, and which is capable of growing an average annual volume of wood fiber of at least 15 cubic feet per acre. 
(c) Partial Exemption Certificates. 
(1) In General. Qualified persons who purchase or lease qualified property from an in-state retailer, or an out-of state retailer obligated to collect use tax, must provide the retailer with a partial exemption certificate in order for the retailer to claim the partial exemption. If the retailer takes a partial exemption certificate timely and in good faith, as defined in subdivision (c)(5), from a qualified person, the partial exemption certificate relieves the retailer from the liability for the sales tax subject to exemption under this regulation or the duty of collecting the use tax subject to exemption under this regulation. A partial exemption certificate will be considered timely if it is taken any time before the retailer bills the purchaser for the qualified property, any time within the retailer's normal billing or payment cycle, any time at or prior to delivery of the qualified property to the purchaser, or no later than 15 days after the date of purchase. A partial exemption certificate that is not taken timely will not relieve the retailer of the liability for tax excluded by the partial exemption; however the retailer may present satisfactory evidence to the Board that the retailer sold the specific property to a qualified person and the property was primarily used in a qualifying manner. A partial exemption from the sales and use tax under this part shall not be allowed unless the retailer claims the partial exemption on its sales and use tax return for the reporting period during which the transaction subject to the partial exemption occurred. Where the retailer fails to claim the partial exemption as set forth above, the retailer may file a claim for refund as set forth in subdivision (e). 
The partial exemption certificate form set forth in Appendix A may be used to claim the partial exemption. 
(2) Blanket Partial Exemption Certificates. In lieu of requiring a partial exemption certificate for each transaction, a qualified person may issue a blanket partial exemption certificate. The partial exemption certificate form set forth in Appendix A may be used as a blanket partial exemption certificate. Appendix A may also be used as a specific partial exemption certificate if the purchaser provides the purchase order or sales invoice number and a precise description of the property being purchased. Qualified persons must include in the partial exemption certificate a description of the qualified property. If purchasing tangible personal property not qualifying for the partial exemption, the qualified person must clearly state in documents such as a written purchase order, sales agreement, lease, or contract that the sale or purchase is not subject to the blanket partial exemption certificate. 
(3) Form of Partial Exemption Certificate. Any document, such as a letter or purchase order, timely provided by the purchaser to the seller will be regarded as a partial exemption certificate with respect to the sale or purchase of the property described in the document if it contains all of the following essential elements: 
(A) The signature of the purchaser, purchaser's employee, or authorized representative of the purchaser. 
(B) The name, address and telephone number of the purchaser. 
(C) The number of the seller's permit held by the purchaser. If the purchaser is not required to hold a permit because the purchaser sells only property of a kind the retail sale of which is not taxable, e.g., food products for human consumption, or because the purchaser makes no sales in this state, the purchaser must include on the certificate a sufficient explanation as to the reason the purchaser is not required to hold a California seller's permit in lieu of a seller's permit number. 
(D) A statement that the purchaser is engaged in commercial timber harvesting operations, and that the property purchased is primarily designed for off-road use in commercial timber harvesting operations and will be used primarily in timber harvesting. 
(E) Description of property purchased. 
(F) Date of execution of document. 
(4) Retention and Availability of Partial Exemption Certificates. A retailer must retain each partial exemption certificate received from a qualified person for a period of not less than four years from the date on which the retailer claims a partial exemption based on the partial exemption certificate. 
While the Board will not normally require the filing of the partial exemption certificate with a sales and use tax return, when necessary for the efficient administration of the Sales and Use Tax Law, the Board may on 30 days' written notice, require a retailer to commence filing with its sales and use tax returns copies of all partial exemption certificates. The Board may also require, within 45 days of the Board's request, retailers provide the Board access to any and all partial exemption certificates, or copies thereof, accepted for the purposes of supporting the partial exemption. 
(5) Good Faith. A seller will be presumed to have taken a partial exemption certificate in good faith in the absence of evidence to the contrary. A seller, without knowledge to the contrary, may accept a partial exemption certificate in good faith where a qualified person states that he or she is engaged in commercial timber harvesting operations and states that the property purchased is primarily designed for off-road use in commercial timber harvesting operations and will be used primarily in timber harvesting. If the qualified person is buying property of a kind not normally used in timber harvesting, the seller should require a statement as to how the specific property purchased will be used. However, an exemption certificate cannot be accepted in good faith where the seller has knowledge that the property is not subject to a partial exemption, or will not be otherwise used in a partially exempt manner. 
(d) Partial Exemption Certificate for Use Tax. The partial exemption certificate must be completed by a qualified person to claim a partial exemption from use tax on purchases of qualified property from an out-of-state retailer not obligated to collect the use tax. A partial exemption from the use tax shall not be allowed unless the purchaser or retailer claims the partial exemption on its individual use tax return, sales and use tax return, or consumer use tax return for the reporting period during which the transaction subject to the partial exemption occurred. Where the purchaser or retailer fails to claim the partial exemption as set forth above, the purchaser or retailer may file a claim for refund as set forth in subdivision (e). 
The purchaser who files an individual use tax return must attach a completed partial exemption certificate to the return. The purchaser who is registered with the Board as a retailer or consumer and files a sales and use tax return or consumer use tax return must, within 45 days of the Board's request, provide the Board access to any and all documents that support the claimed partial exemption. 
The partial exemption certificate form set forth in Appendix A may be used to claim the partial exemption. 
(e) Refund of Partial Exemption. 
(1) For the period commencing on September 1, 2001, and ending on June 30, 2002, a qualified person may claim the partial exemption on qualified purchases from an in-state retailer or an out-of-state retailer obligated to collect the use tax by furnishing the retailer with a partial exemption certificate on or before September 30, 2002. The retailer must refund the tax or tax reimbursement directly to the purchaser or, at the purchaser's sole option, the purchaser may be credited with such amount. 
(2) A retailer who paid sales tax on a qualified sale or a person who paid use tax on a qualified purchase and who failed to claim the partial exemption as provided by this regulation may file a claim for refund equal to the amount of the partial exemption that he or she could have claimed pursuant to this regulation. The procedure for filing a claim shall be the same as for other claims for refund filed pursuant to Revenue and Taxation Code section 6901. For transactions subject to use tax, a qualified person filing a claim for refund of the partial exemption has the burden of establishing that he or she was entitled to claim the partial exemption with respect to the amount of refund claimed under this part. For transactions subject to sales tax, a person filing a claim for refund of the partial exemption has the burden of establishing that the purchaser of the qualified property otherwise met all the requirements of a qualified person at the time of the purchase subject to the refund claimed under this part. 
(f) Improper Use of Partial Exemption. 
(1) Property Used In a Manner Not Qualifying for the Partial Exemption. Notwithstanding subdivision (a), tax applies to any sale of, and the storage, use, or other consumption in this state of tangible personal property that is used in a manner not qualifying for the partial exemption under this regulation. 
(2) Purchases By Non-Qualified Persons. Notwithstanding subdivision (a), tax applies to any sale of, and the storage, use, or other consumption in this state of tangible personal property if a purchaser is not a qualified person. 
(g) Purchaser's Liability for the Payment of Sales Tax. 
(1) If a purchaser timely submits a copy of a partial exemption certificate to the retailer or partial exemption certificate for use tax to the Board, and then uses that tangible personal property in a manner not qualifying for the partial exemption, the purchaser shall be liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the property at the time the property was so removed, converted, or used. 
(2) A purchaser providing a partial exemption certificate accepted in good faith by the retailer or a partial exemption certificate for use tax to the Board for tangible personal property that does not qualify for the partial exemption is liable for payment of the sales tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the property at the time the property was purchased. 
(h) Leases to Qualifying Persons. 
(1) Leases--In General. Leases of tangible personal property which are classified as “continuing sales” and “continuing purchases” of tangible personal property, in accordance with Regulation 1660, “Leases of Tangible Personal Property - In General,” may qualify for the partial exemption subject to all the limitations and conditions set forth in this regulation. This partial exemption may apply to rentals payable paid by a qualified person on or after September 1, 2001 with respect to a lease of qualified property to the qualified person, which qualified property is used primarily in timber harvesting, notwithstanding the fact that the lease was entered into prior to the effective date of this regulation. For purposes of this subdivision, a non-qualified person may purchase property for resale and subsequently lease the property to a qualified person subject to the partial exemption. 
(2) Leases--Acquisition Sale and Leaseback. A qualified person will be regarded as having paid sales tax reimbursement or use tax with respect to that qualified person's purchase of property, within the meaning of those words as they are used in section 6010.65 of the Revenue and Taxation Code, if the qualified person has paid all applicable taxes with respect to the acquisition of the property, notwithstanding the fact that the sale and purchase of the property may have been subject to the partial exemption from tax provided by this regulation. 
(3) Subsequent Lease of Property Acquired Subject to Partial Exemption. If a qualified person has acquired property subject to the partial exemption provided by this regulation and has paid all applicable taxes at that acquisition, the property will be regarded as property as to which sales tax reimbursement or use tax has been paid, and the subsequent lease of that property will not be subject to tax measured by rentals payable. 
(i) Records. Adequate and complete records must be maintained by the qualified person as evidence that the qualified property purchased was primarily designed for off-road use in commercial timber harvesting operations and was used by the qualified person primarily in timber harvesting. 
(j) Operative Date. This regulation is operative as of September 1, 2001. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6356.6, Revenue and Taxation Code. 
HISTORY

1. New section and Appendix A filed 9-3-2002; operative 10-3-2002 (Register 2002, No. 36).
2. Change without regulatory effect amending subsection (a) filed 8-18-2004 pursuant to section 100, title 1, California Code of Regulations (Register 2004, No. 34).
3. Change without regulatory effect amending subsection (a) filed 6-4-2009 pursuant to section 100, title 1, California Code of Regulations (Register 2009, No. 23).
4. Change without regulatory effect amending subsection (a) filed 1-9-2012 pursuant to section 100, title 1, California Code of Regulations (Register 2012, No. 2).

Appendix A

View Graphic
§1535. Racehorse Breeding Stock.
Note     •     History

(a) General. Commencing on and after September 1, 2001, section 6358.5 of the Revenue and Taxation Code partially exempts from sales and use tax the sale of, and the storage, use, or other consumption in this state, of racehorse breeding stock purchased for use by a qualified person. The terms “racehorse breeding stock” and “qualified person” are defined below. 
For the period commencing on September 1, 2001 and ending December 31, 2001, the partial exemption applies to the taxes imposed by sections 6051 and 6201 of the Revenue and Taxation Code (4.75%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. 
For the period commencing on January 1, 2002, and ending on June 30, 2004, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6201, and 6201.3 of the Revenue and Taxation Code (5%), but does not apply to the taxes imposed pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. 
For the period commencing on July 1, 2004, and ending on March 31, 2009, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6201, 6201.3, and 6201.5 of the Revenue and Taxation Code (5.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.
For the period commencing on April 1, 2009, and ending on June 30, 2011, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6051.7, 6201, 6201.3 6201.5 and 6201.7 of the Revenue and Taxation Code (6.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. 
For the period commencing on July 1, 2011, the partial exemption applies to the taxes imposed by sections 6051, 6051.3, 6051.5, 6201, 6201.3, and 6201.5 of the Revenue and Taxation Code (5.25%), but does not apply to the taxes imposed or administered pursuant to sections 6051.2 and 6201.2 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution. 
(b) Definitions. For purposes of this regulation: 
(1) “Qualified person” means a person who purchases racehorse breeding stock solely with the intent and purpose of breeding. 
(2) “Qualified property” means racehorse breeding stock, as defined in subdivision (b)(3). 
(3) “Racehorse breeding stock” means a live horse that meets all of the following criteria: 
(A) Is or will be eligible to participate in a horseracing contest in California wherein pari-mutuel wagering is permitted under rules and regulations prescribed by the California Horse Racing Board. 
(B) Is capable of producing foals which will be eligible to participate in a horseracing contest in California wherein pari-mutuel wagering is permitted under rules and regulations prescribed by the California Horse Racing Board. 
(C) Is or was registered with an agency recognized by the California Horse Racing Board and such registering agency does not register the horse as ineligible for breeding stock. Agencies currently recognized are The Jockey Club, The American Quarter Horse Association, The United States Trotting Association, The Appaloosa Horse Club, The Arabian Horse Registry of America, and the American Paint Horse Association. 
Racehorse breeding stock does not include any horse over four years old, or five years old in the case of an Arabian horse, that has neither participated in or trained for a horserace contest on which pari-mutuel wagering is permitted, nor been used for breeding purposes in order to produce racehorses. 
(4) “Solely” means 100 percent or “only.” 
(c) Partial Exemption Certificates. 
(1) In General. Qualified persons who purchase or lease qualified property from an in-state retailer, or an out-of-state retailer obligated to collect use tax, must provide the retailer with a partial exemption certificate in order for the retailer to claim the partial exemption. If the retailer takes a partial exemption certificate timely and in good faith, as defined in subdivision (c)(5), from a qualified person, the partial exemption certificate relieves the retailer from the liability for the sales tax subject to exemption under this regulation or the duty of collecting the use tax subject to exemption under this regulation. A partial exemption certificate will be considered timely if it is taken any time before the retailer bills the purchaser for the qualified property, any time within the retailer's normal billing or payment cycle, any time at or prior to delivery of the qualified property to the purchaser, or no later than 15 days after the date of purchase. A partial exemption certificate which is not taken timely will not relieve the retailer of the liability for tax excluded by the partial exemption; however the retailer may present satisfactory evidence to the Board that the retailer sold the specific property to a qualified person and the property was used in a qualifying manner. A partial exemption from the sales and use tax under this part shall not be allowed unless the retailer claims the partial exemption on its sales and use tax return for the reporting period during which the transaction subject to the partial exemption occurred. Where the retailer fails to claim the partial exemption as set forth above, the retailer may file a claim for refund as set forth in subdivision (e). 
The partial exemption certificate form set forth in Appendix A may be used to claim the partial exemption. 
(2) Blanket Partial Exemption Certificates. In lieu of requiring a partial exemption certificate for each transaction, a qualified person may issue a blanket partial exemption certificate. The partial exemption certificate form set forth in Appendix A may be used as a blanket partial exemption certificate. Appendix A may also be used as a specific partial exemption certificate if the purchaser provides the purchase order or sales invoice number of the property being purchased. Qualified persons must include in the partial exemption certificate a description of the qualified property. If purchasing tangible personal property not qualifying for the partial exemption, the qualified person must clearly state in documents such as a written purchase order, sales agreement, lease, or contract that the sale or purchase is not subject to the blanket partial exemption certificate. 
(3) Form of Partial Exemption Certificate. Any document, such as a letter or purchase order, timely provided by the purchaser to the seller will be regarded as a partial exemption certificate with respect to the sale or purchase of the property described in the document if it contains all of the following essential elements: 
(A) The signature of the purchaser, purchaser's employee, or authorized representative of the purchaser. 
(B) The name, address and telephone number of the purchaser. 
(C) The number of the seller's permit held by the purchaser. If the purchaser is not required to hold a permit because the purchaser sells only property of a kind the retail sale of which is not taxable, e.g., food products for human consumption, or because the purchaser makes no sales in this state, the purchaser must include on the certificate a sufficient explanation as to the reason the purchaser is not required to hold a California seller's permit in lieu of a seller's permit number. 
(D) A statement that the property purchased is capable of reproduction. 
(E) A statement that the purchaser will use the property solely for the purpose of breeding. 
(F) A description of the property purchased. 
(G) Date of execution of the document. 
(4) Retention and Availability of Partial Exemption Certificates. A retailer must retain each partial exemption certificate received from a qualified person for a period of not less than four years from the date on which the retailer claims a partial exemption based on the partial exemption certificate. 
While the Board will not normally require the filing of the partial exemption certificate with a sales and use tax return, when necessary for the efficient administration of the Sales and Use Tax Law, the Board may on 30 days written notice, require a retailer to commence filing with its sales and use tax returns copies of all partial exemption certificates. The Board may also require that, within 45 days of the Board's request, retailers provide the Board access to any and all partial exemption certificates, or copies thereof, accepted for the purposes of supporting the partial exemption. 
(5) Good Faith. A seller will be presumed to have taken a partial exemption certificate in good faith in the absence of evidence to the contrary. A seller, without knowledge to the contrary, may accept a partial exemption certificate in good faith where a qualified person states that he or she is purchasing the qualified property solely with the intent and purpose of breeding. If the qualified person is buying a horse of a kind not normally used to breed racehorses, the seller should require a statement as to how the specific property purchased will be used. However, a partial exemption certificate cannot be accepted in good faith where the seller has knowledge that the property is not subject to the partial exemption, or will not be otherwise used in a partially exempt manner. 
(d) Partial Exemption Certificate for Use Tax. The partial exemption certificate must be completed by a qualified person to claim a partial exemption from use tax on purchases of qualified property from an out-of-state retailer not obligated to collect the use tax. A partial exemption from the use tax shall not be allowed unless the purchaser or retailer claims the partial exemption on its individual use tax return, sales and use tax return, or consumer use tax return for the reporting period during which the transaction subject to the partial exemption occurred. Where the purchaser or retailer fails to claim the partial exemption as set forth above, the purchaser or retailer may file a claim for refund as set forth in subdivision (e). 
The purchaser who files an individual use tax return must attach a completed partial exemption certificate to the return. The purchaser who is registered with the Board as a retailer or consumer and files a sales and use tax return or consumer use tax return must, within 45 days of the Board's request, provide the Board access to any and all documents that support the claimed partial exemption. 
The partial exemption certificate form set forth in Appendix A may be used to claim the partial exemption. 
(e) Refund of Partial Exemption. 
(1) For the period commencing on September 1, 2001, and ending on December 31, 2002, a qualified person may claim the partial exemption on qualified purchases from an in-state retailer or an out-of-state retailer obligated to collect the use tax by furnishing the retailer with a partial exemption certificate on or before March 31, 2003. The retailer must refund the tax or tax reimbursement directly to the qualified purchaser of qualified property or, at the purchaser's sole option, the purchaser may be credited with such amount. 
(2) A retailer who paid sales tax on a qualified sale or a person who paid use tax on a qualified purchase and who failed to claim the partial exemption as provided by this regulation may file a claim for refund equal to the amount of the partial exemption that he or she could have claimed pursuant to this regulation. The procedure for filing a claim shall be the same as for other claims for refund filed pursuant to Revenue and Taxation Code section 6901. For transactions subject to use tax, a qualified person filing a claim for refund of the partial exemption has the burden of establishing that he or she was entitled to claim the partial exemption with respect to the amount of refund claimed under this part. For transactions subject to sales tax, a person filing a claim for refund of the partial exemption has the burden of establishing that the purchaser of the qualified property otherwise met all the requirements of a qualified person at the time of the purchase subject to the refund claimed under this part. 
(f) Improper Use of Partial Exemption. 
(1) Property Used in a Manner Not Qualifying for the Partial Exemption. Notwithstanding subdivision (a), tax applies to any sale of, or the storage, use, or other consumption in this state of tangible personal property that is used in a manner not qualifying for the partial exemption under this regulation. 
(2) Purchases By Non-Qualified Persons. Notwithstanding subdivision (a), tax applies to any sale of, and the storage, use, or other consumption in this state of tangible personal property if a purchaser is not a qualified person. 
(g) Purchaser's Liability for the Payment of Tax. 
(1) If a purchaser timely submits a copy of a partial exemption certificate to the retailer or partial exemption certificate for use tax to the Board, and then uses that tangible personal property in a manner not qualifying for the partial exemption, the purchaser shall be liable for payment of the tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the property at the time the property was so removed, converted, or used. 
(2) A purchaser providing a partial exemption certificate accepted in good faith by the retailer or a partial exemption certificate for use tax to the Board for tangible personal property that does not qualify for the partial exemption is liable for payment of the tax, with applicable interest, to the same extent as if the purchaser were a retailer making a retail sale of the property at the time the property was purchased. 
(h) Leases to Qualifying Persons. 
(1) Leases-In General. Leases of tangible personal property which are classified as “continuing sales” and “continuing purchases” of tangible personal property, in accordance with Regulation 1660, “Leases of Tangible Personal Property -- In General,” may qualify for the partial exemption subject to all the limitations and conditions set forth in this regulation. This partial exemption may apply to rentals payable paid by a qualified person on or after September 1, 2001 with respect to a lease of qualified property to the qualified person, which qualified property is used for breeding purposes, notwithstanding the fact that the lease was entered into prior to the effective date of this regulation. For purposes of this subdivision, a non-qualified person may purchase property for resale and subsequently lease the property to a qualified person subject to the partial exemption. 
(2) Leases-Acquisition Sale and Leaseback. A qualified person will be regarded as having paid sales tax reimbursement or use tax with respect to that qualified person's purchase of property, within the meaning of those words as they are used in section 6010.65 of the Revenue and Taxation Code, if the qualified person has paid all applicable taxes with respect to the acquisition of the property, notwithstanding the fact that the sale and purchase of the property may have been subject to the partial exemption from tax provided by this regulation. 
(3) Subsequent Lease of Property Acquired Subject to Partial Exemption. If a qualified person has acquired property subject to the partial exemption provided by this regulation and has paid all applicable taxes at that acquisition, the property will be regarded as property as to which sales tax reimbursement or use tax has been paid, and the subsequent lease of that property will not be subject to tax measured by rentals payable. 
(i) Records. Adequate and complete records must be maintained by the qualified person as evidence that the qualified property was capable of reproduction and purchased by the qualified person solely for breeding purposes. 
(j) Operative Date. This regulation is operative as of September 1, 2001. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6358.5, Revenue and Taxation Code. 
HISTORY

1. New section and Appendix A filed 12-10-2002; operative 9-1-2001 (Register 2002, No. 50).
2. Change without regulatory effect amending subsection (a) filed 8-18-2004 pursuant to section 100, title 1, California Code of Regulations (Register 2004, No. 34).
3. Change without regulatory effect amending subsection (a) filed 6-4-2009 pursuant to section 100, title 1, California Code of Regulations (Register 2009, No. 23).
4. Change without regulatory effect amending subsection (a) filed 1-9-2012 pursuant to section 100, title 1, California Code of Regulations (Register 2012, No. 2).

Appendix A

View Graphic
Article 4. Graphic Arts and Related Enterprises
§1540. Advertising Agencies and Commercial Artists.
Note     •     History

(a) Definitions. 
(1) Advertising. Advertising is commercial communication utilizing one or more forms of communication (such as television, print, billboards, or the Internet) from or on behalf of an identified person to an intended target audience. 
(2) Advertising Agencies. Advertising agencies design and implement advertising campaigns for purposes of advertising the goods, services, or ideas of their clients. As part of that primary function, advertising agencies provide their clients with services (such as consultation, consumer research, media planning and placement, public relations, and other marketing activities), and may also provide tangible personal property (such as print advertisements, finished art, and video and audio productions). 
(3) Commercial Artists. Commercial artists, who may characterize themselves as commercial artists, commercial photographers, or designers, provide services and tangible personal property to their clients for use in their clients' advertising campaigns, or for their clients' other commercial endeavors such as sales of copies of finished art (including, e.g., photographic images) provided by a commercial artist. Services they provide to their clients include the creation and development of ideas, concepts, looks, or messages. Electronic artwork they provide may be transferred through remote telecommunications such as by modem or over the Internet, or by tangible means through electronic media such as compact or floppy disc. Tangible personal property they provide may include electronic media on which electronic artwork is transferred to the client, hard copies of the electronic artwork, hard copies of finished art (which may consist of photographic images). 
(4) Contract of Sale. An agreement to transfer tangible personal property for consideration is a contract of sale. The client may, for example, issue a purchase order for the purchase of tangible personal property. The contract of sale for that tangible personal property consists of the terms of the purchase order together with the relevant terms of the master agreement (defined in subdivision (a)(10)). 
(5) Digital Pre-Press Instruction. Digital pre-press instruction is the creation of original information in electronic form by combining more than one computer program into specific instructions or information necessary to prepare and link files for electronic transmission for output to film, plate, or direct to press, which is then transferred on electronic media such as tape or compact disc. 
(6) Electronic Artwork. Electronic artwork is artwork created through the use of computer hardware and software processes which results in artwork in a digital format that can be transmitted to others via electronic means (that is, transmitted through remote telecommunications such as by modem or over the Internet, or by electronic media such as compact or floppy disc). Elements of the process include the creation of original artwork or photographic images, scanning of artwork or photographic images, composition and design of text, insertion and manipulation of scanned and original electronic artwork, photographic images, and text. Electronic artwork does not include artwork that is transferred to clients in a tangible form, other than on electronic media, even where such artwork may have been manufactured or produced in whole or in part by computer hardware and software processes. 
(7) Finished Art. Finished art is the final artwork used for actual reproduction by photomechanical or other processes, or used for display. It includes electronic artwork, illustrations (e.g. drawings, diagrams, halftones, or color images), photographic images, sculptures, paintings, and handlettering. Blueprints, diagrams, and instructions for signage furnished to a client as the result of environmental graphic design services are not finished art. 
(8) Hard Copies. An item is transferred on hard copy when it is transferred on any tangible personal property other than in digital format on electronic media. For example, finished art transferred on canvas or paper is transferred on hard copy while a transfer of finished art in digital format on compact or floppy disc is not regarded as a transfer on hard copy. 
(9) Intermediate Production Aids. Intermediate production aids include items such as artwork, illustrations, photograph images, photo engravings, and other similar materials which are used to produce special printing aids or finished art. 
(10) Master Agreement. A master agreement is a contract, however characterized (such as “agency-client agreement”), entered into between an advertising agency or commercial artist and its client which specifies the obligations of each party to the master agreement with respect to their relationship, whether for a specified time or advertising campaign or until one of the parties terminates the agreement. A master agreement between an advertising agency and its client may specify the obligations of each with respect to the design of an advertising campaign for the client, the placement of the advertising with print and television media, and for the sale and purchase of tangible personal property related to the advertising campaign. There may then be additional terms for the purchase of specific tangible personal property during the advertising campaign, such as in a purchase order, which identifies the specific property that will be purchased and sold and the sales price for that property. 
(11) Preliminary Art. Preliminary art is tangible personal property which is prepared solely for the purpose of demonstrating an idea or message for acceptance by the client before a contract is entered into, or before approval is given, for preparation of finished art provided neither title to, nor permanent possession of, such tangible personal property passes to the client. Examples of preliminary art include roughs, visualizations, layouts, comprehensives, and instant photos. 
(12) Special Printing Aids. Special printing aids are reusable manufacturing aids which are used by a printer during the printing process and are of unique utility to a particular client. Special printing aids include electrotypes, stereotypes, photoengravings, silk screens, steel dies, cutting dies, lithographic plates, film, single or multi color separation negatives, and flats. 
(13) Third Parties. A reference in this regulation to a transfer to a client also includes a transfer to a third party on the client's behalf. For example, the discussion in subdivision (b)(2)(B) for transfers of finished art by loading into the client's computer also includes transfers of the finished art by loading it into a third party's computer at the instruction of the client. 
(b) Application of Tax to Activities of Advertising Agencies and Commercial Artists. 
(1) Services. 
(A) General. 
1. Services performed to convey ideas, concepts, looks, or messages to a client may result in a transfer, enhancement, or revision of either electronic artwork, hard copies of electronic artwork, or copies of manually prepared artwork. If charges for such services are separately stated as “design charges,” “preliminary art,” “concept development,” or any other designation that clearly indicates that the charges are for such services and not for finished art, they are nontaxable; however, tax applies if: (a) the master agreement or other contract provides that the advertising agency or commercial artist will pass to the client title or the right to permanent possession of the artwork in tangible form, such as on electronic media or hard copy, or (b) permanent possession of the artwork in tangible form is transferred to the client. If the master agreement provides that the client owns the concepts embodied in tangible personal property that is owned and possessed by the advertising agency or commercial artist (e.g., so that such concepts cannot be used on behalf of any other person), that contract provision does not constitute the passage of title to tangible personal property to the client. A requirement that an advertising agency or commercial artist retain permanent possession of the artwork in tangible form does not itself constitute a sale of that property to the client in the absence of a provision passing title to such property to the client. 
2. Tangible personal property developed and used during services performed to convey ideas, concepts, looks, or messages is consumed in the performance of those services. Unless, prior to any use, the advertising agency or commercial artist passes title to such property to the client as discussed in the previous paragraph, the advertising agency or commercial artist is the consumer of such tangible personal property used and tax applies to the sale of property to, or to the use of the property by, the advertising agency or commercial artist. If the advertising agency or commercial artist passes title to, or permanent possession of, such tangible personal property to its client, tax applies to the sale of the tangible personal property by the advertising agency or commercial artist to the client. 
(B) Digital Pre-Press Instruction. Digital pre-press instruction is a custom computer program under section 6010.9 of the Revenue and Taxation Code, the sale of which is not subject to tax, provided the digital pre-press instruction is prepared to the special order of the purchaser. Digital pre-press instruction shall not, however, be regarded as a custom computer program if it is a “canned” or prewritten computer program which is held or existing for general or repeated sale or lease, even if the digital pre-press instruction was initially developed on a custom basis or for in-house use. The sale of such canned or prewritten digital pre-press instruction in tangible form is a sale of tangible personal property, the retail sale of which is subject to tax. 
(C) Retouching Photographic Images. Retouching a photographic image for the purpose of repairing or restoring the photograph to its original condition is a repair, the charge for which is not taxable. 
(D) Signage. The creation and providing of single copies of blueprints, diagrams, and instructions for signage as a result of environmental graphic design is a service the charge for which is not taxable. Charges for additional copies are taxable. 
(E) Websites. The design, editing, or hosting of an electronic website in which no tangible personal property is transferred to the client is a service, the charge for which is not subject to tax. 
(F) Specific Nontaxable Charges. The following and similar fees and commissions are not taxable when they are separately stated. Whether separately stated or not, these fees and commissions are not included in the calculation of “direct labor” for purposes of subdivision (b)(3). 
1. Media commissions or fees received for placement of advertising whether paid by the medium, by another advertising agency, or by the client. 
2. Commissions or fees paid to advertising agencies by suppliers. Examples of such commissions are those paid to an advertising agency by a premium manufacturer (or distributor) or a direct-by-mail supplier. 
3. Consultation and concept development fees related to client discussion, development of ideas, and other services. If the advertising agency transfers to the client tangible personal property produced as a result of these services, the transfer is incidental to the advertising agency's providing of the service and is not a sale of that tangible personal property; the advertising agency is the consumer of tangible personal property transferred to the client incidental to the providing of a service. 
4. Fees for research or account planning that entail consumer research and the application of that research to the client's business or industry. 
5. Fees for quality control supervision that entails the proofing and review of printing and other products provided by outside suppliers. 
6. Charges for the formulation and writing of copy. 
(G) Example. A designer contracts to create and sell printed brochures to a law firm. The contract separately states a charge for design, for art direction, for preliminary art, and for the printed brochures. The designer's design and art direction services culminate in the creation of preliminary art that the designer uses to show the designer's concepts to the law firm. After the law firm approves the concepts, the designer finalizes the design of the brochure and contracts with a printer to print the brochures. The printer sells the printed brochures to the designer for resale, and the designer resells the printed brochures to the law firm. The only tangible personal property that will be transferred to the law firm (or to anyone on behalf of the law firm) are the printed brochures. The law firm will not obtain title to, or the right to possession of, any finished art or any other tangible personal property. Tax does not apply to the designer's separately stated charges for design, art direction, and preliminary art. Tax applies to the designer's separately stated charge to the law firm for the printed brochures. 
(2) Finished Art. 
(A) Use of Aids in Creation of Finished Art. If the advertising agency or commercial artist uses any intermediate production aids or special printing aids in the creation of the finished art, the presumptions with respect to passage of title and the calculation of the measure of tax on the sale of such aids by the advertising agency or commercial artist, is governed by the provisions of Regulation 1541 applicable to special printing aids. 
(B) Transfers of Electronic Artwork. A transfer of electronic artwork in tangible form is a sale. However, a transfer of electronic artwork from an advertising agency or commercial artist to the client or to a third party on the client's behalf that is not in tangible form is not a sale of tangible personal property, and the charges for the transfer are not subject to tax. A transfer of electronic artwork is not in tangible form if the file containing the electronic artwork is transferred through remote telecommunications (such as by modem or over the Internet), or if the file is loaded into the client's computer by the advertising agency or commercial artist, and the client does not obtain title to or possession of any tangible personal property, such as electronic media or hard copy. If the transfer is not a transfer in tangible form because it is loaded onto the client's computer, the advertising agency or commercial artist should document that transfer by a written statement signed at the time of loading by the client and by the person who loaded the electronic artwork into the client's computer with the following or similar language: “This electronic artwork was loaded into the computer of [client's name] by [advertising agency's or commercial artist's name], and [advertising agency's or commercial artist's name] did not transfer any tangible personal property containing the artwork, such as electronic media or hard copies, to [client's name].” When such a statement is signed at the time the file is loaded, it will be rebuttably presumed that the transfer of electronic artwork was not transferred in tangible form. If there is no such timely completed statement, the advertising agency or commercial artist may provide other substantive evidence establishing that the artwork was not transferred in tangible form. 
(C) Transfers of Finished Art in Tangible Form. The electronic or manual preparation of finished art for use in reproduction or display is not a service. Unless the transfer is not in tangible form as explained in subdivision (b)(2)(B), the transfer of finished art is a sale of tangible personal property and tax applies to charges for that finished art, including all charges for any rights sold with the finished art, such as copyrights or distribution and production rights, except as provided in subdivision (b)(2)(D)2. 
1. Combined Charge for Finished Art and Conceptual Services. If charges for finished art are combined into a single charge that also includes nontaxable charges for conceptual services described in subdivision (b)(1)(A), the advertising agency or commercial artist may report the measure of tax on the retail sale of the finished art as specified in subdivision (b)(3), provided that the reported measure of tax must also include the value of reproduction rights included with the transfer except those that are not taxable as provided in subdivision (b)(2)(D)2. 
2. Lump Sum Billing -- 75/25 Presumption. If tax is not reported as provided in the previous paragraph, it will be rebuttably presumed that 75 percent of the combined charge for the finished art and conceptual services is for the nontaxable services and that 25 percent of the combined charge is the measure of tax on the retail sale of the finished art. However, if the sales price to the advertising agency or commercial artist of the finished art (or component parts) and any intermediate production aids or special printing aids sold to the client for that combined charge is more than 25 percent of the combined charge to the client, the measure of tax is the sales price of the tangible personal property to the advertising agency or commercial artist. 
(D) Reproduction Rights Transferred With Finished Art. 
1. Charges for the transfer of possession in tangible form to the client or to anyone else on the client's behalf of finished art for purposes of reproduction are included in the measure of tax on that sale, including all charges for the right to use that property, even though there is no transfer of title to the person reproducing the finished art, except as provided in subdivision (b)(2)(D)2. 
2. Any agreement evidenced by a writing (such as a contract, invoice, or purchase order) that assigns or licenses a copyright interest in finished art for the purpose of reproducing and selling other property subject to the copyright interest is a technology transfer agreement, as explained further in Regulation 1507. Tax applies to amounts received for any tangible personal property transferred as part of a technology transfer agreement. Notwithstanding subdivision (b)(2)(C), tax does not apply to temporary transfers of computer storage media containing finished art transferred as part of a technology transfer agreement. Tax does not apply to amounts received for the assignment or licensing of a copyright interest as part of a technology transfer agreement. The measure of tax on the sale of finished art transferred by an advertising agency or commercial artist as part of a technology transfer agreement shall be: 
a. The separately stated sales price if the finished art is permanently transferred, or the separately stated lease price if the finished art is temporarily transferred; provided that the separately stated price is reasonable; 
b. Where there is no such separately stated price, the separate price at which the person holding the copyright interest in the finished art has sold or leased that finished art or like finished art to an unrelated third party where: 1) the finished art was sold or leased without also transferring an interest in the copyright; or 2) the finished art was sold or leased in another transaction at a stated price satisfying the requirements of subdivisions (b)(2)(D)2.a.; or 
c. If there is no such separately stated price under subdivision (b)(2)(D)2.a., nor a separate price under subdivision (b)(2)(D)2.b., 200 percent of the combined cost of materials and labor used to produce or acquire the finished art. “Cost of materials” consists of the costs of those materials used or incorporated into the finished art, or any tangible personal property transferred as part of the technology transfer agreement. “Labor” means any charges for labor used to create such tangible personal property where the advertising agency or commercial artist purchases such labor from a third party, or the work is performed by an employee of the advertising agency or commercial artist. 
(3) Sales of Other Tangible Personal Property by Advertising Agency or Commercial Artist. Tax applies to the total charge for the retail sale of tangible personal property by an advertising agency or commercial artist. If an advertising agency or commercial artist combines charges for nontaxable services as defined in subdivision (b)(1)(F), such as media placement, with charges for tangible personal property for which the advertising agency or commercial artist is the retailer, the measure of tax on that retail sale of property includes the total of: direct labor; the cost of purchased items that become an ingredient or component part of the tangible personal property; the cost of any intermediate production aids or special printing aids; and a reasonable markup. Commissions, fees, and other charges exclusively related to the production or fabrication of tangible personal properly are part of direct labor and are thus included in the measure of tax. Such charges include retouching of photographic images or other artwork for reproduction, provided the retouching is intended to improve the quality of the reproduction. An advertising agency or commercial artist must keep sufficient records to document the basis for the reported measure of tax. 
(4) Items Purchased by an Advertising Agency or Commercial Artist. Except when property is resold prior to any use, an advertising agency or commercial artist is the consumer of tangible personal property used in the operation of its business. Tax applies to the sale of such property to, or to the use of such property by, the advertising agency or commercial artist. 
(c) Situations Specific to Advertising Agencies. 
(1) Advertising Agency Acting as an Agent for Its Client. An agent is one who represents another, called the principal, in dealings with third persons. (Civil Code section 2295.) To the extent that an advertising agency acts as the agent of its client when acquiring tangible personal property, it is neither a purchaser of the property with respect to the supplier nor a seller of the property with respect to its principal (that is, its client). Because of the unique relationship between advertising agencies and their clients, unless an advertising agency elects non-agent status under subdivision (c)(2)(A) or is otherwise the retailer of the property under subdivision (c)(2)(B) or (c)(2)(C), it is rebuttably presumed that the advertising agency acts as the agent of its client when acquiring tangible personal property on its client's behalf. 
(A) A supplier of tangible personal property to an advertising agency is presumed to have made a retail sale of that property unless the supplier takes a timely and valid resale certificate in good faith from the advertising agency. Otherwise, the supplier has the burden of establishing that the advertising agency elected non-agent status under subdivision (c)(2)(A) and resold the property or that the advertising agency resold the property as the retailer under subdivision (c)(2)(B) or (c)(2)(C). 
(B) When an advertising agency is the agent of its client for the purchase of tangible personal property under subdivision (c)(1), sales or use tax is due on the purchase price from the supplier to the advertising agency. Tax does not apply to the charge made by an advertising agency to its client for reimbursement, including tax reimbursement, for the amount charged by a supplier, nor does tax apply to the advertising agency's separately stated charges for its services directly related to its acquisition of such tangible personal property (e.g., when the advertising agency makes a separately itemized charge for reimbursement of the amount paid to the supplier of the property, tax does not apply to a separately itemized “agency fee”). When the applicable tax is use tax and the advertising agency does not pay that use tax to the supplier on the client's behalf, the advertising agency is liable for the use tax and must report and pay the use tax to the Board. The advertising agency's liability for that use tax is not extinguished unless the client has self-reported and paid the tax to the Board. 
(C) An advertising agency may not issue a resale certificate when purchasing tangible personal property as the agent of its client. An advertising agency who issues a resale certificate to a supplier is presumed to be purchasing tangible personal property from that supplier on its own behalf for resale and not to be acting as an agent of its client. However, the advertising agency may provide evidence to prove that its issuance of the resale certificate was erroneous and that the advertising agency was acting as an agent of its client, provided the advertising agency has not treated the transaction as its own sale of tangible personal property to its client, collecting tax or tax reimbursement from its client on that sale. If the resale certificate was issued in error, the advertising agency is liable for use tax on the cost of tangible personal property purchased under the certificate unless the advertising agency has already paid that tax to the supplier or to the Board, or the client has self-reported and paid the tax to the Board. 
(2) Advertising Agency Acting as a Retailer. An advertising agency that acts as a retailer of tangible personal property may issue a resale certificate for such tangible personal property if the property will be resold prior to any use. Absent an agreement that the property will be sold prior to use, tax is due on the purchase price of tangible personal property that is used prior to being resold to the client and, in addition, tax is also due on the sales price of the tangible personal property to the client. 
(A) Election of Non-Agent Status. An advertising agency may elect non-agent status with respect to sales of tangible personal property to its client. This election must be supported by a specific written statement in its master agreement with the client. Alternatively, a statement may be included on an advertising agency's job order or invoice to its client. Statements should include the following or similar language: “(Advertising Agency's name) will not be acting as an agent of (client's name) for purposes of this transaction.”
An advertising agency that elects non-agent status is a retailer with respect to tangible personal property sold to its clients. The measure of tax on the advertising agency's retail sale is the separately stated charge for the tangible personal property. If there is no such separately stated charge, the measure of tax is calculated as provided in subdivision (b). 
(B) Items Produced or Fabricated by an Advertising Agency In-House. Advertising agencies are retailers of tangible personal property they produce or fabricate, e.g., by their own employees. Advertising agencies are not agents of their clients with respect to the acquisition of materials incorporated into such items of tangible personal property they produce or fabricate, but instead are the retailers of such property. The measure of tax on their retail sale of that property is the separately stated charge for the property sold. If there is no such separately stated charge, the measure of tax is calculated as provided in subdivision (b). 
(C) Invoice to Client for More Than Cost of Tangible Personal Property to Advertising Agency. When an advertising agency invoices its client for tangible personal property provided by the advertising agency without separately stating the amount paid to the supplier for that property, the advertising agency is the retailer of the tangible personal property to its client. For example, when the advertising agency invoices a single charge to its client for tangible personal property that includes the amount paid to the supplier for the tangible personal property together with a markup, the advertising agency is the retailer of that tangible personal property and tax applies to that separately stated charge. If the advertising agency makes a combined charge to its client that includes the charge for the tangible personal property as well as the charge for any nontaxable services or reproduction rights under subdivision (b), the advertising agency is the retailer of the tangible personal property provided and the measure of tax on the sale of that tangible personal property is calculated as provided in subdivision (b). 
(d) Transfers by an Artist at a Social Gathering. The transfer of original drawings, sketches, illustrations, or paintings by an artist at a social gathering for entertainment purposes is not a sale or use or purchase of tangible personal property, and the artist is the consumer of any property so transferred, when all the following requirements are satisfied: 
(1) Eighty percent or more of the drawings, sketches, illustrations, or paintings are delivered by the artist to a person or persons other than the purchaser; 
(2) Eighty percent or more of all of the drawings, sketches, illustrations, or paintings are received by a person or persons, other than the purchaser, at no cost to the person or persons who become the owner of the drawings, sketches, illustrations, or paintings; 
(3) The charge for the drawings, sketches, illustrations, or paintings is based on a preset fee; and 
(4) The preset fee charged for the drawings, sketches, illustrations, or paintings is contingent upon a minimum number of at least three drawings, sketches, illustrations, or paintings to be produced by the artist at the social gathering. 
(e) Charges and Transactions Governed by Other Regulations. 
(1) Audio Productions. Tax applies to charges for an audio production obtained or furnished by an advertising agency to its client as provided in Regulation 1527. 
(2) Photography. Tax applies to charges for photography as provided in Regulation 1528 except when the photographic image is furnished by a commercial artist as defined in subdivision (a)(3). 
(3) Printed Sales Messages. Qualifying sales of printed sales messages may qualify for exemption, as explained in Regulation 1541.5. 
(4) Typography. Tax applies to charges for typography or composed type obtained from outside suppliers as provided in Regulation 1541. 
(5) Video or Film Productions. When a video or film production obtained or furnished by an advertising agency to its client constitutes qualified production services as defined in Regulation 1529, tax applies to the charges for such qualified production services as provided in Regulation 1529. 
NOTE

Authority: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6010.3, 6010.30 and 6015, Revenue and Taxation Code; and Preston v. State Board of Equalization (2001) 25 Cal. 4th 197, 105 Cal. Rptr. 2d 407.
HISTORY

1. Renumbering from former section 1902 filed 11-3-71; effective thirtieth day thereafter (Register 71, No. 45). For prior history see Register 68, No. 38.
2. Amendment filed 11-22-74; effective thirtieth day thereafter (Register 74, No. 47).
3. Amendment filed 3-19-76; effective thirtieth day thereafter (Register 76, No. 12).
4. Amendment filed 9-6-83; effective thirtieth day thereafter (Register 83, No. 37).
5. Amendment of subsections (b)(1), (b)(4)(A), (C), (E) and (K) filed 5-23-94; operative 6-22-94 (Register 94, No. 21).
6. Editorial correction of subsection (b)(4)(A) (Register 95, No. 48).
7. Repealer and new section filed 3-24-2000; operative 4-23-2000 (Register 2000, No. 12).
8. Relocation of article 4 heading formerly preceding section 1532 to precede section 1540 filed 6-7-2002; operative 7-7-2002 (Register 2002, No. 23).
9. Amendment of section heading, repealer and new section and amendment of Note filed 9-3-2002; operative 10-3-2002 (Register 2002, No. 36).
§1541. Printing and Related Arts.
Note

(a) Definitions.
(1) Clip Art. Clip art is prepackaged art (including photographic images) which is not produced to the special order of the customer and which is commercially available on CD ROM, other electronic media, or by computer program for use in digital page layout. Images that are enlarged, reduced, or rotated are not considered “produced to the special order of the customer.” 
(2) Color Separator. A color separator is a person who engages in the process of color separation. The process of color separation divides a full color photographic image into four separate components, corresponding to the four primary colors used in process color printing. The color separator may accomplish this photographically or electronically, and the products of this process may be either a negative or positive film separation or a separated printing plate. 
(3) Color Separation Working Products. Color separation working products consist of property such as photographic film for making transparencies, masks, internegatives, interpositives, halftone negatives, composite color separation negatives, goldenrod paper and mylar plastic used in making flats, tape used in stripping negatives into flats, developing chemicals which become a component part of negatives and positives, proofing material and ink used in making final proofs, progressive proofs, and similar items, which are similar in function to special printing aids as defined in subdivision (a)(12). 
(4) Digital Pre-Press Instruction. Digital pre-press instruction is the creation of original information in electronic form by combining more than one computer program into specific instructions or information necessary to prepare and link files for electronic transmission for output to film, plate, or direct to press, which is then transferred on electronic media such as tape or compact disc. 
(5) Finished Art. Finished art is the final artwork used for actual reproduction by photomechanical or other processes, or used for display. It includes electronic artwork, illustrations (e.g. drawings, diagrams, halftones, or color images), photographic images, sculptures, paintings, and handlettering. 
(6) Intermediate Production Aids. Intermediate production aids include items such as artwork, illustrations, photographic images, photo engravings, and other similar materials which are used to produce special printing aids or finished artother intermediate production aids. 
(7) Mechanical or Paste-Up. A mechanical or paste-up (also called camera-ready art or camera-ready copy) is produced by preparing copy to make it camera-ready with all type and design elements, and then pasting the prepared copy on artboard or illustration board in exact position along with instructions, either in the margins or on an overlay, for the platemaker. 
(8) Print Broker. A print broker is a person who contracts to sell printed matter, but who does not actually engage in the printing process to produce the printed matter to be sold, instead purchasing the printed matter from a printer or from another print broker for resale to the print broker's customer. A person who sells printed matter for which that person did not engage in the printing process is acting as a print broker even if that person engages in the print process for other contracts. 
(9) Printer. A printer is a person engaged in the printing process. 
(10) Printing Process. The printing process involves activities related to the production of printed matter such as letterpress, flexography, gravure, offset lithography, reprography, screen printing, steel-die engraving, thermography, laser printing, inkjet printing, and photocopying. 
(11) Reproduction Proof. A reproduction proof is used exclusively for reproduction. It consists of either a direct impression of composed type forms containing type matter only or type matter combined with clip art, or a copy of that direct impression made by any method, including the diffusion transfer method. 
(12) Special Printing Aids. Special printing aids are reusable manufacturing aids which are used by a printer during the printing process and are of unique utility to a particular customer. Special printing aids include electrotypes, stereotypes, photoengravings, silk screens, steel dies, cutting dies, lithographic plates, film, single color or multicolor separation negatives, and flats. For purposes of this regulation, special printing aids includes items defined by subdivision (a)(6) as intermediate production aids. 
(b) Application of Tax.
(1) Sales by Printers. The production of printed matter for a consumer is a sale of tangible personal property whether the materials incorporated into the printed matter are furnished by the consumer or the printer. Unless that sale is exempt from tax, tax applies to the total gross receipts or sales price of the sale with no deduction on account of: the cost of the raw materials or other components; labor or service costs of any step in the process of producing, fabricating, processing, printing, or imprinting the tangible personal property; or any other expenses or services that are a part of the sale. Services that are a part of the sale of tangible personal property to consumers include charges for overtime, set-up, die cutting, embossing, folding (except as provided in subdivision (h)), and other binding operations. Printers may not deduct from the gross receipts or sales price from their sales of printed matter charges related to their typography work or the cost of typography or typesetting to them, nor can they deduct the costs of special printing aids for which they are consumers under subdivision (c)(1)(A), whether or not a separate charge is made to the customer for the special printing aids. Receipts attributable to such costs are includable in the measure of tax.
Tax applies to a printer's sale of special printing aids as provided in subdivision (c).
(2) Purchases by Printers. Printers are consumers of tangible personal property which is not sold prior to use or physically incorporated into the article to be sold. Tax applies to the sale of such property to, or to the use of the property by, a printer and also to any sale subsequent to its use by the printer. Property ordinarily consumed by a printer includes machinery (e.g., printing presses, cameras, digital pre-press equipment, and plate makers), office equipment, and printing aids. Printers, however, may purchase special printing aids for resale as explained in subdivision (c).
(c) Special Printing Aids. In recognition of the unique utility that special printing aids have to the production of printed matter, the practices of the industry, and the need to avoid burdening businesses with unnecessary paperwork, the presumptions and rules set forth in this subdivision apply to a printer's purchase and sale of special printing aids used to produce printed matter sold by the printer. 
(1) Printer's Purchase of Special Printing Aids. 
(A) When a printer who uses special printing aids to produce printed matter does not wish to sell those special printing aids in connection with the printer's sale of the printed matter so produced, the printer shall include the following or substantially similar statement in the contract or the sales invoice: “Special printing aids are not being sold to the customer as part of the sale of the printed matter, and the selling price of the printed matter does not include the transfer of title to the special printing aids.” When this statement, or a substantially similar statement, is included in the contract or sales invoice, the printer retains title to the special printing aids and is the consumer thereof, without regard to whether the printer separately itemizes a charge for the special printing aids. Accordingly, the printer may not issue a resale certificate to purchase such special printing aids for resale, and tax applies to the cost to the printer of those special printing aids. 
(B) Unless the printer includes a statement in the contract or sales invoice retaining title to the special printing aids, as described in subdivision (c)(1)(A), it shall be irrebuttably presumed that the printer resold to the customer the special printing aids purchased or produced by the printer for use on the customer's job, prior to any use, along with the printed matter produced with the special printing aids, without regard to whether the printer separately itemizes a charge for the special printing aids. Accordingly, unless the printer includes a statement in the contract or sales invoice retaining title, the printer may issue a resale certificate when purchasing such special printing aids or their components. If the vendor of the special printing aids to the printer does not take a valid and timely resale certificate from the printer stating that the special printing aids are for resale, the vendor has the burden of showing that the printer actually resold the special printing aids prior to use as provided in this subdivision. 
(2) Printer's Sale of Special Printing Aids. When the printer is regarded as purchasing the special printing aids for resale under subdivision (c)(1)(B), the following rules apply to determine the application of tax to the printer's sale of those special printing aids along with the printed matter produced with the special printing aids. 
(A) Retail Sales of Special Printing Aids. 
1. Sales to the United States Government. When a printer makes a retail sale of special printing aids along with the printed matter produced with those special printing aids to the United States Government, the sale of the printed matter and the special printing aids to the United States Government is exempt from tax as provided in Regulation 1614. 
2. With nontaxable sale of printed matter. When a printer makes a retail sale of special printing aids to anyone other than the United States Government along with a nontaxable sale of printed matter (such as an exempt sale in interstate commerce, an exempt sale of qualifying newspapers, periodicals, or printed sales messages, or a nontaxable sale for resale), the printer's sale of the special printing aids is subject to sales tax. The printer's taxable gross receipts or sales price from the sale of the special printing aids is deemed to be the sale price of the special printing aids, or their components, to the printer without regard to whether the printer separately states a charge for the special printing aids or, if the printer does so, without regard to the amount of that separately stated charge, and tax is due measured by that sale price. If the printer has paid California sales tax reimbursement or use tax on the sale price of the special printing aids or their components to the printer, no additional tax is due. 
3. With taxable sale of printed matter. When a printer makes a retail sale of special printing aids along with the taxable retail sale of printed matter, tax applies to the entire charge for the printed matter and special printing aids, without regard to whether the charge for the special printing aids is separately stated. If the printer does not make a separate charge for the special printing aids, the charge for the printed matter is deemed to include the taxable charge for the special printing aids, and no further tax is due on account of the sale of those special printing aids. 
(B) Nontaxable Sales of Special Printing Aids for Resale. A person purchasing printed matter for resale may also purchase the special printing aids used to produce the printed matter for resale if that person will, in fact, resell the special printing aids prior to any use. A printer will not be regarded as selling special printing aids for resale unless: 1) the printer separately states the sale price of the special printing aids in an amount not less than the sale price of the special printing aids, or their components, to the printer; and 2) the printer accepts a timely and valid resale certificate in good faith from the printer's customer stating that the special printing aids are purchased for resale. The term “special printing aids” on a resale certificate shall be sufficient to cover all special printing aids as defined in subdivision (a)(12), and a printer accepting such a resale certificate in good faith will be regarded as selling the special printing aids for resale provided the printer includes the required separately stated price for them. Otherwise, the printer will be regarded as selling the special printing aids at retail, and will owe tax on that retail sale accordingly. A printer might sell special printing aids for resale along with printed matter under circumstances where the sale of the printed matter is for resale and also qualifies for exemption, such as a sale in interstate commerce where the purchaser will then resell the printed matter prior to use. However, since a purchaser of special printing aids from a printer would not be regarded as purchasing them for resale unless reselling them as part of the sale of the printed matter produced with those special printing aids, a printer claiming its sale of special printing aids is for resale should take a resale certificate for its sale of the printed matter as well, even if the sale of that printed matter would also qualify for exemption. 
1. Sales of printed matter to multiple purchasers. A person is not purchasing special printing aids for resale when title to the special printing aids does not pass to that person's customer prior to any use. If that person's customer does not obtain the right to exercise dominion and control over the special printing aids, the person will not be selling the special printing aids to its customer and cannot purchase the special printing aids for resale. A person does not purchase special printing aids for resale when the printed matter produced with those special printing aids is sold to several purchasers. For example, a person purchasing newspapers for individual sale cannot purchase special printing aids for resale because the individual purchasers of the newspaper are not also purchasing the special printing aids. A person purchasing posters for sale to the general public is not purchasing special printing aids for resale to the general public. A person purchasing printed cartons to pack items for individual sale is not purchasing the special printing aids used to produce the cartons for resale to the ultimate purchasers of the contents of the carton. In addition to the fact that the multiple purchasers in each of these cases could not at any time be regarded as purchasing the special printing aids, the retail purchaser of the end product is not known at the time the special printing aids are used, meaning that the special printing aids could not in any event be resold to those purchasers prior to use. 
2. Existing obligation to resell special printing aids. A person cannot purchase special printing aids for resale when that person does not have an existing obligation to resell those particular special printing aids since, if the purchaser does not have such an existing obligation to resell the special printing aids, the printer will use them on the purchaser's behalf before they could be resold by the purchaser. An existing obligation may be represented by a purchase order, invoice, or other existing agreement, whether oral or in writing. If the existing obligation is an oral agreement, the person purchasing the special printing aids for resale must have some means to establish that the agreement was in existence no later than the time the special printing aids were used in the printing process. 
(C) Split Sales. A printer may use special printing aids to produce printed matter where a portion of the sale is taxable and a portion of the sale is not taxable, such as the sale of printed sales messages some of which are delivered as required for exemption by Regulation 1541.5 and some of which are delivered directly to the purchaser. If a printer makes a sale of printed matter where a portion of the sale is taxable and a portion is not taxable along with a retail sale of the special printing aids used to produce that printed matter, tax is due on the full sale price of the special printing aids. If the printer separately states a charge for the special printing aids in an amount not less than the sale price of the special printing aids or their components to the printer, tax applies to that separate charge. In the absence of such a separate charge, the taxable portion of the sale of printed matter will be regarded as including the sale of the special printing aids provided that the measure of tax on that sale is at least equal to the sale price of the special printing aids or their components to the printer. If so, no further tax is due for the printer's sale of the special printing aids. If the measure of tax on the sale of the printed matter is less than the sale price of the special printing aids or their components to the printer, then the printer owes tax on the difference. 
(3) Purchases and Sales of Special Printing Aids by Print Brokers. 
(A) Print Broker's Purchase of Special Printing Aids for Resale. A person who purchases special printing aids for resale with printed matter but who will not itself use those special printing aids in the printing process is a print broker for that purchase and resale. A print broker who will acquire title to special printing aids from a printer or other print broker will be irrebuttably presumed to have resold the special printing aids to the customer, prior to any use, along with the printed matter produced with the special printing aids provided the print broker has, at the time of acquisition of the special printing aids, an existing obligation with a customer for the sale of printed matter and the print broker does not include a statement in the contract or sales invoice retaining title to the special printing aids, as described in subdivision (c)(1)(A). Accordingly, unless the print broker includes a statement in the contract or sales invoice retaining title, the print broker may purchase such special printing aids for resale pursuant to its existing obligation and issue a resale certificate for both the special printing aids and the printed matter. However, without regard to the taking of a resale certificate, a printer or print broker is regarded as making a retail sale of the special printing aids, and not a sale for resale, unless the printer or print broker separately states the charge for those special printing aids, which charge cannot be less than the sale price of such printing aids, or their components, to the printer. 
(B) Print Broker Issuing Resale Certificate. A print broker who issues a resale certificate for the purchase of special printing aids is liable for tax on the print broker's sale price of the special printing aids, even if the print broker's sale of the printed material produced with the special printing aids is not subject to tax (such as an exempt sale in interstate commerce, an exempt sale of qualifying newspapers, periodicals, or printed sales messages, or a nontaxable sale for resale), unless the print broker sells the special printing aids to the United States Government or to another print broker who issues a timely and valid resale certificate in good faith as provided in this subdivision (c). 
(C) Print Broker's Retail Sales of Special Printing Aids. 
1. Sales to the United States Government. When a print broker who purchases special printing aids under a resale certificate sells those special printing aids along with the printed matter produced with those special printing aids to the United States Government, the sale of the special printing aids to the United States Government is exempt from tax as provided in Regulation 1614. 
2. With nontaxable sale of printed matter. When a print broker who purchases special printing aids under a resale certificate makes a retail sale of special printing aids to anyone other than the United States Government along with a sale of printed matter that is not taxable (such as an exempt sale in interstate commerce, an exempt sale of qualifying newspapers, periodicals, or printed sales messages, or a nontaxable sale for resale), that sale of the special printing aids is subject to tax. If the print broker separately states a charge for the special printing aids that is not less than the printer's separately stated sale price for the special printing aids to the print broker, then tax applies to that separately stated sale price. Otherwise, tax applies to the the print broker's sale of the special printing aids measured by the printer's separately stated sale price to the print broker. 
3. With taxable sale of printed matter. When a print broker who purchases special printing aids under a resale certificate makes a retail sale of those special printing aids along with the taxable retail sale of printed matter, tax applies to the entire charge for the printed matter and special printing aids, without regard to whether the charge for the special printing aids is separately stated. If the print broker does not make a separate charge for the special printing aids, the charge for the printed matter is deemed to include the taxable charge for the special printing aids, and no further tax is due on account of those special printing aids. 
4. Split Sales. A print broker may sell special printing aids to produce printed matter the sale of which is partially exempt and partially subject to tax, such as the sale of printed sales messages some of which are delivered as required for exemption by Regulation 1541.5 and some of which are delivered directly to the purchaser. If a print broker makes a sale of printed matter where a portion of the sale is taxable and a portion is not taxable along with a retail sale of the special printing aids used to produce that printed matter, tax is due on the full sale price of the special printing aids. If the print broker separately states a charge for the special printing aids in an amount not less than the printer's separately stated sale price of the special printing aids to the print broker, tax applies to that separate charge. In the absence of such a separate charge, the taxable portion of the sale of printed matter will be regarded as including the sale of the special printing aids provided that the measure of tax on that sale is at least equal to the printer's separately stated sale price of the special printing aids to the print broker; if so, no further tax is due for the print broker's sale of the special printing aids, but if the measure of tax on the sale of the printed matter is less than the printer's separately stated sale price of the special printing aids to the print broker, then the print broker owes tax on the difference. 
(d) Conceptual Services. 
(1) When the printer makes a lump sum charge for a taxable sale of printed matter, the full lump sum charge is subject to tax with no deduction on account of any conceptual or other services performed to produce that printed matter. When the printer itemizes its charges for a taxable sale of printed matter, tax applies to the printer's entire charge except as provided below. 
(2) As part of its contract to produce and sell printed matter, a printer may also agree to acquire finished art for use in producing the printed matter, and the acquisition of that finished art may involve the providing of services to convey ideas, concepts, looks, or messages to a printer's customer which result in a transfer, enhancement, or revision of either electronic artwork, hard copies of electronic artwork, or copies of manually prepared artwork. If the printer states a separate charge for such services which are itemized as “design charges,” “preliminary art,” “concept development,” or any other designation that clearly indicates that the charges are for such services and not for finished art, they are nontaxable unless the contract of sale provides that the printer will pass to its customer title or the right to permanent possession of the artwork in tangible form, such as on electronic media or hard copy, or permanent possession of the artwork in tangible form is, in fact, transferred to the client. The remainder of the printer's charge is subject to tax. 
(3) If a printer separately itemizes charges for finished art that also include charges for conceptual services described in subdivision (d)(2), it will be rebuttably presumed that 75 percent of the combined charge for the finished art and conceptual services is for the nontaxable services. If, however, the printer acquires the finished art and conceptual services from a commercial artist (rather than producing the finished art itself) and the commercial artist itemizes a separate charge for conceptual services that is less than 75 percent of the commercial artist's combined charge for conceptual services and finished art, that lesser percentage shall be applied to the printer's combined charge for final art and conceptual services to determine the total nontaxable charges for conceptual services. Tax applies to the remaining portion of the combined charge for final art and conceptual services unless: 1) the printer passes title to the final art to its customer; and 2) that transfer qualifies a technology transfer agreement under subdivision (b)(2)(D)2 of Regulation 1540, in which case tax applies to the charge for finished art in accordance with that provision. A separately itemized charge for special printing aids is not a separately itemized charge for finished art and conceptual services, and no portion of that charge is excluded from tax as a charge for nontaxable conceptual services. 
(e) Color Separators. The application of tax to printers as explained in this regulation also applies to color separators. Color separators are consumers and not retailers of tangible personal property which is not sold prior to use or physically incorporated into the article to be sold. Tax applies to the sale of such property to, or to the use of such property by, the color separator. Examples of such property include filters and screens, trial proofing materials, disposable lithographic plates, and developing chemicals which do not become incorporated into the article sold. Color separator working products are special printing aids for purposes of this regulation, and the provisions of subdivision (c) apply to their purchase and sale. Color separators, and persons such as printers when acting as color separators, may purchase color separator working products for resale when title to such property passes to the customer prior to use by the color separator as described in subdivision (c). The term “color separator working products” or “special printing aids” on a resale certificate shall be sufficient to cover all such products. 
Charges for alterations of film work for $100 or less shall be considered charges for restoring property to its original condition and not subject to tax. Charges greater than $100 shall be considered charges for fabrication labor and subject to tax.
(f) Composed Type. 
(1) In General. Tax does not apply to the fabrication or transfer by a typographer or typesetter of composed type, or reproduction proofs of such composed type to printers to use in the preparation of printed matter. The composition of type is the performance of a service, and tax does not apply to charges for such service, unless that service is a part of the sale of printed matter. Tax applies to the gross receipts from the sale of printed matter without any deduction for the charge for typography. Tax applies to charges for transfers of composed type combined with artwork as provided in subdivision (f)(3).
Typographers and typesetters are the consumers and not retailers of materials, such as typesetting machinery, metal forms, galleys, proofing paper, and cleaners which are used in the performance of their service and are consumers of materials transferred to their customers incidental to the performance of nontaxable typography or typesetting services, such as clip art that is combined with text on the same page.
Composed type includes type together with lined borders and plain, straight, fancy, or curved lines. Composed type also includes charts, tables, graphs, and similar methods of providing information.
(2) Photocomposition (Including Phototypesetting and Computer Typesetting). Tax does not apply to the composing of type regardless of whether the type is composed by means of such simplified methods as standard typewriter, desktop publishing, Varityper or Justowriter; by means of photolettering or headlining machines; or by means of a photocomposition (including computer photocomposition) method. Tax does not apply to the transfer, whether temporary or permanent, of the direct product of the type composition service or copy thereof (e.g., typeset matter direct from the typesetting machine ready to be cut and pasted up for reproduction or computer generated type), if that product contains text only or text combined with clip art, whether that product is a paper or film (negative or positive) product, provided the product or copy is to be used exclusively for reproduction.
The transfer of camera-ready copy containing text only or text and clip art in the form of a paste-up, mechanical, or assembly, or a camera-ready reproduction of such, is the transfer of composed type and the charge made by the typographer or typesetter to his or her customer is not subject to tax. Tax does not apply to the transfer of a direct photoreproduction of type composed by means of a photolettering or headlining machine or other similar device.
Camera-ready copy which is produced through the use of desktop publishing software and a personal computer is nontaxable composed type provided it does not contain artwork other than clip art.
Transfers of plates and mats for use in the printing process which are produced using composed type are subject to tax, and tax applies to the entire charge made to the customer including any portion of the charge attributable to the type composition service, whether that charge is separately stated or not. Transfers of engraved printing plates and duplicate plates such as electrotypes, plastic plates, rubber plates, and other plates used in letterpress printing are subject to tax. Similarly, transfers of exposed presensitized, wipe-on, deep-etch, bi-metal and other plates used in offset lithography or of exposed plates produced by a photo-direct method, do not qualify as transfers of reproduction proofs of composed type and are subject to tax. A transfer of gelatin coated film to be transferred to fine mesh silk in the silk-screening process is subject to tax.
(3) Artwork. Artwork, other than clip art combined with composed type on the same page, is not composed type. The term “artwork” includes illustrations (e.g., drawings, diagrams, halftones, or color images), photographic images, drawings, paintings, handlettering, and computer generated artwork. If the basis for billing is on a per page basis, the charge for any page with artwork is subject to sales tax and the charge for any page with only text, or text and clip art, is not subject to tax. If the basis for billing is lump sum, the ratio of pages containing artwork to the total number of pages, applied to the lump sum charge, represents the retail sale price of the artwork and is subject to tax, but in no event shall the retail sale price of the artwork be less that the sale price of the artwork, or its components, to the typographer.
However, if ten percent or fewer of the pages contain artwork, the true object of the sale shall be deemed to be a sale of typography services with an incidental transfer of artwork, and the typographer is the consumer of that artwork. Tax applies to the sale price of the artwork, or its components, to the typographer. Tax does not apply to the sale of the typography service as explained in subdivision (f)(1).
(4) Reproduction Rights. Notwithstanding subdivision (f)(3), if the transfer of artwork qualifies as a technology transfer agreement under subdivision (b)(2)(D)2. of Regulation 1540, tax applies to the transfer of the artwork in accordance with that provision. 
(g) Digital Pre-Press Instruction. Digital pre-press instruction is a custom computer program under section 6010.9 of the Revenue and Taxation Code, the sale of which is not subject to tax, provided the digital pre-press instruction is prepared to the special order of the purchaser. Digital pre-press instruction shall not, however, be regarded as a custom computer program if it is a “canned” or prewritten computer program which is held or existing for general or repeated sale or lease, even if the digital pre-press instruction was initially developed on a custom basis or for in-house use. The sale of such canned or prewritten digital pre-press instruction in tangible form is a sale of tangible personal property, the retail sale of which is subject to tax. 
(h) Mailing. Tax does not apply to charges for postage or for addressing for the purpose of mailing (by hand or by mechanical means), folding for the purpose of mailing, enclosing, sealing, preparing for mailing or mailing letters or other printed matters, provided such charges are stated separately on invoices and in the accounting records. Tax applies, however, to charges for envelopes.
(i) Signs, Show Cards, and Posters. Tax applies to retail sales of signs, show cards, and posters, and to charges for painting signs, show cards, and posters, whether the materials are furnished by the painter or by the customer.
Tax does not apply to charges for painting or lettering on real property. The painter or letterer is the consumer of the materials used in such work, and tax applies with respect to the sale of such property to, or the use of such property by, the painter or letterer.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006-6012, Revenue and Taxation Code.

Note: For Publications, exemption of certain, see regulation 1590 (Section 1590), Title 18).

Note: For Advertising Agencies, see regulation 1540 (Section 1540, Title 18). For Mailing Services, see regulation 1504 (Section 1504, Title 18).
HISTORY

1. Renumbering from former Section 1934 filed 11-3-71; effective thirtieth day thereafter (Register 71, No. 45). For prior history see Register 68, No. 38.
2. Amendment filed 12-2-72; effective thirtieth day thereafter (Register 72, No. 52).
3. Amendment filed 1-11-89; operative 2-10-89 (Register 89, No. 3).
4. Repealer of subsections (a)-(h), new subsections (a)-(g), redesignation of former subsection (i) as subsection (h), and amendment of Note filed 11-3-99; operative 12-3-99 (Register 99, No.45 ).  
5. Amendment filed 9-3-2002; operative 10-3-2002 (Register 2002, No. 36).
§1541.5. Printed Sales Messages.
Note     •     History

(a) Definitions.
(1) “Printed Sales Messages” means and is limited to catalogs, letters, circulars, brochures, and pamphlets printed for the principal purpose of advertising or promoting goods or services. The term includes such items as department store catalogs, brochures advertising automobiles and vacations, circulars advertising professional services, and coupon books. The term does not include campaign literature and other fund-raising materials, stationery, reply envelopes, except as provided for in (b) of this regulation, order forms, sales invoices, containers for sample merchandise, newspapers or periodicals, calendars, notepads, cash register tapes, or directories unless they meet the principal purpose of advertising or promoting goods or services.
(2) “Printed to the Special Order” means designed and prepared according to the specific request of the purchaser. The term is also applicable to additional or supplemental orders, when the original order was printed to the special order of the purchaser.
(3) “Mailing House” means any person engaged in the business of stamping, addressing, sealing or otherwise preparing property for mailing for compensation.
(4) “Common Carrier” means any person engaged in the business of transporting property for hire or compensation and who offers his services indiscriminately to the public or to some portion of the public.
(5) “Cost” means any consideration given for the acquisition of the property, whether directly or indirectly. Examples of indirect costs include subscription fees, franchise fees or any general overhead billing.
(6) “Any other Person” as used herein means any person, other than the purchaser or the purchaser's agent, who takes physical delivery of the printed sales messages and who exercises dominion and control over the property.
(b) Application of Tax. Operative January 1, 1987, tax does not apply to the sale or use of printed sales messages which are:
(1) Printed to the special order of the purchaser;
(2) Mailed or delivered by the seller, the seller's agent or a mailing house acting as the agent for the purchaser, through the United States Postal Service or by common carrier;
(3) Received by any other person at no cost to that person who becomes the owner of the printed material.
(4) If all of the above conditions in (b)(1) through (b)(3) are not met, tax applies to the charges for the printed sales messages to the same extent as to charges for printed matter generally.
(5) To satisfy the common carrier requirement, it is only necessary that a common carrier be involved in some stage of the delivery.
(6) The tax exemption applies regardless of whether or not the purchaser of printed sales messages offers for sale the goods or services advertised in the printed sales messages.
(7) Tax does not apply to charges for containers, such as envelopes or wrapping paper, when sold with the printed sales messages for shipment or delivery, or when sold to persons who place the printed sales messages in the container and sell the printed sales messages together with the container.
(8) Generally, tax applies to sales of reply envelopes and order forms. However, reply envelopes, order forms, or other printed matter will be considered part of the printed sales message when such property is inserted in, stapled, glued, or otherwise affixed to the printed sales message in such a manner that it becomes a component or integral part of the printed sales message and is sold together with the printed sales message. Accordingly, the total charge in such cases is deemed to be for printed sales messages and not subject to tax.
(9) When printed sales messages are attached to reply envelopes and the reply envelopes are provided for the primary purpose of securement of a return payment on a billing, or business reasons other than the promotion of goods or services, tax applies to charges for such reply envelopes.
(10) A purchaser of printed sales messages may act as the agent of the seller of the printed sales messages to purchase from a third party supplier envelopes or other printed matter which become incorporated by the seller into the printed sales message and are sold together with the printed sales message. The purchaser must clearly establish with respect to any acquisition of printed matter that it is acting as agent for the seller of printed sales messages. To establish that a particular acquisition was made as an agent, the purchaser must (1) clearly disclose to the supplier the name of the seller for whom the purchaser is acting as agent, and (2) obtain, prior to acquisition, and retain written evidence of agent status with the seller of printed sales messages. The purchaser (agent) may not charge the seller, exclusive of any agency fee, an amount in excess of the amount paid to the third party supplier for the purchase of the envelopes or other printed matter (see Regulation 1540). The sale by the seller (third party supplier) under this agency relationship is a sale for resale to the seller of the printed sales message. Accordingly, the agent should provide the supplier with a resale certificate, purchase order, or other such document containing the principal/seller's name, address, permit number, signature of the agent or principal/seller, date of execution, and a statement that the property is purchased “for resale.” (see Regulation 1668). Unless the resale certificate, purchase order, or other such document is given on behalf of the seller of printed sales messages pursuant to the agency agreement, it will be presumed that the purchaser is acting on its own behalf. At no time will the purchaser of the printed sales messages act as an agent of the seller with regards to the delivery of the printed sales messages.
(c) Supporting Documentation. Any seller claiming an exemption for the sale of printed sales messages must obtain and retain supporting evidence of the delivery of the property.
(1) Delivery by the Seller. A seller who mails exempt printed sales messages through the United States Postal Service or by common carrier, should obtain and retain U.S. Postal receipts or bills of lading and obtain and retain a timely exemption certificate, taken in good faith, from the purchaser. The exemption certificate should be similar to the following:

“I hereby certify that the items purchased are printed sales messages and that the printed sales messages described herein which I shall purchase from 	 	
will be delivered by the seller or the seller's agent through the U.S. Postal Service or by common carrier at no cost to another person who becomes the owner of the printed material. If any of such printed material is determined not to be a printed sales message or is delivered other than as specified above, I understand that I am required by the Sales and Use Tax Law to report and pay tax, measured by the purchase price of such property. Description of property to be 
purchased: 	
Date ________________, ____ 
Purchaser: 	
                                                   (Company Name) 
Address: 	
Signature: 	
                                      (Signature of Authorized Person) 
Title: 	

Seller's Permit No. of Purchaser (if any) 	”

(2) Delivery by Mailing House as Agent for Purchaser. When the seller of printed sales messages delivers the property to a mailing house acting as agent for the purchaser, the contract of sale should specify to whom the property was delivered, and the seller should obtain and retain a timely exemption certificate, taken in good faith from the purchaser, similar to the following: 

“I hereby certify that the items purchased are printed sales messages and that the printed sales messages described herein which I shall purchase from 	,
delivered by the seller to the mailing house designated below, will be delivered by the mailing house, acting as my agent, through the United States Postal Service or common carrier at no cost to another person who becomes the owner of the printed material. If any such printed material is delivered other than as specified above, I understand that I am required by the Sales and Use Tax Law to report and pay tax, measured by the purchase price of such property. Description of property to be purchased:
Mailing house 	
                                                     (Name)
	
                                                   (Address) 
Date ________________, ____ 
Purchaser: 	
                                              (Company Name) 
Address: 	
Signature: 	
                                 (Signature of Authorized Person) 
Title: 	
Seller's Permit No. of Purchaser (if any) 	”
(3) A copy of the exemption certificate described in subdivision (c)(1) or (c)(2), accepted in good faith, shall relieve the seller from liability for the sales tax for the sale of printed sales messages delivered in accordance with subdivisions (b)(2), (b)(3), and (b)(10) of this regulation. If the seller fails to deliver the printed sales messages in such a manner, the seller will not be relieved from liability for the sales tax, on the ground that an exemption certificate was obtained with respect to the transaction.
(4) If a purchaser certifies in writing to a seller that the printed matter is a printed sales message or that the printed sales messages purchased will be delivered in a manner entitling the seller to regard the gross receipts from the sale as exempt from the sales tax and it is determined that the printed matter is not a printed sale message or the purchaser arranges for the delivery of the printed sales messages in some other manner, the purchaser shall be liable for payment of sales tax as if the purchaser were a retailer making a retail sale of the printed matter at the time of such use and the sales price of the printed matter to the purchaser shall be deemed the gross receipts from such retail sale.
(5) If a purchaser wishes to designate on each purchase order that the property is an exempt printed sales message, the seller should obtain a qualified exemption certificate, i.e., one that states “see purchase order” in the space provided for a description of the property to be purchased. Each purchase order must then specify whether the property covered by the order constitutes an exempt printed sales message within the provisions of this regulation or whether tax applies to the order. If each purchase order does not so specify, it will be assumed that the property covered by that purchase order is not an exempt printed sales message. If the purchase order includes both exempt printed sales messages and printed matter subject to tax, the purchase order must specify which items are exempt printed sales messages and which items are subject to tax.
(6) When the purchaser and seller of printed sales messages enter into an agency agreement for the purchase of envelopes or other printed matter, pursuant to subdivision (b)(10), the purchaser must clearly disclose to the third party supplier the name of the seller for whom the purchaser is acting as an agent prior to, or at the time of purchase. This condition will be met by including on all purchase orders provided to the third party supplier a statement containing the elements noted on the following example:

	“This order is placed for and on behalf of	
	[printer/principal's name]; seller's permit No.	
	[printer/principal's permit number] located at	
	[address of printer/principal] for whom	
	[purchaser/agent's name] is acting as agent.
	
	“The order is for _______________________ [number of envelopes] envelopes to be used as containers for printed sales messages. The envelopes are to be delivered to _________________ [mailing house name] for inclusion of the printed sales message.

	Date: 			
			(Signature of Purchaser or Authorized Agent)”
(7) Pursuant to subdivision (b)(10), prior to the acquisition of the envelopes or other printed matter, the purchaser and seller of the printed sales messages must agree that the purchaser is acting as an agent for the seller with respect to the purchase of envelopes or other printed matter which become incorporated by the seller into the printed sales message sold. This condition will be met by including a statement in a letter of agreement or other such document similar to the following example:

“You are hereby authorized to act as our agent in the procurement on our behalf of ______________ [number of envelopes] envelopes purchased for resale under seller's permit number _________ [printer/seller's permit number] from ____________________ [third party supplier's name], located at _________________ [address of third party supplier] for inclusion of printed sales messages to be sold and delivered pursuant to Regulation 1541.5.

Date: _____________ 19___ 	
	(Signature of Printer/Seller)”  
(8) The fact that the seller/principal of the printed sales messages may not formally reimburse the purchaser/agent with respect to the acquisition of envelopes or other printed matter from the third party supplier will not invalidate the agency relationship between the seller and purchaser of printed sales messages when all other provisions of this regulation are met.
(d) Examples of the Application of Tax Under Specific Circumstances.
(1) A real estate company contracts with a printer to design and prepare a brochure describing homes for sale in an area. The brochures are delivered by the seller to a mailing house for redelivery by common carrier to local merchants at no charge to the merchants. The merchants voluntarily display on the store premises the brochures which are available to the public free of charge. The merchants may dispose of the brochures in any manner they see fit. Tax does not apply to the charges for the brochures by the printer since the mailing house delivered the brochures by common carrier to a person other than the purchaser.
(2) The same real estate company in Example 1 requests the printer to prepare a second distribution of the same brochures in the same manner one month later. Tax does not apply to the charges for the second distribution, since the original printed matter was prepared to the special order of the purchaser and met the other conditions of the exemption.
(3) A manufacturer of automotive oil contracts with a printer to design and prepare a brochure describing the unique features of the oil. The brochures are delivered by the seller to a mailing house for redelivery by the U.S. Postal Service to automotive parts stores at no charge to the stores. The automotive parts stores voluntarily display on the store premises the brochures which are available to the public free of charge. Although the automobile parts store sells the oil, there is no direct or indirect cost to the store for displaying the brochures, that is, the wholesale cost is not determined by the distribution of the brochures. Tax does not apply to the charges for the brochures by the printer since the mailing house delivered the brochures by the U.S. Postal Service to a person other than the purchaser and all other conditions of the exemption were met.
(4) A fast-food franchiser contracts with a printer to prepare and deliver by a common carrier to the franchisee, coupons for a free soft drink. The franchisee distributes the coupons to its patrons at the premises. The franchisee pays a flat monthly fee to the franchiser for general expenses incurred by the franchiser for promotion of the products sold by the franchise. Although no specific charge was made by the franchiser to the franchisee, an indirect charge was made by way of the monthly fee, and, accordingly, tax applies to the charge for the printed matter.
(5) A company contracts with an advertising agency, who is acting as a seller, to prepare and deliver printed sales messages. The advertising agency contracts with a third party to do the printing and mailing. When the advertising agency separately bills the printed material to the company, and all other requirements for exemption are met, tax does not apply to the advertising agency's charges for the printed matter, since the seller need not be the actual printer to qualify for an exemption from the tax.
(6) A department store contracts with a printer to prepare sales catalogs. The printer delivers the catalogs through the U.S. Postal Service to the department store where the catalogs are available at no charge to the store's patrons. Tax applies to the charges made by the printer since delivery was made to the purchaser.
(7) The same department store in Example (6) requests the printer to deliver 75 percent of the catalogs through U.S. Postal Service to be distributed to individuals at no cost to those individuals. The printer delivers 25 percent of the catalogs to the department store and separately lists and prices on the invoice to the department store the charges for the printing aids used in the preparation of the printed sales messages. Tax would not apply to the charges by the printer on 75 percent of the printed material; tax would apply to the 25 percent delivered to the department store and to the entire charge for the printing aids.
(8) An attorney requests a printer to prepare and mail a letter to potential clients advertising the attorney's professional services. The printer inserts a reply envelope into the folder letter and places both into a large envelope and mails the material through the U.S. Postal Service. The letter qualifies as an exempt sales message. The outer envelope is an exempt container sold with the exempt printed sales message. The reply envelope is a component or integral part of the printed sales message when inserted with the letter into the larger envelope and sold with the exempt printed sales message.
(9) A furniture store requests a printer to prepare and mail billings and furniture advertisements to the store's customers. Both the billings and the advertisements are placed by the printer in the same envelope and mailed through the U.S. Postal Service. When the charges for the advertisement material are separately stated, tax does not apply to such charges. Tax does apply to the charges for the preparation of the billings and charges for the envelopes containing the billings, since the primary use of the envelopes is to mail billings and the addition of the printed sales messages is only secondary.
(10) A distributor requests a printer to prepare and mail through the U.S. Postal Service sales catalogs and order forms. The distributor also contracts with an envelope company to prepare reply envelopes to be incorporated into the catalog. The envelope company is requested by the distributor to deliver the reply envelopes to the printer, who will staple a reply envelope with an order form into the center of each catalog. The catalogs are subsequently delivered to the recipients free of charge through the U.S. Postal Service. Tax does not apply to the charges made by the printer for the catalogs or order forms. The order forms were sold by the printer along with the sale of the catalogs and became component parts of the catalogs. Tax applies to the distributor's purchase of the reply envelopes, since the reply envelopes were not component parts of the catalogs at the time they were purchased. However, when the distributor purchases the envelopes from the envelope company as an agent of the seller of the catalogs (in this case the printer), and such agency relationship is disclosed at the time of purchase, the reply envelopes will be considered sold with the catalogs. Accordingly, tax does not apply to the purchase of the envelopes (purchased for resale on behalf of the printer) or the printer's subsequent sale of the reply envelopes. In this case, the reply envelopes are sold along with the catalogs and become component parts when inserted.
(e) Special Printing Aids. The exemption provided under this regulation is limited to sales of printed sales messages and does not affect the application of tax with respect to “special printing aids” or other materials used in the preparation of printed sales messages. Tax applies to the sale of “special printing aids” as provided in Section 1541(e) of Title 18.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6379.5 and 6421, Revenue and Taxation Code.
HISTORY

1. New section filed 10-14-87; operative 11-13-87 (Register 87, No. 42).
2. Amendment of section and Note filed 1-15-99; operative 2-14-99 (Register 99, No. 3).
§1542. Signs, Show Cards, and Posters.
Note     •     History

NOTE

Authority cited: Section 6006, Revenue and Taxation Code.
HISTORY

1. Renumbering from former Section 1935 filed 11-3-71; effective thirtieth day thereafter (Register 71, No. 45).
2. Repealer filed 6-11-73, effective thirtieth day thereafter (Register 73, No.24).
§1543. Publishers.
Note     •     History

(a) Definitions.
(1) ART DIRECTOR. An art director prepares general specifications (in the form of verbal instructions or rough sketches) for an illustrator or photographer. 
(2) AUTHOR. An author creates an original manuscript, whether written by hand, on a typewriter or computer, or otherwise, for the purpose of publication. For purposes of this regulation, the following persons are also authors: 
(A) Copy editor, who reviews a manuscript for grammatical consistency and clarity. 
(B) Developmental editor, who consults with the author who created an original manuscript for purposes of publication to develop the concepts in the manuscript, or who reviews the copy edited manuscript and recommends visual concepts. 
(C) Manuscript reviewer, who reviews a manuscript for technical accuracy and acceptability to the proposed audience. For example, a reviewer may review the manuscript of a book on gardening for technical accuracy and suitability of the gardening advice for a particular climate. 
(D) Photo researcher, who assists other authors or publishers in obtaining permission and rights from third parties to use photographic images for purposes of reproduction in the publication of a manuscript. 
(E) Translator, who produces a manuscript that is a translation of material from a different language. 
(3) DESIGNER. A designer plans and prepares a general layout of typographical and illustrative elements for printed literature. 
(4) FINISHED ART. Finished art is the final artwork used for actual reproduction by photomechanical or other processes, or used for display. It includes electronic art, illustrations (e.g. drawings, diagrams, halftones, or color images), photographic images, sculptures, paintings, and handlettering. 
(5) ILLUSTRATOR. An illustrator creates an illustration, which is an original artwork (including cartoons and comic strips) licensed for the purpose of publication. 
(6) PHOTOGRAPHER. A photographer creates an original photographic image through the use of a camera or similar device, which photographic image is licensed for the purpose of publication. 
(7) PHOTOSTAT. A photostat (also called a “stat”) is a copy produced by photographic means, often used in layout, dummy work, or “for position only” on camera-ready art. 
(8) PRELIMINARY ART. Preliminary art is tangible personal property which is prepared solely for the purpose of demonstrating an idea or message for acceptance by the client before a contract is entered into, or before approval is given, for preparation of finished art provided neither title to, nor permanent possession of, such tangible personal property passes to the client. Examples of preliminary art include roughs, visualizations, layouts, comprehensives, and instant photos. 
(9) PRODUCTION FUNCTION. A production function is a segment of the process of producing camera-ready art or camera-ready copy, and includes the following: 
(A) Alterations, which are changes made to typeset copy or camera-ready copy. 
(B) Dummy, which is a mock-up or layout of a page showing position and overall form, used for approval. A dummy can be assembled manually or generated by a computer program. A dummy is never physically incorporated into a mechanical or paste-up. 
(C) Formatting, which is a manuscript mark-up, when done electronically. 
(D) Manuscript mark-up, which is the application of type specifications to a manuscript for typesetting, when done manually. 
(E) Mechanical or paste-up (also called camera-ready art or camera-ready copy), which is produced by preparing copy to make it camera-ready with all type and design elements, and then pasting the prepared copy on artboard or illustration board in exact position along with instructions, either in the margins or on an overlay, for the platemaker. 
(F) Production Coordination or Production Direction, which is the coordination and scheduling of the various components of a project. 
(G) Production Editing, which is editing that maintains editorial integrity of the author's work during the production process. 
(H) Proofreading, which is a reading of typeset copy for correctness in comparison with the original manuscript. 
(I) Typesetting, typography, or composition, which is the fabrication or production of composed type, or reproduction proofs thereof, for use in the preparation of printed matter. Typesetting, typography, or composition does not include the fabrication or production of a paste-up, mechanical, or assembly of which a reproduction proof is a component part. 
(10) PUBLISHER. A publisher owns, outright or by license, the rights to reproduce, market, and distribute printed literature. 
(11) SYNDICATOR. A syndicator receives from authors original manuscripts, or reproduction proofs thereof, including columns, cartoons, and comic strip drawings, and distributes those manuscripts to publishers for publication. 
(b) Application of Tax. 
(1) Authors.
(A) The transfer by an author to a publisher or syndicator, for the purpose of publication, of an original manuscript or copy thereof, including the transfer of an original column, cartoon, or comic strip drawing, is a service, the charge for which is not subject to sales tax. If the author transfers the original manuscript or copy thereof in tangible form, such as on paper or in machine-readable form such as on tape or compact disc, that transfer is incidental to the author's providing of the service, and the author is the consumer of any such property. However, the transfer of mere copies of an author's work is a sale of tangible personal property, and tax applies accordingly.
(B) Tax applies to charges for transfers of photographic images and illustrations, whether or not the photographic images or illustrations are copyrighted. Transfers of photographic images or illustrations illustrating text written by the photographer or illustrator are not taxable when they are merely incidental to the editorial matter. 
(2) Syndicators. The transfer by a syndicator to a publisher of impressed mats or proofs of syndicated columns, cartoons, or comic strip drawings for the purpose of publication is not subject to tax.
(3) Designers and art directors. Fees paid to a designer or art director for his or her ability to design, conceive, or dictate ideas, concepts, or specifications are not subject to tax if the designer or art director does not transfer to the client or to any other person on behalf of the client title or possession of any tangible personal property used to convey the ideas. The designer or  art director is the consumer of any paper, tape, film, diskette, or other tangible personal property used. Tax applies to the sale of such tangible personal property to, or use of such tangible personal property by, the designer or art director.
(4) Production Functions,
(A) Tax applies to the gross receipts from the retail sale of camera-ready art or camera-ready copy. The measure of tax includes charges for the performance of all production functions, whether the charges are separately stated or not.
(B) A contract under which a person performs only the following functions (or any combination of the following functions) is not subject to tax: manuscript mark-up, formatting, typesetting, proofreading, production coordination, and production editing. Charges for any of such functions are taxable when they are provided as part of the taxable sale of camera-ready copy or camera-ready art unless there is no contract for the camera-ready copy or camera-ready art until after such functions are completed, in which case the charges for such functions are nontaxable. 
(5) Contract To Perform Services and To Furnish Tangible Personal Property. One person may, under a single agreement, contract both to perform author, design, or art direction services, and to produce camera-ready copy or art. If, under the terms of the agreement, the client retains the right to approve the manuscript, layout, or general specifications before authorizing preparation of camera-ready copy or art, and if the author, designer, or art director does not transfer to the client title to the layouts or possession of the layouts other than for the purpose of review and approval only, then separately stated charges for performance of the services are not taxable. In the absence of specific contractual language, proof of client approval shall be evidenced by contemporaneous notation of receipt of approval in the records of the author, designer, or art director. No other proof shall be required.
(6) PRELIMINARY ART. Tax does not apply to separately stated charges for preliminary art, except where the preliminary art becomes physically incorporated into the finished art, as, for example, when the finished art is made by inking directly over the pencil sketch or drawing, or the approved layout is used as camera copy for reproduction. The charge for the preliminary art is separately stated if it is billed separately to the client, either on a separate billing or separately itemized on the billing for the finished art, provided it is clearly identified on the billing as roughs, visualizations, layouts, comprehensives, or other preliminary art. Proof of ordering or producing the preliminary art, prior to the date of the contract or approval for finished art, shall be evidenced by purchase orders of the buyer, or by work orders or other records of the seller. No other proof shall be required. Tax applies to the total charges made for finished art. If there is no separately stated charge for preliminary art, then there is no deduction for such services from the taxable measure for the sale of the finished art except as provided in subdivision (b)(2)(C) of Regulation 1540.
(7) Sales By Publishers. Sales of printed literature are subject to tax unless the sale is for resale or is specifically exempted by law, e.g., qualifying sales of printed sales messages and sales in interstate and foreign commerce.
(8) Transportation Charges and Services Related to Transportation. Tax applies to charges for the transportation of printed matter in connection with a taxable retail sale except as provided in Regulation 1628.
Separately stated charges for services such as addressing (by hand or by mechanical means), folding, enclosing, or sealing directly related to the transportation of printed matter to the customer are not subject to tax. Tax applies, however, to charges for envelopes except as otherwise provided in Regulation 1541.5.
(9) Purchase of Property For Resale. Tax applies to the purchase of tangible personal property that is consumed in any production function and does not become a part of the finished product. However, a person may purchase such property for resale if that person's contract of sale with its client explicitly passes title to the property to that person's client prior to its use. Tangible personal property so purchased must be separately listed and priced on the person's sales invoice to the client and sales tax applies to that charge.
(10) REPRODUCTION RIGHTS. Notwithstanding anything to the contrary in this regulation, if the transfer of a photographic image or artwork is made pursuant to a technology transfer agreement under subdivision (b)(2)(D)2. of Regulation 1540, tax applies to the transfer of the artwork in accordance with that provision. 
(c) Examples of the Application of Tax Under Specific Circumstances. 
(1) A firm provides various services to a publisher. In performing a contract with the publisher, the firm buys a color separation from a third party. The firm does not make a copy of the color separation or use it in any way, but resells it to the publisher. The firm may give a resale certificate to the third party but tax applies to the sale to the publisher.
(2) The firm in Example (1) uses the color separation before reselling it to the publisher. Both the firm and the publisher are consumers, and both sales are subject to tax.
(3) The firm in Example (1) buys both the color separation and a photostatic copy of it from the third party who separately states the price of each item on the sales invoice. The firm retains the photostatic copy but resells the color separation to the publisher without using it in any way. Since the third party used the color separation to make a copy of it, the sale of the component parts to the third party, or the third party's use of those component parts, is subject to tax. The firm may give a resale certificate to the third party for the color separation, but tax applies to the third party's sale of the photostatic copy. Tax also applies to the firm's sale of the color separation to the publisher.
(4) A firm contracts with a publisher to perform a contract in three stages, as follows:
(A) The firm creates an original manuscript of a book. The publisher reviews the first draft, comments on it, and approves it. The firm then does developmental editing, in which the writer and editors develop the manuscript for sound editorial structure and organization. The publisher reviews the resulting second draft, comments on it, and approves it. The firm then does copy editing, in which editors review the manuscript for grammatical consistency and clarity. After this, the firm passes title to the manuscript to the publisher for the purpose of publication. Under the contract, the firm can proceed with further work only with the publisher's approval. 
Tax does not apply to the sale of the finished manuscript or to any of the steps of writing and editing it.  
(B) In the second stage, the publisher returns the accepted manuscript to the firm for typesetting into galleys, which the publisher reviews and approves. The firm then arranges the galleys into page form, which the publisher reviews and approves. The firm then produces camera-ready art, which the publisher reviews for approval or alterations. The publisher then accepts and takes title to the camera-ready art. 
Tax applies to the firm's gross receipts from the sale of the camera-ready art, including formatting, typesetting, proofreading, and production coordination, whether separately stated or not. To preserve the nontaxable status of the receipts described in Example (4)(A), the charges for work done in Example (4)(A) must be separately stated from the charges for the sale of the tangible personal property in this Example (4)(B). 
(C) In the third stage, the publisher returns the camera-ready art to the firm for printing, The firm subcontracts the printing to a printer. The firm manages the quality of the printing. A representative of the publisher visits the printer to approve the work. At the firm's instruction, the printer ships the completed books to the publisher's warehouse. 
Since the firm will be reselling the books to the publisher without using them, the firm may issue a resale certificate to the printer. Since the publisher intends to resell the books, the publisher may issue a resale certificate to the firm. Tax applies to sales of the books by the publisher to consumers unless the sales are specifically exempt by statute (e.g. sales in interstate commerce.) 
(5) A publisher owns an existing manuscript. The publisher contracts with an editorial design firm for developmental editing, copy editing, and design specifications. The firm reviews the manuscript and makes recommendations to the publisher for developing it into publishable form, including recommended layout and a general approach to design (e.g., trim size). After the publisher accepts these recommendations, a designer (at the firm or a subcontractor) prepares sample sketches and dummies to express the idea to the publisher. After the publisher approves the sketches and dummies, the designer creates type specifications. A developmental editor and a copy editor (at the firm or a subcontractor) perform development and copy editing services. The edited manuscript, dummies, and type specifications are transferred to the publisher. 
Tax does not apply to the editing services because they are author's services. Tax does not apply to charges for the dummies and type specifications if those charges are separately stated and if possession and title is retained by the editorial design firm.  
(6) A publisher has an office in California and an office in New York. The publisher's California office purchases camera-ready art from a California production firm, with title passing in California. However, the production firm, on instructions from the publisher, ships the camera-ready art directly to the publisher's New York office for use at the New York office, with no use of the camera-ready art in California. 
Tax does not apply to the production firm's gross receipts from the sale of the camera-ready art, because the sale is in interstate commerce. 
(7) A commercial artist (such as a commercial photographer or illustrator) makes a temporary transfer of finished art (such as a photograph or illustration) that qualifies as a technology transfer agreement under subdivision (b)(2)(D)2. of Regulation 1540 to a publisher for purposes of reproducing the finished art in a children's book. The publisher makes a computer scan of the finished art and returns the original finished art to the commercial artist. The publisher incorporates the computer scan into layouts which are used to reproduce the finished art in the printed children's books, which are then sold. The commercial artist is paid an advance against royalties, and is then paid royalties based on retail sales of the children's book. The commercial artist does not make a separate charge for the tangible personal property leased to the publisher in accordance with subdivision (b)(2)(D)2.a. of Regulation 1540. As provided in subdivision (b)(2)(D)2.b. of Regulation 1540, if the commercial artist has leased like property for a separate price to an unrelated third party without also transferring an interest in the copyright, or has leased that finished art or like finished art for a separate price satisfying the requirements of subdivision (b)(2)(D)2.a. of Regulation 1540, then tax applies to that separate price. Otherwise, tax applies to the commercial artist's transfer as specified in subdivision (b)(2)(D)2.c. of Regulation 1540. Except for the tax due under subdivision (b)(2)(D)2.b. or (b)(2)(D)2.c. of Regulation 1540, no further tax is due on the royalties or the advance paid to the commercial artist. Tax applies to the retail sales of the children's book unless specifically exempt by statute. 
NOTE

Authority: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6015, 6094, 6244, 6362, 6379.5 and 6396, Revenue and Taxation Code. 
HISTORY

1. New section filed 2-15-91; operative 3-17-91 (Register 91, No. 12).  
2. Amendment of subsections (a)(3), (a)(4)(A)-(D), (G), (a)(6), (b)(1)(A)-(B), (b)(2), (b)(4)-(6), (c)(1)-(4)(A), (c)(6) and NOTE filed 4-19-92; operative 4-20-92 (Register 92, No. 13).
3. New subsection (a)(9), amendment of subsection (b)(1)(A), new subsection (b)(2) and subsection renumbering filed 10-24-96; operative 11-23-96 (Register 96, No. 43).
4. Amendment of section and Note filed 8-19-2002; operative 9-18-2002 (Register 2002, No. 34).
Article 5. Installers, Repairers, Reconditioners

(Also See Article 24)
§1546. Installing, Repairing, Reconditioning in General.
Note     •     History

(a) Installation Generally. Charges for labor or services used in installing or applying the property sold are excluded from the measure of the tax. Such labor and services do not include the fabrication of property in place.
(b) Repairmen.
(1) When Retailers. If the retail value of the parts and materials furnished in connection with repair work is more than 10 percent of the total charge, or if the repairman makes a separate charge for such property, the repairman is the retailer and tax applies to the fair retail selling price of such property.1
If the retail value of the property is more than 10 percent of the total charge, the repairman must segregate on the invoices to his customers and in his records the fair retail selling price of the parts and materials from the charges for labor of repair, installation, or other services performed.2 “Total charge” means the aggregate of the retail value of the parts and materials furnished or consumed in making the repairs, charges for installation, and charges for labor of repair or other services performed in making the repairs, including charges for in-plant or on-location handling, disassembly and reassembly. It does not include pick-up or delivery charges.
If the retailer does not make a segregation, the retail selling price of the parts and materials will be determined by the board based on information available to it. 
(2) When Consumers. If the retail value of the parts and materials furnished in connection with the repair work is 10 percent or less of the total charge, as defined in (b)(1) above, and if no separate charge is made for such property, the repairman is the consumer of the property,3 and tax applies to the sale of the property to him.
(3) Lump-sum Maintenance Contracts.
(A) In General--Definitions. “Mandatory maintenance contract.” A maintenance contract is mandatory within the meaning of this regulation when the buyer, as a condition of the sale, is required to purchase the maintenance contract from the seller. “Optional maintenance the meaning of this regulation when the buyer is not required to purchase the maintenance contract from the seller, i.e., he is free to contract with anyone he chooses. 
(B) Mandatory Maintenance Contracts. If the repair work is performed under a mandatory lump-sum maintenance contract providing for the furnishing of parts, materials, and labor necessary to maintain the property, the repairer is regarded as the retailer of the material furnished. Accordingly, if the property upon which the maintenance will be performed is sold at retail, the measure of tax includes any amount charged for the lump-sum maintenance contract, whether or not separately stated. The sale of the parts and materials to the repairer furnishing them under such a contract is a sale for resale and is not taxable.
(C) Optional Maintenance Contracts. If the repair work is performed under an optional lump-sum maintenance contract providing for the furnishing of parts, materials, and labor necessary to maintain the property, the repairer is regarded as the consumer of the parts and materials furnished.
(4) Exchange of Used for Reconditioned Similar Property. If the method of repairing or reconditioning certain tangible personal property involves commingling property delivered to a repairman or reconditioned property which may not be the identical property delivered to the repairman or reconditioner but which is exactly the same kind of property or derived from exactly the same kind of property as that so delivered, tax applies to the amount charged by the repairman or reconditioner for the repaired or reconditioned property.
(5) Repair Jobs Covered by Insurance. An amount represented as the sales price of parts in an accepted bid is the taxable measure required to be reported by the repairman unless there is a subsequent modification of the bid agreement and the customer or the insurer is informed of the change, provided, however, that the sales price of the parts is not less than the cost of the parts actually used. The bid agreement may be modified by an invoice or a priced repair order given to the customer or the insurer showing the sales order given to the customer or the insurer showing the sales price of the property actually furnished by the repairman. If a bid is so modified and the customer or insurer is notified of the change, the amount represented as the sales price of the parts on the modified bid is the amount upon which tax must be reported.
When the accepted bid is in writing, the subsequent modification to the bid agreement must also be in writing. The customer or the insurer should be notified of such modification prior to completion of the sale (e.g., delivery of the repaired automobile).

1  Parts furnished for repairing such property as motor vehicles, airplanes, bicycles, machinery, refrigerators, farm implements, musical instruments, radios, television sets, boats and furniture.

2  Section 9884.8 of the Business and Professions Code provides in part, with respect to automotive repair dealers, that “. . . Service work and parts shall be listed separately on the invoice, which shall also state separately the subtotal prices for service work and for parts, not including sales tax, and shall state separately the sales tax, if any, applicable to each . . .”

3  Parts furnished for repairing such property as tires (retreading and recapping, see regulation 1548), tubes, clothing, fishing rods, watches, and jewelry (see regulation 1553).
NOTE

Authority cited: 7051, Revenue and Taxation Code. References: Sections 6006, 6010, 6011, 6012, and 6015, Revenue and Taxation Code. Tire Retreading and Recapping, see regulation 1548. Accommodation loaned by repairers, see regulation 1669. Returns, Defects, and Replacements, see regulation 1655.
HISTORY

1. Amendment and renumbering of former Section 1946 filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
2. Amendment filed 11-10-70; effective thirtieth day thereafter (Register 70, No. 46).
3. Amendment filed 9-27-73; effective thirtieth day thereafter (Register 73, No. 39).
4. Amendment of subsection (b)(1) and (2) filed 5-30-75; effective thirtieth day thereafter (Register 75, No. 22).
5. Amendment of subsection (b)(1) filed 10-30-75; effective thirtieth day thereafter (Register 75, No. 44).
6. Amendment of subsection (b)(1) filed 1-19-79; effective thirtieth day thereafter (Register 79, No. 3).
7. Editorial correction of subsection (b)(1) (Register 99, No. 53).  
§1547. Vehicle Engine Exchanges.
Note     •     History

NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006 and 6012, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former Section 1948 filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
2. Repealer filed 5-9-84; effective thirtieth day thereafter (Register 84, No. 19).
§1548. Retreading and Recapping Tires.
Note     •     History

(a) Retreading and Recapping Customer's Own Tires. Tire retreaders and recappers are the retailers of the tangible personal property furnished to consumers and tax applies to sales of such property. If a lump-sum charge is made for retreading or recapping, 75 percent thereof is considered to be the sales price of the property.
(b) Sales of Retreaded or Recapped Tires Generally. Tax applies to sales of retreaded or recapped tires, the sales price of which includes any amount allowed for the customer's old tires or other merchandise traded in (see regulation 1654, Barter, Exchange, Trade-ins). If the method of retreading or recapping tires involves the commingling of old tires delivered to the retreader or recapper with similar property so that the customer receives retreaded or recapped tires which may not be the identical tires delivered to the retreader or recapper, but which are similar to those delivered, the tax applies to the amount charged by the retreader or recapper for the tires.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6006, Revenue and Taxation Code.
HISTORY

1. Renumbering from former Section 1951 and amendment filed 11-3-71; effective thirtieth day thereafter (Register 71, No. 45).
§1549. Fur Repairers, Alterers and Remodelers.
Note     •     History

(a) In General. Repairers, alterers, and remodelers of furs are retailers of the fur sold in connection with repairing, altering, and remodeling of fur garments.
Fur repairers, alterers, and remodelers must segregate on the invoices presented to their customers and in their records the fair retail selling price of the fur furnished by them, from the charges for the labor of repairing, altering, or remodeling the fur garment. If the retailer does not make a segregation of these charges, the retail selling price of the fur will be determined by the Board based on information available to it.
The repairers, alterers, and remodelers are the consumers of the thread, buttons, lining, and materials other than fur used in connection with such repairing, altering, and remodeling unless a separate charge for such property is made on the invoices to the customers at the fair retail selling price, in which case they are the retailers of the property.
(b) Fabrication Labor. Where the services performed on the fur garment by repairers, alterers, or remodelers result in producing, processing, or fabricating tangible personal property or are a step in producing, processing, or fabricating tangible personal property, the entire charge, including fabrication labor and materials, is subject to tax.
(c) Examples of the Application of Tax Under Specific Circumstances. Listed below are 12 situations involving the measure of taxability on repairing or remodeling fur garments. The answer “Repair” indicates that the tax applies to the retail selling price of materials furnished by the furrier. The answer “Taxable” indicates that the total charge is subject to tax.
(1) A customer brings in a fur coat and requests that it be restyled as a coat.--Repair.
(2) A customer brings in a coat and requests that it be remodeled into a jacket.--Repair.
(3) A customer brings in a coat and requests that it be made into a cape.--Taxable.
(4) A customer brings in a coat and requests that it be made into a stole.--Taxable.
(5) A customer brings in a jacket and requests that it be remodeled into a cape.--Taxable.
(6) A customer brings in a jacket and requests that it be remodeled into a stole.--Taxable.
(7) A customer brings in a cape and requests that it be remodeled into a stole.--Repair.
(8) A customer brings in a stole and requests that it be remodeled into a cape.--Repair.
(9) A customer brings in a coat and requests that it be remodeled, and it is necessary to use additional fur to add collar or cuffs which have not heretofore existed on the coat.--Repair.
(10) A customer comes in and requests that a garment be relined.--Repair.
(11) A customer comes in with an animal scarf and requests that the scarf be restyled into a new style animal scarf.--Repair.
(12) A customer brings in an animal scarf and requests that it be remodeled into a stole or cape.--Taxable.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6015, Revenue and Taxation Code. Fur dressers and dyers, see Regulation 1525 and Regulation 1928--Unrevised Series.
HISTORY

1. Renumbering from former Section 1949 filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Amendment filed 10-26-77; effective thirtieth day thereafter (Register 77, No. 44).
3. Amendment of subsection (a) filed 1-19-79; effective thirtieth day thereafter (Register 79, No. 3).
§1550. Reupholsterers.
Note     •     History

(a) General. This regulation applies to reupholsterers in general, including but not limited to, reupholsterers of household furniture, automobiles, boats, and airplanes. Effective January 1, 1975, the term “reupholsterers” as used in this regulation includes box spring and mattress renovators.
Reupholsterers generally perform four functions when completing a contract for their services.
(1) The sale of material and parts.
(2) The fabrication of back and seat cushions and the cutting and sewing of new material used for upholstery covering.
(3) Labor for stripping old materials and applying new material to tangible personal property.
(4) Repair labor such as retying springs and refinishing the exposed wooden areas of furniture, i.e., arms, legs, etc.
(b) Sales of Materials and Parts. Reupholsterers are the retailers of materials and parts they sell in connection with reupholstering jobs. These include but are not limited to: fabrics for furniture covering, cushions, foam rubber, padding, burlap, dust covers, seat decking, spring units, legs, arms and casters.
Reupholsterers also are the retailers of items with small unit values or furnished in small quantities on any particular job. These are commonly referred to as findings and include such items as brads, buttons, cardboard strips, edge roll, edge wire, glue, spring clips, tacks, tacking strips, thread, twine, web cord and varnish. If charges for the findings are not segregated, the tax on such findings may be computed and reported in the manner specified in paragraph (e) below.
(c) Fabrication Labor. Charges for fabrication labor are taxable. Cutting and sewing materials for coverings for furniture being reupholstered, including back and seat cushions, are steps in the process of completing a new article and are fabrication labor. Labor for making new furniture from material furnished directly or indirectly by the customer is fabrication labor.
(d) Exempt Labor. Labor charges for repairing furniture and for applying new materials to furniture are exempt providing such charges are segregated in the reupholsterers' records from charges for materials and fabrication labor.
(e) Computation of Exempt Labor. Reupholsterers are required to segregate material charges (other than charges for findings) from labor charges in their records. If no segregation is made between taxable fabrication labor and exempt installation or repair labor, it will be considered that 80 percent of total labor charges represent exempt labor. The remaining 20 percent of total labor charges will be regarded as the measure of taxable fabrication labor and findings.
(f) Method of Reporting. Reupholsterers who segregate in their records the sale price of materials, charges for fabrication labor, and charges for exempt labor may report their taxable sales by reporting total sales less a deduction for exempt labor.
If fabrication labor and sales of findings are not segregated in the reupholsterers' records, the allowable deduction for exempt labor will be an amount equal to 80 percent of the total labor charges.
A combination of the two reporting methods cannot be used for the same reporting period.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6012, and 6015, Revenue and Taxation Code. Fabrication Generally, see regulation 1526.
HISTORY

1. New section filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
2. Amendment of subsections (a) and (g) filed 10-19-73; effective thirtieth day thereafter (Register 73, No. 42).
3. Amendment of subsection a) filed 11-15-74; effective thirtieth day thereafter (Register 74, No. 46).
4. Repealer of subsection (f) and renumbering from subsection (g) to subsection (f) filed 1-19-79; effective thirtieth day thereafter (Register 79, No. 3).
§1551. Repainting and Refinishing.
Note     •     History

(a) Repainting and Refinishing for Consumers. Tax does not apply to single or lump-sum charges for repainting or refinishing used articles. Tax applies in such case to the sale to the refinisher of the paint and other materials used in the process, as he is regarded as the consumer of such property. If the refinisher uses paint or other materials purchased under a resale certificate, or without payment of use tax if purchased outside the state or in interstate commerce, he must report and pay tax measured by the cost of the materials to him.
If, however, the refinisher makes a separate charge at the fair retail selling price for the paint or similar finishing material that is applied to and becomes a component part of the used articles, he is the retailer of such paint or finishing material and tax applies to the amount of the separate charge.
(b) Repainting and Refinishing for Sellers. A refinisher of used articles for sellers who will resell the articles in the regular course of their businesses will be regarded as selling for resale the paint or similar finishing material that becomes a component part of the used articles. The refinisher should take a resale certificate under these circumstances.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6006, Revenue and Taxation Code. Neon sign relettering, see Regulation 1552. Painters, polishers and finishers, see Regulation 1931 Unrevised Series. Resale certificates, see Regulation 1688 (2668 Unrevised Series).
HISTORY

1. Renumbering from former Section 1950 filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Amendment filed 2-11-75; effective thirtieth day thereafter (Register 75, No. 7).
§1553. Miscellaneous Repair Operations.
Note     •     History

(a) Bookbinders. Bookbinders are consumers, rather than retailers, of the materials, such as cloth, leather, cardboard, glue, and thread, used in rebinding used books for a single or lump-sum charge, and tax applies to the sale of such materials to the bookbinder. If, however, the bookbinder makes a separate charge for such property at the fair retail selling price, the bookbinder is the retailer of the materials and tax applies to the amount of the separate charge.
When bound books are sold at retail, tax applies to the gross receipts without any deduction for the cost of binding, even when done by the seller of the books. Tax also applies to the entire charge for the initial binding of new books furnished to a bookbinder for binding, unless the customer of the bookbinder will sell the books in the regular course of business, in which case the customer of the bookbinder may furnish a resale certificate to the bookbinder.
Tax applies to the entire charge for binding done in connection with the furnishing of a finished product, i.e., a bound book, including a book produced with either a hard or soft cover by binding together materials such as magazines, newspapers, or business records.
(b) Motor and Transformer Rewinding. Tax applies to sales of materials and supplies furnished in connection with the rewinding of motors and transformers. If a lump-sum price is charged for the materials and labor, 50 percent thereof is regarded as the sales price of the supplies and materials.
(c) Shoe Repairperson. Persons engaged in repairing shoes are retailers of the tangible personal property furnished in connection with the repair work and tax applies to the retail selling price of such property. If a lump-sum or single charge is made for both materials and labor, 25 percent thereof is considered the retail selling price of the materials.
Tax applies to retail sales by shoe repairpersons of such items as shoes, polishes, and laces.
(d) Tennis Racket Restringing and Repairing. Persons engaged in repairing and restringing tennis rackets are retailers of the strings and other tangible personal property furnished, and tax applies to the retail selling price thereof. If a lump-sum charge is made for materials and labor, 50 percent thereof is regarded as the retail selling price of the materials furnished.
(e) Watch and Jewelry Repair Persons. Persons engaged in repairing watches and jewelry are consumers of watch, clock and jewelry repair parts and materials such as crystals, findings, chain links, gold and gems used in repairing watches, clocks and jewelry. Tax applies with respect to the sale to them of such property unless 
(1) The retail value of the parts and materials furnished in connection with repair work is more than 10 percent of the total charge, or
(2) The repair person makes a separate charge for the repair parts and materials.
Repairers are, however, retailers of wrist watch straps, metal bands, watches, clocks, chains, precious stones, gems and other tangible personal property which they sell to consumers in the regular course of business, and tax applies to the gross receipts from such retail sales.
When the retail value of wrist watch straps, metal bands, watches, clocks, chains, precious stones, gems and other tangible personal property furnished in connection with a repair work is more than 10 percent of the total charge for the repair, the repair person is the retailer of these parts and materials, and must segregate on the invoices to customers and in its records the fair retail selling price of these parts and materials from the charges for the repair labor performed. “Total charge” means the aggregate of the retail value of the parts and materials furnished or consumed in making the repairs and charges for the labor performed in making the repairs.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6006, Revenue and Taxation Code.
HISTORY

1. New section filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Amendment filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
3. Amendment of subsection (a) filed 1-17-75; effective thirtieth day thereafter (Register 75, No. 3).
4. Amendment of section and Note filed 5-27-2003; operative 6-26-2003 (Register 2003, No. 22).
Article 6. Specific Business Engaged in Retailing

(Also See Article 25)
§1565. Auctioneers.
Note     •     History

Persons engaged in the business of making retail sales at auction of tangible personal property owned by such person or others are retailers, and are, therefore, required to hold sellers' permits and pay tax measured by the gross receipts from such sales.
The amount upon which tax is computed includes he amount charged for merchandise returned by a customer at an auction sale, if the sale is made under an agreement or understanding at the time of sale that the property will not be delivered or that any amount paid will be returned to the bidder.
Sales tax does not apply, however, when an owner of property delivers it to an auctioneer for auction and bids in his own property at the auction.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006.6, 6015, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former Section 1966 filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
§1566. Automobile Dealers and Sales Representatives.
Note     •     History

(a) Dealer Aid to Sales Representatives. An automobile dealer, pursuant to section 6015, is regarded as the retailer of tangible personal property sold by the dealer's sales representatives in their own behalf if the dealer aids the sales representatives in making such sales in either of the following ways:
(1) By reporting the sales representatives' sales on the dealer's report of sales to the Department of Motor Vehicles.
(2) By executing conditional sales agreements with respect to such sales representatives' sales in which the dealer appears as the seller.
Dealers who aid their sales representatives by acting as guarantors on conditional sales agreements executed by the sales representatives or by requiring or permitting the sales representatives to use the dealer's showroom or other facilities in making such sales are not required to pay tax on the sale of the vehicles. The purchasers from these sales representatives, and from sales representatives making sales without dealer aid, must pay the use tax to the Department of Motor Vehicles.
(b) Resale Certificates from Nondealer Retailers. A dealer who is licensed or certificated pursuant to the California Vehicle Code and who sells a vehicle to a retailer who is not regularly engaged in selling or leasing vehicles should accept a resale certificate only if it contains a statement that the specific vehicle is being purchased for resale in the regular course of business.
Unless the person named as the purchaser on the resale certificate is also named on the dealer's report of sale and application for registration, either singly or jointly as registered owner, the sale will be regarded as a retail sale subject to sales tax, and the resale certificate will not be honored, whether or not it contains a statement that the specific vehicle is being purchased for resale in the regular course of business.
(c) Sales to Members of the Armed Services. A dealer (or manufacturer or dismantler) who is licensed or certificated pursuant to the California Vehicle Code must report and pay sales tax to the Board with respect to the sale of a vehicle in California to a member of the armed services regardless of the service member's place of residence. A dealer (or manufacturer or dismantler) so licensed or certificated who sells a vehicle outside of California to a member of the armed services for use in California must collect use tax from the service member and remit it to the Board unless the sale is made to a service member on active duty, prior to the effective date of his discharge and his intention to use the vehicle in California results from official transfer orders to California and not from the service member's own independent determination. The service member will be considered to have made an independent determination to use the vehicle in California if the contract to purchase the vehicle is made after the service member receives official transfer orders to California or if at the time the contract to purchase the vehicle is made the service member arranges to take receipt of the vehicle in California.
(d) Out-of-State Purchases of Vehicles.
Regarding the applicability of tax to the out-of-state purchase of a vehicle, see subdivision (b) of Regulations 1620 (18 CCR 1620).
(e) Contract Cancellation Options Required by Car Buyer's Bill of Rights.
(1) Contract Cancellation Option. On and after July 1, 2006, the terms “gross receipts” and “sales price” do not include the purchase price for a contract cancellation option agreement with respect to a contract to purchase a used vehicle with a purchase price of less than forty thousand dollars ($40,000), which a dealer is required to offer to a buyer pursuant to Vehicle Code section 11713.21. The purchase price for a contract cancellation option described in this paragraph shall not exceed:
(A) Seventy-five dollars ($75) for a vehicle with a cash price of five thousand dollars ($5,000) or less;
(B)  One hundred fifty dollars ($150) for a vehicle with a cash price of more than five thousand dollars ($5,000), but not more than ten thousand dollars ($10,000);
(C) Two hundred fifty dollars ($250) for a vehicle with a cash price of more than ten thousand dollars ($10,000), but not more than thirty thousand dollars ($30,000); or
(D) One percent of the purchase price for a vehicle with a cash price of more than thirty thousand dollars ($30,000), but less than forty thousand dollars ($40,000).
(2) Restocking Fee. On and after July 1, 2006, the terms “gross receipts” and “sales price” do not include the dollar amount of a restocking fee the buyer must pay to the dealer to exercise the right to cancel a purchase of a used car under a contract cancellation option agreement pursuant to Vehicle Code section 11713.21 as described in paragraph (1) of this subdivision. The dollar amount of a restocking fee described in this paragraph shall not exceed:
(A) One hundred seventy-five dollars ($175) if the vehicle's cash price is five thousand dollars ($5,000) or less;
(B) Three hundred fifty dollars ($350) if the vehicle's cash price is more than five thousand dollars ($5,000), but less than ten thousand dollars ($10,000); or
(C) Five hundred dollars ($500) if the vehicle's cash price is ten thousand dollars ($10,000) or more.
(3) Amounts Refunded to Customers. On and after July 1, 2006, the terms “gross receipts” and “sales price” do not include that portion of the selling price for a used motor vehicle that is refunded to the buyer due to the buyer's exercise of the right to return the vehicle for a refund, which is contained in a contract cancellation option agreement pursuant to Vehicle Code section 11713.21 as described in paragraph (1) of this subdivision.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6011, 6012, 6012.3, 6015, 6092-6242, 6248, 6249, 6271-6294 and 6422.1, Revenue and Taxation Code; and Section 11713.21, Vehicle Code.
HISTORY

1. Amendment and renumbering of former Section 1967 filed 8-25-69; effective thirtieth day thereafter (Register 69, No. 35).
2. Subsection (d) filed 8-10-70; effective thirtieth day thereafter (Register 70, No. 33).
3. Amendment of subsection (c) filed 11-25-77; effective thirtieth day thereafter (Register 77, No. 48).
4. Change without regulatory effect amending section filed 3-18-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 11).
5. Change without regulatory effect adding subsections (e)-(e)(3) and amending Note filed 4-10-2007 pursuant to section 100, title 1, California Code of Regulations (Register 2007, No. 15).
§1567. Banks and Insurance Companies.
Note     •     History

(a) Banks.
(1) Sales by Banks. Sales tax applies to the sale by banks, other than federally-chartered banks exempt from direct state taxation under federal law such as federal reserve banks and federal home loan banks, of tangible personal property sold at retail in this state.1 Use tax applies to the storage, use, or other consumption in this state of tangible personal property purchased at retail from a bank for storage, use, or other consumption in this state, the sale of which is exempt from sales tax. Banks, whether or not exempt from direct state taxation, which are engaged in business in this state and making sales of tangible personal property the storage, use, or other consumption of which is subject to use tax, must collect the tax from the purchaser and pay the amount of tax to the board.
(2) Sales to Banks. Sales tax applies to the sale to banks, other than federally-chartered banks exempt from direct state taxation under federal law, of tangible personal property sold at retail in this state. Banks, other than federally-chartered banks exempt from direct state taxation under federal law, are required to pay use tax to the same extent and in the same manner as other persons storing, using, or otherwise consuming tangible personal property in this state.1 Retailers engaged in business in this state and making sales to banks of tangible personal property the storage, use, or other consumption of which is subject to use tax must collect the tax from the purchaser and pay the amount of the tax to the board.
(b) Insurance Companies. Sales tax applies to retail sales in this state to insurance companies. Although sales tax does not apply to sales by insurance companies, they are required to collect use tax from consumers when making sales or leases of tangible personal property, and to pay the amount of the tax to the board to the same extent and in the same manner as other retailers selling or renting tangible personal property for storage, use, or other consumption in this state.
Use tax does not apply to the storage, use or other consumption in this state by insurance companies of tangible personal property.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6203 and 6352, Revenue and Taxation Code. Mutual Life Insurance Co. v. City of Los Angeles (1990) 50 Cal.3d 402.
HISTORY

1. Amendment and renumbering of former Section 1991 filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
2. Amendment filed 8-20-76; effective thirtieth day thereafter (Register 76, No. 34).
3. Amendment filed 1-30-80; effective thirtieth day thereafter (Register 80, No. 5).
4. Amendment filed 6-3-83; effective thirtieth day thereafter (Register 83, No. 23). 
5. Amendment of subsection (b) and Note filed 12-14-94; operative 1-13-95 (Register 94, No. 50).

1Sales and use taxes imposed upon banks with respect to all income years, as defined in Revenue and Taxation Code Section 23042, beginning on and after January 1, 1980.
§1568. Beer, Wine and Liquor Dealers.
Note     •     History

The measure of tax with respect to retail sales of beer, wine and spirituous liquors is the entire amount charged therefor, inclusive of the amount of other state or federal taxes imposed with respect to the property.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6012, Revenue and Taxation Code. Federal areas, sales on, see Regulation 1616. Federal taxes generally, see Regulation 1617.
HISTORY

1. Amendment and renumbering of former Section 1968 filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
§1569. Consignees and Lienors of Tangible Personal Property for Sale.
Note     •     History

A person who has possession of property owned by another, and also the power to cause title to that property to be transferred to a third person without any further action on the part of its owner, and who exercises such power, is a retailer when the party to whom title is transferred is a consumer. Tax applies to his gross receipts from such a sale.
Pawnbrokers, storage men, mechanics, artisans, or others selling the property to enforce a lien thereon, are retailers with respect to sales of the property to consumers and tax applies to the receipts from such sales.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6015, Revenue and Taxation Code. Sales by court-appointed officers, see Regulation 1573 (unrevised series 1974).
HISTORY

1. Amendment and renumbering of former Section 1969 filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
§1570. Charitable Organizations.
Note     •     History

(a) Definition. For purposes of this regulation, the term “charitable organization” means and includes any organization which meets all of the following conditions:
(1) The organization must be formed and operated for charitable purposes and must qualify for the “welfare exemption” from property taxation provided by section 214 of the Revenue and Taxation Code.
(2) The organization must be engaged in the relief of poverty and distress.
(3) The organization's sales or donations must be made principally as a matter of assistance to purchasers or donees in distressed financial condition.
(4) The property sold or donated must have been made, prepared, assembled or manufactured by the organization.
(A) The welfare exemption referred to in condition (1) is available to property owned and operated by a charitable organization under certain conditions. Among them is the requirement that the property be used in the actual operation of a charitable activity. Property used merely to raise funds is not used in a charitable activity even though the funds will be devoted to a charitable purpose. An example of a retail location being engaged in a charitable activity is a store employing handicapped persons as store personnel which devotes its profits to the store operation and an associated closed workshop for the handicapped.
(B) In order to receive the sales tax exemption it is necessary for the organization to receive the welfare exemption on the retail location for which the seller's permit is held. The welfare exemption must be claimed annually with the county assessor on forms provided for this purpose. If the organization does not own the store premises, it must receive the welfare exemption on its personal property, i.e., furnishings and fixtures.
(C) Conditions (2) and (3) are fulfilled if the primary purpose of the organization is to relieve poverty and distress and to aid purchasers and donees by selling its property at reduced prices or donating its property so as to be of real assistance to the purchasers and donees. Incidental sales to persons other than indigents will not preclude the organization from receiving the benefits of Revenue and Taxation Code Section 6375.
(D) Condition (4) is fulfilled when the property is picked up at various locations and brought together (assembled) at one or more locations for purposes of sale or donation, even though nothing further remains to be done to the property to place it in saleable condition. Property is deemed “prepared” when it is made ready for sale or donation by such processes as cleaning, repairing, or reconditioning.
(b) Sales by Charitable Organizations. Sales by a charitable organization are exempt from the sales tax and the purchaser is exempt from the use tax provided all of the conditions of paragraph (a) above are met.
(c) Sales to Charitable Organizations.
(1) Effective January 1, 1990, neither the sales tax nor the use tax apply to tangible personal property purchased by a charitable organization for the purpose of donation by the organization provided all of the conditions of paragraph (a) above are met. Tax applies, however, to sales to the organization of supplies (such as tools and office supplies) and other articles not otherwise exempt.
(2) Except as provided in (c)(3), tax does not apply to the gross receipts from the sale of, and the storage, use, or other consumption in this state of new children's clothing that is sold to a nonprofit organization for its distribution without charge to elementary schoolchildren. For purposes of this subdivision, “nonprofit organization” means an organization that meets all of the following requirements:
(A) Is organized and operated for charitable purposes.
(B) Has exempt status under Revenue and Taxation Code section 23701d.
(C) Is engaged in the relief of poverty and distress.
(D) Distributes new children's clothing principally as a matter of assistance to recipients in distressed financial conditions.
(3) From January 1, 2008, through December 31, 2013, tax does not apply to the gross receipts from the sale of, and the storage, use, or other consumption in this state of new children's clothing that is sold to a nonprofit organization for its distribution without charge to individuals under 18 years of age. For purposes of this subdivision, “nonprofit organization” means an organization which meets all of the following criteria:
(A) Is organized and operated for charitable purposes.
(B) Has exempt status under Revenue and Taxation Code section 23701d or 23701f.
(C) Furnishes new children's clothing principally as a matter of assistance to recipients in distressed financial conditions.
(4) Any seller claiming an exemption from the sales tax for property sold to a charitable organization for subsequent donation may obtain from the organization and retain an exemption certificate in accordance with the requirements of section 1667, Title 18, California Code of Regulations (Regulation 1667, “Exemption Certificates”).
(d) Seller's Permits Required.
Organizations qualifying for exemption under section 6375 are retailers and are required to hold seller's permits even though all of their sales are exempt from tax.
(e) Medical Health Information Literature. Use tax does not apply to the storage, use, or other consumption in this state of medical health information literature purchased by any organization formed and operated for charitable purposes which qualifies for the exemption provided by section 214, the “welfare exemption,” which is engaged in the dissemination of medical health information; provided that such purchases are made from a national office, or another branch of that national office, of the same organization.
(f) Health and Safety Materials. Use tax does not apply to the storage, use, or other consumption in this state of health and safety educational materials and insignia routinely sold in connection with health and safety and first aid classes, purchased or sold by any national organization formed and operated for charitable purposes which qualifies for the exemption provided by section 214, the “welfare exemption,” which is engaged in the dissemination of health and safety information; provided  that such purchases are made from a national office another branch or chapter of such office of the same organization.
(g) Medical Identification Tags. Tax does not apply to the sale of, or the storage,use, or other consumption of, medical identification tags furnished by an organization exempt from taxes under Revenue and Taxation Code section 23701. The term “medical identification tags” includes any tag worn by a person for the purpose of alerting other persons that the wearer of such tag has a medical disability or allergic reaction to certain treatments.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6371, 6375, 6375.5, 6408, 6409, 23701d and 23701f, Revenue and Taxation Code.
HISTORY

1. Renumbering from section 1970 and amendment filed 6-9-70; effective thirtieth day thereafter (Register 70, No. 24).
2. Adoption of subsections (d) and (e) filed 9-6-78; effective thirtieth day thereafter (Register 78, No. 36).
3. New subsections (f), (g), (h) and (i) filed 12-6-79; effective thirtieth day thereafter (Register 79, No. 49).
4. Amendment of subsection (f) filed 10-2-81; effective thirtieth day thereafter (Register 81, No. 40).
5. Amendment filed 12-29-88; operative 1-28-89 (Register 89, No. 2).
6. Amendment filed 6-13-90; operative 7-13-90 (Register 90, No. 32).
7. Change without regulatory effect amending subsections (f) and (g) filed 1-31-94 pursuant to title 1, section 100, California Code of Regulations (Register 94, No. 5).
8. Change without regulatory effect adopting new subsections (c)(2)-(c)(3)(C), renumbering subsections and amending Note filed 4-10-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 15).
9. Change without regulatory effect amending subsection (a)(4)(B) filed 12-27-2011 pursuant to section 100, title 1, California Code of Regulations (Register 2011, No. 52).
§1571. Florists.
Note     •     History

(a) Definition. For purposes of this regulation, the term “florist” means a retailer who conducts transactions for the delivery of flowers, wreaths, etc., through a florist delivery association utilizing telephonic, electronic, or other means for the transmission of orders, except that the term “florist” shall not include any retailer who does not fulfill other florists' orders for the delivery of flowers, wreaths, etc.
(b) Application of Tax.
(1) Tax applies to amounts charged by a florist to customers for the delivery of flowers, wreaths, etc., to points within California, even though the florist instructs another florist to make the delivery, but in such case tax will not apply to amounts received by the florist making the delivery.
(2) Tax applies to amounts charged by florists who receive orders for the delivery of flowers, wreaths, etc., to points outside this state and instruct florists outside this state to make the delivery.
(3) The measure of tax includes charges made for faxes or telephone calls whether or not the charges are separately stated. A “relay” or other service charge, made in addition to the charge for the fax or telephone call, must also be included in the measure of tax.
(4) Tax does not apply to amounts received by California florists who make deliveries in this state pursuant to instructions received from florists outside this state.
(5) When a retailer of flowers who is not a florist instructs a California florist to make a delivery of flowers, wreaths, etc. in California, tax does not apply to the amounts received by the florist making the delivery, nor shall the florist making the delivery be treated as a drop shipper within the meaning of Regulation 1706.
(6) When an out-of-state florist instructs a California retailer of flowers who is not a florist to make a delivery of flowers, wreaths, etc. in California, tax does not apply to amounts received by the retailer making the delivery, nor shall the retailer making the delivery be treated as a drop shipper within the meaning of Regulation 1706.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sec. 6012, Revenue and Taxation Code.
HISTORY

1. Renumbering and amendment of former Section 1972 filed 1-19-71; effective thirtieth day thereafter (Register 71, No. 4).
2. Editorial correction of History 1 (Register 95, No. 23).
3. Amendment filed 3-30-2007; operative 4-29-2007 (Register 2007, No. 13). 
§1572. Memorial Dealers.
Note     •     History

(a) Memorial Dealers as Retailers. Memorial dealers are retailers of the tombstones, markers, and other memorials sold by them, and the consumers of materials, such as cement, used in setting the memorial in the cemetery. The term memorial dealer includes cemeteries which sell memorials.
(b) Measure of Tax--Cemetery Installations by Memorial Dealers. When the memorial dealer agrees to furnish a memorial and to set it in the cemetery, the dealer must segregate on the invoice presented to his customer, and in his records, the fair retail selling price of the memorial from the charge for setting the memorial in the cemetery. Tax applies to the sale to the customer measured by the fair retail selling price of the memorial, including charges for cutting, shaping, polishing, or lettering the memorial, or for transporting the memorial to the cemetery. Tax does not apply to the charge for the labor of setting the memorial in the cemetery. Tax applies to the sale to or the use by the memorial dealer of the material consumed in the installation of the memorial.
(c) Cemeteries Constructing Foundations. When a cemetery constructs a foundation upon which a memorial dealer places a memorial, the cemetery is the consumer of the materials furnished in the construction of the foundation and tax applies to the sale to or the use by it of the material consumed in constructing the foundation. This is the case, whether a cemetery collects charges for the foundation from the memorial dealer or directly from the customer of the memorial dealer.
(d) Segregation of Charges. If the memorial dealer or cemetery does not segregate the retail selling price of the memorials from the charges for installation of the memorials and the construction of the foundations, a segregation of these charges will be determined by the Board based on information available to it.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6010-6012, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former Section 1973 filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Amendment filed 2-28-78; effective thirtieth day thereafter (Register 78, No. 9).
3. Amendment of subsection (d) filed 1-19-79; effective thirtieth day thereafter (Register 79, No. 3).
§1573. Court Ordered Sales, Foreclosures and Repossessions.
Note     •     History

(a) Sales Ordered by State Courts. Tax applies to the sale of tangible personal property by an officer of the court such as a sheriff, commissioner, assignee for the benefit of creditors, executor or administrator (including a bank), or other officer appointed by a court to make the sales if the officer is a retailer with respect to that sale.
Generally, an officer is a retailer if he makes three or more sales of tangible personal property for substantial amounts, or a substantial number of sales for relatively small amounts, in any period of 12 months in the conduct or liquidation of a single business or estate. Sales of vehicles required to be registered or subject to identification under the Vehicle Code or of vessels or aircraft are not counted in determining the number of sales for this purpose.
An officer is a retailer with respect to every sale of a vehicle required to be registered under the Vehicle Code or subject to identification under Division 16.5 of that code, of a vessel, or of an aircraft. This is true whether or not the officer makes a series of sales of other tangible personal property from the same business or estate. The purchaser of such a vehicle, vessel or aircraft is generally required to pay use tax.
(b) Foreclosure Sales. Tax does not apply to sales of tangible personal property at public auction pursuant to the provisions of a security agreement if the property is purchased by the secured party who sold the property to the debtor. Tax applies to other foreclosure sales and to other sales by the secured party or the debtor to the same extent as it applies to sales generally.
(c) Repossessions. Tax does not apply to a repossession of tangible personal property by a seller from a purchaser who has not completed his payments provided the purchaser does not receive an amount from the seller, including the cancellation of the unpaid balance, that is greater than his purchase price.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6015 and 6019, Revenue and Taxation Code.
HISTORY

1. Renumbering from former Section 1974 filed 11-3-71; effective thirtieth day thereafter (Register 71, No. 45).
2. Amendment filed 5-17-74; effective thirtieth day thereafter (Register 74, No. 20).
§1574. Vending Machine Operators.
Note     •     History

(a) General.
(1) Permits. Persons operating vending machines dispensing tangible personal property of a kind the gross receipts from the retail sale of which are subject to tax or dispensing food products at retail for more than 15 cents must obtain permits to engage in the business of selling tangible personal property. One permit is sufficient for all machines of one operator.
A statement in substantially the following form must be affixed upon each vending machine in a conspicuous place:

View Graphic
(2) Records. Adequate and complete records must be kept by the operator showing the location or locations of each machine operated by him or her, the serial number thereof, purchases and inventories of merchandise bought for sale through all such machines, the prices charged by the operator, the gross receipts derived from the operation at each location, the receipts from exempt sales, and where applicable, the sales price to the operator of all tangible personal property of which the operator is the consumer, see subdivision (b). Records must be kept of the receipts derived from each machine at a location if differing kinds of merchandise are vended through separate machines at that location.
(3) Schedule Showing Allocation by County. If the machines are operated in more than one county, a schedule must be attached to the return showing the tax allocable to each county. If a person purchases property under a resale certificate and dispenses it through a vending machine under circumstances where the person is considered to be the consumer of the property, see subdivision (b), a schedule must be attached to the return showing the use tax due thereon allocable to each county.
(4) Sales to Operators Not Furnishing Resale Certificates. Persons making sales of tangible personal property of a kind the gross receipts from the retail sale of which are taxable, to operators of vending machines to be resold through such machines, must notify this board of the name and address of each operator who fails to furnish a valid resale certificate. In the event such persons fail to so notify the board, or desire to assume tax liability for the operations of particular vending machines, then, pursuant to Revenue and Taxation Code Section 6015, they are required to return the tax to the state, measured by the receipts from the retail sale of the property.
(b) Application of Tax.
(1) In General. Persons operating vending machines dispensing tangible personal property of a kind the gross receipts from the retail sale of which are subject to tax must report and pay to the state the tax upon gross receipts from all sales of such property made through such machines. Sales of tangible personal property through vending machines are presumed to be made on a tax-included basis. Gross receipts from retail sales of tangible personal property through the vending machines are total receipts less the amount of sales tax reimbursement included therein.
(A) Photocopies. Tax applies to the gross receipts from sales of photocopies through coin- or card-operated copy machines. However, library districts, municipal libraries, county libraries, or any vendor making sales pursuant to a contract with a library district, municipal library, or county library are consumers of photocopies sold at retail through a coin- or card-operated copy machine located at a library facility.
(B) Sales by Parent-Teacher Associations. Parent-teacher associations or equivalent associations under Regulation 1597(f) (18 CCR 1597(f)), are consumers of tangible personal property dispensed through vending machines and are not required to hold seller's permits by reason of such activities.
(C) Sales by Nonprofit, Charitable, or Education Organizations. Nonprofit, charitable, or education organizations dispensing tangible personal property for 15 cents or less through a vending machine are the consumers of such property and are not required to hold a seller's permit by reason of such activities.
(D)  Sales of Water. Sales of purified drinking water through vending machines where the water enters the machine through local supply lines and is dispensed into the customer's own containers are exempt from the tax under Revenue and Taxation Code Section 6353.
(2) Food Products. 
(A) Effective January 1, 1986, tax applies to the gross receipts from the retail sale of food products, including candy and confectionery, dispensed through a vending machine at retail for more than 15 cents unless otherwise exempted as provided below. Since sales through vending machines are presumed to be made on a tax-included basis, total receipts from the taxable retail sale of food products through vending machines should be adjusted to compensate for the sales tax included therein. The term “food products” does not include carbonated beverages. A vending machine operator is a consumer of, and not a retailer of, food products, including candy and confectionery, dispensed through a vending machine at retail for 15 cents or less, effective January 1, 1986. Tax is measured by the sale price to the vending machine operator of such items unless otherwise exempt. If the property sold to the operator is an exempt food product or a nonreturnable container, no tax is payable regardless of the nature of the product when dispensed through the vending machine, and regardless of whether facilities for consumption are furnished at locations of the vending machines. For the purposes of this subdivision, the term “candy and confectionery” includes candy-coated gum products.
(B) Operative January 1, 1988, tax does not apply to the sales, and the vending machine operator is the consumer, of any food products, including candy and confectionery other than beverages or hot prepared food products, sold through a coin-operated bulk vending machine if the amount of each sale is twenty-five cents ($0.25) or less. For purposes of this regulation, “bulk vending machine” means a vending machine containing unsorted food products, including candy and confectionery, which, upon insertion of a coin, dispenses those products in approximately equal portions, at random, and without selection by the customer. For the purposes of this subdivision, the term “candy and confectionery” includes candy-coated gum products.
(C) Beginning January 1, 1988, a partial exemption from the tax is allowed any retailer who receives gross receipts through vending machines from the sale of cold food products, hot coffee, hot tea and hot chocolate which are subject to the tax. The following percentages of the gross receipts from the sales of such products are subject to the tax: 77% for the calendar year 1988, 55% for the calendar year 1989, and 33% thereafter. This partial exemption does not apply to sales of hot prepared food products (except hot coffee, hot tea and hot chocolate) and receipts from such sales may not be included in the computation of the exemption.
“Gross receipts from the sale of cold food products, hot coffee, hot tea and hot chocolate” represents total receipts after adjusting for sales tax included. Therefore, in order to determine taxable receipts, an adjustment must be made to compensate for sales tax included in total receipts. Following is an example of the computation using the 7 1/4 percent rate:

Total receipts from sales of cold food products, 
hot coffee, hot tea and hot chocolate 
through vending machines	 $10,000.00
Factor	 32.2289%
Taxable receipts	 $3,222.89
Tax rate	 7.25%
Tax included	 $233.66
Exempt receipts	 $6,543.45
Proof: 	$10,000 -- 233.66 = $9,766.34       
	$9,766.34 x 33% = 3,222.89        
Gross receipts from the sale of cold food products, hot coffee, hot tea and hot chocolate subject to the tax may be calculated for the year 1990 and forward using the following percentages for the tax rates indicated:

	TAX RATE	PERCENTAGE

	7.25%	32.2289%
	7.375%	32.2160%
	7.50%	32.2030%
	7.625%	32.1900%
	7.75%	32.1771%
	7.875%	32.1641%
	7.975%	32.1538%
	8.00%	32.1512%
	8.125%	32.1383%
	8.25%	32.1254%
	8.275%	32.1228%
	8.375%	32.1125%
	8.475%	32.1022%
	8.50%	32.0996%
	8.725%	32.0765%
	8.75%	32.0739%
	9.00%	32.0482%
	9.25%	32.0225%
To compute the cold food factor for other tax rates the formula is as follows:
Cold food factor percentage = 100 ¸ [3.0303 + tax rate (decimal form)]
Example: Cold food factor at 7.25% = 100 ¸ (3.0303 + .0725) = 100 ¸ 3.1028 = 32.2289%
(D) Tax does not apply to sales of any food products, whether sold through a vending machine or otherwise, to students of a school by public or private schools, school districts, student organizations, or any blind person (as defined in Section 19153 of the Welfare and Institutions Code) operating a restaurant or vending stand in an educational institution under Article 5 (commencing with Section 19625) of Chapter 6 of Part 2 of Division 10 of the Welfare and Institutions Code.
(3) Definitions. 
(A) Food Products. For the period July 15, 1991 through November 30, 1992, the term “food products” does not include snack foods (as defined in Regulation 1602 (18 CCR1602), “Food Products”), nonmedicated gum, candy, and confectionery. Sales during this period of such items through vending machines are subject to the tax unless exempted under subdivisions (b)(1) and (b)(2) above.
(B) Nonprofit Organizations. Nonprofit organizations include any group, association, or corporation which is formed for charitable, religious, scientific, social, literary, educational, recreational, benevolent or any other purpose, provided that no part of the net earnings of such organization inures to the benefit of any member, shareholder, director, officer, or any person having a personal and private interest in the activities of the organization. Examples of this type of organization are museums, veterans organizations, youth sportsmanship organizations, clubs such as the Kiwanis Club, fraternal societies, orders or associations operating under the lodge system such as the Loyal Order of the Moose, and student organizations.
(C) Charitable Organizations. Charitable organizations include any group, association, or corporation created for or devoted to charitable purposes, the net earnings of which are used solely for charitable purposes such as the relief of poverty, the advancement of education, the advancement of religion, the promotion of health and the promotion of government. Examples of this type of organization are libraries, museums, hospitals, senior citizen community centers, thrift shops, and organizations such as the Salvation Army and Goodwill.
(D) Education Organizations. Education organizations include any profit or nonprofit group, association, or corporation which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its education activities are regularly carried on. Examples of such organizations are primary and secondary schools, colleges, professional and trade schools, whether public, private, nonprofit or profit making.
(4) Resale and Exemption Certificates.
(A) Vendors of Items for 15 Cents or Less Only. A purchaser who sells the property purchased only through vending machines for 15 cents or less may give an exemption certificate with respect to the purchase of nonreturnable containers, but may not give a resale certificate with respect to the purchase of any other property. The supplier is responsible for payment of sales tax on the gross receipts from the sales to the purchaser of property, the sale of which is subject to tax.
(B) Vendors of Items for 15 Cents or Less and Over 15 Cents. A purchaser who holds a valid seller's permit and who sells the property purchased only through vending machines both at prices of 15 cents or less and at prices of more than 15 cents may give a resale certificate with respect to the purchases of such property.
(C) Vendors Selling Both Through Vending Machines and Otherwise. A purchaser who holds a valid seller's permit and who sells the property purchased both through vending machines and other than through vending machines may give a resale certificate with respect to the purchases of such property.
(D) Vendors Not Segregating Purchases. A purchaser who does not wish to segregate the purchases of property which is sold through vending machines for 15 cents or less from purchases of like property which is otherwise sold, may reimburse his  or her vendor for sales tax measured by the retail selling price of all such property provided the vendor is authorized to report and pay the tax to the state in the manner provided by Section 6015.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6015, 6066-6068, 6353, 6359, 6359.2, 6359.4, 6359.45, 6363, 6364 and 6370, Revenue and Taxation Code; and Canteen Corporation v. State Board of Equalization (1985), 174 Cal. App. 3d 952.
HISTORY

1. Amendment filed 8-24-83 as an emergency; designated effective 8-1-83 (Register 83, No. 35). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 11-29-83. For prior history, see Register 79, No. 13.
2. Reinstatement of section as it existed prior to emergency amendment filed 8-24-83 by operation of Government Code section 11346.1(f) (Register 85, No. 5).
3. Amendment filed 2-1-85; effective thirtieth day thereafter (Register 85, No. 5).
4. Editorial correction adding HISTORY NOTE  2 (Register 85, No. 34).
5. Amendment of subsection (b) filed 8-23-85; effective thirtieth day thereafter (Register 85, No. 34).
6. Amendment of subsections (a)(1) and (b) filed 6-3-86; effective thirtieth day thereafter (Register 86, No. 23).
7. Amendment of subsections (b)(5) and (c)(2) for clarification of existing law filed 6-1-87; operative 7-1-87 (Register 87, No. 23).
8. Amendment filed 7-27-88; operative 8-26-88 (Register 88, No. 32).
9. Amendment filed 10-14-93; operative 11-15-93 (Register 93, No. 42).
10. Amendment of subsections (a)(1)-(2), (b)(1), (b)(2)(A) and (b)(2)(C) filed 9-20-2001; operative 10-20-2001 (Register 2001, No. 38).
11. Change without regulatory effect amending subsection (b)(1)(B) filed 11-2-2004 pursuant to section 100, title 1, California Code of Regulations (Register 2004, No. 45).
12. Change without regulatory effect amending subsection (b)(2)(C) filed 9-24-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 39).
§1583. Modular Systems Furniture.
Note     •     History

Modular systems furniture is tangible personal property, whether or not affixed to realty. A contract to sell and install modular systems furniture is a contract for the sale of tangible personal property and is not a construction contract. Persons who contract to sell and install modular systems furniture are retailers of the items which they sell and install, and tax applies to the entire contract price less those charges excludable from gross receipts or sales price pursuant to Sections 6011 and 6012 of the Revenue and Taxation Code. Retailers who claim a deduction for such charges should maintain complete and detailed records to support the amounts claimed. Such records should include, but not be limited to, a separate accounting of charges for installation labor, such as labor to affix, bolt, fasten, or hardwire panels to realty and labor to fasten or affix fully constructed components to fully constructed panel systems or other components. Charges for fabrication labor, such as labor to attach, assemble, connect, construct, or fabricate panel systems or components, labor to attach or connect one panel to another to form workstations or cubicles, and labor to construct or fabricate the individual panels, components, or accessories are subject to tax.
For contracts to sell and install modular systems entered into on or after October 1, 1999, ten percent (10%) of the total contract price, excluding charges attributable to freestanding desks, credenzas, lateral files, bookcases, worktables, returns, convergents, corner units, storage towers, chairs, footrests, and other property not attached to panels, other components, or realty, but including all other charges, will be presumed to be a charge for labor to install or apply the property sold. Retailers may claim the ten percent (10%) labor deduction in lieu of separately accounting for the actual installation charges incurred.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6011, 6012, 6015, 6016 and 7053, Revenue and Taxation Code.
HISTORY

1. New section filed 11-3-99; operative 12-3-99 (Register 99, No. 45).  
§1584. Membership Fees.
Note     •     History

(a) Application of Tax.
(1) In General. Membership fees related to the anticipated retail sale of tangible personal property are includible in taxable gross receipts when either
(A) the retailer sells its products only to members and the membership fee exceeds a nominal amount,
or
(B) regardless of the amount of the membership fee, the retailer sells its products for a lower price to a person who has paid the membership fee than to a person who has not paid the fee.
(2) The membership fees described in subdivision (a)(1)(A) or (a)(1)(B) are part of the gross receipts of the person selling tangible personal property to a member. It is immaterial that the person who sold the membership is not the person who sells the tangible personal property to a member. Any sale of a membership described in subdivision (a)(1)(A) or (a)(1)(B) is regarded as related to the retail sale by the retailer selling tangible personal property to a member, not by the person selling the membership, measured by the amounts received by the person selling the membership.
(3) Incidental Sales. Charges for memberships not related to anticipated retail transactions are not subject to tax. For example, when a country club or similar organization charges fees (dues) to members and provides substantial service benefits, e.g., the use of golfing, tennis and swimming facilities, the membership fees are not related to sales even though the organization may establish minimum meal and drink purchase requirements for its members.
(4) Consumer Cooperatives. Initial or periodic membership fees received by consumer cooperatives, as defined in section 6011.1 and 6012.1 of the Revenue and Taxation Code, are not subject to tax.
(b) Nominal Amount.
(1) For purposes of this regulation, beginning January 1, 2011, the term “nominal amount” means an amount totaling $55 or less per year subject to increase as provided in subdivision (b)(2). For periods from January 1, 2006 through December 31, 2010, the term “nominal amount” for purposes of this regulation means an amount totaling $50 or less per year. For periods from January 1, 2001 through December 31, 2005, the term “nominal amount” for purposes of this regulation means an amount totaling $45 or less per year. For periods prior to January 1, 2001, the term “nominal amount” for purposes of this regulation meant an amount totaling $40 or less per year. Amounts received for memberships which are in conjunction with a basic membership (add-ons) are not considered a part of the basic membership fee in determining the nominal amount of the basic membership. Additional cards issued under the same membership number are sales of separate memberships.
(2) During September in the year 2000, and every five years thereafter, the threshold for the nominal amount will be adjusted effective the following January 1, rounded to the nearest $5, to reflect changes in the California Consumer Price Index (CCPI) whenever that change is more than 5 percent higher than any previous adjustment. For purposes of computing the CCPI increase, the June 30 CCPI index of the computation year will be compared with the June 30 CCPI index of the computation year which resulted in an adjusted nominal amount. For example, for the January 1, 2016 adjustment computation, the CCPI index on June 30, 2015, will be compared with the CCPI index on June 30, 2010. If no adjustment is made at that time, the next comparison will be of the CCPI index on June 30, 2020 with the CCPI index on June 30, 2010.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6011.1, 6012 and 6012.1, Revenue and Taxation Code.
HISTORY

1. New section filed 7-3-96; operative 8-2-96 (Register 96, No. 27).
2. Change without regulatory effect amending subsections (b)(1) and (b)(2) filed 1-5-2001 pursuant to section 100, title 1, California Code of Regulations (Register 2001, No. 1).
3. New subsection (a)(2), subsection renumbering and amendment of newly designated subsection (a)(3) filed 7-27-2004; operative 8-26-2004 (Register 2004, No. 31).
4. Change without regulatory effect amending subsections (b)(1) and (b)(2) filed 1-10-2006 pursuant to section 100, title 1, California Code of Regulations (Register 2006, No. 2).
5. Change without regulatory effect repealing subsection (c) filed 5-13-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 20).
6. Change without regulatory effect amending subsections (b)(1)-(2) filed 1-12-2011 pursuant to section 100, title 1, California Code of Regulations (Register 2011, No. 2).
Article 7. Specific Kinds of Property and Exemptions Generally
§1585. Cellular Telephones, Pagers, and Other Wireless Telecommunication Devices.
Note     •     History

(a) Definitions.
(1) Wireless Telecommunication Device. A portable communication device such as a wireless telephone or pager requiring activation by a wireless telecommunications service provider or seller of utility services in order to send, receive, or send and receive transmissions via a network of wireless transmitters throughout multiple service areas, or otherwise. The term includes devices based on analog technology and devices based on digital technology.
(2) Wireless Telecommunications Service Provider. A utility regulated by the Public Utilities Commission or the Federal Communications Commission which offers or provides wireless communication or paging services.
(3) Bundled Transaction. The retail sale of a wireless telecommunication device which contractually requires the retailer's customer to activate or contract with a wireless telecommunications service provider for utility service for a period greater than one month as a condition of that sale. A transaction is a bundled transaction within the meaning of this regulation without regard to the method in which the price is stated to the customer. Also, it is immaterial whether the wireless telecommunication device and utility service are sold for a single price or are separately itemized in the context of a sale or on a sales invoice. A transaction is a bundled transaction if goods and services are sold as a single package, whether wireless telecommunication service is supplied to the customer by the retailer or by an independent service supplier. In such transactions, wireless devices may be sold at a “discounted” price, as an inducement for the customer to enter into an extended service contract. The fact that a wireless telecommunication device, such as a PCS (Personal Communication Service) telephone, may, because of its technological specifications, be subject to activation with only one service supplier, does not alone mean that the sale of the device will be treated as a bundled transaction.
(4) Unbundled Sales Price. The price at which the retailer has sold specific wireless telecommunication devices to customers who are not required to activate or contract for utility service with the retailer or with an independent wireless telecommunications service provider for utility service as a condition of that sale. If the retailer cannot establish an unbundled sales price to the satisfaction of the Board based upon its own sales records, the unbundled sales price of the device shall equal the fair retail selling price of that device. If tax is reported and paid on an amount equal to the cost of the device plus a markup on cost of at least 18 percent, such amount shall be regarded as the fair retail selling price of the device. The unbundled sales price of an obsolete wireless telecommunication device shall equal the actual selling price of that device.
(b) Application of Tax.
(1) In General. Tax applies to the gross receipts from the retail sale of a wireless telecommunication device. The retailer of the wireless telecommunication device is required to report and pay the tax.
(2) Unbundled Transactions. Tax applies to the gross receipts from the retail sale of a wireless telecommunication device prior to October 1, 1995, or sold in a transaction not described in subdivisions (a)(3), (b)(5), or (b)(6), measured by the actual gross receipts received by the retailer from the end-use customer from the sale of that device.
(3) Bundled Transactions. Tax applies to the gross receipts from the retail sale of a wireless telecommunication device sold in a bundled transaction, measured by the unbundled sales price of that device. Tax applies to the unbundled sales price whether the wireless telecommunication device and utility service are sold for a single price or are separately itemized in the context of a sale or on a sales invoice. The retailer of the wireless telecommunication device is required to report and pay tax measured by the unbundled sales price of the device and may collect tax or tax reimbursement from its customer measured by the unbundled sales price. Tax does not apply to the charges in excess of the unbundled sales price made for telecommunication services.
(4) Activation Fees. Tax does not apply to a one-time charge for activating a new wireless telecommunication device with, or on behalf of, a wireless telecommunications service provider where the charge is separately stated and is not for the electronic or physical modification of the device in order for it to function within a wireless telecommunications service provider's service network. A one-time charge for activating a wireless telecommunication device is subject to tax if the activation consists of the physical or electronic modification or fabrication of a wireless telecommunication device in order for the device to function within a wireless telecommunications service provider's service network. The person collecting this fee is required to report and pay tax on that amount. Any subsequent charge for the physical or electronic modification or fabrication of that device which changes the customer's telephone number or which allows that customer to utilize a different wireless telecommunications service provider is subject to tax as set forth in Regulation 1546 (18 CCR 1546).
For purposes of this subdivision, “physical or electronic modification or fabrication of a wireless telecommunication device” does not include the manual input of activation information into the device solely by means of the device's own numeric or function keys, nor does it include the remote electronic input of activation information into the device.
(5) Consignment Transactions and Sale or Return Transactions. In transactions of this type, a service provider furnishes an inventory of wireless telecommunication devices to an independent retailer without charge or at a nominal price. The independent retailer sells the devices to end-use customers, retaining the proceeds of sale. The end-use customer must contract for wireless service for a period greater than one month with the wireless service provider or, if the end-use customer does not enter such an extended service contract, the end-use customer is required to pay additional service consideration for the device to the service provider. Typically, a credit card imprint is taken by the retailer, to the benefit of the service provider, at the time of the sale, to guarantee payment of the additional consideration. This is a bundled transaction in which the measure of tax is the unbundled sales price. The service provider may collect sales tax reimbursement from the end-use customer. The nominal amount collected from the end-use customer is in the nature of a commission and is not subject to tax. The person providing the device to the end-use customer may not collect sales tax reimbursement from the end-use customer.
(6) Sales at Less than 50 Percent of Cost. Operative January 1, 1999, except with respect to transfers described in (b)(5), any person making any sale, whether at retail or for resale, in a bundled transaction or otherwise, of a wireless telecommunication device at a price, measured by the actual sales price in an unbundled transaction or the unbundled sales price, as determined under this regulation, in a bundled transaction, less than 50 percent of cost, must report and pay use tax measured by the cost to it of the device. If the sale at less than 50 percent of cost is a retail sale, sales tax does not apply to that retail sale. The person making the sale of the device is the consumer of the device for sales and use tax purposes and may not collect tax reimbursement from its customer. Likewise, persons who sell devices for resale at less than 50 percent of cost are consumers. They must report and pay use tax measured by the cost to them of the device. In this case, any subsequent retail sale of the device is subject to sales tax unless that sale is at less than 50 percent of cost. Sales tax reimbursement may be collected from the end-use customer based upon the retail selling price of the device to the end-use customer. This subdivision shall not, however, be applicable in any instance involving the sale of a functionally or economically obsolete wireless telecommunication device.]
(c) Bad Debt Deductions.
(1) In General. The provisions of Regulation 1642, “Bad Debts” (18 CCR 1642), apply to retailers making sales of wireless telecommunication devices to subdivision (b)(1).
(2) Charge-Backs to the Retailer. Retailers reporting tax measured by the unbundled sales price of a wireless telecommunication device may take a bad debt deduction pursuant to Regulation 1642 when a payment or rebate from a wireless telecommunications service provider is charged-back to the retailer based on a customer's termination of its contract with the wireless telecommunications service provider before the date specified in the utility service contract. The amount of bad debt deduction claimed by a retailer may not exceed the difference between the gross receipts on which tax was reported and paid by the retailer, and the total amount collected and retained by the retailer from the sale of the wireless telecommunication device excluding any amounts collected from the customer as tax or tax reimbursement. Any tax or tax reimbursement collected by the retailer on the amount of bad debt deduction claimed by the retailer constitutes excess tax reimbursement and must be returned to the customer or paid to the Board unless the customer and retailer agree that this amount may be applied toward the amounts owed by the customer on the debt. The customer and retailer will be regarded as having agreed to the application of any excess tax reimbursement to the customer's debt where the retailer's books reflect both the debt owned by the customer and the corresponding credit for excess tax reimbursement.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6010, 6011, 6012 and 6055, Revenue and Taxation Code.
HISTORY

1. New section filed 1-13-99; operative 2-12-99 (Register 99, No. 3).
§1586. Works of Art and Museum Pieces for Public Display.
Note     •     History

(a) General.
(1) Original Work of Art. Tangible personal property which is an original work of art and which is purchased by or for donation to certain public or nonprofit organizations for the purpose of display to the public in museums or public places is exempt from the sales and use taxes under certain conditions.
(2) Museum Pieces. Tangible personal property purchased by certain organizations to replace museum pieces which were destroyed by a calamity are exempt from the sales and use taxes under certain conditions.
(b) Definitions.
(1) “Original Work of Art” for purposes of this regulation means tangible personal property which has been created as a unique object intended to provide aesthetic pleasure to the beholder and/or to express the emotions of the artist. The form in which an original work of art is presented includes but is not limited to:
(A) visual art, e.g., a drawing, painting, mural, fresco, sculpture, mosaic, film, or photograph, a work of calligraphy, a work of graphic art (an etching, lithograph, offset print, silk screen, or a work of graphic art of like nature),
(B) crafts, e.g., crafts in clay, textile, fiber, wood, metal, plastic, glass, costume, dress, clothing, personal adornment, and like materials, or
(C) mixed media, e.g., a collage, assemblage, or any combination of the foregoing art media.
(2) “Museum” for purposes of this regulation means a place specifically designated for display of artifacts or objects of art which either:
(A) has a significant portion of its display space open to the public without charge during its normal operating hours;
(B) has its entire display space open to the public without charge for at least six of its normal operating hours during each month of operation; or
(C) has its entire display space open without charge to a segment of the student or adult population for educational purposes.
(c) Application of Tax.
(1) Original Works of Art.
(A) Tax does not apply to the sale or use of original works of art which are:
1. purchased by this state, or any city, county, city and county, or other local governmental entity in this state;
2. purchased by any nonprofit organization which operates a public museum under contract for such governmental entity;
3. purchased by any nonprofit organization qualifying for exemption from state income tax pursuant to Section 23701d of the Revenue and Taxation Code. The works of art must be purchased for display in a museum either operated by the purchaser or by another nonprofit organization which qualifies for exemption pursuant to Section 23701d. The museum in which the art is displayed must be open to the public regularly for not less than 20 hours per week and for not less than 35 weeks of the calendar year; 
4. purchased by any person for donation to the above governmental entities or nonprofit organizations. To qualify for exemption from the tax under this subparagraph, donated works of art must be delivered by the retailer of the art directly to the donee pursuant to the instructions of the buyer-donor. Written evidence of transfer of title to the works of art from the buyer-donor to the donee must be maintained by the retailer and the buyer-donor to support the exemption; or
5. operative January 1, 2007, leased from one nonprofit organization to another nonprofit organization for 35 years or more, if both lessor and lessee are nonprofit organizations as defined in subdivisions (c)(1)(A)(2) and (c)(1)(A)(3) of this regulation.
(B) The exemption provided by subdivision (c)(1)(A) applies only to original works of art which are purchased or leased to become part of the permanent collection of any of the following:
1. a museum;
2. a nonprofit corporation which (1) has qualified for exemption from the state income tax pursuant to Revenue and Taxation Code Section 23701d, (2) regularly loans not less than 85 percent of the value of its collection of works of art to one or more museums, and (3) is required by its articles of incorporation to loan its works of art and is otherwise prohibited by its articles from making any private use of its works of art. The works of art for which the exemption is claimed pursuant to this subparagraph must be placed on display at a museum in California for not less than 24 months during the three-year period commencing from the date of purchase; or
3. operative January 1, 1988, this state and any city, county, city and county, or other local governmental entity in this state for display to the public in buildings, parks, plazas, or other places which are open to the public without charge for not less than 20 hours per week and for not less than 35 weeks of the calendar year. Operative January 1, 2007, “permanent collection” as it applies to leases of original works of art, means a collection with a lease term of 35 years or more.
(2) Museum Pieces.
(A) Tangible personal property is exempt from the sales and use tax if purchased to replace destroyed objects of a museum's permanent collection when such property is purchased by:
1. a nonprofit museum regularly open to the public and operated by or for a local or state government entity,
2. a nonprofit museum regularly open to the public and operated by a nonprofit organization which has qualified for exemption from the state income tax pursuant to section 27301d of the Revenue and Taxation Code, or
3. operative January 1, 1988, this state or any local governmental entity in this state as part of a public art collection for display in a space which is open to the public without charge.
(B) To qualify for the exemption, the property must be purchased and used exclusively for display purposes. However, the property purchased does not need to be similar in character to the property it is replacing. The exemption does not extend to display cases, shelving, lamps, lighting fixtures, or other items of tangible personal property utilized in the operations of the museum. The purchased property must be:
1. purchased to replace property which has been physically destroyed by fire, flood, earthquake, or other calamity,
2. purchased within three years from the date of the calamity, and
3. the aggregate amount of property purchased must not exceed the value of the property destroyed on the date the calamity occurred.
(d) Records. Records must be maintained to substantiate any claim of exemption pursuant to this regulation. Such records must include, but are not limited to, documents indicating the name of the purchaser, the date of purchase, the purchase price, the date the property was first brought into this state (if applicable), and the dates and locations the work of art was on display at a museum.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6365 and 6366.3, Revenue and Taxation Code.
HISTORY

1. New section filed 12-29-88; operative 1-28-89 (Register 89, No. 2).
2. Change without regulatory effect amending subsections (b)(1)(B), (c)(1)(A)-(B) and (c)(1)(B)3. filed 7-26-2007 pursuant to section 100, title 1, California Code of Regulations (Register 2007, No. 30).
§1587. Animal Life, Feed, Drugs and Medicines.
Note     •     History

(a) Animal Life. Tax does not apply to sales of any form of animal life of a kind the products of which ordinarily constitute food for human consumption (food animals), as for example, cattle, sheep, swine, baby chicks, hatching eggs, fish, and bees. Operative January 1, 1993, food animals include ostriches. Operative January 1, 1996, food animals include emus. Operative January 1, 2000, the term “food animals” includes any form of animal life classified by the California Department of Food and Agriculture, by regulation, as livestock or poultry intended for human consumption under Sections 18848 and 25408 of the California Food and Agricultural Code. Tax shall not apply to sales of such newly defined food animals on or after the date the related California Food and Agricultural regulation is effective.
The term “food animals” does not include any forms of animal life which are commonly kept as pets or companions, the sale of which for food is prohibited by Penal Code Section 598b, nor does it include any horse, the sale of which for human consumption is prohibited by Penal Code Section 598c. For example, cats, dogs, horses, mink, and canaries are not food animals.
(b) Feed.
(1) Definition. The term “feed” as used herein includes cod-liver oil, salt, bone meal, calcium carbonate, double purpose limestone granulars and oyster shells, but does not include sand, charcoal, granite grit, sulphur and medicines. It also includes any item which is purchased for use as an ingredient of a product which would constitute a feed were the product itself sold.
(2) Application of Tax.
(A) In General. Tax does not apply to sales of feed for food animals or for any non-food animals which are to be sold in the regular course of business.
(B) Cellulose Casings. Tax does not apply to the sale or use of cellulose casings used in the manufacture and production of processed meat products which are ultimately resold as, or incorporated into, feed for food animals or non-food animals which are to be sold in the regular course of business.
(C) Medicated Feed. Tax does not apply to the sale of medicated feed, the primary purpose of which is prevention and control of disease of food animals, or of non-food animals which are to be sold in the regular course of business. Tax also does not apply to sales of the particular ingredients purchased from different sellers by a purchaser who mixes them for feeding to such animal life in such proportions that the product is an exempt medicated feed rather than a drug.
(c) Drugs or Medicines. 
(1) Definitions. The term “drugs or medicines, the primary purpose of which is the prevention and control of disease,” as used herein, means and includes any livestock drug approved by the United States Food & Drug Administration, which are defined and registered pursuant to California Food & Agricultural Code Sections 14202, 14206, and 14281. The term also includes vitamins as well as insecticides which are labeled for livestock use and which are administered directly to the livestock. The term includes, but is not limited to, legend drugs, pills and capsules, liquid medications, injected drugs, ointments, vaccines, intravenous fluids, and medicated soaps. “Livestock” includes poultry. “Livestock drug” means any drug, combination of drugs, proprietary medicine, or combination of drugs and other ingredients which is prepared for administration to livestock. On or after January 1, 1997, the term “drugs and medicines” also includes oxygen administered to food animals, as provided in (c)(2)(A) below.
(2) Application of Tax.
(A) Oxygen. On or after January 1, 1997, tax does not apply to the sale or use of oxygen administered to food animals for the primary purpose of preventing or controlling disease, including oxygen injected into ponds or tanks that house or contain aquatic species raised, kept, or used as food for human consumption. However, tax does apply to the sale or use of oxygen administered to nonfood animals whether or not the animals are being held for sale in the regular course of business.
(B) Administered Directly. Prior to January 1, 1997, except as provided in Regulation 1506 (18 CCR 1506), subdivision (h), dealing with licensed veterinarians, tax applies to the sale or use of drugs or medicines as defined in subdivision (c)(1) which are administered directly to animal life. Operative January 1, 1997, tax does not apply to the sale or use of drugs or medicines as defined in subdivision (c)(1) which are administered directly (e.g., orally, hypodermically, or topically or externally as injections, implants, drenches, repellents, or pour-ons) to food animals. The sale or use of drugs or medicines as defined in subdivision (c)(1) administered directly to non-food animals are subject to tax regardless that such animals are being held for sale in the regular course of business.
(C) Mixed With Feed or Drinking Water. Prior to April 1, 1996, tax applies to the sale or use of drugs or medicines as defined in subdivision (c)(1) administered to animal life as an additive to feed (except as provided in (b)(2)(B) above) or to drinking water. Operative April 1, 1996, tax does not apply to the sale or use of such drugs or medicines administered as an additive to, or component of, feed or drinking water for food animals or for nonfood animals being held for sale in the regular course of business.
(d) Exemption Certificates.
(1) Feed. Sellers of feed should secure feed exemption certificates with respect to sales of feed of a kind customarily used both to feed food animals and to feed non-food animals which is purchased for food animals, and with respect to sales of all feed which is purchased for non-food animals beings held for sale in the regular course of business. The following form of certificate is suggested: 

“I hereby certify that all of the feed which I shall purchase from	
	 
will be purchased for use as feed for animals or for non-food animals which are being held for sale in the regular course of business. This certificate shall be considered a part of each order which I give unless such order shall otherwise specify. This certificate shall be good until revoked in writing.

Signature 	

Address 	

Occupation 	

Seller's Permit No. (if any)	”
Sellers of feed need not secure feed exemption certificates with respect to sales of feed of a kind ordinarily used only in the production of meat, dairy or poultry products for human consumption or with respect to sales in small units (two standard stacks of grain or less and/or four bales of hay or less) of feed of a kind customarily used either for food production or other purposes (feeding work stock), or with respect to sales of feed that is specifically labeled by the manufacturer for food animals. In the absence of evidence to the contrary, it will be presumed that all such feed are to be used in producing meat, dairy or poultry products for human consumption.
(2) Drugs or Medicines. 
(A) Administered Directly. Operative January 1, 1997, persons who buy drugs or medicines as defined in subdivision (c)(1), which will be administered directly (e.g., orally, hypodermically, or topically or externally as injections, implants, drenches, repellents, or pour-ons) to food animals, should give the vendor an exemption certificate similar to the example in subdivision (d)(2)(C) below.
(B) To be Mixed With Feed or Drinking Water. Operative April 1, 1996, persons who buy drugs or medicines as defined in subdivision (c)(1) to be mixed with feed or drinking water, for food animals or of non-food animals being held for sale in the regular course of business, should give the vendor an exemption certificate similar to the example in subdivision (d)(2)(C) below.
(C) Sellers of drugs or medicines to be mixed with feed or drinking water for food animals or for non-food animals being held for sale in the regular course of business, to be administered directly to a food animal, or, if oxygen, administered to a food animal such as by pumping or injecting the oxygen into the animal's living environment should request a certificate similar to the following from the buyer: 

“I hereby certify that the drugs or medicines which I shall purchase from	

will be purchased 

[ ] as an additive to feed or drinking water for food animals or for non-food animals being held for sale in the regular course of business, 
[ ] for administration directly to a food animal, or
[ ] for oxygen administered to a food animal.

This certificate shall be considered a part of each order which I give unless such order shall otherwise specify. This certificate shall be good until revoked in writing.

Signature 	

Address 	

Occupation 	

Seller's Permit No. (if any)	”
(3) Invoices Related to Exemption Certificates. Exemption certificates should be complete with the information specified in the above forms, including the names and addresses of the purchasers, in order to constitute adequate support for exemptions claimed by sellers. In addition, the invoices on sales claimed as exempt should specify the names of the purchasers in order to relate them to exemption certificates.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6018.1, 6358 and 6358.4, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former Section 1987 filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
2. New subsection (c)(3) filed 3-19-76; effective thirtieth day thereafter (Register 76, No. 12).
3. Amendment of subsection (b)(2)(C) filed 11-13-86; effective thirtieth day thereafter (Register 86, No. 46). 4. Amendment filed 1-27-88; operative 2-26-88 (Register, 88 No. 6).
4. Amendment filed 1-27-88; operative 2-26-88 (Register 88, No. 6).
5. Amendment of subsections (a), (b)(2)(B)-(C), and (c)(1)-(2) filed 9-12-96; operative 10-12-96 (Register 96, No. 37).
6. Amendment of section heading, section and Note filed 12-9-97; operative 1-8-98 (Register 97, No. 50).
7. New subsection (b)(2)(B) and subsection relettering filed 9-1-99; operative 10-1-99 (Register 99, No. 36).
8. Amendment of subsections (a) and (c)(1), new subsections (c)(2)-(c)(2)(A), redesignation of former subsections (c)(2)-(3) to (c)(2)(B)-(C) and amendment of subsection (d)(2)(C) filed 4-18-2000; operative 5-18-2000 (Register 2000, No. 16).
§1588. Seeds, Plants and Fertilizer.
Note     •     History

(a) Seeds and Plants. Tax does not apply to sales of seeds, annual plants, and operative January 1, 1999, non-annual plants, the products of which ordinarily constitute food for human consumption or the products of which are to be sold in the regular course of the purchaser's business including fruit trees, berry vines, and grape rootlings or rootstock, or cuttings of every variety. Tax does not apply to sales of seed, the products of which will be used as feed for any form of animal life of a kind the products of which ordinarily constitute food for human consumption or the products of which are to be sold in the regular course of the purchaser's business.
(b) Fertilizer.
(1) Definition. The term “fertilizer” includes commercial fertilizers, agricultural minerals, and manure. The terms “commercial fertilizers” and “agricultural minerals” as used herein are defined in Sections 14522 (commercial fertilizer) and 14512 (agricultural minerals) of the Food and Agricultural Code. “Manure” means the excreta of any domestic animal or domestic fowl which is not artificially mixed with any material except a material which has been used for bedding, sanitary, or feeding purposes for such an animal or fowl or for the preservation of the manure. The term “fertilizer” does not include “soil amendments” or “auxiliary soil and plant substances” as these terms are defined (with the exception noted below) in Sections 14552 (soil amendments) and 14513 (auxiliary soil and plant substances) of the Food and Agricultural Code. For purposes of this regulation, “manures sold without guarantees for plant nutrients” as described in Section 14552 of the Food and Agricultural Code are not soil amendments.
(2) Application of Tax. Tax does not apply to sales of fertilizer to be applied to land (including foliar application) the products of which are to be: (a)  used as food for human consumption,  (b) used as feed for any form of animal life of a kind the products of which ordinarily constitute food for human consumption, or (c) sold in the regular course of the purchaser's business.
When insecticides are mixed with fertilizer and the mixture sold, that portion of the total price allocable to the fertilizer may be excluded from the measure of the tax if the mixed product is applied to land (including foliar application) the products of which are to be: (a)  used as food for human consumption, (b) used as feed for any form of animal life of a kind the products of which ordinarily constitute food for human consumption,  or (c) sold in the regular course of the purchaser's business.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6358, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former section 1988 filed 3-30-70; effective thirtieth day thereafter (Register 70, No. 14).
2. Amendment filed 10-23-85; effective thirtieth day thereafter (Register 85, No. 43).
3. Amendment of subsection (a) filed 10-19-88; operative 11-18-88 (Register 88, No. 43).
4. Amendment of subsections (a) and (b)(1)-(2) filed 12-11-92; operative 1-11-93 (Register 92, No. 50).
5. Change without regulatory effect amending subsections (a) and (b)(2) filed 3-2-99 pursuant to section 100, title 1, California Code of Regulations (Register 99, No. 10).
6. Change without regulatory effect amending subsection (a) and Note filed 12-3-99 pursuant to section 100, title 1, California Code of Regulations (Register 99, No. 49).
7. Change without regulatory effect amending subsection (a) filed 1-13-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 2).
§1589. Containers and Labels.
Note     •     History

(a) Definitions. The term “containers” as used herein means the articles in or on which tangible personal property is placed for shipment and delivery such as wrapping materials, bags, cans, twines, gummed tapes, barrels, boxes, bottles, drums, carboys, cartons, sacks, pallets and materials from which such containers are manufactured.
The term “returnable containers” as used herein means containers of a kind customarily returned or resold by the buyers of the contents for re-use by the packers, bottlers or sellers of the commodities contained therein. A container, title to which is retained by the seller or for which a deposit is taken by such seller, is a returnable container.
A container used for shipment or delivery of food for human consumption is not customarily returned by the buyer when:
1. The container is sold together with the contents;
2. No deposit is charged on the container;
3. Title to the container is not retained;
4. There is no obligation to repurchase the container;
5. The container is of the type that is fungible; and
6. The container is repurchased without regard to whether it is the same container originally sold.
Example: A tomato paste processor purchased a new or used container. The processor fills the container with tomato paste or other processed food. The tomato paste, together with the container, is sold to a spaghetti sauce manufacturer. No deposit is charged on the container, title to the container is not retained, and there is no obligation to repurchase the container. The container is of a type that is fungible. The spaghetti sauce manufacturer sells the container to a warehouse or a food processor who in turn sells containers that may or may not include the original container to a tomato paste processor that may or may not be the original purchaser. This container is not customarily returned by the buyer.
Examples of returnable containers are: registered dairy products containers, steel drums, certain types of beer and soft drink bottles, wine barrels, chemical carboys, and gas cylinders.
All other containers are “nonreturnable containers.” Examples of nonreturnable containers are: wrapping and packing materials, paper bags, twine, cartons, cans, medicine and distilled spirits bottles.
The term “deposit” as used herein means an amount charged to the purchaser of the contents of the container with the understanding that such amount will be repaid when the container or a similar container is delivered to the seller. The term “deposit” as used herein does not include amounts representing redemption or recycling values of beverage containers pursuant to division 12.1 (commencing with Section 14500) of the Public Resources Code whether or not such amounts are separately stated to the purchaser of the contents of the container.
(b) Application of Tax.
(1) Containers. Tax does not apply to the sale of, and the storage, use, or other consumption of:
(A) Nonreturnable containers when sold or leased without the contents to persons who place the contents in the container and sell the contents together with the container.
(B) Nonreturnable containers when sold without the contents to persons who place food products for human consumption in the containers for subsequent sale.
(C) Returnable containers when sold with the contents in connection with a retail sale of the contents, or when resold for refilling. In the case of a lease of a returnable container that is a continuing sale, the lessor's first lease of the container for filling is taxable for the full term of the lease or thirty (30) days whichever is greater. The lessor's subsequent lease of the container for refilling for sale with the contents is not taxable.
(D) All containers when sold or leased with the contents, if the sales price of the contents is not required to be included in the measure of the sales tax or the use tax.
(E) Operative April 1, 2000, all containers when sold or leased without the contents to persons who place food products for human consumption in the containers for shipment, provided the food products will be sold. The exemption applies without regard to whether the food products are sold in the same container or not, or whether the food products are remanufactured or repackaged prior to their sale.
Tax applies to all other sales of containers except sales for the purpose of resale to other sellers of containers who purchase them for resale without the contents.
Operative April 1, 1998, tax does not apply to the sale or to the storage, use, or other consumption of any container used to collect or store human whole blood, plasma, blood products, or blood derivatives held for medical purposes, including, but not limited to, blood collection units and blood pack units.
Deposits as defined herein are not taxable.
(2) Labels. Tax does not apply to sales of labels or nameplates if:
(A) The purchaser affixes them to property to be sold and sells them along with and as a part of such property, as, for example, sales of nameplates of manufacturers or producers which are permanently affixed to each unit of products sold, such as automobiles and machinery.
(B) The purchaser affixes them to nonreturnable containers of property to be sold, or to returnable containers of such property if a new label is affixed to the container each time it is refilled. Examples are sales of labels to be affixed to fruit boxes, cans, bottles and packing cases, to growers, packers, bottlers and others who place the contents in the containers.
(c) Particular Applications.
(1) Price Tags. Tax applies to sales of such items as price tags, shipping tags and advertising matter used in connection with the sale of property or enclosed with the property sold.
(2) Feed Analysis Tags. Tax does not apply to sales of feed analysis tags to be attached to containers of feeds and sold along with the container and contents.
(3) Feed Bags. Feed bags sold to feed dealers who place feed in the bags and sell the feed together with the bags are nonreturnable containers,1 and the sale of such bags to feed dealers is not taxable. It is immaterial whether the bags are made of burlap, cotton, paper, or other material, or whether there is a brand name or dealer's name imprinted on the bags.
If, however, any feed dealer charges a deposit to customers to secure the return of the bags, or otherwise requires his customers to return the bags to him, the bags become returnable containers and tax applies to the sale of the bags to the feed dealer.
(4) Gift Wrapping. Tax applies to the entire charge for “gift wrapping,” (i.e., furnishing the materials and labor required to wrap an item for a customer so as to be suitable for use by him as a gift), whether or not the person who does the gift wrapping is the seller of the contents. If the person who does the gift wrapping is the seller of the contents, the gift wrapping is considered sold together with the contents, whether or not a separate charge is made for the gift wrapping. The person who does the gift wrapping may purchase the materials free of tax for resale.
However, tax does not apply to charges for gift wrapping exempt food products sold by the person who does the gift wrapping, unless the value of the gift wrapping exceeds the value of the food products.

---------

1 The conclusion that feed bags are nonreturnable containers resulted from a statewide survey made by the board with the cooperation of the California Grain, and Feed Association, which showed that substantially less than 50 percent of the feed bags are returned to the feed dealers by their customers for re-use.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6007, 6008, 6009, 6012, 6364 and 6364.5, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former Section 1989 filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Amendment of subsection (a) and new subsection (c)(4) filed 5-30-75; effective thirtieth day thereafter (Register 75, No. 22).
3. Amendment of subsection (a) filed 11-30-87; operative 12-30-87 (Register 87, No. 49). 
4. Editorial correction reinserting footnote (Register 92, No. 7).
5. New subsection (b)(1)(B), subsection relettering, and amendment of subsection (c)(4) and Note filed 7-9-96; operative 8-8-96 (Register 96, No. 28).
6. Change without regulatory effect amending subsection (b)(1)(D) and Note filed 6-11-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 24).
7. Amendment of subsections (a), (b)(1)(A) and (b)(1)(C)-(D) filed 9-15-99; operative 10-15-99 (Register 99, No. 38).
8. Change without regulatory effect amending subsection (b)(1) and adding new subsection (b)(1)(E) filed 1-13-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 2).
§1590. Newspapers and Periodicals.
Note     •     History

(a) Definitions.
(1) “Newspaper.” The term “newspaper” as used herein conforms to the definition of a newspaper as set forth in a ruling of the United States Treasury Department published in the Federal Register, December 29, 1960. Under this definition, the term is limited to those publications which are commonly understood to be newspapers and which are printed and distributed periodically at daily, weekly, or other short intervals for the dissemination of news of a general character and of a general interest. The term does not include handbills, circulars, flyers, or the like, unless distributed as a part of a publication which constitutes a newspaper within the meaning of this subparagraph. Neither does the term include any publication which is issued to supply information on certain subjects of interest to particular groups, unless such publication otherwise qualifies as a newspaper within the meaning of this subparagraph. For purposes of this subparagraph, advertising is not considered to be news of a general character and of a general interest.
(2) “Periodical.” The term “periodical” as used herein is limited to those publications which appear at stated intervals, each issue of which contains news or information of general interest to the public, or to some particular organization or group of persons. Each issue must bear a relationship to prior or subsequent issues in respect to continuity of literary character or similarity of subject matter, and there must be some connection between the different issues of the series in the nature of the articles appearing in them.1 Each issue must be sufficiently similar in style and format to make it evident that it is one of a series. An annual report of a corporation which is substantially different in style and format from the corporation's quarterly reports is not part of a series with the quarterly reports. The term “periodical” does not include books complete in themselves, even those that are issued at stated intervals, for example, books sold by the Book-of-the-Month Club or similar organizations, so-called “pocket books,” a new one of which may be issued once a month or some other interval, or so-called “one-shot” magazines that have no literary or subject matter connection or continuity between prior or subsequent issues. The term does not include catalogs, programs, score-cards, handbills, price lists, order forms or maps. Neither does it include shopping guides or other publications of which the advertising portion, including product publicity, exceeds 90 percent of the printed area of the entire issue in more than one-half of the issues during any 12-month period.
(3) “Ingredient or Component Part of a Newspaper or Periodical.” The term “ingredient or component part of a newspaper or periodical” includes only those items that become physically incorporated into the publication and not those which are merely consumed or used in the production of the publication. For example, newsprint and ink are ingredients of a newspaper; however, a photograph does not become an ingredient or component part of a newspaper or periodical merely because the image of the photograph is reproduced in the publication.
Handbills, circulars, flyers, order forms, reply envelopes, maps or the like are considered as component parts of a newspaper or periodical when attached to or inserted in and distributed with the newspaper or periodical.
(4) “Publisher.” “Publisher” means and includes any person who owns the rights to produce, market, and distribute printed literature and information.
(5) “Distributor.” “Distributor” means any person who acquires newspapers or periodicals for subsequent distribution to retailers or newspaper carriers.
(6) “Newspaper Carrier.” “Newspaper carrier” means any person who acquires newspapers from a publisher or distributor to deliver to consumers. The term includes a hawker. A “hawker” is an individual who sells single copies of newspapers to passersby on a street corner or other trafficked area. “Newspaper carrier” does not include persons selling newspaper or periodicals from a fixed place of business.
(7) “Third Party Retailer.” “Third party retailer” means and includes any person who sells at retail subscriptions to newspapers and periodicals who is not the publisher of the newspapers or periodicals. Typically, third party retailers solicit subscriptions in a single offering for a large number of different publications, require that payment be made to the account of the third party retailer, and undertake to resolve subscription problems. The term includes persons commonly known as direct mail, school, paid during service, cash, catalog, and telephone agents. “Third party retailer” does not include persons who solicit renewals of subscriptions on behalf of individual publishers.
(b) Application of Tax.
(1) In General. Effective July 15, 1991, the sale of newspapers and periodicals, including sales by third party retailers, is subject to tax unless otherwise exempt.
Tax does not apply to sales of tangible personal property to persons who purchase the property for incorporation as a component part of a newspaper or periodical which will be sold notwithstanding that the purchaser is not the seller of the newspaper or periodical.
See Regulation 1574 (18 CCR 1574) for the application of tax to sales through vending machines and Regulation 1628 (18 CCR 1628) for the application of tax to transportation charges.
(2) Distributions of Newspapers and Periodicals  Without Charge. Effective October 2, 1991, tax does not apply to the sale or use of tangible personal property which becomes an ingredient or component part of a copy of a newspaper or periodical regularly issued at average intervals not exceeding three months when that copy of such newspaper or periodical is distributed without charge, nor does tax apply to such distribution.
Newspapers and periodicals distributed on a voluntary pay basis shall be considered as distributed without charge. Newspapers and periodicals are distributed on a voluntary pay basis when payment is requested from the consumer but is not required.
(3) Subscriptions. The sale or use of newspapers and periodicals is exempt from tax during the term of a prepaid subscription if the purchaser ordered and paid for the subscription prior to July 15, 1991.
Effective November 1, 1992, tax does not apply to the sale or use of a periodical, including a newspaper, which appear at least four, but not more than 60 times each year, which is sold by subscription, and which is delivered by mail or common carrier. For example, a daily newspaper is not a periodical for the purposes of this subdivision (b)(3). Tax does not apply to the sale or use of tangible personal property which becomes an ingredient or component part of such a periodical.
Sales tax reimbursement collected on the sale of a periodical subscription prior to the November 1, 1992 effective date of the exemption for the sale of issues delivered on or after November 1, 1992 constitutes excess tax reimbursement. The retailer must refund the tax reimbursement to the customer or pay it to the state in accordance with subdivision (b) of Regulation 1700 (18 CCR 1700).
Each delivery of a newspaper or periodical pursuant to a subscription sale is a separate sale transaction. When the sale is subject to tax, the retailer must report and pay the tax based upon the reporting period within which the delivery is made. The subscription price shall be prorated over the term of the subscription period.
(4) Membership Organizations. Generally, tax applies to sales of newspapers and periodicals by membership organizations. If the price is separately stated, tax applies to that amount. If the price is not separately stated, the measure of tax is the fair retail selling price of the publication.
The application of tax to distributions of newspapers and periodicals by nonprofit organizations is provided at subdivision (b)(5). The application of tax to sales of periodicals by subscription is provided at subdivision (b)(3).
(5) Nonprofit Organizations.
(A) Internal Revenue Code Section 501(c)(3) Organizations. Effective November 1, 1991, until October 31, 1992, tax does not apply to the sale or use of any newspaper or periodical distributed by an organization that qualifies for tax exempt status under section 501(c)(3) of the Internal Revenue Code, nor tangible personal property which becomes an ingredient or component part of any such newspaper or periodical, only as to issues distributed under either of the following circumstances:
1. The issues are distributed to the organization's members in consideration of the organization's membership fee; or
2. The issues are of a newspaper or periodical which neither receives revenue from, nor accepts, any commercial advertising.
Effective November 1, 1992, the exemption is applicable only as to a newspaper or periodical regularly issued at average intervals not exceeding three months.
For purposes of this subdivision, any governmental entity established and administered for the purposes provided in Internal Revenue Code Section 501(c)(3) shall be considered to be an organization that qualifies for tax exempt status under that section.
(B) Other Nonprofit Organizations. Effective November 1, 1991, tax does not apply to the sale or use of any newspaper or periodical distributed by a nonprofit organization, nor tangible personal property that becomes an ingredient or component part of or any such newspaper or periodical, only as to issues distributed pursuant to both of the following requirements:
1. The issues are distributed to the organization's members in consideration, in whole, or in part, of the organization's membership fee;
2. The amount paid or incurred by the nonprofit organization for the cost of printing the newspaper or periodical is less than ten percent of the membership fee attributable to the period for which the newspaper or periodical is distributed, whether the publication is printed within or without this state. The cost of printing shall be determined as follows.
The cost of printing includes costs of tangible personal property purchased to become an ingredient or component part of the newspaper or periodical (e.g., ink and paper) and costs of labor to print the newspaper or periodical. The cost of printing does not include costs not attributable to actual printing, such as costs of special printing aids, typography, and preparation of layouts.
If the organization contracts with an outside printer to print the newspaper or periodical, the organization shall obtain and retain documentation segregating the costs of printing from the printer's other charges.
If the organization is the printer of the newspaper or periodical, the cost of printing includes the aggregate of the cost of tangible personal property purchased to become an ingredient or component part of the newspaper or periodical; labor of printing, including fringe benefits and payroll taxes; and other costs attributable to the actual printing of the newspaper or periodical.
If an organization has published the newspaper or periodical for a period exceeding twelve months and the method of printing has not changed, the organization may elect to consider the cost of printing for a reporting period to be equal to the amount paid or incurred for the same reporting period for the previous fiscal or calendar year.
(6) Newspaper Carriers. A newspaper carrier is not a retailer. The publisher or distributor for whom the carrier delivers is the retailer of the newspapers delivered. The publisher or distributor shall report and pay tax measured by the price charged to the customer by the carrier.
(7) Consumption of Property. Tax applies to the sale to or use by a newspaper or periodical publisher of tangible personal property consumed in the manufacturing process. Tax does not apply to the cost of tangible personal property lost or wasted in the manufacturing process when that property was purchased for the purpose of incorporation into a newspaper or periodical to be sold or to be distributed in accordance with subdivision (b)(2).
(8) Fixed Price Contracts. The sale or use of newspapers and periodicals is exempt from tax during the term of a prepaid subscription if the purchaser ordered and paid for the subscription prior to July 15, 1991.
(9) School Catalogs and Yearbooks. Public or private schools, county offices of education, school districts, or student organizations are the consumers of catalogs and yearbooks prepared for or by them, and tax does not apply to their receipts from the distribution of the publications to students.
Tax applies to charges for the preparation of such publications made to public or private schools, county offices of education, school districts, or student organizations by printers, engravers, photographers and the like.
(c) Exemption Certificates.
Any seller claiming a transaction as exempt from sales tax pursuant to Revenue and Taxation Code sections 6362.7 or 6362.8 should timely obtain an exemption certificate in writing from the purchaser. The exemption certificate will be considered timely if obtained by the seller at any time before the seller bills the purchaser for the property, or any time within the seller's normal billing and payment cycle, or any time at or prior to delivery of the property.
(1) Certificate A. Certificate to be used for purchases of tangible personal property for incorporation into newspapers or periodicals for sale in accordance with subdivisions (b)(1) or (b)(3), above.
(2) Certificate B. Certificate to be used for purchases of tangible personal property that becomes an ingredient or component part of newspapers or periodicals that are distributed without charge in accordance with subdivision (b)(2), above.
(3) Certificate C. Certificate to be used for purchases of tangible personal property that becomes an ingredient or component part of newspapers or periodicals that are distributed by organizations which qualify for tax-exempt status under Internal Revenue Code section 501(c)(3) in accordance with subdivision (b)(5)(A), above.
(4) Certificate D. Certificate to be used for purchases of tangible personal property that becomes an ingredient or component part of newspapers or periodicals that are distributed by nonprofit organizations in accordance with subdivision (b)(5)(B), above.

Certificate A

California Sales Tax Exemption Certificate
Sales of tangible personal property for
incorporation into a newspaper or periodical for sale

(Name of Purchaser)

(Address of Purchaser)

I HEREBY CERTIFY:

Initial one of	[___]	That I hold valid seller's permit
the following:		No. __ issued pursuant to the
		Sales and Use Tax Law.
	[___]	That I do not hold a seller's permit
		issued pursuant to the Sales and
		Use Tax Law. I do not sell any 
		tangible personal property for 
		which a permit is required.

I further certify that the tangible personal property described herein
which I shall purchase from		
		
	(Name of Vendor)	
will become a component part of the newspaper or periodical*
		
and sold as a component part of the application.

I understand that in the event any such property is sold or used other
than as specified above or used other than for retention, demonstration,
or display while holding it for sale in the regular course of business, I am
required by the Sales and Use Tax Law to report and pay any applicable
sales or use tax. Description of the property to be purchased:

				
Date:	, 19___
				
	(Signature of Purchaser or Authorized Agent)
				
			    (Title)

*Insert name and type of newspaper or periodical

Certificate B

California Sales Tax Exemption Certificate
Sales of tangible personal property which becomes an ingredient
or component part of newspapers or periodicals that are
distributed without charge

(Name of Purchaser)

(Address of Purchaser)

I HEREBY CERTIFY:

Initial one of	[___]	That I hold valid seller's permit
the following:		No. __ issued pursuant to the
		Sales and Use Tax Law.
	[___]	That I do not hold a seller's permit
		issued pursuant to the Sales and
		Use Tax Law. I do not sell any 
		tangible personal property for 
		which a permit is required.

I further certify that I am engaged in the business of publishing*
				
which is regularly issued at average intervals not exceeding three months
and distributed without charge by me. The tangible personal property de-
scribed herein which I shall purchase from	
				
	(Name of Vendor)	
will become a component part of the publication listed above. I under-
stand that if I use any of the property purchased for any other purpose I
am required by the Sales and Use Tax Law to report and pay tax, mea-
sured by the purchase price of such property.

Description of property to be purchased:

Date	, 19__

	(Signature of Purchaser or Authorized Agent)

	        (Title)

*Insert name and type of  newspaper or periodical

Certificate C

California Sales Tax Exemption Certificate
Sales of tangible personal property that becomes an ingredient
or component of newspapers or periodicals that are distributed
by organizations which qualify for tax-exempt status under
Internal Revenue Code section 501(c)(3)

(Name of Purchaser)

(Address of Purchaser)

I HEREBY CERTIFY:

Initial one of	[___]	That the purchaser holds valid
the following:		seller's permit No. __
		issued pursuant to the Sales
		and Use Tax Law.
	[___]	That the purchaser does not hold
		a permit issued pursuant to the
		Sales  and Use Tax Law.
		The purchaser does not sell any 
		tangible personal property for 
		which a permit is required.

I further certify that the purchaser is an organization that qualifies for tax-exempt status under Section 501(c)(3) of the Internal Revenue Code and is engaged in the business of selling or publishing*

The tangible personal property described herein which I shall purchase
from 				
		(Name of Vendor)

will be resold in the form of tangible personal property or will become a component part of a newspaper or periodical distributed by the organization and (check one or both):
[___] The organization will distribute the newspaper or periodical to the members of the organization in consideration of payment of the organization's membership fee or to the organization's contributors.
[___] The publication does not receive revenue from or accept any commercial advertising.

I understand that in the event any such property is sold or used other
than as specified above or used other than for retention, demonstration,
or display while holding it for sale in the regular course of business, I am
required by the Sales and Use Tax Law to report and pay any applicable
sales or use tax. Description of the property to be purchased:	

Date:	, 19__
				
	(Signature of Purchaser or Authorized Agent)
				
			   (Title)

*Insert name and type of  newspaper or periodical

Certificate D

California Sales Tax Exemption Certificate

Sales of tangible personal property which becomes an ingredient
or component part of newspapers or periodicals that are distributed
by nonprofit organizations

(Name of Purchaser)

(Address of Purchaser)

I HEREBY CERTIFY:

Initial one of	[___]	That the purchaser holds valid
the following:		seller's permit No.  __
		issued pursuant to the Sales
		and Use Tax Law.
	[___]	That the purchaser does not hold
		a permit issued pursuant to the
		Sales  and Use Tax Law.
		The purchaser does not sell any 
		tangible personal property for 
		which a permit is required.

I further certify that the purchaser is a nonprofit organization which is engaged in business of selling or publishing*	

The tangible personal property described herein which I shall purchase
from				
		(Name of Vendor)

will be resold by the organization in the form of tangible personal property or will become a component part of a newspaper or periodical distributed by the organization and both of the following apply:
(A) Distribution will be to any member of the nonprofit organization in consideration, in whole or in part, of payment of the organization's membership fee.
(B) The amount paid or incurred by the nonprofit organization for the cost of printing the newspaper or periodical is less than 10 percent of the membership fee attributable to the period for which the newspaper or periodical is distributed.

I understand that in the event any of such property is sold or used other than as specified above or used other than retention, demonstration, or display while holding it for sale in the regular course of business, I am required by the Sales and Use Tax Law to report and pay any applicable sales or use tax. Description of property to be purchased:

Date:	, 19__
				
	(Signature of Purchaser or Authorized Agent)
				
			    (Title)

*Insert name and type of  newspaper or periodical
1  This definition is based upon Business Statistics Organization Inc.  v . Joseph, 299 N.Y. 443, 87 N.E. 2d 505, and Houghton v. Payne, 194 U. S. 88, 48 L.Ed. 888.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code; Reference: Sections 6005, 6006, 6007, 6010, 6015, 6361.5, 6362.3, 6362.7 and 6362.8,  Revenue and Taxation Code.
HISTORY

1. Renumbering from section 1990 and amendment filed 4-10-70; effective thirtieth day thereafter (Register 70, No. 15). For history of former section see Register 66, No. 7.
2. Amendment of subsection (a)(2) filed 2-13-75; effective thirtieth day thereafter (Register 75, No. 7).
3. Amendment of subsection (b)(2) filed 12-20-77; effective thirtieth day thereafter (Register 77, No. 52).
4. Amendment of subsections (a)(2), (b)(2) and (c)(2) filed 5-8-89; operative 6-7-89 (Register 89, No. 19).
5. Amendment of subsections (a) and (b) and repealer of subsections (c) and (d) filed 8-30-91 as an emergency; operative 8-30-91 (Register 92, No. 7). A Certificate of Compliance must be transmitted to OAL 12-30-91 or emergency language will be repealed by operation of law on the following day.
6. Repealer of emergency amendments filed 8-30-91 and reinstatement of prior text filed 9-22-92 by operation of Government Code section 11346.1(f) (Register 92, No. 40).
7. Amendment of subsections (a)(2)-(3), new subsections (a)(4)-(7), amendment of subsection (b)(1), new subsections (b)(2)-(8), redesignation and amendment of  subsection (b)(2) to subsection (b)(9), repealer of subsections (c)-(d) and new subsections (c)-(c)(4), and amendment of footnote 1 and Note filed 8-5-94; operative 9-6-94 (Register 94, No. 31).
8. Editorial correction amending subsections (a)(2), (a)(7), (b)(3), (b)(5)(B)2., (b)(8), (b)(9) and (c)(4) (Register 94, No. 39).
§1591. Medicines and Medical Devices.
Note     •     History

(a) Definitions.
(1) Administer. “Administer” means the direct application of a drug or device to the body of a patient or research subject by injection, inhalation, ingestion, or other means.
(2) Dispense. “Dispense” means the furnishing of drugs or devices upon a prescription from a physician, dentist, optometrist, or podiatrist. Dispense also means and refers to the furnishing of drugs or devices directly to a patient by a physician, dentist, optometrist, or podiatrist acting within the scope of his or her practice.
(3) Furnish. “Furnish” means to supply by any means, by sale or otherwise. 
(4) Health Facility. “Health Facility” as used herein has the meaning ascribed to the term in Section 1250 of the Health and Safety Code, and also includes “clinic” as defined in sections 1200 and 1200.1 of the Health and Safety Code.
(A) Section 1250 of the Health and Safety Code provides that “health facility” means any facility, place or building that is organized, maintained, and operated for the diagnosis, care, prevention, and treatment of human illness, physical or mental, including convalescence and rehabilitation and including care during and after pregnancy, or for any one or more of these purposes, for one or more persons, to which the persons are admitted for a 24-hour stay or longer. 
(B) Section 1200 of the Health and Safety Code provides that “clinic” means an organized outpatient health facility which provides direct medical, surgical, dental, optometric, or podiatric advice, services, or treatment to patients who remain less than 24 hours, and which may also provide diagnostic or therapeutic services to patients in the home as in incident to care provided at the clinic facility. A place, establishment, or institution which solely provides advice, counseling, information, or referrals on the maintenance of health or on the means and measures to prevent or avoid sickness, disease, or injury, where such advice, counseling, information, or referrals does not constitute the practice of medicine, surgery, dentistry, optometry, or podiatry, shall not be deemed a clinic for purposes of this subdivision.
(C) Section 1200.1 of the Health and Safety Code provides that “clinic” also means an organized outpatient health facility which provides direct psychological advice, services, or treatment to patients who remain less than 24 hours. As provided in section 1204.1 of the Health and Safety Code, such clinics serve patients under the direction of a clinical psychologist as defined in section 1316.5 of the Health and Safety Code, and are operated by a nonprofit corporation, which is exempt from federal taxation under paragraph (3), subsection (c) of section 501 of the Internal Revenue Code of 1954, as amended, or a statutory successor thereof, and which is supported and maintained in whole or in part by donations, bequests, gifts, grants, government funds, or contributions which may be in the form of money, goods, or services. In such clinics, any charges to the patient shall be based on the patient's ability to pay, utilizing a sliding fee scale. Such clinics may also provide diagnostic or therapeutic services authorized under Chapter 6.6 (commencing with section 2900) of Division 2 of the Business and Professions Code to patients in the home as an incident to care provided at the clinic facility.
(5) Pharmacist. “Pharmacist” means a person to whom a license has been issued by the California State Board of Pharmacy, under the provisions of Section 4200 of the Business & Professions Code, except as specifically provided otherwise in Chapter 9 of the Pharmacy Law.” 
(6) Pharmacy. “Pharmacy” means an area, place, or premises licensed by the California State Board of Pharmacy in which the profession of pharmacy is practiced and where prescriptions are compounded. Pharmacy includes, but is not limited to, any area, place, or premises described in a license issued by the California State Board of Pharmacy wherein controlled substances, dangerous drugs, or dangerous devices are stored, possessed, prepared, manufactured, derived, compounded, or repackaged, and from which the controlled substances, dangerous drugs, or dangerous devices are furnished, sold, or dispensed at retail. Pharmacy shall not include any area specifically excluded by paragraph (b) of Section 4037 of the Business and Professions Code. 
(7) Prescription. “Prescription” means an oral, written, or electronic transmission order that is issued by a physician, dentist, optometrist, or podiatrist licensed in this state and given individually for the person or persons for whom ordered. The order must include all of the following: 
(A) The name or names and address of the patient or patients. 
(B) The name and quantity of the drug or device prescribed and the directions for use. 
(C) The date of issue. 
(D) Either rubber stamped, typed, or printed by hand or typeset, the name, address, and telephone number of the prescriber, his or her license classification, and his or her federal registry number, if a controlled substance is prescribed. 
(E) A legible, clear notice of the conditions for which the drug is being prescribed, if requested by the patient or patients. 
(F) If in writing, signed by the prescriber issuing the order. 
(8) Physicians, Dentists, Optometrists, and Podiatrists. “Physicians,” “dentists,” “optometrists,” and “podiatrists” are persons authorized by a currently valid and unrevoked license to practice their respective professions in this state. “Physician” means and includes any person holding a valid and unrevoked physician's and surgeon's certificate or certificate to practice medicine and surgery, issued by the Medical Board of California or the Osteopathic Medical Board of California and includes an unlicensed person lawfully practicing medicine pursuant to Section 2065 of the Business & Professions Code, when acting within the scope of that section. 
(9) Medicines. “Medicines” means: 
(A) Except where taxable for all uses as provided in subdivision (c), any product fully implanted or injected in the human body, or any drug or any biologic, when such are approved by the U.S. Food and Drug Administration to diagnose, cure, mitigate, treat or prevent disease, illness or medical condition regardless of ultimate use, or
(B) Any substance or preparation intended for use by external or internal application to the human body in the diagnosis, cure, mitigation, treatment or prevention of disease and which is commonly recognized as a substance or preparation intended for that use. 
The term medicines also includes certain articles, devices, and appliances as described in subdivision (b) of this regulation. 
(b) “Medicines.” In addition to the definition set forth in subdivision (a)(9) of this section, the term “medicines” means and includes the following items:
(1) Preparations and Similar Substances. Preparations and similar substances intended for use by external or internal application to the human body in the diagnosis, cure, mitigation, treatment or prevention of disease and which are commonly recognized as a substance or preparation intended for such use qualify as medicines. Tax does not apply to the sale or use of such medicines sold or furnished under one of the conditions provided in subdivision (d)(1) through (d)(6).
“Preparations and similar substances” include, but are not limited to, drugs such as penicillin, and other antibiotics, “dangerous drugs” (drugs that require dispensing only on prescription); alcohol (70% solution) and isopropyl; aspirin; baby lotion, oil, and powder; enema preparations; hydrogen peroxide; lubricating jelly; medicated skin creams; oral contraceptives; measles and other types of vaccines; topical creams and ointments; and sterile nonpyrogenic distilled water. Preparations and similar substances applied to the human body in the diagnosis, cure, mitigation, treatment, or prevention of disease qualify as medicines. “Preparations and similar substances” also include Total Parenteral Nutrition (also called TPN), Intradialytic Parenteral Nutrition (also called IDPN), and food provided by way of enteral feeding, except when the TPN, IDPN, or food provided by enteral feeding qualifies as a meal under Regulation 1503. For purposes of this regulation, TPN, IDPN, and enteral feeding are means of providing complete nutrition to the patient; TPN and IDPN are provided in the form of a collection of glucose, amino acids, vitamins, minerals, and lipids, TPN being administered intravenously to a patient who is unable to digest food through the gastrointestinal tract and IDPN being administered to hemodialysis patients as an integral part of the hemodialysis treatment; enteral feeding is the feeding of the patient directly into the gastrointestinal tract.
(2) Permanently Implanted Articles. Articles permanently implanted in the human body to assist the functioning of, as distinguished from replacing all or any part of, any natural organ, artery, vein or limb and which remain or dissolve in the body qualify as medicines. An article is considered to be permanently implanted if its removal is not otherwise anticipated. Except for devices excluded from the definition of “medicines,” permanently implanted articles include the interdependent internal and external components that operate together as one device in and on the person in whom the device is implanted. Tax does not apply to the sale or use of articles permanently implanted in the human body to assist the functioning of any natural organ, artery, vein or limb and which remain or dissolve in the body when such articles are sold or furnished under one of the conditions provided in subdivision (d)(1) through (d)(6).
Permanently implanted articles include, but are not limited to, permanently implanted artificial sphincters; bone screws and bone pins; dental implant systems including dental bone screws and abutments; permanently implanted catheters; permanently implanted hydrocephalus devices and their implanted pressure regulating components; implanted defibrillators and implanted leads; pacemakers; tendon implants; testicular gel implants; and ear implants, including the ear implant's interdependent internal and external components. Sutures are also included whether or not they are permanently implanted. A non-returnable, nonreusable needle fused or prethreaded to a suture is regarded as part of the suture. 
Implantable articles that do not qualify as “permanently” implanted medicines include, but are not limited to, Chemoport implantable fluid systems; Port-a-Cath systems used for drug infusion purposes; disposable urethral catheters; temporary myocardial pacing leads used during surgery and recovery; and defibrillator programmer and high voltage stimulator used with an implanted defibrillator. The sale or use of these items is subject to tax. 
(3) Artificial Limbs and Eyes. Artificial limbs and eyes, or their replacement parts, including stump socks and stockings worn with artificial legs and intraocular lenses for human beings, qualify as medicines as provided by Revenue and Taxation Code section 6369(c)(5). Tax does not apply to the sale or use of these items when sold or furnished under one of the conditions provided in subdivision (d)(1) through (d)(6).
(4) Orthotic Devices. Orthotic devices and their replacement parts, designed to be worn on the person of the user as a brace, support or correction for the body structure are medicines as provided under Revenue and Taxation Code section 6369(c)(3). The sale or use of orthotic devices and their replacement parts is not subject to tax when sold or furnished under one of the conditions provided in subdivision (d)(1) through (d)(6). Orthotic devices and their replacement parts do not need to be furnished by a pharmacist, within the meaning of subdivision (d)(1), to be considered dispensed on prescription provided the devices are furnished pursuant to a written order of a physician or podiatrist. For the purposes of this regulation, orthotic devices furnished pursuant to a written order of a physician or podiatrist by, but not limited to, medical device retailers, clinics, physical therapists, device suppliers, intermediate care facilities, or other such persons, are deemed to be dispensed on prescription within the meaning of subdivision (d)(1).
Orthotic devices worn on the body of the person include, but are not limited to, abdominal binders and supports, ace bandages, ankle braces, anti-embolism stockings, athletic supporters (only for patients recovering from rectal or genital surgery), casts, and cast components, cervical supports, neck collars, cervical traction devices, clavicular splints, post-surgical corsets, elbow supports, head halters, pelvic traction devices, post-operative knee immobilizers and braces, legging orthoses, rib belts and immobilizers, rupture holders, sacral belts, sacro-lumbar back braces, shoulder immobilizers, slings, stump shrinkers, sternum supports, support hose (and garter belts used to hold them in place), thumb and finger splints, trusses, and wrist and arm braces. All of the above must be worn on the body of the person and act as a brace, support or correction for body structure to qualify as a medicine. If any part of the orthotic device is not worn on the person, the device is not a medicine for the purposes of this regulation.
Orthopedic shoes and supportive devices for the foot do not qualify as medicines unless they are an integral part of a leg brace or artificial leg or are custom-made biomechanical foot orthoses. “Custom-made biomechanical foot orthosis” means a device that is made on a positive model of the individual patient's foot. The model may be individually constructed from suitable model material such as plaster of Paris, stone, or wax, and may be manually constructed or fabricated using electronic technology.
“Custom-made biomechanical foot orthosis” do not include: 
(A) any pre-made or pre-molded foot orthosis or shoe insert even if it has been modified or customized for an individual patient by the practitioner regardless of the method of modification; 
(B) any foot orthosis fabricated directly on the patient's foot regardless of the method and materials used and regardless of its individual character; or 
(C) any foot orthosis fabricated inside of the patient's shoe regardless of the method of manufacture and materials used and regardless of its individual character. 
(5) Prosthetic Devices. Prosthetic devices and their replacement parts designed to be worn on or in the patient to replace or assist the functioning of a natural part of the human body are medicines as provided under Revenue and Taxation Code section 6369(c)(4). The sale or use of prosthetic devices and their replacement parts is not subject to tax when sold or furnished under one of the conditions provided in subdivision (d)(1) through (d)(6). Prosthetic devices and their replacement parts do not need to be furnished by a pharmacist, within the meaning of subdivision (d)(1), to be considered dispensed on prescription provided the devices are furnished pursuant to a written order of a physician or podiatrist. For the purposes of this regulation, prosthetic devices furnished pursuant to a written order of a physician or podiatrist by, but not limited to, medical device retailers, clinics, physical therapists, device suppliers, intermediate care facilities, or other such persons, are deemed to be dispensed on prescription within the meaning of subdivision (d)(1). For purposes of this regulation only, prosthetic devices include bags and tubing, as well as filters, locks, tape, clamps, and connectors which are integral to the tubing, each of which is used to dispense enteral feeding to the patient, including: gastrostomy tubes (also called G tubes) which are used to deliver the nutrition directly into the stomach; jejunostomy tubes (also called J tubes) which are used to deliver the nutrition directly into the intestinal tract; and nasogastric tubes (also called NG tubes) which are used to deliver the nutrition directly through the nasal passage to the stomach. For purposes of this regulation only, prosthetic devices also include needles, syringes, cannulas, bags, and tubing, as well as filters, locks, tape, clamps, and connectors which are integral to the tubing, each of which is used to dispense TPN or IDPN to the patient, provided each of these items is used primarily to dispense the TPN or IDPN.
Prosthetic devices that are considered medicines when worn on or in the patient include, but are not limited to, acetabular cups, atrial valves, breast tissue expanders and tissue expanders, cervical cuffs, dacron grafts, heart valves, orbital implant, nerve cups, rhinoplasty prosthesis, neuromuscular electrical stimulators, transcutaneous nerve stimulators, urinary incontinent devices, and wigs and hairpieces prescribed by a physician or podiatrist.
Prosthetic devices that do not qualify as medicines include, but are not limited to, air compression pumps and pneumatic garments; noninvasive, temporary pace makers; vacuum/constriction devices used to treat male impotency; auditory, ophthalmic and ocular devices or appliances; and dental prosthetic devices and materials such as dentures, removable or fixed bridges, crowns, caps, inlays, artificial teeth, and other dental prosthetic materials and devices. Sales of such items are subject to tax in the same manner as any other sale of tangible personal property. 
(6) Drug Infusion Devices. Programmable drug infusion devices to be worn on or implanted in the human body which automatically cause the infusion of measured quantities of a drug on an intermittent or continuous basis at variable dose rates and at high or low fluid volume into the body of the wearer of the device qualify as medicines under Revenue and Taxation Code section 6369(c)(6). The sale or use of the qualifying infusion device is not subject to tax when the device is sold or furnished under one of the conditions provided in subdivision (d)(1) through (d)(6). 
(c) Exclusions from the Definition of “Medicines.” 
Except as otherwise provided in subdivision (b), the following items are specifically excluded from the definition of medicines. Sales of these items are subject to tax in the same manner as any other sale of tangible personal property.
(1) Orthodontic, prosthetic (except as described in subdivision (b)(5)), auditory, ophthalmic or ocular devices or appliances.
(2) Articles which are in the nature of splints, bandages, pads, compresses, supports, dressings, instruments, apparatus, contrivances, appliances, devices or other mechanical, electronic, optical or physical equipment or article or the component parts and accessories thereof. “Medicines” does not include arch supports, cervical pillows, exercise weights (boots or belts), hospital beds, orthopedic shoes and supportive devices (unless an integral part of a leg brace or artificial leg), plastazote inserts, plastazote shoes, plastic shoes (custom or ready-made), sacro-ease seats, shoe modifications, spenco inserts, traction units (other than those fully worn on the patient), thermophore pads, nor foot orthoses.
(3) Any alcoholic beverage the manufacture, sale, purchase, possession or transportation of which is licensed and regulated by the Alcoholic Beverage Control Act (division 9, commencing with Section 23000, of the Business and Professions Code).
(d) Application of Tax -- In General
Tax applies to retail sales, including over-the-counter sales of drugs and medicines, and other tangible personal property by pharmacists and others. However, tax does not apply to the sale or use of medicines when sold or furnished under one of the following conditions: 
(1) prescribed for the treatment of a human being by a person authorized to prescribe the medicines, and dispensed on prescription filled by a pharmacist in accordance with law, or 
(2) furnished by a licensed physician, dentist or podiatrist to his or her own patient for treatment of the patient, or 
(3) furnished by a health facility for treatment of any person pursuant to the order of a licensed physician, dentist or podiatrist, or 
(4) sold to a licensed physician, dentist, podiatrist or health facility for the treatment of a human being, or 
(5) sold to this state or any political subdivision or municipal corporation thereof, for use in the treatment of a human being; or furnished for the treatment of a human being by a medical facility or clinic maintained by this state or any political subdivision or municipal corporation thereof, or 
(6) effective January 1, 1995, furnished by a pharmaceutical manufacturer or distributor without charge to a licensed physician, surgeon, dentist, podiatrist, or health facility for the treatment of a human being, or to an institution of higher education for instruction or research. Such medicine must be of a type that can be dispensed only: (a) for the treatment of a human being, and (b) pursuant to prescriptions issued by persons authorized to prescribe medicines. The exemption provided by this subdivision applies to the constituent elements and ingredients used to produce the medicines and to the tangible personal property used to package such medicines. 
(e) Specific Tax Applications.
(1) Prescriptions. No person other than a licensed physician, dentist, optometrist or podiatrist is authorized to prescribe or write a prescription for the treatment of a human being. Tax does not apply to the sale or use of medicines prescribed by a licensed physician, dentist, optometrist, or podiatrist for the treatment of a human being and dispensed on prescription filled by a pharmacist.
(2) Licensed Physician, Dentist or Podiatrist. Tax does not apply to a specific charge made by a licensed physician, dentist or podiatrist to his or her own patient for medicines furnished for the treatment of the patient. Tax also does not apply to sales of medicines to licensed physicians, dentists or podiatrists for the treatment of a human being regardless of whether the licensed physician, dentist or podiatrist makes a specific charge to his or her patient for the medicines furnished. 
(3) Health Facility. Tax does not apply to sales of medicines by a health facility (as defined in subdivision (a)(4)) for the treatment of any person pursuant to the order of a licensed physician, dentist or podiatrist. Tax does not apply to sales of medicines to a health facility for the treatment of a human being regardless of whether or not a specific charge is made for the medicines.
(4) Pharmaceutical Manufacturer or Distributor. Tax does not apply to the storage, use or consumption of medicines furnished by a pharmaceutical manufacturer or distributor without charge to a licensed physician, surgeon, dentist, podiatrist, or health facility for the treatment of a human being or furnished without charge to an institution of higher education for instruction or research provided the medicines furnished are of a type that can be dispensed only (1) on prescription by persons authorized to prescribe and (2) for the treatment of a human being. The exemption from tax includes the costs of the materials used to package the “sample” medicines, such as bottles, boxes, blister packs, patches impregnated with medicines, or pre-filled syringes, and the elements and ingredients used to produce the “samples” whether or not such items are purchased under a resale certificate in this state or outside this state. When a pre-filled syringe or other such delivery device is used to package and contain a sample medicine (i.e., pre-filled with the medicine) as well as to inject or otherwise administer the medicine to the patient, the exemption from tax will not be lost due to the fact that the device is used for a dual purpose. However, the use of empty syringes or other such delivery devices, furnished to the licensed physician separately or included in the packages with the medicines, is subject to tax.
This exemption applies in the same manner to the use of clinical trial medicines during the United States Food and Drug Administration's drug development and approval process. “Clinical trial medicines” are substances or preparations approved as “Investigational New Drugs” by the United States Food and Drug Administration intended for treatment of, and application to, the human body, which are furnished by a pharmaceutical developer, manufacturer, or distributor to a licensed physician and subsequently dispensed, furnished, or administered pursuant to the order of the licensed physician. “Clinical trial medicines” do not include placebos. Placebos are not used for the treatment of a human being and, as such, do not qualify for the exemption provided under this subdivision. Thus, the use of placebos is subject to tax.
(5) Antimicrobial Agents Used by Hospital Personnel. Tax does not apply to the sale or use of substances or preparations, such as antiseptic cleansers or scrubs, when such substances or preparations qualify as medicines and are used by hospital personnel on the patient or by hospital personnel on their own bodies to benefit the patient, and which constitute a critical component of the patient's treatment. Qualifying medicines used on the bodies of hospital personnel include antimicrobial agents used for preoperative scrubbing or hand cleansing prior to any patient contact such as Accent Plus Skin Cleanser; Accent Plus Perinal Cleanser; Bacti-Stat; Betadine; and Medi-Scrub. However, antimicrobial agents such as Accent Plus 1 Skin Lotion; Accent Plus 2 Body Massage; Accent Plus 2 Skin Crème; and Accent Plus Total Body Shampoo applied to the body of hospital personnel are not considered used in the treatment of the patient and the sale or use of these products is subject to tax. 
(6) Vitamins, Minerals, Herbs, and Other Such Supplements. In general, sales of vitamins, minerals, herbs and other such supplements are subject to tax. However, when vitamins, minerals, herbs and other such supplements are used in the cure, mitigation, treatment or prevention of disease, and are commonly recognized as a substance or preparation intended for such use, they will qualify as medicines for the purposes of Revenue and Taxation Code section 6369. As such, their sale or use is not subject to tax when sold or furnished under one of the conditions in subdivision (d)(1) throu (d)(6). 
(7) Dietary Supplements and Adjuncts. Dietary supplements and adjuncts furnished to a patient as part of a medically supervised weight loss program to treat obesity qualify as medicines for the purposes of Revenue and Taxation Code section 6369 when the product does not otherwise qualify as a food product under Regulation 1602. The sale or use of such products is not subject to tax when sold or furnished under one of the conditions in subdivision (d)(1) through (d)(6) of Regulation 1591.
(8) Diagnostic Substances, Test Kits, and Equipment. Tax applies to the sale or use of diagnostic substances applied to samples of cells, tissues, organs, or bodily fluids and waste after such samples have been removed, withdrawn, or eliminated from the human body. Diagnostic substances are applied to the samples outside the living body (“in vitro”) in an artificial environment. They are not administered in the living body (“in vivo”). As the substances are not applied internally or externally to the body of the patient, they do not qualify as medicines under Revenue and Taxation Code section 6369.
Except as provided in Regulation 1591.1(b)(4), tax applies to the sale or use of test kits and equipment used to analyze, monitor, or test samples of cells, tissues, organs and blood, saliva, or other bodily fluids. Such items do not qualify as medicines regardless of whether they are prescribed for an individual by a person authorized to prescribe and dispensed pursuant to a prescription. 
(f) Insurance Payments 
(1) Medical Insurance and Medi-Cal. The exemption of retail sales of medicines is not affected by the fact that charges to the person for whom the medicine is furnished may be paid, in whole or in part, by an insurer. This is so even though a joint billing may be made by the retailer in the name of both the person and the insurer.
(2) Medicare 
(A) Medicare Part A. Tax does not apply to the sale of items to a person insured pursuant to Part A of the Medicare Act as such sales are considered exempt sales to the United States Government. Under Part A, the healthcare provider has a contract with the United States Government to provide certain services. Therefore, sales of medicines, devices, appliances, and supplies in which payment is made under Part A qualify as exempt sales to the United States Government. 
(B) Medicare Part B. Tax applies to sales of items to a person in which payment is made pursuant to Part B of the Medicare Act. Sales made under Part B do not qualify as exempt sales to the United States Government even though the patient may assign the claim for reimbursement to the seller and payment is made by a carrier administering Medicare claims under contract with the United States Government. Under Part B, the seller does not have a contract with the United States Government. The contract is between the patient and the United States Government. Unless the sale is otherwise exempt (such as a sale of a medicine under subdivision (d)), the sale is subject to tax. 
(3) Employer Medical Contracts. Certain employers have contracted with their employees to provide the latter with medical, surgical and hospital benefits in a hospital operated by or under contract with the employer for a fixed charge. Usually the charge is by payroll deduction. These contracts are not insurance plans; rather, they are agreements to furnish specified benefits under stated conditions, one of which may be that no charge is to be made to the employee for prescribed medicines. The agreements may provide for making a charge for medicines furnished to out-patients but not to in-patients. This in no way affects the exemption of sales of medicines.
(g) Records. 
Any pharmacy whether in a health facility or not must keep records in support of all deductions claimed on account of medicines. Section 4081 of the Business and Professions Code requires that all prescriptions filled shall be kept on file and open for inspection by duly constituted authorities.
Pursuant to Section 4081 of the Business and Professions Code, physicians and surgeons and podiatrists must keep accurate records of drugs furnished by them. Any deduction on account of sales of medicines shall be supported by appropriate records.
(1) The following written information constitutes acceptable documentation for retailers in those cases where sales are made of supplies which are “deemed to be dispensed on prescription” within the meaning of Section 6369:
Name of purchaser
Name of doctor
Date of sale
Item sold
The sale price
(2) “Double Deduction” Unauthorized. The law does not, of course, permit a double deduction for sales of exempt medicines. For example, if an exemption is claimed on account of a sale of a prescription medicine, no additional deduction for the same sale may be taken as a sale to the United States Government under the Medicare Program.
(3) Persons making purchases of items in which their sale or use is exempt under this regulation should give their suppliers an exemption certificate pursuant to Regulation 1667.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006 and 6369, Revenue and Taxation Code; and Sections 1200, 1200.1, 1204.1 and 1250, Health and Safety Code.
HISTORY

1. Amendment filed 3-30-78; effective thirtieth day thereafter (Register 78, No. 13). For prior history, see Register 77, No. 52.
2. Amendment filed 7-31-78 as an emergency; effective upon filing (Register 78, No. 31).
3. Certificate of Compliance filed 10-19-78 (Register 78, No. 42).
4. Amendment of subsections (b)(5) and (c) filed 10-19-78; effective thirtieth day thereafter (Register 78, No. 42).
5. Amendment filed 10-17-79; effective thirtieth day thereafter (Register 79, No. 42).
6. Amendment filed 10-18-83; effective thirtieth day thereafter (Register 83, No. 43).
7. Amendment of subsections (a)-(i), (k)-(m) and (p) filed 9-7-89; operative 10-7-89 (Register 89, No. 36).
8. Amendment of subsections (b)(4), (b)(7), (h), (k) and (m) filed 1-18-94; operative 2-17-94 (Register 94, No. 3).
9. Editorial correction of printing errors in subsections (a)(6) and (l) (Register 94, No. 3).
10. New subsection (n) and subsection relettering filed 7-24-96; operative 8-23-96 (Register 96, No. 30).
11. Change without regulatory effect amending subsection (a)(6) and adding new subsection (a)(7) filed 11-19-96 pursuant to section 100, title 1, California Code of Regulations (Register 96, No. 47).
12. Change without regulatory effect amending subsections (a)(6), (b)(4)(A) and (b)(5), redesignating  of former section (c)(4) to new (c)(3), and amending  subsections (d)-(h), (k), (l)(1) and (l)(3)(B), filed 9-17-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 38).
13. Amendment of section heading, section and Note filed 2-9-2000; operative 3-10-2000 (Register 2000, No. 6). 
14. Amendment of subsections (b)(1), (b)(2) and (b)(5) filed 3-13-2001; operative 4-12-2001 (Register 2001, No. 11).
15. Amendment of subsections (b)(2), (b)(4) and (b)(5) filed 1-26-2004; operative 2-25-2004 (Register 2004, No. 5).
16. Amendment of subsection (a)(9), new subsections (a)(9)(A)-(B) and amendment of subsections (b), (c)(1) and (g) filed 7-27-2006; operative 8-26-2006 (Register 2006, No. 30).
17. Change without regulatory effect amending subsection (a)(4), adding subsections (a)(4)(A)-(B), amending subsections (f)(2)(B) and (g)(3) and amending Note filed 7-30-2007 pursuant to section 100, title 1, California Code of Regulations (Register 2007, No. 31).
18. New subsection (e)(7) and subsection renumbering filed 11-14-2008; operative 12-14-2008 (Register 2008, No. 46).
19. Amendment of subsection (b)(2) filed 4-29-2009; operative 5-29-2009 (Register 2009, No. 18).
§1591.1. Specific Medical Devices, Appliances, and Related Supplies.
Note     •     History

(a) Definitions. 
(1) Physicians, Dentists, Optometrists, and Podiatrists. “Physicians,” “dentists,” “optometrists,” and “podiatrists” are persons authorized by a currently valid and unrevoked license to practice their respective professions in this state. “Physician” means and includes any person holding a valid and unrevoked physician's and surgeon's certificate or certificate to practice medicine and surgery, issued by the Medical Board of California or the Osteopathic Medical Board of California and includes an unlicensed person lawfully practicing medicine pursuant to Section 2065 of the Business & Professions Code, when acting within the scope of that section. 
(2) Prescription. “Prescription” means an oral, written, or electronic transmission order that is issued by a physician, dentist, optometrist, or podiatrist licensed in this state and given individually for the person or persons for whom ordered. The order must include all of the following: 
(A) The name or names and address of the patient or patients. 
(B) The name and quantity of the drug or device prescribed and the directions for use. 
(C) The date of issue. 
(D) Either rubber stamped, typed, or printed by hand or typeset, the name, address, and telephone number of the prescriber, his or her license classification, and his or her federal registry number, if a controlled substance is prescribed. 
(E) A legible, clear notice of the conditions for which the drug is being prescribed, if requested by the patient or patients. 
(F) If in writing, signed by the prescriber issuing the order. 
(b) Specific Applications. 
(1) Hemodialysis Products. Tax does not apply to the sale or use of hemodialysis products supplied on order of a licensed physician and surgeon to a patient by a pharmacist or by a manufacturer, wholesaler, or other supplier authorized by Section 4054 or 4059 of the Business and Professions Code to distribute such products directly to the patient. 
(2) Mammary Prostheses and Ostomy Appliances and Related Supplies. Tax does not apply to the sale or use of mammary prostheses and ostomy appliances and related supplies required as a result of any surgical procedure by which an artificial opening is created in the human body for the elimination of natural waste when sold or furnished under one of the conditions provided in Regulation 1591 subdivision (d)(1) through (d)(6). The mammary prostheses devices and ostomy appliances and related supplies do not need to be furnished by a pharmacist, within the meaning of subdivision (d)(1), to be considered dispensed on prescription as long as they are furnished pursuant to a written order of a person authorized to prescribe.
Ostomy appliances and related supplies must be used in postoperative situations or sold as an accommodation to patients following surgery in order to qualify as medicines. When used as an adjunct to surgical procedures, the sale or use of these items is subject to tax unless the appliances remain in the patient for postoperative purposes.
Qualifying mammary prostheses and qualifying ostomy appliances and related supplies include, but are not limited to, bras to hold a mammary prosthesis in place, filler pads, lymphedema arm sleeves, adhesive spray and remover: catheters used as a result of an artificial opening created in the human body; colostomy bags; deodorant used on the person of the user; karaya rings; antacid used externally as a skin ointment; skin gel; nonallergic paper tape and gauze; skin bond cement; tincture of benzoin applied topically as a protective; urinary drainage appliances; closed stoma bags; drainable stoma bags; loop ostomy supplies and tubing; and endotracheal and tracheotomy tubes and tracheostomy tubes used for the evacuation of metabolic waste when used post-operatively or for home care. 
(3) Kidney Dialysis Machines. The term “ostomy appliances” and “related supplies” includes kidney dialysis machines, replacement parts for the kidney dialysis machines, and the catheters, dialysis fluid additives, volumetric infusion pumps, tubing, blood sets, fistula sets, and shunts used in conjunction with such machines. In order to qualify as a “related supply,” an item must be a necessary and integral part of the machine itself, or a substance or preparation intended for external or internal application to the human body of the patient undergoing dialysis. 
(4) Catheters. Generally, sales of catheters are subject to tax in the same manner as other sales of tangible personal property. However, sales of the following types of catheters are not subject to tax. 
(A) Intra-aortic balloon pump catheters and coronary angioplasty balloon catheters.
However, sales of related supplies are subject to tax. The term “related supplies” includes, but is not limited to, coronary guiding catheters, coronary guide wires, guide wire introducers, sheath introducer systems, torquing devices, hemostatic valves, inflation devices, and syringes. 
(B) Catheters which are permanently implanted in the human body and assist the functioning of a natural organ, artery, vein, or limb and remain or dissolve in the body. 
(C) Catheters used for drainage purposes through which an artificial opening is created in the human body. Such catheters qualify as ostomy materials and related supplies. 
(D) Catheters or similar types of devices used for drainage purposes through natural openings in the human body to assist or replace the functioning of a natural part of the human body. Such catheters are designed to be worn on or in the body of the user and qualify as prosthetic devices. 
(5) Insulin and Insulin Syringes. “Insulin” and “insulin syringes” furnished by a pharmacist to a person for treatment of diabetes as directed by a physician shall be deemed to be dispensed on prescription within the meaning of Revenue and Taxation Code section 6369(e). As such, the sale or use of insulin and insulin syringes furnished by a pharmacist to a person for treatment of diabetes, as directed by a physician, is exempt from tax.
Glucose test strips and skin puncture lancets furnished by a registered pharmacist that are used by a diabetic patient to determine his or her own blood sugar level and the necessity for and amount of insulin and/or other diabetic control medication needed to treat the disease in accordance with a physician's instructions are an integral and necessary active part of the use of insulin and insulin syringes or other anti-diabetic medications and, accordingly, are not subject to sale or use tax pursuant to subsection (e) of Revenue and Taxation Code section 6369. These medical supplies are not medicines and their sale or use does not qualify for tax exemption under subsections (a) or (b) of Revenue and Taxation Code section 6369. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6369 and 6369.1, Revenue and Taxation Code.
HISTORY

1. New section filed 2-9-2000; operative 3-10-2000 (Register 2000, No. 6).  
§1591.2. Wheelchairs, Crutches, Canes, and Walkers.
Note     •     History

(a) Definitions. 
(1) Physician. For purposes of this regulation, “physician” means and includes any person holding a valid and unrevoked physician's and surgeon's certificate or certificate to practice medicine and surgery, issued by the Medical Board of California, the Osteopathic Medical Board of California, or the California Board of Podiatric Medicine. Physician, as defined, includes doctors of medicines (MD), doctors of osteopathy (DO), and doctors of podiatric medicine (DPM). 
(2) Prescription. “Prescription” means an oral, written, or electronic transmission order that is issued by a physician, dentist, optometrist, or podiatrist licensed in this state and given individually for the person or persons for whom ordered. The order must include all of the following: 
(A) The name or names and address of the patient or patients. 
(B) The name and quantity of the drug or device prescribed and the directions for use. 
(C) The date of issue.
(D) Either rubber stamped, typed, or printed by hand or typeset, the name, address, and telephone number of the prescriber, his or her license classification, and his or her federal registry number, if a controlled substance is prescribed. 
(E) A legible, clear notice of the conditions for which the drug is being prescribed, if requested by the patient or patients. 
(F) If in writing, signed by the prescriber issuing the order. 
(3) Health Facility. “Health Facility” as used herein has the meaning ascribed to the term in Section 1250 of the Health and Safety Code, and also includes “clinic” as defined in sections 1200 and 1200.1 of the Health and Safety Code.
(A) Section 1250 of the Health and Safety Code provides that “health facility” means any facility, place or building that is organized, maintained, and operated for the diagnosis, care, prevention, and treatment of human illness, physical or mental, including convalescence and rehabilitation and including care during and after pregnancy, or for any one or more of these purposes, for one or more persons, to which the persons are admitted for a 24-hour stay or longer.
(B) Section 1200 of the Health and Safety Code provides that “clinic” means an organized outpatient health facility which provides direct medical, surgical, dental, optometric, or podiatric advice, services, or treatment to patients who remain less than 24 hours, and which may also provide diagnostic or therapeutic services to patients in the home as an incident to care provided at the clinic facility. A place, establishment, or institution which solely provides advice, counseling, information, or referrals on the maintenance of health or on the means and measures to prevent or avoid sickness, disease, or injury, where such advice, counseling, information, or referrals does not constitute the practice of medicine, surgery, dentistry, optometry, or podiatry, shall not be deemed a clinic for purposes of this subdivision.
(C) Section 1200.1 of the Health and Safety Code provides that “clinic” also means an organized outpatient health facility which provides direct psychological advice, services, or treatment to patients who remain less than 24 hours. As provided in section 1204.1 of the Health and Safety Code, such clinics serve patients under the direction of a clinical psychologist as defined in section 1316.5 of the Health and Safety Code, and are operated by a nonprofit corporation, which is exempt from federal taxation under paragraph (3), subsection (c) of section 501 of the Internal Revenue Code of 1954, as amended, or a statutory successor thereof, and which is supported and maintained in whole or in part by donations, bequests, gifts, grants, government funds, or contributions which may be in the form of money, goods, or services. In such clinics, any charges to the patient shall be based on the patient's ability to pay, utilizing a sliding fee scale. Such clinics may also provide diagnostic or therapeutic services authorized under Chapter 6.6 (commencing with section 2900) of Division 2 of the Business and Professions Code to patients in the home as an incident to care provided at the clinic facility.
(b) Tax Application. Tax does not apply to the sale or use, including leases that are continuing sales and purchases, of wheelchairs; crutches; canes; quad canes; white canes used by the legally blind; walkers; and replacement parts for these devices when sold to an individual for the personal use of that individual as directed by a licensed physician. Electric three-wheel scooters that are similar in both design and function to a conventional electric wheelchair, qualify as a wheelchair for the purposes of Revenue and Taxation Code section 6369.2. When the scooters are sold or leased to an individual for the personal use of that individual as directed by a licensed physician their sale or use qualifies for an exemption from tax.
“Replacement parts” include, but are not limited to, batteries for electric wheelchairs; belts and cushions sold to replace or supplement the basic items originally sold with wheelchairs, lap boards and trays attached to wheelchairs and considered a part of the wheelchair; and rubber tips, wheels, and other such items prescribed for an individual to replace an original component of the device sold. “Replacement parts” do not include items such as mechanical devices that aid the patient in eating or writing unless the items are part of the device itself, or restraints or other such items sold to an individual, but which do not become a part of the wheelchair or other such prescribed device. 
(c) Sales to Health Facilities. Sales, or leases that are continuing sales and purchases, of wheelchairs, crutches, canes, and walkers to hospitals or other health facilities for use by patients while at the facilities are subject to tax. Such sales or leases are not considered sold to an individual for the individual's personal use as directed by a physician. However, when wheelchairs, crutches, canes, and walkers are ordered by a hospital or health facility on behalf of a specific patient, as directed by a physician, the items may be considered to be purchased by an individual for his or her own personal use as required under Revenue and Taxation Code section 6369.2 and, therefore, the sale will qualify for exemption from tax. 
(d) Sales to Insured Persons. The exemption for qualifying retail sales of wheelchairs, crutches, canes, quad canes, white canes used by the legally blind, walkers, and replacement parts for these devices is not affected by the fact that charges to the individual to whom such items are sold, may be paid, in whole or in part, by an insurer. This is so even though a joint billing may be made by the retailer in the name of both the person and the insurer. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6369 and 6369.2, Revenue and Taxation Code; and Sections 1200, 1200.1, 1204.1 and 1250, Health and Safety Code.
HISTORY

1. New section filed 2-9-2000; operative 3-10-2000 (Register 2000, No. 6).  
2. Change without regulatory effect amending subsection (a)(3), adding subsections (a)(3)(A)-(C) and amending Note filed 7-30-2007 pursuant to section 100, title 1, California Code of Regulations (Register 2007, No. 31).
§1591.3. Vehicles for Physically Handicapped Persons.
Note     •     History

(a) Definitions. 
(1) Physically Handicapped Persons. For purposes of this regulation, “physically handicapped” persons include disabled persons described in Vehicle Code Section 5007 as qualified for special parking privileges. 
(2) Vehicle. For purposes of this regulation, “vehicle” includes all devices that qualify under Vehicle Code Section 670 as “vehicles” including, but not limited to, automobiles, vans, trucks, mobilehomes and trailercoaches. “Vehicles” qualifying under this regulation mean and include: 
(A) Vehicles which are owned and operated by physically handicapped persons and, 
(B) Vehicles which are used in the public or private transport of physically handicapped persons and which would otherwise qualify for a distinguishing license plate pursuant to Vehicle Code Section 5007 if the vehicle were registered to the physically handicapped person or persons. 
(b) Application of Tax. Tax does not apply to the sale or use of items and materials used to modify a vehicle for physically handicapped persons when such items are necessary to enable the vehicle to be used to transport a physically handicapped person or persons. Tax does not apply whether the property is installed by the retailer or is sold for installation by other persons. However, sales or purchases of tools and supplies used in modifying the vehicle and which are not incorporated into, attached to, or installed on the vehicle are subject to tax.
Items and materials considered necessary to enable a vehicle to be used to transport a physically handicapped person include, but are not limited to, an interlock system; upper torso restraint; an airbag of a unique type to raise or lower the vehicle for loading or unloading; running boards on lower side of vehicle; a bolt cam used to restrain a wheelchair inside a van; seat belts; a tire carrier to hold a spare and which is installed within reach of a handicapped person; AC lights to illuminate the ramp or elevator area; hardware for privacy curtains; air compressor for use with medical equipment; a 12-volt receptacle to supply power to medical equipment; a 4-point tie down system to restrain a wheelchair; and an allocable portion(s) of the various interior packages, interior materials, and conversions necessary to modify the vehicle for transport of physically handicapped persons.
Items and materials that are generally not considered necessary to enable a vehicle to be used to transport a physically handicapped person include, but are not limited to, an upper torso durable pad (unless part of the restraint); portable ramps (telescopic); air conditioners (unless necessary for the transport of certain types of disabled persons); a fire extinguisher; a CB radio (unless shown to be necessary to the transport of certain types of disable persons); leather seat covers; extra windows and their accessories; upgrades to the interior (upgrade to leather seats); and an engine cover. The sale or use of such items, whether installed on a vehicle to be used for transport of physically handicapped persons or not, are generally subject to tax. 
(c) Sales of Modified Vehicles. Tax does not apply to the gross receipts attributable to the portion of a vehicle that has been modified to enable the vehicle to be used to transport a physically handicapped person or persons when the modified vehicle is sold to a physically handicapped person, as defined. 
(d) Repairs to Modified Vehicles. Tax does not apply to the sale or use of items and materials used to repair the modified portion (the portion that contains equipment previously used to modify the vehicle) of a vehicle used to transport a physically handicapped person or persons. Once installed, such “repair parts” qualify as items and materials used to modify a vehicle in order for the vehicle to be used to transport a physically handicapped person or persons.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6369 and 6369.4, Revenue and Taxation Code.
HISTORY

1. New section filed 2-9-2000; operative 3-10-2000 (Register 2000, No. 6).  
§1591.4. Medical Oxygen Delivery Systems.
Note     •     History

(a) Definitions. 
(1) Physician. “Physicians” are persons authorized by a currently valid and unrevoked license to practice their respective professions in this state. “Physician” means and includes any person holding a valid and unrevoked physician's and surgeon's certificate or certificate to practice medicine and surgery, issued by the Medical Board of California or the Osteopathic Medical Board of California and includes an unlicensed person lawfully practicing medicine pursuant to Section 2065 of the Business & Professions Code, when acting within the scope of that section. 
(2) Prescription. “Prescription” means an oral, written, or electronic transmission order that is issued by a physician, dentist, optometrist, or podiatrist licensed in this state and given individually for the person or persons for whom ordered. The order must include all of the following: 
(A) The name or names and address of the patient or patients.
(B) The name and quantity of the drug or device prescribed and the directions for use. 
(C) The date of issue. 
(D) Either rubber stamped, typed, or printed by hand or typeset, the name, address, and telephone number of the prescriber, his or her license classification, and his or her federal registry number, if a controlled substance is prescribed. 
(E) A legible, clear notice of the conditions for which the drug is being prescribed, if requested by the patient or patients. 
(F) If in writing, signed by the prescriber issuing the order. 
(3) Health Facility. “Health Facility” as used herein has the meaning ascribed to the term in Section 1250 of the Health and Safety Code, and also includes “clinic” as defined in sections 1200 and 1200.1 of the Health and Safety Code.
(A) Section 1250 of the Health and Safety Code provides that “health facility” means any facility, place or building that is organized, maintained, and operated for the diagnosis, care, prevention, and treatment of human illness, physical or mental, including convalescence and rehabilitation and including care during and after pregnancy, or for any one or more of these purposes, for one or more persons, to which the persons are admitted for a 24-hour stay or longer. 
(B) Section 1200 of the Health and Safety Code provides that “clinic” means an organized outpatient health facility which provides direct medical, surgical, dental, optometric, or podiatric advice, services, or treatment to patients who remain less than 24 hours, and which may also provide diagnostic or therapeutic services to patients in the home as an incident to care provided at the clinic facility. A place, establishment, or institution which solely provides advice, counseling, information, or referrals on the maintenance of health or on the means and measures to prevent or avoid sickness, disease, or injury, where such advice, counseling, information, or referrals does not constitute the practice of medicine, surgery, dentistry, optometry, or podiatry, shall not be deemed a clinic for purposes of this subdivision.
(C) Section 1200.1 of the Health and Safety Code provides that “clinic” also means an organized outpatient health facility which provides direct psychological advice, services, or treatment to patients who remain less than 24 hours. As provided in section 1204.1 of the Health and Safety Code, such clinics serve patients under the direction of a clinical psychologist as defined in section 1316.5 of the Health and Safety Code, and are operated by a nonprofit corporation, which is exempt from federal taxation under paragraph (3), subsection (c) of section 501 of the Internal Revenue Code of 1954, as amended, or a statutory successor thereof, and which is supported and maintained in whole or in part by donations, bequests, gifts, grants, government funds, or contributions which may be in the form of money, goods, or services. In such clinics, any charges to the patient shall be based on the patient's ability to pay, utilizing a sliding fee scale. Such clinics may also provide diagnostic or therapeutic services authorized under Chapter 6.6 (commencing with section 2900) of Division 2 of the Business and Professions Code to patients in the home as an incident to care provided at the clinic facility.
(4) Medical Oxygen Delivery System. A system used to administer oxygen directly into the lungs of the patient for the relief of conditions in which the human body experiences an abnormal deficiency or inadequate supply of oxygen. Devices that only assist the patient in breathing, but do not deliver air or oxygen directly into the lungs of the patient, do not qualify as medical oxygen delivery systems. 
(b) Tax Application. 
(1) Medical Oxygen Delivery Systems. Tax does not apply to the sale or use of medical oxygen delivery systems when sold, leased or rented to an individual for the personal use of that individual as directed by a licensed physician. Medical oxygen delivery systems include, but are not limited to, liquid oxygen containers, high-pressure cylinders, regulators, oxygen concentrators, tubes, masks and related items necessary for the delivery of oxygen to the patient. The term also includes repair and replacement parts for use in such a system. 
(2) Ventilators and Other Respiratory Equipment. For the purposes of this regulation, ventilators that produce a form of controlled respiration in which compressed air is delivered under positive pressure into the patient's airways qualify for the exemption provided under Section 6369.5 for medical oxygen delivery systems. Pressure ventilators and volume ventilators provide assisted respiration and intensive positive pressure in which compressed air, a component of which is oxygen, is administered into the breathing systems of patients to help them breathe. The sale or use of ventilators, as described, is exempt from tax when sold or leased to an individual for the personal use of that individual as directed by a physician.
Respiratory equipment that induces air into the lungs of a patient, through the application of pressure to the chest area, also qualifies for the exemption provided for medical oxygen delivery systems, regardless of whether the pressure applied is negative pressure or positive pressure. The sale or use of respiratory equipment, as described, is exempt from tax when sold or leased to an individual for the personal use of that individual as directed by a physician. Included within the scope of the exemption are exsufflation belts, iron lungs, chest shells, pulmo wraps, and the pumps and regulators necessary for the operation of the listed equipment. 
(c) Sales to Health Facilities and Health Care Providers. Sales of medical oxygen delivery systems are exempt when sold to an individual for his or her own use under the direction of a licensed physician. Sales of medical oxygen delivery systems to hospitals, immediate care facilities, physicians, or other health care providers for use on their premises are subject to tax in the same manner as other sales of tangible personal property.
A rental or lease of a medical oxygen delivery system to a health facility qualifies for an exemption from tax when the facility intends to lease or rent the system to an individual for the personal use of that individual as directed by a licensed physician and the system is then leased or rented as intended. However, the transaction between the health facility and the individual must constitute an actual lease or rental. When the patient's use of the medical delivery system is limited to the health facility's premises, the direction and control of the equipment does not transfer to the patient. Therefore, an actual lease or rental of the system to the patient does not occur even when a separate billing is made to the patient for the use of the system. As such, the lease or rental of the system to the health facility does not qualify for the exemption provided under Section 6369.5. 
(d) Sales of Medical Oxygen. Medical oxygen and other gases sold to a licensed physician and surgeon, podiatrist, dentist, or health facility for treatment of human beings are considered medicines. Therefore, their sale or use is not subject to tax when (1) furnished by a licensed physician and surgeon, podiatrist, or dentist to his or her own patient or (2) furnished by the health facility pursuant to the order of a licensed physician and surgeon, dentist, or podiatrist.
Medical oxygen sold by distributors of compressed gases to an individual for use as part of the individual's treatment, pursuant to a physician's prescription, is regarded as a medicine furnished by a licensed physician to his or her own patient for treatment of the patient as provided by Regulation 1591(b)(2). Sales of medical oxygen to individuals under the “Casey Bill” (i.e., the retailer bills the service acting as a fiscal agent for the State of California) are regarded as sales of medicines to this State for use in the treatment of human beings as provided by Regulation 1591(b)(5). Therefore, sales of medical oxygen by distributors, under these conditions, are not subject to tax whether or not the distributor is a medical supply house. 
(e) Sales to Insured Persons. The exemption for qualifying retail sales of oxygen delivery systems and replacement parts is not affected by the fact that charges to the individual for whom such items are sold, leased, or rented may be paid, in whole or in part, by an insurer. This is so even though a joint billing may be made by the retailer in the name of both the person and the insurer. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6369 and 6369.5, Revenue and Taxation Code; and Sections 1200, 1200.1, 1204.1 and 1250, Health and Safety Code.
HISTORY

1. New section filed 2-9-2000; operative 3-10-2000 (Register 2000, No. 6).  
2. Change without regulatory effect amending subsection (a)(3), adding subsections (a)(3)(A)-(C) and amending Note filed 7-30-2007 pursuant to section 100, title 1, California Code of Regulations (Register 2007, No. 31).
§1592. Eyeglasses and Other Ophthalmic Materials.
Note     •     History

(a) Physicians and Surgeons and Optometrists. 
(1) In General. A physician and surgeon or optometrist is the consumer of ophthalmic materials including eyeglasses, frames, and lenses used or furnished in the performance of his/her professional services in the diagnosis, treatment or correction of conditions of the human eye. Tax applies with respect to the sale of such materials to physicians and surgeons and optometrists.
(2) Filling Prescription of Another Physician and Surgeon or Optometrist. When an optometrist fills a prescription prepared by another optometrist or by a physician and surgeon, the optometrist who fills the prescription is the consumer of the glasses, frames, and other materials and tax applies with respect to the sale of such materials to him/her.
(3) Replacement Lenses and Frames. A physician and surgeon or optometrist is also the consumer of lenses and frames furnished to patients as duplications or replacements of parts of eyeglasses or contact lenses which were previously prescribed for the patient pursuant to an eye examination, and tax applies to the sale thereof to him/her.
(4) Plano Lenses or Sunglasses (Without Correction). When plano lenses and frames or plano sunglasses, including clip-on sunglasses,  are furnished by a physician and surgeon or optometrist pursuant to a prescription for a particular class of plano or for the treatment or correction of conditions of the human eye following, and as a result of, a diagnosis made by him/her in an examination and refraction he/she is the consumer of the plano lenses and frames or sunglasses, and tax applies with respect to the sale thereof to him/her. In all other instances the physician and surgeon or optometrist is the retailer of such lenses and frames or sunglasses, and tax applies to the gross receipts from such a retail sale.
(b) Dispensing Opticians.
(1) In General. A registered dispensing optician is the consumer of ophthalmic materials including eyeglasses, frames, and lenses dispensed pursuant to a prescription prepared by a physician and surgeon or optometrist. Tax applies with respect to the sale of such materials to the dispensing optician.
(2) Replacement Lenses and Frames. A dispensing optician is also the consumer of lenses and frames furnished as duplications or replacements of parts of eyeglasses or contact lenses which were previously prescribed by a physician and surgeon or optometrist.
(3) Plano Lenses or Sunglasses (Without Correction). When plano lenses and frames or plano sunglasses, including clip-on sunglasses, are dispensed pursuant to a prescription prepared by a physician and surgeon or optometrist for a particular class of plano, the dispensing optician is the consumer of the lenses and frames or sunglasses, and tax applies to the sale thereof to him/her. In all other instances the dispensing optician is the retailer of such lenses and frames or sunglasses, and tax applies to the gross receipts from such a retail sale.
(c) Pharmacists.
(1) In General. Operative January 1, 1998, a licensed pharmacist is the consumer of replacement contact lenses dispensed pursuant to a prescription prepared by a physician or optometrist. Tax applies with respect to the sale of such contact lenses to the pharmacist.
(2) Replacement Contact Lenses. For purposes of this subdivision, “replacement contact lenses” means soft contact lenses that require no fitting or adjustment, and that are dispensed as packaged and sealed by the manufacturer.
(d) Definition of Prescription. For the purposes of this regulation a “prescription” means a written formula for ophthalmic lenses or contact lenses prepared by a physician and surgeon or optometrist.
With respect to plano lenses and frames or sunglasses without correction, prescription means a written order for a distinctive type or class of plano identified by numbers or symbols descriptive of a specific tint, color or characteristic.
The prescription shall bear the name and address of the prescriber, the name and address of the patient, and the date of issue.
Pursuant to section 4124 of the Business and Professions Code, with respect to replacement contact lenses dispensed under subdivision (c) above, in addition to the above requirements, operative January 1, 1998, a prescription must:
(1) Include the state license number of the prescribing practitioner,
(2) Explicitly state an expiration date of not more than one year from the date of the last prescribing examination, and
(3) Explicitly state that the prescription is for contact lenses and include the lens brand name, type, and tint, including all specifications necessary for the ordering of lenses.
NOTE

Authority cited: 7051, Revenue and Taxation Code. Reference: Sections 6006 and 6018, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former Section 1930 filed 3-30-70; effective thirtieth day thereafter (Register 70, No. 14).
2. Amendment filed 5-11-71; effective thirtieth day thereafter (Register 71, No. 20).
3. Change without regulatory effect amending subsections (a)-(b) and (b)(3), adding new subsection (c), relettering subsection, amending newly designated subsection (d) and adding subsections (d)(1)-(3) filed 3-25-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 13).
4. Amendment of subsections (a)(4) and (b)(3) filed 7-18-2003; operative 8-17-2003 (Register 2003, No. 29).
§1593. Aircraft and Aircraft Parts.
Note     •     History

(a) Definitions. 
(1) “Aircraft.” As used herein, the term “aircraft” means any contrivance designed for powered navigation in the air except a rocket or missile.
(2) “Common Carrier.” As used herein, the term “common carrier” means any person who engages in the business of transporting persons or property for hire or compensation and who offers his or her services indiscriminately to the public or to some portion of the public.
(3) “Component Part.” As used in subdivision (b)(2), the term “component part” means an item incorporated by securing to the aircraft in compliance with Federal Aviation Administration (FAA) requirements, or United States military equivalent, related to the maintenance, repair, overhaul, or improvement of the aircraft which part is essentially associated with the functional aspects of the aircraft, including those related to safety and air worthiness.
(A) Examples of property which are component parts are engines, passenger seats, and landing gear; items replaced, repaired, or overhauled according to manufacturer service bulletins; items required by air worthiness directives issued by the FAA; life limited parts; and cargo and baggage containers which are designed to be secured, and which are secured, to the aircraft during flight.
(B) Examples of property which are not component parts are general expense items or comfort-related items such as attendant carts, blankets, pillows, or serving utensils.
(b) Application of Tax.
(1) Aircraft. Tax does not apply to the sale of and the storage, use, or other consumption of aircraft sold, leased, or sold to persons for the purpose of leasing, to:
(A) a person who operates the aircraft as a common carrier of persons or property, provided:
1. the person operates the aircraft under authority  of the laws of this state, of the United States, or of any foreign government, and
2. the person's use of the aircraft as a common carrier is authorized or permitted by the person's governmental authority to operate the aircraft;
(B) a foreign government for use of the aircraft by that government outside of California; or,
(C) a nonresident of California who will not use the aircraft in this state other than to remove the aircraft from California.
(2) Aircraft Parts.
(A) When tangible personal property becomes a component part of an aircraft described in subdivision (b)(1) as a result of the maintenance, repair, overhaul, or improvement of that aircraft in compliance with FAA requirements, or United States military equivalent, the charges for such tangible personal property, as well as for labor and services rendered with respect to that maintenance, repair, overhaul, or improvement are exempt from tax provided the aircraft will continue to be used in a manner described in subdivision (b)(1).
(B) The exemption described in subdivision (b)(2)(A) applies with respect to tangible personal property purchased and placed in inventory with the intent to thereafter remove the property from inventory and incorporate it as a component part of an aircraft under the conditions specified in subdivision (b)(2)(A), provided the property is so incorporated into a qualifying aircraft. If instead the property is removed from inventory for use in some other manner, the purchaser owes the applicable sales or use tax at that time.
(C) The exemption described in subdivision (b)(2)(A) shall apply only under the following circumstances:
1. the tangible personal property which becomes a component part of the aircraft is purchased on or after October 1, 1996; or,
2. the tangible personal property which becomes a component part of the aircraft was purchased prior to October 1, 1996, but the property first enters California on or after October 1, 1996.
(c) Use of Aircraft. 
(1) Common Carriers. In determining whether a purchaser or lessee of an aircraft is using that aircraft as a common carrier of persons or property, only that use of the aircraft by the carrier during the first 12 consecutive months commencing with the first operational use of the aircraft will be considered. This test period does not include, and is extended by, the amount of time, prior to the first use of the aircraft as a common carrier, during which the aircraft is in the physical possession of a repair station certified by the FAA or a manufacturer's maintenance facility undergoing modification, repair, or replacement. The period of this extension/exclusion shall not exceed 12 months. If the purchaser does not own the aircraft for 12 consecutive months commencing with the first operational use, as may be extended as provided herein, then only the period of time commencing with the first operational use that the purchaser owns the aircraft will be considered.
(A) “Operational use” means the actual time during which the aircraft is operated in powered navigation in the air. Operational use includes positioning or repositioning aircraft by flying the aircraft from one point to another (“ferry flights”) except when such flights are solely for purposes of having the aircraft repaired. Ferry flights solely for the purpose of transporting the aircraft to a repair location, or solely to return from a repair location, are not operational use, nor are test flights as described in subdivision (d)(2) or personnel training as described in subdivision (d)(4).
(B) If the aircraft is used as a common carrier for more than one-half of the operational use during the test period, the carrier's principal use of the aircraft will be deemed to be that of a common carrier except as provided in subdivisions (c)(1)(D) and (c)(1)(E). Each flight of the aircraft is examined separately for purposes of determining common carrier use. For these purposes, a flight is the powered navigation of the aircraft from one location on the ground or water to the first point on the ground or water at which the aircraft lands.
(C) A flight qualifies as a common carrier use of the aircraft for purposes of the exemption only if the flight is authorized or permitted by the governmental authority under which the aircraft is operated and involves the transportation of persons or property. Where the aircraft does not itself transport the person or property to a location on the ground (or water), the flight does not qualify as a common carrier flight for purposes of the exemption.
1. Following are examples of flights that do not qualify as common carrier use:
a. Student instruction or training flights.
b. Flights to position or reposition aircraft by flying the aircraft from one point to another (“ferry flights”).
c. Aerial work such as crop dusting, seeding, spraying, bird chasing, towing of banners and gliders, and fire fighting by dropping water or flame retardant.
d. Aerial photography or surveying, and powerline and pipeline patrol, without regard to whether the flight carries persons or property while the pilot or other crew member engages in the photography, surveying, or patrol.
e. Helicopter operations to perform construction or repair work, or in the lumber industry to reposition fallen lumber within the same general location.
f. Flights carrying persons or property for the purpose of parachute jumps or air drops.
g. Flights for the purpose of search and rescue, without regard to whether the flight carries persons or property while the search and rescue operation is conducted.
2. Following are examples of flights that do qualify as common carrier use when such services are offered indiscriminately to the public or to some portion of the public, provided the flights are authorized or permitted by the governmental authority under which the aircraft is operated:
a. Flights whose purpose is to transport persons or property from the location on the ground or water at which the aircraft takes off to another point on the ground or water at which the aircraft lands, including flights to transport fire fighting personnel, search and rescue personnel, construction workers, and equipment during fire fighting, search and rescue, and construction operations.
b. Sightseeing flights, even if they begin and end at the same airport, area of land, or water that was used for takeoff.
c. Helicopter flights to move large equipment from one location to another where the transportation is the purpose for the flight. For example, a flight with the purpose of moving a large air conditioning unit from a storage facility to the work site could qualify as common carrier use, but a flight with the purpose of positioning the air conditioning unit while it is being attached to the real property would not qualify as a common carrier use even if the positioning occurred as part of the flight moving the unit from the storage facility to the work site.
d. Flights to transport injured persons to medical facilities.
(D) With respect to aircraft sold during the period from January 1, 1987 through December 31, 1996, it shall be presumed that a person is not using the aircraft as a common carrier of persons or property if the person's yearly gross receipts from the use of the aircraft as a common carrier do not exceed ten percent (10%) of the purchase cost of the aircraft to him or her, or twenty-five thousand dollars ($25,000), whichever is less. With respect to aircraft sold on or after January 1, 1997, it shall be presumed that a person is not using the aircraft as a common carrier of persons or property if the person's yearly gross receipts from the use of the aircraft as a common carrier do not exceed 20 percent of the purchase cost of the aircraft to him or her, or fifty thousand dollars ($50,000), whichever is less. These presumptions may be rebutted by contrary evidence satisfactory to the board showing that the person is using the aircraft principally as a common carrier of persons or property for hire.
(E) With respect to aircraft leased, or sold for the purpose of leasing, during the period from January 1, 1987 through December 31, 1996, it shall be presumed that the aircraft is not used as a common carrier of persons or property if the lessor's yearly gross receipts from the lease of that aircraft to persons for use as common carriers of persons or property do not exceed ten percent (10%) of the cost of the aircraft to the lessor, or twenty-five thousand dollars ($25,000), whichever is less. With respect to aircraft leased, or sold for the purpose of leasing, on or after January 1, 1997, it shall be presumed that the aircraft is not regularly used as a common carrier of persons or property if the lessor's yearly gross receipts from the lease of that aircraft to persons for use as a common carrier of persons or property do not exceed 20 percent of the cost of the aircraft to the lessor, or fifty thousand dollars ($50,000), whichever is less. These presumptions may be rebutted by contrary evidence satisfactory to the board showing that the aircraft is used principally as a common carrier of persons or property for hire.
(F) For purposes of subdivisions (c)(1)(D) and (c)(1)(E), “gross receipts” do not include compensation paid by the owner or lessor of the aircraft or by related parties for use of the aircraft as a common carrier. “Related parties” include the owner's or lessor's immediate family, entities in which the owner or lessor, or the immediate family of the owner or lessor, hold one-half or more interest, and employees of the owner or lessor while on company business.
(G) For purposes of subdivisions (c)(1)(D) and (c)(1)(E), “contrary evidence” includes sworn oral or written testimony that is offered to prove that a person is engaged in the business as a common carrier. Such testimony would include evidence that a person was engaged in the business as a common carrier but was unable to meet the minimum yearly gross receipts requirements because the aircraft was unfit to fly.
(2) Foreign Governments. A foreign government will be deemed to have acquired an aircraft for use outside of California if the aircraft is promptly removed from the state and the foreign government as owner or lessee does not return the aircraft to this state within 12 months after its removal from this state.
(3) Nonresidents. A nonresident will be considered as not using the aircraft other than to remove the aircraft from California if the aircraft is promptly removed from the state and is not returned to California within 12 months after its removal from this state.
(d) Activities Not Affecting Exemption.
(1) Repair or Warranty Service. The exemptions described by subdivision (b) will not be affected if the aircraft is returned to California within the 12-month period solely for repair or service covered by warranty.
(2) Test Flights. Test flights made for the purpose of determining whether an aircraft will fly in accordance with specifications, or whether the aircraft is in proper operating condition in all its parts, do not constitute use or consumption of the aircraft or its component parts which would disqualify the sale and use of the aircraft or its component parts from the exemptions described in subdivision (b) of this regulation whether such flights occur before or after the sale and delivery of the aircraft. This conclusion is unaffected by the circumstance that personnel of the vendor or vendee, government officials, or other observers may be on board in the aircraft during test flights.
(3) Modification, Repair, or Replacement. The work of modification, repair, or replacement performed on an aircraft following its delivery and preparatory to its intended use, which is performed prior to the aircraft's being placed in regular operation by a common carrier, or in the case of a foreign government or nonresident prior to the aircraft's removal from the State of California, will not disqualify the sale and use of the aircraft or its component parts from the exemptions described in subdivision (b). For purposes of this subdivision, flights for the sole purpose of positioning the aircraft at the modification, repair, or replacement facility will be considered a nonoperational use of the aircraft.
(4) Personnel Training. The operation of an aircraft in this state for the purpose of training pilots or other personnel of the aircraft's operator in the proper operation and maintenance of that particular aircraft will not disqualify the sale and use of that aircraft or its component parts from the exemptions described in subdivision (b) whether such operation occurs before or after the sale and delivery of the aircraft, provided the training period is no longer than is reasonably required for that purpose. For purposes of this subdivision, personnel training includes only such training as is necessary to familiarize the personnel with the operation of the subject aircraft. Examples of the type of activities that are not personnel training for purposes of this subdivision, and instead which are operational use, include training for a higher crew member certificate, proficiency or recurrency flights, and flight testing to observe the crew member's ability to satisfactorily perform procedures and maneuvers during the test flight.
(5) Nonrevenue Operations.
(A) The operation of an aircraft for a short period for the transportation of nonrevenue passengers or property by a common carrier for the purpose of advancing the purchaser's interests incidental to its business as a common carrier prior to placing the aircraft in regular operation will not disqualify the sale and use of the aircraft or its component parts from the exemptions described in subdivision (b).
(B) The use of an aircraft following its delivery to a foreign government or nonresident to transport the personnel or property of such foreign government or nonresident during the aircraft's prompt removal from this state will not disqualify the sale and use of the aircraft or its component parts from the exemptions described in subdivision (b).
(e) Aircraft and Aircraft Parts Exemption Certificate. The law provides that for the purposes of the proper administration of the sales and use tax and to prevent the evasion of tax, it shall be presumed that all sales are subject to the tax until the contrary is established. This presumption may be rebutted by the seller as to any sale of aircraft or aircraft parts as defined in subdivision (a) by establishing to the satisfaction of the Board that the gross receipts or sales price from the sale are not subject to the tax or by taking an aircraft or aircraft parts exemption certificate substantially in the form set forth below. The certificate shall relieve the seller from liability for the sales tax or for use tax collection only if it is taken timely and in good faith.
For special provisions affecting aircraft, see Regulation 1610 (18 CCR 1610), “Vehicles, Vessels and Aircraft”.

AIRCRAFT OR AIRCRAFT PARTS EXEMPTION CERTIFICATE

I HEREBY CERTIFY: That the aircraft identified below will be used
[ ] Principally as a common carrier* of persons or property under authority of the laws of California, of the United States, or of any foreign government; or
[ ] Outside California by a foreign government; or
[ ] Outside California by a nonresident of California which aircraft was not used in this state other than the removal from California.

That the purchase of all tangible personal property which I shall purchase from

is exempt from tax under section 6366 or 6366.1 of the Revenue and Taxation Code and Regulation 1593. The identification numbers of all aircraft purchased under this certificate are listed below. Until this certificate is revoked in writing, all other property purchased from the seller consists of tangible personal property to become a component part of aircraft in the course of repair, maintenance, overhaul, or improvement of same in compliance with Federal Aviation Administration requirements, or United States military equivalent, which aircraft will be used by the purchaser or the purchaser's lessee in a manner qualifying for exemption under section 6366 or 6366.1 and under Regulation 1593. (The purchaser issuing this certificate can revoke it as to a particular purchase by clearly indicating on a purchase order than the purchase is not exempt under either section 6366 or 6366.1 or under Regulation 1593.)

I UNDERSTAND that in the event any such property is used in any manner other than as specified above, I am required by the Sales and Use Tax Law to report and pay any applicable sales or use tax.

*NOTE: Revenue and Taxation Code section 6366 creates a rebuttable presumption that an aircraft is not principally used as a common carrier if the owner's or lessor's annual gross receipts from such operations do not exceed 20 percent of the purchase price of the aircraft or fifty thousand dollars ($50,000), whichever is less. Amounts received for use of the aircraft as a common carrier from the owner or lessor of the aircraft or related parties or employees of the owner or lessor, are excluded from gross receipts for purposes of this presumption.

Identification Numbers of Aircraft Purchased under this Certificate:

			

Date Certificate Given 		

Purchaser 			
                (Company Name)

Address 			

Signature			
            (Signature of Authorized Persons)
   			
               (Print or Type Name)

Title 			
           (Owner, Partner, Purchasing Agent, etc.)

Seller's Permit No. (if any) 		

NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6091, 6366, 6336.1 and 6421, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former Section 1986 filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
2. Amendment filed 10-19-78; effective thirtieth day thereafter (Register 78, No. 42).
3. Amendment of subsections (a), (b) and (h) filed 6-1-88; operative 7-1-88 (Register 88, No. 23).
4. Amendment of section and Note filed 9-17-98; operative 10-17-98 (Register 98, No. 38).
§1594. Watercraft.
Note     •     History

(a) General Exemptions. Tax does not apply to the sale of nor to the storage, use, or other consumption of watercraft which are used, leased to a lessee for use, or sold to persons for leasing to lessees for use either in interstate or foreign commerce, in commercial deep sea fishing, or in transporting persons or property to vessels or offshore drilling platforms located outside the territorial waters of this state.
(1) Interstate or Foreign Commerce. Tax does not apply if the watercraft for which the exemption is claimed is used either exclusively in interstate or foreign commerce involving the transportation of persons or property for hire or both in interstate or foreign commerce and in intrastate commerce provided the principal use of the watercraft is transportation for hire in interstate or foreign commerce. The exemption may apply to watercraft which operates between termini within the state, such as ferry boats or barges operating entirely within the state if they are principally used to transport interstate passengers or cargo and tugs that operate entirely within the state and are principally used to convoy or aid the departure or arrival of vessels to or from points outside the state.
(A) The tax applies with respect to watercraft making voyages both in interstate or foreign commerce and voyages that are exclusively in intrastate commerce where the principal use of the watercraft is in intrastate commerce.
(B) With respect to watercraft sold on or after January 1, 1987, it shall be presumed that the watercraft is not regularly used in the transportation for hire of property or persons if the annual gross receipts from such use of the watercraft do not exceed ten percent (10%) of the cost of the watercraft to the person using it, or twenty-five thousand dollars ($25,000), whichever is less.
(C) With respect to watercraft leased on or after January 1, 1987, it shall be presumed that the watercraft is not regularly used in the transportation for hire of property or persons, if the annual gross receipts of the lessor from the lease of the watercraft to persons using it in this manner do not exceed ten percent (10%) of the cost of the watercraft to the lessor, or twenty-five thousand dollars ($25,000), whichever is less.
(D) The presumptions explained in subdivisions (B) and (C) above may be rebutted by contrary evidence satisfactory to the board showing that the watercraft is regularly used in the transportation for hire of property or persons.
(E) When determining whether watercraft is regularly used by the owner or lessee in the transportation for hire of property or persons, the first 12-month period after the first functional use of the watercraft shall be used. Gross receipts from the transportation for hire of property or persons, whether in interstate or foreign commerce or in intrastate commerce, may be used to meet the minimum gross receipts requirements stipulated in subdivisions (B) and (C) above.
(2) Commercial Deep Sea Fishing. Tax does not apply if the watercraft for which the exemption is claimed is used in commercial deep sea fishing operations outside the territorial waters of this state by persons who are regularly engaged in commercial deep sea fishing if the principal use of the watercraft occurs outside the territorial waters of this state. 
It shall be rebuttably presumed that “persons who are regularly engaged in commercial deep sea fishing” do not include persons who have gross receipts from commercial deep sea fishing operations that total less than $20,000 a year with respect to watercraft sold on or after July 29, 1991, and $5,000 a year with respect to watercraft sold during the period January 1, 1980 through July 28, 1991. When determining whether a person has less than  the minimum amount of $5,000 or $20,000 (as applicable) in gross receipts from commercial deep sea fishing operations, the first 12-month period after the first functional use of the watercraft shall be used if the person purchasing the watercraft was not engaged in commercial deep sea fishing at the time of purchase. If the person purchasing the watercraft is already engaged in commercial deep sea fishing operations, the person will not be considered to be regularly engaged in the business of commercial deep sea fishing unless receipts from commercial deep sea fishing operations aggregate at least the minimum amount during any consecutive 12-month period which includes the first operational use of the watercraft as to which exemption is claimed. Fish receipts from either commercial deep sea fishing within the territorial waters of this state or from commercial deep sea fishing outside the waters of California may be used to meet the minimum fish receipts requirements. The tax applies with respect to watercraft used in commercial deep sea fishing operations if the principal use occurs within the territorial waters of this state.
(3) Transporting Persons or Property to Vessels or Offshore Drilling Platforms. Tax does not apply if the watercraft is used in transporting for hire persons or property to vessels or offshore drilling platforms located outside the territorial waters of this state provided that the watercraft is functionally used 80 percent or more of the time in such transportation activities.
(b) Use of Watercraft.
(1) Interstate or Foreign Commerce. In addition to the requirement that the watercraft be regularly used in the transportation for hire of property and persons, the watercraft for which the exemption is claimed must actually be used principally in interstate or foreign commerce.
In determining whether a purchaser or a lessee of a watercraft is using that watercraft in interstate or foreign commerce, only that use of the watercraft by the purchaser or lessee during the first 12 consecutive months commencing with the first operational use of the watercraft will be considered. If the purchaser does not own the watercraft for 12 consecutive months commencing with the first operational use, then the period of time commencing with the first operational use that the purchaser owns the watercraft will be considered.
(2) Commercial Deep Sea Fishing In addition to the requirement that the watercraft be used by persons who are regularly engaged in commercial deep sea fishing, the watercraft as to which exemption is claimed must itself actually be used principally in commercial deep sea fishing operations outside the territorial waters of this state. In determining whether a buyer or a lessee of a watercraft is using that watercraft in commercial deep sea fishing operations outside the territorial waters of this state, only that use of the watercraft by the purchaser or lessee during the first 12 consecutive months commencing with the first operational use of the watercraft will be considered. If the purchaser does not own the watercraft for 12 consecutive months commencing with the first operational use, then the period of time commencing with the first operational use that the purchaser owns the watercraft will be considered.
(3) Transporting Persons or Property to Vessels or Offshore Drilling Platforms. In determining whether a purchaser or a lessee of a watercraft is using that watercraft in transporting for hire persons or property to vessels or offshore drilling platforms located outside the territorial waters of this state, only that functional use of the watercraft by the purchaser or lessee during the first 12 consecutive months commencing with the first operational use of the watercraft will be considered. If the purchaser does not own the watercraft for 12 consecutive months commencing with the first operational use, then the period of time commencing with the first operational use that the purchaser owns the watercraft will be considered.
(4) For purposes of this regulation:
(A) “Principal use” means more than one-half of the operational use during the test period.
(B) “Operational use” or “functional use” means the actual time during which the watercraft is operated and shall not include storage, modification, repair, or replacement.
(c) Component Parts of Watercraft. The tax does not apply with respect to tangible personal property becoming a component part of watercraft, exempt under subdivision (a) of this regulation, in the course of constructing, repairing, cleaning, altering or improving that watercraft.
(1) Items Included. To be considered a “component part” of a watercraft for purposes of the exemption the property must be an integral part of the watercraft, affixed or attached thereto in a substantial manner when in use. The following examples are illustrative only, and do not constitute a complete list:
The hull and all affixed property constituting an integral part thereof.
All property affixed or attached to the structure of the watercraft used while thus affixed or attached for navigation or operation, such as: radio transmitters, receivers and other radio equipment, radar equipment, intercommunication systems, winches, anchors, lifeboats, engines, generators, switch-gear, compasses, indicators, levers, control and signal systems, lamps, chains and cables.
All property affixed or attached to the structure of the watercraft used while thus affixed or attached for the comfort or convenience of the passengers and crew, such as: built-in bunks, furniture attached by bolts, screws or otherwise, including counters, shelves, stools, railing, stairs, partitions, doors, windows, window shades and curtains, awnings, hardware, stoves, sinks and other plumbing fixtures, and paint.
(2) Items Excluded. Property is not considered a component part of a watercraft for purposes of the exemption if it is a kind commonly treated as expense items and is not affixed or attached to the watercraft in a substantial manner when in use. The following examples are illustrative only, and do not constitute a complete list:
Portable equipment, furniture, devices and other property, such as; chairs, deck chairs, table or floor radios, table or floor lamps, dishes and other utensils, tables, bedding, linen, mattresses, cots, athletic or recreational equipment (not affixed or attached), pictures, fire extinguishers (portable), tools, brooms, mops, rags, towels, oil, grease, soap, cleaning materials and other consumable supplies.
(d) Watercraft Exemption Certificate. The law provides that for the purposes of the proper administration of the sales and use tax and to prevent the evasion of the sales tax it shall be presumed that all gross receipts are subject to the tax until the contrary is established. This presumption may be rebutted by the seller as to any sale of watercraft or component parts of watercraft by establishing to the satisfaction of the Board that the gross receipts from the sale are not subject to the tax or by timely taking a watercraft exemption certificate substantially in the form set forth below. The certificate shall relieve the seller from liability for the sales tax only if it is taken in good faith.
For special provisions affecting watercraft, see Regulation 1610 (18 CCR 1610), “Vehicles, Vessels and Aircraft”. 

WATERCRAFT EXEMPTION CERTIFICATE 
I HEREBY CERTIFY: That the watercraft identified below is used
( ) In the transportation by water of persons or property for hire in interstate or foreign commerce*;
( ) In commercial deep sea fishing operations outside the territorial waters of this state*;
( ) In transporting for hire persons or property to vessels or offshore drilling platforms located outside the territorial waters of this state;
That all tangible personal property which I shall purchase from described on purchase orders, or invoices, as tax exempt under Section 6368 of the Sales and Use Tax Law and Regulation 1594 consists of watercraft or tangible personal property becoming a component part of watercraft in the course of constructing, repairing, cleaning, altering, or improving the same, which watercraft will be used principally in the operation checked above. 

*NOTE:  Revenue and Taxation Code section 6368(b) creates a rebuttable presumption that you are not regularly engaged in commercial deep sea fishing if your gross receipts from such operations are less than twenty thousand dollars ($20,000) a year. Revenue and Taxation Code section 6368(c) creates a rebuttable presumption that the watercraft is not regularly used in interstate or foreign commerce if  your yearly gross receipts from such operations do not exceed 10 percent of the cost of the watercraft or twenty-five thousand dollars ($25,000), whichever is less.

Date Certificate Given 	
Purchaser 	
                                                      (Company Name) 
Address 	
Signed By 	
                                      (Signature of Authorized Person)
	
                                               (Print or Type Name) 
Title 	
                                 (Owner, Partner, Purchasing Agent, etc.) 
Seller's Permit No. (if any) 	
and/or Fish and Game License No. 	
Names of Watercraft for which certifying purchaser will be making purchases: 

	
	
	____
  
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6368, 6368.1 and 6421, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former section 1992 filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Amendment filed 10-19-78; effective thirtieth day thereafter (Register 78, No. 42).
3. Amendment of subsections (a)(3), (b)(2) and (d) filed 2-28-80; effective thirtieth day thereafter (Register 80, No. 9).
4. Amendment filed 8-23-85; effective thirtieth day thereafter (Register 85, No. 34).
5. Amendment filed 11-25-87; operative 12-25-87 (Register 87, No. 48).
6. Amendment filed 7-27-88; operative 8-26-88 (Register 88, No. 32).
7. Amendment of subsection (a)(2), repealer of subsection (d) and relettering, amendment of new subsection (d) and “Watercraft Exemption Certificate”, repealer of “Diesel Fuel Exemption Certificate” and amendment of Note filed 12-21-92; operative 1-20-93 (Register 92, No. 52).
§1595. Occasional Sales--Sale of a Business--Business Reorganization.
Note     •     History

(a) Activities Requiring Seller's Permit.
(1) General. Tax applies to all retail sales of tangible personal property including capital assets whether sold in one transaction or in a series of sales, held or used by the seller in the course of an activity or activities for which a seller's permit or permits is required or would be required if the activity or activities were conducted in this state. See subdivision (e) below for special rules regarding sales of property by producers of hay.
Generally, a person who makes three or more sales for substantial amounts in a period of 12 months is required to hold a seller's permit regardless of whether the sales are at retail or are for resale. Each sale of the person during the 12 month period is included in determining whether that person is required to hold a permit, or would be required to hold a permit if the activities were conducted entirely inside this state. Thus, a sale occurring outside California, whether at retail or for resale, is included, even though it would not be subject to California sales tax. A person who makes a substantial number of sales for relatively small amounts is also required to hold a seller's permit. 
Tax does not apply to a sale of property held or used in the course of an activity not requiring the holding of a seller's permit unless the sale is one of a series of sales sufficient in number, scope and character to constitute an activity for which the seller is required to hold a seller's permit or would be required to hold a seller's permit if the activity were conducted in this state. If tangible personal property is leased under a lease which is a “sale” as defined in Revenue and Taxation Code Section 6006 or a “purchase” as defined in Revenue and Taxation Code Section 6010, tax applies to the lease as provided in Regulation 1660 (18 CCR 1660), and the lessor must hold a seller's permit as provided in Regulation 1699 (18 CCR 1699). The lessor is not making an occasional sale since the lessor is making a “continuing sale” and is thereby holding the leased property in an activity requiring the holding of a seller's permit. As such, the lessor's sale of the leased property at the end of the lease term is likewise not an occasional sale.
(2) Property Held or Used in an Activity, or Activities Requiring the Holding of a Seller's Permit. A seller's permit is required of a person engaged in the business of selling tangible personal property. An activity requiring the holding of that permit includes, but is not limited to, the acquisition and sale of tangible personal property, whether the person's sales are all at retail, all for resale, or include both sales at retail and sales for resale.
Acquisition includes the obtaining of the property in any manner whatsoever. For example, raw materials may be purchased or may be obtained by extraction from the earth, air or waters of the earth. These may be sold in raw form or processed or manufactured into other raw materials, component parts or finished items which are sold. Each of these activities is an activity which is so related to the sale of tangible personal property, that it is part of the activity requiring the holding of a seller's permit.
(3) Separate Businesses. A person engaged in an activity or activities requiring the holding of a seller's permit or permits may also be engaged in entirely separate endeavors which do not require the holding of a seller's permit or permits. Tax applies to the sale of tangible personal property held or used in the course of an activity requiring the holding of a seller's permit. Tax does not apply to the sale of property held or used by the seller in the non-selling endeavors which do not require the holding of a permit unless that sale is itself one of a series of sales requiring the holding of a seller's permit. For example, a person may own a hardware store at one location and a real estate brokerage business at another location, with no relationship between the two activities except that of common ownership. Under these circumstances, a sale of furniture used in the brokerage business would not be a sale of property held or used in an activity requiring the holding of a seller's permit unless it was one of a series of sales of the property of the brokerage business. A sale of tangible personal property held or used in the hardware business would be a sale of property held or used in an activity requiring the holding of a seller's permit.
(4) Series of Sales Requiring the Holding of a Seller's Permit. A person not otherwise engaged in an activity requiring the holding of a seller's permit may make a series of sales sufficient in number, scope and character to require the holding of a seller's permit. The sale in that series of sales, and subsequent sales, during any 12 month period which resulted in the requirement to hold a permit are subject to tax, unless otherwise exempt.
(A) Number. 
1. Generally the minimum number of sales to require the holding of a seller's permit by a person not otherwise engaged in a selling activity is three within any 12 month period.
2. When calculating the minimum number of sales which requires a person to hold a seller's permit, the following types of sales are excluded:
a. Sales made by an auctioneer on behalf of the person. In such transactions, the auctioneer is the retailer liable for tax.
b. Sales through claiming races of horses owned by the person. In such transactions, the racing association is the retailer liable for tax.
c. Sales of vehicles, mobilehomes, commercial coaches, vessels, or aircraft which are exempted from sales tax by Revenue and Taxation Code Sections 6282 and 6283.
d. A trade-in made by the person which is incidental to a nonselling activity of the person.
(B) Scope. The extent of the sales measured by their frequency or dollar volume.
(C) Character. This relates to the similarity in type and value giving effect to the taxpayer's operations. For example, a processor of food products for human consumption is not required to hold a seller's permit for the processing and sale of food products. Sales of used lug boxes, obsolete or used machinery, food handling and similar items are of a character that three or more sales of sufficient scope will require the processor to hold a seller's permit for this selling activity.
(5) Examples Applying the Above Principles.
(A) Service enterprises which make some incidental sales.
1. Operators of service enterprises such as hospitals, hotels, theaters, schools, laundromats, car washes, transportation companies, and trucking companies may make some sales incidental to their primary service business. A hospital may operate a pharmacy and cafeteria as an adjunct to the hospital. A hotel may operate a restaurant and a bar. A theater may sell popcorn to patrons. A school may operate a cafeteria and bookstore. A laundromat may sell soap to its customers.
If any of these businesses were sold, tax would apply only to the gross receipts from the tangible personal property held or used in the selling activity.
2. If, in any 12 month period, the operator of the service enterprise makes more than two sales in substantial amounts of tangible personal property used in the service enterprise, the first two sales are exempt occasional sales, but the operator is required to hold a permit for the third and subsequent sales during any 12 month period. The gross receipts from the third and subsequent sales during any such 12 month period are subject to tax, unless otherwise exempt. For example, the only sales that a service enterprise made were the following sales (each of which was “substantial” for purposes of this regulation) of tangible personal property used in the service enterprise:

	a.	February 23, 1996	Occasional sale

	b.	August 16, 1996	Occasional sale

	c.	January 8, 1997	Not occasional sale

	d.	February 8, 1997	Not occasional sale

	e.	January 27, 1998	Occasional sale

	f.	February 3, 1998	Not occasional sale

	g.	August 11, 1999	Occasional sale

	h.	December 12, 1999	Occasional sale

	i.	September 8, 2000	Occasional sale

	j.	December 9, 2000	Not occasional sale

Sales a. and b. are occasional sales since they were the first two sales made by the service enterprise.

Sales c. and d. are not occasional sales since they were the third and fourth sales in the series of sales commencing on February 23, 1996, which was less than 12 months prior to these sales.

Sale e. is an occasional sale since it was only the second sale in the series of sales commencing within the prior 12 months, on February 8, 1997. The January 8, 1997 sale is not relevant since it occurred more than 12 months prior to sale e.

Sale f. is not an occasional sale since it was the third sale in the series of sales commencing on February 8, 1997, which was less than 12 months prior to this sale.

Sale g. is an occasional sale since the service enterprise made no other sales in the prior 12 months.

Sale h. is an occasional sale since it was only the second sale in the series of sales commencing within the prior 12 months, on August 11, 1999.

Sale i. is an occasional sale since it was only the second sale in the series of sales commencing within the prior 12 months, on December 12, 1999.

Sale j. is not an occasional sale since it was the third sale in the series of sales commencing within the prior 12 months, on December 12, 1999.
(B) Other businesses.
1. Tax applies to the sales of assets of a business which is not essentially a service enterprise. Examples of this are sales of grocery stores and liquor stores making both exempt sales of food products for human consumption and taxable sales of other tangible personal property, service stations which sell gasoline, oil and similar items and which also perform automotive repairs and lubrication services, and computer stores which also provide training in the use of computers and repairs for computer products.
2. Where a service enterprise and a sales business are operated together so as to constitute one business, tax will apply to the sale of the assets of the business. For example, if a car wash and gasoline station are operated at the same premises and the car wash is available only to persons who buy gasoline or if the price of the car wash is reduced if gasoline is purchased, tax applies to the sale of the car wash.
3. A person purchases a hardware store with the intent of selling tangible personal property. The person must hold a seller's permit regardless of the number of sales of tangible personal property actually made. For example, if the person makes only two sales, a sale of a hammer and a sale of the business, neither sale is an occasional sale.
4. A person intends to create and sell custom furniture. The person must hold a seller's permit for all his or her sales of furniture. This is true even if, because of the time necessary to create each piece of furniture and the profit resulting from each sale, the person averages one sale of furniture per year.
(6) Transfer of Shares in a Corporation. The sale of stock of a corporation is not a sale of tangible personal property and is not subject to sales tax. A stock purchase is not a purchase of tangible personal property and is not subject to sales or use tax notwithstanding the fact that the stock purchase may be treated as an asset acquisition for federal income tax purposes pursuant to Internal Revenue Code Section 338.
(b) Sale or Reorganization of All or Part of a Business.
(1) General. In general, when a person sells a business which is required to hold a seller's permit, tax applies to the gross receipts from the retail sale of tangible personal property held or used by that business in the course of its activities requiring the holding of the seller's permit. The gross receipts from the sale of the business include all consideration received by the transferor, including cash, notes, and any other property as well as any indebtedness assumed by the transferee. It is irrelevant that the indebtedness assumed may have arisen solely in connection with the transferor's acquisition of the tangible personal property transferred, the other property transferred, or some combination thereof. That is, the transferor is selling a business, and all consideration received is for that business. The measure of tax is the price agreed to by the parties. In the absence of an agreement as to the price of the tangible personal property, the gross receipts from that sale is allocated among the taxable portion and the nontaxable portion by dividing the selling price of the tangible personal property acquired by the purchaser for use rather than resale by the selling price of the entire business sold, and then multiplying that amount by the total gross receipts (i.e., all consideration) received for the business. Book value will be regarded as establishing the price of properties sold. (See Regulation 1610 for special rules applicable to sales of vehicles, vessels, and aircraft.) 
(2) Transfers of Substantially All Property Without Substantial Change in Ownership. Tax does not apply to a transfer of all or substantially all the property held or used by a person in the course of activities for which the person is required to hold a seller's permit or permits or would be required to hold a seller's permit or permits if the activities were conducted in this state, provided that after the transfer the real or ultimate ownership of the property is substantially similar to that which existed before such transfer. “Substantially all the property” means 80 percent or more of all the tangible personal property held or used by the person in the course of activities requiring the holding of a seller's permit, including tangible personal property located outside of this state. If a person engages in two or more separate selling activities requiring the holding of a seller's permit, for each of which the person is required to hold a seller's permit or would be required to hold a seller's permit if the activity were conducted in this state, a transfer of 80 percent or more of the tangible personal property held or used in the combined activities must be made in order to qualify for the exemption described in this paragraph. If a person simultaneously transfers all or substantially all of its assets to more than one entity, the transfer will qualify for the exemption if the ownership remains substantially similar. Stockholders, bondholders, partners, or other persons holding an ownership interest rather than a security interest in the corporation or other entity are regarded as having the real or ultimate ownership of the property of the corporation or other entity.
The real or ultimate ownership is “substantially similar” to that which existed before a transfer if 80 percent or more of that ownership of the tangible personal property is unchanged after the transfer. In the following example, the ownership is “substantially similar” to that which existed before the transfer:

	Interest in	Interest in	Interests Common
	Transferor	Transferee	Before and After
Stockholders	Corporation	Corporation	Transfer

A 	40%	33 1/3%	33 1/3%
B 	40%	33 1/3%	33 1/3%
C 	 20%	33 1/3%	20%     
	100%	100%	86 2/3%

(3) Statutory Merger. A transfer pursuant to a statutory merger is not a sale but is instead a transfer by operation of law. Thus, tax does not apply to a transfer of property of a constituent corporation to a surviving corporation or new corporation pursuant to a statutory merger under sections 6010-6022, 1100-1305, or 15678.1-15678.9 of the California Corporations Code or similar laws of this state or other states. The surviving corporation stands in the place of each constituent corporation (including the disappearing corporation(s)). As a result, if property acquired by the surviving corporation in the merger had been purchased and held by the constituent corporation for resale, then the surviving corporation must report and pay use tax on the constituent corporation's purchase price if it makes any use of such resale property, just as the constituent corporation would have owed such tax if it had used the property. Similarly, if the constituent corporation had avoided paying tax measured by the purchase price of mobile transportation equipment by making a timely election to report tax on the fair rental value, the surviving corporation must continue to report tax measured by the fair rental value on its leases of the mobile transportation equipment; if the surviving corporation makes any use of that mobile transportation equipment other than leasing it to another person, the surviving corporation must report tax on the purchase price paid by the constituent corporation.
(4) Contribution to Commencing Corporation, Limited Liability Company, Partnership, or Joint Venture. The transfer of tangible personal property to a commencing corporation, commencing limited liability company, commencing partnership, or commencing joint venture in exchange solely for first issue stock of the commencing corporation or an interest in the commencing limited liability company, partnership, or joint venture is not a sale since the interest received by the transferor is not regarded as having measurable value at the time of the transfer. The transferor is the consumer of such property. However, such a transfer is a sale if the transferor receives any consideration, such as cash, notes, or an assumption of indebtedness (whether or not the transferor retains any joint liability with respect to the indebtedness assumed by the transferee), and tax applies to that sale unless it otherwise qualifies for exemption. For purposes of determining the measure of tax from the sale, it is irrelevant that any of the transferor's indebtedness assumed by the transferee may have arisen solely in connection with the transferor's acquisition of the tangible personal property transferred, the other property transferred, or some combination thereof. The gross receipts from that sale is allocated among the taxable portion and the nontaxable portion by dividing the selling price of the tangible personal property transferred to the purchaser for use rather than for resale by the selling price of all property transferred and then multiplying that amount by the total gross receipts (i.e., all consideration) received by the transferor.
When the transferor is a consumer under the previous paragraph, no tax applies with respect to the transfer provided the transferor's use of the property in California would not otherwise be subject to tax. For example, in the case of property purchased by the transferor for resale without payment of the tax, the transferor is the consumer of such property which the transferee will not sell. Since the transferor's use of such resale inventory is subject to tax, the transferor owes tax measured by its purchase price. However, no tax applies with respect to the transfer of such resale inventory provided the transferee will sell such property without any use other than retention, demonstration, and display while holding the property for sale. If the transferee thereafter makes any other use of such property, it must report use tax measured by the transferor's purchase price.
(5) Dissolution of Corporation. A distribution of assets, including tangible personal property, by a corporation upon its dissolution to its stockholders in accordance with their ownership interests is a liquidating dividend and is not a sale when no consideration is received by the corporation other than the stockholders' return of stock certificates for purposes of cancellation. The corporation is the consumer of such property and no tax applies with respect to the transfer provided the corporation's use of the property in California would not otherwise be subject to tax. If consideration is given or received for the transfer, such as an assumption of liabilities by the stockholders, tax applies measured by that consideration.
(6) Dissolution of Limited Liability Company. A distribution of assets, including tangible personal property, by a limited liability company upon its dissolution to its members (i.e., persons holding membership interests and persons holding economic interests) in accordance with their ownership interests is a liquidating dividend and is not a sale when no consideration is received by the limited liability company other than cancellation of the members' interests. The limited liability company is the consumer of such property and no tax applies with respect to the transfer provided the limited liability company's use of the property in California would not otherwise be subject to tax. If consideration is given or received for the transfer, such as an assumption of liabilities by the members, tax applies measured by that consideration.
(7) Dissolution of Partnership. A partnership is a person for sales and use tax purposes. (Revenue and Taxation Code Section 6005.) However, a partnership is defined for general law purposes as an association of two or more persons to carry on as co-owners a business for profit. (Corporations Code Section 15006.) Dissolution of a partnership is caused by withdrawal of a partner or admission of a new partner, unless otherwise provided in an agreement in writing signed by all the partners, including any such withdrawing partner or any such newly admitted partner before such withdrawal or admission. (Corporations Code Section 15031(7).)
Under Corporations Code Section 15026, a partner's interest in the partnership is the partner's share of the profits and surplus, and is personal property. Under Corporations Code Section 15027(1), a conveyance by a partner of that partner's interest in the partnership does not in itself dissolve the partnership, nor, as against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books; but it merely entitles the assignee to receive in accordance with the partnership contract the profits to which the assigning partner would otherwise be entitled. The assignment of a partnership interest in this technical sense is not a sale of tangible personal property and is not subject to tax.
In common usage, however, the term “partnership interest” refers to all of the rights of a partner including (1) the person's rights in specific partnership property, (2) the person's interest (in the technical sense) in the partnership, and (3) the person's right to participate in the management. In a typical commercial transaction when a partner “sells the person's interest in a partnership” to another, it is intended that the person “selling the interest” will withdraw from the partnership and the person “purchasing the interest” will be admitted to the partnership. The legal effect of this transaction is to dissolve the first partnership and to create a new partnership, in the absence of a provision in the agreement providing for continued life of the partnership. The effect for sales and use tax purposes is that there is a dissolution of the partnership, a distribution of the assets on a pro rata basis, and a sale by the withdrawing partner of the person's ownership interest in the tangible personal property distributed to that person. Except as provided in subdivision (c), this sale of tangible personal property will qualify as an occasional sale under Revenue and Taxation Code Section 6006.5 and will be nontaxable under Section 6367, unless the withdrawing partner holds a seller's permit or the sale of tangible personal property is one of a series of sales sufficient in number, scope, and character to require the holding of a seller's permit.
A distribution of assets, including tangible property, by a partnership upon its dissolution to the partners in accordance with their ownership interest in the partnership is a liquidating dividend and is not a sale when no consideration is received by the partnership other than cancellation of the partners' interests. The partnership is the consumer of such property and no tax applies with respect to the transfer provided the partnership's use of the property in California would not otherwise be subject to tax. If consideration is given or received for the transfer, such as an assumption of liabilities by the partners, tax applies measured by that consideration.
Where a partnership distributes some of its assets in the form of a partial liquidation of the business, the transfer will be regarded as a liquidating dividend, subject to the rules set forth in the previous paragraph, if an entire segment of the business of the partnership is being liquidated. For example, a partnership operates a lumberyard and an automobile repair and parts business. If the partnership ceases operation of the lumberyard and distributes its assets to the partners in accordance with their interest in the partnership and the partnership receives no consideration from the partners such as an assumption of liabilities, the transfer is a liquidating dividend subject to the rules set forth in the previous paragraph. If, however, the partnership ceases operating the repair portion of the automobile repair and parts business and distributes the assets of that portion of the business, it is not liquidating an entire segment of its business and the transfer does not qualify as a nontaxable liquidating dividend.
(8) Dissolution of Joint Venture. For purposes of this paragraph, a joint venture is an undertaking by two or more persons jointly to carry out a single enterprise for profit. The rules applicable to a partnership's liquidating dividends apply to a joint venture's liquidating dividends. The distribution of assets by a joint venture will be regarded as a liquidating dividend, subject to the rules set forth for partnerships, provided at least 80 percent of the purpose of the joint venture has been completed at the time of the distribution. The distribution of the assets of a joint venture prior to 80 percent completion of the purpose of the joint venture cannot qualify as a liquidating dividend and is a sale transaction subject to tax.
(9) Sale Following Liquidation. Except as provided in subdivision (c), the transferee's sale of assets acquired in a transfer qualifying as a liquidating dividend, as discussed in this regulation, would be an exempt occasional sale if the property is not sold as part of an activity requiring the holding of a seller's permit and is not one of a series of sales requiring the holding of a seller's permit.
(c) Vehicles, Mobilehomes, Commercial Coaches, Vessels, and Aircraft. There is no occasional sale exemption for the sale or use of vehicles required to be registered with the Department of Motor Vehicles, or off-highway vehicles subject to identification under Division 16.5 of the Vehicle Code, mobilehomes and commercial coaches required to be registered with the Department of Housing and Community Development, vessels, or aircraft, as defined by the law and in Regulation 1610 (18 CCR 1610) or in Regulation 1610.2 (18 CCR 1610.2), except when such property is included in a transfer of all or substantially all the property held or used in the course of business activities of the person selling the property and the real or ultimate ownership of the property is substantially similar to that which existed before such transfer. The rules set forth in subdivision (b)(2) of this regulation are applicable in determining under this paragraph whether a transfer is of substantially all the property and whether the ownership is substantially similar.
(d) Manufacturers and Wholesalers. A manufacturer, wholesaler, or other person in the business of making sales for resale of tangible personal property of a kind the retail sale of which is taxable, whether or not the property is ever sold at retail or is suitable for sale at retail, is liable for tax measured by receipts from any of the person's retail sales of tangible personal property.
(e) Producers of Hay. A producer of hay is required to hold a seller's permit by reason of the producer's sales of hay, regardless of whether the hay is sold for resale or at retail, and regardless of whether the hay sold at retail constitutes feed for any form of animal life of a kind the products of which ordinarily constitute food for human consumption, unless, operative April 1, 1996, the producer is a grower who produces hay for sale only to beef cattle feedlots or dairies or is a grower who sells exclusively through a farmer-owned cooperative.
However, an occasional sale includes a sale of property by a producer of hay, other than hay, provided that the sale is not one of a series of sales sufficient in number, scope, or character to constitute an activity for which the producer would be required to hold a seller's permit if the producer were not also selling hay.
The producer's sale of tangible personal property held or used in the course of an activity of producing the hay (such as farm equipment and machinery) is an occasional sale, provided all of the following conditions apply:
(1) The sale is not one of three or more sales of tangible personal property (other than hay) for substantial amounts in any period of 12 months.
(2) The sale is not one of a substantial number of sales of tangible personal property (other than hay) for relatively small amounts in any period of 12 months.
(3) The tangible personal property was not also held or used in the course of an activity (other than the production of hay) for which a seller's permit is required, or would be required if the activity were conducted in this state.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6006.5, 6014, 6015, 6019, 6066, 6075, 6281, 6282, 6283, 6292, 6358(b) and 6367, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former Section 2101 filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
2. Amendment of subsection (c) filed 5-19-72; effective thirtieth day thereafter (Register 72, No. 21).
3. Amendment of subsections (a) and (b) filed 4-29-75; effective thirtieth day thereafter (Register 75, No. 18).
4. Amendment of subsections (a)(3)(K) and (b)(3) filed 6-13-79; effective thirtieth day thereafter (Register 79, No. 24).
5. Amendment of subsection (c) filed 6-7-83; effective thirtieth day thereafter (Register 83, No. 24).
6. Amendment filed 2-22-85; effective thirtieth day thereafter (Register 85, No. 8).
7. Amendment of subsections (a)(1), (b)(1) and new subsection (e) filed 7-21-86; effective thirtieth day thereafter (Register 86, No. 30). Amendment made in part pursuant to changes to Revenue and Taxation Code Section 6006.5(c), operative October 1, 1985.
8. Amendment of section and Note filed 2-4-97; operative 3-6-97 (Register 97, No. 5).
9. Amendment of subsections (a)(4) and (a)(5)(A)2. and new subsections (a)(5)(B)3.-4. filed 1-5-2001; operative 2-4-2001 (Register 2001, No. 1).
§1596. Buildings and Other Property Affixed to Realty.
Note     •     History

(a) Buildings and Minerals. The transfer of buildings or minerals or the like affixed to land is taxable as a sale of personal property if, pursuant to the contract or agreement of sale, the buildings or minerals or the like are to be severed by the seller thereof. If, pursuant to the contract or agreement of sale, such buildings or minerals or the like are to be severed by the purchaser thereof, such a transfer is not taxable as a sale of personal property.
The gross receipts from the sale of or the storage, use, or other consumption in this state of any used mobilehome the initial retail sale of which qualified for the 60 percent exclusion provided for by Revenue and Taxation Code Section 6012.8 for the period January 1, 1980 to June 30, 1980, inclusive, is exempt from the sales and use tax.
Operative July 1, 1980, the gross receipts from the sale of, and the storage, use, or other consumption in this state of any used mobilehome subject to local property taxation is exempt from the sales and use tax.
The exemptions for sales of used mobilehomes does not extend to accessories or other items as defined in Regulation 1610(b)(3)(B)(1) that are not an integral part of the mobilehome at the time of sale.
(b) Timber. The transfer of timber to be severed is taxable as a sale of personal property, regardless of whether the timber is to be severed by the seller or by the purchaser thereof.
(c) Fixtures, Machinery and Equipment, and Draperies Affixed to Real Property. The transfer “in place” of affixed fixtures, machinery and equipment, or draperies is taxable as a sale of personal property when removal of the fixtures, machinery or equipment, or draperies by the seller or purchaser is contemplated by the contract of sale. The transfer “in place” of affixed fixtures, machinery and equipment, or draperies owned by a lessee of land or buildings to which those items are affixed, is also taxable as a sale of personal property when the lessee-seller has the present right to remove the items either as trade fixtures under Section 1019 of the Civil Code or under the express terms of the lease. 
The measure of tax with respect to the sale of fixtures, machinery and equipment, or draperies does not include any value attributable to their attachment to real property, even though such value might be included in the agreed price. In the absence of evidence requiring a different method of computation, when the agreed price includes the value attributable to the attachment of the items, the measure of tax will be determined by applying to the agreed price that percentage which the original cost of the property bears to the total of that cost and the cost of attachment, i.e., 

View Graphic
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference Sections 6006, 6010, 6012.2, 6012.8 6012.9, 6016, 6016.3, 6276, 6276.1 and 6379, Revenue and Taxation Code. Leased property affixed to realty as tangible personal property when lessor has right to remove, see regulation 2060.
HISTORY

1. New section filed 2-20-70; effective thirtieth day thereafter (Register 70, No. 8).
2. Amendment of subsection (c) filed 5-30-75; effective thirtieth day thereafter (Register 75, No. 22).
3. Amendment of subsection (c) filed 8-8-78; effective thirtieth day thereafter (Register 78, No. 32).
4. Amendment of subsection (a) filed 8-22-80 as an emergency; effective upon filing (Register 80, No. 34). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 12-22-80.
5. Certificate of Compliance including amendment of subsection (a) transmitted to OAL 12-19-80 and filed 1-16-81 (Register 81, No. 3).
§1597. Property Transferred or Sold by Certain Nonprofit Organizations.
Note     •     History

(a) In General. Sections 6018.9, 6359.3, 6360, 6361, 6361.1 and 6370 of the Revenue and Taxation Code provide that certain organizations are consumers and not retailers of specified kinds of tangible personal property under certain conditions. The subsections which follow describe the organizations and the kind of tangible personal property involved.
(b) Flags Sold by Nonprofit Veterans' Organizations. Any nonprofit veterans' organization is a consumer of and shall not be considered a retailer of flags of the United States which it sells where the profits are used solely and exclusively in furtherance of the purpose of the organization.
(c) Prisoners of War Bracelets Transferred by Charitable Organizations. Any charitable organization qualifying for the welfare exemption from property taxation under section 214 of the Revenue and Taxation Code is the consumer of bracelets designed to commemorate American prisoners of war, which it distributes, whether or not a contribution is made to such organization, where the profits are used solely and exclusively in furtherance of the purposes of such organization.
(d) Handcrafted or Artistic Tangible Personal Property Sold by Certain Qualified Organizations. Any organization which is exempt from taxation under Section 501(c)(3) of the Internal Revenue Code (26 U.S.C.A.); which, as its primary purpose, provides services to individuals with developmental disabilities or, effective August 3, 1995, to children with severe emotional disturbances, and which does not discriminate on the basis of race, sex, nationality, or religion is the consumer and not the retailer of any tangible personal property sold by them if all of the following conditions are met:
(1) The tangible personal property is of a handcrafted or artistic nature and is designed, created, or made by individuals with developmental disabilities or, effective August 3, 1995, by children with severe emotional disturbances, who are members of, or receive services from, the qualified organization.
(2) The price of each item of tangible personal property sold does not exceed twenty dollars ($20), or ten dollars ($10) if sold prior to August 3, 1995.
(3) The qualified organization's sales are made on an irregular or intermittent basis.
(4) The qualified organization's profits from the sales are used exclusively in furtherance of the purposes of the organization.
(e) Food Products, Nonalcoholic Beverages and Other Tangible Personal Property Sold by Nonprofit Youth Organizations.
(1) A qualified youth organization is the consumer and not the retailer of food products, nonalcoholic beverages, and tangible personal property created by members of the organization, which are sold on an irregular or intermittent basis provided the profits from such sales are used solely and exclusively in the furtherance of the purpose of the organization.
(A) “Qualified youth organization” means and includes:
1. any nonprofit organization which qualifies for tax-exempt status under section 501(c) of the Internal Revenue Code (26 U.S.C.A.); which provides a supervised program of competitive sports for youth or promotes good citizenship in youth as its primary purpose; and which does not discriminate on the basis of race, sex, nationality, or religion, or
2. any youth group or club sponsored by or affiliated with a qualified educational institution, including but not limited to any student activity group, e.g., debating team, swimming team, band, or choir.
(B) “Qualified educational institution” means and includes:
1. any public elementary, secondary, or vocation-technical school which provides education for either kindergarten; grades 1 through 12, inclusive; or college or university undergraduate programs, or any part thereof, or
2. any nonprofit private school which provides education programs for either kindergarten; grades 1 through 12, inclusive; or college or university undergraduate programs, or any part thereof. Nonprofit private school educational programs must meet the requirements of the State Department of Education and must satisfy the requirements of state and local laws governing private educational institutions in effect on January 1, 1990. The term does not include a nonprofit private school which otherwise qualifies but which discriminates on the basis of race, sex, nationality, or religion. For example, a youth group sponsored by a private school which has enrollment open only to females is not a “qualified youth organization.”
(C) “Irregular or intermittent” is defined to mean sales made at particular events, such as fairs, galas, parades, scout-a-ramas, games, and similar activities, which are not conducted on a regularly scheduled basis. Sales made at refreshment stands or booths at scheduled events of organized youth sports leagues are considered made on an “irregular or intermittent” basis; however, sales made in storefront or mobile retail outlets which ordinarily require local business licenses do not qualify.
(2) The following organizations are “qualified youth organizations” and are consumers, not retailers, of tangible personal property under the circumstances described in paragraph (e)(1):
Little League, Bobby Sox, Boy Scouts, Cub Scouts, Girl Scouts, Campfire, Inc., formerly Campfire Girls, Young Men's Christian Association, Young Women's Christian Association, Future Farmers of America, Future Homemakers of America, 4-H Clubs, Distributive Education Clubs of America, Future Business Leaders of America, Vocational Industrial Clubs of America, Collegiate Young Farmers, Boys' Clubs, Girls' Clubs, Special Olympics, Inc., American Youth Soccer Organization, California Youth Soccer Association, North, California Youth Soccer Association, South, and Pop Warner Football.
(f) Tangible Personal Property Sold by Certain Nonprofit Organizations. The following organizations are consumers and not retailers of any tangible personal property sold by them if the profits from such sales are used exclusively in the furtherance of the purposes of the organization:
(1) Nonprofit parent-teacher associations chartered by the California Congress of Parents, Teachers, and Students, Incorporated, and equivalent organizations performing the same type of service for public or private schools and authorized to operate within the school by the governing authority of the school.
(2) Nonprofit associations commonly called Friends of the Library, and equivalent organizations performing auxiliary services to any library district, municipal library, or county library in the state, which are authorized to operate within the library by the governing authority of the library.
(3) Nonprofit parent cooperative nursery schools.
(g) Resale Certificates: Obligations of Persons Who Sell to Consumers. An organization classed as a consumer under this regulation may not give a resale certificate with respect to the property it transfers.
All persons, other than organizations classed as consumers, who make sales of tangible personal property not otherwise exempt, should report tax on their sales unless the purchasers furnish resale certificates which can be accepted in good faith.
It will be presumed that all sales of tangible personal property not otherwise exempt, by organizations not classed as consumers, for delivery in this state to purchasers who do not furnish resale certificates which the seller accepts in good faith are subject to sales tax or that the seller is obligated to collect use tax from the purchasers.
(h) Taxable Sales of Tangible Personal Property by or Through Nonprofit Organizations.  A nonprofit organization is treated as a consumer of tangible personal property it may sell under circumstances described in subdivisions (d), (e) and (f) of this regulation.  In other cases, a nonprofit organization is regarded as a retailer  of property it sells to consumers, or it is regarded as an agent of the companies which furnish the property to it for delivery to consumers.
When a nonprofit organization solicits orders, collects payments, and distributes tangible personal property for a supplier, it is considered to be the agent of that supplier.  Accordingly, the supplier, not the organization, is the retailer of the merchandise sold.  This is true unless documentation establishes that the nonprofit organization is buying and selling for its own account.  The nonprofit organization is presumed to be buying and selling on its own account if all of the following factors are present: 1) the organization solicits the orders from the public in its own name; 2) the organization collects the sale price from the customer in its own name; 3) the organization is responsible for and pays the supplier for the merchandise; and 4) the contract between the organization and the supplier clearly identifies the fact the organization and the supplier clearly identifies the fact the organization will purchase and resell the products to its customers.  If it is selling for its own account, the nonprofit organization will be required to obtain a permit and will be considered the retailer, unless the supplier has been classified by the Board as a retailer under Revenue and Taxation Code Section 6015 or the nonprofit organization is classified under subdivisions (d), (e) and (f) of this regulation.
If the supplier is a 6015 retailer, the supplier must pay the tax and the organization does not need a seller's permit.  The measure of tax is the amount charged to the consumer.  When this price is unknown by the supplier, tax will apply to the suggested retail selling price.  If the nonprofit organization is classified as a consumer under subdivisions (d), (e) and (f) of this regulation, the supplier will calculate tax measured by the selling price to the nonprofit organization. 
(i) Transfer of Tangible Personal Property to Members. From April 1, 2010, until January 1, 2015, an organization described under Section 501(c) of the Internal Revenue Code (26 U.S.C.A.) is the consumer of tangible personal property transferred to its members, if the following requirements are met:
(1) The tangible personal property bears a logo or other identifying mark of the organization and is a promotional item or other item commonly associated with use by a member to demonstrate the member's association with, or membership in, the organization.
(2) The cost to the member of the organization for the acquisition of the tangible personal property is not more than the cost to the nonprofit organization to obtain and transfer to the member the tangible personal property, including any applicable sales or use tax paid by the nonprofit organization.
(3) Reasonable steps are taken by the organization to ensure that no member is allowed to acquire more than 30 identical items of tangible personal property or to resell the items to another person.
(4) The tangible personal property is not distributed for purposes of organized political campaigning or issue advocacy.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6018.9, 6359.3, 6360, 6361, 6361.1 and 6370, Revenue and Taxation Code; and Scholastic Book Clubs, Inc. v. State Board of Equalization (1989) 207 Cal. App. 3d 734.
HISTORY

1. Amendment filed 2-14-73; effective thirtieth day thereafter (Register 73, No. 7). For prior history, see Register 72, No. 9.
2. Amendment of subsection (d) and new subsection (e) filed 12-27-74; effective thirtieth day thereafter (Register 74, No. 52).
3. Amendment of subsection (d) filed 5-30-75; effective thirtieth day thereafter (Register 75, No. 22).
4. Amendment filed 10-19-78; effective thirtieth day thereafter (Register 78, No. 42).
5. Renumbering and amendment of subsection (f) to subsection (g) and new subsection (f) filed 2-28-80; effective thirtieth day thereafter (Register 80, No. 9).
6. Amendment of subsection (d) filed 6-6-86; effective thirtieth day thereafter (Register 86, No. 23).
7. Amendment of section heading and subsection (d) filed 8-20-87; operative 9-19-87 (Register 87, No. 35).
8. Renumbering and amendment of subsection (f) to subsection (e)(2) and subsection (g) to subsection (f), and new subsection (e)(3) filed 10-18-88; operative 11-17-88 (Register 88, No. 43).
9. Amendment filed 5-18-89; operative 6-17-89 (Register 89, No. 20).
10. Amendment of subsections (a), (d) and (e) filed 2-14-91; operative 3-16-91 (Register 91, No. 12).
11. New subsection (e), amendment of subsection (a) and subsection renumbering filed 8-29-91 as an emergency; operative 8-29-91 (Register 91, No. 51). A Certificate of Compliance must be transmitted to OAL 12-27-91 or  emergency language will be repealed by operation of law on the following day.
12. Repealer of emergency amendments filed 8-29-91 and reinstatement of prior text filed 9-22-92 by operation of Government Code section 11346.1(f) (Register 92, No. 40).
13. New subsection (g) filed 2-3-94; operative 3-7-94 (Register 94, No. 5).
14. Change without regulatory effect amending subsection (g) filed 6-27-94 pursuant to section 100, title 1, California Code of Regulations (Register 94, No. 26).
15. Amendment of subsection (a), new subsections (d)-(d)(4), subsection relettering, and amendment of newly designated subsections (e)(2), (f)(1), (h) and Note filed 6-15-95; operative 7-17-95 (Register 95, No. 24).
16. Change without regulatory effect amending subsections (d)-(d)(2) and (f)(3) filed 4-23-96 pursuant to section 100, title 1, California Code of Regulations (Register 96, No. 17).
17. Change without regulatory effect amending subsection (a), adopting new subsections (i)-(i)(4) and amending Note filed 3-16-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 12).
§1598. Motor Vehicle and Aircraft Fuels.
Note     •     History

(a) In General. Sales tax or use tax applies to the sale or use of fuel for propelling motor vehicles or aircraft or for other purposes, except as stated below.
(b) Exceptions.
(1) Neither the sales tax nor the use tax applies to the sale or use of motor vehicle fuel used in propelling aircraft, the distribution of which in this state is subject to the tax imposed by Part 2 (commencing with Section 7301) of Division 2 of the Revenue and Taxation Code. This type of fuel includes gasoline and similar fuels but does not include aircraft jet fuel. (See subdivision (i) for requirements for supporting aircraft fuel exemptions.)
(2) Neither the sales tax nor the use tax applies to the sale or use of aircraft fuel sold to an air common carrier for immediate consumption or shipment in its business as an air common carrier on a flight whose final destination is a foreign destination (see Regulation 1621, Sales to Common Carriers).
(c) Measure of Tax.
(1) The measure of tax includes:
(A) The tax imposed by the United States upon importers or producers of gasoline, diesel, and jet fuel, except as provided in (c)(2)(D) and (c)(2)(E),
(B) The tax imposed upon distributors of gasoline and similar fuels by the State of California pursuant to Part 2 of Division 2 of the Revenue and Taxation Code, and which has not been refunded, and
(C) The tax imposed by the State of California on aircraft jet fuel pursuant to Chapter 2.5 of Part 2 of Division 2 of the Revenue and Taxation Code.
(2) The measure of tax does not include:
(A) The use fuel tax, including the annual flat rate fuel tax, imposed by the State of California pursuant to Part 3 of Division 2 of the Revenue and Taxation Code on the following fuels:
1. Compressed natural gas.
2. Liquid natural gas.
3. Liquefied petroleum gas.
4. Ethanol or methanol containing not more than 15 percent gasoline or diesel fuel.
5. All other fuels not taxed under Parts 2 or 31 of Division 2 of the Revenue and Taxation Code.
(B) The diesel fuel tax, imposed by the State of California pursuant to Part 31 of Division 2 of the Revenue and Taxation Code.
(C) The federal retailer's excise taxes on:
1. Gasoline used as a fuel in noncommercial aircraft.
2. Jet fuel used as a fuel in noncommercial aircraft.
3. Diesel fuel.
4. Special motor fuels.
(D) Prior to July 1, 1995, the federal excise tax imposed pursuant to Section 4091 of the Internal Revenue Code with respect to diesel fuel and jet fuel for which the purchaser certifies that he or she is entitled to either a direct refund or credit against his or her income tax for the federal excise tax paid. (See subdivision (j) for requirements for supporting claimed exclusions.)
(E) Beginning July 1, 1995, the federal excise tax imposed pursuant to Section 4081 or 4091 of the Internal Revenue Code with respect to gasoline, diesel, and jet fuels for which the purchaser certifies that he or she is entitled to either a direct refund or credit against his or her income tax for the federal excise tax paid. (See subdivision (j) for requirements for supporting claimed exclusions.)
(F) Beginning January 1, 2001, the federal excise tax imposed pursuant to Section 4081 or 4091 of the Internal Revenue Code with respect to gasoline, diesel, and jet fuels for which the purchaser provides a valid certificate pursuant to subdivision (k).
(d) Partial Exemption for Motor Vehicle Fuel. Operative July 1, 2010, section 6357.7 of the Revenue and Taxation Code provides a partial exemption from sales and use tax for the sale of, and the storage, use, or other consumption in this state of motor vehicle fuel. “Motor vehicle fuel” means gasoline and aviation gasoline and does not include jet fuel, kerosene, liquefied petroleum gas, natural gas in liquid or gaseous form, alcohol, or racing fuel, as defined in the Motor Vehicle Fuel Tax Law.
The partial exemption applies to the taxes imposed by section 6051, 6051.3, 6051.7, 6201, 6201.3, and 6201.7 of the Revenue and Taxation Code (cumulative statewide 6% sales and use tax rate), but does not apply to the taxes imposed or administered pursuant to sections 6051.2, 6051.5, 6201.2, or 6201.5 of the Revenue and Taxation Code, the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, or section 35 of article XIII of the California Constitution.
(e) Additional Tax on Sale of Diesel Fuel. 
(1) Operative July 1, 2011, an additional state sales and use tax is imposed on the sale and the storage, use, or other consumption of “diesel fuel” as defined in section 60022 of the Revenue and Taxation Code. As defined in this section, diesel fuel does not include gasoline, kerosene, liquefied petroleum gas, natural gas in liquid or gaseous form, or alcohol. 
(2) The additional state sales and use tax is imposed at the following rates: 
(A) 1.87 percent for the period July 1, 2011, through June 30, 2012; 
(B) 2.17 percent for the period July 1, 2012, through June 30, 2013; 
(C) 1.94 percent for the period July 1, 2013, through June 30, 2014; and
(D) 1.75 percent on or after July 1, 2014. 
(3) Exemptions and Exemption Certificates. 
(A) An exemption from the additional state sales and use tax is provided for diesel fuel purchased for use or used in a manner that is exempt from the taxes imposed pursuant to Part 31 (commencing with section 60001) of Division 2 of the Revenue and Taxation Code and not subject to the back up tax imposed by section 60058 or the payment requirement specified in section 60108 of the Revenue and Taxation Code. 
(B) Exempt bus operators. An exemption from the additional state sales and use tax is provided for diesel fuel subject to the payment requirement specified in section 60502.2 of the Revenue and Taxation Code. 
(C) Sellers of diesel fuel for which the purchaser claims exemption from the measure of tax under this subdivision shall secure from the purchaser and retain a certificate in substantially the form prescribed below. The certificate shall relieve the seller from liability for any tax due only if it is timely taken in good faith. A certificate will be considered timely if it is taken at any time before the seller bills the purchaser for the property, or any time within the seller's normal billing and payment cycle, or any time at or prior to delivery of property to the purchaser. The certificate will be valid until revoked in writing by the purchaser. 

Certificate for Exemption from the Additional State Sales and Use
Tax Imposed Under Sections 6051.8 and 6201.8 
This certificate may be issued by a purchaser whose fuel purchase is exempt from the diesel fuel taxes imposed under section 60050 and not subject to the backup tax imposed under section 60058 or the payment requirement specified in section 60108 of the Revenue and Taxation Code. 
This certificate may be issued by a purchaser whose fuel purchase is subject to the payment requirement specified in section 60502.2 of the Revenue and Taxation Code. 
This certificate entitles the seller to exclude the sale amount from the measure of sales subject to the additional state sales and use tax imposed on sales and purchases of diesel fuel under sections 6051.8 and 6201.8 of the Revenue and Taxation Code. 

	I HEREBY CERTIFY: That the purchase of diesel from
	 		
	 	,

	j is exempt from diesel fuel taxes (e.g., exempt train operators or exempt off-highway use). 
	
	The purchase is not subject to the additional state sales and use tax because it is exempt from the diesel fuel taxes imposed under Revenue and Taxation Code section 60050 and not subject to the backup tax imposed by section 60058 or the payment requirement specified in section 60108. 

OR

	j is purchased by an exempt bus operator. 
	
	The purchase is not subject to the additional state sales and use tax because it is subject to the payment requirement specified in Revenue and Taxation Code section 60502.2. 
	
	In the event the diesel fuel is not used in a manner which entitles me to an exemption from the additional state sales and use tax, it is understood that I am required by the Sales and Use Tax Law to report and pay the additional sales tax imposed by Revenue and Taxation Code section 6051.8 on the sales price of the diesel fuel to me, with applicable interest, as if I were a retailer making a retail sale of the diesel fuel at the time the fuel is so used. This certificate is valid until revoked in writing by the purchaser. 

	Purchaser: 				
(Company Name) 

	Address: 				
	
	Phone Number: 				
	
	Signature:	 Date:			

	       (Signature of Authorized Agent)
	
	Title: 				
		         (Owner, Partner, Purchasing Agent, etc.)
	
	License/permit # (if any): 			
		      (Exempt bus operator, train operator, fuel registration)
(f) Sales of Motor Vehicle Fuel on Sales Tax-Included Basis. Sales tax reimbursement will be deemed included in the total price per gallon of gasoline dispensed through an apparatus on which there is a price per gallon display including all taxes as required by Business and Professions Code Section 13470. Sales tax reimbursement will be deemed included in the total price per gallon of other motor vehicle fuel if the retailer posts on the premises a notice reading substantially as follows:
“The price per gallon of all motor vehicle fuel includes reimbursement for applicable sales taxes computed to the nearest mill.”
Following are examples of prices computed on a tax-included basis:

(A)	Sales price per gallon of gasoline net of all taxes		$2.435

	Federal excise tax*		.184

	State excise tax*		     .353

  Total	$2.972

	*Sales tax reimbursement computed at 2 1/4%* 
	 of $2.972		    .067

	Total tax-included price per gallon		$3.039

(B)	Sales price per gallon of diesel fuel

	 net of all taxes*		$2.355
	Federal excise tax* 		  .244
	Total		$2.599

	*Sales tax reimbursement computed at

	 9%* of $2.599		.234

	State excise tax*		     .13 

	 Total tax-included price per gallon		$2.963

----------
 *The rates used are  for purposes of this example only. The  rates  in effect  at the time of the sale and at the place where the business is located must be used in computing the tax-included selling price of fuel.
(g) Application of Sales or Use Tax to Fuel Furnished With Leased Vehicles or Aircraft. The lessor is the retailer of fuel furnished to a lessee of a vehicle or an aircraft if the sales price of the fuel is separately stated from the rental charge for the vehicle or aircraft. The lessor is also the retailer of fuel furnished to a lessee under a lease which is a “sale” or “purchase” (see Regulations 1660 and 1661) and under which the rental charge includes fuel for the operation of the vehicle or aircraft (such arrangements are sometimes called “wet rentals”). The lessor may purchase such fuel for resale.
The lessor is the consumer of fuel furnished to a lessee of a vehicle or an aircraft under a lease which is not a “sale” or “purchase” (see Regulations 1660 and 1661) and under which the rental charge includes fuel for the operation of the vehicle or aircraft. If a lessor of mobile transportation equipment elects under Regulation 1661 to report and pay use tax measured by the “fair rental value” of the mobile transportation equipment leased, the “fair rental value” does not include the sale price to the lessor of fuel which is furnished under the lease to the lessee. 
(h) Refunds of Excise Tax
(1) Federal Excise Taxes. 
The refund of the federal excise tax on gasoline, diesel, or jet fuel (either by direct refund or as a credit against income tax) is an adjustment to the sales price of the gasoline, diesel, or jet fuel. Accordingly, the retailer who paid the sales tax or the purchaser who paid use tax measured by the sales price of the gasoline, diesel, or jet fuel which included that federal excise tax may file with the Board a claim for refund of tax measured by the amount of the federal excise tax so refunded or credited. The claim must be supported by proof of the exempt use of the gasoline, diesel, or jet fuel and of the refund or credit of the federal excise tax to the purchaser.
(2) Sales or Use Tax Refunds. If the sales or use tax refund is made to a person other than the consumer, the person receiving the refund must pay it to the consumer.
(i) Supporting Data for Aircraft Fuel Exemptions. Sellers of motor vehicle fuel which, at the time of sale, is exempt from sales and use tax under subdivision (b)(1), shall secure and retain documentary evidence to support their exempt sales.
(1) The exemption with respect to motor vehicle fuel sold and delivered directly into the fuel supply tank of aircraft may be supported either by a properly completed sales invoice or an aircraft fuel exemption certificate in the form prescribed in subdivision (i)(2). If a sales invoice is used, it must show the purchaser's name and address, the aircraft identification number, the number of gallons sold, the price per gallon, the amount of sale, the date of sale, and the name and address of the seller.
(2) The exemption with respect to retail sales of motor vehicle fuel delivered into the purchaser's storage facilities or receptacles other than the fuel tanks of aircraft, for use in propelling aircraft shall be supported by an aircraft fuel exemption certificate and an invoice. An exemption certificate in substantially the following form and signed by the purchaser shall be retained by the seller as evidence to support such exempt sales. The exemption certificate will be valid until revoked in writing by the purchaser.

Exemption Certificate for Motor Vehicle Fuel for Propelling Aircraft
This certificate may be issued by a purchaser for purchases of motor vehicle fuel (other than aircraft jet fuel) for use in propelling aircraft.
I HEREBY CERTIFY: That I am the owner or operator of the aircraft identified below; that the motor vehicle fuel which I shall purchase from__________________________________________________________, will be used in propelling aircraft: and that the distribution of this fuel is subject to the tax imposed by the Motor Vehicle Fuel License Tax Law (Revenue and Taxation Code section 7301 et seq.) and not subject to refund.

	In the event that any of this motor vehicle fuel is used for purposes other than propelling aircraft, it is understood that I am required by the Sales and Use Tax Law to report and pay tax measured by the purchase price of such fuel. This certificate is valid until revoked in writing by the purchaser.

	Purchaser: 				
(Company Name) 

	Address: 				
	
	Phone Number: 				
	
	Signature:	 Date:			

		(Signature of Authorized Agent)
	
	Title: 				
		      (Owner, Partner, Purchasing Agent, etc.)
	
	Seller's Permit No. (if any): 				
Identification Numbers of Aircraft Owned or Operated

					

					
	
(j) Certificate for Exclusion of Federal Excise Taxes from Measure of Tax. Sellers of gasoline, diesel, or jet fuel for which the purchaser claims exclusion from the measure of tax under subdivision (c)(2)(D) or (c)(2)(E) shall secure from the purchaser and retain a certificate in substantially the form prescribed in subdivision (j)(1).
(1) The certificate prescribed below shall relieve the seller from liability for any tax due only if it is timely taken in good faith. A certificate will be considered timely if it is taken at any time before the seller bills the purchaser for the property, or any time within the seller's normal billing and payment cycle, or any time at or prior to delivery of property to the purchaser. The certificate will be valid until revoked in writing by the purchaser.

Certificate for the Exclusion of Sales and Use Tax on Federal Excise Taxes
This certificate may be issued by a purchaser whose entire fuel purchase is entitled to a direct refund or credit for the federal excise taxes for income tax purposes. This certificate entitles the seller to exclude the amount of federal excise taxes imposed on fuel purchases from the measure of sales and use tax.

	I HEREBY CERTIFY: That I am entitled to either a direct refund or credit against my income tax for the federal excise tax paid pursuant to Internal Revenue Code Section 4081 or 4091 for the gasoline/diesel/jet fuel I shall purchase from 		
		.

	In the event the fuel is not used in a manner which entitles me to a direct refund or credit against my income tax or if I do not receive such refund or credit, it is understood I am required by the Sales and Use Tax Law to report and pay tax measured by the amount of federal excise tax paid to the extent the seller has not remitted sales or use tax measured by that amount. This certificate is valid until revoked in writing by the purchaser.

	Purchaser: 				
(Company Name) 

	Address: 				
	
	Phone Number: 				
	
	Signature:	 Date:			

		(Signature of Authorized Agent)
	
	Title: 				
		      (Owner, Partner, Purchasing Agent, etc.)
	
	Seller's Permit No. (if any): 				
(2) Any person, including any officer or employee of a corporation who gives the certificate described in subdivision (j)(1) and who knows at the time of purchase that he or she is not entitled to either a direct refund or credit against his or her income tax is liable to the state for the amount of sales or use tax that would be due had he or she not given the certificate. In addition to the tax, interest, and other penalties, the person is liable for a penalty of 10 percent of the tax or five hundred dollars ($500), whichever is greater, for purchases made for personal gain or to evade payment of taxes.
(k) Alternate Certificate for Exclusion of Federal Excise Taxes from Measure of Tax. On and after January 1, 2001, a purchaser of gasoline, diesel, or jet fuel who is qualified under subdivision (k)(1) may issue a certificate in substantially the form set forth in subdivision (k)(3) to the seller of that fuel. A seller who takes and retains such certificate shall be relieved of liability for tax due measured by the federal excise taxes imposed pursuant to Section 4081 or 4091 of the Internal Revenue Code on the fuel sold under the certificate, provided the certificate is timely taken in good faith. A certificate will be considered timely if it is taken at any time before the seller bills the purchaser for the property, or any time within the seller's normal billing and payment cycle, or any time at or prior to delivery of property to the purchaser. The certificate will be valid until revoked in writing by the purchaser.
(1) A purchaser is qualified and may issue a certificate under subdivision (k) if satisfying all the following requirements:
(A) The purchaser was entitled to either a direct refund or credit against his or her income tax for the federal excise tax imposed pursuant to Section 4081 or 4091 of the Internal Revenue Code for more than 50 percent of all the purchaser's purchases of gasoline, diesel, and jet fuel during the prior calendar year on an aggregate basis. A purchaser who was entitled to a direct refund or credit against his or her income tax for the federal excise tax imposed pursuant to Section 4081 or 4091 of the Internal Revenue Code for more than 50 percent of that purchaser's purchases of one type of fuel, e.g., diesel, but not more than 50 percent of all that purchaser's purchases of gasoline, diesel, and jet fuel on an aggregate basis is not a qualified purchaser, and may not issue a certificate under this subdivision, for any of that purchaser's purchases of fuel.
(B) The purchaser's business remains substantially the same as during the prior calendar year whereby the purchaser reasonably expects to be entitled to either a direct refund or credit against his or her income tax for the federal excise tax imposed pursuant to Section 4081 or 4091 of the Internal Revenue Code for more than 50 percent of the purchaser's purchases of gasoline, diesel, and jet fuel on an aggregate basis.
(C) The purchaser holds a valid California seller's permit.
(2) With respect to any fuel purchased under the certificate which is used in a manner whereby the purchaser is not entitled to a direct refund or credit against his or her income tax of the federal excise tax imposed pursuant to Section 4081 or 4091 of the Internal Revenue Code, the purchaser is liable for use tax on the amount of that federal excise tax. The purchaser must report and pay such use tax with the purchaser's return for the period in which the fuel was used. A certificate may not be issued under this subdivision when the purchaser knows that all of the fuel that would be purchased under the certificate will be used in a manner whereby the purchaser is not entitled to a direct refund or credit against his or her income tax of the federal excise tax imposed pursuant to Section 4081 or 4091 of the Internal Revenue Code.
(3) A certificate issued under this subdivision shall be in substantially the following form:

Revenue and Taxation Code Section 6245.5 Certificate for the 
Exclusion of Sales and Use Tax on Federal Excise Taxes
This certificate may be issued for purchases of gasoline, diesel, or jet fuel by a purchaser who meets all the required conditions. This certificate entitles the seller to exclude the amount of federal excise taxes imposed on such fuel purchases from the measure of sales and use tax.
I HEREBY CERTIFY that I satisfy all of the following conditions:
1. I was entitled to either a direct refund or credit against my income tax for the federal excise tax imposed pursuant to Section 4081 or 4091 of the Internal Revenue Code for more than 50 percent of my purchases of gasoline, diesel, and jet fuel on an aggregate basis during the prior calendar year.
2. My business remains substantially the same as during the prior calendar year such that I reasonably expect to be entitled to either a direct refund or credit against my income tax for the federal excise tax imposed pursuant to Section 4081 or 4091 of the Internal Revenue Code for more than 50 percent of my purchases of gasoline, diesel, or jet fuel on an aggregate basis.
3. I hold a valid California seller's permit, the number for which is set forth below.

	With respect to any fuel that is not used in a manner which entitles me to a direct refund or credit against my income tax of the federal excise tax imposed pursuant to Section 4081 or 4091 of the Internal Revenue Code, or if I do not receive such refund or credit, I will report and pay tax, measured by the amount of the federal excise tax that had been paid in connection with that fuel, with my return for the period on which the fuel is used. This certificate is valid until revoked in writing by the purchaser.

	Purchaser: 				
(Company Name) 

	Address: 				
	
	Signature:	 Date:			

		(Signature of Authorized Agent)

	Phone Number: 				

	Title: 				
		      (Owner, Partner, Purchasing Agent, etc.)
	
	Seller's Permit No. (if any): 				
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6011, 6012, 6051.8, 6201.8, 6245.5, 6357, 6357.3, 6357.5, 6357.7 and 6423, Revenue and Taxation Code.
HISTORY

1. Amendment of subsections (b), (c)(2)(A) and (d)(1) filed 12-2-75; designated effective 1-1-76 (Register 75, No. 49). For prior history, see Register 73, No. 20.
2. Amendment of subsections (d)(1) and (g) filed 6-25-76; effective thirtieth day thereafter (Register 76, No. 26).
3. Amendment of subsections (d) and (f)(1) filed 12-29-78; effective thirtieth day thereafter (Register 78, No. 52).
4. Amendment filed 12-22-80 as an emergency; effective upon filing (Register 80, No. 52). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 4-21-81.
5. Order of Repeal of 12-22-80 order filed 12-26-80 by OAL pursuant to Government Code section 11349.6 (Register 80, No. 52).
6. Amendment filed 7-20-81; effective thirtieth day thereafter (Register 81, No. 30).
7. Amendment of subsections (d) and (e) and repealer of subsection (i) filed 11-8-82; effective thirtieth day thereafter (Register 82, No. 45).
8. Amendment filed 10-14-83; effective thirtieth day thereafter (Register 83, No. 42).
9. Editorial correction of subsection (c)(2)(B)1. filed 4-24-84 (Register 84, No. 17).
10. Amendment filed 5-1-85; effective thirtieth day thereafter (Register 85, No. 18).
11. Amendment filed 6-7-90; operative 7-7-90 (Register 90, No. 30).
12. Editorial correction of printing error in subsections (d), (g) and (h) (Register 91, No. 45).
13. Amendment of subsections (b) and (d) filed 8-29-91 as an emergency; operative 8-29-91 (Register 92, No. 1). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 12-27-91.
14. Certificate of Compliance as to 8-29-91 order, including editorial correction of subsection (d),  transmitted to OAL 12-12-91 and filed 1-3-92 (Register 92, No. 12). 
15. Amendment of subsections (b)(1)-(2) and (d)-(f)(1)(B) filed 9-13-93; operative 10-13-93 (Register 93, No. 38).
16. Editorial correction of subsection (e) (Register 95, No. 48).
17. Amendment filed 2-27-96; operative 3-28-96 (Register 96, No. 9).
18. Change without regulatory effect amending subsections (c)(A) and (c)(2)(D), adding subsection (c)(2)(E), and amending subsection (h) filed 7-24-96 pursuant to section 100, title 1, California Code of Regulations (Register 96, No. 30).
19. Amendment of section and Note filed 11-1-2001; operative 12-1-2001 (Register 2001, No. 44).
20. Change without regulatory effect amending subsection (b)(1), adding new subsection (d), relettering subsections and amending newly designated subsections (e)(A)-(B), (h)(1), (i), (i)(2), (j) and (j)(1) and Note filed 8-26-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 35).
21. Amendment of subsections (b)(1) and (c)(2)(D)-(F), new subsections (e)-(e)(3)(C), subsection relettering and amendment of newly designated subsections (f)(B), (i)(1), (j), (j)(2)-(k)(1) and (k)(3) and amendment of Note filed 9-26-2011; operative 10-26-2011 (Register 2011, No. 39).
§1598.1. Diesel Fuel Prepayment Exemption.
Note     •     History

(a) Definitions.
(1) “Bulk deliveries” mean transfers of diesel fuel into storage tanks holding 500 gallons or more.
(2) “Cardlock, keylock, or other unattended mechanism” means an unattended, completely automated fueling station at which a purchaser obtains diesel fuel through use of a coded card or key and an access code. Charges for sales of diesel fuel to customers are usually consolidated at a central location and periodically invoiced to the purchaser.
(3) A “diesel fuel consumer” or “diesel fuel consumers” mean a person or persons that use diesel fuel in a manner that qualifies for the partial sales and use tax exemption set forth in Revenue and Taxation Code section 6357.1 and Regulation 1533.2, Diesel Fuel Used in Farming Activities or Food Processing.
(4) “Diesel fuel,” for purposes of the imposition of the prepayment of sales tax, is defined in Revenue and Taxation Code section 6480(c) (by reference to Revenue and Taxation Code section 60022) and means any liquid that is commonly or commercially known or sold as a fuel that is suitable for use in a diesel-powered highway vehicle. A liquid meets this requirement if, without further processing or blending, the liquid has practical and commercial fitness for use in the engine of a diesel-powered highway vehicle. However, a liquid does not possess this practical and commercial fitness solely by reason of its possible or rare use as a fuel in the engine of a diesel-powered highway vehicle.
Diesel fuel does not include gasoline, kerosene, liquefied petroleum gas, natural gas in liquid or gaseous form, or alcohol.
Diesel fuel does not include the water in a diesel fuel and water emulsion of two immiscible liquids of diesel fuel and water, which emulsion contains an additive that causes the water droplets to remain suspended within the diesel fuel, provided the diesel fuel emulsion meets standards set by the California Air Resources Board.
(5) “Qualified retailer” means a person who meets the requirements of subdivisions (b)(1) through (b)(5).
(6) “Seller” means either the supplier or the wholesaler, as those terms are defined in Revenue and Taxation Code section 6480(c), that sells diesel fuel to a qualified retailer.
(7) “Total taxable sales” means the gross receipts from the sale of tangible personal property subject to tax, including sales of diesel fuel.
(b) Application of Tax. Commencing on and after October 9, 2002, a seller of diesel fuel is not required to collect the prepayment of sales tax on that percentage of diesel fuel specified in the retailer's diesel fuel prepayment exemption certificate that is otherwise required by Revenue and Taxation Code section 6480.1, provided the diesel fuel is sold to a retailer who:
(1) Will resell the diesel fuel in the ordinary course of business,
(2) Issues a diesel fuel prepayment exemption certificate to the seller as set forth in subdivision (c),
(3) Sells diesel fuel to a diesel fuel consumer,
(4) During the calendar year immediately preceding any purchases of diesel fuel, sold diesel fuel to diesel fuel consumers in which the gross receipts from such sales exceeded 25 percent of that retailer's total taxable sales, and
(5) Sold more than 50% of its diesel fuel through bulk deliveries or through a cardlock, keylock, or other unattended mechanism, or both.
For purposes of calculating the percentages set forth in subdivision (b)(4) above, the numerator shall be the sum total of amounts entered on Form BOE 401GS line 10(e)(4) (Amount Subject to the Diesel Fuel Used in Farming and Food Processing Exemption) for each return filed during the preceding calendar year and the denominator shall be the sum total of amounts entered on line 14(a) (Transactions Subject to County Tax) for each return filed during the preceding calendar year.
(c) Prepayment Exemption Certificate.
(1) In General. A seller of diesel fuel who takes a diesel fuel prepayment exemption certificate timely and in good faith, as defined in subdivision (c)(5), from a qualified retailer, is relieved from the liability for the sales tax prepayment subject to the exemption under this regulation, or the duty of collecting the sales tax prepayment subject to exemption under this regulation. A diesel fuel prepayment exemption certificate will be considered timely if it is taken any time before the seller bills the qualified retailer for the diesel fuel, any time within the seller's normal billing or payment cycle, or any time at or prior to delivery of the diesel fuel to the qualified retailer. A diesel fuel prepayment exemption certificate which is not taken timely will not relieve the seller of the liability for the sales tax prepayment excluded by the exemption; however, the seller may present satisfactory evidence to the Board that the seller sold the diesel fuel to a qualified retailer. A diesel fuel prepayment exemption under this part shall not be allowed unless the seller claims the exemption on its sales and use tax return for the reporting period during which the transaction subject to the diesel fuel prepayment exemption occurred. The diesel fuel prepayment exemption certificate form set forth in the Appendix may be used to claim the diesel fuel prepayment exemption.
(2) Blanket Prepayment Exemption Certificate. In lieu of requiring a diesel fuel prepayment exemption certificate for each transaction, a qualified retailer may issue a blanket diesel fuel prepayment exemption certificate. The diesel fuel prepayment exemption certificate form set forth in the Appendix may be used as a blanket diesel fuel prepayment exemption certificate. The diesel fuel prepayment exemption certificate in the Appendix may also be used as a specific diesel fuel prepayment exemption certificate if the qualified retailer provides the purchase order or sales invoice number and a precise description of the property being purchased. A blanket diesel fuel prepayment exemption certificate is only valid during the calendar year in which it is provided to the seller.
(3) Form of Prepayment Exemption Certificate. Any document, such as a letter or purchase order, timely provided by the qualified retailer to the seller will be regarded as a diesel fuel prepayment exemption certificate with respect to the sale of diesel fuel if it contains all of the following essential elements:
(A) The signature of the qualified retailer, qualified retailer's employee, or authorized representative of the qualified retailer.
(B) The name, address and telephone number of the qualified retailer.
(C) The number of the seller's permit held by the qualified retailer.
(D) A statement setting forth the requirements of subdivisions (b)(1) through (b)(5).
(E) A statement of what percentage of total diesel fuel purchases will be resold to diesel fuel consumers.
(F) Date of execution of document.
(4) Retention and Availability of Prepayment Exemption Certificates. A seller must retain each diesel fuel prepayment exemption certificate received from a qualified retailer who purchases diesel fuel for resale to diesel fuel consumers for a period of not less than four years from the date on which the qualified retailer claims an exemption for sales tax prepayment based on the diesel fuel prepayment exemption certificate. The Board may require, within 45 days of the Board's request, sellers to provide the Board access to any and all diesel fuel prepayment exemption certificates, or copies thereof, accepted for the purposes of supporting the diesel fuel prepayment exemption.
(5) Good Faith. A seller will be presumed to have taken a diesel fuel prepayment exemption certificate in good faith in the absence of evidence to the contrary. However, a diesel fuel prepayment exemption certificate cannot be accepted in good faith where the seller has knowledge that the diesel fuel will not be sold to a retailer who meets the requirements  of subdivisions (b)(1) through (b)(5), will not otherwise be used by diesel fuel consumers, or that the percentage listed on the exemption certificate for sales tax prepayment is inaccurate. A blanket diesel fuel prepayment exemption certificate utilized for sales occurring in a subsequent calendar year in which the blanket diesel fuel prepayment exemption certificate was initially provided to the seller is not accepted in good faith for sales occurring in that subsequent calendar year.
(d) Retailer's Liability for the Payment of Tax.
(1) A qualified retailer providing a diesel fuel prepayment exemption certificate pursuant to subdivision (c) is liable for the taxes imposed by the Bradley-Burns Uniform Local Sales and Use Tax Law, the Transactions and Use Tax Law, and the tax that is imposed under Revenue and Taxation Code section 6051.2 or 6201.2, or under section 35 of article XIII of the California Constitution on the sale of diesel fuel to diesel fuel consumers.
(2) A qualified retailer providing a diesel fuel prepayment exemption certificate pursuant to subdivision (c) is liable for sales tax on any portion of the gross receipts derived from the sale of diesel fuel that is not sold to diesel fuel consumers.
(3) A qualified retailer that is liable for the tax under the provisions of subdivisions (d)(1) or (d)(2) shall report and pay that tax with the sales and use tax return filed for the reporting period during which the qualified retailer sells the diesel fuel.
(e) Improper Use of Prepayment Exemption Certificate. Any person who gives a diesel fuel prepayment exemption certificate pursuant to this regulation for the purpose of evading the prepayment of sales tax on sales of diesel fuel that he or she knows at the time of sale do not qualify for the diesel fuel prepayment exemption is guilty of a misdemeanor punishable as provided in Revenue and Taxation Code section 7153. In addition, such person shall be liable to the state for a penalty of one thousand dollars ($1,000) for each diesel fuel prepayment exemption certificate issued for personal gain or to evade the prepayment of sales tax.
(f) Records. Adequate and complete records must be maintained by the seller and qualified retailer as evidence that the diesel fuel qualifies for the diesel fuel prepayment exemption.
(g) Operative Date. This regulation is operative as of October 9, 2002.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6357.1, 6480, 6480.1 and 6480.3, Revenue and Taxation Code.
HISTORY

1. New section filed 12-22-2003; operative 10-9-2002 pursuant to Revenue and Taxation Code section 7051 (Register 2003, No. 52).
§1598.5. Organic Fuels and Waste Byproducts Used for Fuel Purposes. [Repealed]
Note     •     History

NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6358.1, Revenue and Taxation Code.
HISTORY

1. New section filed 12-22-80 as an emergency; effective upon filing (Register 80, No. 52). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 4-21-81.
2. Order of Repeal of 12-22-80 order filed 12-26-80 by OAL pursuant to Government Code Section 11349.6 (Register 80, No. 52).
§1599. Coins and Bullion.
Note     •     History

(a) General.
(1) Sales of Coins. The transfer of coins for use solely as a medium of exchange, i.e., as legal tender, is not subject to tax even though the transferee pays an amount exceeding the face amount. For example, tax does not apply to a transaction whereby a coin changer returns only 95 cents on a dollar. On the other hand, tax does apply to sales of coins as collector's items or as an investment, except as otherwise specified in this regulation.
(2) Sales of Gold or Silver Bullion. Tax applies to sales of gold or silver bullion except as provided in subdivision (a)(3) below.
(3) Sales in Bulk of Monetized Bullion, Nonmonetized Gold or Silver Bullion, and Numismatic Coins. Sales in bulk of “monetized bullion,” nonmonetized gold or silver bullion, and numismatic coins which sales are substantially equivalent to transactions in securities or commodities through a national securities or commodities exchange, are exempt from both the sales tax and the use tax. The exemption for sales in bulk of non-- monetized gold or silver bullion and numismatic coins is effective with respect to sales occurring on and after January 1, 1986.
“Monetized bullion” means coins or other forms of money manufactured of gold, silver, or other metal and heretofore, now, or hereafter used as a medium of exchange under the laws of this state, the United States, or any foreign nation. The medium of exchange must have had a legal status equivalent to legal tender.
Effective September 28, 1983, “monetized bullion” includes gold medallions struck under authority of the American Arts Gold Medallion Act (Title IV of Public Law 95-630).
Nonmonetized bullion means gold or silver which has been smelted or refined and has a value dependent primarily upon its gold or silver content and not upon its form.
Neither the sales tax nor the use tax applies to sales of “monetized bullion,” nonmonetized gold or silver bullion, and numismatic coins provided the following conditions are met:
(A) The sale is in bulk amount. For sales occurring on or before December 31, 2008, a sale in bulk occurs if the total market value of the monetized bullion, nonmonetized gold or silver bullion, and numismatic coins sold in a single transaction is $1,000 or more. For sales occurring on or after January 1, 2009, a sale in bulk occurs if the total market value of the monetized bullion, nonmonetized gold or silver bullion, and numismatic coins sold in a single transaction is $1,500 or more, or is equal to or exceeds the adjusted amount as computed by Revenue and Taxation Code Section 6355. For purposes of this regulation, market value means sales price as defined in Section 6011 of the Sales and Use Tax Law.
(B) The sale is by or through a person registered pursuant to the Commodity Exchange Act (7 U.S.C. Sec. 1 et seq.) or not required to be registered under the Commodity Exchange Act.
(4) Sales of Commemorative “California Gold” Medallions. Effective September 27, 1985, tax does not apply to the sale of or the storage, use, or other consumption in this state of commemorative “California Gold” medallions produced and sold in accordance with Chapter 25 (commencing with Section 7551) of Division 7 of Title 1 of the Government Code.
(b) Application of Tax to Specific Types of Transactions.
(1) Options to Buy. “Options to buy” are contracts in which the seller agrees to sell specified property, usually at a predetermined price, while the buyer obtains the right but not the duty to purchase the property. Accordingly, the “buyer” has the option to purchase the property but may decide not to purchase without breaching the contract. A sale happens if the buyer exercises his or her option to purchase the property and tax applies at the time the option is exercised unless the sale is otherwise exempt. On the other hand, if the option is not exercised, no sale happens and no tax applies.
(2) Options to Sell. “Options to sell” are contracts in which the buyer agrees to buy specified property, usually at a predetermined price, while the seller obtains the right but not the duty to sell the property. A sale happens if the option is exercised and tax applies unless otherwise exempt.
(3) Future Sales and Purchases. A contract to sell and buy goods in the future obligates the seller to sell and the buyer to buy goods at a particular time in the future. The price of the goods is usually set at the time of contracting, but neither the title nor possession of the goods is then transferred. If the title (or the possession in lieu of title) is later transferred, the sale happens, and tax applies unless the sale is otherwise exempt. However, the seller and the buyer or their assignees may agree to cancel the contract before performance. If they do so, no sale happens and no tax applies. “Future” sales do not include present sales of tangible personal property for future delivery.
(4) Present Sales for Future Delivery. A present sale for future delivery is a contract in which the title is intended to pass from seller to buyer at the time the contract is entered but the seller is not obligated to deliver possession of the goods until some future date. The sale happens when title passes and tax applies unless the sale is otherwise exempt.
(5) Credit Transactions. When a consumer makes a down payment and enters a contract for the purchase of coins, the parties may regard it as a credit transaction. But the sale may or may not happen at the time the “credit” is extended.
In some instances, the buyer receives a loan of the balance of the purchase price, and the title to the coins is transferred to the buyer. But the creditor, who may be the buyer's broker or the seller, retains possession of the property owned by the buyer as collateral for the loan to him or her. The buyer's creditor has the power to sell the buyer's property and pay off the loan if the market price of the property falls and approaches the amount of the loan. Often the broker or seller has power to repledge the property to his or her creditor to secure a loan to him or her. In any event a sale of tangible personal property to the consumer happens and tax applies unless otherwise exempt. These transactions are usually referred to as “margin” or “margined” purchases.
In other instances, the contract conditions the passage of title to the goods to the buyer on his or her payment of the full purchase price (conditional sales contract). The seller does not deliver possession of the goods until the payment of the full purchase price. Under this arrangement neither title nor possession in lieu of title can pass until full payment, and so a sale cannot happen until then. The seller and the buyer can agree to cancel the contract before title passes to the buyer and so no sale may ever happen under the contract. But if the title does pass after full payment, the sale happens and tax applies unless otherwise exempt. Because the seller may hold goods for the buyer, and the market price of the goods may fluctuate, the seller may regard the contract as an extension of credit to the buyer or may refer to the transaction as a “margin” or “margined” purchase.
Other “credit” arrangements are possible. Each transaction must be examined to determine if or when a sale or purchase happened.
(6) Fees. “Fees” charged by a seller for services in connection with the sale of coins, silver and gold bullion, or other precious metals are a part of the sales price of the property with the exception of insurance, interest, finance and carrying charges as provided in Regulation 1641 (18 CCR 1641) with respect to credit sales.
(7) Interstate Sales. The same rules with respect to interstate sales that are applicable to sales and purchases of other tangible personal property also apply to sales of coins, silver and gold bullion, and other precious metals.
(c) Purchase of Coins and Bullion as Investment. Purchases of coins and bullion as investments are purchases at retail. It is immaterial that a gain, benefit, or advantage may not be realized until the resale of the coins and bullion. A resale certificate may not be issued for purchases for this purpose.
A person purporting to hold coins or bullion solely for resale in the regular course of business must be able to prove that they actively engage in business as a seller of coins and bullion. The following are some examples of relevant evidence:
(1) The number, scope, and character of the person's purchases and sales of coins or bullion.
(2) Evidence of the person's continuing efforts to advertise and sell coins or bullion.
(3) Evidence that the person held out to the public that they were engaged in business as a seller of coins or bullion at an identified place of business.
(4) The manner in which income from transactions in coins or bullion was reported by that person for income tax purposes.
(5) Whether a local business license was issued to that person to engage in sales of coins or bullion.
Sellers' permits may be held only by persons actively engaging in the business of selling tangible personal property.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6007, 6008, 6009, 6011, 6354 and 6355, Revenue and Taxation Code.
HISTORY

1. New section filed 4-29-75; effective thirtieth day thereafter (Register 75, No. 18).
2. Amendment of subsection (a)(4)(A) filed 8-8-78; effective thirtieth day thereafter (Register 78, No. 32).
3. Amendment filed 3-3-80 as an emergency; effective upon filing (Register 80, No. 10). A Certificate of Compliance must be filed within 120 days or emergency language will be repealed on 7-2-80.
4. Certificate of Compliance filed 6-17-80 (Register 80, No. 25).
5. Amendment of subsection (a) filed 7-20-81; effective thirtieth day thereafter (Register 81, No. 30).
6. Amendment of subsection (a) filed 7-26-84; effective thirtieth day thereafter (Register 84, No. 30).
7. Amendment of subsection (a) filed 6-5-86; effective thirtieth day thereafter (Register 86, No. 23).
8. Amendment of subsection (a) (4) filed 5-9-88; operative 6-8-88 (Register 88, No. 20).
9. Change without regulatory effect amending subsections (a)(3)(A), (b)(1), (5) and (6), (c) and (c)(3) filed 11-16-94 pursuant to section 100, title 1, California Code of Regulations (Register 94, No. 46).
10. Change without regulatory effect amending subsection (a)(3)(A) filed 9-24-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 39).
Article 8. Food Products and Meals
§1602. Food Products.
Note     •     History

(a) In General. Tax does not apply to sales of food products for human consumption except as provided in Regulations 1503, 1574, and 1603. (Grocers, in particular, should note that tax applies to sales of “hot prepared food products” as provided in Regulation 1603(e).)
(1) “Food products” include cereal and cereal products, including malt and malt extracts, milk and milk products, including ice cream, ice milk and ice cream and ice milk novelties, sherbets, imitation ice cream and imitation ice milk, dried milk products, sugar of milk, milk shakes, malted milks, and any other similar type beverages composed at least in part of milk or a milk product and requiring the use of milk or a milk product in their preparation, oleomargarine, meat and meat products, fish and fish products, eggs and egg products, vegetables and vegetable products, including dehydrated vegetables, fruit and fruit products, spices and salt, coffee and coffee substitutes, tea, cocoa and cocoa products, sugar and sugar products, baby foods, bakery products, marshmallows, baking powder, baking soda, cream of tartar, coconut, flavoring extracts, flour, gelatine, jelly powders, mustard, nuts, peanut butter, sauces, soups, syrups (for use as an ingredient of, or upon, food products as defined herein), yeast cakes, olive oil, bouillon cubes, meat extracts, popcorn, honey, jams, jellies, certo, mayonnaise, and flavored ice products, including popsicles and snow cones. “Food products” include candy, confectionery, and chewing gum.
(2) “Food products” include all fruit juices, vegetable juices, and other beverages, whether liquid or frozen, including all beverages composed in part of fruit or vegetable juice and concentrates, powders, or other bases for such beverages, and noncarbonated and noneffervescent bottled water [intended for human consumption regardless of the method of delivery]. “Food products” does not include carbonated or effervescent bottled waters, spirituous, malt or vinous liquors, or carbonated beverages.
Sales of purified drinking water through vending machines or outlets in retail stores where the water enters the machine or outlet through local supply lines and is dispensed into the customer's own containers are exempt under Revenue and Taxation Code section 6353.
Tax does not apply to sales of water in bulk quantities of 50 gallons or more to an individual for use in a residence when that residence is not serviced by lines, mains or pipes.
(3) “Food products” do not include medicines, cough drops, mineral oils, cigarettes, cigars, tobacco, coloring extract, ice, and dog, cat, bird and other animal foods.
(4) “Food products” do not include any product for human consumption in liquid, powdered, granular, tablet, capsule, lozenge, or pill form (A) which is described on its package or label as a food supplement, food adjunct, dietary supplement, or dietary adjunct, and to any such product (B) which is prescribed or designed to remedy specific dietary deficiencies or to increase or decrease generally one or more of the following areas of human nutrition:
1. Vitamins
2. Proteins
3. Minerals
4. Caloric intake
In determining whether a product falls within category (B), it is important whether the manufacturer has specially mixed or compounded ingredients for the purpose of providing a high nutritional source. For example, protein supplements and vitamin pills are taxable as food supplements.
Other items, such as cod liver oil, halibut liver oil, and wheat germ oil, are considered dietary supplements and thus subject to tax even though not specially compounded. 
However, unusual foods such as brewer's yeast, wheat germ and seaweed are not subject to tax except when their label states they are a food supplement or the equivalent. Finally, the compounding of nutritional elements in items traditionally accepted as food does not make them taxable, e.g., vitamin-enriched milk and high protein flour.
Tax, however, does not apply to any such products which either are exempted by Revenue and Taxation Code Section 6369, respecting prescription medicines, or are complete dietary foods providing the user in the recommended daily dosage with substantial amounts of vitamins, proteins, minerals and foods providing adequate caloric intake. The latter is a food if it provides the user with the following daily minimums:
1. 70 grams of high quality protein
2. 900 calories
3. Minimum daily requirements as established by the regulations of the Federal Food and Drug Administration of the following vitamins: A, B1, C, D, Riboflavin, and Niacin or Niacinamide; and the following minerals: Calcium, Phosphorus, Iron and Iodine.
When supplement or adjunct products that do not meet the definition of food under this subdivision are furnished by a physician to his or her own patient as part of a medically supervised weight loss program to treat obesity, such products are regarded as “medicine.” The sale and use of such products are exempt from tax pursuant to subdivision (e)(7) of Regulation 1591 which interprets and explains Revenue and Taxation Code section 6369.
(b) Sales of Combination Packages. When a package contains both food products (e.g., dried fruit) and nonfood products (e.g., wine or toys) the application of tax depends upon the essential character of the complete package. If more than 10 percent of the retail value of the complete package, exclusive of the container, represents the value of the nonfood products, a segregation must be made if the retailer has documentation that would establish the cost of the individual component parts of the package, with the tax measured by the retail selling price of such nonfood products.
When the retailer does not have documentation that would establish the cost of the individual component parts of the package, and the package consists of nonfood products whose retail selling price would exceed 10 percent of the retail selling price for the entire package, exclusive of the container, the tax may be measured by the retail selling price of the entire package.
If the retail value of the nonfood products is 10 percent or less, exclusive of the container, and the retail value of the container is 50 percent or less of the retail value of the entire package, the selling price of the entire package is not subject to tax.
(c) Sales of Non-Edible Decorations. When the sale of a cake or other bakery good for a single price includes non-edible decorations, the application of tax depends upon the value of the non-edible merchandise versus the value of the cake or bakery good. If more than 50 percent of the total retail value of the cake or bakery good represents the value of non-edible decorations, a segregation must be made and the tax measured by the retail selling price of such non-edible decorations. If the price of the non-edible decoration is separately stated, then tax applies to such charge.
(d) Food Products Processed by the Consumer. A commodity included in the term “food products” under Revenue and Taxation Code Section 6359 may be sold to a consumer to be processed and incorporated into a product which is for human consumption but which is excluded from the term “food products.” For example, grapes may be sold to be used in making wine for consumption and not for resale. If the commodity sold to the consumer is included in the term “food products” and if the product into which it is incorporated is for human consumption, the sale of the commodity is within the exemption provided by this section.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6091, 6353 and 6359, Revenue and Taxation Code; and Article XIII, Section 34, California Constitution.
HISTORY

1. Repealer of subsection (e) filed 5-24-73; effective thirtieth day thereafter (Register 73, No. 21). For prior history, see Register 72, No. 9.
2. Amendment filed 9-27-73; effective thirtieth day thereafter (Register 73, No. 39).
3. Amendment of subsection (a) filed 10-2-81; effective thirtieth day thereafter (Register 81, No. 40).
4. Amendment of subsection (a)(2) filed 5-1-85; effective thirtieth day thereafter (Register 85, No. 18).
5. Amendment of subsections (a) and (b) and Note filed 8-30-91 as an emergency; operative 8-30-91 (Register 92, No. 1). A Certificate of Compliance must be transmitted to OAL by 12-30-91 or emergency language will be repealed by operation of law on the following day.
6. Certificate of Compliance including amendments as to 8-30-91 order transmitted to OAL 12-20-91 and filed 1-21-92 (Register 92, No. 13). 
7. Change without regulatory effect amending subsections (a)-(a)(4), repealer of subsection (a)(4)(C) and subsection redesignation, and amendment of subsections (a)(4)(E), (b) and Note filed 9-29-94 pursuant to section 100, title 1, California Code of Regulations (Register 94, No. 39).
8. New subsection (c) and subsection relettering filed 5-13-99; operative 6-12-99 (Register 99, No. 20).
9. Amendment of section and Note filed 3-8-2007; operative 4-7-2007 (Register 2007, No. 10).
10. Amendment of subsection (a)(4) filed 11-14-2008; operative 12-14-2008 (Register 2008, No. 46).
§1602.5. Reporting Methods for Grocers.
Note     •     History

(a) Food Products Exemption--In General. Tax does not apply to sales of food products for human consumption. Accurate and complete records of all purchases and sales of tangible personal property must be kept to verify all exemptions claimed as sales of exempt food products.
In preparing returns, grocers may use any method of determining the amount of their sales of exempt food products which does not result in an overstatement of the exemption. Grocers must be prepared to demonstrate by records which can be verified by audit that the method used properly reflects their sales of exempt food products.
(b) Reporting Methods.
(1) Purchase-Ratio Method. One method which may be used is the purchase-ratio method sometimes referred to as the “grocer's formula.” Under this method, grocers may claim as sales of exempt food products that proportion of their total gross receipts from the sale of “grocery items” that the amount of their purchases of exempt food products bears to their total purchases of grocery items.
If the grocer elects to use the purchase-ratio method of reporting, the following criteria should be followed:
(A) The purchase-ratio method may be used only by grocers and only with respect to sales of “grocery items.”
(B) Grocers selling clothes, furniture, hardware, farm implements, distilled spirits, drug sundries, cosmetics, body deodorants, sporting goods, auto parts, cameras, electrical supplies, appliances, books, pottery, dishes, film, flower and garden seeds, nursery stock, fertilizers, flowers, fuel and lubricants, glassware, stationery supplies, pet supplies (other than pet food), school supplies, silverware, sun glasses, toys and other similar property should not include the purchases and sales of such items in the purchase-ratio method. These items are referred to as “nongrocery taxable” items.
When the purchase-ratio method is used for reporting purposes and sales of nongrocery taxable items are computed by the retail extension or markup method, the computation of nongrocery taxable sales should include adjustments for beginning and ending inventories of these items and may include adjustments for shrinkage as specified in (d) below.
(C) Grocers selling gasoline, feed for farm animals, farm fertilizers or who operate a snack bar or restaurant, or sell hot prepared food should not include the purchases and sales of such items or operations in the purchase-ratio method.
(D) The purchases and sales of meat, fruit, produce, delicatessen (except hot prepared food or food sold for immediate consumption at facilities provided by the grocer), beverage (except distilled spirits in the liquor department) and bakery departments must be included in the purchase-ratio method if these departments are operated by the grocer.
(E) The records should be complete and adequate and all sales and purchases should be properly accounted for in the records. All purchases of exempt food products, grocery taxable items and nongrocery taxable items should be segregated into their respective classifications.
(F) The following definitions apply to the purchase-ratio method:
1. “Exempt food products” means those items generally described as food products in Section 6359 and Regulation 1602. If grocers are uncertain as to the classification of any product, they should contact the nearest board office.
2. “Total gross receipts from the sale of grocery items” means the total amount of the sales price of all exempt food products and taxable grocery items, including sales tax reimbursement, amounts receivable from manufacturers, or others, for coupons (excluding any handling allowances) redeemed by customers, and the face value of federal food stamps. The term does not include receipts from sales of those items described in (b)(1)(B), above, which are commonly referred to as “nongrocery taxable items,” or from those sales described in (b)(1)(C), above (gasoline, snack bar, etc.). It does not include amounts which represent “deposits,” as defined in Regulation 1589, e.g., bottle deposits. When deposits are not segregated, it will be presumed, and in the absence of evidence to the contrary, that the total deposits received are equal to the deposits refunded.
3. “Grocery items” means exempt food products and taxable items other than those generally classified under (b)(1)(B) and (b)(1)(C), above.
4. “Purchases” means the actual amount which a grocer is required to pay to the suppliers of merchandise, net of any cash discounts, volume rebates or quantity discounts and promotional allowances. The term does not include the cost of transportation, processing, manufacturing, warehousing, and other costs, if these operations are self-performed. It does not include the cost of operating supplies such as wrapping materials, paper bags, string, or similar items. It does not include amounts which represent “deposits,” as defined in Regulation 1589, e.g., bottle deposits (see (b)(1)(F)2., above). If deposits are not segregated, it will be presumed, in the absence of evidence to the contrary, that the amount deposited with the supplier is equal to the credit received for bottles returned by the grocer.
A. As used herein, the term “cash discount” means a reduction from the invoice price which is allowed the grocer for prompt payment.
B. As used herein, the term “volume rebate or quantity discount” means an allowance or reduction of the price for volume purchases based on the number of units purchased or sold. Such rebates or discounts normally are obtained without any specific contractual obligation upon the part of the grocer to advertise or otherwise promote sales of the products purchased. The term does not include patronage dividends distributed to members by nonprofit cooperatives pursuant to Section 12805 of the Corporations Code, or rebates which constitute a distribution of profits to members or stockholders.
C. As used herein, the term “promotional allowance” means an allowance in the nature of a reduction of the price to the grocer, based on the number of units sold or purchased during a promotional period. The allowance is directly related to units sold or purchased although some additional promotional expense may be incurred by the grocer. Normally, grocers would feature the product in their advertising, although they may or may not be contractually obligated to do so. The retail price of the product may or may not be lowered during a promotional period.
The term does not include display or other merchandising plan allowances or payments which are based on agreements to provide shelf space for a price not related to volume of purchases, or cooperative advertising allowances which are based on a national line rate for advertising and are not directly related to volume of purchases and sales. Cooperative advertising allowances are intended to reimburse grocers for a portion of their advertising costs for a particular product or products.
(G) Sales tax reimbursement collected in accordance with Regulation 1700 which is included in total sales is an allowable deduction. An example of the computation of the purchase-ratio method which provides for an adjustment for sales tax included follows:--

1. Taxable grocery purchases	 $40,000 
2. Add sales tax adjustment (8.25%* x Item 1)	 3,300 
3. Adjusted taxable grocery purchases 
   (Item 1 + Item 2)	 43,300 
4. Exempt food products purchases	 130,000 
5. Total grocery purchases including sales tax 
   (Item 3 + Item 4)	 173,300 
6. Exempt food products ratio 
   (Item 4 divided by Item 5)	 75.01%
7. Total sales including sales tax	 254,088 
8. Nongrocery taxable sales including sales tax 
   (if such sales are not accurately segregated, 
   mark up nongrocery taxable cost of goods sold to 
   compute sales--add 8.25%* sales tax to total)**	 31,500 
9. Grocery sales including sales tax (Item 7 - Item 8)	222,588   
10. Exempt food products sales (Item 6 x Item 9)	 166,963 
11. Sales of taxable items including sales tax 
   (Item 7 - Item 10)	 87,125 
  e.g., 2% x $100,000)	 2,000 
13. Taxable Measure including sales tax 
   (Item 11 - Item 12)	 85,125 
14. Sales tax included (8.25/108.25* x Item 13)	 6,488 
15. Measure of tax (Item 13 - Item 14)	 78,637 
16. Sales tax payable (8.25%* x Item 15)	 6,488 
(2) Modified Purchase-Ratio Method. Any grocer who does not follow the procedure outlined in (b)(1), above, but reports on a purchase-ratio basis of some type is using a modified version of the purchase-ratio method. For example, grocers who include self-performed processing, manufacturing, warehousing or transportation costs in the purchase-ratio formula are using a modified version. Grocers using such a modified version must establish that their modified version does not result in an overstatement of their food products exemption. They may demonstrate the adequacy of their modified method by extending taxable purchases, adjusted for inventories, to retail for a representative period or computing taxable sales by marking up taxable purchases, adjusted for inventories, for a representative period. Grocers must retain adequate records which may be verified by audit, documenting the modified purchase-ratio method used. 
(3) Retail Inventory Method and Markup Method. Grocers who engage in manufacturing, processing, warehousing or transporting their own products may prefer to use a retail or markup method of reporting. These methods are described below:
(A) Retail Inventory Method.
1. The opening inventory is extended to retail and segregated as to exempt food products and taxable merchandise.
2. As invoices for merchandise are received, they are extended to retail and segregated as to exempt food products and taxable merchandise.
3. The ending inventory at retail is segregated as to exempt food products and taxable merchandise.
4. The total of segregated amounts determined in 1 and 2 less 3 represent anticipated exempt and taxable sales.
5. The segregated amounts determined in 4 are adjusted for net markons, net markdowns, and shrinkage to determine realized exempt and taxable sales.
6. Physical inventories are taken periodically to adjust book inventories.
(B) Cost Plus Markup Method--Taxable Merchandise.
1. The cost of all taxable merchandise is marked up to anticipated selling prices at the time of purchase. Records are kept of net markons, net markdowns, and shrinkage for all taxable merchandise. Such records are used to adjust the anticipated selling price to the realized price. Inventory adjustments are required unless the inventory of taxable merchandise at the beginning and ending of reporting periods is substantially constant. Returns should reflect as taxable sales the realized selling price of all taxable merchandise during a reporting period (anticipated sales price on purchases adjusted for inventory changes and other adjustments of the types mentioned).
2. If the grocer elects to use the cost plus markup method of reporting, the following criteria should be followed:
A. Markup factor percentages1 applicable to taxable merchandise should be determined by a shelf test sample of representative purchases, covering a minimum purchasing cycle of one month within a three-year period, segregated by commodity groupings, i.e., beer, wine, carbonated beverages, tobacco and related products, paper products, pet food, soap, detergents, etc. The markup factor percentages determined for commodity groupings should be applied to the cost of sales of the respective commodities for the reporting period to determine taxable sales.
In order to insure that markup factor percentages typical of the total business are determined, grocers who conduct multistore operations should include purchases from several representative stores in the shelf test sample of markup factor percentages.
B. As an alternative procedure to A., above, the overall average markup factor percentage for all taxable commodity groupings may be used to determine taxable sales for the reporting period. This markup factor percentage is applied to the overall cost of taxable sales for the reporting period. 
The overall average markup factor percentage should be determined as follows:
a. Determine markup factor percentages by commodity groupings based on shelf tests covering a minimum purchasing cycle of one month within a three-year period.
b. Determine cost of sales, segregated by commodity groupings, for a representative one-year period.
c. Apply markup factor percentages (Step a) to the cost of sales of the respective commodity groupings (Step b) to determine anticipated sales by commodity groupings and in total.
d. Divide total anticipated sales (Step c) by the respective total cost of sales to determine the overall average markup factor percentage.
C. In calculating markup factor percentages, appropriate consideration should be given to markon and markdown price adjustments, quantity price adjustments such as on cigarettes sold by the carton, liquor sold by the case and other selling price adjustments. Quantity and other price adjustments may be determined by a limited test of sales of a representative period or by sales experience of a representative store within the operating entity.
D. The computation of taxable sales for the reporting period should be based on cost of sales for the period. If for any particular reporting period or periods, cost of sales is not determinable because actual physical inventories are unknown and inventories remain substantially constant, the computation of taxable sales may be based on purchases for the period. However, if inventories are not substantially constant, adjustments for physical inventories should be taken into consideration in one of the reporting periods occurring within the accounting year.
E. Shrinkage should be adjusted as specified in (d) below.
F. Taxable markup factor percentages based on shelf test samples will generally be considered valid for reporting purposes for a period of three years, provided business operations remain substantially the same. A substantial change in business operations will be considered as having occurred when there is a significant change in pricing practices, commodities handled, commodity mix, locations operated, sources of supply, or other circumstances affecting the nature of the business.
(4) Electronic Scanning Systems. The use of a scanning system is another acceptable reporting method for grocers. Electronic scanning systems utilize electronic scanners and central computers to automatically compile and record taxable and nontaxable sales, sales tax, and related data from scanning of products imprinted with the Universal Product Code. It is the grocer's responsibility to establish the propriety of reported amounts. Grocers must ensure that proper controls are maintained for monitoring and verifying the accuracy of the scanning results and tax returns. Adequate documentation must be retained which may be verified by audit, including all scanning programs relating to product identity, price, sales tax code, program changes and corrections to the programs. Records which clearly show a segregation of taxable and nontaxable merchandise purchases would provide an additional source from which the scanning accuracy may be monitored or verified.
(c) Food Stamps. Tangible personal property eligible to be purchased with federal food stamps and so purchased is exempt from the tax. Grocers who receive gross receipts in the form of federal food stamp coupons in payment for such tangible personal property which normally is subject to the tax, e.g., nonalcoholic carbonated beverages, may deduct on each sales tax return an amount equal to two percent (2%) of the total amount of food stamps redeemed during the period for which the return is filed. Effective January 1, 1993, grocers may claim amounts in excess of two percent whenever the following computation results in a greater percentage: total purchases of taxable items eligible to be purchased with federal food stamps divided by an amount equal to the total of the exempt food product purchases as defined in subdivision (b)(1)(F)1 plus the purchases of taxable items eligible to be purchased with federal food stamps. For example, for a reporting period, if the total purchases of carbonated beverages equals $5,000 and the total purchases of exempt food products equals $130,000, a percentage of 3.7% ($5,000 ¸ $135,000) may be used in computing the allowable food stamp deduction for that period. This deduction may be taken in lieu of accounting separately for such sales.
(d) Shrinkage. As used herein, the term “shrinkage” means unaccounted for losses due to spoilage, breakage, pilferage, etc. Grocers who incur such losses, may, for reporting purposes, adjust for such losses as follows:
(1) An adjustment of up to 1 percent of the cost of taxable merchandise may be taken into consideration when the retail inventory or markup method is used for reporting purposes.
(2) An adjustment of up to 3 percent of the cost of nongrocery taxable items may be taken into consideration when the purchase-ratio method is used for reporting purposes and sales of nongrocery taxable items are computed by the retail extension or markup method. The adjustment is limited to an overall 1 percent of taxable purchases when other than the purchase-ratio method is used for reporting purposes.
Losses in excess of the above are allowable when supported by records which show that a greater loss is sustained.
(e) List of Methods Not Exhaustive. The methods by which grocers may determine their sales of exempt food products are not limited to the methods described above. Grocers may use any method which they can support as properly reflecting their exempt food sales. As is the case for all exemptions, it is the grocer's responsibility to establish the propriety of the amount of the claimed exemption.
(f) Audits. Taxpayers using one of the approved methods of reporting described in this regulation will normally be audited by application of the same approved procedure in the audit to verify the accuracy of claimed deductions. However, determinations may be imposed or refunds granted if the board, upon audit of the retailer's accounts and records, determines that the returns did not accurately disclose the amount of tax due.

--------
* Use applicable tax rate--tax rate of 8.25% used for illustration purposes. 

** Adjust for shrinkage if applicable--see paragraph (d).

1  Markup factor percentage is the markup + 100%. When applied to cost, it computes the selling price. For example, an item costing $1.00 and selling at a 25% markup will have a markup factor of 125%. The markup factor (125%) when applied to $1.00 cost results in a $1.25 selling price.
NOTE

Authority cited: Sections 7051 and 7051.5, Revenue and Taxation Code. Reference: Sections 6359 and 6373, Revenue and Taxation Code.
HISTORY

1. New section filed 5-24-73; effective thirtieth day thereafter (Register 73, No. 21).
2. Amendment filed 10-18-88; operative 11-17-88 (Register 88, No. 43).
3. Amendment of subsection (c) and Note filed 9-21-93; operative 10-21-93 (Register 93, No. 39).
4. Amendment filed 6-19-95; operative 7-19-95 (Register 95, No. 25).
5. Amendment of subsections (b)(1)(G) and (b)(2), repealer of subsection (b)(3)(B)2.G. and amendment of subsection (b)(4) filed 12-1-2008; operative 12-31-2008 (Register 2008, No. 49).
6. Change without regulatory effect amending subsections (b)(1)(G)2.-3., (b)(1)(G)5.-6.,  (b)(1)(G)8., (b)(1)(G)10.-11. and (b)(1)(G)13.-16. and related footnote filed 5-13-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 20).
§1603. Taxable Sales of Food Products.

(a) Restaurants, Hotels, Boarding Houses, Soda Fountains, and Similar Establishments. 
(1) Definitions.
(A) Boarding House. The term “boarding house” as used in this regulation means any establishment regularly serving meals, on the average to five or more paying guests. The term includes a “guest home,” “residential care home,” “halfway house,” and any other establishment providing room and board or board only, which is not an institution as defined in Regulation 1503 and section 6363.6 of the Revenue and Taxation Code. The fact that guests may be recipients of welfare funds does not affect the application of tax. A person or establishment furnishing meals on the average to fewer than five paying guests during the calendar quarter is not considered to be engaged in the business of selling meals at retail.
(B) American Plan Hotel. The term “American Plan Hotel” as used in this regulation means a hotel which charges guests a fixed sum by the day, week, or other period for room and meals combined.
(C) Complimentary Food and Beverages. As used in this subdivision (a), the term “complimentary food and beverages” means food and beverages (including alcoholic and non-alcoholic beverages) which are provided to transient guests on a complimentary basis and:
1. There is no segregation between the charges for rooms and the charges for the food and beverages on the guests' bills, and
2. The guests are not given an option to refuse the food and beverages in return for a discounted room rental.
(D) Average Retail Value of Complimentary Food and Beverages. The term “average retail value of complimentary food and beverages” (ARV) as used in this regulation means the total amount of the costs of the complimentary food and beverages for the preceding calendar year marked-up one hundred percent (100%) and divided by the number of rooms rented for that year. Costs of complimentary food and beverages include charges for delivery to the lodging establishment but exclude discounts taken and sales tax reimbursement paid to vendors. The 100% markup factor includes the cost of food preparation labor by hotel employees, the fair rental value of hotel facilities used to prepare or serve the food and beverages, and profit.
(E) Average Daily Rate. The term “average daily rate” (ADR) as used in this regulation means the gross room revenue for the preceding calendar year divided by the number of rooms rented for that year. “Gross room revenue” means and includes the full charge to the hotel customers but excludes separately stated occupancy taxes, revenue from contract and group rentals which do not qualify for complimentary food and beverages, and revenue from special packages (e.g., New Year's Eve packages which include food and beverages as well as guest room accommodations), unless it can be documented that the retail value of the food and beverages provided as a part of the special package is 10% or less of the total package charge as provided in subdivision (a)(2)(B). “Number of rooms rented for that year” means the total number of times all rooms have been rented on a nightly basis provided the revenue for those rooms is included in the “gross room revenue”. For example, if a room is rented out for three consecutive nights by one guest, that room will be counted as rented three times when computing the ADR.
(2) Application of Tax.
(A) In General. Tax applies to sales of meals or hot prepared food products (see (e) below) furnished by restaurants, concessionaires, hotels, boarding houses, soda fountains, and similar establishments whether served on or off the premises. In the case of American Plan hotels, special packages offered by hotels, e.g., a New Year's Eve package as described in subdivision (a)(1)(E), and boarding houses, a reasonable segregation must be made between the charges for rooms and the charges for the meals, hot prepared food products, and beverages. Charges by hotels or boarding houses for delivering meals or hot prepared food products to, or serving them in, the rooms of guests are includable in the measure of tax on the sales of the meals or hot prepared food products whether or not the charges are separately stated. (Caterers, see (h) below.) Sales of meals or hot prepared food products by restaurants, concessionaires, hotels, boarding houses, soda fountains, and similar establishments to persons such as event planners, party coordinators, or fundraisers, which buy and sell on their own account, are sales for resale for which a resale certificate may be accepted (see subdivision (h)(3)(C)2.) 
Soufflé cups, straws, paper napkins, toothpicks and like items that are not of a reusable character which are furnished with meals or hot prepared food products are sold with the meals or hot prepared food products. Sales of such items for such purpose to persons engaged in the business of selling meals or hot prepared food products are, accordingly, sales for resale.
(B) Complimentary Food and Beverages. Lodging establishments which furnish, prepare, or serve complimentary food and beverages to guests in connection with the rental of rooms are consumers and not retailers of such food and beverages when the retail value of the complimentary food and beverages is “incidental” to the room rental service regardless of where within the hotel premises the complimentary food and beverages are served. For complimentary food and beverages to qualify as “incidental” for the current calendar year, the average retail value of the complimentary food and beverages (ARV) furnished for the preceding calendar year must be equal to or less than 10% of the average daily rate (ADR) for that year.
If a hotel provides guests with coupons or similar documents which may be exchanged for complimentary food and beverages in an area of the hotel where food and beverages are sold on a regular basis to the general public (e.g., a restaurant), the hotel will be considered the consumer and not the retailer of such food and beverages if the coupons or similar documents are non-transferable and the guest is specifically identified by name. If the coupons or similar documents are transferable or the guest is not specifically identified, food and beverages provided will be considered sold to the guest at the fair retail value of similar food and beverages sold to the general public. In the case of coupons redeemed by guests at restaurants not operated by the lodging establishment, the hotel will be considered the consumer of food and beverages provided to the hotel's guests and tax will apply to the charge by the restaurant to the hotel.
Lodging establishments are retailers of food and beverages which do not qualify as “incidental” and tax applies as provided in subdivision (a)(2)(A) above. Amounts paid by guests for food and beverages in excess of a complimentary allowance are gross receipts subject to the tax. Lodging establishments are retailers of otherwise complimentary food and beverages sold to non-guests.
In the case of hotels with concierge floor, club level or similar programs, the formula set forth above shall be applied separately with respect to the complimentary food and beverages furnished to guests who participate in the concierge, club or similar program. That is, the concierge, club or similar program will be deemed to be an independent hotel separate and apart from the hotel in which it is operated. The ADR and the retail value of complimentary food and beverages per occupied room will be computed separately with respect to the guest room accommodations entitled to the privileges and amenities involved in the concierge, club or similar program.
The following example illustrates the steps in determining whether the food and beverages are complimentary:

FORMULA:	ARV ¸ ADR £ 10%

	Average Daily Rate (ADR):

	Room Revenue	$9,108,000
	Rooms Rented	74,607
	ADR ($9,108,000 ¸ 74,607)	$122.08

	Average Retail Value of Complimentary
	Food and Beverages (ARV):

	Complimentary Food Cost	$169,057
	Complimentary Beverage Cost	52,513
	 Total	$221,570
	Add 100% Markup	221,570

	Average Retail Value	$443,140

	ARV per occupied room ($443,140 ¸ 74,607)	$5.94

	Application of Formula:	$5.94 ¸ $122.08 = 4.87%

In the above example, the average retail value of the complimentary food and beverages per occupied room for the preceding calendar year is equal to or less than 10% of the average daily rate. Therefore, under the provisions of this subdivision (a)(2)(B), the complimentary food and beverages provided to guests for the current calendar year qualify as “incidental”. The lodging establishment is the consumer and not the retailer of such food and beverages. This computation must be made annually.
When a lodging establishment consists of more than one location, the operations of each location will be considered separately in determining if that location's complimentary food and beverages qualify as incidental.
(C) “Free” Meals. When a restaurant agrees to furnish a “free” meal to a customer who purchases another meal and presents a coupon or card, which the customer previously had purchased directly from the restaurant or through a sales promotional agency having a contract with the restaurant to redeem the coupons or cards, the restaurant is regarded as selling two meals for the price of one, plus any additional compensation from the agency or from its own sales of coupons. Any such additional compensation is a part of its taxable gross receipts for the period in which the meals are served.
Tax applies only to the price of the paid meal plus any such additional compensation.
(b) “Drive-Ins.” Tax applies to sales of food products ordinarily sold for immediate consumption on or near a location at which parking facilities are provided primarily for the use of patrons in consuming the products purchased at the “drive-in” establishment, even though such products are sold on a “take out” or “to go” order and are actually packaged or wrapped and taken from the premises of the retailer. Food products when sold in bulk, i.e., in quantities or in a form not suitable for consumption on the retailer's premises, are not regarded as ordinarily sold for immediate consumption on or near the location at which parking facilities are provided by the retailer. Accordingly, with the exception of sales of hot prepared food products (see (e) below) and sales of cold food under the 80-80 rule (see (c) below), sales of ice cream, doughnuts, and other individual food items in quantities obviously not intended for consumption on the retailer's premises, without eating utensils, trays, or dishes and not consumed on the retailer's premises, are exempt from tax. Any retailer claiming a deduction on account of food sales of this type must support the deduction by complete and detailed records.1 
(c) Cold Food Sold on a “Take-Out” Order. 
(1) General.
(A) Seller Meeting Criteria of 80-80 Rule.  When a seller meets both criteria of the 80-80 rule as explained in subdivision (c)(3) below, tax applies to sales of cold food products (including sales for a separate price of hot bakery goods and hot beverages such as coffee) in a form suitable for consumption on the seller's premises even though such food products are sold on a “take-out” or “to go” order.  Sales of cold food products which are suitable for consumption on the seller's premises are subject to the tax no matter how great the quantity purchased, e.g., 40 one-half pint containers of milk.  Except as provided elsewhere in this regulation, tax does not apply to sales of food products which are furnished in a form not suitable for consumption on the seller's premises.
Operative April 1, 1996, although a seller may meet both criteria of the 80-80 rule, he or she may elect to separately account for the sale of “take-out” or “to go” orders of cold food products which are in a form suitable for consumption on the seller's premises. The gross receipts from the sale of those food products shall be exempt from the tax provided the seller keeps a separate accounting of these transactions in his or her records. Tax will remain applicable to the sale of food products as provided in subdivisions (a), (b), (e), or (f) of this regulation. Failure to maintain the required separate accounting and documentation claimed as exempt under this subdivision will revoke the seller's election under this subdivision.
(B) Seller Not Meeting Criteria of 80-80 Rule.  When a seller does not meet both criteria of the 80-80 rule as explained in subdivision (c)(3) below, tax does not apply to sales of cold food products (including sales for a separate price of hot bakery goods and hot beverages such as coffee) when sold on a “take-out” or “to go” order.
(2) Definitions. 
(A) For purposes of this subdivision (c), the term “suitable for consumption on the seller's premises” means food products furnished:
1. In a form which requires no further processing by the purchaser, including but not limited to cooking, heating, thawing, or slicing, and
2. In a size which ordinarily may be immediately consumed by one person such as a large milk shake, a pint of ice cream, a pint of milk, or a slice of pie.  Cold food products (excluding milk shakes and similar milk products) furnished in containers larger in size than a pint are considered to be in a form not suitable for immediate consumption.
Pieces of candy sold in bulk quantities of one pound or greater are deemed to be sold in a form not suitable for consumption on the seller's premises.
The term does not include cold food products which obviously would not be consumed on the premises of the seller, e.g., a cold party tray or a whole cold chicken.
(B) For purposes of this subdivision (c), the term “seller's premises” means the individual location at which a sale takes place rather than the aggregate of all locations of the seller. For example, if a seller operates several drive-in and fast food restaurants, the operations of each location stand alone and are considered separately in determining if the sales of food products at each location meet the criteria of the 80-80 rule.
When two or more food-selling activities are conducted by the same person at the same location, the operations of all food related activities will be considered in determining if the sales of food products meet the criteria of the 80-80 rule. For example, if a seller operates a grocery store and a restaurant with no physical separation other than separate cash registers, the grocery store operations will be included in determining if the sales of food products meet the criteria of the 80-80 rule. When there is a physical separation where customers of one operation may not pass freely into the other operation, e.g., separate rooms with separate entrances but a common kitchen, each operation will be considered separately for purposes of this subdivision (c).
(3) 80-80 Rule.  Tax applies under this subdivision (c) only if the seller meets both of the following criteria:
(A) More than 80 percent of the seller's gross receipts are from the sale of food products, and
(B) More than 80 percent of the seller's retail sales of food products are taxable as provided in subdivisions (a), (b), (e), and (f) of this regulation.
Sales of alcoholic beverages, carbonated beverages, or cold food to go not suitable for immediate consumption should not be included in this computation. Any seller meeting both of these criteria and claiming a deduction for the sale of cold food products in a form not suitable for consumption on the seller's premises must support the deduction by complete and detailed records of such sales made.
(d) Places Where Admission Is Charged.
(1) General. Tax applies to sales of food products when sold within, and for consumption within, a place the entrance to which is subject to an admission charge, during the period when the sales are made, except for national and state parks and monuments, and marinas, campgrounds, and recreational vehicle parks.
(2) Definitions.
(A) “Place” means an area the exterior boundaries of which are defined by walls, fences or otherwise in such a manner that the area readily can be recognized and distinguished from adjoining or surrounding property. Examples include buildings, fenced enclosures and areas delimited by posted signs.
(B) “Within a place” means inside the door, gate, turnstile, or other point at which the customer must pay an admission charge or present evidence, such as a ticket, that an admission charge has been paid. Adjacent to, or in close proximity to, a place is not within a place.
(C) “Admission charge” means any consideration required to be paid in money or otherwise, for admittance to a place.
“Admission charge” does not include:
1. Membership dues in a club or other organization entitling the member to, among other things, entrance to a place maintained by the club or organization, such as a fenced area containing a club house, tennis courts, and a swimming pool. Where a guest is admitted to such a place only when accompanied by or vouched for by a member of the club or organization, any charge made to the guest for use of facilities in the place is not an admission charge.
2. A charge for a student body card entitling the student to, among other things, entrance to a place, such as entrance to a school auditorium at which a dance is held.
3. A charge for the use of facilities within a place to which no entrance charge is made to spectators. For example, green fees paid for the privilege of playing a golf course, a charge made to swimmers for the use of a pool within a place, or a charge made for the use of lanes in a public bowling place.
(D) “National and state parks and monuments” means those which are part of the National Park System or the State Park System. The phrase does not include parks and monuments not within either of those systems, such as city, county, regional, district or private parks.
(3) Presumption That Food Is Sold for Consumption Within a Place. 
When food products are sold within a place the entrance to which is subject to an admission charge, it will be presumed, in the absence of evidence to the contrary, that the food products are sold for consumption within the place. Obtaining and retaining evidence in support of the claimed tax exemption is the responsibility of the retailer. Such evidence may consist, for example, of proof that the sales were of canned jams, cake mixes, spices, cooking chocolate, or other items in a form in which it is unlikely that such items would be consumed within the place where sold.
(4) Food Sold to Students. The exemption otherwise granted by Section 6363 does not apply to sales of food products to students when sold within, and for consumption within, a place the entrance to which is subject to an admission charge, and such sales are subject to tax except as provided in (p) of this regulation. For example, when food products are sold by a student organization to students or to both students and nonstudents within a place the entrance to which is subject to an admission charge, such as a place where school athletic events are held, the sales to both students and nonstudents are taxable.
(e) Hot Prepared Food Products.
(1) General. Tax applies to all sales of hot prepared food products unless otherwise exempt. “Hot prepared food products” means those products, items, or components which have been prepared for sale in a heated condition and which are sold at any temperature which is higher than the air temperature of the room or place where they are sold. The mere heating of a food product constitutes preparation of a hot prepared food product, e.g., grilling a sandwich, dipping a sandwich bun in hot gravy, using infra-red lights, steam tables, etc.. If the sale is intended to be of a hot food product, such sale is of a hot food product regardless of cooling which incidentally occurs. For example, the sale of a toasted sandwich  intended to be in a heated condition when sold, such as a fried ham sandwich on toast, is a sale of a hot prepared food product even though it may have cooled due to delay. On the other hand, the sale of a toasted sandwich which is not intended to be in a heated condition when sold, such as a cold tuna sandwich on toast, is not a sale of a hot prepared food product. 
When a single price has been established for a combination of hot and cold food items, such as a meal or dinner which includes cold components or side items, tax applies to the entire established price regardless of itemization on the sales check. The inclusion of any hot food product in an otherwise cold combination of food products sold for a single established price, results in the tax applying to the entire established price, e.g., hot coffee served with a meal consisting of cold food products, when the coffee is included in the established price of the meal. If a single price for the combination of hot and cold food items is listed on a menu, wall sign or is otherwise advertised, a single price has been established. Except as otherwise provided in (b), (c), (d) or (f) of this regulation, or in Regulation 1574, tax does not apply to the sale for a separate price of bakery goods, beverages classed as food products, or cold or frozen food products. Hot bakery goods and hot beverages such as coffee are hot prepared food products but their sale for a separate price is exempt unless taxable as provided in (b), (c), (d) or (f) of this regulation, or in Regulation 1574. Tax does apply if a hot beverage and a bakery product or cold food product are sold as a combination for a single price. Hot soup, bouillon, or consommé is a hot prepared food product, which is not a beverage.
(2) Air Carriers Engaged in Interstate or Foreign Commerce. Tax does not apply to the sale, storage, use, or other consumption of hot prepared food products sold by caterers or other vendors to air carriers engaged in interstate or foreign commerce for consumption by passengers on such air carriers, nor to the sale, storage, use, or other consumption of hot prepared food products sold or served to passengers by air carriers engaged in interstate or foreign commerce for consumption by passengers on such air carriers. “Air carriers” are persons or firms in the business of transporting persons or property for hire or compensation, and include both common and contract carriers. “Passengers” do not include crew members. Any caterer or other vendor claiming the exemption must support it with an exemption certificate from the air carrier substantially in the form prescribed in Appendix A of this regulation.
(f) Food for Consumption at Facilities Provided by the Retailer. Tax applies to sales of sandwiches, ice cream, and other foods sold in a form for consumption at tables, chairs, or counters or from trays, glasses, dishes, or other tableware provided by the retailer or by a person with whom the retailer contracts to furnish, prepare, or serve food products to others.
A passenger's seat aboard a train, or a spectator's seat at a game, show, or similar event is not a “chair” within the meaning of this regulation. Accordingly, except as otherwise provided in (c), (d), and (e) above, tax does not apply to the sale of cold sandwiches, ice cream, or other food products sold by vendors passing among the passengers or spectators where the food products are not “for consumption at tables, chairs, or counters or from trays, glasses, dishes, or other tableware provided by the retailer.”
(g) Tips, Gratuities, and Service Charges. 
This subdivision applies to restaurants, hotels, caterers, boarding houses, soda fountains, drive-ins and similar establishments.
An optional payment designated as a tip, gratuity, or service charge is not subject to tax. A mandatory payment designated as a tip, gratuity, or service charge is included in taxable gross receipts, even if the amount is subsequently paid by the retailer to employees.
(1) Optional Payment.
(A) A payment of a tip, gratuity, or service charge is optional if the customer adds the amount to the bill presented by the retailer, or otherwise leaves a separate amount in payment over and above the actual amount due the retailer for the sale of meals, food, and drinks that include services. The following examples illustrate transactions where a payment of a tip, gratuity or service charge is optional and not included in taxable gross receipts. This is true regardless of printed statements on menus, brochures, advertisements or other materials notifying customers that tips, gratuities, or service charges will or may be added by the retailer to the prices of meals, food, or drinks:
Example 1. The restaurant check is presented to the customer with the “tip” area blank so the customer may voluntarily write in an amount, or
Example 2. The restaurant check is presented to the customer with options computed by the retailer and presented to the customer as tip suggestions. The “tip” area is blank so the customer may voluntarily write in an amount:

		Guest Check

	Food Item A 	$9.95
	Beverage Item B	3.75
	Subtotal	$13.70
	8% sales tax	1.10
	Subtotal	$14.80
	Tip*
	Total
	
	*Suggested tips:
	15%=$2.06; 18%=$2.47; 20%=$2.74; other.
If an employer misappropriates these payments for these charges, as discussed in subdivision (g)(1)(B) below, such payments are included in the retailer's taxable gross receipts.
(B) No employer shall collect, take, or receive any gratuity or a part thereof, paid, given to, or left for an employee by a patron, or deduct any amount from wages due an employee on account of such gratuity, or require an employee to credit the amount, or any part thereof, of such gratuity against and as a part of the wages due the employee from the employer. (Labor Code section 351.) If this prohibition is violated, any amount of such gratuities received by the employer will be considered a part of the gross receipts of the employer and subject to the tax.
(2) Mandatory Payment.
(A) An amount negotiated between the retailer and the customer in advance of a meal, food, or drinks, or an event that includes a meal, food, or drinks is mandatory.
(B) When the menu, brochures, advertisements or other printed materials contain statements that notify customers that tips, gratuities, or service charges will or may be added, an amount automatically added by the retailer to the bill or invoice presented to and paid by the customer is a mandatory charge and subject to tax. These amounts are considered negotiated in advance as specified in subdivision (g)(2)(A). Examples of printed statements include:
“An 18% gratuity [or service charge] will be added to parties of 8 or more.”
“Suggested gratuity 15%,” itemized on the invoice or bill by the restaurant, hotel, caterer, boarding house, soda fountain, drive-in or similar establishment.
“A 15% voluntary gratuity will be added for parties of 8 or more.”
An amount will be considered “automatically added” when the retailer adds the tip to the bill without first conferring with the customer after service of the meal and receiving approval to add the tip or without providing the customer with the option to write in the tip. Nonetheless, any amount added by the retailer is presumed to be mandatory. This presumption may be overcome as discussed in subdivision (g)(2)(C) below.
(C) It is presumed that an amount added as a tip by the retailer to the bill or invoice presented to the customer is mandatory. A statement on the bill or invoice that the amount added by the retailer is a “suggested tip,” “optional gratuity,” or that “the amount may be increased, decreased, or removed” by the customer does not change the mandatory nature of the charge.
This presumption may be controverted by documentary evidence showing that the customer specifically requested and authorized the gratuity be added to the amount billed.
Examples of documentary evidence that may be used to overcome the presumption include:
1. A guest check that is presented to the customer showing sales tax reimbursement and the amount upon which it was computed, without tip or with the “tip” area blank and a separate document, such as a credit card receipt, to which the retailer adds or prints the requested tip.
2. Guests receipts and payments showing that the percentage of tips paid by large groups varies from the percentage stated on the menu, brochure, advertisement or other printed materials.
3. A retailer's written policy stating that its employees shall receive confirmation from a customer before adding a tip together with additional verifiable evidence that the policy has been enforced. The policy is not in itself sufficient documentation to establish that the customer requested and authorized that a gratuity be added to the amount billed without such additional verifiable evidence.
The retailer must retain the guest checks and any additional separate documents to show that the payment is optional. The retailer is also required to maintain other records in accordance with the requirements of Regulation 1698, Records.
(h) Caterers.
(1) Definition. The term “caterer” as used in this regulation means a person engaged in the business of serving meals, food, or drinks on the premises of the customer, or on premises supplied by the customer, including premises leased by the customer from a person other than the caterer, but does not include employees hired by the customer by the hour or day.
(2) Sales to Caterers. A caterer generally is considered to be the consumer of tangible personal property normally used in the furnishing and serving of meals, food or drinks, except for separately stated charges by the caterer for the lease of tangible personal property or tangible personal property regarded as being sold with meals, food or drinks such as disposable plates, napkins, utensils, glasses, cups, stemware, place mats, trays, covers and toothpicks.
(3) Sales by Caterers.
(A) Caterer as Retailer. Tax applies to the entire charge made by caterers for serving meals, food, and drinks, inclusive of charges for food, the use of dishes, silverware, glasses, chairs, tables, etc., used in connection with serving meals, and for the labor of serving the meals, whether performed by the caterer, the caterer's employees or subcontractors. Tax applies to charges made by caterers for preparing and serving meals and drinks even though the food is not provided by the caterers. Tax applies to charges made by caterers for hot prepared food products as in (e) above whether or not served by the caterers. A caterer who separately states or itemizes charges for the lease of tangible personal property regardless of the use of the property will be deemed to be the lessor of such property. Tax applies in accordance with Regulation 1660 Leases of Tangible Personal Property -- In General. Tax does not apply to charges made by caterers for the rental of dishes, silverware, glasses, etc., purchased by the caterer with tax paid on the purchase price if no food is provided or served by the caterers in connection with such rental.
(B) Caterers as Lessors of Property Unrelated to the Serving or Furnishing of Meals, Food, or Drinks by a Caterer.
1. When a caterer who is furnishing or serving meals, food, or drinks also rents or leases from a third party tangible personal property which the caterer does not use himself or herself and the property is not customarily provided or used within the catering industry in connection with  the furnishing and serving of food or drinks, such as decorative props related solely to optional entertainment, special lighting for guest speakers, sound or video systems, dance floors, stages, etc., he or she is a lessor of such property. In such instance, tax applies to the lease in accordance with Regulation 1660.
2. When a person who in other instances is a caterer does not furnish or serve any meals, food, or drinks to a customer, but rents or leases from a third party tangible personal property such as dishes, linen, silverware and glasses, etc., for purposes of providing it to his or her customer, he or she is not acting as a caterer within the meaning of this regulation, but solely as a lessor of tangible personal property. In such instances tax applies to the lease in accordance with Regulation 1660.
(C) Caterers Planning, Designing and Coordinating Events.
1. Tax applies to charges by a caterer for event planning, design, coordination, and/or supervision if they are made in connection with the furnishing of meals, food, or drinks for the event. Tax does not apply to separately stated charges for services unrelated to the furnishing and serving of meals, food, or drinks, such as optional entertainment or any staff who do not directly participate in the preparation, furnishing, or serving of meals, food, or drinks, e.g., coat-check clerks, parking attendants, security guards, etc.
2. When a caterer sells meals, food, or drinks, and the serving of them, to other persons such as event planners, party coordinators, or fundraisers, who buy and sell the same on their own account or for their own sake, it is a sale for resale for which the caterer may accept a resale certificate. However, a caterer may only claim the sale as a resale if the caterer obtains a resale certificate in compliance with Regulation 1668. A person is buying or selling for his or her own account, or own sake, when such person has his or her own contract with a customer to sell the meals, food, or drinks to the customer, and is not merely acting on behalf of the caterer.
3. When a caterer sells meals, food or drinks and the serving of them to other persons who charge a fee for their service unrelated to the taxable sale, the separately stated fee is not subject to tax.
(D) Sales of Meals by Caterers to Social Clubs, Fraternal Organizations. Sales of meals to social clubs and fraternal organizations, as those terms are defined in subdivision (i) below, by caterers are sales for resale if such social clubs and fraternal organizations are the retailers of the meals subject to tax under subdivision (i) and give valid resale certificates therefor.
(E) Tips, Gratuities, or Service Charges. Tips, gratuities, and service charges are discussed in subdivision (g).
(4) Premises. General. Separately stated charges for the lease of premises on which meals, food, or drinks are served, are nontaxable leases of real property. Where a charge for leased premises is a guarantee against a minimum purchase of meals, food or drinks, the charge for the guarantee is gross receipts subject to tax. Where a person contracts to provide both premises and meals, food or drinks, the charge for the meals, food or drinks must be reasonable in order for the charge for the premises to be non taxable.
(5) Private Chefs. A private chef is generally not an employee of the customer, but an independent contractor who pays his or her own social security, and federal and state income taxes. Such a private chef, who prepares and serves meals, food and drinks in the home of his or her customer is a caterer under this regulation.
(i) Social Clubs and Fraternal Organizations. “Social Clubs and Fraternal Organizations” as used herein include any corporation, partnership, association or group or combination acting as a unit, such as service clubs, lodges, and community, country, and athletic clubs.
The tax applies to receipts from the furnishing of meals, food, and drink by social clubs and fraternal organizations unless furnished: (1) exclusively to members; and also, (2) less frequently than once a week. Both these requirements must be met. If the club or organization furnishes meals, food or drink to nonmembers, all receipts from the furnishing of meals, food or drink are subject to tax whether furnished to members or nonmembers, including receipts on occasions when furnished exclusively to members. Meals, food or drink paid for by members are considered furnished to them even though consumed by guests who are not members.
(j) Student Meals.
(1) Definitions. 
(A) “Food Products”. As used herein, the term “food products” as defined in Regulation 1602 (18 CCR 1602) includes food furnished, prepared, or served for consumption at tables, chairs, or counters, or from trays, glasses, dishes, or other tableware provided by the retailer or by a person with whom the retailer contracts to furnish, prepare or serve food to others.
(B) “Meals”. As used herein, the term “meals” includes both food and nonfood products which are sold to students for an established single price at a time set aside for meals.  If a single price for the combination of a nonfood product and a food product is listed on a menu or on a sign, a single price has been established. The term “meals” does not include nonfood products which are sold to students for a separate price and tax applies to the sales of such products. Examples of nonfood products are: carbonated beverages and beer. For the purpose of this regulation, products sold at a time designated as a “nutrition break”,  “recess”, or similar break, will not be considered “meals”.
(2) Application of Tax.
(A) Sales by Schools, School Districts and Student Organizations. Sales of meals or food products for human consumption to students of a school by public or private schools, school districts, and student organizations are exempt from tax, except as otherwise provided in (d)(4) above.
(B) Sales by Parent-Teacher Associations. Tax does not apply to the sale of, nor the storage, use or other consumption in this state of, meals and food products for human consumption furnished or served to the students of a school by parent-teacher associations. Parent-teacher associations qualifying under Regulation 1597 as consumers are not retailers of tangible personal property, which they sell. Accordingly, tax does apply to the sale to such associations of nonfood items such as carbonated beverages, containers, straws and napkins.
(C) Sales by Blind Vendors. Tax does not apply to the sale of meals or food products for human consumption to students of a school by any blind person (as defined in section 19153 of the Welfare and Institutions Code) operating a restaurant or vending stand in an educational institution under article 5 of chapter 6 of part 2 of division 10 of the Welfare and Institutions Code, except as otherwise provided in (d)(4) above.
(D) Sales by Caterers. The application of tax to sales by caterers in general is explained in subdivision (h) above. However, tax does not apply to the sale by caterers of meals or food products for human consumption to students of a school, if all the following criteria are met:
1. The premises used by the caterer to serve the lunches to the students are used by the school for other purposes, such as sporting events and other school activities, during the remainder of the day;
2. The fixtures and equipment used by the caterer are owned and maintained by the school; and
3. The students purchasing the meals cannot distinguish the caterer from the employees of the school.
(k) Employees' Meals.
(1) In General. Any employer or employee organization that is in the business of selling meals, e.g., a restaurant, hotel, club, or association, must include its receipts from the sales of meals to employees, along with its receipts from sales to other purchasers of meals, in the amount upon which it computes its sales tax liability. An employer or an employee organization selling meals only to employees becomes a retailer of meals and liable for sales tax upon its receipts from sales of meals if it sells meals to an average number of five or more employees during the calendar quarter.
(2) Specific Charge. The tax applies only if a specific charge is made to employees for the meals. Tax does not apply to cash paid an employee in lieu of meals. A specific charge is made for meals if:
(A) Employee pays cash for meals consumed.
(B) Value of meals is deducted from employee's wages.
(C) Employee receives meals in lieu of cash to bring compensation up to legal minimum wage.
(D) Employee has the option to receive cash for meals not consumed.
(3) No Specific Charge. If an employer makes no specific charge for meals consumed by employees, the employer is the consumer of the food products and the non-food products, which are furnished to the employees as a part of the meals.
In the absence of any of the conditions under (k) (2) a specific charge is not made if:
(A) A value is assigned to meals as a means of reporting the fair market value of employees' meals pursuant to state and federal laws or regulations or union contracts.
(B) Employees who do not consume available meals have no recourse on their employer for additional cash wages.
(C) Meals are generally available to employees, but the duties of certain employees exclude them from receiving the meals and are paid cash in lieu thereof.
(4) Meals Credited Toward Minimum Wage. If an employee receives meals in lieu of cash to bring his or her compensation up to the legal minimum wage, the amount by which the minimum wage exceeds the amount otherwise paid to the employee is includable in the employer's taxable gross receipts up to the value of the meals credited toward the minimum wage.
For example, if the minimum rate for an eight-hour day is $46.00, and the employee received $43.90 in cash, and  a lunch is received which is credited toward the minimum wage in the maximum allowable amount of $2.10, the employer has received gross receipts in the amount of $2.10 for the lunch.
(5) Tax Reimbursement. If a separately stated amount for tax reimbursement is not added to the price of meals sold to employees for which a specific charge is made, the specific charge will be regarded as being a tax-included charge for the meals.
(l) Religious Organizations. Tax does not apply to the sale of, and the storage, use or other consumption in this state of, meals and food products for human consumption furnished or served by any religious organization at a social or other gathering conducted by it or under its auspices, if the purpose in furnishing or serving the meals and food products is to obtain revenue for the functions and activities of the organization and the revenue obtained from furnishing or serving the meals and food products is actually used in carrying on such functions and activities. For the purposes of this regulation, “religious organization” means any organization the property of which is exempt from taxation pursuant to subdivision (f) of section 3 of article XIII of the State Constitution.
(m) Institutions. Tax does not apply to the sale of, nor the storage, use, or other consumption in this state of, meals and food products for human consumption furnished or served to and consumed by patients or residents of an “institution” as defined in Regulation 1503. Tax, however, does apply to the sale of meals and food products by an institution to persons other than patients or residents of the institution.
(n) Meal Programs for Low-Income Elderly Persons. Tax does not apply to the sale of, and the storage, use or other consumption in this state of, meals and food products for human consumption furnished or served to low-income elderly persons at or below cost by a nonprofit organization or governmental agency under a program funded by this state or the United States for such purposes.
(o) Food Products, Nonalcoholic Beverages and Other Tangible Personal Property Transferred by Nonprofit Youth Organizations. See Regulation 1597 for application of tax on food products, nonalcoholic beverages and other tangible personal property transferred by nonprofit youth organizations.
(p) Nonprofit Parent-Teacher Associations. Nonprofit parent-teacher associations and equivalent organizations qualifying under Regulation 1597 are consumers and not retailers of tangible personal property, which they sell.
(q) Meals and Food Products Served to Condominium Residents. Tax does not apply to the sale of and the storage, use, or other consumption in this state of meals and food products for human consumption furnished to and consumed by persons 62 years of age or older residing in a condominium and who own equal shares in a common kitchen facility; provided, that the meals and food products are served to such persons on a regular basis.
This exemption is applicable only to sales of meals and food products for human consumption prepared and served at the common kitchen facility of the condominium. Tax applies to sales to persons less than 62 years of age.
(r) Veteran's Organization. Beginning April 1, 2004, tax does not apply to the sale of, and the storage, use or other consumption in this state of, meals and food products for human consumption furnished or served by any nonprofit veteran's organization at a social or other gathering conducted by it or under its auspices, if the purpose in furnishing or serving the meals and food products is to obtain revenue for the functions and activities of the organization and the revenue obtained from furnishing or serving the meals and food products is actually used in carrying on those functions and activities.
(s) Food Stamp Coupons.  Tax does not apply to tangible personal property which is eligible to be purchased with federal food stamp coupons acquired pursuant to the Food Stamp Act of 1977 and so purchased. When payment is made in the form of both food stamps and cash, the amount of the food stamp coupons must be applied first to tangible personal property normally subject to the tax, e.g., nonalcoholic carbonated beverages. Retailers are prohibited from adding any amount designated as sales tax, use tax, or sales tax reimbursement to sales of tangible personal property purchased with food stamp coupons. (See paragraph (c) of Regulation 1602.5 for special reporting provisions by grocers.) 
(t) Honor System Snack Sales. An “honor system snack sale” means a system where customers take snacks from a box or tray and pay by depositing money in a container provided by the seller. Snacks sold through such a system may be subject to tax depending upon where the sale takes place. Sales of such snacks are taxable when sold at or near a lunchroom, break room, or other facility that provides tables and chairs, and it is contemplated that the food sold will normally be consumed at such facilities. Honor system snack sales do not include hotel room mini-bars or snack baskets.

  1  The records acceptable in support of such a deduction are:
 (a) A sales ticket prepared for each transaction claimed as being tax exempt showing:
  (1) Date of the sale,
  (2) The kind of merchandise sold,
  (3) The quantity of each kind of merchandise sold,
  (4) The price of each kind of merchandise sold,
  (5) The total price of merchandise sold,
  (6) A statement to the effect that the merchandise purchased is not to be consumed on or near the location at which parking facilities are provided by the retailer, and
 (b) A daily sales record kept in sufficient detail to permit verification by audit that all gross receipts from sales have been accounted for and that all sales claimed as being tax exempt are included therein. 

Appendix A
California Sales Tax Exemption Certificate Supporting Exemption Under Section 6359.1

View Graphic
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6012, 6359, 6359.1, 6359.45, 6361, 6363, 6363.5, 6363.6, 6363.8, 6370, 6373, 6374 and 6376.5, Revenue and Taxation Code.
Food Products Generally, see Regulation 1602.
Alcoholic Beverages, tax reimbursements when served with, see Regulation 1700.
“Free” meals with purchased meals, see Regulation 1670.
Meals served to patients and inmates of an institution, see Regulation 1503.
Vending Machines, when considered selling meals, see Regulation 1574.
Meals at summer camps, see Regulation 1506(e).
Parent-Teacher associations as consumers, see Regulation 1597.
HISTORY

1. Amendment of subsections (d) and (i) filed 8-24-83 as an emergency; designated effective 8-1-83 (Register 83, No. 35). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 11-29-83. For prior history, see Register 81, No. 30.
2. Reinstatement of section as it existed prior to emergency amendment filed 8-24-83 by operation of Government Code section 11346.1(f) (Register 84, No. 20).
3. Amendment of subsections (d)(1) and (i)(2) and (3) filed 8-13-84; effective thirtieth day thereafter (Register 84, No. 33).
4. Amendment filed 5-28-85; effective thirtieth day thereafter (Register 85, No. 22).
5. Amendment of subsections (d) and (o) filed 6-24-86; effective thirtieth day thereafter (Register 86, No. 26).
6. Amendment of subsections (a), (e), (g), (n), (p) and (q), new subsections (r) and (s), and repealer of Appendix B filed 10-20-88; operative 11-19-88 (Register 88, No. 46).
7. Amendment of subsections (j), (k), (l) and (m) filed 9-15-89; operative 10-15-89 (Register 89, No. 38).
8. Amendment filed 6-3-92; operative 7-3-92 (Register 92, No. 23).
9. Amendment of subsections (b)-(c)(3)(B), (d)(1), (j)(1)(B), (j)(2)(B) and (s) filed 1-21-94; operative 2-21-94 (Register 94, No. 3).
10. Amendment filed 12-10-98; operative 1-9-99 (Register 98, No. 50).
11. Amendment of section and new cross-references filed 5-14-2002; operative 6-13-2002 (Register 2002, No. 20).
12. Change without regulatory effect adding subsection (a)(2)(C), amending subsections (h)(5) and (l) and repealing and adding new subsection (r) filed 9-10-2004 pursuant to section 100, title 1, California Code of Regulations (Register 2004, No. 37).
13. Change without regulatory effect amending subsections (a)(1)(A) and (a)(1)(C) and Note filed 1-6-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 1).
14. Amendment of subsection (g), new subsections (g)(1)-(g)(2)(C) and amendment of subsections (h)(1), (h)(3)(E) and (l) filed 7-17-2007; operative 8-16-2007 (Register 2007, No. 29).
Article 9. Special Provisions Affecting Vehicles, Vessels and Aircraft
§1610. Vehicles, Vessels and Aircraft.
Note     •     History

(a) Definitions. For purposes of this regulation the following definitions govern:
(1) “Vehicle.” “Vehicle” means:
(A) Any device by which any person or property may be propelled, moved or drawn upon a highway, excepting a device moved by human power or used exclusively upon stationary rails or tracks and excepting a device that is not required to be registered under the Vehicle Code. “Vehicle” does not include a mobilehome or commercial coach required to be registered under the Health and Safety Code. “Vehicle” includes trailer coaches which are required to be registered with the Department of Motor Vehicles. 
(B) Off-highway motor vehicles subject to identification under Division 16.5 (commencing with section 38000) of the Vehicle Code. “Vehicle” does not include automatic bale wagon.
(2) “Vessel.” “Vessel” means any boat, ship, barge, craft, or floating thing designed for navigation in the water, except:
(A) A seaplane.
(B) A watercraft specifically designed to operate on a permanently fixed course, the movement of which is restricted to or guided on such permanently fixed course by means of a mechanical device on a fixed track or arm to which the watercraft is attached or by which the watercraft is controlled, or by means of a mechanical device attached to the watercraft itself.
(C) A watercraft of a type designed to be propelled solely by oars or paddles.
(D) A watercraft eight feet or less in length of a type designed to be propelled by sail.
A motor or other component of a vessel shall be deemed to be a part of the vessel when sold therewith.
(3) “Aircraft.” “Aircraft” means any contrivance designed for powered navigation in the air, except a rocket or a missile. “Aircraft” includes an airframe or a fuselage even without an engine.
(b) Application of Tax.
(1) Sales tax does not apply to:
(A) Sales of vehicles other than off-highway vehicles subject to identification under Division 16.5 of the Vehicle Code, when the retailer is not licensed or certificated pursuant to the Vehicle Code as a manufacturer, dealer, dismantler, or lessor-retailer, subject to the provisions of section 11615.5 of the Vehicle Code,1 or
(B) Sales of off-highway vehicles subject to identification under Division 16.5 of the Vehicle Code when the retailer is not licensed or certificated pursuant to the Vehicle Code as a manufacturer, dealer, dismantler, or lessor-retailer, subject to the provisions of section 11615.5 of the Vehicle Code,1 nor required to hold a seller's permit by reason of the number, scope and character of the person's sales of such off-highway vehicles, or 
(C) Sales of vessels and aircraft by a person not required to hold a seller's permit by reason of the number, scope, and character of the person's sales of such vessels or aircraft, as the case may be.
Except as otherwise provided herein, the purchaser must pay use tax measured by the sales price of the property to the purchaser.
(2) Neither sales tax nor use tax applies to the sale or use of:
(A) Vehicles, vessels, and aircraft sold by the parent, grandparent, grandchild, child, or spouse of the purchaser, or, on or after January 1, 2005, by the registered domestic partner (as referenced in Family Code section 297.5) of the purchaser or by the brother or sister of the purchaser if both are under the age of 18 and are related by blood or adoption, where the seller is not engaged in the business of selling the type of property for which the exemption is claimed. Claimants of this exemption must submit satisfactory evidence of relationship.
(B) Vehicles purchased out of state by a member of the armed services on active duty and delivered to the service member out of state if the purchase is made prior to the effective date of discharge from the service and the service member's intention to use the vehicle in California results from official transfer orders to California and not from the service member's own independent determination. The service member will be considered to have made an independent determination to use the vehicle in California if the contract to purchase the vehicle is made after the service member receives official transfer orders to California or if at the time the contract to purchase the vehicle is made the service member arranges to take receipt of the vehicle in California.
(C) Vehicles, vessels, and aircraft when included in any transfer of all or substantially all of the property held or used in the course of business activities of the transferor and when after the transfer the real and ultimate ownership remains substantially similar.
(D) Operative January 1, 1990, a new, noncommercial motor vehicle manufactured in the United States and sold to a resident of a foreign country who arranges for the purchase through an authorized vehicle dealer in the foreign country prior to arriving in the United States, if:
1. the purchaser is issued an in--transit permit by the California Department of Motor Vehicles pursuant to section 6700.1 of the Vehicle Code, and
2. prior to or at the end of 30 consecutive days from the first date of operation under the in--transit permit, the motor vehicle is delivered or shipped to a point outside the United States by the retailer, by means of:
a. facilities operated by the retailer, or
b. a carrier, forwarding agent, export packer, customs broker or other person engaged in the business of preparing property for export, or arranging for its export. As used herein, the term “carrier” means a person or firm regularly engaged in the business of transporting for compensation tangible personal property owned by other persons, and includes both common and contract carriers.
Retailers must obtain and retain evidence of export to support deductions taken under this section. Examples of evidence of export of vehicles which are driven to a foreign country by employees of the retailer include but are not limited to, employees' expense claims, fuel purchase receipts, and motel receipts. Examples of evidence to support deductions for exports by other than the retailers' facilities include but are not limited to, bills of lading and import documents of a foreign country.
If a vehicle is not removed from this country as required above, the retailer will be subject to payment of the sales tax as well as fees and penalties as specified in section 6700.1(a) of the Vehicle Code. Section 6700.1(i) of the Vehicle Code provides that if the conditions of the in--transit permit are not met, the manufacturer of the new motor vehicle sold to a foreign purchaser under the above conditions will reimburse the retailer for an amount equal to the sales tax and registration fees and penalties paid by the retailer. Such amounts received by the retailer from the manufacturer of the vehicle are not considered part of the gross receipts from the sale of the vehicle.
(c) Payment of Tax by Purchaser.
(1) Vehicles. Purchasers of vehicles, including off-highway vehicles subject to identification under Division 16.5 of the Vehicle Code, the sales of which are exempt from sales tax under (b)(1), above, shall pay tax to the Department of Motor Vehicles, acting for and on behalf of the Board, at the time of making application for registration or identification, except:
(A) When the applicant establishes that the tax is inapplicable under the general exemptions in (b)(2) above.
(B) When the applicant furnishes to the Department of Motor Vehicles a use tax exemption or tax clearance certificate issued by the Board.
A purchaser may pay the use tax and penalty, if any, to the Department of Motor Vehicles so as to secure immediate action upon the purchaser's application for registration or identification and thereafter apply through the Department of Motor Vehicles to the Board for a refund of the amount so paid.
Except when a vehicle, required to be registered under the Vehicle Code is purchased outside this state from a manufacturer or a vehicle dealer, whenever the purchaser of such a vehicle is required to pay use tax to the Department of Motor Vehicles, the sales price shall be presumed to be an amount equal to the market value of the vehicle at the time of the purchase as that value is determined to measure vehicle license fees imposed under part 5 of division 2 of the Revenue and Taxation Code, multiplied by a factor of 1.2 for a noncommercial vehicle, including a passenger vehicle, as defined in section 465 of the Vehicle Code; or by a factor of 1.8 for a commercial vehicle as defined in section 260 of the Vehicle Code. Commercial motor vehicles under 6,001 pounds unladen weight and commercial trailers under 2,000 pounds unladen weight shall be treated as noncommercial vehicles for the purposes of this regulation. The presumption may be rebutted by evidence which establishes that the sales price was other than such amount.
The measure of tax on the purchase of an off-highway vehicle subject to identification under Division 16.5 of the Vehicle Code is the sales price.
The measure of tax on a purchase of a vehicle from a bona fide dealer outside this state is the sales price and is payable to the Department of Motor Vehicles.
If the purchaser of a vehicle makes an application to the Department of Motor Vehicles which is not timely, and is subject to penalty because of delinquency in effecting registration or identification or transfer of registration or identification of the vehicle, the purchaser then becomes liable also for penalty as specified in section 6591 of the Revenue and Taxation Code, but no interest shall accrue.
If the purchaser of a vehicle does not make application to the Department of Motor Vehicles,or does not pay the amount of use tax due, or files a return with the Board under section 6455 of the Revenue and Taxation Code which is not timely, interest and penalties shall apply with respect to the unpaid amount as provided in Chapter 5 (commencing with section 6451) of the Revenue and Taxation Code.
Any purchaser of a vehicle who registers it outside the state for the purpose of evading the payment of taxes due shall be liable for a penalty of 50 percent of any tax determined to be due on the sales price of the vehicle.
(2) Vessels and Aircraft.
(A) Aircraft and Documented Vessels. Except as provided in subdivision (c)(2)(C), purchasers of aircraft or documented vessels from any person other than a person required to hold a seller's permit by reason of the number, scope, and character of the person's sales of documented vessels or of aircraft, as the case may be and not otherwise specifically exempt shall report and pay tax to the Board. A documented vessel means a vessel which is required to be documented by the United States Coast Guard and for which the United States Coast Guard has issued a valid marine certificate.
A purchaser who holds a seller's permit, or to whom a consumer's use tax account number has been assigned, must include the tax in the purchaser's return for the period in which the aircraft or documented vessel was purchased.
A purchaser who does not hold a seller's permit, or to whom a consumer's use tax number has not been assigned, shall make a return and pay use tax, measured by the sales price of the vessel or aircraft, on or before the last day of the calendar month next succeeding the month in which a return form is mailed to the purchaser, or the last day of the twelfth month following the month during which the vessel or aircraft was purchased, whichever period expires the earlier.
Any purchaser of a vessel or aircraft who registers it outside the state for the purpose of evading the payment of taxes due shall be liable for a penalty of 50 percent of any tax determined to be due on the sales price of the vessel or aircraft.
(B) Undocumented Vessels. Any vessel which is not required to have, and does not have a valid marine certificate issued by the United States Coast Guard is an undocumented vessel.
Purchasers of undocumented vessels, the sales of which are exempt from sales tax under (b)(1) above, shall pay the use tax to the Department of Motor Vehicles, acting for, and on behalf of, the Board pursuant to section 9928 of the Vehicle Code, at the time of making application for registration except:
1. When the applicant establishes that the tax is inapplicable under the general exemptions in (b)(2)(A) and (b)(2)(C) above.
2. When the applicant furnishes to the Department of Motor Vehicles a certificate of use tax exemption or tax clearance certificate issued by the Board.
3. When, operative January 1, 1996, the applicant has proof of payment of sales or use tax to a broker under the provisions of subdivision (c)(2)(C).
If at the time of registration the purchaser does not have the necessary documentation to establish that tax does not apply but wants to secure immediate action upon his or her application for registration, the purchaser will be required to pay the tax to the Department of Motor Vehicles. If the purchaser can thereafter establish that no tax was applicable, he or she may file with the Board a claim for refund of the tax paid to the Department of Motor Vehicles.
If the purchaser makes an application to the Department of Motor Vehicles which is not timely, and is subject to penalty because of delinquency in effecting registration or transfer of registration of the undocumented vessel, he or she then becomes liable also for penalty as specified in Section 6591 of the Revenue and Taxation Code, but no interest shall accrue.
If the purchaser does not make application to either department, or does not pay the amount of use tax due, or files a return with the Board under section 6455 of the Revenue and Taxation Code which is not timely, interest and penalties shall apply with respect to the unpaid amount as provided in Chapter 5 (commencing with section 6451) of the Revenue and Taxation Code.
Any purchaser of a vessel who registers it outside the state for the purpose of evading the taxes due shall be liable for a penalty of 50 percent of any tax determined to be due on the sales price of the vessel.
(C) Vessels and Aircraft Purchased Through Brokers. Notwithstanding any other provision, when a person purchases a vessel or aircraft, on or after January 1, 1996, from another person through a broker, the purchaser is relieved from the liability for use tax on the transaction only to the extent that he or she:
1. has paid an amount as sales or use tax to the broker, and
2. has obtained and retained a receipt from the broker showing the payment of such tax.
The purchaser is relieved from liability only to the extent of the amount paid, and for which a receipt is provided, but remains liable for any amount of tax later determined to be due. An amount designated as sales or use tax collected by the broker from the purchaser constitutes a debt owed by the broker to the state and the broker shall be liable for that amount as if he or she were a retailer engaged in business in this state required to collect that amount as use tax from the purchaser.
(d) Leased Vehicles. (See Regulation 1661 (18 CCR 1661) for application of tax to leases of mobile transportation equipment.)
(1) Lease of Vehicles. The general rules respecting the application of tax to leases apply to leases of vehicles, subject to the following special requirements in the case of vehicles:
If under a lease or rental arrangement a vehicle is to be registered in the name of the lessee only, the lessor may not elect to pay the tax measured by the rental receipts. Under these circumstances, use tax will be collected at the time of registration or transfer of registration to the lessee unless the transfer of registration to the lessee is by a certificated dealer, dismantler, manufacturer, or lessor-retailer, using a Report of Sale, in which case the sales tax will be applicable measured by the sales price to the lessor. If the certificated dealer, dismantler, manufacturer, or lessor-retailer is also the lessor, use tax will be applicable measured by the sales price to the lessor, and must be paid by the lessor to the Board. The following examples illustrate applications of the foregoing provisions and are conditions under which tax may not be paid on rental receipts.
(A) A certificated dealer sells a vehicle to a lessor who is not a certificated dealer, dismantler, manufacturer, or lessor-retailer. The sale is reported to the Department of Motor Vehicles by the dealer and the vehicle is registered in the name of a lessee only. Sales tax is applicable measured by the selling price to the lessor.
(B) A certificated dealer is also a lessor and registers a vehicle in the name of the lessee only. Use tax is applicable measured by the cost of the vehicle to the dealer-lessor.
(C) A lessor who is not a certificated dealer, dismantler, manufacturer, or lessor-retailer leases a vehicle and has it registered in the name of the lessee only.
1. Use tax is applicable if the vehicle was purchased from a bona fide dealer outside this state. The measure of tax is the sales price of the vehicle to the lessor and it is payable by the lessor to the Department of Motor Vehicles.
2. Use tax is applicable if the vehicle was purchased from a person who is not a certificated California dealer, manufacturer, dismantler, lessor-retailer, or a bona fide out-of-state dealer. The measure of tax is the sales price of the vehicle to the lessor and, in the absence of evidence to the contrary, the sales price will be presumed to be an amount determined as in paragraph 3 of (c)(1) above.
Lessors who own vehicles registered in the names of lessees only may have the registration changed to show either the lessor or the lessor and lessee relationship on the registration card. Where this is done, they may continue to pay tax measured by the rental receipts. Insofar as the registration is not made pursuant to a retail sale, the change may be made without incurring use tax liability on the transfer of registration. Transfers, however, will be subject to transfer fees imposed by the Department of Motor Vehicles.
Lessors who change the registration should notify dealers from whom they purchase the vehicles and to whom they gave resale certificates that the registrations have been changed.
(2) Transfer of a Vehicle to a Lessee by a Lessor--Presumption. It will be presumed that a transfer of a vehicle to a lessee by a lessor, as defined in section 372 of the Vehicle Code, was a sale for resale if the lessee transfers title and registration to a third party within 10 days from the date the lessee acquired title from the lessor at the expiration or termination of a lease. The presumption may be rebutted by evidence that the sale was not for resale prior to use. “Transfer of title and registration” occurs, for purposes of this regulation, when the lessee endorses the certificate of ownership.
(e) Out-of-State Purchases of Vehicles, Vessels, and Aircraft.
Regarding the applicability of tax to the out-of-state purchase of a vehicle, vessel, or aircraft, see subdivision (b) of Regulation 1620 (18 CCR 1620).
_______
1  Section 11615.5 of the Vehicle Code requires a licensed lessor-retailer to pay sales tax with respect to the retail sale of a motor vehicle, except a sale to the lessee of the vehicle, if the lessor-retailer files a report of sale with the Department of Motor Vehicles.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6010, 6202, 6271-6294, 6366.2, 6422.1, 6451, 6455, 6485.1, 6514.1 and 6591, Revenue and Taxation Code; and Section 297.5, Family Code. 
HISTORY

1. Amendment of subsections (b)(2)(B), (c)(2) and (d) filed 11-25-77; effective thirtieth day thereafter (Register 77, No. 48). For prior history, see Register 77, No. 8.
2. Amendment of subsections (a)(1)(B) and (c)(1)(B) filed 12-20-77; effective thirtieth day thereafter (Register 77, No. 52).
3. New subsection (b)(3) filed 1-30-80; effective thirtieth day thereafter (Register 80, No. 5).
4. Amendment of subsections (a)(4) and (b) filed 8-22-80 as an emergency; effective upon filing (Register 80, No. 34). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 12-22-80.
5. Certificate of Compliance including amendment of subsection (b) transmitted to OAL 12-19-80 and filed 1-16-81 (Register 81, No. 3).
6. Amendment filed 1-10-85; effective thirtieth day thereafter (Register 85, No. 2).
7. Amendment of subsections (c) and (d) filed 9-5-85; effective thirtieth day thereafter (Register 85, No. 36).
8. Amendment of subsection (a)(1)(A) and new subsection (b)(2)(D) Filed 3-19-90; operative 4-18-90 (Register 90, No. 13).
9. Amendment of subsections (a)(3), (b)(1)(B), (b)(2)(B), (b)(2)(D)2b, (d) and (d)(1)(C) filed 6-8-94; operative 7-8-94 (Register 94, No. 23).
10. Editorial correction of subsections (a)(1)(A), (a)(1)(B) and (b)(1)(B) (Register 97, No. 14).
11. Amendment of subsections (c)(2)(A) and (c)(2)(B)2., new subsections (c)(2)(B)3. and (c)(2)(C)-(c)(2)(C)2., amendment of subsection (d)(1) and amendment of Note filed 4-3-97; operative 5-3-97 (Register 97, No. 14).
12. Change without regulatory effect amending section filed 3-8-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 10).
13. Change without regulatory effect amending subsection (b)(2)(A) and Note filed 1-3-2007 pursuant to section 100, title 1, California Code of Regulations (Register 2007, No. 1).
§1610.2. Mobilehomes and Commercial Coaches.
Note     •     History

(a) Definitions. For purposes of this regulation, the following definitions govern:
(1) “Mobilehome” means a structure transportable in one or more sections, designed and equipped to contain not more than two dwelling units to be used with or without a foundation system. A “dwelling unit” consists of one or more habitable rooms which are designed to be occupied by one family with facilities for living, sleeping, cooking, eating, and sanitation. “Mobilehome” does not include a recreational vehicle, commercial coach, or factory built housing as defined in Section 19971 of the Health and Safety Code.
(2) “Commercial Coach” means a structure transportable in one or more sections, designed and equipped for human occupancy for industrial, professional, or commercial purposes, which is required to be moved under permit, and shall include a trailer coach. “Trailer coach” means a vehicle, other than a motor vehicle, designed for human habitation, or human occupancy for industrial, professional, or commercial purposes, for carrying property on its own structure, and for being drawn by a motor vehicle.
(3) “Used Mobilehome” means a mobilehome that was previously sold and registered or titled with the Department of Housing and Community Development, or with an appropriate agency or authority, or any other state, District of Columbia, territory or possession of the United States or a foreign state, province, or country.
(4) “Current Recognized Value Guide” means (1) the Kelley Blue Book Manufactured Housing and Mobilehome Guide or (2) the National Automobile Dealer Associations's (NADA) Mobilehome Manufactured Housing Appraisal Guide, which is the current guide for the period in which the sale, storage, use or other consumption occurs.
(b) Basic Application of Tax.
(1) General Exemptions.
(A) Sales Tax. Sales tax does not apply to sales of mobilehomes or commercial coaches required to be annually registered under the Health and Safety Code when the retailer (as defined in Revenue and Taxation Code Section 6275) is not licensed pursuant to the Health and Safety Code as a manufacturer, manufacturer branch, dealer, dealer branch, distributor, distributor branch, representative, or representative branch. Generally, where sales tax does not apply to the sale, unless the transaction is also exempt from the use tax as provided in subdivision (b)(1)(B) below, use tax applies to the purchase of the mobilehome or commercial coach. The purchaser is required to pay the use tax to the Department of Housing and Community Development at the time of making application for registration. (For explanation regarding payment of tax by purchaser, see subdivision (c) below.)
(B) Sales and Use Tax. Neither sales tax nor use tax applies to the sale or use of:
1. Mobilehomes and commercial coaches sold by the parent, grandparent, child, grandchild, or spouse of the purchaser, or by the brother or sister of the purchaser if both are under the age of 18 and are related by blood or adoption, where the seller is not engaged in the business of selling the type of property for which the exemption is claimed. Claimants of this exemption must submit satisfactory evidence of relationship.
2. Mobilehomes and commercial coaches when included in any transfer of all or substantially all of the property held or used in the course of business activities of the transferor and when after the transfer the real and ultimate ownership remains substantially similar.
3. Used mobilehomes which are subject to property tax pursuant to Part 13 (commencing with Section 5800) of Division 1 of the Revenue and Taxation Code at the time of sale.
(2) Fees. The “gross receipts” from the retailer's sale of a mobilehome and the “sales price” of a mobilehome stored, used, or otherwise consumed in this State does not include separately stated escrow fees or registration fees charged in connection with the sale of any mobilehome.
(3) New Mobilehomes.
(A) In General. Generally, unless the transaction qualifies as a sale for occupancy as a residence, or is otherwise exempt, tax applies to the gross receipts from the sale of a new mobilehome to the same extent as sales of other tangible personal property. See subdivision (b)(3)(B) below for special rules applicable to sales of new mobilehomes for occupancy as residences.
(B) Mobilehomes Sold for Occupancy as a Residence. A mobilehome dealer is the “retailer-consumer” of any new mobilehome sold to the customer for occupancy as a residence if the transaction would otherwise have been subject to the sales tax and the mobilehome is thereafter subject to local property taxation. For a description of the conditions under which a mobilehome dealer may tender a resale certificate to a supplier, see Regulation 1668(h).
1. Measure of Tax. The retailer-consumer is required to declare and pay tax at 75 percent of the retailer-consumer's purchase price for the period in which the qualifying sale is made to a customer. A qualifying sale is one in which the customer certifies to the retailer-consumer at the time of sale that the mobilehome is being acquired for occupancy as a residence. The retailer-consumer is not authorized to separately bill the customer for tax reimbursement.
The applicable percentage of the purchase price applies to all items which the retailer-consumer has purchased and affixed as an integral part of the mobilehome prior to sale, or pursuant to the contract of sale, such as carpeting, wall paneling, room partitions, and built-in appliances. Operative January 1, 1985, for purposes of this regulation, draperies and freestanding refrigerators and ranges shall be considered an integral part of a mobilehome. If these items are not included in the price of the mobilehome when acquired by the retailer-consumer, they must be included when computing the total amount subject to tax. The retailer-consumer's purchase price of these items also must include any labor charges for affixing the property when the labor is performed by other than the retailer-consumer.
A mobilehome dealer is the retailer of certain other items which are not an integral part of the mobilehome, such as furniture. The mobilehome dealer is also the retailer of mobilehome accessories, such as window awnings, skirting, and air conditioning units, provided these items are not affixed to a mobilehome situated on a permanent foundation or directly affixed to realty. Tax is due on the entire retail selling price to the customer.
2. Certification of Exemption. If a purchaser certifies in writing at the time of the sale that the mobilehome will be used in a manner or for a purpose entitling the retailer to report tax on the transaction based on 75 percent of the retailer's purchase price and subsequently uses the property in some other manner or for some other purpose not qualifying for the exemption, then the purchaser shall be liable for payment of tax measured by the entire sales price or gross receipts from the sale less an amount of equal to 75 percent of the sales price or gross receipts from the sale of the mobilehome to the retailer.
The following is a form of certification approved by the Board. 

CERTIFICATION OF EXEMPTION
MOBILEHOME RESIDENCE PURCHASE
I hereby certify that the mobilehome that I (name of purchaser) am purchasing from (name of retailer-consumer) is being purchased for occupancy as a residence and that it will only be used for this purpose. I further certify and agree that if the property purchased under authority of this certificate is used for any other purpose, I shall be liable for payment of tax measured by the entire sales price or gross receipts from the sale to me less an amount equal to 75 percent of the sales price or gross receipts from the sale of the mobilehome to the retailer.
Date Certificate Given: 
Signed By: (name of purchaser) 
Capacity: 
Description of Property:
3. Determining the Date of Sale. Generally the tax applies upon the date of the sale of the property to the buyer. A sale takes place on the date of actual transfer of title to the property to the retailer-consumer's customer or at the time possession is transferred to the purchaser where title is retained by the retailer-consumer solely as security for the payment of the purchase price.
Transactions involving installations by dealers upon permanent foundation systems are subject to tax upon installation. For purpose of such a transaction, installation shall be considered to be complete upon the date of delivery of possession of the mobilehome to the buyer or upon the date of close of escrow for the sale, whichever event first occurs.
4. Equivalent Measure of Tax for Direct Sales by a Manufacturer. A manufacturer is the “retailer-consumer” of any new mobilehome which he sells directly to a customer for occupancy as a residence and is required to declare and pay tax measured by an amount equal to 75 percent of the sales price or gross receipts from the sale at which a similar mobilehome ready for installation would be sold by the manufacturer to a retailer-consumer in this state.
5. Purchase of a Mobilehome from a Retailer at an Out-of-State Location. If the out-of-state retailer is engaged in business in this state within the meaning of Revenue and Taxation Code Section 6203, the out-of-state retailer is a retailer-consumer with respect to its qualifying sales of new mobilehomes and must report and pay tax as provided in subdivision (b)(3)(B)(1).
If the out-of-state retailer is not engaged in business in this state, then the purchaser must report and pay use tax measured by 75 percent of the out-of-state retailer's purchase price of any new mobilehome as set forth in subdivision (b)(3)(B)(1) of this regulation. In the absence of satisfactory evidence of the out-of-state vendor's purchase price, it shall be presumed that the measure of use tax for the transaction is an amount equivalent to 60 percent of the sales price of the mobilehome to the purchaser, provided the vendor is not the manufacturer of the mobilehome. If the out-of-state vendor is the manufacturer, tax will apply as provided in subdivision (b)(3)(B)(4) above.
(4) Used Mobilehomes.
(A) In General. Tax applies to the “gross receipts” from the sale of a used mobilehome and the “sales price” of a used mobilehome stored, used, or otherwise consumed in this State if, at the time of sale or use, the mobilehome is subject to annual license fees under the Health and Safety Code. Tax does not apply to the sale of a used mobilehome if, at the time of sale, the mobilehome is subject to property tax pursuant to Part 13 of Division 1 of the Revenue ad Taxation Code commencing with Section 5800; however, if, subsequent to the time of sale, the mobilehome is removed from the property tax rolls and reinstated under the annual license fee system, then tax applies in the same manner as if the mobilehome had been subject to the annual license fees at the time of sale.
Where a dealer, who is acting on its own account and not as a broker, sells a used mobilehome, the dealer is a retailer and tax applies to the retail sales price of the used mobilehome including separately stated charges for awnings, skirting, and other items of tangible personal property sold with the used mobilehome provided these items are not affixed to a mobilehome situated on a permanent foundation or directly affixed to realty. However, if a used mobilehome is sold in-place by a dealer, any separately stated values of existing real property improvements such as cement and landscaping or separately stated in-place location value are not subject to tax.
(B) Special Application of Tax to Certain Transactions Involving Used Mobilehomes.
1. Application of Tax for the Period January 1, 1983 through December 31, 1984. From January 1, 1983, to December 31, 1984, inclusive, “gross receipts” from the retail sale of, and “sales price” of a used mobilehome, sold or stored, used, or otherwise consumed in this state, means the retail value of the used mobilehome as determined in accordance with a current recognized value guide, whenever the registered or legal owner sells a used mobilehome through a person licensed under the Health and Safety Code as a dealer and not on the dealer's own account or through a licensed real estate broker acting pursuant to Section 10131.6 of the Business and Professions Code.
2. Application of Tax for the Period January 1, 1985 through December 31, 1985. From January 1, 1985 through December 31, 1985, inclusive, “ross receipts” from the retail sale of, and “sales price” of a used mobilehome, sold or stored, used, or otherwise consumed in this state, means the retail value of the used mobilehome as determined in accordance with a current recognized value guide, whenever the sale is:
a. Through a person licensed under the Health and Safety Code as a dealer and not on the dealer's own account; or
b. Through a licensed real estate broker acting pursuant to Section 10131.6 of the Business and Professions Code; or
c. Whenever a purchaser of a used mobilehome is required to pay the use tax to the Department of Housing and Community Development. 
If the value guide does not specify the age, model, and manufacturer of a used mobilehome or if the actual sales price of a used mobilehome is less than the current value specified in the value guide, the “sales price” shall be based on the actual sales price of the mobilehome as evidenced by the purchase documents.
If the total contract price includes charges for accessories or other items which are not an integral part of the mobilehome, such as in-place location value, landscaping, or furnishings, and the actual sales price of the used mobilehome is not segregated in the purchase documents, the “actual sales price” of the used mobilehome for purposes of determining the “sales price” under the provisions of the preceding paragraph shall be either the total contract price or the value specified in the value guide, whichever is lower. However, if the value of the used mobilehome is not specified in the value guide, then the “actual sales price” of the mobilehome included within the total contract price shall be determined by the Board based on information available to it.
3. Application of Tax For Periods On and After January 1, 1986. Effective January 1, 1986, “gross receipts” from the retail sale of, and “sale price” of a used mobilehome, sold or stored, used, or otherwise consumed in this state, means the retail value of the used mobilehome as determined in accordance with a current recognized value guide, whenever the sale is:
a. Through a person licensed under the Health and Safety Code as a dealer and not on the dealer's own account; or
b. Through a licensed real estate broker acting pursuant to Section 101231.6 of the Business and Professions Code; or
c. Whenever a purchaser of a used mobilehome is required to pay the use tax to the Department of Housing and Community Development.
If the value guide does not specify the model or manufacturer of a used mobilehome, the value of the used mobilehome shall be established by reference to the highest value in the value guide according to age and size or the actual sales price, whichever is less. If the actual sales price of a used mobilehome is less than the current value specified in the value guide, the sales price shall be based on the actual sales price of the mobilehome as evidenced by the purchase documents. “Actual sales price” means the total contract price, including, but not limited to, the value of the mobilehome, in-place location, awning, skirting, carport, patio, landscaping, shrubs, unattached furnishings, or other items not part of the mobilehome, and documentation fees.
(c) Payment of Tax by Purchaser. Purchasers of mobilehomes and commercial coaches required to be registered annually under the Health and Safety Code, the sales of which are exempt from sales tax under subdivision (b)(1)(A) above, shall pay tax to the Department of Housing and Community Development, acting for and on behalf of the Board, at the time of making application for registration except:
(1) When the applicant establishes that the tax is inapplicable under the general exemption in subdivision (b)(1)(B) above; or
(2) When the applicant furnishes to the Department of Housing and Community Development a use tax exemption or tax clearance certificate issued by the Board.
A purchaser may pay the use tax and penalty, if any, to the Department of Housing and Community Development so as to secure immediate action upon the application for registration and thereafter apply to the Board for a refund of the amount so paid.
Whenever the purchaser of a commercial coach is required to pay use tax to the Department of Housing and Community Development, the sales price shall be presumed to be an amount equal to the market value of the property at the time of the purchase as that value is determined to measure the license fees imposed under Chapter 8 (commencing with Section 18075) of Part 2, Division 13, of the Health and Safety Code, multiplied by a factor of 1.8. The presumption may be rebutted by evidence which establishes that the sales price was other than such amount. This provision does not apply to commercial coaches required to be registered annually under the Health and Safety Code which are purchased outside this state from a manufacturer or dealer. The measure of tax of a purchase of a commercial coach from a bona-fide dealer outside this state is the sales price and the tax is payable to the Department of Housing and Community Development.
Whenever the purchaser of a mobilehome is required to pay use tax to the Department of Housing and Community Development, the measure of tax shall be determined in accordance with subdivision (b)(3) or (b)(4) of this regulation, whichever is applicable.
If the purchaser of a mobilehome or commercial coach makes n application to the Department of Housing and Community Development which is not timely, and is subject to penalty because of delinquency in effecting registration or transfer of registration of the property, the purchaser then becomes liable also for penalty specified in Section 6591 of the Revenue and Taxation Code, but no interest shall accrue.
If the purchaser of a mobilehome or commercial coach does not make application to the Department of Housing and Community Development, or does not pay the amount of use tax due, or files a return with the Board under Section 6455 of the Revenue and Taxation Code which is not timely, interest and penalties shall apply with respect to the unpaid amount as provided in Chapter 5 (commencing with Section 6451) of Part 1, Division 2, of the Revenue and Taxation Code.
(d) Real Property Improvements on or to Mobilehomes or Commercial Coaches. A person who both furnishes and affixes accessories or other items as improvements or additions to land, or to a mobilehome, or a commercial coach, which rests on a permanent foundation, is a construction contractor. The application of tax to construction contracts is explained in Regulation 1521, Construction Contractors.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6010, 6012.2, 6012.9, 6275-6293, 6379 and 6422.1, Revenue and Taxation Code.
HISTORY

1. New section filed 6-10-83; effective thirtieth day thereafter (Register 83, No. 24).
2. Amendment filed 11-20-86; effective thirtieth day thereafter (Register 86, No. 47).
3. Editorial correction of subsection (b)(3)(B) (Register 88, No. 10).
4. Change without regulatory effect amending subsection (b)(3)(B) filed 11-4-2004 pursuant to section 100, title 1, California Code of Regulations (Register 2004, No. 45).
Article 10. Matters Involving the Federal Government

(Also See Article 28)
§1614. Sales to the United States and Its Instrumentalities.
Note     •     History

(a) Generally. Sales tax does not apply to sales to:
(1) The United States or its unincorporated agencies and instrumentalities.
(2) Any incorporated agency or instrumentality of the United States wholly owned by either the United States, or by a corporation wholly owned by the United States.
(3) The American National Red Cross, its chapters and branches.
(4) Incorporated federal instrumentalities not wholly owned by the United States, unless federal law permits taxing the instrumentality. Examples of incorporated federal instrumentalities exempt from tax are federal reserve banks, federal credit unions, federal land banks, and federal home loan banks.
Application of the use tax to the storage, use, or other consumption of tangible personal property by agencies or instrumentalities of the United States is prohibited unless federal law permits taxing the agency or instrumentality.
Where payment for tangible personal property sold or consumed in this state is made partly by the United States or its instrumentalities and partly by nonexempt persons, the payment is exempt to the extent of the United States' or its instrumentality's share provided it is made directly to the vendor by the United States or its instrumentality. If the nonexempt party makes full payment and then seeks reimbursement from the United States or its instrumentality, the entire amount is taxable even though the United States or its instrumentality may reimburse the party in full or in part.
(b) Army and Air Force Exchange Services, Navy Exchanges, Coast Guard Exchanges, Open Messes, and Officers' Messes. Army and air force exchange services, navy exchanges, coast guard exchanges, open messes, and officers' messes, established pursuant to regulations of the appropriate branch of the armed services are instrumentalities of the United States, and tax does not apply to sales to these organizations.
Tax applies to sales to persons in the armed services of the United States, notwithstanding the circumstance that the merchandise may be billed through any army or air force exchange service, navy exchange, coast guard exchange, or similar organization.
(c) Company and Other Unit Funds. Tax does not apply to sales to the armed services of merchandise purchased with unit and similar funds (company, troop, hospital, recreation, welfare, etc.) where the expenditures are made in accordance with appropriate regulations of the armed services for the general benefit of armed services personnel.
(d) Civilian Welfare Funds. Civilian welfare funds are established and administered under armed services regulations under which post restaurants are also administered. Both are nonappropriated fund activities and are unincorporated governmental instrumentalities. Accordingly, sales tax does not apply to sales made to such organizations properly conducted and operated at military installations in this state in accordance with appropriate regulations.
Any seller to such organizations claiming a transaction as exempt from sales tax must obtain from the purchaser a certificate similar to the following:

View Graphic
(e) The Selective Service System. Tax does not apply to receipts from sales to State Procurement Officers for selective service authorized by selective service regulations.
(f) Medicare Program. Tax does not apply to the sale of items to a person insured pursuant to Part A of the Medicare Act as such sales are considered exempt sales to the United States.
Tax applies to the sale of an item to a person insured pursuant to Part B of the Medicare Act even though the person assigns the claim for reimbursement to the retailer and the retailer files the claim with, and is paid by, a carrier administering medicare claims under contract with the United States.
(g) Supporting Documents. Any seller claiming a transaction as exempt from tax under Section 6381 must obtain from the purchaser, and retain, a government purchase order or documents demonstrating direct payment by the United States to support the claim.

Note: Construction contractors generally, see Regulation 1521.
Motion pictures produced for United States Government, see Regulation 1529.
United States contractors, see Regulation 1615.
Leases and rentals in general, see Regulation 1660.
Diamond National Corp., et al. v. State Board of Equalization ________ 
US ________.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6381 and 6381.5, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former Section 2014 filed 2-20-70; effective thirtieth day thereafter (Register 70, No. 8).
2. Amendment filed 8-20-76; effective thirtieth day thereafter (Register 76, No. 34).
3. Amendment filed 12-29-78; effective thirtieth day thereafter. Pursuant to Section 7051, Revenue and Taxation Code, the order establishes that these amendments, adopted on 12-7-78, are operative only with respect to sales occurring on leases in effect on or after 1-1-79 (Register 78, No. 52).
4. Amendment of subsections (a)(3) and (i) filed 3-26-79; effective thirtieth day thereafter (Register 79, No. 13).
5. Amendment filed 2-28-80; effective thirtieth day thereafter (Register 80, No. 9).
6. Amendment filed 7-30-84; effective thirtieth day thereafter 84, No. 31).
7. Editorial correction of subsection (d) (Register 95, No. 48).
8. Change without regulatory effect amending subsections (a)(4) and (g) filed 5-25-2004 pursuant to section 100, title 1, California Code of Regulations (Register 2004, No. 22).
§1615. United States Contractors. [Repealed]
Note     •     History

NOTE

Authority cited: Section 6384, Revenue and Taxation Code; Section 9 of Chapter 681, Statutes of 1941. Additional authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006-6010, 6012, 6015, 6016.3, 6016.5, 6054.5, 6055, 6203.5, Revenue and Taxation Code.
HISTORY

1. Renumbering from former Section 1922 filed 11-3-71; effective thirtieth day thereafter (Register 71, No. 45). For prior history, see Register 55, No. 14.
2. Repealer filed 2-25-76; designated effective 4-1-76 (Register 76, No. 9).
§1616. Federal Areas.
Note     •     History

(a) In General. Tax applies to the sale or use of tangible personal property upon federal areas to the same extent that it applies with respect to sale or use elsewhere within this state.
(b) Alcoholic Beverages. Manufacturers, wholesalers and rectifiers who deliver or cause to be delivered alcoholic beverages to persons on federal reservations shall pay the state retailer sales tax on the selling price of such alcoholic beverages so delivered, except when such deliveries are made to persons or organizations which are instrumentalities of the Federal Government or persons or organizations which purchase for resale.
Sales to officers' and non-commissioned officers' clubs and messes may be made without sales tax when the purchasing organizations have been authorized, under appropriate regulations and control instructions, duly prescribed and issued, to sell alcoholic beverages to authorized purchasers.1
(c) Sales Through Vending Machines. Sales through vending machines located on Army, Navy, or Air Force installations are taxable unless the sales are made by operators who lease the machines to exchanges of the Army, Air Force, Navy, or Marine Corps, or other instrumentalities of the United States, including Post Restaurants and Navy Civilian Cafeteria Associations, which acquire title to and sell the merchandise through the machines to authorized purchasers.
For the exemption to apply, the contracts between the operators and the United States instrumentalities and the conduct of the parties must make it clear that the instrumentalities acquire title to the merchandise and sell it through machines leased from the operators to authorized purchasers.
(d) Indian Reservations. 
(1) In General. Except as provided in this regulation, tax applies to the sale or use of tangible personal property upon Indian reservations to the same extent that it applies with respect to sale or use elsewhere within this state.
(2) Definitions. For purposes of this regulation “Indian” means any person of Indian descent who is entitled to receive services as an Indian from the United States Department of the Interior. 
Indian organizations are entitled to the same exemption as a Indians. “Indian organization” includes Indian tribes and tribal organizations and also includes partnerships all of whose members are Indians. The term includes corporations organized under tribal authority and wholly owned by Indians. The term excludes other corporations, including other corporations wholly owned by Indians. “Reservation” includes reservations, rancherias, and any land held by the United States in trust for any Indian tribe or individual Indian.
(3) Sales by On-Reservation Retailers.
(A) Sales by Indians.
1. Sales by Indians to Indians who reside on a reservation. Sales tax does not apply to sales of tangible personal property made to Indians by Indian retailers negotiated at places of business located on Indian reservations if the purchaser resides on a reservation and if the property is delivered to the purchaser on a reservation. The purchaser is required to pay use tax only if, within the first 12 months following delivery, the property is used off a reservation more than it is used on a reservation.
2. Sales by Indians to non-Indians and Indians who do not reside on a reservation. Sales tax does not apply to sales of tangible personal property by Indian retailers made to non-Indians and Indians who do not reside on a reservation when the sales are negotiated at places of business located on Indian reservations if the property is delivered to the purchaser on the reservation. Except as exempted below, Indian retailers are required to collect use tax from such purchasers and must register with the Board for that purpose.
Indian retailers selling meals, food or beverages at eating and drinking establishments are not required to collect use tax on the sale of meals, food or beverages that are sold for consumption on an Indian reservation.
(B) Sales by non-Indians.
1. Sales by non-Indians to Indians who reside on a reservation. Sales tax does not apply to sales of tangible personal property made to Indians by retailers when the sales are negotiated at places of business located on Indian reservations if the property is delivered to the purchaser on a reservation. The sale is exempt whether the retailer is a federally licensed Indian trader or is not so licensed. The purchaser is required to pay use tax only if, within the first 12 months following delivery, the property is used off a reservation more than it is used on a reservation.
2. Sales by non-Indians to non-Indians and Indians who do not reside on a reservation. Either sales tax or use tax applies to sales of tangible personal property by non-Indian retailers to non-Indians and Indians who do not reside on a reservation.
(C) Resale Certificates. Persons making sales for resale of tangible personal property to retailers conducting business on an Indian reservation should obtain resale certificates from their purchasers. If the purchaser does not have a permit and all the purchaser's sales are exempt under paragraph (d)(3)(A) of this regulation, the purchaser should make an appropriate notation to that effect on the certificate in lieu of a seller's permit number (see Regulation 1668, “Resale Certificates”).
(4) Sales by Off-Reservation Retailers.
(A) Sales Tax--In General. Sales tax does not apply to sales of tangible personal property made to Indians negotiated at places of business located outside Indian reservations if the property is delivered to the purchaser and ownership to the property transfers to the purchaser on the reservation. Generally ownership to property transfers upon delivery if delivery is made by facilities of the retailer and ownership transfers upon shipment if delivery is made by mail or carrier. Except as otherwise expressly provided herein, the sales tax applies if the property is delivered off the reservation or if the ownership to the property transfers to the purchaser off the reservation.
(B) Sales Tax--Permanent Improvements--In General. Sales tax does not apply to a sale to an Indian of tangible personal property (including a trailer coach) to be permanently attached by the purchaser upon the reservation to realty as an improvement if the property is delivered to the Indian on the reservation. A trailer coach will be regarded as having been permanently attached if it is not registered with the Department of Motor Vehicles. Sellers of property to be permanently attached to realty as an improvement should secure exemption certificates from their purchasers (see Regulation 1667, “Exemption Certificates”).
(C) Sales Tax--Permanent Improvements--Construction Contractors. 
1. Indian contractors. Sales tax does not apply to ales of materials to Indian contractors if the property is delivered to the contractor on a reservation. Sales tax does not apply to sales of fixtures furnished and installed by Indian contractors on Indian reservations. The term “materials” and “fixtures” as used in this paragraph and the following paragraph are as defined in Regulation 1521 “Construction Contractors.”
2. Non-Indian contractors. Sales tax applies to sales of materials to non-Indian contractors notwithstanding the delivery of the materials on the reservation and the permanent attachment of the materials to realty. Sales tax does not apply to sales of fixtures furnished and installed by non-Indian contractors on Indian reservations.
(D) Use Tax--In General. Except as provided in paragraphs (d)(4)(E) and (d)(4)(F) of this regulation, use tax applies to the use in this state by an Indian purchaser of tangible personal property purchased from an off-reservation retailer for use in this state.
(E) Use Tax--Exemption. Use tax does not apply to the use of tangible personal property (including vehicles, vessels, and aircraft) purchased by an Indian from an off-reservation retailer and delivered to the purchaser on a reservation unless, within the first 12 months following delivery, the property is used off a reservation more than it is used on a reservation.
(F) Leases. Neither sales nor use tax applies to leases otherwise taxable as continuing sales or continuing purchases as respects any period of time the leased property is situated on an Indian reservation when the lease is to an Indian who resides upon the reservation. In the absence of evidence to the contrary, it shall be assumed that the use of the property by the lessee occurs on the reservation if the lessor delivers the property to the lessee on the reservation. Tax applies to the use of leased vehicles registered with the Department of Motor Vehicles to the extent that the vehicles are used off the reservation.
(G) Property Used in Tribal Self-Governance. Sales and use tax does not apply to sales of tangible personal property to and the storage, use, or other consumption of tangible personal property by the tribal government of an Indian tribe that is officially recognized by the United States if: 
1. The tribal government's Indian tribe does not have a reservation or the principal place where the tribal government meets to conduct tribal business cannot be its Indian tribe's reservation because the reservation does not have a building in which the tribal government can meet or the reservation lacks one or more essential utility services, such as water, electricity, gas, sewage, or telephone, or mail service from the United States Postal Service;
2. The property is purchased by the tribal government for use in tribal self-governance, including the governance of tribal members, the conduct of intergovernmental relationships, and the acquisition of trust land; and 
3. The property is delivered to the tribal government and ownership of the property transfers to the tribal government at the principal place where the tribal government meets to conduct tribal business. 
The purchase of tangible personal property is not exempt from use tax under this paragraph if the property is used for purposes other than tribal self-governance more than it is used for tribal self-governance within the first 12 months following delivery. 

1 The following is a summary of the pertinent regulations which have been issued:
(a) General. Air force regulation 34-57, issued under date of February 9, 1968, army regulation 210-65, issued under date of May 4, 1966, and navy general order No. 15, issued under date of May 5, 1965, authorize the sale and possession of alcoholic beverages at bases and installations subject to certain enumerated restrictions.
(b) Air Force. Air force regulation 34-57, paragraph 5, permits commissioned officers' and non-commissioned officers' open messes, subject to regulations established by commanders of major air commands to sell alcoholic beverages to authorized purchasers at bars and cocktail lounges, and provides that commanders will issue detailed control instructions. Paragraphs 8 and 9 require commanders of major air commands to issue regulations relative to package liquor sales and to procurement of alcoholic beverages, respectively.
(c)  Army. Army regulation 210-65, paragraph 9, provides that major commanders are authorized to permit at installations or activities within their respective commands the dispensing of alcoholic beverages by the drink or bottle. Paragraph 11 of AR 210-65 provides that when authorized by major commanders as prescribed in paragraph 9, AR 210-65, officers' and non-commissioned officers' open messes may, subject to regulations prescribed by the commanding officer of the installation or activity concerned, dispense alcoholic beverages by the drink, and operate a package store.
(d) Navy. Navy general order No. 15 provides that commanding officers may permit, subject to detailed alcoholic beverage control instructions, the sale of packaged alcoholic beverages by officers' and noncommissioned officers' clubs and messes and the sale and consumption of alcoholic beverages by the drink in such clubs and messes.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6017, 6021, Revenue and Taxation Code, Public Law No. 817-76th Congress (Buck Act). Vending machines, sales generally, see Regulation 1574. Items dispensed for 10¢ or less, see Regulation 1574. Additional reference: Section 6352, Revenue and Taxation Code.
HISTORY

1. Renumbering of former Section 2016 and amendment filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
2. New subsection (d) filed 7-7-78; effective thirtieth day thereafter (Register 78, No. 27).
3. Amendment of subsection (d)(3)(A)2. filed 2-4-2003; operative 3-6-2003 (Register 2003, No. 6).
4. New subsections (d)(4)(G)-(d)(4)(G)3. filed 1-11-2012; operative 2-10-2012 (Register 2012, No. 2).
§1617. Federal Taxes.
Note     •     History

(a) Federal Excise Taxes on Retail Sales.
Gross receipts subject to sales tax and the sales price subject to use tax do not include the amount of any federal tax imposed upon or with respect to retail sales whether imposed upon the retailer or upon the consumer and regardless of whether the amount of federal tax is stated to the consumer as a separate charge.
Retailers must retain records to show that the amounts deducted as federal tax have been returned to the United States or will be returned to the United States.
(b) Other Federal Excise Taxes.
(1) Except as indicated in subdivisions (b)(2) and (b)(3), gross receipts subject to sales tax and the sales price subject to use tax include the amount of any federal excise tax included in the prices of the property sold, even though the manufacturer or importer is also the retailer thereof, and it is immaterial whether or not the amount of such tax is stated as a separate charge.
(2) Prior to July 1, 1995, gross receipts subject to sales tax and the sales price subject to use tax do not include the amount of the federal excise tax imposed pursuant to section 4091 of the Internal Revenue Code with respect to diesel fuel or jet fuel for which the purchaser obtains either a direct refund or credit against his or her income tax.
(3) Beginning July 1, 1995, gross receipts subject to sales tax and the sales price subject to use tax do not include the federal excise tax imposed pursuant to Section 4081 or 4091 of the Internal Revenue Code with respect to gasoline, diesel, or jet fuel for which the purchaser obtains either a direct refund or credit against his or her income tax.
(c) Import Duties. Import duties are imposed by federal statute (19 U.S.C. section 1505(a)) on the importer of record. If the importer of record is a consignee and the consignee is the seller, import duties included in the price of the property sold are subject to sales and use tax. If the importer of record is a consignee and the consignee is the buyer, such duties are excludable from the sales price subject to use tax.
(d) Repeal or Reduction of Federal Taxes.
(1) In General--Installment Payments. When an article subject to a federal excise tax prior to the date such tax is repealed or reduced is sold under an agreement calling for payment of the sales price in installments, payments made on or after the repeal or reduction date will be considered as if they were made with respect to an article sold on or after the repeal or reduction date if the vendor establishes that the amount of payments due on or after such date were reduced by an amount equal to the tax reduction.
(2) Retailers' Excise Taxes Collected After Repeal. Amounts collected by a retailer as federal retailers' excise tax after the tax has been repealed, but neither paid by the retailer to the Internal Revenue Service nor refunded to its customers, constitute gross receipts subject to sales tax.
(e) Refunds of Federal Taxes.
(1) Repayment by Manufacturer to Retailer. When a manufacturer receives a refund of federal excise tax and repays the amount of the tax to the retailer pursuant to requirements of federal law, the repayment to the retailer will be regarded for sales and use tax purposes as a reduction of the retailer's cost of goods sold.
(2) Repayment to Consumer. When a manufacturer receives a refund of federal manufacturers' excise tax and repays the amount of the tax to the consumer either directly or through the retailer pursuant to requirements of federal law, the repayment to the consumer will be regarded for sales and use tax purposes as a price adjustment. Taxable gross receipts of the retailer for the period in which the repayment is made to the consumer will be reduced accordingly, and sales tax previously paid by the retailer on the amount will be refunded to the retailer, provided the amount collected from the consumer as sales tax reimbursement is also refunded to him or her.
(3) Refunds on Gasoline, Diesel or Jet Fuel. The refund of the federal excise tax imposed by Section 4081 or 4091 of the Internal Revenue Code with respect to gasoline, diesel, or jet fuel (either by direct refund or as a credit against income tax) is an adjustment to the sales price of the gasoline, diesel, or jet fuel. Accordingly, the retailer who paid the sales tax or the purchaser who paid use tax measured by the sales price of the gasoline, diesel, or jet fuel may file with the board a claim for refund of tax measured by the amount of the federal excise tax so refunded or credited. The claim must be supported by proof of the exempt use of the gasoline, diesel or jet fuel and of the refund or credit of the federal excise tax to the purchaser.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6011, 6012, 6245.5 and 6423, Revenue and Taxation Code; 19 U.S.C Section 1505(a); and 19 CFR Section 141.1(b).
HISTORY

1. Renumbering of former section 2017 and amendment filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32). For prior history, see Register 68, No. 35.
2. Amendment filed 6-7-90; operative 7-7-90 (Register 90, No. 31).
3. Amendment of subsection (e)(2) and new subsection (e)(3) filed 10-14-93; operative 11-15-93 (Register 93, No. 42).
4. Amendment of subsections (b)(1) and (b)(2), new subsection (b)(3), and amendment of subsection (e)(3) filed 1-23-97; operative 2-22-97 (Register 97, No. 4).
5. Amendment of subsections (a)-(b)(3) and (e)(3) and amendment of Note filed 11-1-2001; operative 12-1-2001 (Register 2001, No. 44).
§1618. United States Government Supply Contracts.
Note     •     History

(a) Definitions.
(1) “United States Government supply contract” means a contract with the United States to furnish, or to fabricate and furnish, tangible personal property including ships, aircraft, ordnance, or equipment, whereby title to tangible personal property purchased for use in fulfilling the contract passes to the United States pursuant to the title provisions contained in the contract before the contractor uses the property to perform the function or act for which the property was designed or manufactured. The term “U.S. Government supply contract” does not include contracts to construct improvements on or to real property or to the purchase of tangible personal property for use in fulfilling such contracts.
(2) “Direct consumable supplies” means supplies, tools, or equipment consumed in the performance of a contract which are specifically identified to the contract and the actual cost of which is charged as a direct item of cost to the specific contract. Effective June 14, 2007, “Tools” as used in this definition includes “special tooling” that was previously covered by Federal Acquisition Regulation (FAR) 52.245-17.
(3) “Overhead materials” means supplies consumed in the performance of a contract the cost of which is charged to an overhead expense account and then allocated to various contracts based on generally accepted accounting principles and consistent with government cost accounting standards.
(b) Application of Tax.
(1) Sales to U.S. Government supply contractors of tools, equipment, direct consumable supplies and overhead materials are sales for resale if the United States takes title pursuant to a United States government supply contract prior to any use of the property by the contractor to perform the function or act for which the property was designed or manufactured. Accordingly, tax does not apply to such sales even though the property does not become a component part of the tangible personal property furnished, fabricated, or manufactured by the contractor. If the contractor makes any use of the property to perform the function or act for which the property was designed or manufactured prior to the passage of title to the United States, tax applies to the sales to or to the use by the contractor.
(2) Whether title to direct consumable supplies or indirect consumable supplies (i.e., overhead materials) passes to the United States under a United States government supply contract and the time at which title passes will be determined in accordance with the title provisions contained in the contract, if any. 
(A) For direct consumable supplies, which are charged direct to the United States government contract, title passes to the United States government pursuant to the title passage clause(s) associated with that specific contract.
(B) For indirect consumable supplies (i.e., overhead materials), which are charged to an expense account which is then allocated to various locations, cost centers or contracts, it will be considered that title passed to the United States government prior to use of the property, and tax will not apply with respect to the purchase or use of the property charged to the expense account, if the item is allocated to a specific United States government supply contract, pursuant to the terms of which title passes to the United States prior to the use of the item. Property will be considered allocated to a specific United States government supply contract when it is allocated pursuant to:
1. Accounting standards promulgated by the Cost Accounting Standards Board (Office of Federal Procurement Policy, Office of Management and Budget), if applicable; otherwise,
2. Generally accepted accounting principles that are equitable, consistently-applied, and appropriate to the particular circumstances.
Direct consumable supplies identified in subdivision (b)(2)(A) and indirect consumable supplies (i.e., overhead materials) which may be allocated in the manner identified in subdivision (b)(2)(B) include, but are not limited to, property used to repair items of capital equipment when a portion of the contractor's use is properly allocable to its government supply contracts, notwithstanding the fact that title to the property being repaired remains with the contractor.
(3) Special Tooling. Effective December 29, 1989 through June 13, 2007, title will generally not pass prior to use by the contractor for special tooling which is subject to the Special Tooling Clauses of Federal Acquisition Regulation (48 CFR) 52.245-17. Title to such special tooling will pass prior to use by the contractor only if the agreement between the contractor and the United States government contains a custom clause providing for title passage prior to use by the contractor. Therefore, sales of special tooling will generally be subject to tax.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6007 and 6381, Revenue and Taxation Code; and Aerospace Corp. v. St. Bd. of Equalization (1990) 218 Cal.App.3d 1300.
HISTORY

1. Renumbering from Section 1923 and amendment filed 11-3-71; effective thirtieth day thereafter (Register 71, No. 45).
2. Amendment filed 6-21-84; effective thirtieth day thereafter (Register 84, No. 25). 
3. Editorial correction of subsection (b) printing error (Register 88, No. 13).
4. Amendment filed 10-11-95; operative 11-10-95 (Register 95, No. 41).
5. Amendment filed 8-7-2012; operative 9-6-2012 (Register 2012, No. 32).
§1619. Foreign Consuls.
Note     •     History

(a) Application of Tax.
(1) In General. Neither sales tax nor use tax applies to the sale or use of tangible personal property sold or leased to foreign consular officers, employees, or members of their families, to the extent that such persons have been identified by the U.S. Department of State as exempt from the tax pursuant to treaties or other diplomatic agreements with the United States. Persons identified as exempt from taxation pursuant to treaties or other diplomatic agreements with the United States will be issued a Tax Exemption Card by the U. S. Department of State which identifies the bearer as exempt from tax and which specifies the extent of the exemption.
Tax applies to sales of tangible personal property to foreign consular officers, employees, or members of their families, who do not hold a Tax Exemption Card issued by the U. S. Department of State except as provided in subparagraph (a) (2) below. Also, tax applies to sales of tangible personal property to persons holding Tax Exemption Cards where their total purchases in a single transaction do not exceed the minimum level of exemption as specified on the Tax Exemption Card. Sales or use tax applies to the sale or use of tangible personal property sold to nationals of the United States even though such persons may perform consular functions for foreign governments.
(2) Vehicles. In addition to the exemption provided in subparagraph (a)(1), the purchase or lease of vehicles on or after the date of assumption of duties by foreign consular officers, employees, or members of their families who do not hold a Personal Tax Exemption Card will be exempt from the sales and use taxes if an identification letter is furnished directly to the retailer by the Office of Foreign Missions, U.S. Department of State (OFM). In the absence of a Mission Tax Exemption Card, the purchase or lease of vehicles on behalf of a mission also will be exempt from the sales and use taxes provided an identification letter is furnished directly to the retailer by OFM. Such letters must confirm the name, exempt status, identification number (if available), and date of assumption of duties of the person seeking the exemption (if applicable) and must be furnished to the retailer at the time of the sale. For purposes of this regulation, “vehicle” is as defined in Section 6272 of the Revenue and Taxation Code.
Effective June 1, 2003, the sale or lease of vehicles to foreign consular officers, employees, or members of their families will be exempt from the sales and use tax if:
(A) The purchaser provides a valid Tax Exemption Card (Personal or Mission) or a protocol identification card to the retailer; and
(B) The retailer contacts and obtains directly from the OFM a letter stating that the vehicle sale or lease to the purchaser is eligible for exemption from tax (“OFM Eligibility Letter”).
(b) Records of Retailers. Invoices or other written evidence of sale must be retained by the retailer to support any deduction claimed on sales tax returns for sales to foreign consuls. The invoices should show the name of the purchaser, the name of the mission, the tax exemption number, the expiration date of the Tax Exemption Card, and the minimum level of exemption specified on the Tax Exemption Card. In addition, to support each transaction claimed as an exempt sale or lease of a vehicle to a foreign diplomat or mission not holding a Tax Exemption Card, the identification letter from the OFM confirming the exempt status of the diplomat must be retained by the retailer. 
Effective June 1, 2003, in addition to retaining invoices or other written evidence as specified above, the retailer must retain a copy of the Tax Exemption Card (Personal or Mission) or protocol identification card, and the OFM Eligibility Letter to support each transaction claimed as an exempt sale or lease of a vehicle to a foreign consular officer, employee, or member of his or her family.

Note: For special provisions affecting record retention, see Regulation 1698.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6272, 6352 and 7053, Revenue and Taxation Code; and Vienna Convention on Diplomatic Relations of April 18, 1961, Article 34 (23 UST 3242) T.I.A.S. No. 7502.
HISTORY

1. New section filed 4-15-77; effective thirtieth day thereafter (Register 77, No. 16).
2. Amendment filed 3-3-86; effective upon filing pursuant to Government Code Section 11346.2(d) (Register 86, No. 10).
3. Amendment filed 4-12-88; operative 5-12-88 (Register 88, No. 18).
4. Amendment filed 9-6-96; operative 10-6-96 (Register 96, No. 36).
5. Amendment of subsection (a)(2), new subsections (a)(2)(A)-(B) and amendment of subsection (b) filed 1-6-2005; operative 6-1-2003 (Register 2005, No. 1).
Article 11. Interstate and Foreign Commerce
§1620. Interstate and Foreign Commerce.
Note     •     History

(a) Sales Tax.
(1) In General. When a sale occurs in this state, the sales tax, if otherwise applicable, is not rendered inapplicable solely because the sale follows a movement of the property into this state from a point beyond its borders, or precedes a movement of the property from within this state to a point outside its borders. Such movements prevent application of the tax only when conditions exist under which the taxing of the sale, or the gross receipts derived therefrom, is prohibited by the United States Constitution or there exists a statutory exemption. If title to the property sold passes to the purchaser at a point outside this state, or if for any other reason the sale occurs outside this state, the sales tax does not apply, regardless of the extent of the retailer's participation in California in relation to the transaction. The retailer has the burden of proving facts establishing his right to exemption.
(2) Sales Following Movement of Property Into State From Point Outside State.
(A) From Other States--When Sales Tax Applies. Sales tax applies when the order for the property is sent by the purchaser to, or delivery of the property is made by, any local branch, office, outlet or other place of business of the retailer in this state, or agent or representative operating out of or having any connection with, such local branch, office, outlet or other place of business and the sale occurs in this state. The term “other place of business” as used herein includes the homes of district managers, service representatives, and other resident employees, who perform substantial services in relation to the retailer's functions in this state. It is immaterial that the contract of sale requires or contemplates that the goods will be shipped to the purchaser from a point outside the state. Participation in the transaction in any way by the local office, branch, outlet or other place of business is sufficient to sustain the tax.
(B) From Other States--When Sales Tax Does Not Apply. Sales tax does not apply when the order is sent by the purchaser directly to the retailer at a point outside this state, or to an agent of the retailer in this state, and the property is shipped to the purchaser, pursuant to the contract of sale, from a point outside this state directly to the purchaser in this state, or to the retailer's agent in this state for delivery to the purchaser in this state, provided there is no participation whatever in the transaction by any local branch, office, outlet or other place of business of the retailer or by any agent of the retailer having any connection with such branch, office, outlet, or place of business. 
(C) Imports. Sales tax applies to sales of property imported into this state from another country when the sale occurs after the process of importation has ceased, regardless of whether the property is in its original package, if the transaction is otherwise subject to sales tax under subdivision (a)(2)(A) of this regulation.
(3) Sales Preceding Movement of Goods From Within State to Points Outside State.
(A) To Other States--When Sales Tax Applies. Except as otherwise provided in (B) below, sales tax applies when the property is delivered to the purchaser or the purchaser's representative in this state, whether or not the disclosed or undisclosed intention of the purchaser is to transport the property to a point outside this state, and whether or not the property is actually so transported. It is immaterial that the contract of sale may have called for the shipment by the retailer of the property to a point outside this state, or that the property was made to specifications for out-of-state jobs, that prices were quoted including transportation charges to out-of-state points, or that the goods are delivered to the purchaser in this state via a route a portion of which is outside this state. Regardless of the documentary evidence held by the retailer (see (3)(D) below) to show delivery of the property was made to a carrier for shipment to a point outside the state, tax will apply if the property is diverted in transit to the purchaser or his representative in this state, or for any other reason it is not delivered outside this state.
(B) Shipments Outside the State--When Sales Tax Does Not Apply. Sales tax does not apply when the property pursuant to the contract of sale, is required to be shipped and is shipped to a point outside this state by the retailer, by means of:
1. Facilities operated by the retailer or
2. Delivery by the retailer to a carrier, customs broker or forwarding agent, whether hired by the purchaser or not, for shipment to such out-of-state point. As used herein the term “carrier” means a person or firm regularly engaged in the business of transporting for compensation tangible personal property owned by other persons, and includes both common and contract carriers. The term “forwarding agent” means a person or firm regularly engaged in the business of preparing property for shipment or arranging for its shipment. An individual or firm not otherwise so engaged does not become a “carrier” or “forwarding agent” within the meaning of this regulation simply by being designated by a purchaser to receive and ship goods to a point outside this state. (This subsection is effective on and after September 19, 1970, with respect to deliveries in California to carriers, etc., hired by the purchasers for shipment to points outside this state that are not in another state or foreign country, e.g., to points in the Pacific Ocean.)
(C) Exports.
1. When Sales Tax Applies. Except for certain new motor vehicles delivered to a foreign country pursuant to paragraph (b)(2)(D) of Regulation 1610 (18 CCR  1610), sales tax applies when the property is delivered in this state to the purchaser or the purchaser's representative prior to an irrevocable commitment of the property into the process of exportation. It is immaterial that the disclosed or undisclosed intention of the purchaser is to ship or deliver the property to a foreign country or that the property is actually transported to a foreign country.
Sales of property such as fuel oil and other items consumed during a voyage to a foreign country are not exempt even though they are transported out of, and are not returned to this country. It is immaterial that the ship to which the property is delivered is of foreign registry.
2. When Sales Tax Does Not Apply. Sales tax does not apply when the property is sold to a purchaser for shipment abroad and is shipped or delivered by the retailer to the foreign county. To be exempt as an export the property must be intended for a destination in a foreign country, it must be irrevocably committed to the exportation process at the time of sale, and must actually be delivered to the foreign country prior to any use of the property. Movement of the property into the process of exportation does not begin until the property has been shipped, or entered with a common carrier for transportation to another country, or has been started upon a continuous route or journey which constitutes the final and certain movement of the property to its foreign destination.
There has been an irrevocable commitment of the property to the exportation process when the property is sold to a purchaser for shipment abroad and is shipped or delivered by the retailer in a continuous route or journey to the foreign country by means of:
a. Facilities operated by the retailer,
b. A carrier, forwarding agent, export packer, customs broker or other person engaged in the business of preparing property for export, or arranging for its export, or
c. A ship, airplane, or other conveyance furnished by the purchaser for the purpose of carrying the property in a continuous journey to the foreign country, title to and control of the property passing to the purchaser upon delivery. Delivery by the retailer of property into a facility furnished by the purchaser constitutes an irrevocable commitment of the property into the exportation process only in those instances where the means of transportation and character of the property shipped provide certainty that the property is headed for its foreign destination and will not be diverted for domestic use. The following are examples of deliveries by the retailer into facilities furnished by the purchaser which demonstrate an irrevocable commitment of the property into the exportation process:
Example 1. Sale of fuel oil delivered into the hold of a vessel provided by the purchaser. The fuel is to be unloaded at the foreign destination.
Example 2. Sale of jewelry delivered aboard a scheduled airline with a scheduled departure to a foreign destination.
Example 3. Sale of equipment, designed specifically for use in the foreign destination, delivered to a foreign purchaser's aircraft. The foreign purchaser has filed a flight plan showing that the aircraft will be transporting the property on a continuous journey to its foreign destination.
The following are examples of sales which do not demonstrate sufficient indicia of an irrevocable commitment to the exportation process and do not qualify as exports:
Example 4. Sale of jewelry delivered to a foreign purchaser at the retailer's place of business or to the purchaser or his representative at the airport prior to boarding the plane. The tax applies even though the purchaser may hold tickets for the foreign destination.
Example 5. Sale of a television set delivered into the trunk of a passenger vehicle or into the storage area of a pickup truck. 
Example 6. Sale of equipment delivered to a foreign purchaser's aircraft even though a flight plan had been filed showing that the aircraft was to be flown to a foreign destination. If the equipment sold had been altered or specifically designed for use in the foreign destination, then the combined factors of the character of the property and the means of transportation would provide certainty of export and the sale would qualify as an export as described in (3) above.
Export has not begun where property is transported from a point within this state to a warehouse or other collecting point in this state even though it is intended that the property then be transported, and in fact is transported, to another country. Nevertheless, sales of property are exempt if transported under the circumstances described in 2.b. above to a warehouse or other collecting point of a carrier, forwarding agent, export packer, customs broker, or other person engaged in the business of preparing property for export, or arranging for its export. Property is regarded as transported under the circumstances described in 2.b. above, when the property is sold to a purchaser for shipment abroad and is shipped or delivered to a point in this state to a person who is not the purchaser, whether or not that person is a legal entity related to the purchaser, who ships or delivers the property to a foreign destination as provided in paragraph (a)(3)(C)2.b. of this regulation.
(D) Proof of Exemption. Bills of lading or other documentary evidence of the delivery of the property to a carrier, customs broker, or forwarding agent for shipment outside this state must be retained by the retailer to support deductions taken under (B) above. Bills of lading, import documents of a foreign country or other documentary evidence of export must be obtained and retained by retailers to support deductions taken under (C) above.
(E) Particular Applications.
1. Property Mailed to Persons in the Armed Forces. Tax does not apply to sales of property which is mailed by the retailer, pursuant to the contract of sale, to persons in the armed forces at points outside the United States, notwithstanding the property is addressed in care of the postmaster at a point in this state and forwarded by him to the addressee.
When mail is addressed to Army Post Offices (A.P.O.'s) or to Fleet Post Offices (F.P.O.'s) in care of the postmaster, it will be presumed that it is forwarded outside California. The retailer must keep records showing the names and addresses as they appear on the mailed matter and should keep evidence that the mailing was done by him.
2. Property for Defense Purposes Delivered to Offices of the United States. Tax does not apply to sales of property shipped to a point outside this state pursuant to the contract of sale when the property is marked for export and delivered by retailer to the “contracting officer,” “officer in charge,” “port quartermaster,” or other officer of the United States for transportation and delivery to the purchaser at such a point.
3. Airplanes Delivered to Agencies of the United States. Tax does not apply to sales of airplanes and parts and equipment for airplanes transported to a point outside this state pursuant to the contract of sale when such property is delivered to the United States Air Force or any other agency or instrumentality of the United States for transportation and delivery to the purchaser or someone designated by him at that point.
4. Repairers. When repairers of property in California, in fulfillment of their repair contracts with their customers, ship the repaired property to points outside this state by one of the methods set forth under (a)(3)(B) and (C) above, tax does not apply to the sale by the repairer of the repair parts and materials affixed to and becoming a component part of the repaired property so shipped.
(b) Use Tax.
(1) In General. Use tax applies to the use of any property purchased for storage, use or other consumption and stored, used, or consumed in this state, the sale of which is exempt from sales tax under this regulation.
(2) Exceptions.
(A) Use tax does not apply to the use of property held or stored in this state for sale in the regular course of business nor to the use of property held for the purposes designated in subparagraph (b)(9), below.
(B) Interstate and Foreign Commerce.
1. In General. Use tax does not apply to the use of property purchased for use and used in interstate or foreign commerce prior to its entry into this state, and thereafter used continuously in interstate or foreign commerce both within and without California and not exclusively in California.
2. Intermodal Cargo Containers. Intermodal cargo containers are containers that are used to transport freight during a continuous movement of that freight from the origin shipper to the destination receiver by the use of two or more of the following modes of transportation: railroad, vehicle, or vessel. The use of an intermodal cargo container in California is exempt from tax if the use meets the requirements of subdivision (b)(2)(B)1 of this regulation. 
An intermodal cargo container is regarded as first used in interstate or foreign commerce prior to its entry into California if the container is loaded with freight outside California and then first enters California during a continuous movement of that freight from the origin shipper to the destination receiver. For purposes of the requirements set forth in subdivision (b)(2)(B)1 of this regulation, an intermodal cargo container is also regarded as first used in interstate or foreign commerce prior to its entry into California if all of the following conditions are satisfied:
a. The contract for the sale or lease of the intermodal cargo container requires that the container be used in interstate or foreign commerce and such sales contract or lease contract is entered into prior to the entry of the intermodal cargo container into California;
b. The purchaser or lessee transports the intermodal cargo container into California with the specific intent that such intermodal cargo container will then be loaded with freight for transport in a continuous movement to a destination outside California, whether or not the purchaser knows which particular freight will be loaded into the intermodal cargo container at the time the intermodal cargo container first enters California; and
c. The intermodal cargo container is, in fact, first loaded with freight for transport in a continuous movement to a destination outside California, and the intermodal cargo container is thereafter used continuously in interstate or foreign commerce both within and without California and not exclusively in California.
(C) Use tax does not apply to the use of certain new motor vehicles purchased for subsequent delivery to a foreign country and so delivered pursuant to paragraph (b)(2)(D) of Regulation 1610 (18 CCR 1610).
(D) Hand-Carried from a Foreign Country.
1. Prior to January 1, 2008, use tax does not apply to the storage, use, or other consumption in this state of the first four hundred dollars ($400) of tangible personal property purchased in a foreign country by an individual from a retailer and personally hand-carried into this state from the foreign country within any 30-day period. This subdivision shall not apply to property sent or shipped to this state.
2. On and after January 1, 2008, use tax does not apply to the storage, use, or other consumption in this state of the first eight hundred dollars ($800) of tangible personal property purchased in a foreign country by an individual from a retailer and personally hand-carried into this state from the foreign country within any 30-day period. This subdivision shall not apply to property sent or shipped to this state.
(3) Purchase for Use in this State. Property delivered outside of California to a purchaser known by the retailer to be a resident of California is regarded as having been purchased for use in this state unless a statement in writing, signed by the purchaser or the purchaser's authorized representative, that the property was purchased for use at a designated point or points outside this state is retained by the vendor.
Notwithstanding the filing of such a statement, property purchased outside of California which is brought into California is regarded as having been purchased for use in this state if the first functional use of the property is in California. For purposes of this regulation, “functional use” means use for the purposes for which the property was designed. Except as provided in subdivision (b)(5) of this regulation, when property is first functionally used outside of California, the property will nevertheless be presumed to have been purchased for use in this state if it is brought into California within 90 days after its purchase, unless the property is used, stored, or both used and stored outside of California one-half or more of the time during the six-month period immediately following its entry into this state. Except as provided in subdivision (b)(5) of this regulation, prior out-of-state use not exceeding 90 days from the date of purchase to the date of entry into California is of a temporary nature and is not proof of an intent that the property was purchased for use elsewhere. Except as provided in subdivision (b)(5) of this regulation, prior out-of-state use in excess of 90 days from the date of purchase to the date of entry into California, exclusive of any time of shipment to California, or time of storage for shipment to California, will be accepted as proof of an intent that the property was not purchased for use in California. 
(4) Purchase for Use in this State -- Vehicles, Vessels, and Aircraft--90-Day Test (Prior to October 2, 2004, and from July 1, 2007, through September 30, 2008). The provisions of subdivision (b)(4) apply prior to October 2, 2004, and from July 1, 2007, through September 30, 2008. A vehicle, vessel or aircraft purchased outside of California which is brought into California is regarded as having been purchased for use in this state if the first functional use of the vehicle, vessel or aircraft is in California. When the vehicle, vessel or aircraft is first functionally used outside of California, the vehicle, vessel or aircraft will nevertheless be presumed to have been purchased for use in this state if it is brought into California within 90 days after its purchase, exclusive of any time of shipment to California or time of storage for shipment to California, unless: 
(A) Physically Located Outside California. Use tax will not apply if the vehicle, vessel or aircraft is used, stored, or both used and stored outside of California one-half or more of the time during the six-month period immediately following its entry into this state. 
(B) Used in Interstate or Foreign Commerce.
1. If the property is a vehicle, use tax will not apply if one-half or more of the miles traveled by the vehicle during the six-month period immediately following its entry into this state are commercial miles traveled in interstate or foreign commerce. 
2. If the property is a vessel, use tax will not apply if one-half or more of the nautical miles traveled by the vessel during the six-month period immediately following its entry into the state are commercial miles traveled in interstate or foreign commerce.
3. If the property is an aircraft, use tax will not apply if one-half or more of the flight time traveled by the aircraft during the six-month period immediately following its entry into the state is commercial flight time traveled in interstate or foreign commerce. Such use will be accepted as proof of an intent that the property was not purchased for use in California. For purposes of subdivision (b)(4), the term “commercial” applies to business uses and excludes personal use. However, the term “commercial” is not limited to for-profit businesses.
(5) Purchase for Use in this State -- Vehicles, Vessels, and Aircraft -- 12-Month Test (From October 2, 2004, through June 30, 2007, and after September 30, 2008).
(A) Purchased for Use in California. Except as provided in subdivision (b)(5)(D) below, the provisions of subdivision (b)(5) apply from October 2, 2004, through June 30, 2007, and after September 30, 2008. A vehicle, vessel, or aircraft purchased outside of California which is brought into California is regarded as having been purchased for use in this state if the first functional use of the vehicle, vessel, or aircraft is in California. When a vehicle, vessel, or aircraft is purchased outside of California, is first functionally used outside of California, and is brought into California within 12 months from the date of its purchase, it is rebuttably presumed that the vehicle, vessel, or aircraft was acquired for storage, use, or other consumption in this state and is subject to use tax if any of the following occur:
1. The vehicle, vessel, or aircraft was purchased by a California resident as defined in section 516 of the Vehicle Code, as that section now reads or is hereinafter amended.
2. In the case of a vehicle, the vehicle was subject to registration under Chapter 1 (commencing with section 4000) of Division 3 of the Vehicle Code during the first 12 months of ownership.
3. In the case of a vessel or aircraft, that vessel or aircraft was subject to property tax in this state during the first 12 months of ownership.
4. The vehicle, vessel, or aircraft is used or stored in this state more than one-half of the time during the first 12 months of ownership.
(B) Evidence Rebutting Presumption. This presumption may be controverted by documentary evidence that the vehicle, vessel, or aircraft was purchased for use outside of this state during the first 12 months of ownership. This evidence may include, but is not limited to, evidence of registration of that vehicle, vessel, or aircraft, with the proper authority, outside of this state.
Operative September 20, 2006, through June 30, 2007, and after September 30, 2008, in the case of a vehicle, this presumption also may be controverted by documentary evidence that the vehicle was brought into this state for the exclusive purpose of warranty or repair service and was used or stored in this state for that purpose for 30 days or less. The 30-day period begins when the vehicle enters this state, includes any time of travel to and from the warranty or repair facility, and ends when the vehicle is returned to a point outside the state. The documentary evidence shall include a work order stating the dates that the vehicle is in the possession of the warranty or repair facility and a statement by the owner of the vehicle specifying dates of travel to and from the warranty or repair facility.
(C) Used in Interstate or Foreign Commerce.
1. If the property is a vehicle, use tax will not apply if one-half or more of the miles traveled by the vehicle during the six-month period immediately following its entry into this state are commercial miles traveled in interstate or foreign commerce.
2. If the property is a vessel, use tax will not apply if one-half or more of the nautical miles traveled by the vessel during the six-month period immediately following its entry into the state are commercial miles traveled in interstate or foreign commerce.
3. If the property is an aircraft, use tax will not apply if one-half or more of the flight time traveled by the aircraft during the six-month period immediately following its entry into the state is commercial flight time traveled in interstate or foreign commerce.
Such use will be accepted as proof of an intent that the property was not purchased for use in California. For purposes of subdivision (b)(5)(C), the term “commercial” applies to business uses and excludes personal use. However, the term “commercial” is not limited to for-profit businesses.
(D) Repair, Retrofit, or Modification of Vessels or Aircraft.
1. Notwithstanding subdivision (b)(5)(A) above, aircraft or vessels, the purchase and use of which are subject to the 12-month test described in subdivision (b)(5), that are brought into this state for the purpose of repair, retrofit, or modification, shall not be deemed to be acquired for storage, use, or other consumption in this state.
2. Subdivision (b)(5)(D)1. does not apply if, during the period following the time the aircraft or vessel is brought into this state and ending when the repair, retrofit, or modification of the aircraft or vessel is complete, more than 25 hours of airtime in the case of an airplane or 25 hours of sailing time in the case of a vessel are logged on the aircraft or vessel by the registered owner of that aircraft or vessel or by an authorized agent operating the aircraft or vessel on behalf of the registered owner of the aircraft or vessel. The calculation of airtime or sailing time logged on the aircraft or vessel does not include airtime or sailing time following the completion of the repair, retrofit, or modification of the aircraft or vessel that is logged for the sole purpose of returning or delivering the aircraft or vessel to a point outside of this state.
(E) Binding Purchase Contract. Subdivision (b)(5) does not apply to any vehicle, vessel, or aircraft that is either purchased, or is the subject of a binding purchase contract that is entered into, on or before October 1, 2004, or from July 1, 2007, through September 30, 2008.
(6) Purchase for Use in This State -- Locomotives -- 90-Day Test. A locomotive purchased outside of California which is brought into California is regarded as having been purchased for use in this state if the first functional use of the locomotive is in California. When the locomotive is first functionally used outside of California, the locomotive will nevertheless be presumed to have been purchased for use in this state if it is brought into California within 90 days after its purchase, exclusive of any time of shipment to California or time of storage for shipment to California, unless:
(A) Physically Located Outside California. Use tax will not apply if the locomotive is used, stored, or both used and stored outside of California one-half or more of the time during the six-month period immediately following its entry into this state.
(B) Used in Interstate or Foreign Commerce. Use tax will not apply to transactions involving locomotives if one-half or more of the miles traveled by the locomotive during the six-month period immediately following its entry into California are commercial miles traveled in interstate or foreign commerce.
Such use will be accepted as proof of an intent that the property was not purchased for use in California. For purposes of subdivision (b)(6), the term “commercial” applies to business uses and excludes personal use. However, the term “commercial” is not limited to for-profit businesses.
(7) Examples of Interstate and Foreign Commerce. Examples of what constitutes interstate or foreign commerce include, but are not limited to the following:
Example 1. A sightseeing tour bus group (charter) or regularly scheduled bus service (per capita) originates in California and travels to another state or country for a single day or several days, then returns to California where the charter or schedule terminates.
Example 2. A charter bus, vessel or aircraft deadheads under contract to another state, picks up the group and operates the charter without entering the state of California, drops the group in the other state, and deadheads back into the State of California. (The charter was quoted round trip.)
Example 3. A commercial vehicle deadheads to another state or country or transports property to another state or country and delivers that property within the other state or country or to another state or country. The vehicle then returns to California, either loaded or empty.
Example 4. A charter bus group tours under contract to another state or country for a day or several days, drops the passengers in the other state or country, and then deadheads back under contract to its terminal or next assignment.
Example 5. Property arriving in California via plane, train, or vessel from another state or country is picked up by a commercial vehicle, vessel or aircraft and transported to another state or country for a day or several days. The commercial vehicle, vessel or aircraft then returns to California, either loaded or empty.
Example 6. A sightseeing tour bus group (charter) arriving in California via plane, train, or ship from another state or country is picked up by bus and tours California for a number of days, goes to another state or country for a number of days, and then terminates service either in another state, country, or California.
Example 7. Property arriving in California via plane, train, or vessel from another state or country is picked up by a commercial vehicle, vessel or aircraft, which may be operating wholly within California, and transported for further distribution to one or more California locations or to locations in another state or country. The vehicle, vessel or aircraft then returns empty to pick up another load arriving in California via plane, train, or vessel from another state or country.
Example 8. A commercial vehicle, vessel, aircraft, or regularly scheduled bus service operating wholly within California is picking up or feeding passengers or property arriving from, or destined to, a state or country other than California to another form of transportation be it plane, train, ship, or bus. (Example: an airport bus service or a bridge carrier for Amtrak.)
Example 9. Property is transported by a commercial vehicle, vessel, aircraft, or locomotive from another state or country to California or from California to another state or country. While engaged in this transportation, the commercial vehicle, vessel, aircraft, or locomotive also transports property from one point in California to another.
Example 10. A commercial vehicle, vessel, aircraft, or locomotive is dispatched from one location in California to another location in California to pick up property and transport it to another state or country.
Example 11. A commercial vehicle, vessel or aircraft, sightseeing tour bus group (charter), or regularly scheduled bus service operating in interstate or foreign commerce experiences a mechanical failure and is replaced by another vehicle, vessel or aircraft. The replacement vehicle, vessel or aircraft is also deemed to be operating in interstate or foreign commerce as a continuation of the original trip.
Example 12. A vehicle, vessel, aircraft, or locomotive transports persons or property for commercial purposes (a) from California to another state or country; (b) from another state or country to California; (c) entirely within California, but the vehicle, vessel, aircraft, or locomotive picks up persons or property arriving in California via train, bus, truck, vessel, or aircraft from another state or country and then transports the persons or property in a continuous route or journey to one or more California locations or to locations in another state or country.
Example 13. A vessel transports persons or property for commercial purposes (a) from a California port to a port in another state or country; or (b) from a port in another state or country to a port in California.
(8) Imports. Use tax applies with respect to purchases of property imported into this state from another country when the use occurs after the process of importation has ceased and when sales tax is not applicable, regardless of whether the property is in its original package.
(9) “Storage” and “Use”--Exclusions. “Storage” and “use” do not include the keeping, retaining or exercising any right or power over property for the purpose of subsequently transporting it outside the state for use thereafter solely outside the state, or for the purpose of being processed, fabricated or manufactured, into, attached to, or incorporated into, other property to be transported outside the state and thereafter used solely outside the state.
The following examples are illustrative of the meaning of the exclusion:
Example 1. An engine installed in an aircraft which is flown directly out of the state for use thereafter solely outside the state qualifies for the exclusion. The use of the engine in the transporting process does not constitute a use for purposes of the exclusion. However, if any other use is made of the aircraft during removal from this state, such as carrying passengers or property, the exclusion does not apply.
Example 2. An engine installed in a truck which is transported by rail or air directly out of the state for use thereafter solely outside the state qualifies for the exclusion.
Example 3. An engine transported outside the state and installed on an aircraft which returns to the state does not qualify for the exclusion. It does not matter whether the use of the aircraft in California is exclusively interstate or intrastate commerce or both. 
Example 4. An engine transported outside the state and installed on an aircraft which does not return to the state qualifies for the exclusion.
(c) Rail Freight Cars. Sales tax does not apply to the sale of, and the use tax does not apply to the storage, use or other consumption in this state of rail freight cars for use in interstate or foreign commerce.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6008, 6009.1, 6051, 6201, 6247, 6248, 6352, 6366.2, 6368.5, 6387, 6396 and 6405, Revenue and Taxation Code.
HISTORY

1. Renumbering from section 2015 and amendment filed 12-16-70; effective thirtieth day thereafter (Register 70, No. 51).
2. Amendment filed 7-29-76; effective thirtieth day thereafter (Register 76, No. 31).
3. Amendment of subsection (a)(3)(D) filed 12-20-77; effective thirtieth day thereafter (Register 77, No. 52).
4. Amendment of subsection (b) filed 10-19-78; effective thirtieth day thereafter (Register 78, No. 42).
5. Amendment filed 1-9-86; effective thirtieth day thereafter (Register 86, No. 2).
6. Amendment of subsections (a)(3)(C) and new subsection (b)(2)(C) filed 3-19-90; operative 4-18-90 (Register 90, No. 13).
7. Amendment of subsections (a)(2)(A), (a)(3)(C)1, (a)(3)(C)3, (b)(2)(A) and (b)(2)(C)-(3) and Note filed 6-14-94; operative 7-14-94 (Register 94, No. 24).
8. Amendment of subsection (a)(2)(A) and Note filed 10-5-95; operative 11-4-95 (Register 95, No. 40).
9. Amendment filed 1-8-99; operative 2-7-99 (Register 99, No. 2).
10. Amendment of subsections (a)(3)(C)1.c., (b)(3) and (b)(5) filed 1-24-2000; operative 2-23-2000 (Register 2000, No. 4).  
11. Amendment of subsections (b)(2)(A) and (b)(3), new subsection (b)(4), subsection relettering and amendment of newly designated (b)(4) examples filed 11-17-2000; operative 12-17-2000 (Register 2000, No. 46).
12. Amendment of subsections (b)(1) and (b)(2)(A)-(B), new subsections (b)(2)(B)1.-(b)(2)(B)2.c. and amendment of subsection (b)(2)(C) filed 6-6-2001; operative 7-6-2001 (Register 2001, No. 23).
13. Amendment filed 1-8-2002; operative 2-7-2002 (Register 2002, No. 2).
14. Change without regulatory effect amending subsections (a)(3)(C)2.c. (Example 6) and (b)(3)-(4), adopting new subsections (b)(5)-(b)(6) and renumbering subsections filed 3-3-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 9).
15. Amendment of subsection (b)(2)(A), new subsections (b)(6)-(b)(6)(B), subsection renumbering and amendment of subsection (b)(7) filed 12-29-2005; operative 1-28-2006 (Register 2005, No. 52).
16. Change without regulatory effect amending subsections (b)(4), (b)(5) and (b)(5)(A) and amending Note filed 9-15-2006 pursuant to section 100, title 1, California Code of Regulations (Register 2006, No. 37).
17. Change without regulatory effect amending subsection (b)(5)(B) filed 4-25-2007 pursuant to section 100, title 1, California Code of Regulations (Register 2007, No. 17).
18. Change without regulatory effect adopting subsections (b)(2)(D)-(b)(2)(D)2. and amending subsections (b)(4) and (b)(5)(C) and Note filed 4-23-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 17).
19. Change without regulatory effect amending subsections (b)(4), (b)(5), (b)(5)(A) and (b)(5)(B), repealing subsection (b)(5)(D)1., renumbering subsections and amending newly designated subsections (b)(5)(D)1.-2. and subsection (b)(5)(E) filed 2-5-2009 pursuant to section 100, title 1, California Code of Regulations (Register 2009, No. 6).
20. Change without regulatory effect amending subsection (b)(2)(A) and (b)(5)(C) filed 9-29-2009 pursuant to section 100, title 1, California Code of Regulations (Register 2009, No. 40).
§1620.1. Sales of Certain Vehicles and Trailers for Use in Interstate or Out-of-State Commerce.
Note     •     History

(a) Definitions
(1) Permanent Trailer Identification (PTI) Program. A registration program for commercial trailers as defined in Vehicle Code section 5014.1 administered by the Department of Motor Vehicles (DMV). Assessments made pursuant to the PTI program constitute a flat fee and are not based on the weight of a commercial trailer subject to the PTI program. In lieu of annual registration, DMV assesses a service fee every five (5) years.
(2) Purchaser's Agent. For purposes of this regulation, a purchaser's agent means a person authorized by the purchaser of a trailer to act on the purchaser's behalf in providing an exemption certificate from the sales or use tax to the seller of the trailer. To establish that a particular person is acting as the purchaser's agent, the purchaser must: 1) clearly disclose in writing to the seller the purchaser's intent to use an agent in the transaction, including the name of the purchaser's agent, and 2) obtain and retain, prior to the use of the agent, written evidence of the agent's status with the purchaser. An agent may include a registration service company engaged by either the purchaser or dealer who sells trailers. A dealer, manufacturer or remanufacturer may not act as the purchaser's agent with respect to a trailer that it sells or delivers to a purchaser.
(3) Remanufacturer and Remanufactured Vehicles. A remanufacturer of vehicles or trailers means a person who is licensed by the DMV pursuant to Vehicle Code section 507.8. A remanufactured vehicle means a vehicle constructed by a remanufacturer and meeting the criteria of Vehicle Code section 507.5. A vehicle purchased from an out-of-state company will qualify as a remanufactured vehicle if the out-of-state company is licensed as a remanufacturer by the appropriate governmental agency in that state and the vehicle meets the criteria established by that state for a remanufactured vehicle. The sale of a used vehicle or trailer alone does not qualify as a sale of a remanufactured vehicle unless the vehicle or trailer otherwise qualifies as a remanufactured vehicle or trailer pursuant to applicable state laws.
(4) Single State Registration System (SSRS). A federally regulated program under which states monitor a motor carrier's compliance with federal registration and insurance requirements. Motor carriers generally must register with the state in which they have their principal place of business. In California, the program is administered by the DMV and covers only motor carriers of property. Compliance with the SSRS program requires eligible motor carriers to register annually with the DMV, report the number of vehicles operating in other states participating in the SSRS program, and to pay the requisite fees. “Vehicles” for purposes of SSRS registration means only self-propelled units and not trailers. SSRS filings do not identify individual vehicles.
(5) Trailer. For purposes of this regulation, trailer means a new or remanufactured trailer or semi-trailer with an unladen weight of 6,000 pounds or more. Any vehicle not designed for carrying persons or property on its own structure, such as an auxiliary dolly, does not qualify as a trailer for purposes of this regulation. Qualified trailers may be manufactured or remanufactured either inside or outside this state.
(6) United States Department of Transportation (USDOT) Number. A number issued by the Federal Motor Carrier Safety Administration (FMCSA) to any motor carrier located in the United States that is engaged in the transportation of property in interstate or foreign commerce. A USDOT number is assigned to a motor carrier and not to the motor carrier's individual vehicles.
(7) United States -- Federal Maritime Commission (FMC) Number. A number issued by the Federal Maritime Commission to entities operating as common carriers in U.S. foreign commerce. An FMC number is assigned to an ocean carrier and to the ocean carrier's individual trailers.
(8) Vehicle. For purposes of this regulation, the term vehicle means a new or remanufactured truck, truck tractor, semitrailer, or trailer with an unladen weight of 6,000 pounds or more; or a new or remanufactured trailer coach, or auxiliary dolly, manufactured or remanufactured in this state and purchased from an out-of-state dealer for delivery in this state.
(b) Application of Tax
(1) In General. Tax applies to the sale or storage, use, or other consumption of vehicles and trailers in this state except as provided in subdivisions (b)(2) and (b)(3).
(2) Exempt Sales of Vehicles for Use in Out-of-State or Foreign Commerce.
(A) Notwithstanding subdivision (b)(1), tax does not apply to the sale or storage, use, or other consumption of a vehicle delivered in this state by the vehicle manufacturer or remanufacturer to a purchaser who is not a resident of California for use exclusively in out-of-state or foreign commerce where the purchaser:
1. Purchases the vehicle from a dealer located outside this state,
2. Removes the vehicle from this state within 30 days from and after the date of delivery,
3. Provides a valid affidavit to the manufacturer or remanufacturer, that is accepted by such person in good faith, stating:
a. The name and location of the out-of-state dealer from whom the vehicle was purchased,
b. The name and location of the in-state manufacturer or remanufacturer that delivered the vehicle to the purchaser and the date of delivery
c. That the purchaser is not a resident of California,
d. That the vehicle was purchased for use exclusively outside California,
e. That the vehicle was removed from this state within 30 days of the delivery date, and
f. The date of removal.
4. Provides evidence of out-of-state vehicle registration (state of registration, license plate number and VIN or serial number) to the manufacturer or remanufacturer within 60 days of providing the affidavit to the deliverer.
(B) Notwithstanding the forgoing provisions, it is rebuttably presumed that a vehicle registered outside California and apportioned for use within this state is not purchased for use exclusively outside this state.
(C) An affidavit for the providing of the information set forth in subdivision (b)(2)(A) is set forth in the Appendix to this regulation.
(3) Exempt Sales of Trailers for Use in Interstate, Out-of-State or Foreign Commerce.
(A) Notwithstanding the provisions of subdivisions (b)(1) and (b)(2), tax does not apply to the sale or storage, use, or other consumption of a trailer delivered in this state by the manufacturer, remanufacturer or dealer to a purchaser for use exclusively in interstate, out-of-state, or foreign commerce where all the following criteria are met:
1. The trailer is manufactured or remanufactured outside California and is removed from this state within 30 days from and after the date of delivery; or the trailer is manufactured or remanufactured within California and is removed from the state within 75 days from and after the date of delivery,
2. If the trailer is registered outside the state, the purchaser or purchaser's agent provides the delivering manufacturer, remanufacturer, or dealer a copy of the current out-of-state license and registration for the trailer showing the Vehicle Identification Number (VIN) or serial number; or, if the trailer is registered in-state under the PTI program, the purchaser or purchaser's agent provides the delivering manufacturer, remanufacturer, or dealer a copy of the federal document assigning or confirming the purchaser's or lessee's USDOT number, FMC number, or a copy of the current SSRS filing with the DMV.  A purchaser or purchaser's agent may not use an FMC number if the purchaser has a current USDOT number. Evidence of registration outside California must be submitted to the dealer, manufacturer, or remanufacturer no later than 60 days after the timely providing of an affidavit described in subdivision (b)(3)(A)3. Evidence of a USDOT number, FMC number, or SSRS filing must be submitted with the affidavit,
3. The purchaser or purchaser's agent provides a valid affidavit to the manufacturer, remanufacturer, or dealer, that is accepted by such person in good faith, stating:
a. The name and location of the dealer from whom the trailer was purchased,
b. The name and location of the California dealer, manufacturer or remanufacturer that delivered the trailer to the purchaser and the date of delivery,
c. That the trailer was purchased for use exclusively outside the state, or exclusively in interstate or foreign commerce, or both,
d. That the trailer was removed from the state within the appropriate time periods provided for in subdivision (b)(3)(A)(1), and
e. The date of removal.
(B) An affidavit for the providing of the information set forth in subdivision (b)(3) to the deliverer is set forth in the Appendix to this regulation.
(c) Affidavit. An affidavit is valid where a purchaser or, in the case of a claimed section 6388.5 exemption, a purchaser or purchaser's agent, provides all information required by subdivisions (b)(2) or (b)(3), signs and dates the affidavit, and provides it to the manufacturer or remanufacturer that delivered the vehicle to the purchaser or to the manufacturer, remanufacturer, or dealer that delivered the trailer to the purchaser within 30 days after the vehicle or trailer is removed from the state.
For transactions that include the purchase of more than one vehicle or trailer, the purchaser need not file a separate affidavit for each vehicle or trailer, but may instead append a list of the vehicles or trailers included in the transaction, identifying each one by a VIN or serial number. The purchaser must, however, report the date each vehicle or trailer was delivered and the date each was removed from the state and provide current out-of-state license and registration or USDOT number, FMC number, or SSRS filing applicable to each vehicle or trailer, as required by subdivisions (b)(2) and (b)(3).
For purposes of this regulation, it is presumed that the person who delivers a vehicle or trailer to the purchaser accepted the affidavit in good faith in the absence of evidence to the contrary.
(d) Lessors. The sale of a vehicle or trailer to a lessor qualifies for the exemptions from sales and use tax provided by Revenue and Taxation Code sections 6388 and 6388.5 provided the sale and subsequent use of the vehicle or trailer as leased tangible personal property meets the appropriate criteria detailed in subdivisions (b)(2) and (b)(3). In addition to the information required in these subdivisions, a lessor must provide the name and address of the lessee on the affidavit and, when applicable, documentation showing that the vehicle or trailer was registered outside the state on behalf of the lessor or lessee. If a leased trailer is registered under the PTI program, the lessor must provide the lessee's USDOT number, FMC number, or current SSRS filing.
(e) Documentation to be Maintained by Purchasers. Purchasers of vehicles shall maintain internal records documenting that a vehicle qualifying for the Revenue and Taxation Code section 6388 exemption was taken out of California within the time mandated by statute and was used exclusively outside the state. Purchasers of trailers shall maintain internal records documenting that a trailer qualifying for the Revenue and Taxation Code section 6388.5 exemption was taken out of California within the time mandated by statute and was used exclusively in out-of-state, foreign or interstate commerce. A purchaser must provide the supporting documentation to the Board upon request.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code.  Reference: Sections 6388, 6388.3, 6388.5 and 6421, Revenue and Taxation Code.
HISTORY

1. New section and appendix filed 9-16-2003; operative 10-16-2003 (Register 2003, No. 38).

Appendix

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§1620.2. Beverages Sold or Served by Carriers.
Note     •     History

(a) Definitions.
(1) Carrier. “Carrier” means any person or firm who engages in the business of transporting by vehicle, train, vessel, or aircraft persons or property for hire or compensation. The term includes common and contract carriers engaged in intrastate, interstate or foreign commerce. It does not include, however, the National Railroad Passenger Corporation (Amtrack).
(2) Trans-State Trip. “Trans-state trip” means the act of crossing California territory or airspace during a continuous journey between points outside this state without stopping or landing in this state.
(3) Taxable Beverages. “Taxable beverages” means all beverages sold or served by carriers except beverages described as food products in Section 6359 of the Revenue and Taxation Code and Regulation 1602.
(b) Application of Tax. Tax applies to the sale or use of taxable beverages in this state by carriers, except when the sale or use occurs during a trans-state trip. This includes taxable beverages sold or served on a complimentary no charge basis by carriers to passengers or crew.
(c) Acquisition of Taxable Beverages. Taxable beverages which will be sold to passengers or crew may be purchased for resale. Beverages which are served only on a complimentary no charge basis may not be purchased for resale. (See Regulation 1668 for provisions regarding the effect and form of resale certificates.)
(d) Reporting Methods.
(1) General. In reporting taxable measure, a carrier may utilize the California passenger mile method described in (d)(2) or any other reporting method which accurately reports the tax due on taxable beverages sold or used in this state. The carrier must be prepared to demonstrate by records which can be verified by audit that the method used accurately reflects the taxable measure. Carriers contemplating use of other reporting methods are encouraged to submit an outline of the proposed method to the nearest board office for review and formal approval prior to use of the method.
(2) California Passenger Miles Method. Under this method, a carrier may report its tax liability from the sale and consumption of taxable beverages in this state by allocating a portion of its total gross receipts and its total cost of taxable beverages served on a complimentary basis to California based on the ratio that its passenger miles in California bears to its total system-wide passenger miles.
The ratio of passenger miles in California to total passenger miles may be determined by tests. The test shall be representative of the carrier's operations. Further, new tests should be made when there is any significant change in routes, schedules, or other operating conditions. All detail and test data shall be retained for examination by Board representatives.
The California mileage used in computing the ratio should exclude trans-state trip mileage. Air carriers shall make no adjustment for ascent and descent miles unless total system-wide mileage is adjusted for total ascent and descent miles.
(A) Determination of Taxable Receipts Under the Passenger Miles Method. In determining taxable receipts under this method, a carrier must apply the ratio to its total gross receipts from the sale of taxable beverages system-wide. As used in this subsection, “total gross receipts” means the total amount of the sales price of all taxable beverages including sales tax reimbursement. Since the taxable receipts determined under this method represents taxable receipts before adjustment for sales tax included therein, taxable receipts may be adjusted to compensate for California sales tax included in total gross receipts.
(B) Determination of Cost of Taxable Beverages Consumed Under the Passenger Miles Method. In determining the cost of taxable beverages consumed in this state, a carrier must apply the ratio to its total cost of beverages served on a complimentary basis system-wide.
Separate calculations must be made for taxable beverages of a kind which are resold and those of a kind not resold. For example, soft drinks normally are not resold, while beer, wine and liquor normally are resold.
1. Beverages of a Kind Not Generally Resold. The cost of taxable beverages consumed in this state may be determined by applying the passenger miles method to the cost of taxable beverages served on a complimentary basis system-wide. A credit may be taken for taxable beverages acquired on which California sales tax reimbursement was paid to the vendor. However, the credit may not exceed the total cost of taxable beverages consumed in California as determined by the passenger miles method.
2. Beverages of a Kind Generally Resold. The cost of taxable beverages of a kind normally resold but which are served on a complimentary basis may be determined on the passenger miles method. If the carrier has paid California sales tax reimbursement at the time of acquisition, a credit may be taken for taxable beverages so acquired.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6009, 6051, 6091, 6201, 6352 and 7053, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-85; effective thirtieth day thereafter (Register 85, No. 18).
§1621. Sales to Common Carriers.
Note     •     History

(a) Definitions.
(1) Common Carrier. As used herein the term “common carrier” means any person who engages in the business of transporting persons or property for hire or compensation and who offers these services indiscriminately to the public or to some portion of the public. With respect to water transportation the term includes any vessel engaged, for compensation, in transporting persons or property in interstate or foreign commerce. This includes those vessels commonly called “ocean tramps,” “trampers,” or “tramp vessels.”
(2) Foreign Air Carrier. As used herein, the term “foreign air carrier” means any person, not a citizen of the United States, who undertakes, whether directly or indirectly or by lease or any other arrangement, to engage in foreign air transportation.
(b) Application of Tax.
(1) Common Carriers. The sale of tangible personal property, other than fuel and petroleum products, to common carriers, including foreign air carriers, is exempt from sales tax pursuant to section 6385(a) of the Revenue and Taxation Code when such property is:
(A) Shipped by the seller via the facilities of the purchasing carrier under a bill of lading, to an out-of-state point, and
(B) Actually transported by the common carrier to the out-of-state destination, pursuant to the bill of lading, over a route the California portion of which the purchasing carrier is authorized to transport cargo under common carrier rights, and
(C) Not put to use until after the transportation by the purchasing carrier to the out-of-state destination, and
(D) Used by the carrier in the conduct of its business as a common carrier.
(2) Foreign Air Carriers. The sale of tangible personal property, other than aircraft fuel and petroleum products, to foreign air carriers is exempt from sales tax pursuant to section 6385(b) of the Revenue and Taxation Code when such property is:
(A) Transported by the foreign air carrier to a foreign destination, and
(B) Not put to use until after the transportation by the purchasing foreign air carrier to the foreign destination, and
(C) Used by the foreign air carrier in the conduct of its business as a common carrier by air of persons or property.
(3) Fuel and Petroleum Products.
(A) Operative July 15, 1991, sales of fuel and petroleum products delivered to the purchasing carriers in California are subject to sales tax except as provided in paragraph (b)(3)(B) and (b)(3)(C) of this regulation. Sales tax applies notwithstanding the fact that the purchaser may issue a bill of lading to the seller and notwithstanding the fact that the seller may purport to reserve a title to the property until the property arrives at an out-of-state destination.
(B) Operative January 1, 1989, the sale, storage, use, or other consumption of, fuel or petroleum products is exempt from sales and use tax pursuant to section 6357.5 of the Revenue and Taxation Code when such property is:
1. sold to an air common carrier which holds a valid seller's permit or which has timely obtained a fuel exemption registration number,
2. for immediate consumption or shipment, and
3. shipped or consumed by the carrier in the conduct of its business as an air common carrier on a flight whose first destination is a foreign destination. Effective January 1, 1993, a flight which has an intermediate stop within the United States will qualify for the exemption if the final destination of that flight is a foreign destination.
For the period January 1, 1989 through December 31, 1992, the tax will not apply to the sale or use of fuel or petroleum products which are shipped or consumed on a flight to a foreign destination even though there is an intermediate stop at a point within the United States, provided no cargo, including mail, or passengers are loaded or discharged at such intermediate stop. The tax will not apply if crew members are loaded or discharged at such intermediate stop; however, the tax will apply if other airline personnel flying without charge (deadhead) are loaded or discharged. The tax also will not apply to fuel used on flights which are aborted for emergency purposes if such flights otherwise would have qualified for the exemption.
To qualify for the exemption, the sale of the fuel or other petroleum products must be for “immediate consumption or shipment.”
A “sale” occurs when the purchaser takes either title to or possession of the fuel. “Immediate consumption or shipment” occurs when the delivery of fuel by the seller is directly to an aircraft for consumption in propulsion to a foreign destination or for transportation to a foreign destination and not for storage. Fuel is sold for storage, and not for immediate consumption or shipment, if title to the fuel passes to the purchaser while the fuel remains in storage facilities owned or leased by the seller. Fuel is sold for storage, and not for immediate consumption or shipment, if the fuel is transferred by the seller into a storage facility controlled by or leased to the purchaser or to any third party who takes delivery for the purchaser. Tax applies notwithstanding the contract of sale providing that the seller shall retain title to the fuel until the fuel is loaded onto the aircraft. In such cases, any attempt by the seller to retain title is limited in effect to the reservation of a security interest.
To qualify for the exemption, a common carrier which is not otherwise required to hold a valid seller's permit shall be required to register with the Board and obtain a fuel exemption registration number. The fuel exemption registration number will be considered obtained timely if the purchasing carrier receives such registration number from the Board no later than 45 days after taking the fuel on board.
In the event that the federal exemption provided in Section 1309 of Title 19 of the United States Code, relating to supplies for certain vessels and aircraft, is repealed, this exemption also is repealed as of that date.
(C) For the period January 1, 1993 through December 31, 2002, and for the period April 1, 2004 through December 31, 2013, the sale of fuel and petroleum products is exempt from sales tax pursuant to section 6385(c) of the Revenue and Taxation Code when such property is:
1. Sold to a water common carrier who holds a valid seller's permit or who has timely obtained a fuel exemption registration number,
2. For immediate shipment outside this state,
3. Consumed by the water carrier in the conduct of its business as a common carrier after the first out-of-state destination.
The sales tax applies with respect to sales of fuel and petroleum products which will be consumed in a voyage from the California point where the fuel is taken on to the first destination outside of California.
For purposes of this subdivision (b)(3)(C), the term “first destination outside of California” means the first point reached outside this state by a water common carrier in the conduct of its business as a common carrier at which cargo or passengers are loaded or discharged, cargo containers are added or removed, fuel is bunkered, or docking fees are charged. The term also includes the entry point of the Panama Canal when the carrier is only transiting the canal in the conduct of its business as a common carrier.
To qualify for the exemption, the “sale” of the fuel (or other petroleum product) must be for “immediate shipment”. A “sale” occurs when the purchaser takes either title to or possession of the fuel. An “immediate shipment” occurs when the delivery of fuel by the seller is directly to a vessel for transportation outside this state and not for storage.
Fuel is sold for storage and not for immediate shipment, if title to the fuel passes to the purchaser while the fuel remains in storage facilities owned or leased by the seller.
Fuel is sold for storage, and not for immediate shipment, if the fuel is transferred by the seller into a storage facility controlled by or leased to the purchaser or to any third party who takes delivery for the purchaser. Tax applies notwithstanding the contract of sale provides that the seller shall retain title to the fuel until the fuel is loaded onto the vessel. In such cases, any attempt by the seller to retain title is limited in effect to the reservation of a security interest.
Fuel is sold for immediate shipment, and not for storage, if the fuel is transferred by the seller into storage facilities maintained by a third party, the seller has contracted with the third party to store the fuel, and title does not pass to the purchaser until the fuel is loaded onto the vessel.
Fuel is sold for immediate shipment, and not for storage, if the fuel is transferred by the seller to storage facilities maintained by a third party, even though the purchaser may have contracted with the third party to store the fuel, if the sale occurs when the fuel is loaded onto the vessel and the seller has the legal obligation to deliver the fuel to the purchaser's vessel. If the obligation of the seller to deliver the fuel is complete upon transfer of the fuel to the third party, then any retention or reservation of title to the fuel after such transfer is limited in effect to a reservation of a security interest, and the fuel will be regarded as having been delivered to the purchaser for storage and not for immediate shipment outside this state. A mere recital in the contract of sale that the delivery will occur at the vessel, or that the seller will retain title to the fuel until delivery at the vessel, is insufficient of itself to establish that delivery of the fuel by the seller is directly into the vessel.
In determining whether the delivery occurs at the vessel, and not upon transfer of the fuel to the third party, the board shall consider the following factors: whether the losses during storage are for the account of the seller; whether the seller has the right to remove the fuel from the storage facilities; whether the seller has the duty to remove the fuel from the storage facilities at the seller's expense should the seller's deliveries into the storage facilities exceed specified quantities, and whether the contract between the seller and purchaser is a requirements contract. The presence or absence of one or more factors is not conclusive.
A sale of fuel, otherwise qualifying as a sale for immediate shipment under the above rules, will qualify for the exemption even though the fuel is delivered to a fuel truck or barge from which the fuel is delivered directly into the vessel.
(c) Proof of Exemption.
(1) Common Carrier. Any seller claiming a transaction as exempt from sales tax under section 6385(a) must receive at the time of the transaction, and retain, a properly executed bill of lading, or copy thereof, pursuant to which the goods are shipped. The bill of lading must show the seller as consignor. It must indicate that the described goods are consigned to the common carrier at a specified destination outside this state. Where the form of the transaction is “freight collect,” no specific freight charge need be shown on the bill of lading, inasmuch as such charges are not ordinarily shown thereon in “freight collect” transactions. Furthermore, the carrier need not actually collect freight charges from itself. The form and language of the bill of lading should be similar to the form and language normally used where the purchaser and carrier are not the same. A bill of lading will be considered obtained at the time of the transaction if it is received either before the seller bills the purchaser for the property, within the seller's normal billing and payment cycle, or upon delivery of the property to the purchaser.
In addition to a bill of lading, the seller must obtain from the purchaser prior to or at the time of the transaction, and retain, a certificate in writing that the property shall be transported and used in the manner described in subdivision (b)(1) of this regulation. The certificate shall be in substantially the same form as Certificate A or B, appearing in the appendix of this regulation. Certificate B may be used when multiple transactions claimed as exempt are made between a seller and a carrier and may be included as part of a transaction by reference to the certificate on the purchase order or other appropriate documentation for each transaction.
(2) Foreign Air Carrier. Any seller claiming a transaction as exempt from sales tax pursuant to section 6385(b) of the Revenue and Taxation Code must receive from the purchaser a certificate in writing that the property shall be transported and used in the manner described in section (b)(2) of this regulation. The certificate shall be in substantially the same form as Certificate C, appearing in the appendix to this regulation. Effective January 1, 1990, if a seller does not have a certificate on hand at the time the board requests it be made available for verification of a transaction claimed to be exempt from sales tax, the seller will have 45 calendar days from the date of the board's written request to obtain the certificate from the purchasing foreign air carrier. A “blanket” certificate, i.e., on issued to cover future transactions, may be issued by a foreign air carrier and included as part of a transaction by reference to the certificate on the purchase order or other appropriate documentation for each transaction.
The provisions of (c)(3) and (d)(3) of this regulation shall apply with respect to sales of aircraft fuel and petroleum products to foreign air carriers.
(3) Fuel and Petroleum Products. Any seller claiming a transaction as exempt from sales tax pursuant to Section 6357.5 or 6385(c) of the Revenue and Taxation Code should timely obtain an exemption certificate in writing from the purchasing common carrier. The exemption certificate will be considered timely if obtained by the seller within the seller's normal billing and payment cycle or within 45 days from the date of delivery, whichever is later. The exemption certificate must show either the purchaser's seller's permit number, or if the purchaser is not required to hold a seller's permit, the purchaser's fuel exemption registration number. The exemption certificate must conform in substance with one of the following, appearing in the appendix to this regulation.
(A) Certificate D is to be used for purchases of fuel or petroleum products within Section 6357.5 by air common carriers (including foreign air carriers) operating under authority from the Federal Aviation Administration. One certificate may be provided for each regularly scheduled flight number which has a foreign destination as its final destination. Such certificate will remain valid until revoked in writing.
(B) Certificate E is to be used for purchases of fuel or petroleum products within Section 6385(c) by a steamship company which is a common carrier. This includes any vessel engaged, for compensation, in transporting persons or property in interstate or foreign commerce.
(d) Effect of Exemption Documents.
(1) Common Carriers. Copies of the bill of lading and supporting certificate described in (c)(1) of this regulation, accepted in good faith, constitute prima facie evidence of the facts entitling the seller to the exemption provided under section 6385(a) of the Revenue and Taxation Code.
Unless both of these documents are received and retained, the seller is liable for sales tax on the transaction.
(2) Foreign Air Carriers. A copy of the exemption certificate described in (c)(2) of this regulation, accepted in good faith, relieves the seller from liability for the sales tax.
(3) Fuel and Petroleum Products. A copy of the exemption certificate described in subdivision (c)(3) of this regulation, accepted timely in good faith, shall relieve the seller from liability for the sales tax on fuel and petroleum products delivered by the seller directly into a ship or an aircraft. If the seller does not obtain an exemption certificate, or does not obtain an exemption certificate within the time specified by paragraph (c)(3) of this regulation, the seller will be relieved of liability for the tax only if the seller presents satisfactory evidence that the sale met the requirements of Sections 6357.5 or 6385(c) of the Revenue and Taxation Code, including the requirement that the purchaser held a valid seller's permit at the time of the sale or a fuel exemption number with the Board at the time of sale or within 45 days after taking the fuel on board.
(e) Liability of Purchaser. A purchasing common carrier or foreign air carrier who gives a certificate of exemption which entitles the seller to regard the gross receipts from the sale as exempted from sales tax under section 6357.5 or 6385 of the Revenue and Taxation Code, but uses the property in some other manner or for some other purpose, or fails to document the transportation of the property to the first out of state destination, is liable for sales tax under section 6357.5(h) or 6385(k) of the Revenue and Taxation Code.
A common carrier or foreign air carrier who gives a certification of exemption which entitles the seller to regard the gross receipts from the sale as exempt from sales tax under section 6357.5 of the Revenue and Taxation Code shall make available to the Board, upon request, records, including, but not limited to, a copy of a log abstract, an air waybill, or a cargo manifest, documenting its consumption or transportation of the fuel or petroleum product to a foreign destination and the amount claimed as exempt.
A foreign air carrier, who gives a certificate of exemption which entitles the seller to regard the gross receipts from the sale as exempt from tax under section 6385(b) of the Revenue and Taxation Code must maintain records in this state, such as a copy of a bill of lading, an airway bill or cargo manifest, documenting its transportation of the tangible personal property to a foreign destination and the amount claimed as exempt.
A common carrier who gives a certificate of exemption which entitles the seller to regard the gross receipts from the sale as exempt from sales tax under Section 6385(c) of the Revenue and Taxation Code shall make available to the Board, upon request, records, including, but not limited to, a copy of a log abstract or a cargo manifest, documenting its transportation of the fuel or petroleum product to an out-of-state destination and the amount claimed as exempt.
A purchaser liable for tax under this paragraph (e) must report and pay the sales tax as if the purchaser were a retailer making a retail sale of the property at the time of the use or failure to provide supporting documentation. If the purchaser does not report and pay tax, the purchaser will be subject to a deficiency determination which will include applicable penalties and interest.
CERTIFICATE A
CALIFORNIA SALES TAX EXEMPTION CERTIFICATE SUPPORTING BILL OF LADING

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CERTIFICATE B
CALIFORNIA BLANKET SALES TAX EXEMPTION CERTIFICATE SUPPORTING BILL OF LADING

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CERTIFICATE C
CALIFORNIA SALES TAX EXEMPTION CERTIFICATE

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CERTIFICATE D
CALIFORNIA BLANKET SALES TAX EXEMPTION CERTIFICATE SUPPORTING EXEMPT PURCHASES UNDER SECTION 6357.5 -- AIR COMMON CARRIERS

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CERTIFICATE E
EXEMPTION CERTIFICATE SUPPORTING EXEMPT FUEL PURCHASES UNDER SECTION 6385(c) -- WATER CARRIERS

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NOTE

Authority: Section 7051, Revenue and Taxation Code. Reference: Sections 6357.5 and 6385, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of section 2101.5 filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45)
2. Amendment filed 10-28-77; effective thirtieth day thereafter (Register 77, No. 44)
3. Amendment of subsection (d)(1) filed 11-25-77 as an emergency; designated effective 11-27-77. Certificate of Compliance included (Register 77, No. 48)
4. Amendment filed 1-3-80; effective thirtieth day thereafter (Register 80, No. 5)
5. Amendment filed 9-1-87; operative 10-1-87 (Register 87, No. 36)
6. Amendment filed 6-5-90; operative 7-5-90 (Register 90, No. 32)
7. Amendment filed 8-29-91 as an emergency; operative 8-29-91 (Register 92, No. 1) A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 12-27-91.
8. Editorial correction of printing error (Register 92, No. 1)
9. Amendment filed 9-19-91; operative 10-21-91 (Register 92, No. 13).
10. Amendment of subsections (b)(1), (b)(3)(A), (c)(1)-(2), (c)(3), (d)(3) and (e) filed 6-3-92; operative 7-3-92 (Register 92, No. 23).
11. Amendment filed 6-7-95; operative 7-7-95 (Register 95, No. 23).
12. Change without regulatory effect amending subsection (b)(3)(C) filed 3-26-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 13).
13. Change without regulatory effect amending subsection (b)(3)(C) filed 1-21-2004 pursuant to section 100, title 1, California Code of Regulations (Register 2004, No. 4).
Article 12. Matters Involving Transportation of Property
§1628. Transportation Charges.

(a) Transportation by Carrier. Except as provided in paragraph (c) below, in the case of a sale, whether by lease or otherwise, tax does not apply to “separately stated” charges for transportation of property from the retailer's place of business or other point from which shipment is made “directly to the purchaser,” provided the transportation is by other than facilities of the retailer, i.e., by United States mail, independent contract or common carrier. The place where the sale occurs, i.e., title passes to the customer or the lease begins, is immaterial, except when the property is sold for a delivered price or the transportation is by facilities of the retailer, as explained in (b) below. The amount of transportation charges excluded from the measure of tax shall not exceed the cost of the transportation to the retailer.
Transportation charges will be regarded as “separately stated” only if they are separately set forth in the contract for sale or in a document reflecting that contract, issued contemporaneously with the sale, such as the retailer's invoice. The fact that the transportation charges can be computed from the information contained on the face of the invoice or other document will not suffice as a separate statement. If a separately stated charge is made designated “postage and handling” or “shipping and handling” only that portion of the charge which represents actual postage or actual shipment may be excluded from the measure of tax. Such amounts may be excluded from the measure of tax even though such amounts are not affixed to, or noted on, the package. A separately stated charge designated “handling” or “handling charge” is not a separate statement of transportation charges. Tax applies to such charges, notwithstanding the fact that postage or shipment charges may or may not be affixed to or noted on the package.
Property will not be considered delivered “directly to the purchaser” if it is shipped to the retailer, to the retailer's agent or representative, or to anyone else acting in the retailer's behalf. Any separately stated charges by the retailer for the transportation of property to, rather than from, the retailer's place of business, or to another point from which the property will then be “delivered directly to the purchaser,” are included in the measure of tax. Such charges represent incoming freight and are taxable as part of the cost of the property sold by the retailer.
(b) Transportation by Retailer's Facilities or Property Sold for Delivered Price.
(1) Definition. “Delivered Price.” Property is sold for a delivered price when the price agreed upon in the contract for sale includes whatever cost or charge may be made for transportation of the property directly to the purchaser. A sale for a “guaranteed price” including a separately stated amount for transportation is a sale for a “delivered price.” Property is not sold for a delivered price when the price is agreed upon and to this price is added a separately stated amount representing the cost or charge for transportation of the property directly to the purchaser and any increase or decrease in the actual cost of transportation is borne by or credited to the purchaser.
(2) In General. Except as provided in paragraph (c) below, when transportation is by facilities of the retailer or the property is sold for a delivered price, tax applies to charges for transportation to the purchaser, unless (A) the transportation charges are separately stated, (B) are for transportation from the retailer's place of business or other point from which shipment is made directly to the purchaser, and (C) the transportation occurs after the sale of the property is made to the purchaser. When the sale occurs before the transportation to the purchaser commences, the tax does not apply to separately stated charges for the transportation. The amount that may be excluded from the measure of the tax cannot exceed a reasonable charge for transportation by facilities of the retailer or the cost of transportation by other than facilities of the retailer.
(3) Determination of When Sale Occurs.
(A) Security Agreements. When a sale is made pursuant to a security agreement in which the retailer retains the title as security for the payment of the price, the sale occurs when possession of the property is transferred by the retailer to the purchaser or other person at the purchaser's direction.
(B) Leases. When the sale is by lease, the sale occurs upon the transfer of possession or granting of the right of possession of the property by the lessor to the lessee or other person at his direction.
(C) Sale on Approval. When the sale is on approval, the sale does not occur until the purchaser accepts the property.
(D) Other Sales. Unless explicitly agreed that title is to pass at a prior time, the sale occurs at the time and place at which the retailer completes his performance with reference to the physical delivery of the property, even though a document of title is to be delivered at a different time or place. If the contract requires or authorizes the retailer to send the property to the purchaser but does not require him to deliver it at destination, the retailer completes his performance with reference to the physical delivery of the property at the time and place of shipment e.g., delivery of the property to a carrier for delivery by the carrier to the purchaser; but if the contract expressly requires delivery at destination, including cases where one of the terms of the contract is F.O.B. place of destination, the retailer completes his performance with reference to the physical delivery of the property on tender to the purchaser there. When delivery of the property is by facilities of the retailer, title passes when the property is delivered to the purchaser at the destination unless there is an explicit written agreement executed prior to the delivery that title is to pass at some other time.
(4) Place of Sale. For the purposes of the state Sales and Use Tax Law (but not for the purposes of the Bradley-Burns Uniform Local Sales and Use Tax Law nor for the purposes of the Transactions and Use Tax Law) the place of the sale or purchase of tangible personal property is the place where the property is physically located at the time the act constituting the sale or purchase takes place. 
(c) Transportation of Landfill Material. Operative January 1, 1989, tax does not apply to separately stated charges for transportation of landfill material, e.g., sand, dirt or gravel, removed from the ground and transported from the excavation site to a landfill site specified by the purchaser if:
(1) the amount of transportation charges excluded from the measure of tax does not exceed a reasonable charge for transportation by facilities of the retailer or the cost of the transportation by other than facilities of the retailer, or
(2) the consideration received is solely for the purpose of transporting the material to a specified site and the material is transferred without charge. If such transportation charges are in excess of a reasonable charge for transportation by facilities of the retailer or in excess of the cost of the transportation by other than facilities of the retailer, the provisions of this paragraph will not apply.
For purposes of this paragraph, it is immaterial when title passes to the purchaser of the landfill material.

Appendix
(a) Examples of Contract for Delivered Price.
(1) The contract for sale provides for the sale of property for $100 per unit delivered to the purchaser.
(2) The contract for sale provides for the sale of property for $100 per unit “which includes cost of delivery at $10 per unit.”
(3) The contract for sale provides for the sale of property for $100 per unit delivered, freight prepaid.
(4) The contract for sale provides for the sale of property for $100 per unit freight collect and allowed.
(5) The contract for sale calls for the sale of property for a guaranteed price of $100 consisting of $90 plus $10 freight.
(b) Examples of Contracts Which Are Not for a Delivered Price.
(1) The contract for sale provides for the sale of property for $100 per unit freight collect.
(2) The contract for sale provides for the sale of property for $100 per unit actual freight prepaid and added to the sales price.
(c) Examples of Application of Tax. All deliveries are by independent carrier.
All billings are in accordance with the terms of the contract.
(1) The contract for sale provides for the sale of property for $100 per unit delivered to the purchaser with freight prepaid.
Tax applies to sales price of $100 per unit with no deduction for freight charge since the freight charges are not separately stated. The contract is for a delivered price and requires delivery to the purchaser. Title does not pass to the purchaser prior to delivery.
(2) Contract for sale provides for the sale of property for $100 per unit. The retailer is required to ship the property to the purchaser freight collect.
Tax applies to $100 per unit since the responsibility for the payment of the freight is upon the purchaser, and the seller makes no charge for freight. Since the carrier will bill the purchaser for the actual freight charge, there will be a separate statement of the freight. The property is not sold for a delivered price.
(3) The contract for sale provides for the sale of property for $100 per unit freight collect and allowed.
The measure of tax is $100 per unit less the amount of the freight paid to the carrier and shown on the payment voucher sent to the retailer by the purchaser.
The sale is for a delivered price. Separately stated transportation charges are excludable from the measure of tax since the transportation occurred after the sale of the property. If the contract for sale explicitly provided for passage of title upon delivery to the destination, then the measure of tax would be $100 per unit since the sale was for a delivered price and title did not pass prior to transportation.
(4) The contract for sale provides for the sale of property for $100 per unit plus actual freight of $10 per unit. Any increase or decrease in the freight is for the account of the buyer.
Tax applies to $100 per unit since the contract is not for a delivered price and shipment is by independent carrier.
(5) The contract for sale provides for the sale of property for $100 plus freight of $10, and the seller guarantees the price will not exceed $110.
Tax applies to $100 because the sale is for a delivered price and there is no showing that title was to pass upon delivery at the destination. A contract will be construed as a shipment contract unless it expressly requires delivery at destination point. If the contract for sale explicitly provided for passage of title upon delivery to the destination, then the measure of tax would be $110 since the sale was for a delivered price and title did not pass prior to transportation.
(6) The contract for sale provides for the sale of property for $100 per unit freight equalized with x city. The invoice shows 10 units at $100 per unit, $1,000, freight from x city $100, total $1,100.
Under these circumstances, tax applies to $1,000 since the only separate statement of freight is the freight equalized with x city in the amount of $100. If the actual freight paid to the carrier for the transportation of the property from the retailer's place of business or other point from which shipment is made directly to the purchaser is less than $100, the exclusion will be limited to the amount paid to the carrier.
(7) Assuming the same facts as above, except the invoice shows 10 units at $100 per unit, $1,000, freight equalized with x city $100, total $1,100. The invoice also shows the notation, “Actual freight prepaid from point of shipment to destination is $200.”
The sale is not for a delivered price. On the basis of the above billing, a separate statement of freight is made in the amount of $200. Accordingly, the measure of tax is $1,100 minus $200, or $900. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6010, 6010.5, 6011 and 6012, Revenue and Taxation Code.
HISTORY

1. Renumbering from Section 2028 filed 11-3-71; effective thirtieth day thereafter (Register 71, No. 45). For prior history see Register 65, No. 23.
2. Amendment filed 11-16-71; effective thirtieth day thereafter (Register 71, No. 47).
3. Amendment filed 11-13-84; effective thirtieth day thereafter (Register 84, No. 46).
4. Amendment filed 5-22-89; operative 6-21-89 (Register 89, No. 21).
5. Amendment filed 6-19-95; operative 7-19-95 (Register 95, No. 25).
§1629. Goods Damaged in Transit.
Note     •     History

(a) Sales Tax. If damage to goods in transit to the consumer occurs after the “sale” as defined in section 6006 of the Revenue and Taxation Code is made, sales tax applies to the sale. If the damage occurs prior thereto, sales tax applies as follows:
(1) If the goods are destroyed, tax does not apply to damages paid the retailer for their destruction.
(2) If the goods are not destroyed, and are sold at retail in their damaged condition, tax applies to that portion of the total amount paid to the retailer representing the fair retail value of the goods in their damaged condition.
(b) Use Tax. Use tax does not apply with respect to goods destroyed before the purchaser makes any storage or use of the goods. If the goods are damaged but are nevertheless stored or used by the purchaser, tax applies to that portion of the total amount paid to the retailer representing the fair retail value of the goods in their damaged condition.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6010, Revenue and Taxation Code.
HISTORY

1. Renumbering of former Section 2029 filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
§1630. Packers, Loaders, and Shippers.
Note     •     History

(a) In General--Definitions. Packers, loaders, and shippers (hereinafter collectively called “shippers”) purchase tangible personal property to be used in conditioning the goods to be shipped and to preserve, protect, and contain the goods during transportation. Such property includes, but is not limited to, the following:
(1) Property Used to Condition the Goods for Shipment or to Preserve and Protect the Goods During Shipment.

	bracing materials 	ice and dry ice
	car strips 	miscellaneous pre-
	cleaning compounds 	servatives
	degreasing compounds 	rust preventing com-
	derusting compounds 	pounds
	dunnage or “loose” 	salt
	lumber 	solvents
	(except as otherwise 	tarpaulin (weather
	specified in (2) below	protection)
	gas (including
	dispensers)
(2) Property Used as Containers or as Parts of Containers of the Goods Shipped.

	bags	gummed tape
	barrels 	kegs
	bottles	lumber (including
	boxes 	“loose” lumber
	cans 	used in the same
	carboys 	manner and for the
	cartons 	same purpose as
	crates 	pallets)
	cylinders 	pallets
	drums	sacks
	excelsior and other 	strapping
	packing and crating 	twine
	material 	wrapping paper
(3) Property that when Physically Incorporated in the Final Product Being Sold is a Sale for Resale.

	wax and fungicide
	post harvest protective shields
	protective coatings
	salt, acids & caustics
(b) Application of Tax.
(1) Property Used to Condition, Preserve or Protect Goods During Shipment.
(A) General. Tax applies to sales to shippers of property used in conditioning the goods to be shipped, or to preserve and protect the goods during transportation. It is immaterial whether or not a separate charge or separate billing is made by the shipper for the particular item, that it may not be returned to or reused by the shipper, that the goods are shipped in interstate or foreign commerce, or that the shipper's contract is with the United States. The property is purchased by the shipper for a purpose other than resale, i.e., conditioning the goods, or preserving and protecting the goods during shipment. Thus, the sale to the shipper is a retail sale, even though he or she may not retain title to the property used by him or her.
(B) Ice, Carbon Dioxide and Preservatives.
1. Ice. The sale or use of ice or dry ice used in packing and shipping or transporting food products for human consumption is exempt from tax when the food products are shipped or transported in intrastate, interstate or foreign commerce by common carriers, contract carriers, or proprietary carriers.
2. Carbon Dioxide. Operative January 1, 1995, the sale or use of carbon dioxide used in packing and shipping or transporting fruits or vegetables for human consumption is exempt from tax when the fruits or vegetables are shipped or transported in intrastate, interstate, or foreign commerce by common carriers, contract carriers, or proprietary carriers, provided the fruits or vegetables are not sold to the ultimate consumer in the package that contains the carbon dioxide.
3. Preservatives. Tax does not apply to the sale or purchase of preservative products under the following two circumstances:
a. The preservative product is included in the shipping container of exempt food products when they serve a beneficial purpose in preserving the food products during shipment or storage. These include moisture-absorbing desiccants, gas-absorbing ethylene sachets, and gas emitting sulfur dioxide pads or similar products.
b. The preservative product serves a beneficial purpose in preserving the food product and remains in the packaged food product until opened by the ultimate consumer. This includes nitrogen gas used to maintain an inert atmosphere in packaged food products which remains in the packaged food as a preservative until opened by the consumer; and moisture absorbing desiccants included in individual packages of beef jerky which remain sealed until opened by the consumer.
(2) Property Used as Containers or Parts of Containers of Goods Shipped.
(A) General. Tax applies to the sale or use of containers or container materials under the provisions of regulation 1589, “Containers and Labels”, (18 CCR 1589). However, except as provided in paragraph (b)(2)(C), when the shipper is not the seller of the contents, the sale of the containers or container materials or parts to the shipper is a taxable retail sale unless the shipper expressly contracts with his or her customer for the sale to his or her customer of the container or container material, making a separate charge therefor, with title passing from the shipper to his or her customer before any use of the material is made, and without any understanding or trade custom that the property will be returned to the shipper for reuse. When all of these conditions exist, the shipper may purchase the property for resale by giving a resale certificate to the supplier of the property. The sale of the property by the shipper is taxable unless exempt as a sale to the United States, as a sale in interstate or foreign commerce, or exempt for any other reason.
(B) Carbon Dioxide. Operative January 1, 1995, the sale or use of nonreturnable container materials containing carbon dioxide atmosphere is exempt from the tax when used in packing and shipping or transporting fruits or vegetables in intrastate, interstate, or foreign commerce by common carriers, contract carriers, or proprietary carriers, whether or not the shipper is the seller of the fruits or vegetables.
(C) Packing Food Products for Human Consumption. Operative April 1, 2000, the sale of, and the storage, use, or other consumption of, all containers is exempt from tax when sold or leased without the contents to persons who place food products for human consumption in the containers for shipment, provided the food products will be sold. The exemption applies without regard to whether the food products are sold in the same container or not, or whether the food products are remanufactured or repackaged prior to their sale.
(3) Disposable Temperature Recording Devices. The sale or storage, use or other consumption of a disposable temperature recording device in this state is subject to tax unless an exemption or exclusion from taxation applies. When a shipper of perishable food products purchases for resale a disposable temperature recording device for the sole purpose of shipping the device along with the products it ships, the shipper of the perishable food products does not make a taxable use of the disposable temperature recording device merely by starting the recording device in this state. If, pursuant to a perishable food product shipper's contract with its customer, the shipper provides a recording device along with perishable food products to an out-of-state point, the shipper's sale of the device constitutes an exempt sale in interstate commerce pursuant to Revenue and Taxation Code section 6396. The provisions of this paragraph do not, however, apply to the sale or lease of non-disposable temperature recording devices.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6007, 6359.7, 6359.8 and 6364, Revenue and Taxation Code. 
HISTORY

1. Amendment and renumbering from Section 2030 filed 7-20-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Amendment of subsection (b)(1) filed 1-30-80; effective thirtieth day thereafter (Register 80, No. 5).
3. Amendment of subsection (b) (1) (B) filed 6-9-86; effective thirtieth day thereafter (Register 86, No. 24).
4. Change without regulatory effect amending section and Note filed 12-13-95 pursuant to section 100, title 1, California Code of Regulations (Register 95, No. 50).
5. Editorial correction of subsection (b)(1)(A) (Register 96, No. 43).
6. Change without regulatory effect amending subsections (b)(1)(B)2. and (b)(2)(A), adding subsection (b)(2)(C) and amending Note filed 10-23-96 pursuant to section 100, title 1, California Code of Regulations (Register 96, No. 43).
7. Editorial correction of subsection (b)(2)(C) (Register 97, No. 6).
8. New subsection (a)(3), amendment of subsection (b)(1)(B) and new subsections (b)(1)(B)3.-(b)(1)(B)3.b. filed 9-27-99; operative 10-27-99 (Register 99, No. 40).
9. New subsection (b)(3) filed 9-15-2003; operative 10-15-2003 (Register 2003, No. 38).
10. Change without regulatory effect amending subsection (b)(2)(C) filed 1-11-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 2).
§1632. C.O.D. Fees.
Note     •     History

On and after July 1, 1970, tax applies to any C.O.D. fee paid by the retailer's customer on taxable C.O.D. sales except where the C.O.D. fee is not included in the invoice and the carrier collects it from the retailer's customer and retains it.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6011 and 6012, Revenue and Taxation Code.
HISTORY

1. New section filed 3-30-70; effective thirtieth day thereafter (Register 70, No. 14).
Article 13. Credit Transactions

(Also See Article 30)
§1641. Credit Sales and Repossessions.
Note     •     History

(a) In General. If tangible personal property is sold on credit, either under a security agreement, or otherwise the whole amount of the contract is taxable, unless the retailer keeps adequate and complete records to show separately the sales price of the tangible personal property, and the insurance, interest, finance, and carrying charges made in the contract. If such records are kept by the retailer, the insurance, interest, finance and carrying charges may be excluded from the computation of the tax.
(b) Contracts Designated as Leases. If tangible personal property is, for all intents and purposes, sold, but the transaction is designated as a lease or rental for the purpose of retaining title in the seller as security for payment of the purchase price, or for the purpose of avoiding the tax, the transaction is taxable as a sale under a security agreement.
(c) Due Date of Tax. The total amount of the tax on the entire sales price in credit transactions is due and payable on the due date of the return to be filed after the close of the reporting period in which the sale is made. No reduction in the amount of tax payable by the retailer is allowable by reason of his transfer at a discount of a sale under security agreements or other evidence of indebtedness.
(d) Repossessions. No deduction is allowable in the event that property sold on credit is repossessed except where the entire consideration paid by the purchaser is refunded to him or where a credit for a worthless account is allowable.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6011 and 6012, Revenue and Taxation Code. Bad Debts, see regulations 1642, Returns, defects, replacements, see regulation 1655, Personal Property Leases Generally, see regulation 1660.
HISTORY

1. New section filed 1-9-70; effective thirtieth day thereafter (Register 70, No. 2).
§1642. Bad Debts.
Note     •     History

(a) In General. A retailer is relieved from liability for sales tax (section 6055 of the Revenue and Taxation Code) or from liability to collect use tax (section 6203.5 of the Revenue and Taxation Code) insofar as the measure of the tax is represented by accounts found worthless and charged off for income tax purposes (which include circumstances where the retailer's income is reported on a related person's income tax return and the bad debt is charged off on that return) or, if the retailer is not required to file income tax returns and the retailer's income is not reported on another person's return, charged off in accordance with generally accepted accounting principles. A retailer may claim a bad debt deduction provided that the sales tax, or amount of use tax, was actually paid to the state.
This deduction should be taken on the return filed for the period in which the amount was found worthless and charged off for income tax purposes or, if the retailer is not required to file income tax returns, charged off in accordance with generally accepted accounting principles.
Failure to take the deduction on the proper return will not in itself prevent the allowance of a refund measured by an amount for which a retailer could have taken a timely deduction provided a claim for refund is filed with the board within the limitation periods specified in section 6902 of the Revenue Taxation Code.
(b) Amount Subject to Deduction.
(1) Taxable Receipts. If the amount of an account found to be worthless and charged off is comprised in part of nontaxable receipts such as interest, insurance, repair, or installation labor and in part of taxable receipts upon which tax has been paid, a bad debt deduction may be claimed only with respect to the unpaid amount upon which tax has been paid. In determining that amount, all payments and credits to the account may be applied ratably against the various elements comprising the amount the purchaser contracted to pay (pro rata method), may be applied as provided in the contract of sale (contract method), or may be applied by another method which reasonably determines the amount of the taxable receipts (alternative method). When claiming a bad debt deduction or refund using an alternative method, the retailer must include a clear explanation of that method along with the claiming of the deduction or refund. After having applied payments and credits using one method and claiming a deduction or refund based on such method, a retailer shall not thereafter reapply the payments or credits using another method with respect to such losses previously claimed.
(2) Expenses of Collection. No deduction is allowable for expenses incurred by the retailer in attempting to enforce collection of any account receivable, or for that portion of a debt recovered that is retained by or paid to a third party as compensation for services rendered in collecting the account.
(c) Reporting. All retailers must report sales tax liability on an accrual basis. Bad debt deductions will not be disallowed solely for the reason that a retailer is on a cash reporting basis for income tax purposes.
(d) Worthless Account Subsequently Collected. If any account found worthless and charged off is thereafter collected by the retailer, in whole or in part, the taxable percentage of the amount so collected shall be included in the first return filed after such collection and tax shall be paid on such amount with the return. The same percentage of the account which the retailer claimed as an allowable bad debt deduction or refund shall be used to determine the taxable percentage of the recovery. The taxable percentage of any amounts received from a third party for the sale of an account after the retailer has found them to be worthless and has claimed a bad debt deduction or refund are regarded as amounts subsequently collected for purposes of this provision, and the retailer must include such amounts in the first return filed after receipt of such amounts and pay tax thereon. 
(e) Records. In support of deductions or claims for refund for bad debts, retailers must maintain adequate and complete records showing:
(1) Date of original sale.
(2) Name and address of purchaser.
(3) Amount purchaser contracted to pay.
(4) Amount on which retailer paid tax.
(5) The jurisdiction(s) where the local taxes and, when applicable, district taxes were allocated. 
(6) All payments or other credits applied to account of purchaser.
(7) Evidence that the uncollectible portion of gross receipts on which tax was paid actually has been legally charged off as a bad debt for income tax purposes (whether or not the income tax return has yet been filed) or, if the retailer is not required to file income tax returns  and the retailer's income is not reported on another person's return, charged off in accordance with generally accepted accounting principles.
(8) The taxable percentage of the amount charged off as a bad debt properly allocable to the amount on which the retailer reported and paid tax. (See Appendix 1.) 
(f) Allowable Methods of Computing Loss. 
(1) In General. When there is a repossession, a bad debt deduction is allowable only to the extent that the retailer sustains a net loss of gross receipts upon which tax has been paid. This will be when the amount of all payments and credits allocated to the purchase price of the merchandise, including the wholesale value of the repossessed article, is less than that price. If the pro rata method is used to apply payments, a retailer incurs an allowable bad debt deduction if the wholesale value of the repossessed merchandise is less than the net contract balance (after excluding unearned insurance and finance charges) at the date of repossession. If the contract method is used to apply payments, a retailer incurs an allowable bad debt deduction if the wholesale value of the repossessed merchandise is less than the net contract balance at the date of repossession. An alternative method of computing a bad debt loss may be used subject to approval by the Board. 
(2) Method of Computing Loss--Pro Rata Method.
(A) Loss Per Records. The loss per records is the bad debt loss the retailer writes off for income tax purposes. An estimate of bad debt losses based in part upon the history of the business or industry averages, may not be used to claim bad debt deductions or refunds for sales and use tax purposes. 
(B) Taxable Portion of Loss Per Records. 
Only that portion of a bad debt loss attributable to the amount on which the retailer paid tax may be used to claim a bad debt deduction or refund for sales and use tax purposes. Even an account with all sales subject to tax may include some amounts on which tax was not paid, such as the tax or tax reimbursement charged to the consumer which is included in the account balance. The percentage of loss on which tax was paid for an account which is secured by the merchandise purchased, or which represents a single purchase of a significant amount, should be calculated on an actual basis. The percentage of loss on which tax was paid for accounts involving a large volume of small transactions may be calculated based on an analysis of the composition of the accounts receivable. All accounts of the retailer for which this calculation is made should use the same method of applying payments for the calculation (e.g., use FIFO for all accounts or use LIFO for all accounts). Examples using the pro rata method are attached as Appendices 1 and 2. 
(3) Method of Computing Loss--Contract Method. The allowable bad debt deduction is calculated by subtracting all payments and credits from the purchase price of the merchandise pursuant to the method of applying payments set forth in the applicable contract(s) with the customer and, to the extent the contract is silent on the method of applying payments, the loan accounting systems used by the retailer in the ordinary course of business, and from that amount subtracting the proceeds of the sale of any repossessed merchandise in accordance with (4) below. 
(4) Determining the Wholesale Value of Repossessed Merchandise. The wholesale value of repossessed merchandise must be determined in order to calculate the allowable bad debt deduction, if any, for the account. When the retailer sells the repossessed merchandise to a reseller in an arm's length transaction, the amount the retailer receives for the sale, less the direct cost of reconditioning the property prior to that sale and direct auction expenses paid to a third party, is the wholesale value. Otherwise, other sources must be used to determine the wholesale value.  In the case of automobiles, industry-recognized price guides are generally the best source of such information. Adjustments should be made to the published wholesale prices in those instances where the automobile is in other than average condition.
Establishing the wholesale value of other types of repossessed merchandise such as jewelry, furniture, appliances, etc., presents a more difficult problem if the retailer does not sell the merchandise to a reseller in an arm's length transaction. Each case must be considered on its own merits. Generally, if the retailer places the repossessed property into resale inventory, the retailer should use the amount at which the merchandise is recorded in resale inventory as its wholesale value. This amount should not, however, include any costs of repossessing, reconditioning, or other expense to put the merchandise in saleable condition.
(5) Consolidation of Numerous Repossessed Items. Retailers who have several repossessions each reporting period will find it convenient and time saving to consolidate the pertinent data. When this is done, only one calculation for each set of transactions need be made to compute the allowable deduction. The consolidations may be made by using 15-column working paper with one column for each of the elements required to compute the deduction (see Appendix 2).
Only those repossessions on which a loss is incurred should be scheduled. The retailer may quickly determine whether a particular transaction should be scheduled by comparing the net payoff with the wholesale value of the merchandise. If the net payoff is greater, a loss has been suffered and the transaction should be scheduled.
(g) Bad Debt Losses Other Than Repossessions. Allowable bad debt deductions or refunds also may arise from sales made on an open account or on an unsecured installment basis. The deduction or refund should be computed in substantially the same manner as those involving repossessions (i.e., by prorating all payments or credits between the sales price of the merchandise on which the retailer paid tax and the nontaxable charges or by applying all payments and credits as provided in the contract of sale and, if the contract is silent, the loan accounting systems used by the retailer in the ordinary course of business). No deduction or claim for refund will be allowed in any period subsequent to the period in which a bad debt deduction is taken based on a method of calculating the bad debt deduction different from that originally used in calculating the bad debt deduction.
(h) Special Situations.
(1) Bad Debt Deductions for Persons Other than the Retailer or Lender.
(A) A successor who pays full consideration for receivables acquired from the predecessor is entitled to a bad debt deduction to the same extent that the predecessor would have been entitled had the predecessor continued the business. A “successor” for purposes of this provision is one who is required by Revenue and Taxation Code section 6811 to withhold sufficient of the purchase price of the subject business to cover amounts due from the seller of the business under the Sales and Use Tax Law. A predecessor may not claim a bad debt deduction for any transaction or account for which a successor is entitled to a bad debt deduction under this provision. 
(B) Except as provided in subdivision (h)(1)(A) and subdivision (i), a purchaser of receivables cannot claim a bad debt deduction or refund for accounts which are not collected.
(C) A retailer who sells receivables with recourse so that the retailer will bear any bad debt loss on them is entitled to a bad debt deduction to the same extent as if the receivables had not been sold. The fact that a retailer sells receivables at a discount, however, with or without recourse, does not in itself entitle the retailer to a bad debt deduction to the extent of the discount.
(2) Bad Debts of Construction Contractors. 
A construction contractor who is a consumer of materials or fixtures, or both, under Sales and Use Tax Regulation 1521 cannot claim a bad debt deduction or refund with respect to such materials or fixtures. A United States construction contractor as defined in subdivision (a)(3) of Regulation 1521 is always the consumer of both materials and fixtures, and thus can never claim a bad debt deduction or refund with respect to such materials or fixtures. A construction contractor, other than a United States construction contractor, is generally the consumer of materials, and thus may claim a bad debt deduction with respect to materials only when the contractor is regarded as selling those materials under subdivision (b)(2)(A)2. of Regulation 1521. A construction contractor, other than a United States construction contractor, is the retailer of fixtures and thus may claim a bad debt deduction or refund with respect to its retail sales of such fixtures. A construction contractor incurring a bad debt loss for which it is entitled to a bad debt deduction or refund as just explained must claim the deduction or refund in the same manner as those resulting from other types of taxable retail sales of tangible personal property. 
(3) Entity Affiliated with Retailer. The provisions of this subdivision (h)(3) apply only with respect to bad debt losses incurred on accounts created as a result of retail sales of tangible personal property for which the retailer remitted California sales or use tax on or after January 1, 2000. 
(A) If a retailer wishes to assign to a person who is its affiliated entity under section 1504 of Title 26 of the United States Code the right to claim a deduction or refund for the amount of bad debts for which the retailer is otherwise entitled to a deduction or refund, the retailer and the affiliated entity must file an election with the Board prior to the affiliated entity's claiming of any deduction or refund. This election filed with the Board must include all the following elements: 
1. The name, address, and seller's permit number of the retailer who reported or will report the tax; and the name, address, and seller's permit number of the affiliated entity of the retailer to whom the assignment is made. 
2. A statement clearly specifying that the affiliated entity is entitled to any (and all) deductions or refunds as a result of any bad debt losses charged off on the account(s) covered by the election and the effective date of that election, and a statement that the retailer relinquishes all claims to such deductions or refunds. 
3. A list of accounts to which the election pertains. 
4. The agreement of the retailer to furnish any and all documentation required by the Board to support the claiming of deductions or refunds by the affiliated entity. 
5. The acknowledgement by both the retailer and its affiliated entity that the Board may disclose relevant confidential information to all parties involved in order to support and confirm any deductions or refunds claimed. 
6. A statement that the election may not be amended or revoked unless a new election signed by both the retailer and its affiliated entity is filed with the Board. 
7. The acknowledgement by the affiliated entity that it cannot further assign the right to claim a deduction or refund for bad debts charged off on the account. 
8. The dated signatures of the retailer and its affiliated entity, or their authorized representatives. If a copy of the signed election is filed with the Board rather than the original, the affiliated entity must retain the election with the original signatures. 
(B) The term “retailer” as used in this regulation (except as used in subdivisions (h) and (i)) includes an entity affiliated with a retailer under section 1504 of Title 26 of the United States Code with respect to those accounts for which the affiliated entity is the person entitled to the bad debt deduction or claim pursuant to an election filed under this subdivision (h)(3). 
(i) Bad Debts Incurred in Connection with Accounts Held by Lenders. The provisions of this subdivision (i) apply only with respect to bad debt losses incurred on accounts created as a result of retail sales of tangible personal property for which the retailer remitted California sales or use tax on or after January 1, 2000. 
(1) Lender Defined. A “lender” for purposes of this regulation is defined as any of the following: 
(A) A person who holds an account which that person purchased without recourse directly from a retailer who reported California sales or use tax with respect to the sales of tangible personal property for which credit was extended under the retail account. 
(B) A person who holds an account without recourse pursuant to that person's contract directly with a retailer who reported California sales or use tax with respect to the sales of tangible personal property for which credit was extended under the retail account. 
(C) A person who is either an affiliated corporation (or affiliated entity electing to be taxed as a corporation) under section 1504 of Title 26 of the United States Code or an assignee of a person described in subdivision (i)(1)(A) or (i)(1)(B). A person is a “lender” under this subdivision (i)(1)(C) only if an election is filed under subdivision (i)(4). 
(2) Conditions to Claiming Deduction or Refund. With respect to an account held by a lender without recourse, a deduction or refund may be claimed for bad debt losses on the account only if all of the following conditions are met: 
(A) No deduction or refund was previously claimed or allowed on any portion of the account. 
(B) The account has been found worthless and charged off by the lender for income tax purposes (which include circumstances where the lender's income is reported on a related person's income tax return and the bad debt is charged off on that return) or, if the lender is not required to file income tax returns and the lender's income is not reported on another person's return, charged off in accordance with generally accepted accounting principles. 
(C) The contract between the retailer and the lender under which the lender has the right to the account contains an irrevocable relinquishment of all rights to the account from the retailer to the lender. 
(D) The account is for sales for which the retailer remitted California sales or use tax on or after January 1, 2000. 
(E) The retailer and the lender file an election with the Board which contains the elements specified in subdivision (i)(3) and which designates either the retailer or the lender as the person entitled to claim any deduction or refund under this regulation for tax previously paid by the retailer measured by amount of the account found to be worthless and charged off. No deduction or refund can be claimed until this election is filed with the Board. 
(3) Election Between Retailer and Lender. 
(A) In order for the retailer or the lender to claim a deduction or refund for bad debt losses from an account held by the lender without recourse, the retailer and the lender must file an election with the Board designating which of them may claim such deduction or refund. The election may be in any form, including an existing contract between the retailer and the lender, so as long as the election contains the following elements: 
1. The name, address, and seller's permit number of the retailer who reported or will report the tax and the name, address, and seller's permit number, if any, of the lender to whom the account(s) is assigned. 
2. An agreement that the retailer relinquishes all rights to the account to the lender. 
3. A statement clearly specifying whether the retailer or the lender is entitled to claim any (and all) deductions or refunds as a result of any bad debt losses charged off by the lender for the account(s) covered by the election, the effective date of that election, and a statement that the other party relinquishes all rights to claiming such deductions or refunds. 
4. A list of accounts to which the election pertains. If the election is a blanket election for all accounts assigned without recourse by the retailer to the lender or all accounts held by the lender without recourse pursuant to the lender's contract directly with the retailer, the election must so state. 
5. The agreement of both the retailer and the lender to furnish any and all documentation requested by the Board to support the deductions or refunds claimed. 
6. The acknowledgement by both the retailer and the lender that the Board may disclose relevant confidential information to all parties involved in order to support and confirm any deductions or refunds claimed. 
7. If the lender is the person entitled to claim any deduction or refund for bad debts on the account, the Certificate of Registration -- Lender account number of the lender. If the lender does not yet hold such a registration, the agreement of the lender that it will apply for the Certificate of Registration -- Lender no later than on the date the lender first claims a deduction or refund for bad debts charged off on the account. 
8. A statement that the election may not be amended or revoked unless a new election signed by both the retailer and the lender is filed with the Board. 
9. The date of the election and the signatures of the retailer and the lender, or their authorized representatives. If a copy of the signed election is filed with the Board rather than the original, the person with the right under the election to claim the bad debt deduction or refund must retain the election with the original signatures. An election may be signed in counterparts, and its filing would be regarded as perfected as of the filing of the second signed counterpart, provided each counterpart is identical except for the signature and date of the signature. If copies of the signed counterparts are filed with the Board, the person with the right under the election to the bad debt deduction or refund must retain all counterparts with the original signatures not filed with the Board. 
(B) The term “retailer” as used in this regulation (except as used in subdivisions (h) and (i)) includes a lender with respect to those accounts for which the lender is the person entitled to the bad debt deduction or claim pursuant to an election filed under this subdivision (i)(3). 
(4) Election Between Lender and Affiliated Entity or Other Assignee. 
(A) If a person who is a lender under subdivision (i)(1)(A) or (i)(1)(B) and who has the right to claim any deduction or refund for bad debts the lender charges off on the account wishes to assign to a person who is its affiliated entity under section 1504 of Title 26 of the United States Code or to some other assignee the right to claim any deduction or refund for the amount of bad debts charged off on the account, the lender and the affiliated entity or other assignee must file an election with the Board prior to the affiliated entity's or other assignee's claiming of any deduction or refund. The election filed with the Board may be in any form, but must include all the following elements: 
1. The name, address, and seller's permit number of the retailer who reported or will report the tax; the name, address, seller's permit number, if any, and Certificate of Registration -- Lender account number, if any, of the lender under subdivision (i)(1)(A) or (i)(1)(B) making the assignment; and the name, address, seller's permit number, if any, and Certificate of Registration -- Lender account number, if any, of the person to whom the assignment is made under subdivision (i)(1)(C). 
2. A copy of the election between the retailer and the lender under which the lender has the right to any (and all) deductions or refunds as a result of any bad debt losses charged off by the lender on the account(s). If that election has not yet been filed with the Board, then that election must be filed along with the election between the lender and its affiliated entity or other assignee. If the election with the original signature was retained by the lender rather than filing it with the Board, that election must either be filed with the Board or retained by the affiliated entity or other assignee. 
3. A statement clearly specifying that the affiliated entity or other assignee is entitled to any (and all) deductions or refunds as a result of any bad debt losses charged off on the account(s) covered by the election and the effective date of that election, and a statement that the lender under subdivision (i)(1)(A) or (i)(1)(B) relinquishes all claims to such deductions or refunds. 
4. A list of accounts to which the election pertains. If the election is a blanket election for all accounts held by the lender, the election must so state. 
5. The agreement of the lender to furnish any and all documentation required by the Board to support the claiming of deductions or refunds by the affiliated entity or other assignee. 
6. The acknowledgement by both the lender and its affiliated entity or other assignee that the Board may disclose relevant confidential information to all parties involved in order to support and confirm any deductions or refunds claimed. 
7. If the affiliated entity or other assignee does not yet hold a Certificate of Registration -- Lender, the agreement that it will apply for that certificate no later than on the date it first claims a deduction or refund for bad debts charged off on the account. 
8. The acknowledgement by the affiliated entity or other assignee that it cannot further assign the right to claim a deduction or refund for bad debts charged off on the account. 
9. A statement that the election may not be amended or revoked unless a new election signed by both the lender and the affiliated entity or other assignee is filed with the Board. 
10. The date of the election and the signatures of the lender and the affiliated entity or other assignee, or their authorized representatives. If a copy of the signed election is filed with the Board rather than the original, the person with the right under the election to claim the bad debt deduction or refund must retain the election with the original signatures. An election may be signed in counterparts, and its filing would be regarded as perfected as of the filing of the second signed counterpart, provided each counterpart is identical except for the signature and date of the signature. If copies of the signed counterparts are filed with the Board, the person with the right under the election to the bad debt deduction or refund must retain all counterparts with the original signatures not filed with the Board. 
(B) The term “retailer” as used in this regulation (except as used in subdivisions (h) and (i)) includes an entity affiliated with a lender under section 1504 of Title 26 of the United States Code, or other assignee, with respect to those accounts for which the affiliated entity or other assignee is the person entitled to the bad debt deduction or claim pursuant to an election filed under this subdivision (i)(4). 
(5) Registration, Returns, Claims for Deduction and Refunds, and Payment of Tax. 
(A) A retailer who has the right to claim deductions or refunds for bad debts charged off by a lender on an account held by that lender pursuant to an election filed under subdivision (i)(3) shall claim those deductions or refunds under the provisions of this regulation in the same manner as if the retailer held the account itself. 
(B) Without regard to whether a lender holds a seller's permit for its own sales of tangible personal property, a lender who has the right to claim deductions or refunds for bad debts charged off on accounts pursuant to an election filed under subdivision (i)(3) and, if applicable, subdivision (i)(4), shall register with the Board for a Certificate of Registration -- Lender no later than the date on which it first claims such a deduction or refund. 
(C) A lender who has the right to claim deductions or refunds for bad debts charged off pursuant to an election filed under subdivision (i)(3) and, if applicable, subdivision (i)(4), is entitled to the same amount of deduction or refund, calculated in the same manner under the provisions of this regulation, as if the lender were the retailer who had sold the tangible personal property for which the retailer had reported and paid tax. If the lender has provided the name, address, and seller's permit number of the retailer responsible for paying the tax, in determining whether to grant the lender's claim for deduction or refund, the Board shall regard the retailer as having paid the applicable tax due unless the Board establishes otherwise. (Regardless of the Board's action on the lender's claim for deduction or refund, a retailer who failed to pay the applicable tax due remains liable for that tax.) 
(D) A lender who claims a deduction or refund for bad debts charged off shall be liable for tax on the taxable percentage of worthless accounts subsequently collected under subdivision (d), including amounts received for the sale of accounts for which the lender has claimed a bad debt deduction or refund. 
(E) A lender who has a seller's permit for its own sales of tangible personal property may not commingle the claiming of its deductions pursuant to an election under subdivision (i)(3) and, if applicable, subdivision (i)(4), with any bad debt deductions related to its own sales of tangible personal property but must instead report such deductions on a separate return or schedule in the form specified by the Board. If the lender files a schedule attached to its sales and use tax return, it may apply the amount of its deduction calculated on that separate schedule against its liability for sales and use tax. To the extent that the deduction is not fully exhausted when applied to the lender's own sales and use tax liability, the lender may file a claim for refund. 
(F) The filing by a lender of a claim for deduction or refund for bad debts on accounts covered by this subdivision (i) is not valid if an election pursuant to subdivision (i)(3) and, if applicable, an election pursuant to subdivision (i)(4), has not been filed with the Board. If a lender files a claim for deduction or refund and the applicable election(s) is filed thereafter, the claim for deduction or refund will be regarded as having been filed on the date of the filing of the election(s). 
(G) A lender holding a Certificate of Registration -- Lender shall file a return in a form specified by the Board to report the taxable percentage of recoveries and claim losses on accounts covered by an election pursuant to subdivision (i)(3) and, if applicable, an election pursuant to subdivision (i)(4). This return shall be filed on a quarterly basis unless otherwise specified by the Board. The return shall include the taxable percentage of the amount of any recoveries for which the lender is liable for tax under subdivision (i)(5)(D). The lender may offset the amount of tax for which it would otherwise be entitled to a bad debt refund for the reporting period against the amount of tax for which it is liable for the taxable percentage of recoveries received during that same reporting period. The lender must file a return without regard to whether the lender received any net recoveries of previously claimed bad debts in the filing period. If the lender files a return under a seller's permit it holds for its own sales of tangible personal property, the lender must file a separate schedule to report the taxable percentage of its bad debt recoveries and losses on accounts covered by an election pursuant to subdivision (i)(3) and, if applicable, an election pursuant to subdivision (i)(4), in a form specified by the Board, as an attachment to the lender's sales and use tax return rather than filing a separate return for such recoveries and losses. 
(H) A lender claiming a deduction or refund for bad debts, or reporting tax on recoveries for accounts for which it previously claimed a bad debt deduction or refund, must properly allocate the local and district taxes. If the transactions were approved by the lender on a transaction-by-transaction basis or the lender has the necessary information to do so, local and district taxes should be allocated on an actual basis. The lender may allocate local and district taxes related to all other accounts on an appropriate basis subject to approval by the Board. 
NOTE

Authority cited: 7051, Revenue and Taxation Code. Reference: Sections 6055 and 6203.5, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (h)2) filed 2-25-76; designated effective 4-1-76 (Register 76, No. 9). For prior history, see Register 70, No. 46.
2. Amendment of subsection (h)(2) filed 8-20-76; effective thirtieth day thereafter (Register 76, No. 34).
3. Amendment of Appendix 1 and 2 filed 5-20-80; effective thirtieth day thereafter (Register 80, No. 21). For technical reasons, printed in Register 80, No. 23.
4. Change without regulatory effect of subsection (e)(6) and Appendix 1 (Register 86, No. 28).
5. Amendment filed 1-17-89; operative 2-16-89 (Register 89, No. 3).
6. Amendment of subsection (a) filed 9-12-95; operative 10-12-95 (Register 95, No. 37).
7. Amendment of section and repealer and new appendices 1 and 2 filed 12-17-2001; operative 1-16-2002 (Register 2001, No. 51).

Appendix 1   Example of Computing Allowable Bad Debt Deduction for a Repossessed Vehicle Using Pro Rata Method
I. Step One. Compute the Repossession Loss Per Records 

a. 	Retail sales price 		$12,000
b. 	Taxable fees (i.e., doc/smog) 		  230
c. 	Total amount subject to tax 		12,230	(a+b)
d. 	Sales Tax (6%) 	734		(c*.06)
e. 	License Fees 	240
f. 	Other non-taxables 	  0
g. 	Total non-taxable charges 		974	(d+e+)
h. 	Total sales price 		13,204	(c+g)
i. 	Down payment 		 2,000
j. 	Balance on contract 		11,204	(h-i) 
k. 	Finance charges/accrued interest 		 3,000
l. 	Total contract value 		14,204	(j+k) 
m. 	Payments received on contract 		 2,100
n. 	Balance on date of repossession 		12,104	(l-m) 
o. 	Unearned finance charges 		 2,750
p. 	Net contract balance 		9,354	(n-o) 
q. 	Value of repossession 		6,000
r. 	Repossession loss per records 		$ 3,354
II. Step Two. Compute the Taxable Percentage of Loss. 
This is done by dividing the total amount subject to tax (line c) by the total sales price (line h). 
12,230 / 13,204 = 92.62%. 
III. Step Three. Compute the Allowable Deduction. 
This is done by multiplying the taxable percentage of loss (step Two) by the repossession loss per records (step One). 
92.62% * 3,354 = $3,106.47

Appendix 2   Consolidation of Allowable Bad Debt Deduction for Multiple Repossessed Vehicles Using Pro Rata Method

(A) 	(B) 	(C) 	(D) 	(E) 	(F) 	(G) 	(H) 	(I) 	(J) 	(K) 	(L) 	(M) 	(N) 

			 			 			 				Repos-
 Date of 		 Sales 	Sales	 	 	Total	 		Finance	Net 		Value of	session	
 Repos-		Price of	Tax  	License	Insurance	Sales 	Down 	Balance to	Charges	Contract		Repos-	Loss Per 
session	Car # 	MdseA	(6%)	Fee 	(Net)B	Price	Payment	Finance	(Net)C	Balance	Payments	session	Records

														        			[C*.06] 			[C...F] 		[G-H] 		[I+J] 			[K-L-M] 
														
09-30-00 	507 	$ 9,000 	$ 540 	$160	$200 	$ 9,900 	$2,000 	$ 7,900 	$ 400 	$ 8,300 	$1,900 	$ 5,000	$1,400
10-27-00 	521 	 8,000 	 480 	 140	 160 	 8,780 	 1,700 	 7,080 	 350 	 7,430 	 1,650 	  4,400 	 1,380 11-04-00 	540 	 6,000 	 360 	 110 	 120 	 6,590	 1,300 	 5,290 	 260 	 5,550 	 1,250 	  3,300 	 1,000
12-09-00 	575 	 5,000 	 300 	 90 	 100 	 5,490 	 1,100 	 4,390 	 200 	 4,590	 1,000 	  2,700 	  890 

Totals 		$28,000 	$1,680 	$500 	$580	$30,760 	$6,100 	$24,660 	$1,210 	$25,870 	$5,800 	$15,400 	$4,670 
		 (1) 				 (2)  							 (3) 

[Computation of the Taxable Percentage of Loss: 
  $28,000(1) = 91.03% 
  $30,760(2) 

Computation of Allowable Deduction: 
  91.03% x $4,670(3) = $4,251] 
___________________

A Includes taxable amounts, such as doc and smog fees. 

B Original insurance charge less rebate of unearned premium. 

C Total finance charges per contract less unearned charges. 
§1643. Debit Card Charges.
Note     •     History

Generally, tax does not apply to automated teller machine (A.T.M.) charges when an access device (commonly known as a debit card or credit card) is issued to make a cash withdrawal from, or to engage in any other transaction that is not subject to tax at, an A.T.M. The transaction is not regarded as a sale of tangible personal property but is a nontaxable financial transaction.
Debit cards may also be used by consumers to pay for a retail purchase of tangible personal property. Gross receipts from the retail sale of tangible personal property do not include debit card charges which the retailer may collect from the customer when all of the following apply:
(1) the debit card charges are separately stated,
(2) the consumer would not incur the charge if he or she did not use the debit card,
(3) the fee is not calculated as a percentage of the amount of the purchase, and
(4) the charge is reasonably related to the cost of the transaction to the retailer.
Under these circumstances, the charge is regarded as a cash access fee and is not subject to tax.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6011 and 6012, Revenue and Taxation Code.
HISTORY

1. New section filed 8-23-96; operative 9-22-96 (Register 96, No. 34).
Article 14. Exchanges, Returns, Defects
§1654. Barter, Exchange, “Trade-Ins” and Foreign Currency Transactions.
Note     •     History

(a) Barter and Exchange Generally. The terms “sale” and “purchase” as defined in sections 6011 and 6012 respectively, include exchange and barter, and gross receipts and sales price constituting the measure of tax include the amount allowed by a retailer to his customer for property or services of any kind. Thus, the operator of an “exchange” where customers pay for their purchases of tangible personal property entirely or in part by other property is a retailer and taxable upon his gross receipts, unless his sales are insufficient in number, scope and character to constitute an activity requiring the holding of a seller's permit.
(b) Merchandise Traded In.
(1) In General. When merchandise is “traded in” on the purchase price of other merchandise, the retailer accepting the trade-in must include in the measure of tax the amount agreed upon between seller and buyer as the allowance for the merchandise traded in. Should, however, the board find that the allowance stated in the agreement is less than the fair market value, it shall be presumed that the allowance actually agreed upon is such market value.
(2) Discount and Trade-In Allowance on Same Transaction. Although discounts allowed and taken by purchasers are not a part of taxable gross receipts, if there is a trade-in and also a discount, the contract between seller and buyer must make it clear that the parties contract for both a trade-in allowance and for a discount. Otherwise, the amount of the claimed discount will be considered to be an overallowance, and the total sales price will be subject to tax.
(c) Exchange of Commodities.
(1) In General. When commodities are exchanged on a weight or volume basis, each party to the exchange is a seller with respect to the property transferred and a purchaser with respect to the property received. Each sale is subject to sales tax unless it is otherwise exempt, such as a sale for resale or a sale in interstate commerce.
With respect to each retail sale, sales tax is measured by the fair retail market value of the property received in payment for the property sold. The measure of tax includes all charges made to the purchaser, such as storage and handling charges, not expressly excluded from tax by statute.
(2) Determining Fair Retail Market Value.
(A) Simultaneous Exchanges. When the properties are transferred simultaneously, the property received must be valued in money on the date and at the place the property is paid and delivered to the retailer. The date of the contract is immaterial. Actual cost of the property to the transferor or book value of the property for accounting purposes are irrelevant. The measure of tax for use tax purposes is the same as for sales tax purposes.
(B) Successive Exchanges. When properties are transferred successively, each sale occurs when each property is transferred.
Where the obligations of the parties are specified in the contract, the measure of tax for each sale is the fair retail market value of the property on the contract date. The fair retail market value to be used must be the fair retail market value at the place where the property received in payment is delivered to the retailer. 
Where the obligations of the parties are not specified in the contract but rather are contingent on future events i.e. an output or requirements contract, the measure of tax for each sale is the fair retail market value of the property on the date of sale or on the date property received in payment for the sale is delivered to the retailer, whichever occurs first. The fair retail market value to be used must be the fair retail market value at the place where the property received in payment is delivered to the retailer.
(3) Examples.
(A) On January 1, Company A and Company B enter into a contract whereby Company A agrees to deliver 1,000,000 barrels of fuel oil to Company B in Los Angeles on February 1 and Company B agrees to deliver 1,000,000 barrels of fuel oil to A in San Francisco on February 1.
This is a simultaneous exchange. Company A has made a retail sale of fuel oil to Company B on February 1. The measure of tax is the fair retail market value of the 1,000,000 barrels of fuel oil in San Francisco on February 1. The value must be the fair retail market value at the place where the property is paid and delivered to the retailer, i.e., San Francisco.
Company B has made a retail sale of fuel oil to Company A on February 1. The measure of tax is the fair retail market value of the 1,000,000 barrels in Los Angeles on February 1.
The measure of tax includes all charges made t the purchaser, such as storage and handling charges, not expressly excluded from tax by statute.
(B) On January 1, Company A and Company B enter into a contract whereby Company A is to deliver 1,000,000 barrels to Company B in Los Angeles in February 1 and Company B is to deliver 500,000 barrels in San Francisco on March 1 and 500,000 barrels in Houston, Texas on April 1.
This is a successive exchange pursuant to a contract where the obligations of the parties are specific. Company A has made a retail sale of fuel oil to Company B on February 1. The measure of tax is the fair retail market value of the 1,000,000 barrels of fuel oil on January 1 (the contract date). The fair retail market value to be used is the value of 500,000 barrels in Houston and 500,000 barrels in San Francisco on January 1.
Company B has made two sales, one on March 1 and the other on April 1. The sale on April 1 is an exempt sale in interstate commerce. The measure of tax on the March 1 sale is the fair retail market value of the 500,000 barrels of fuel oil in Los Angeles on January 1 (the contract date).
(C) On January 1, Company A and Company B enter into a contract whereby Company A agrees to deliver excess fuel oil to Company B, as such excesses may develop in the future, in exchange for the return of like quantities of fuel oil at times and places mutually to be agreed upon in the future. Company B delivers 600,000 barrels of fuel oil to Company A in Long Beach on February 1, 200,000 barrels in San Francisco on April 1, and 200,000 barrels in Los Angeles on July 1. Company A delivers 1,000,000 barrels to Company B in Los Angeleson March 1.
This is a successive exchange pursuant to an output or requirements contract. The measure of tax is the fair retail market value of the property at the date the property received in payment is delivered to the retailer or the date of sale, whichever occurs first. Company A received an advance payment from Company B of 600,000 barrels delivered in Long Beach on February 1. The payments made by Company B to Company A on April 1 and July 1 are deferred payments on Company A's sale of March 1. The measure of tax with respect to the sale by Company A is the fair retail market value on February 1 of the 600,000 barrels delivered to Company A in Long Beach on that date, plus the fair market retail value on March 1 (date of sale) of the 400,000 barrels to be delivered by Company B in the future at the place where the property is to be delivered.
Company B has made three retail sales: one on February 1, one on April 1, and one on July 1. The measure of tax for the February 1 sale is the fair retail market value on February 1 of the 600,000 barrels to be delivered by Company A in the future at the place where the property is to be delivered. This is a sale with deferred payment, and tax must be reported on an accrual basis. The measure of tax for the April 1 sale is the fair retail market value of 200,000 barrels in Los Angeles on March 1. The measure of tax for the July 1 sale is the fair retail market value of 200,000 barrels in Los Angeles on March 1. The sales on April 1 and July 1 were sales with advance payments and must be valued on the date the property received in payment was delivered to the retailer (March 1).
(d) Foreign Currency Transactions.
If a purchaser or seller enters into a contract where the consideration is set forth in terms of foreign currency, tax is measured in United States dollars based on the conversion rate of the foreign currency to United States dollars on the date of the contract.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6010, 6011, and 6012, Revenue and Taxation Code. Exchange in connection with repairs, see regulation 1546. Occasional Sales--Sale of a Business, see regulation 1595. Reimbursement for tax, effect of collecting, see regulation 1700 (unrevised series 2100). Vehicle Engine Exchanges in lieu of repairs, see regulation 1547.
HISTORY

1. New section filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
2. New subsections (c) and (d) filed 6-18-85; effective thirtieth day thereafter (Register 85, No. 25).
§1655. Returns, Defects and Replacements.
Note     •     History

(a) Returned Merchandise. 
(1) In General. Except as provided in paragraph (2) of this subdivision, the amount upon which tax is computed does not include the amount charged for merchandise returned by customers if, (1) the full sale price, including that portion designated as “sales tax,” is refunded either in cash or credit, and (2) the customer, in order to obtain the refund or credit, is not required to purchase other property at a price greater than the amount charged for the property that is returned. Refund or credit of the entire amount is deemed to be given when the purchase price, less rehandling and restocking costs, is refunded or credited to the customer. The amount withheld for rehandling and restocking may not exceed the actual cost of rehandling and restocking the returned merchandise. However, in lieu of using the actual cost for each transaction, the amount withheld for rehandling and restocking may be a percentage of the sales price determined by the average cost of rehandling and restocking returned merchandise during the previous accounting cycle (generally one year). If the seller elects to withhold rehandling and restocking amounts based on a percentage of sales price, the seller is bound by that election for the entire accounting cycle for which the election is made and must apply that percentage in lieu of actual cost during that period on all returned merchandise transactions for which rehandling and restocking costs are withheld. The amount withheld as rehandling and restocking costs may not include compensation for increased overhead costs because of the return, for refinishing or restoring the property to salable condition where the necessity therefore is occasioned by customer usage, or for any expense prior to the “sale” (i.e., transfer of title, lease, or possession under a conditional sale contract). Sellers must maintain adequate records which may be verified by audit, documenting the percentage used.
(2) Contract Cancellation Options Required by Car Buyer's Bill of Rights.
(A) Contract Cancellation Option. On and after July 1, 2006, the terms “gross receipts” and “sales price” do not include the purchase price for a contract cancellation option agreement with respect to a contract to purchase a used vehicle with a purchase price of less than forty thousand dollars ($40,000), which a dealer is required to offer to a buyer pursuant to Vehicle Code section 11713.21. The purchase price for a contract cancellation option described in this subparagraph shall not exceed:
1. Seventy-five dollars ($75) for a vehicle with a cash price of five thousand dollars ($5,000) or less;
2.  One hundred fifty dollars ($150) for a vehicle with a cash price of more than five thousand dollars ($5,000), but not more than ten thousand dollars ($10,000);
3. Two hundred fifty dollars ($250) for a vehicle with a cash price of more than ten thousand dollars ($10,000), but not more than thirty thousand dollars ($30,000); or
4. One percent of the purchase price for a vehicle with a cash price of more than thirty thousand dollars ($30,000), but less than forty thousand dollars ($40,000).
(B) Restocking Fee. On and after July 1, 2006, the terms “gross receipts” and “sales price” do not include the dollar amount of a restocking fee the buyer must pay to the dealer to exercise the right to cancel a purchase of a used car under a contract cancellation option agreement pursuant to Vehicle Code section 11713.21 as described in subparagraph (A) of this paragraph. The dollar amount of a restocking fee described in this subparagraph shall not exceed:
1. One hundred seventy-five dollars ($175) if the vehicle's cash price is five thousand dollars ($5,000) or less;
2. Three hundred fifty dollars ($350) if the vehicle's cash price is more than five thousand dollars ($5,000), but less than ten thousand dollars ($10,000); or
3. Five hundred dollars ($500) if the vehicle's cash price is ten thousand dollars ($10,000) or more.
(C) Amounts Refunded to Customers. On and after July 1, 2006, the terms “gross receipts” and “sales price” do not include that portion of the selling price for a used motor vehicle that is refunded to the buyer due to the buyer's exercise of the right to return the vehicle for a refund, which is contained in a contract cancellation option agreement pursuant to Vehicle Code section 11713.21 as described in subparagraph (A) of this paragraph.
(b) Defective Merchandise.
(1) In General. Amounts credited or refunded by sellers to consumers on account of defects in merchandise sold may be excluded from the amount on which tax is computed. If, however, defective merchandise is accepted as part payment for other merchandise and an additional allowance or credit is given on account of its defective condition, only the amount allowed or credited on account of defects may be excluded from taxable gross receipts. The amount allowed as the “trade-in” value must be included in the measure of tax.
(2) Restitution or Replacement Under California Lemon Law.
(A) General. Under subdivision (d) of Civil Code section 1793.2, if a manufacturer is unable to service or repair a “new motor vehicle,” as that term is defined in subdivision (e)(2) of Civil Code section 1793.22, to conform to the applicable express warranties after a reasonable number of attempts, the manufacturer must either replace the motor vehicle or provide the buyer restitution of the purchase price, less specified amounts, at the buyer's election.
(B) Restitution. A manufacturer who pays a buyer restitution pursuant to, and in complete compliance with, subdivision (d)(2) of Civil Code section 1793.2 is entitled to a refund of the amount of sales tax or sales tax reimbursement included in the restitution paid by the manufacturer to the buyer. The manufacturer may file a claim for refund of that amount with the board. The claim must include a statement that the claim is submitted in accordance with the provisions of section 1793.25 of the Civil Code. The manufacturer must submit with the claim documents evidencing that restitution was made pursuant to, and in complete compliance with, subdivision (d)(2) of Civil Code section 1793.2 including: a copy of the original sales agreement between the buyer and the dealer of the non-conforming motor vehicle; copies of documents showing all deductions made in calculating the amount of restitution paid to the buyer along with full explanations for those deductions, including settlement documents and odometer statements; a copy of the title branded “Lemon Law Buyback” for the non-conforming motor vehicle returned by the buyer; and proof that the decal the manufacturer is required to affix to that motor vehicle has been so affixed in accordance with section 11713.12 of the Vehicle Code. The manufacturer must also submit with the claim the seller's permit number of the dealer who made the retail sale of the non-conforming motor vehicle to the buyer, and evidence that the dealer had reported and paid sales tax on the gross receipts from that sale. For purposes of this regulation, the number of attempts made to repair the non-conforming motor vehicle, if any, prior to providing the customer restitution is not relevant for purposes of determining whether restitution has been made pursuant to subdivision (d)(2) of Civil Code section 1793.2.
(C) Replacement. For purposes of this regulation, a manufacturer who, pursuant to subdivision (d)(2) of Civil Code section 1793.2, replaces a non-conforming motor vehicle with a new motor vehicle substantially identical to the motor vehicle replaced is replacing the motor vehicle under the terms of the mandatory warranty. No additional tax is due unless the buyer is required to pay an additional amount to receive the replacement motor vehicle, in which case tax is due measured by the amount of that payment. If an amount is refunded to the customer as part of the exchange of the non-conforming motor vehicle for the replacement motor vehicle, then that amount is regarded as restitution for purposes of this regulation if it satisfies the requirements of subdivision (d)(2) of Civil Code section 1793.2. The manufacturer may file a claim for refund under subdivision (b)(2)(B) of this regulation for the amount of sales tax or sales tax reimbursement that is included in the amount of that restitution paid by the manufacturer to the buyer. For purposes of this regulation, the number of attempts made to repair the non-conforming motor vehicle, if any, prior to providing the customer a replacement is not relevant for purposes of determining whether the replacement has been made pursuant to subdivision (d)(2) of Civil Code section 1793.2.
(c) Replacement Parts--Warranties.
(1) In General--Definitions. “Mandatory Warranty.” A warranty is mandatory within the meaning of this regulation when the buyer, as a condition of the sale, is required to purchase the warranty or guaranty contract from the seller.  “Optional Warranty.”  A  warranty  is  optional within the meaning of this regulation when the buyer is not required to purchase the warranty or guaranty contract from the seller, i.e., the buyer is free to contract with anyone he or she chooses.
(2) Mandatory Warranties. The sale of tangible personal property includes the furnishing, pursuant to the guaranty provisions of the contract of sale, or mandatory warranty, of replacement parts or materials, and if the property subject to the warranty is sold at retail, the measure of the tax includes any amount charged for the guaranty or warranty, whether or not separately stated. The sale of the replacement parts and materials to the seller furnishing them thereunder is a sale for resale and not taxable.
(3) Optional Warranties. The person obligated under an optional warranty contract to furnish parts, materials, and labor necessary to maintain the property is the consumer of the materials and parts furnished and tax applies to the sale of such items to that person. If he or she purchased the property for resale or from outside California, without tax paid on the purchase price, he or she must report and pay tax upon the cost of such property to him or her when he or she appropriates it to the fulfillment of the contract of warranty.
(4) Deductibles. A deductible paid by a customer under the terms of a mandatory or optional warranty contract is subject to tax measured by the amount of the deductible allocable to the sale of tangible personal property to the customer. For example, if the itemized sales price of tangible personal property (or the fair retail value if not separately itemized) provided pursuant to a warranty is 50 percent of the total fair retail value of the repairs and the deductible is $100, 50 percent of that deductible, $50, would be allocable to the sale of tangible personal property and would be subject to tax, whether the warranty were optional or mandatory. Unless otherwise stated in the warranty contract, when either an optional or a mandatory warranty provides that the customer will pay a deductible towards repairs and services provided under the warranty, the person providing the warranty contract is liable for any tax or tax reimbursement otherwise payable by the customer with respect to that deductible.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006-6012 and 6012.3, Revenue and Taxation Code; Sections 1793.2-1793.25, Civil Code; and Sections 11713.12 and 11713.21, Vehicle Code.
HISTORY

1. New section filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
2. Amendment of subsection (c)(3) filed 11-10-70; effective thirtieth day thereafter (Register 70, No. 46).
3. Amendment of subsection (a) filed 11-30-84; effective thirtieth day thereafter (Register 84, No. 48).
4. Amendment of section and Note filed 12-26-2000; operative 1-25-2001 (Register 2000, No. 52).
5. Change without regulatory effect redesignating and amending a portion of subsection (a) as new subsection (a)(1), adding subsections (a)(2)-(a)(2)(C) and amending Note filed 4-10-2007 pursuant to section 100, title 1, California Code of Regulations (Register 2007, No. 15).
Article 15. Leases of Tangible  Personal Property
§1660. Leases of Tangible Personal Property--In General.
Note     •     History

(a) Definitions.
(1) Lease. The term “lease” includes rental, hire, and license. It includes a contract under which a person secures for a consideration the temporary use of tangible personal property which, although not on his or her premises, is operated by, or under the direction and control of, the person or his or her employees. “Lease,” however, does not include a use of tangible personal property for a period of less than one day for a charge of less than twenty dollars ($20) when the privilege to use the property is restricted to use thereof on the premises or at a business location of the grantor of the privilege (see (e) below).
(2) Sale Under a Security Agreement.
(A) Where a contract designated as a lease binds the “lessee” for a fixed term and the “lessee” is to obtain title at the end of the term upon completion of the required payments or has the option to purchase the property for a nominal amount, the contract will be regarded as a sale under a security agreement from its inception and not as a lease. The option price will be regarded as nominal if it does not exceed $100 or 1 percent of the total contract price, whichever is the lesser amount.
(B) In the case of a contract designated as a lease with any state or local government, the governmental agency designated as a lessee shall be treated as bound for a fixed term notwithstanding any right it may have to terminate the contract to the extent that sufficient funds are not appropriated to pay amounts due under the contract. Such transactions are subject to tax as sales under a security agreement at their inception.
(3) Sale and Leaseback Transactions.
(A) General. Transactions structured as sales and leasebacks will be treated as financing transactions if (1) the “lease” transaction would be regarded as a sale at inception under paragraph (a)(2) of this regulation, (2) the purchaser-lessor does not claim any deduction, credit or exemption with respect to the property for federal or state income tax purposes, and (3) the amount which would be attributable to interest, had the transaction been structured originally as a financing agreement, is not usurious under California law. Transactions treated as financing transactions are not subject to sales or use tax.
(B) Special Application. Transactions structured as sales and leasebacks will also be treated as financing transactions if all of the following requirements are met:
1. The initial purchase price of the property has not been completely paid by the seller-lessee to the equipment vendor.
2. The seller-lessee assigns to the purchaser-lessor all of its right, title and interest in the purchase order and invoice with the equipment vendor.
3. The purchaser-lessor pays the balance of the original purchase obligation to the equipment vendor on behalf of the seller-lessee.
4. The purchaser-lessor does not claim any deduction, credit or exemption with respect to the property for federal or state income tax purposes.
5. The amount which would be attributable to interest, had the transaction been structured originally as a financing agreement, is not usurious under California law.
6. The seller-lessee has an option to purchase the property at the end of the lease term, and the option price is fair market value or less.
(C) Tax Benefit Transactions. Tax does not apply to sale and leaseback transactions entered into in accordance with former Internal Revenue Code section 168(f)(8), as enacted by the Economic Recovery Tax Act of 1981 (Public Law 97-34).
(D) Acquisition Sale and Leaseback Transactions. No sales or use tax applies to the transfer of title to, or the lease of, tangible personal property pursuant to an acquisition sale and leaseback, which is a transaction satisfying all of the following conditions:
1.  The seller/lessee has paid California sales tax reimbursement or use tax with respect to that person's purchase of the property.
2. The acquisition sale and leaseback is consummated within 90 days of the seller/lessee's first functional use of the property (this 90 day period does not begin to run until the first functional use of the property; a period of storage after the purchase, but before the first functional use, is not used to calculate the 90 day period).
3. The acquisition sale and leaseback transaction is consummated on or after January 1, 1991.
The sale of the property at the end of the lease term is subject to sales or use tax. Any lease of the property by the purchaser/lessor to any person other than the seller/lessee would be subject to use tax measured by rentals payable. A lease to the seller/lessee at the end of the original lease term is subject to use tax measured by rentals payable unless such lease is pursuant to an election to exercise an option to extend the lease term, which option was contained in the original lease agreement.
(b) Leases as Sales or Purchases.
(1) In General. Any lease of tangible personal property in any manner whatsoever for a consideration is a “sale” as defined in section 6006 of the Revenue and Taxation Code, and a “purchase” as defined in section 6010 of the Revenue and Taxation Code, except a lease of:
(A) Motion picture films and video tapes, including television films and video tapes, whether or not they are productions complete in themselves. See, however, subdivision (d)(2) below for application of tax for periods on and after September 1, 1983, to leases of video cassettes, videotapes, and videodiscs for private use under which the lessee or renter does not obtain or acquire the right to license, broadcast, exhibit, or reproduce the video cassette, videotape, or videodisc.
(B) Linen supplies and similar articles, including such items as towels, uniforms, coveralls, shop coats, dust cloths, caps and gowns, etc., when an essential part of the lease is the furnishing of the recurring service of laundering or cleaning of the articles leased.
(C) Household furnishings with a lease of the living quarters in which they are to be used. The lessor of the household furnishings must also be the lessor of the living quarters. The living quarters must be real property rather than tangible personal property.
(D) Mobile transportation equipment for use in transportation of persons or property (see regulation 1661 (18 CCR 1661)).
(E) Tangible personal property leased in substantially the same form as acquired by the lessor or leased in substantially the same form as acquired by a transferor as to which the lessor or his or her transferor acquired the property in a transaction that was a retail sale with respect to which the lessor or the transferor has paid sales tax reimbursement or as to which the lessor or the transferor has timely paid use tax measured by the purchase price of the property.
As used herein, “transferor” means:
1. A person from whom the lessor acquired the property in a transaction described in section 6006.5(b) of the Revenue and Taxation Code, or
2. A decedent from whom the lessor acquired the property by will or by law of succession.
For purposes of 1. above, the transaction will qualify if the property is acquired in a transfer of all or substantially all of the tangible personal property held or used by the transferor in all of his or her activities requiring the holding of a seller's permit or permits or in an activity or activities not requiring the holding of a seller's permit or permits, and the ownership of the tangible personal property is substantially similar after the transfer.
(F) Tangible personal property occurring on or after January 1, 1997 described in sections 17053.49 or 23649 of the Revenue and Taxation Code by the manufacturer of that property when leased to a qualified person, as described in sections 17053.49 or 23649 of the Revenue and Taxation Code, in a form not substantially the same as acquired as to which the manufacturer made a timely election to report and pay tax measured by the cost price of that property as defined in section 6244.5 of the Revenue and Taxation Code and Regulation 1525.3.
(G) A mobilehome, as defined in sections 18008(a) and 18211 of the Health and Safety Code, other than a mobilehome originally sold new prior to July 1, 1980 and not subject to local property taxation.
(2) Leases as Continuing Sales and Purchases. In the case of any lease that is a “sale” and “purchase” under (b)(1) above, the granting of possession by the lessor to the lessee, or to another person at the direction of the lessee, is a continuing sale in this state by the lessor, and the possession of the property by a lessee, or by another person at the direction of the lessee, is a continuing purchase for use in this state by the lessee, as respects any period of time the leased property is situated in this state, irrespective of the time or place of delivery of the property to the lessee or such other persons. The application of tax to such leases is set forth below.
(c) General Application of Tax.
(1) Nature of Tax. In the case of a lease that is a “sale” and “purchase” the tax is measured by the rentals payable. Generally, the applicable tax is a use tax upon the use in this state of the property by the lessee. The lessor must collect the tax from the lessee at the time rentals are paid by the lessee and give him or her  a receipt of the kind called for in Regulation 1686 (18 CCR 1686). The lessee is not relieved from liability for the tax until he or she is given such a receipt or the tax is paid to the state.
When the lessee is not subject to use tax (for example, insurance companies), the sales tax applies. The sales tax is upon the lessor and is measured by the rentals payable.
Neither the sales tax nor the use tax applies to leases to the United States and its instrumentalities unless federal law permits taxing the instrumentality. For a more complete explanation regarding sales to the United States and its instrumentalities see Regulation 1614 (18 CCR 1614).
The “rentals” subject to the tax include any payments required by the lease, including amounts paid for personal property taxes on the leased property, whether assessed directly against the lessee or against the lessor, but does not include amounts paid to the lessor for:
(A) Collection costs, including attorney's fees, court costs, repossession charges, and storage fees; but tax does apply to any delinquent rental payments, including those collected by court action;
(B) Insuring, repairing or refurbishing the leased property following a default;
(C) Cost incurred in defending a court action or paying a tort judgment arising out of the lessee's operation of the leased property, or any premiums paid on insurance policies covering such court actions or tort judgments;
(D) Cost incurred in disposing of the leased property at expiration or earlier termination of the lease;
(E) Late charges and interest thereon for failing to pay the rentals timely;
(F) Separately stated optional insurance charges, maintenance or warranty contracts.
(G) Personal property taxes assessed against personal property where a bank or financial corporation is the lessor.
(H) “Customer facility fees” collected pursuant to Civil Code section 1936, or any other law whereby a local agency operating an airport requires a rental car company to collect a facility financing fee from its customers.
(2) Property Leased in Form Acquired. No sales or use tax is due with respect to the rentals charged for tangible personal property leased in substantially the same form as acquired by the lessor, or by his  or her transferor, as to which the lessor or transferor has paid sales tax reimbursement or has paid use tax measured by the purchase price. If such tax has not been so paid, and the lessor desires to pay tax measured by the purchase price, it must be reported and paid timely with the return of the lessor for the period during which the property is first placed in rental service. A timely return is a return filed within the time prescribed by sections 6452 or 6455 of the Revenue and Taxation Code, whichever is applicable.
(3) Property Purchased Tax Paid. In the case of property ultimately leased in substantially the same form as acquired, payment of tax or tax reimbursement measured by the purchase price at the time the property is acquired constituted an irrevocable election not to pay tax measured by rental receipts. The lessor may not change his or her election by reporting tax on rental receipts and claiming a tax-paid-purchase-resold deduction.
(4) Property Acquired in Exempt Transactions.
(A) A purchaser of tangible personal property acquired in a transaction defined as an occasional sale in section 6006.5(a) of the Revenue and Taxation Code and leased in substantially the same form as acquired by him or her, may elect to pay use tax measured by the purchase price of the property in lieu of tax measured by rental receipts.
(B) A purchaser of tangible personal property acquired in a transaction which qualifies under section 6006.5(b) of the Revenue and Taxation Code and leased in substantially the same form as acquired by his or her transferor may elect to pay use tax measured by his or her transferor's purchase price of the property in lieu of tax on rental receipts. This provision has application where the transferor did not pay tax or tax reimbursement when he or she acquired the property.
For purposes of this provision, the transaction will qualify if the property is acquired in a transfer of all or substantially all of the tangible personal property held or used by the transferor in all of his or her activities requiring the holding of a seller's permit or permits or in an activity or activities not requiring the holding of a seller's permit or permits and the ownership of the tangible personal property is substantially similar after the transfer (see also (b)(1)(E) above).
(C) The election provided for in subdivisions (c)(4)(A) and (c)(4)(B) above shall be exercised by the lessor in a timely return filed for the period in which the property is first leased by him or her.
(5) Property Subleased. Tax does not apply to receipts from subleases of tangible personal property which is leased in substantially the same 

form as acquired by the prime lessor where the prime lessor has paid sales tax reimbursement or use tax measured by his or her purchase price. Also, tax does not apply to subleases of tangible personal property if the tax is paid on rental receipts derived under the prime lease, or any prior sublease.
(6) Use of Property by Lessor. If a lessor, after leasing property and collecting and paying use tax, or paying sales tax, measured by rental receipts, makes any use of the property in this state, other than an incidental use, he or she is liable for use tax measured by the purchase price of the property. He or she may, however, apply as a credit against the tax so computed, the amount of tax previously paid to the Board with respect to rentals of the property. If the credit is less than the tax, he or she must pay the difference with his or her return, but may apply the amount of such payment against his or her liability for tax on subsequent rentals of the property. Effective January 1, 1973, through December 31, 1978, any amount collected as tax or tax reimbursement by the lessor from the lessee on such subsequent rentals will be regarded as excess tax reimbursement to the extent that the lessor is permitted by the foregoing provisions to apply the amount of his or her payment for use tax against his or her liability for tax on subsequent rentals of the property. An incidental use, e.g., a brief loan of property which otherwise is leased by the lessor pursuant to leases which are continuing sales, subjects the lessor to liability for use tax measured by the fair rental value of the property during the period of the incidental use. (See Regulation 1669.5(b)(7) (18 CCR 1669.5(b)(7)).)
(7) Options to Purchase. An agreement providing for the lease of tangible personal property and granting the lessee an option to purchase the property results in a sale when the option is exercised. The tax applies to the amount required to be paid by the purchaser upon the exercise of the option.
(8) Tax Paid to Another State. A lessor who leases property in substantially the same form as acquired and who has paid a retail sales or use tax, or reimbursement therefor, imposed with respect to that property by any other state, political subdivision thereof or the District of Columbia prior to leasing the property in this state may credit the payment against any use tax imposed on him or her by this state because of such lease. However, to be entitled to the credit the lessor must make a timely election to measure any tax liability for the property by its purchase price, unless the out-of-state tax equals or exceeds the tax imposed on him or her by this state. If the out-of-state tax equals or exceeds the tax imposed on him or her by this state, the lessor will be deemed to have made a timely election and the rental receipts will not be subject to tax provided the property is leased in substantially the same form as acquired. If a timely election is not made, no credit will be allowed because the tax due will be a use tax measured by rental receipts and imposed directly against the lessee, a person other than the one who paid the out-of-state tax or tax reimbursement. If the lessee is not subject to use tax and the lessor does not make a timely election to pay tax measured by his or her purchase price, he or she may not credit the amount of the out-of-state tax against the tax due on the rental receipts because the tax due is a sales tax rather than a use tax.
A credit otherwise permitted by the foregoing provisions shall not be allowed against taxes which are measured by periodic payments made under a lease, to the extent that taxes imposed by any other state, political subdivision or the District of Columbia were also measured by periodic payments made under a lease prior to the lease of the property in this state.
(9) Assignment of Leases.
(A) In General-Status of Assigned Leases. The situations described in (B), (C), and (D) below involve existing leases which are “sales” and “purchases” subject to tax measured by rental payments. When such a lease is assigned, whether or not title to the leased property is transferred, the rental payments remain subject to tax, without any option to measure tax by the purchase price. An assignee-purchaser who uses the property after termination of the lease is subject to use tax measured by the purchase price as provided in (c)(6) above.
Generally, when an existing lease that is not a “sale” and “purchase” is assigned, whether or not title to the leased property is transferred, the rental payments are not subject to tax. If title is transferred, tax applies measured by the sales price.
For rules relating to the assignment of leases of mobile transportation equipment coming within the exclusions provided in sections 6006(g)(4) and 6010(e)(4) of the Revenue and Taxation Code, see Regulation 1661 (18 CCR 1661) .
(B) Assignment of a Right and Creation of a Security Interest. This type of assignment is an assignment by the lessor of the right to receive the rental payments together with the creation of a security interest in the leased property which is designated as such. The assignee has recourse against the assignor.
The assignee in this situation does not have the rights of a lessor and is not obligated to collect or pay the tax measured by the rental payments. The lessor remains subject to the obligation of collecting and reporting the tax even if he or she does not receive the rental payments directly from the lessee. The assignee, however, is obligated to remit to the board any amounts paid to him or her by the lessee as tax.
If the assignee enforces the security agreement and takes title to the property, the assignee as lessor becomes responsible for collecting and reporting the tax.
(C) Assignment of Contract with Transfer of Right, Title, and Interest for Security Purposes. This type of assignment is an assignment by the lessor of the lease contract together with the transfer of the right, title, and interest in the leased property for security purposes. After the termination of the lease, the property usually reverts to the original lessor. The assignment contract may specify that the transfer is for security purposes, or the circumstances may otherwise demonstrate it (e.g., a separate agreement that the property will be returned to the assignor at the termination of the lease). The assignee has recourse against the assignor.
In this situation, the assignee has assumed the position of a lessor. He or she is required to hold a seller's permit and is obligated to collect, report and pay the tax to the board. The assignor should obtain a resale certificate, covering the property in question, from the assignee.
(D) Assignment of Contract and All Right, Title, and Interest. This type of assignment is an assignment by the lessor of the lease contract together with the transfer of all right, title, and interest in the leased property. The assignment is not for security purposes, and the assignor does not retain any substantial ownership rights in the contract or the property. The assignee has no recourse against the assignor.
In this situation, the assignee has assumed the position of a lessor. He or she is required to hold a seller's permit and is obligated to collect, report and pay the tax to the board. The assignor should obtain a resale certificate, covering the property in question, from the assignee.
(d) Particular Applications.
(1) Portable Toilets. A lease of a portable toilet unit is a sale or purchase and tax applies measured by the lease or rental price regardless of whether the unit is leased in substantially the same form as acquired and regardless of whether sales tax reimbursement or use tax has been paid.
Charges for mandatory maintenance or cleaning services of portable toilet units are subject to tax as part of the rental price. Charges for optional maintenance or cleaning services of portable toilet units are not part of the rental price of the portable toilet units and are not subject to tax. Maintenance or cleaning services are mandatory within the meaning of this regulation when the lessee, as a condition of the lease or rental agreement, is required to purchase the maintenance or cleaning service from the lessor. Maintenance or cleaning services are optional within the meaning of this regulation when the lessee is not required to purchase the maintenance or cleaning service from the lessor.
Charges for maintenance or cleaning services will be considered mandatory and therefore part of the taxable rental price, unless the lessor provides documentary evidence establishing that such charges are optional. The terms of the lease or rental agreement determine whether the maintenance or service charges are mandatory or optional. In the absence of a lease or rental agreement, or in the absence of language in the lease or rental agreement specifying whether the maintenance or service charges are mandatory or optional, an invoice stating that the maintenance or cleaning charges are optional, and separately stating these charges from the rental charge, will be sufficient to support the exemption from tax.
Other documentary evidence may be accepted by the Board to establish that the maintenance or cleaning is performed at the option of the lessee.
When the maintenance or cleaning services are subject to tax, the supplies used to perform these services are considered to be sold with the services and may be purchased for resale. When the maintenance or cleaning services are not subject to tax, the provider of these services is the consumer of the supplies, and tax generally applies to the sale to or the use of these supplies by the provider of the maintenance or cleaning services.
(2) Video Cassettes, Videotapes, Videodiscs. On and after September 1, 1983, the rental or lease of a video cassette, videotape, or videodisc for private use under which the lessee or renter does not obtain or acquire the right to license, broadcast, exhibit, or reproduce the video cassette, videotape, or videodisc is a sale or purchase and tax applies measured by rental receipts. Tax applies measured by rental receipts regardless of whether the property is leased in substantially the same form as acquired and regardless of whether sales tax reimbursement or use tax has been paid by the lessor with respect to the purchase price of the video cassette, videotape, or videodisc. If the property was rented, leased or otherwise used prior to September 1, 1983, no refund, credit, or offset for any sales tax reimbursement or use tax paid on the purchase price will be allowed against the tax measured by the lease or rental price after September 1, 1983.
(3) Lease of an Animal. A lease of any form of animal life of a kind the products of which ordinarily constitute food for human consumption is not subject to tax.
(4) Composed Type, Reproduction Proofs, Impressed Mats. Tax does not apply to leases of composed type or reproduction proofs thereof by a typographer to another person for use in the preparation of printed matter or to leases of such reproduction proofs or impressed mats to a printer or publisher for use in printing, except when the reproduction proof is a component part of a “paste-up,” “mechanical” or “assembly.”
(5) Repair Parts. Sales tax does not apply to sales of repair parts to a lessor which are used by him or her in maintaining the leased equipment pursuant to a mandatory maintenance contract where the rental receipts are subject to tax. Such repair parts are regarded as being part of the sale of the leased item and may be purchased for resale. The amount paid by the lessee under the mandatory maintenance contract is regarded as part of the rental payments.
(6) Neon Signs. A lease of a neon sign that is personal property is subject to the provisions of the Sales and Use Tax Law as any other lease of personal property.
(7) Property Affixed to Realty. For the purpose of this regulation, “tangible personal property” includes any leased fixture affixed to realty if the lessor has the right to remove the fixture upon breach or termination of the lease agreement, unless the lessor of the fixture is also the lessor of the realty to which the fixture is affixed. The term fixture as used herein has the same meaning as the term “fixture” in Regulation 1521 (18 CCR 1521).
Leases of structures together with the component parts of such structures, e.g., plumbing fixtures, air conditioners, water heaters, etc., will be treated as leases of real property. Accordingly, tax applies to contracts to construct such structures and the attached components in accordance with Regulation 1521 (18 CCR 1521).
On and after September 26, 1989, leases of factory-built school buildings (relocatable classrooms) as defined in paragraph (c)(4)(B) of Regulation 1521 (18 CCR 1521), “Construction Contractors”, will be treated as leases of real property with the lessor to the school or school district as the consumer. If the lessor is the manufacturer, tax applies to the manufacturer's costs of all tangible personal property used in constructing the factory-built school building. If the lessor is other than the manufacturer, tax applies to 40% of the sales price of the factory-built school building to such lessor.
For purposes of this section, “structure” does not include any prefabricated mobile homes or similar items which are registered with the Department of Motor Vehicles. It also does not include a portable building, such as a shed or kiosk, which is moveable as a unit from its site of installation, unless the building is physically attached to the realty, upon a concrete foundation or otherwise. Such a building resting in place by its own weight, whether upon the ground, a concrete slab, or sills or piers, is not a “structure”. A prefabricated or modular building similar in size to, but which is not, a factory-built school building (relocatable classroom) is a “structure” whether the building rests in place by its own weight or is physically attached to realty.
Those fixtures which are essential to the structure such as heating and air conditioning units, sinks, toilets, and faucets, which are leased by the lessor of the structure to which they are attached are considered part of the structure and therefore improvements to real property.
On the other hand, those fixtures which although being a component part of the structure are leased by other than the lessor of the structure, will be considered tangible personal property. Accordingly, the tax consequences with respect to such fixtures will be the same as with respect to any other lease of tangible personal property.
(8) Mobilehomes.
(A) The leasing of any mobilehome purchased by a retailer without payment of sales tax reimbursement or use tax and first leased prior to July 1, 1980, is a continuing sale and tax is due measured by the periodic lease payments unless the mobilehome becomes subject to local property taxation, in which event the lease of the property is thereafter exempt from the sales and use tax.
(B) The lease of a new mobilehome purchased by a retailer without payment of sales tax reimbursement or use tax and first leased on or after July 1, 1980, is excluded from classification as a continuing sale and the lessor's use of such property by leasing is subject to the use tax. 
If the use of the property is for occupancy as a residence then the tax is measured by an amount equivalent to 75 percent of the purchase price paid by the lessor's vendor. In the absence of satisfactory evidence of the vendor's purchase price it shall be presumed that the measure of use tax is an amount equivalent to 60 percent of the sales price of the mobilehome to the lessor unless the vendor is also the manufacturer. If such mobilehome is purchased by the lessor from the manufacturer, the measure of the use tax liability is 75 percent of the purchase price of the mobilehome to the lessor.
If the use of the property is not for occupancy as a residence, then the tax is measured by the full retail sales price to the lessor.
(C) The subsequent lease of a used mobilehome which was first sold new in this state after July 1, 1980, is exempt from the sales and use tax.
(e) Grant of Privilege to Use Which is Not a Lease.
(1) In General. Certain restricted grants of a privilege to use property are excluded from the term “lease.” To fall within the exclusion, the use must be for a period of less than one continuous 24-hour period, the charge must be less than $20, and the use of the property must be restricted to use on the premises or at a business location of the grantor of the privilege to use the property.
(2) Definitions.
(A) “Grantor of the privilege” means a person who allows another person to use the personal property.
(B) “Use” includes the possession of, or the exercise of any right or power over personal property by a grantee of a privilege to use the property.
(C) “Premises” or “business location” means a building or specific area owned or leased by a grantor or to which a grantor has an exclusive right of use or a space occupied by the personal property which a grantor allows other persons to use in place. For example:
1. A place in a depot at which a grantor places a coin-operated amusement device pursuant to a contract with the management of the depot.
2. An area in an apartment house or motel where a grantor has a right to place coin-operated washing machines and dryers for use by occupants of the apartment house or motel.
3. A laundromat owned or leased by a person who places therein coin-operated washing machines and dryers for use by customers.
4. A riding stable at which horses are furnished to the public at an hourly rate with a restriction that the horses be ridden within a specific area owned or leased by a grantor of the privilege. The “specific area” might be an enclosed arena or other place the exterior boundaries of which are defined by walls, fences or otherwise in such a manner that the area readily can be recognized and distinguished from adjoining or surrounding property.
5. A golf course owned or leased by a golf club which owns or leases golf carts that it furnishes to persons for use in playing the course, or a golf course under the supervision and control of a golf professional who owns or leases golf carts that he or she furnishes to persons for use in playing the course.
(3) Examples of Situations Which Do Not Qualify for Exclusion from the Term “Lease.”
(A) One of several rental firms permitted by a hospital to do so rents a portable television set and stand to a hospital patient for a charge of $4.00 per day for a period of six days. 
This situation does not qualify for the exclusion because the period of “use” is not for less than one day, the total rental is not less than $20 and the place of use is not the “premises” or “business location” of the rental firm since it does not have “exclusive right of use” of the hospital as regards the placing of its rental units therein nor is the space regularly occupied by it for use in place.
(B) Rental of a canoe for a period of eight hours for a total charge of $4 when the customer will use the canoe on the Russian River. 
This situation does not qualify for the exclusion because the river is not the premises or business location of the grantor of the privilege.
(C) Rental of tools to be used on the premises of the owner of the tools for a period of eight hours invoiced as follows:

	1 Portable lamp	 $ 4
	1 Wheel pulley	 4
	1 Portable hoist	 4
	1 Sander	 4
	1 Spray gun	   5
	 Total rental	  $21
This situation does not qualify for the exclusion because the agreement for rental of the property is a single agreement involving rental charges of $21 and does not meet the requirement that the charge be less than $20.
(D) An equipment rental firm rents a cement mixer to a customer who takes the mixer to his or her home and uses it for less than one day. The rental charge is $9. The mixer is of a type which must be firmly “in place” during the cement mixing operation. 
This situation does not qualify for the exclusion because although the mixer is firmly “in place” during the mixing operation, it is not in a space regularly occupied by it for use in place by customers of the grantor.
(4) Application of Tax to Situations Qualifying for Exclusion from the Term “Lease.” The grantor of the privilege to use property under the conditions described in (e)(1) above is the consumer of the property. Accordingly, charges by him or her for the privilege to use the property are not subject to tax. Tax applies to the sale of the property to him or her by a retailer or to his or her use of the property, measured by his or her purchase price, when the property is purchased from a retailer in California under a resale certificate or from a retailer at an out-of-state location. If the property is acquired through an “occasional sale” as defined in section 6006.5 of the Revenue and Taxation Code, or other exempt transaction, no tax applies to the acquisition or use of the property by the grantor nor to his or her charges for the privilege to use the property.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6006.1, 6006.3, 6006.5, 6009, 6010, 6010.1, 6010.65, 6010.7, 6011, 6012, 6012.6, 6016.3, 6092.1, 6094, 6094.1, 6243.1, 6244, 6244.5, 6379, 6390, 6391, 6407 and 6457, Revenue and Taxation Code; and Section 1936, Civil Code.
HISTORY

1. Amendment filed 11-17-83 as an emergency; effective upon filing (Register 83, No. 47). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 3-17-84. For prior history, see Register 81, No. 30.
2. Certificate of Compliance as to 11-17-83 order transmitted to OAL 3-16-84 and filed 4-12-84 (Register 84, No. 15).
3. Amendment of subsections (c)(1) and (c)(8) filed 8-23-85; effective thirtieth day thereafter (Register 85, No. 34).
4. Amendment filed 6-26-89; operative 7-26-89 (Register 89, No. 26).
5. Amendment of subsections (b)(1)(A), (b)(1)(F) and (d)(8) filed 7-23-91; operative 8-22-91 (Register 91, No. 47).
6. Repealer of subsection (d)(3) and renumbering filed 8-27-91 as an emergency; operative 8-27-91 (Register 92, No. 13). A Certificate of Compliance must be transmitted to OAL 12-26-91 or emergency language will be repealed by operation of law on the following day.
7. Certificate of Compliance as to 8-27-91 order transmitted to OAL 12-12-91 and filed 1-13-92 (Register 92, No. 18).
8. Amendment of section and Note filed 6-30-94; operative 8-1-94 (Register 94, No. 26).
9. Change without regulatory effect repealing subsection (a)(3)(D)4. filed 6-22-95 pursuant to section 100, title 1, California Code of Regulations (Register 95, No. 25).
10. Change without regulatory effect adding new subsection (b)(1)(F), relettering subsection, and amending Note filed 11-5-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 45).
11. Amendment of subsection (c)(1) and new subsection (c)(1)(G) filed 4-25-2000; operative 5-25-2000 (Register 2000, No. 17).
12. Amendment of subsection (d)(1) and amendment of Note filed 12-6-2001; operative 1-5-2002 (Register 2001, No. 49).
13. Change without regulatory effect adding subsection (c)(1)(H) and amending Note filed 7-10-2007 pursuant to section 100, title 1, California Code of Regulations (Register 2007, No. 28).
§1661. Leases of Mobile Transportation Equipment.
Note     •     History

(a) Definitions.
(1) “Mobile Transportation Equipment”. The term “mobile transportation equipment” includes only equipment for use in transporting persons or property for substantial distances, such as railroad cars and locomotives, buses, trucks (except “one-way rental trucks”), truck tractors, truck trailers, dollies, bogies, chassis, reusable cargo shipping containers, aircraft and ships, and tangible personal property which is or becomes a component part of such equipment. The term does not include items of a kind commonly used only in loading or unloading persons or property, or short distance moving within the confines of a limited area, such as a loading dock, warehouse, terminal, bay or airport. Examples of such items are hand dollies, forklift trucks, mine cars, pilot boats, tugboats and lighters, not including, however, lighters or barges specifically designed to be carried regularly aboard vessels for substantial distances. The term does include pickup trucks and tangible personal property which is or becomes a component part of mobile transportation equipment.
The following items are specifically excluded from the definition of mobile transportation equipment:
(A) Passenger vehicles as defined in section 465 of the California Vehicle Code;
(B) Trailers and baggage containers designed for hauling by passenger vehicles; and
(C) One-way rental trucks. These vehicles are motor trucks of a kind required to be registered under the Vehicle Code, not exceeding the manufacturer's gross vehicle weight rating of 24,000 pounds, which are principally employed by a person in the rental business in being leased out for short-term periods of not more than thirty-one (31) days to individual customers for one-way or local hauling of personal property of the customers, and which upon acquisition or being employed in this state by the person, are identified to the board by reporting tax measured by rental receipts on a timely return for the first reporting period in which the truck is leased and maintaining records which can be verified by audit of the vehicles as to which such an election has been made.
Upon the leasing of such a truck to a customer, the lessor shall make known to the customer the fact that the vehicle is designated as a one-way rental truck and any taxes which are imposed are measured by the rentals. Once a truck is identified to the board as a one-way rental truck, the election may not be revoked with respect to the equipment as to which it is made. However, failure of the lessor to make such a timely election will cause such vehicles to be classified as mobile transportation equipment.
(2) “Bogie”. The term “bogie” means a vehicle consisting of an axle or axles with wheels and tires with a device mounted on its frame to support a container (van body) as an undercarriage. It acts as wheels for and in conjunction with the container (or van body). Bogies are specifically designed to couple under a container temporarily for highway use, being detachable when not required. Bogies may be designed and constructed so as to allow a sliding movement under a container (or van body) to several positions under the container to adjust to desired axle loading.
(3) “Chassis”. The term “chassis” means a frame with one or more axles designed to be used in conjunction with and as a temporary support or undercarriage for a container or other van-type box. The chassis and axle or axles may be designed and constructed so as to allow a sliding movement for extending the chassis to allow the carriage of various length bodies or to allow movement of one or more axles to any given position under the container. When operated as a semitrailer, the front portion of the container and chassis is attached to a motor vehicle or dolly.
(4) “Dolly”. The term “dolly” means a vehicle consisting of a tongue, fifth wheel and axle equipped with wheels and tires to be connected to a semitrailer so as to support the front end of the semitrailer, including a portion of the cargo thereon, but which is not permanently attached to the semitrailer.
When coupled to the semitrailer by its fifth wheel (which is mounted on the frame) and to a trailer by the tongue, the semitrailer becomes in effect a “full” trailer. A dolly may also be designed and used as the third or rear axle of a two-axle tractor to act as an additional axle to support a portion of the weight of a towed semitrailer and any load thereon, thus reducing tractor axle loads. Pole, pipe and logging dollies consist of a tongue, bolster and axle or axles equipped with wheels and tires. When connected to a motor vehicle by its tongue, or by the cargo, this type of dolly is used to transport long poles, timbers, logs, pipes or structural materials with the rear end of the cargo resting on the dolly bolster and the front end on the motor vehicle.
(5) “Ships”. The term “ships” includes vessels, such as trawlers, fishing boats, sailboats, yachts and houseboats, which are 30 feet or more in length. The term does not include vessels less than 30 feet in length.
(b) Application of Tax.
(1) With respect to leases of mobile transportation equipment, the sale to the lessor is the retail sale and the lessor is the consumer of the equipment. Accordingly, either the sale of the equipment to the lessor or its use in this state may be subject to tax. For example, if a dealer of that mobile transportation equipment makes the sale and delivery within California, the transaction is subject to sales tax unless the lessor makes a timely election to report his or her tax liability measured by the fair rental value as provided in subdivision (b)(2). On the other hand, if the sale and delivery occur outside California and the property is purchased for use in California, use tax will apply measured by the purchase price unless the equipment enters the state in interstate commerce and is used continuously thereafter in interstate commerce, or the lessor makes a timely election to report use tax liability measured by the fair rental value as provided in subdivision (b)(2). 
If in connection with an assignment of an existing lease of mobile transportation equipment, title to the leased property is transferred to the assignee, the transfer is a sale to the assignee and the assignee is the consumer of the equipment. Application of tax is governed by the rules set forth in this subdivision (b)(1).
(2) If the use of mobile transportation equipment purchased without the payment of tax or tax reimbursement on the purchase price is limited to leasing the equipment, the purchaser may elect to pay his or her use tax liability measured by the fair rental value. Such election must be made on or before the due date of a return for either the period in which the equipment is first leased or the period in which the equipment first entered California, whichever is later. The election must be made by reporting tax measured by the fair rental value on a timely return for that period. Tax must thereafter be paid with the return for each reporting period, measured by the fair rental value, whether the equipment is within or without this state.The election may not be revoked with respect to the equipment as to which it is made. Any separately stated amount collected from a lessee by a lessor electing to report use tax measured by fair rental value under the representation by the lessor that the amount is use tax imposed on the customer must be returned to the customer or paid to the Board. A designation by the lessor of a separately stated amount as “use tax,” without further explanation, will be regarded as a representation that the amount is use tax imposed on the customer.
This election is available to any purchaser who leases mobile transportation equipment, other than a person exempt from use tax, such as under Revenue and Taxation Code section 6352, and such purchaser may properly issue a resale certificate for the limited purpose of reporting use tax liability based on fair rental value.
(A) Fair Rental Value. 
“Fair rental value” means the rentals required by the lease, except where the Board determines the rental receipts are nominal. Fair rental value does not include any payment made by the lessee to reimburse the lessor for the lessor's use tax, whether or not the amount is separately stated, and regardless of how the charge is designated in the lease documentation and invoices. Lump-sum charges to the lessee will be assumed to include reimbursement for the lessor's use tax whether or not any statement to that effect is made to the lessee.
For example, assuming a 6 percent tax rate, if the invoice to the lessee states “rental $100, tax reimbursement to the lessor $6,” “rental $100, sales and use taxes $6,” or similar wording, the fair rental value is $100. If the invoice to the lessee states “rental $106” and makes no reference to reimbursement, the fair rental value is $100 ($106 divided by 1.06). Assuming a 6.5 percent tax rate, the fair rental value is $99.53 ($106 divided by 1.065).
Fair rental value includes any deficiency payment required from the lessee on disposition of mobile transportation equipment at the termination of an open-end lease and such payment is subject to tax. Any surplus rentals, however, which are returned to the lessee at the termination of an open-end lease may be deducted from the total fair rental value reported for the period in which the surplus rentals are returned. In the alternative, a refund may be claimed within the applicable statute of limitations period for any tax paid on such surplus rentals.
Fair rental value includes any capitalized cost reduction payment, which is a one-time payment by the lessee at the start of the lease to reduce the lessor's investment and the lessee's rentals. The payment may either be reported for the period in which it became due from the lessee or it may be reported in equal increments over the lease term. On early termination of such a lease, any unreported portion of the capitalized cost reduction payment shall be reported for the period in which termination occurred.
The term “fair rental value” includes any payments required by the lease, including amounts paid for personal property taxes on the leased property, whether assessed directly against the lessee or against the lessor, but does not include amounts paid to the lessor for:
1. Collection costs, including attorney's fees, court costs, repossession charges, and storage fees; but tax does apply to any delinquent rental payments, including those collected by court action;
2. Insuring, repairing or refurbishing the leased property following a default;
3. Costs incurred in defending a court action or paying a tort judgement arising out of the lessee's operation of the leased property, or any premiums paid on insurance policies covering such court actions or tort judgements;
4. Costs incurred in disposing of the leased property at expiration or earlier termination of the lease;
5. Late charges and interest thereon for failing to pay the rentals timely;
6. Separately stated optional insurance charges, maintenance or warranty contracts.
7. Personal property taxes assessed against personal property where a bank or financial corporation is the lessor.
(B) Tax Application. Tax applies to fair rental value for all periods during which the mobile transportation equipment is leased even though the lessee may not make the required rental payments. The lessor must pay tax at the rate in effect at the time the equipment is first leased. The tax rate will remain the same for all periods during which the equipment is leased, including the periods during the first lease of the equipment and all periods during any subsequent leases of the equipment.
Tax on fair rental value does not apply either (a) for periods during which the equipment is not leased and is merely held for lease; or (b), for periods after the lessor has formally demanded return of the equipment if the lessee wrongfully retains possession of the property and is not required to make rental payments under the lease. If mobile transportation equipment is sold while subject to an existing lease and the new purchaser elects to pay tax measured by fair rental value, the applicable tax rate during the existing lease and during all subsequent leases is the rate in effect at the time of the sale of the mobile transportation equipment to the new purchaser.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6006.1, 6006.3, 6006.5, 6009, 6010, 6010.1, 6011, 6012, 6016.3, 6023, 6024, 6092.1, 6094, 6243.1, 6244, 6352, 6390, 6391, 6407, 6457, 23154 and 23182, Revenue and Taxation Code; and Article XIII, Section 27, California Constitution. Leases generally, see regulation 1660.
HISTORY

1. Amendment of subsections (g)(1) and (h) filed 1-30-73; effective thirtieth day thereafter (Register 73, No. 5). For prior history, see Register 72, No. 9.
2. Amendment of subsections (e)(2), (g)(1) and (g)(2) filed 1-19-79; effective thirtieth day thereafter (Register 79, No. 3).
3. Editorial correction of subsection (g)(2) (Register 79, No. 6). 
4. Amendment of subsection (e)(2) filed 7-13-79; effective thirtieth day thereafter (Register 79, No. 28).
5. Amendment of subsections (e)(2), (f) and (g)(2) filed 2-28-80; effective thirtieth day thereafter (Register 80, No. 9).
6. Amendment of subsections (b) and (e)(2) filed 6-3-83; effective thirtieth day thereafter (Register 83, No. 23).
7. Amendment of subsection (e)(2)(A) filed 8-23-85; effective thirtieth day thereafter (Register 85, No. 34).
8. Amendment filed 5-23-94; operative 6-22-94 (Register 94, No. 21).
9. Editorial correction of subsection (b)(2)(A)5. (Register 95, No. 48).
10. Amendment of subsection (b)(2)(A), new subsection (b)(2)(A)7. and amendment of Note filed 4-27-2000; operative 5-27-2000 (Register 2000, No. 17).
11. Amendment of subsections (a)(1) and (a)(5) filed 11-1-2000; operative 12-1-2000 (Register 2000, No. 44).
12. Amendment of subsections (b)(1)-(b)(2)(A) filed 12-4-2001; operative 1-3-2002 (Register 2001, No. 49).
Article 16. Resale Certificates; Demonstration; Gifts and Promotions
§1667. Exemption Certificates.
Note     •     History

(a) In General. The law provides that for the purpose of the proper administration of the sales and use tax and to prevent evasion of the sales tax it shall be presumed that all gross receipts are subject to the tax until the contrary is established.
This presumption may be rebutted by the seller as to any sale by establishing to the satisfaction of the Board that the gross receipts from the sale are not subject to the tax or by timely taking a resale certificate as provided in Regulation 1668 or by taking a certificate as provided in this regulation.
(b) Effect.
(1) Except as stated hereinafter, a seller is relieved of the liability for sales tax if the purchaser timely certifies in writing to the seller that the property will be used in a manner or for a purpose entitling the seller to regard the gross receipts from the sale to be exempted from the sales tax by one or more of the provisions of Chapter 4 (commencing with Section 6351) of the Sales and Use Tax Law. A certificate will be considered timely if it is given at any time before the seller bills the purchaser for the property, or any time within the seller's normal billing and payment cycle, or any time at or prior to delivery of the property to the purchaser.
The certificate shall relieve the seller from liability for the sales tax only if it is taken in good faith.
Invoices on sales claimed by a seller as exempt should specify the names of the purchasers in order to relate them to exemption certificates.
(2) Effective January 1, 1990, a certificate of exemption from the sales tax for the sale of tangible personal property, other than fuel or petroleum products, to a foreign air carrier need not be received timely. A seller will be allowed 45 days from the date of the Board's written request to obtain an exemption certificate from the purchasing foreign air carrier as provided in Regulation 1621(c)(2), 18 CCR 1621.
(3) If a purchaser certifies in writing to a seller that the property purchased will be used in a manner or for a purpose entitling the seller to regard the gross receipts from the sale as exempt from the sales tax and uses the property in some other manner or for some other purpose, the purchaser shall be liable for payment of sales tax as if the purchaser were a retailer making a retail sale of the property at the time of such use and the sales price of the property to the purchaser shall be deemed the gross receipts from such retail sale. 
The term “use” is the same as defined in Section 6009 of the Sales and Use Tax Law without the exclusion defined in Section 6009.1.
(c) Issuance of Certificate.
(1) Form of Certificates. Certain other regulations prescribe the form of exemption certificates to be used with respect to several specific kinds of transactions. Where no specific form of certificate is prescribed, the certification must be in writing and include the date; the signature of the purchaser, the purchaser's agent, or the purchaser's employee; the name and address of the purchaser; the number of the purchaser's seller's permit, or if the purchaser is not required to hold a seller's permit, a notation to that effect and the reason; a description of the property purchased under the certificate; and a statement of the manner in which or the purpose for which the property will be used so as to make the sales tax inapplicable to the sale.
To relieve the seller from liability for the sales tax, the statement of the manner in which or the purpose for which the property will be used must be one which under the provisions of Chapter 4 (commencing with Section 6351) of the Sales and Use Tax Law does entitle the seller to regard the gross receipts from the sale as exempted from the sales tax.
(2) Issuance of Certificates Where Not Appropriate. There are several cases in which certification will not relieve the seller of liability for the sales tax. In such cases, an exemption certificate should not be obtained but rather the facts and documentation of the transaction must support the exemption. For example, a certification to the effect that sales tax does not apply because the property purchased will be exported and shipped out of state, does not relieve the seller of liability for the sales tax. A sale is exempt from sales tax as a sale in interstate or foreign commerce only if the conditions set forth in Regulation 1620 are met, and the seller should obtain the documentation required by that regulation in order to support the exemption.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6385 and 6421, Revenue and Taxation Code.
HISTORY

1. New section filed 4-15-77; effective thirtieth day thereafter (Register 77, No. 16).
2. Amendment of subsection (b) filed 12-20-77; effective thirtieth day thereafter (Register 77, No. 52).
3. Editorial correction of printing error in subsections (b) and (c) (Register 91, No. 45).
4. Amendment of subsections (a), (b) and (c), repealer of subsection (d) and Note filed 9-19-91; operative 10-21-91 (Register 92, No. 2).
5. Editorial correction of printing error in subsection (b)(1) (Register 92, No. 24).
§1668. Sales for Resale.
Note     •     History

(a) Resale Certificate.
The burden of proving that a sale of tangible personal property is not at retail is upon the seller unless the seller timely takes in good faith a certificate from the purchaser that the property is purchased for resale. If timely taken in proper form as set forth in subdivision (b) and in good faith from a person who is engaged in the business of selling tangible personal property and who holds a California seller's permit as required by Regulation 1699, “Permits,” the certificate relieves the seller from liability for the sales tax and the duty of collecting the use tax. A certificate will be considered timely if it is taken at any time before the seller bills the purchaser for the property, or any time within the seller's normal billing and payment cycle, or any time at or prior to delivery of the property to the purchaser. A resale certificate remains in effect until revoked in writing.
(b) Form of Certificate.
(1) Any document, such as a letter or purchase order, timely provided by the purchaser to the seller will be regarded as a resale certificate with respect to the sale of the property described in the document if it contains all of the following essential elements:
(A) The signature of the purchaser, purchaser's employee, or authorized representative of the purchaser.
(B) The name and address of the purchaser.
(C) The number of the seller's permit held by the purchaser. If the purchaser is not required to hold a permit because the purchaser sells only property of a kind the retail sale of which is not taxable, e.g., food products for human consumption, or because the purchaser makes no sales in this State, the purchaser must include on the certificate a sufficient explanation as to the reason the purchaser is not required to hold a California seller's permit in lieu of a seller's permit number.
(D) A statement that the property described in the document is purchased for resale. The document must contain the phrase “for resale.” The use of phrases such as “nontaxable,” “exempt,” or similar terminology is not acceptable. The property to be purchased under the certificate must be described either by an itemized list of the particular property to be purchased for resale, or by a general description of the kind of property to be purchased for resale.
(E) Date of execution of document. (An otherwise valid resale certificate will not be considered invalid solely on the ground that it is undated.)
(2) A document containing the essential elements described in subdivision (b)(1) is the minimum form which will be regarded as a resale certificate. However, in order to preclude potential controversy, the seller should timely obtain from the purchaser a certificate substantially in the form shown in Appendix A of this regulation. If a purchaser operates an auto body repair and/or paint business, a specific resale certificate in substantially the same form as shown in Appendix B of this regulation should be used, rather than the general resale certificate shown in Appendix A. 
(3) Blanket Resale Certificate. If a purchaser issues a general (blanket) resale certificate which provides a general description of the items to be purchased, and subsequently issues a purchase order which indicates that the transaction covered by the purchase order is taxable, the resale certificate does not apply with respect to that transaction. However, the purchaser will bear the burden of establishing either that the purchase order was sent to and received by the seller within the seller's billing cycle or prior to delivery of the property to the purchaser (whichever is the later), or that the tax or tax reimbursement was paid to the seller. The purchaser may avoid this burden by using the procedures described in subdivision (b) (4) below.
(4) Qualified Resale Certificate. If a purchaser wishes to designate on each purchase order whether the property being purchased is for resale, the seller should obtain a qualified resale certificate, i.e., one that states “see purchase order” in the space provided for a description of the property to be purchased. Each purchase order must then specify whether or not the property covered by the order is purchased for resale. The use of the phrases “for resale,” “resale = yes,” “nontaxable,” “taxable = no,” or similar terminology on a purchase order, indicating that tax or tax reimbursement should not be added to the sales invoice will be regarded as designating that the property described is purchased for resale provided the combination of the purchase order and the qualified resale certificate contains all the essential elements provided in subdivision (b)(1). However, a purchase order where the applicable amount of tax is shown as $0 or is left blank will not be accepted as designating that the property is purchased for resale, unless the purchase order also includes the phrase “for resale” or other terminology described above to specify that the property is purchased for resale. If each purchase order does not so specify, or is not issued timely within the meaning of subdivision (a), it will be presumed that the property covered by that purchase order was not purchased for resale and that sale or purchase is subject to tax. If the purchase order includes both items to be resold and items to be used, the purchase order must specify which items are purchased for resale and which items are purchased for use. For example, a purchase order issued for raw materials for resale and also for tooling used to process the raw materials should specify that the raw materials are purchased for resale and that the sale of the tooling is subject to tax.
The seller shall retain copies of the purchase orders along with the qualified resale certificates in order to support the sales for resale.
(5) If the seller does not timely obtain a resale certificate, the fact that the purchaser deletes the tax or tax reimbursement from the seller's billing, provides a seller's permit number to the seller, or informs the seller that the transaction is “not taxable” does not relieve the seller from liability for the tax nor from the burden of proving the sale was for resale.
(c) Good Faith. In absence of evidence to the contrary, a seller will be presumed to have taken a resale certificate in good faith if the resale certificate contains the essential elements as described in subdivision (b)(1) and otherwise appears to be valid on its face. If the purchaser insists that the purchaser is buying for resale property of a kind not normally resold in the purchaser's business, the seller should require a resale certificate containing a statement that the specific property is being purchased for resale in the regular course of business.
(d) Improper Use of Certificate. Except when a resale certificate is issued in accordance with subdivision (h) or (i):
(1) A purchaser, including any officer or employee of a corporation, is guilty of a misdemeanor punishable as provided in section 7153 if the purchaser, for the purpose of evading payment to the seller of tax or tax reimbursement, gives a resale certificate for property which the purchaser knows at the time of purchase will be used rather than resold.
(2) Any person, including any officer or employee of a corporation, who gives a resale certificate for property which he or she knows at the time of purchase is not to be resold by him or her or the corporation in the regular course of business is liable to the state for the amount of tax that would be due if he or she had not given such resale certificate. In addition to the tax, the person shall be liable to the state for a penalty of 10 percent of the tax or five hundred dollars ($500) whichever is greater, for  each purchase made for personal gain or to evade the payment of taxes, as provided in sections 6072 and 6094.5.
(3) In addition to the penalty of 10 percent or five hundred dollars ($500), whichever is greater, if the person fails to report and pay the use tax due on the use of the property purchased improperly with a resale certificate, the person may be liable for the 10 percent penalty for negligence or the 25 percent penalty for fraud, as provided in sections 6484 and 6485.
(e) Other Evidence to Rebut Presumption of Taxability. A sale for resale is not subject to sales tax. A person who purchases property for resale and who subsequently uses the property owes tax on that use. A resale certificate which is not timely taken is not retroactive and will not relieve the seller of the liability for the tax. Consequently, if the seller does not timely obtain a resale certificate containing the essential elements as described in subdivision (b)(1), the seller will be relieved of liability for the tax only where the seller shows that the property:
(1) Was in fact resold by the purchaser and was not used by the purchaser for any purpose other than retention, demonstration, or display while holding it for sale in the regular course of business, or
(2) Is being held for resale by the purchaser and has not been used by the purchaser for any purpose other than retention, demonstration, or display while holding it for sale in the regular course of business, or
(3) Was consumed by the purchaser and tax was reported directly to the Board by the purchaser on the purchaser's sales and use tax return, or
(4) Was consumed by the purchaser and tax was paid to the Board by the purchaser pursuant to an assessment against or audit of the purchaser developed either on an actual basis or test basis.
(f) Use of XYZ Letters. A seller who does not timely obtain a resale certificate may use any verifiable method of establishing that it should be relieved of liability for tax under subdivision (e). One method that the Board authorizes to assist a seller in satisfying its burden that the sale was for resale or that tax was paid, is the use of “XYZ letters.” XYZ letters are letters in a form approved by the Board which are sent to some or all of the seller's purchasers inquiring as to the purchaser's disposition of the property purchased from the seller. An XYZ letter will include certain information and request responses to certain questions, set forth below. The XYZ letter may also be further customized by agreement between the Board's staff and the seller to reflect the seller's particular circumstances.
(1) An XYZ letter may include the following information: seller's name and permit number, date of invoice(s), invoice number(s), purchase order number(s), amount of purchase(s), and a description of the property purchased or other identifying information. A copy of the actual invoice(s) may be attached to the XYZ  letter. The XYZ letter will request the purchaser to complete the statement and include the purchaser's name, seller's permit number and nature of the purchaser's business. The statement shall be signed by the purchaser, purchaser's  employee or authorized representative, and include the printed name of person signing the certificate, title, date, telephone number and city.
(2) An XYZ letter will request that the purchaser, purchaser's employee or authorized representative check one of the boxes provided inquiring as to whether the property in question was:
(A) Purchased for resale and resold in the form of tangible personal property, without any use other than retention, demonstration, or display while being held for sale in the regular course of business;
(B) Purchased for resale and presently in resale inventory, without having been used for any purpose other than retention, demonstration, or display while being held for sale in the regular course of business;
(C) Purchased solely for leasing and was so leased. Tax has been paid directly to the Board measured by the purchase price or rental receipts (“tangible personal property”); or tax has been paid measured by the purchase price or fair rental value (“mobile transportation equipment”).
(D) Purchased for resale but consumed or used (whether or not subsequently resold); or
(E) Purchased for use.
(F) When the purchaser answers either (D) or (E) affirmatively (box checked), the XYZ letter will inquire further whether:
1. The tax was paid directly to the Board on the purchaser's Sales and Use Tax Return, and if so, in what amount;
2. The tax was added to the billing of the seller and remitted to the seller, and if so, in what amount;
3. The tax was paid directly to the Board by the purchaser pursuant to an assessment against or audit of the purchaser developed either on an actual basis or test basis.
4. The purchaser confirms that the purchase is a taxable transaction and that tax is applicable.
(3) A response to an XYZ letter is not equivalent to a timely and valid resale certificate. A purchaser responding affirmatively to questions reflected in paragraphs (A), (B), (C), or (D) of subdivision (f)(2) will be regarded as confirming the seller's belief that a sale was for resale for purposes of subdivision (g). However, the Board is not required to relieve a seller from liability for sales tax or use tax collection based on a response to an XYZ letter. The Board may, in its discretion, [verify the information provided in the response to the XYZ letter,] including making additional contact with the purchaser or other persons to determine whether the purchase was for resale or for use [or whether tax was paid by the purchaser.] When the Board accepts the purchaser's response to an XYZ letter as a valid response, the Board shall relieve the seller of liability for sales tax or use tax collection.
(4) When there is no response to an XYZ letter, the Board staff should consider whether it is appropriate to use an alternative method to ascertain whether the seller should be relieved of tax under subdivision (e) with respect to the questioned or unsupported transaction(s).
(g) Purchaser's Liability for Tax. A purchaser who issues a resale certificate containing the essential elements as described in subdivision (b)(1) and that otherwise appears valid on its face, or who otherwise purchases tangible personal property that is accepted by the Board as purchased for resale pursuant to subdivision (f) and who thereafter makes any storage or use of the property other than retention, demonstration, or display while holding it for sale in the regular course of business is liable for use tax on the cost of the property. The tax is due at the time the property is first stored or used and must be reported and paid by the purchaser with the purchaser's tax return for the period in which the property is first so stored or used. A purchaser cannot retroactively rescind or revoke a resale certificate and thereby cause the transaction to be subject to sales tax rather than use tax.
A purchaser who issues a resale certificate for property which the purchaser knows at the time of purchase is not to be resold in the regular course of business is liable for the sales tax on that purchase measured by the gross receipts from the sale to that purchaser. The tax is due as of the time the property was sold to the purchaser and must be reported and paid by the purchaser with the purchaser's tax return for the period in which the property was sold to the purchaser.
(h) Mobilehomes. A mobilehome retailer who purchases a new mobilehome for sale to a customer for installation for occupancy as a residence on a foundation system pursuant to Section 18551 of the Health and Safety Code, or for installation for occupancy as a residence pursuant to Section 18613 of the Health and Safety Code, and which mobilehome is thereafter subject to property taxation, may issue a resale certificate to the mobilehome vendor even though the retailer is classified as a consumer of the mobilehome by Sections 6012.8 and 6012.9 of the Revenue and Taxation Code. Also, effective September 19, 1985,a mobilehome retailer, licensed as a mobilehome dealer under Section 18002.6 of the Health and Safety Code, who purchases a new mobilehome for sale to a customer for installation for occupancy as a residence on a foundation system pursuant to Section 18551 of the Health and Safety Code, may issue a resale certificate to the mobilehome vendor even though the mobilehome retailer may have the mobilehome installed on a foundation system as an improvement to realty prior to the retailer's sale of the mobilehome to the customer for occupancy as a residence.
Where the mobilehome is acquired by a mobilehome retailer, who is not licensed as a dealer pursuant to Section 18002.6 of the Health and Safety Code, for affixation by the retailer to a permanent foundation, or for other use or consumption (except demonstration or display while holding for sale in the regular course of business), prior to sale, the mobilehome retailer may not issue a resale certificate. The mobilehome retailer shall notify the vendor that the purchase is for consumption and not for resale. When a mobilehome manufacturer or other vendor is informed or has knowledge that the purchaser will install the mobilehome on a permanent foundation prior to its resale, the manufacturer or other vendor is not making a sale for resale. Such vendor is making a taxable retail sale and cannot accept a resale certificate in good faith.
(i) Mobile Transportation Equipment. Any person, other than a person exempt from use tax, such as under Revenue and Taxation Code section 6352, who purchases mobile transportation equipment for the sole purpose of leasing that equipment, may issue a resale certificate for the limited purpose of reporting use tax based on fair rental value as provided in Regulation 1661.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6012.8, 6012.9, 6072, 6091-6095, 6241-6245, 6484, 6485 and 7153, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of Section 2068 filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
2. Amendment filed 4-15-77; effective thirtieth day thereafter (Register 77, No. 16).
3. Amendment of subsection (e) filed 12-20-77; effective thirtieth day thereafter (Register 77, No. 52).
4. Amendment filed 5-27-83; effective thirtieth day thereafter (Register 83, No. 22).
5. Amendment of subsection (g) and repealer of subsection (h) filed 5-28-85; effective thirtieth day thereafter (Register 85, No. 22).
6. Amendment of subsection (e) filed 6-5-86; effective thirtieth day thereafter (Register 86, No. 23).
7. Change without regulatory effect of subsection (e) (Register 86, No. 51).
8. Amendment of subsections (b)(2), (b)(2)(B) and (d) filed 6-6-2001; operative 7-6-2001 (Register 2001, No. 23).
9. Amendment of section heading and section filed 4-16-2002; operative 5-16-2002 (Register 2002, No. 16).
10. Editorial correction inserting inadvertently omitted Appendices A and B (Register 2002, No. 23).
11. Change without regulatory effect amending subsections (d)(1)-(2), adopting new subsection (d)(3) and amending Note filed 6-5-2007 pursuant to section 100, title 1, California Code of Regulations (Register 2007, No. 23).
12. Amendment of section and Appendix A filed 7-30-2009; operative 8-29-2009 (Register 2009, No. 31).

Appendix A

California Resale Certificate

View Graphic

Appendix B

California Resale Certificate for the Auto Body Repair and Painting Industry

View Graphic
§1669. Demonstration, Display, and Use of Property Held for Resale--General.
Note     •     History

(a) In General. A purchaser of tangible personal property who gives a resale certificate therefor, and who uses the property solely for demonstration or display while holding it for sale in the regular course of business, is not required to pay tax on account of such use. Except as otherwise provided in this regulation, if the property is used for any purpose other than or in addition to demonstration or display, such as making deliveries, personal use of employees, etc., the purchaser must include in the measure of the tax reported the purchase price of the property. Tax applies to the subsequent retail sale of the property.
(b) Sale to Sales Representatives for Demonstration. Tax applies to sales by dealers to their sales representatives of tangible personal property to be used for demonstration. It is presumed that any such tangible personal property will be used for purposes in addition to demonstration, and any resale certificates given for such property by sales representatives to dealers will be questioned, even if the sales representatives hold seller's permits.
(c) Rental to Sales Representatives for Demonstration. A dealer who rents property to sales representatives is regarded as making a continuous sale of the property and must collect and pay tax on the rental receipts unless tax has been paid measured by the purchase price of the property rented. The dealer must also include in the measure of the tax reported the gross receipts from the retail sale of such property following its rental to the sale representatives.
(d) Loans to Schools for Educational or Training Program. The loan by any retailer of any tangible personal property to any school district for an educational program conducted by the district is exempt from the use tax.
(e) Donations of Property.
(1) In General. Operative January 1, 1989, use tax does not apply to tangible personal property withdrawn from a resale inventory for the purpose of making a charitable contribution to a qualified organization located in this state. This exemption applies only to property which has been purchased for resale and subsequently donated without any use other than retention, demonstration or display while holding it for sale in the regular course of business. For purposes of this regulation, property purchased for the purpose of incorporation into a manufactured article is regarded as having been purchased for resale. For the period January 1, 1989 through October 1, 1989, this exemption is available only to retailers. Effective October 2, 1989, this exemption is available to all sellers.
Property purchased specifically for donation to a qualified organization remains subject to the tax. As provided in section 6094.5 of the Revenue and Taxation Code, a person is guilty of a misdemeanor if a resale certificate is issued for property which he or she knows at the time of purchase will be donated rather than resold. Such improper use of a certificate may cause the person to become liable for penalties called for by sections 6072, 6094.5, 6484 or 6485 of the Revenue and Taxation Code.
(2) “Qualified Organization”. For purposes of this regulation, “qualified organization” means and includes any organization described in section 170(b)(1)(A) of the Internal Revenue Code, including but not limited to:
A. religious organizations, e.g., synagogues, churches and associations of churches;
B. charitable organizations, e.g., the Red Cross, the Salvation Army, nonprofit schools and hospitals, and medical assistance and research groups;
C. organizations operated for educational, scientific, or literary purposes including nonprofit museums, art galleries, and performing arts groups;
D. organizations operated for the protection of children or animals;
E. fraternal lodges if the donated property is to be used for charitable purposes and not for the benefit of the members; and
F. the United States, this state and any political subdivisions of this state.
Effective January 1, 1990, a nonprofit museum will not be considered a “qualified organization” unless the donated property is used exclusively for purposes of display to the public within the museum and the museum either;
(1) has a significant portion of its display space open to the public without charge during its normal operating hours;
(2) has its entire display space open to the public without charge for at least six of its normal operating hours during each month of operation; or
(3) has its entire display space open without charge to a segment of the student or adult population for educational purposes.
(f) Use of Rental Value as a Measure of Tax.
(1) Where Applicable.
(A) Accommodation Loans. If the use of property purchased under a resale certificate is limited to the loan of property to customers as an accommodation while awaiting delivery of property purchased or leased from the lender or while property is being repaired for customers by the lender, the measure of tax is the fair rental value of the property for the duration of each loan so made. The lender must also include in the measure of the tax reported the gross receipts from the retail sales of such property following its loan to customers.
(B) Property Used Both for Demonstration and Other Purposes. If property purchased under a resale certificate is used frequently for purposes of demonstration or display while holding it for sale in the regular course of business and is used partly for other purposes, the measure of tax is the fair rental value of the property for the period of such other use or uses. The gross receipts from the retail sale of the property after such use or uses must be included in the measure of tax.
This applies, for example, to a situation in which a dealer or lessor purchases property without tax paid on the purchase price and uses it personally, or allows sales representatives, sales managers, partners, corporate officers, or other authorized persons to use the property, for purposes in addition to demonstration or display.
The property must, in fact, be used frequently for demonstration or display. Mere incidental use for demonstration or display will not suffice. The dealer or lessor must maintain evidence substantiating the exempt use for examination by board auditors.
(C) Aircraft Dealers. The use of aircraft withdrawn from inventory for flight instruction and personal and business use is subject to tax. Tax may be reported on the fair hourly rental value of such use provided the requirements of (B) above are met.
(D) Mobile Transportation Equipment Leased While Being Held for Resale. If the use of mobile transportation equipment purchased under a resale certificate is limited to leasing the equipment, the purchaser may elect to pay use tax liability measured by the fair rental value if the election is made on or before the due date of a return for the period in which the equipment is first leased. The election must be made by reporting tax measured by the fair rental value on the return for that period. Tax must thereafter be paid with the return for each reporting period, measured by the fair rental value, whether the equipment is within or without this state. The election may not be revoked with respect to the equipment as to which it is made.
This election is available to any purchaser who leases mobile transportation equipment, other than a person exempt from use tax under Revenue and Taxation Code section 6352, and such purchaser may properly issue a resale certificate for the limited purpose of reporting use tax liability based on fair rental value.
1. Fair Rental Value.
“Fair rental value” means the rentals required by the lease, except where the Board determines the rental receipts are nominal. Fair rental value does not include any payment made by the lessee to reimburse the lessor for the lessor's use tax, whether or not the amount is separately stated, and regardless of how the charge is designated in the lease documentation and invoices. Lump-sum charges to the lessee will be assumed to include reimbursement for the lessor's use tax whether or not any statement to that effect is made to the lessee.
EXAMPLE: Assuming a 6 percent tax rate, if the invoice to the lessee states “rental $100, tax reimbursement to the lessor $6,” “rental $100, sales and use taxes $6,” or similar wording, the fair rental value is $100. If the invoice to the lessee states “rental $106” and makes no reference to reimbursement, the fair rental value is $100 ($106 divided by 1.06). Assuming a 6.5 percent tax rate, the fair rental value is $99.53 ($106 divided by 1.065).
Fair rental value includes any deficiency payment required from the lessee on disposition of mobile transportation equipment at the termination of an open-end lease and such payment is subject to tax. Any surplus rentals, however, which are returned to the lessee at the termination of an open-end lease may be deducted from the total fair rental value reported for the period in which the surplus rentals are returned. In the alternative, a refund may be claimed for any tax paid within the applicable statute of limitations period on such surplus rentals.
Fair rental value includes any capitalized cost reduction payment, which is a one-time payment by the lessee at the start of the lease to reduce the lessor's investment and the lessee's rentals. The payment may either be reported for the period in which it became due from the lessee or it may be reported in equal increments over the lease term. On early termination of such a lease, any unreported portion of the capitalized cost reduction payment shall be reported for the period in which termination occurred.
The term “fair rental value” includes any payments required by the lease, including amounts paid for personal property taxes on the leased property, whether assessed directly against the lessee or against the lessor, but does not include amounts paid to the lessor for:
a. Collection costs, including attorney's fees, court costs, repossession charges, and storage fees; but tax does apply to any delinquent rental payments, including those collected in court action;
b. Insuring, repairing or refurbishing the leased property following a default;
c. Cost incurred in defending a court action or paying a tort judgement arising out of the lessee's operation of the leased property, or any premiums paid on insurance policies covering such court actions or tort judgements;
d. Cost incurred in disposing of the leased property at expiration or earlier termination of the lease;
e. Late charges and interest thereon for failing to pay the rentals timely;
f. Separately stated optional insurance charges, maintenance or warranty contracts.
g. Personal property taxes assessed against personal property where a bank or financial corporation is the lessor.
2. Tax Application. Tax applies to fair rental value for all periods during which the mobile transportation equipment is leased even though the lessee may not make the required rental payments.
Tax on fair rental value does not apply either (a) for periods during which the equipment is not leased and is merely held for lease; or (b), for periods after the lessor has formally demanded return of the equipment if the lessee wrongfully retains possession of the property and is not required to make rental payments under the lease.
(2) Measuring Fair Rental Value. The fair rental value for property other than mobile transportation equipment is the amount which normally is charged by the lender for the rental of similar property under similar circumstances. If the lender does not rent similar property, the rental rate which generally is charged by others in the area is to be used.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6092.1, 6094, 6243.1, 6244 and 6403, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (a)(1)(D) filed 2-24-72 as an emergency; effective upon filing. Certificate of Compliance included (Register 72, No. 9). For prior history, see Register 72, No. 9.
2. Amendment of subsections (d) and (e) filed 6-30-76; effective thirtieth day thereafter (Register 76, No. 27).
3. Amendment of subsection (e)(1)(D) filed 12-29-78; effective thirtieth day thereafter (Register 78, No. 52).
4. Amendment of subsection (e)(1)(D) filed 6-3-83; effective thirtieth day thereafter (Register 83, No. 23).
5. Amendment of subsection (e)(1)(D) filed 8-23-85; effective thirtieth day thereafter (Register 85, No. 34).
6. New subsection (e) and amendment to subsections (a), (b), (c), (d), and former (e), re-lettered to (f), filed 6-17-91; operative 7-17-91 (Register 91, No. 35).
7. Editorial correction of printing error in subsection (e)(1)(D) (Register 91, No. 35).
8. Change without regulatory effect amending subsection (e)(1) and the EXAMPLE in (f)(1)(D)(1) filed 7-1-92; operative 7-31-92 pursuant to section 100, title 1, California Code of Regulations (Register 92, No. 28).
9. New subsection (f)(1)(D)1.g. filed 4-24-2000; operative 5-24-2000 (Register 2000, No. 17).
§1669.5. Demonstration, Display, and Use of Property Held for Resale-Vehicles.

(a) Vehicle Dealers, Lessors, Manufacturers, and Distributors--In General.
(1) “Vehicle.” Except as used in (a)(4), the term “vehicle” as used herein means passenger motor vehicles, as defined in section 465 of the Vehicle Code, pickup trucks, and small vans.
(2) “Lessor.” The term “lessor,” as used herein, means only a lessor whose leases are continuing sales.
(3) Demonstration or Display. A purchaser of a vehicle under a resale certificate, who uses the vehicle solely for demonstration or display while holding it for sale in the regular course of business, is not required to pay tax on account of such use.
(4) Loans to Schools, Colleges, and Veterans' Institutions for Educational or Training Programs.
(A) The loan by any retailer of any tangible personal property to any school district for an educational program conducted by the district is exempt from the use tax.
(B) The loan by any retailer of any motor vehicle to the California State Universities or the University of California for exclusive use in an approved driver education teacher preparation certification program conducted by the state college or university is exempt from the use tax.
(C) The loan by any retailer of a motor vehicle to be used exclusively for driver training in an accredited private or parochial secondary school in a driver education and training program approved by the State Department of Education as a regularly conducted course of study is exempt from the use tax.
(D) The loan by any retailer of any motor vehicle to a veterans' hospital or such other nonprofit facility or institution to provide instruction in the operation of specially equipped motor vehicles to disabled veterans is exempt from the use tax.
(5) Donations of Vehicles. Operative January 1, 1989, vehicles withdrawn from resale inventory for donation to a qualified organization located in this state as described in paragraph (e) of Regulation 1669, (18 CCR 1669), are exempt from the use tax. For the period January 1, 1989 through October 1, 1989, this exemption is available only to retailers. Effective October 2, 1989, this exemption is available to all sellers.
(6) Personal or Business Use. Vehicles withdrawn from resale inventory for personal or business use are subject to use tax except as provided in paragraph (a)(5). If the vehicle is not frequently demonstrated or displayed while holding it for resale in conjunction with such business or personal use, the tax is measured by the purchase price of the vehicle.
(7) Vehicles Capitalized as Fixed Assets. Except for vehicles held for the purpose of leasing, vehicles which are capitalized in a fixed asset account and depreciated for income tax purposes are not held for sale in the regular course of business. Tax must be paid measured by the purchase price of such vehicles.
(8) Registration. If a vehicle manufacturer, distributor, dealer, or lessor registers a vehicle purchased for resale in a name other than that of the manufacturer, distributor, dealer, or lessor, while retaining title to the vehicle, the vehicle is not held for sale in the regular course of business, and the manufacturer, distributor, dealer, or lessor must pay use tax measured by his purchase price of the vehicle.
(9) Vehicles Used Both For Demonstration and Other Purposes. If vehicles purchased under a resale certificate are frequently demonstrated or displayed while being held for sale in the regular course of business, and are also used partly for other purposes, tax must be paid measured by the fair rental value of the vehicles for the periods of other use. Such interspersed demonstration or display and other use may occur when a dealer or lessor purchases vehicles without tax paid on the purchase price and uses them personally, or allows vehicle salespersons, vehicle sales managers, partners, corporate officers, or other persons to use them for purposes in addition to demonstration or display.
(10) Rental to Salespersons For Demonstration. A dealer who rents vehicles which are not mobile transportation equipment to salespersons is regarded as making continuing sales of the vehicles and must collect and pay tax on the rental receipts, unless tax has been paid measured by the purchase price of the vehicles. However, if the rental receipts are less than 1/60th of the dealer's purchase price of the vehicle for each month of the rental, the transaction will not be considered a bona fide rental, and tax will be measured by 1/60th of the purchase price for each month of such use. For the application of tax to rentals of pickup trucks and other mobile transportation equipment, see Regulation 1661.
(11) Subsequent Retail Sales. The taxability of retail sales of vehicles is not affected by the fact that tax has been paid previously on the purchase price, rental receipts, or fair rental value because of the use or rental of the vehicles.
(12) Sales to Salespersons for Demonstration. Tax applies to sales by dealers to their salespersons of vehicles to be used for demonstration and personal use.
(13) Presumptions. Any presumption established by this regulation may be rebutted only by clear and convincing evidence to the contrary. However, declarations after the fact are of little value as evidence because of their self-serving nature, and will be given little weight.
(b) New and Used Vehicle Dealers and Lessors--Specific Applications. The following provisions apply with respect to vehicles which are registered in the name of the dealer or lessor, and vehicles which are not registered. If vehicles are registered in the name of a person other than the dealer or lessor, see (a)(8) above.
(1) Types of Vehicles Not Ordinarily Sold. If a vehicle dealer or lessor purchases under a resale certificate a new vehicle of a type which he or she is not franchised to sell, or does not ordinarily sell or lease as a new vehicle, and uses the vehicle for any purpose other than, or in addition to, demonstration or display, it will be presumed that the vehicle is not being held for sale in the regular course of business and that tax is due measured by the purchase price of such vehicle.
(2) Vehicles Assigned to Vehicle Sales Personnel. When a vehicle dealer or lessor assigns a vehicle as a demonstrator to vehicle sales personnel for a period not exceeding 12 months, it will be presumed that such vehicles are frequently demonstrated or displayed, and that they are also used partly for other purposes. Under these circumstances, the measure of tax is the fair rental value of the vehicle for the periods of personal or business use which are interspersed with the demonstration or display. It will be further presumed that the fair rental value for such business and personal use is 1/60th of the purchase price of the vehicle for each month of combined demonstration or display and use. As used here, the term “sales personnel” is limited to vehicle salespersons and vehicle sales managers, and to sole proprietors, partners, or corporate officers who directly participate in negotiating sales.
(3) Vehicles Assigned to Others.
(A) When a vehicle dealer or lessor assigns a vehicle for a period not exceeding 12 months to employees or officers other than vehicle sales personnel, it will be presumed that such vehicles are frequently demonstrated or displayed, but less frequently than those assigned to vehicle sales personnel, and that they are also used for other purposes to a greater extent than those assigned to vehicle sales personnel. Under these circumstances, the measure of tax is the fair rental value of the vehicle for the periods of personal or business use which are interspersed with demonstration or display. It will be further presumed that the fair rental value for such business and personal use is 1/40th of the purchase price of the vehicle for each month of combined demonstration or display and use.
(B) When a vehicle dealer or lessor assigns a vehicle to persons other than employees or officers, such as relatives or business associates, it will be presumed that the vehicle is not frequently demonstrated or displayed. Tax must be paid measured by the purchase price of such vehicles.
(4) Vehicles Assigned For Extensive Periods of Time. It will be presumed that any vehicle assigned for more than 12 months to one or a series of persons for business or personal use in addition to demonstration or display is not held for sale in the regular course of business. Tax must be paid measured by the purchase price of such vehicles. If at the time the vehicle is assigned for such combined use the duration of the combined use is not known, the dealer or lessor may use either the 1/40th or 1/60th formula, as appropriate, to report use tax liability until the period of combined use exceeds 12 months. At that time he or she must report and pay tax on the difference between the purchase price of the vehicle and the measure of tax previously reported with respect to the vehicle under the formula.
(5) Unassigned Demonstrators. If no use is made of vehicles purchased under a resale certificate, other than demonstration or display while holding them for sale in the regular course of business, no tax liability arises. Such vehicles generally are not assigned to any individual. However, if such vehicles are registered in the name of the dealer, it will be presumed that they are used for other purposes in addition to demonstration or display. Under these circumstances, the measure of tax is the fair rental value of the vehicle for the periods of personal or business use which are interspersed with the demonstration or display. It will be further presumed that the fair rental value for such other use is 1/40th of the purchase price of the vehicle for each month of combined demonstration or display and use.
(6) Customer Loan Vehicles. If the use of a vehicle purchased under a resale certificate is limited to the loan, but not the rental, of the vehicle to customers while they are awaiting delivery of vehicles purchased or leased from the dealer, or while their vehicles are being repaired by the dealer, the measure of tax is the fair rental value of the vehicle for the duration of each loan so made. The fair rental value is the amount for which the dealer rents similar vehicles for similar periods to persons who are not customers awaiting delivery of vehicles purchased or leased from the dealer or being repaired by the dealer. If the dealer does not rent vehicles under such circumstances, the fair rental value is the amount for which other dealers in the area rent similar vehicles for similar periods to persons who are not customers awaiting delivery of vehicles purchased or leased from the other dealers or being repaired by the other dealers.
If a lessor loans a vehicle to a lessee while the lessee is awaiting delivery of the leased vehicle, or while the leased vehicle is being repaired, and the regular lease payments continue to accrue during the period of the loan, the regular lease payments will be considered to cover the use of the substitute loan vehicle. No additional tax beyond the tax measured by the regular lease payments will be due as a result of the loan.
(7) Other Loans of Vehicles. If a vehicle dealer or lessor removes a vehicle from resale inventory and loans it to persons other than those specified in (b)(6) above, and the vehicle is not frequently demonstrated or displayed, tax must be paid measured by the purchase price of the vehicle, unless the loan is of such short duration as to constitute only incidental use. If the loan constitutes only incidental use, preceded and followed by frequent demonstration or display, the measure of tax is the fair rental value of the vehicle for the period of such use as fair rental value is defined in (b)(6) above. A loan for a period of 30 days or less will be considered incidental use. Periods during which a vehicle is leased, pursuant to leases which constitute continuing sales, will be regarded as periods equivalent to periods of demonstration and display.
(c) Vehicle Manufacturers and Distributors--Specific Applications.
(1) Vehicles Assigned For Extensive Periods of Time. It will be presumed that any vehicle assigned for more than 12 months to one or a series of persons for business or personal use in addition to demonstration or display, or assigned for more than 12 months to “pool service,” is not held for sale in the regular course of business. Tax must be paid by manufacturers measured by the purchase price of tangible personal property used to manufacture the vehicle, and tax must be paid by distributors measured by their purchase price of the vehicle.
(2) Vehicles Assigned For Limited Periods of Time. It will be presumed that any vehicle assigned to one or a series of employees or other persons for a period of time not exceeding 12 months in the aggregate is frequently demonstrated or displayed and that it is also used partly for other purposes. This same presumption will be made with respect to any vehicle registered in the name of the manufacturer or distributor, and any vehicle placed for a period of time not exceeding 12 months in a “pool” from which vehicles are assigned to various employees or loaned for short intervals to television studios, visiting dignitaries, automotive magazine editors, etc. Under these circumstances, the measure of tax is the fair rental value of the vehicle for the periods of personal or business use which are interspersed with the demonstration or display. It will be further presumed that the fair rental value for such personal or business use is 1/40th of the “net dealer price” of the vehicle for each month of such combined use. Since manufacturers' and distributors' sales personnel demonstrate vehicles less frequently than dealers' or lessors' sales personnel, no distinction is made in this presumption between sales personnel and others.
“Net dealer price” is the factory selling price to dealers, including optional extra cost equipment, before any discounts or rebates. It also includes federal excise tax, but it does not include destination, handling, and other charges.

Appendix
In determining 1/40th or 1/60th of the purchase price of vehicles, the following schedule may be used:

	Purchase Price	Median
	of Vehicle	Cost	1/40th	1/60th

$	900 	to 	$1,500	$1,200	$ 30	$ 20
	1,500 	to 	2,100	1,800	45	30
	2,100 	to 	2,700	2,400	60	40
	2,700 	to 	3,300	3,000	75	50
	3,300 	to 	3,900	3,600	90	60
	3,900 	to 	4,600	4,200	105	70
	4,500 	to 	5,100	4,800	120	80
	5,100 	to 	5,700	5,400	135	90
	5,700 	to 	6,300	6,000	150	100
	6,300 	to 	6,900	6,600	165	110
	6,900 	to 	7,500	7,200	180	120
	7,500 	to 	8,100	7,800	195	130
	8,100 	to 	8,700	8,400	210	140

NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6094, 6244 and 6403, Revenue and Taxation Code.
HISTORY

1. New section filed 7-30-76; effective thirtieth day thereafter (Register 76, No. 27).
2. Editorial correction of subsection (a)(4)(B) filed 9-6-83 (Register 83, No. 37).
3. New subsection (a)(5) and renumbering of existing subsections (a)(5) through (a)(12) to (a)(6) through (a)(13) respectively filed 6-19-91; operative 7-19-91 (Register 91, No. 38).
§1670. Gifts, Marketing Aids, Premiums and Prizes.
Note     •     History

(a) Gifts. Persons who make gifts of property to others are the consumers of the property and the tax applies with respect to the sale of the property to such persons.
(b) Marketing Aids. The tax applies to sales of advertising material, display cases, counter display cards, racks, and other similar marketing aids to persons acquiring such property for use in selling other property to customers. A marketing aid is deemed to be “sold” if a consideration at least equivalent to 50 percent of the purchase price of the aid is obtained from the customer, either by the making of a separate charge or by increasing the regular sales price of other merchandise sold to the customer and delivered with the marketing aid.
Manufacturers or others who provide marketing aids to persons engaged in selling their products without obtaining reimbursement equivalent to 50 percent of the purchase price of the aid are deemed to be the consumers of the property provided. In such case the sales tax applies to the sale to or the use tax applies to the use by the manufacturer or other person purchasing the aid for distribution whether it is delivered directly to the person engaged in selling its product or is delivered to a distributor, wholesaler, or jobber for redelivery to such person with “deal merchandise.” Distributors, wholesalers, or jobbers are the retailers of aids which they “sell” to persons engaged in marketing their products.
(c) Premium Delivered With Goods Sold. When a person delivers tangible personal property as a premium together with other merchandise sold, and the obtaining of the premium by the purchaser is certain and not dependent upon chance or skill, the transaction is a sale of both articles. Tax applies to the gross receipts received from the purchaser for the goods and the premium except when the premium is delivered along with a food product for human consumption or other exempt item. In such case tax applies to the gross receipts from the sale of the premium, which will be regarded as the cost of the premium to the retailer, in the absence of any evidence that the retailer is receiving a larger sum. If there is no such evidence, and if sales tax or use tax has been paid measured by the sale price of the premiums to the retailer, no further tax is due.
(d) Prizes. The operator of a game who delivers a prize to each customer is regarded as the retailer of the merchandise delivered as prizes, and the tax applies to the operator's total gross receipts. The awarding of such prizes is not regarded as dependent upon chance or skill, inasmuch as the customer for each game played is certain to receive a prize. Similarly, the tax applies to the entire receipts from operators of “grab bag” concessions by which the customer always receives some tangible personal property. If the prize consists of a food product, the tax does not apply.
An operator who delivers both food items and nonfood items as prizes may take a deduction of that percentage of his total receipts which equals the percentage of the cost to him of the food items to the total cost to him of all merchandise purchased for delivery as prizes.
The operator of a game who awards property as a prize the winning of which depends upon chance or skill is the consumer of the property and tax applies with respect to the sale to or the use of the property by the operator.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6007-6009, 6015 and 6365, Revenue and Taxation Code. Charitable Organizations, see Regulation 1570. Exemption Certificates, see Regulation 1667. “Free” Meals, see Regulation 1603.
HISTORY

1. Amendment and renumbering of former Section 2072 filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
2. Amendment of subsections (c) and (e) filed 12-29-78; effective thirtieth day thereafter (Register 78, No. 52).
3. Amendment filed 12-6-79; effective thirtieth day thereafter (Register 79, No. 49).
4. Repealer of former subsections (b) and (f), relettering and amendment of former subsection (c) to subsection (b), and relettering of former subsections (d) and (e) to subsections (c) and (d) filed 12-29-88; operative 1-28-89 (Register 89, No. 2).
§1671. Trading Stamps and Related Promotional Plans.
Note     •     History

(a) Introduction. A variety of sales promotion plans involving premiums are in use by retailers. Common to these plans are some indicia furnished by the retailer to his customers based on the amount of purchases. Examples of such indicia are trading tamps, coupons, tickets and cash register tapes. Given quantities of indicia are surrendered by the customer in exchange for the premium. (b) Description of Plans. For the purposes of this ruling, these plans may be divided into three types, as follows:
(1) At or near the time of making the same the retailer incurs expense with relation to the premium by paying a third party, which third party assumes the obligation to furnish the premium to the retailer's customer. The retailer's payment to the third party is not dependent on his customer subsequently surrendering the indicia in exchange for the premium.
(2) The retailer incurs no expense with relation to the premium until such time as the customer obtains the premium. The retailer purchases the premium and delivers it to his customer in exchange for the required quantity of indicia.
(3) The retailer incurs no expense with relation to the premium until about the customer obtains the premium. A third party delivers the premium to the customer in exchange for the required quantity of indicia. The retailer pays the third party on an agreed basis related to premium merchandise delivered to the customer by the third party.
The typical trading stamp plan falls under (1) above. The typical cash register tape plan falls under (2) or (3) above. 
(c) Cash Discounts Generally. Cash discounts allowed and taken on taxable retail sales may be excluded from the measure of the tax. The promotion plans described above constitute cash discounts. The cash discount is allowed by the retailer and taken by the customer at the time the retailer incurs the expense with relation to the premium.
(d) Plan Described in (b)(1).
(1) Cash Discount. The retailer is entitled to a cash discount deduction at the time he pays the third party who undertakes to redeem the indicia used in the plan. The amount of the cash discount shall be computed on the basis of the amount the retailer pays to the third party for the indicia. See paragraph (g) below for proration of cash discount where retailer's sales are not all taxable.
(2) Sale of Premium. The delivery of premium merchandise in exchange for a prescribed number of units of indicia used in this type of plan constitutes a taxable retail sale of the premium merchandise by the person delivering the merchandise (assuming that the premium merchandise is of a kind the retail sale of which is subject to tax). The selling price is the average amount paid to the third party by its customers for the indicia surrendered in exchange for the premiums.
(e) Plan Described in (b)(2).
(1) Cash Discount. The retailer incurs the expense with relation to the premium at the time he delivers the premium to his customer. The retailer is entitled to a cash discount deduction at the time he delivers the premium to his customer. The amount of the cash discount deduction shall be the selling price of the premium as determined by paragraph (e)(2) below. Since the cash discount relates to the previous sales on which indicia of some kind were issued to customers and which indicia are surrendered in exchange for the premium, the retailer is not entitled to the full cash discount deduction unless the previous sales on which indicia were issued were all taxable retail sales. Where some, but less than all, of such previous sales were taxable retail sales the retailer shall be allowed a portion of the cash discount as a deduction. See paragraph (g) below.
(2) Sale of Premium. The delivery of premium merchandise by the retailer to his customer in exchange for a prescribed number of units of indicia constitutes a taxable retail sale of the premium merchandise (assuming that the premium merchandise is of a kind the retail sale of which is subject to tax). The selling price is the sales price to the retailer of the premium merchandise.
(f) Plan Described in (b)(3).
(1) Cash Discount. If a third party delivers the premium to the customer and the retailer pays such third party on an agreed basis related to premium merchandise delivered to the customer by the third party, the retailer is entitled to a cash discount deduction for the reporting period in which he pays the third party. The amount of the cash discount is the amount of the payment to the third party.
If the retailer's sales are not all taxable retail sales, there must be a proration of the cash discount. See paragraph (g) below.
(2) Sale of Premium. The delivery of premium merchandise by a third party to a retailer's customer in exchange for a prescribed number of units of indicia is a taxable retail sale (assuming the premium merchandise is of a kind the retail sale of which is subject to tax). The selling price is the amount received by the third party.
(g) Proration of Cash Discount Between Taxable and Exempt Transactions. If the retailer makes taxable sales and also engages in exempt transactions (for example, sales of food or services such as dry cleaning), and issues indicia on both taxable and exempt transactions, the cash discount must be prorated between taxable and exempt transactions and the cash discount deduction on his sales tax return may be taken only for cash discounts on taxable sales. In making tax returns, the retailer may use the following formula to determine the proration of cash discounts to taxable sales:
Taxable sales of the current reporting period on which indicia are issued divided by all transactions of the current reporting period on which indicia are issued. 
If upon audit this formula is shown to produce an incorrect proration, an appropriate determination or refund will be made.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6011, 6012, Revenue and Taxation Code. Tax reimbursement on discounts, effect of collecting, see Regulation 1700 (2100 Unrevised Series).
HISTORY

1. Amendment and renumbering of former Section 2073 filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Editorial correction of subsection (e)(1) (Register 71, No. 4). 3. Amendment of subsections (d)(2), (e)(2), (f)(2) and (g) filed 1-19-79; effective thirtieth day thereafter (Register 79, No. 3).
3. Amendment of subsections (d)(2), (e)(2), (f)(2) and (g) filed 1-19-79; effective thirtieth day thereafter (Register 79, No. 3).
§1671.1. Discounts, Coupons, Rebates, and Other Incentives.
Note     •     History

(a) In General. Retailers often engage in marketing and sales programs in which they issue coupons or other indicia to their customers that entitle the customers to a reduction in the amount they are required to pay for products sold by the retailers. Manufacturers, vendors, and other third parties often engage in various programs that result in credits or payments made to retailers with respect to a retailer's taxable sale of products to an end-use customer. These payments and credits include, but are not limited to, purchase and cash discounts, coupon reimbursements, ad or rack allowances, buy-downs, scanbacks, voluntary price reductions and other incentives, promotions, and rebates. Under certain conditions, payments received by the retailer in the form of rebates or other types of payments or credits for products sold at retail are included in the retailer's gross receipts or sales price from the sale of the product. 
(b) Discounts. 
(1) Cash discounts are offered by a retailer to its customer for prompt payment by that customer. If the customer makes prompt payment and takes the discount, the retailer's gross receipts are reduced by the amount of the discount. Cash discounts allowed and taken on sales are excluded from gross receipts. If, however, the customer does not make prompt payment, the retailer's gross receipts are the amount billed. Generally, discounts provided to customers utilizing a grocery store discount club card are regarded as cash discounts or retailer coupons. 
(2) Purchase discounts are given by a manufacturer and/or wholesaler to a vendor (i.e., a retailer) based upon the amount of prior or future purchases by that vendor. These discounts are regarded as trade discounts and are excluded from gross receipts as they are based on the number of products the retailer purchased from the manufacturer and/or wholesaler and not the number of products sold by the vendor at retail. Agreements wherein the retailer agrees to sell the products at a target price for a period of time are also “purchase discounts” and excluded from gross receipts when the discount is based on the number of products purchased by the vendor. The rebates received either directly from the manufacturer or from the wholesaler are not subject to tax since they are tied to the retailer's wholesale purchases of the products, not to the number of retail sales made at the target price. 
(3) Ad or rack allowances are contractual agreements usually between a manufacturer and the retailer to advertise a product, or to give that product preferential shelf space. Ad or rack allowances are also known as “Local Pay,” “Display Shelf Payments,” or something similar. Such allowances are not related to the retail sale of the underlying product and are excluded from gross receipts. Generally, payments to a grocery store retailer pursuant to discounts offered through a grocery store discount club card are regarded as ad or rack allowances. 
(4) Retailer coupons are issued by a retailer in paper or paperless form. When presented to the retailer by the customer, they entitle the customer to buy tangible personal property at a certain amount or percentage off the advertised selling price. Although the coupons are presented to the retailer to receive a reduction in the selling price, retailer coupons do not result in compensation from a third party. If the customer has not paid any consideration for the coupon, e.g., a coupon clipped from a magazine or newspaper, the coupon represents a true price reduction resulting in a corresponding reduction in the retailer's gross receipts from the sale. If, however, the customer has previously given compensation to the retailer for the coupon, e.g., the coupon was purchased as part of a coupon booklet sold by the retailer to the customer, the pro rata share of the cost of the booklet represented by the purchase for which the coupon was given must be included in gross receipts. 
(5) Manufacturer coupons are paper or paperless coupons funded by the manufacturer that customers can utilize at the time of purchasing the manufacturer's product, thus entitling customers to a certain amount or percentage off the advertised selling price. These coupons are generally identified as “manufacturer coupons” and include retailer reimbursement terms that must be followed by retailers in order to redeem the coupons. Amounts paid by a manufacturer to a retailer to reimburse the retailer for the value of the manufacturer coupon are included in the retailer's gross receipts. The retailer may, by contract, charge the customer sales tax reimbursement on the amount paid by the manufacturer. When a retailer charges such reimbursement, the amount on which the reimbursement is charged is fully disclosed to the customer through the customer's utilization of the manufacturer coupon. 
(c) Rebates and Incentives. 
(1) Definitions. For purposes of this subdivision (c) only, the following definitions shall apply: 
(A) “Discount” means a reduction in the amount of consideration the customer is required to provide in order to purchase the tangible personal property from a retailer as a result of third-party consideration promised to or received by the retailer. 
(B) “Retailer's vendor” means a person who sells tangible personal property for resale directly to the retailer.
(C) Operative October 1, 2007, “third party” means a person other than the retailer or the retailer's customer, such as a manufacturer or retailer's vendor. 
(2) Rebates Issued Directly to Customers. Manufacturers engage in promotional programs in which they offer product rebates directly to the retailer's customers following their purchase of the manufacturer's products. To receive the product rebate, customers are generally required to submit a rebate application form along with any required documentation (e.g., sales receipt) to the manufacturer or manufacturer's representative directly or through the retailer. Once the rebate form and required documents are processed and accepted, the manufacturer or the manufacturer's representative will issue the customer a rebate check. Rebates checks issued by manufacturers directly to the retailer's customers are not part of the retailer's gross receipts. In this situation, the customer pays the retailer the full selling price and receives a subsequent rebate directly from the manufacturer. 
(3) Rebates and Incentives Issued to Retailers. Retailers engage in rebate and incentive programs with manufacturers or other third parties that result in additional revenue for the retailer when certain conditions are satisfied. These are transactions involving buy-down programs, markdowns, discounts, coupons, rebates, and other price reductions. These rebate and incentive programs are also known as “Buy-Down Rebates,” “Voluntary Price Reductions,” “Promotions,” “Flex” (Flex Extensions), “Coupon Redemptions,” “Scanbacks,” “Instant Rebates,” or by a similar name. 
(A) Operative October 1, 2007, when a retailer enters into an oral or written contract with a manufacturer or other third party that requires, on a transaction-by-transaction basis, a specific reduction in the retailer's selling price of specified products in exchange for a certain payment of a like amount from the contracting party (e.g., a payment that is not contingent upon selling a particular amount of the specified products), such payments received by the retailer are part of the taxable gross receipts or sales price of the sales. For purposes of this subdivision, it is rebuttably presumed that any consideration received by retailers from third parties related to promotions for sales of specified products is subject to tax until the contrary is established. The types of documentation that will generally rebut this presumption include, but are not limited to, the following: 
1. A copy of an agreement or contract between the retailer and a third party that requires the retailer to give specified products preferential shelf space or to display the products in specific areas of the retailer's establishment in exchange for the payment received. 
2. A copy of an agreement or contract between the retailer and a third party that provides the retailer with an advertising allowance, equal to or in excess of the payment received, when the retailer advertises the third-party's products. 
3. A copy of an agreement or contract between the retailer and a third party that provides that the retailer will only receive the payment if the retailer sells a certain quantity of the products within a specified price range during a particular period, or if the retailer purchases a certain quantity of the products during a particular period. 
4. In the absence of a written agreement or contract, the retailer may use any verifiable method of establishing that the consideration received from the third party was not subject to tax, such as a signed and dated letter or other type of documentation provided by the third party, subsequent to the contract or agreement, verifying that the payment received was not paid pursuant to a contract requiring a reduction in the selling price of specified products on a transaction-by-transaction basis. 
(B) Operative October 1, 2007, for purposes of this subdivision, when a retailer contracts with its customer for the addition of sales tax reimbursement to the gross receipts of tangible personal property sold at retail, or when a retailer is obligated to collect use tax measured by the sales price, the retailer is required to disclose to the customer the amount upon which sales tax reimbursement or use tax is collected, including the amount of any taxable discounts, rebates, or incentives offered or paid to the retailer by third parties. The retailer may show the amount upon which sales tax reimbursement or use tax is collected on the customer's sales receipt, sales invoice, or other proof of sale. When applicable, the retailer may also post on its premises in a location visible to the customer, or in an advertisement or other printed material directed to customers, a notice to the effect that “tax” will be added to the selling price of all items, including the amount of any taxable discounts, rebates, or incentives offered or paid to the retailer by third parties. 
A retailer that does not disclose the amount of any taxable discounts, rebates, or incentives upon which sales tax reimbursement is collected, is in violation of the provisions of Regulation 1700, Reimbursement for Sales Tax. A retailer obligated to collect the use tax that does not disclose the amount of any taxable discounts, rebates, or incentives is in violation of the provisions of Regulation 1686, Receipts for Tax Paid to Retailers. 
(d) Examples. 
(1) The following are examples of transactions where the value of the coupon or discount is part of the retailer's gross receipts (or sales price if subject to use tax) from the sale of the product: 
(A) Customer clips a coupon out of a newspaper and presents it to the retailer at the time of sale to receive a discounted price on the product purchased. The coupon indicates “Manufacturer Coupon.” Since the manufacturer will compensate the retailer for the amount of the price reduction and the customer presents a manufacturer coupon to the retailer, the value of the coupon is included in the retailer's gross receipts. 
(B) Coupon on dog food bag indicates $2 off at register. The coupon also indicates “payable by Big Bad Dog Food Co. (BBDF Co.)” or “All promotional costs paid by BBDF Co.” The store clerk removes the coupon from the dog food bag and enters the amount of the discount into the register. The discount is included in the retailer's gross receipts. 
(C) Retailer provides its customers with a coupon discount booklet containing coupons accepted by the retailer during sales periods. The booklet includes coupons identified as “manufacturer coupons” and retailer coupons. Customers remove the coupons from the booklet and present them to the checkout clerk. The value of the coupons identified as “manufacturer coupons” is included in the retailer's gross receipts. The value of the retailer coupons, however, would generally not be included in the retailer's gross receipts. 
(D) Retailer offers a grocery store discount club card. The customer uses the club card when purchasing various products. The customer also presents manufacturer coupons to the store clerk that are scanned along with the club card. Although the price reductions associated with the club card are not part of the retailer's gross receipts, the value of the manufacturer coupons is included in gross receipts. 
(2) The following are examples of transactions where rebate or incentive payments are part of the retailer's gross receipts (or sales price if subject to use tax) from the sale of the product: 
(A) The retailer purchases dog food from a distributor, a separate legal entity from the manufacturer (BBDF Co.). No coupon is present on the dog food bag. However, a display notice indicates that a $2 “price reduction is made possible by BBDF Co.” Since the retailer agrees to reduce the selling price of the product in exchange for an offsetting reimbursement from the distributor, the discounted amount is included in the retailer's gross receipts. 
(B) The retailer maintains an online sales Web site. The retailer enters into buy-down programs with manufacturers in which the manufacturers require the retailer to offer their products at a reduced price. When the customer purchases a discounted product, the customer's invoice lists the selling price less the amount of the manufacturer's discount. The amount of the discount is subject to tax. 
(C) Retailer purchases cosmetic products directly from the manufacturer. The manufacturer and retailer enter into a buy-down program in which the retailer is required to reduce the selling price of the manufacturer's products. In turn, the manufacturer agrees to compensate the retailer for the amount of the price reduction. The rebate revenue is included in the retailer's gross receipts. 
(D) A cola distributor enters into graduated rebate agreements with retailers that entitle the retailers to reimbusement from the distributor based on the number of 12-packs of cola the retailers sell at a required discounted price during the month of July. The amount of the sales discount is dictated by the distributor as follows: A participating retailer is certain to receive 50 cents for every 12-pack of cola the retailer sells in July at the required discounted price. However, after surpassing a minimum threshold of 12-pack units sold, the retailer will receive an additional 50 cents for each additional 12-pack sold over the threshold minimum. At the end of the promotional period, after verifying the number of 12-pack units sold, the distributor issues a rebate check to the participating retailer. Only the certain payment of 50 cents for every 12-pack of cola the retailer sells in July at the required discounted price is subject to tax. To the extent the retailer receives additional rebates for exceeding the minimum threshold, such contingent rebates are not subject to tax. 
(3) The following are examples of transactions where the value of the coupon or discount is not included in the retailer's gross receipts (or sales price if subject to use tax) from the sale of the product: 
(A) Retailer has store discount coupons printed in newspaper advertisements. The customers present the coupons when purchasing the advertised products. The retailer's coupon is not a third-party coupon, nor is the retailer reimbursed for the amount of the discount. Although the customers may present a coupon to the retailer, the amount of the discount is not included in the retailer's gross receipts. 
(B) Retailer advertises a special promotional sale to a specific customer base. Qualifying customers are mailed a 25% discount coupon they may use on the last Tuesday of the month. The customers are required to bring the coupon to the store during the promotional period in order to receive a discount on their purchases. The retailer is not reimbursed by a third party for the discounted amount. The discounts provided to the retailer's customers qualify as nontaxable discounts. 
(C) Retailer offers a “double discount” for certain manufacturer coupons used by customers. The customers present a manufacturer coupon offering $1 off the purchase of a specific healthcare product. In turn, the retailer also allows an additional $1 off the selling price of the healthcare product. Although the value of the reimbursable manufacturer coupon is included in the amount subject to tax, the retailer's additional $1 discount qualifies as a nontaxable discount. 
(4) The following are examples of transactions where rebate and incentive payments are not included in the retailer's gross receipts (or sales price if subject to use tax) from the sale of the product: 
(A) A cola distributor enters into written agreements with retailers that entitle the retailers to compensation from the distributor based on the number of 12-packs of cola the retailers sell during the month of July. The retailers retain copies of the agreements. The retailers may or may not reduce the selling price of the 12-packs. At the end of the promotional period, the distributor issues rebate checks to the participating retailers. Given the retailers can document there was no requirement to reduce the selling price of the product, the additional revenue is not included in the retailers' gross receipts. 
(B) A manufacturer enters into written agreements with retailers to advertise the manufacturer's products and to provide the products preferential shelf space. Retailers that agree to the manufacturer's terms receive compensation from the manufacturer at the end of the promotional period. Assuming the retailers can document that the agreements were not based on a selling price reduction, the payments from the manufacturer are not included in the retailers' gross receipts. 
(C) A retailer's vendor agrees to discount the retailer's November purchases of Christmas products by 20% if the retailer's total sales for October exceed a specific amount. The retailer increases its purchases during October, gives the products preferential shelf space and advertises the products at 10% off. Although the retailer reduced the selling price of the products, a price reduction was not a condition of the agreement. The retailer retains documentation to support this fact. The discount is a reduction to the retailer's cost of good sold, not additional gross receipts. 
(D) A manufacturer's representative enters into an agreement with a retailer that entitles the retailer to compensation from the manufacturer if the retailer's sales of the manufacturer's hair and skin care products exceed a specific amount during the month of June. The retailer offers the products at a reduced price and provides the hair care products with preferential shelf space. The retailer's sales for June exceed the specified amount and the manufacturer issues a check to the retailer, as agreed. The rebate payment is not subject to tax. 
(E) A retailer buys products from either a wholesaler or the manufacturer of products. Retail sales of these products are generally subject to tax. The product manufacturer and/or the wholesaler enters into an agreement with the retailer for a rebate, based upon the number of products the retailer purchases from either the manufacturer or the wholesaler, if the retailer agrees to sell the products at a “target” price for a specified period. Typically, a target price is used to establish a general price range for a particular geographic area or demographic market. The rebates received either directly from the manufacturer or from the wholesaler are not subject to tax since they are tied to the retailer's wholesale purchases of the products, not to the number of retail sales made at the target price. 
(F) During a routine audit of the retailer's books and records, the retailer is asked to provide documentation to support its nontaxable treatment of the revenue received; however, the retailer does not have sufficient documentation to support its reporting of the transactions in question. To verify that the revenue received from the manufacturer was not part of gross receipts, the retailer sends a letter to the manufacturer requesting that the manufacturer verify that the payment received under their promotional agreement was not paid pursuant to a contract requiring the retailer to reduce the selling price of their products. The manufacturer signs and dates the letter verifying this fact and returns it to the retailer. No concerns regarding the authenticity of the letter exist. Since the subsequent verification establishes that the rebate revenue was not paid in exchange for a required reduction to the retailer's selling price of the manufacturer's products, the revenue is not part of the retailer's gross receipts. 
(5) The following are examples of transactions involving payments by automobile manufacturers to automobile dealers or end-use customers with respect to the sale or lease of automobiles. 
(A) An automobile manufacturer provides a customer with a $1,000 rebate upon the purchase of a specific automobile. Rather than receive payment from the manufacturer, the customer assigns the rebate to the dealer, who in turn applies the amount of that rebate toward the customer's payment for the vehicle. The $1,000 payment by the manufacturer is part of the dealer's gross receipts, since the rebate is provided to the customer who uses the rebate amount to partially satisfy that customer's total payment obligation to the dealer. The $1,000 rebate does not constitute a reduction in the retailer's gross receipts as a retailer's coupon, cash discount, purchase discount, or otherwise. 
(B) An automobile dealer receives a $500 incentive from the automobile manufacturer for every vehicle sold of a specific model in a given period. The manufacturer does not have an oral or written contract requiring the dealer to sell the specific model at a reduced price. The selling price is based solely on the dealer's discretion. Under these facts, the $500 payment by the manufacturer is not part of the dealer's gross receipts since the manufacturer does not require a reduction in the retail selling price of the vehicle. The $500 incentive instead constitutes a reduction in the dealer's cost of goods sold. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6011 and 6012, Revenue and Taxation Code.
HISTORY

1. New section filed 6-4-2007; operative 7-4-2007 (Register 2007, No. 23).
Article 17. Payment and Collection of Use Tax
§1683. “Engaged in Business.” [Repealed]
Note     •     History

NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6023, Revenue and Taxation Code.
HISTORY

1. Renumbering and amendment of former Section 2083 filed 1-19-71; effective thirtieth day thereafter (Register 71, No. 4). For history of former section, see Register 65, No. 19.
2. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§1684. Collection of Use Tax by Retailers. [Effective until at least 9-15-2012; see history note for new version of §1684 for details]
Note     •     History

(a) Retailers Engaged in Business in State. Retailers engaged in business in this state as defined in Section 6203 of the Revenue and Taxation Code and making sales of tangible personal property, the storage, use, or other consumption of which is subject to the tax must register with the Board and, at the time of making the sales, or, if the storage, use or other consumption of the tangible personal property is not then taxable, at the time it becomes taxable, collect the tax from the purchaser and give the purchaser a receipt therefor.
Any retailer deriving rentals from a lease of tangible personal property situated in this state is a “retailer engaged in business in this state” and is required to collect the tax at the time rentals are paid by his lessee.
The use of a computer server on the Internet to create or maintain a World Wide Web page or site by an out-of-state retailer will not be considered a factor in determining whether the retailer has a substantial nexus with California. No Internet Service Provider, On-line Service Provider, internetwork communication service provider, or other Internet access service provider, or World Wide Web hosting services shall be deemed the agent or representative of any out-of-state retailer as a result of the service provider maintaining or taking orders via a web page or site on a computer server that is physically located in this state.
A retailer is not “engaged in business in this state” based solely on its use of a representative or independent contractor in this state for purposes of performing warranty or repair services with respect to tangible personal property sold by the retailer, provided that the ultimate ownership of the representative or independent contractor so used and the retailer is not substantially similar. For purposes of this paragraph, “ultimate owner” means a stock holder, bond holder, partner, or other person holding an ownership interest.
(b) Convention and Trade Show Activities. For purposes of this subdivision, the term “convention and trade show activity” means any activity of a kind traditionally conducted at conventions, annual meetings, or trade shows, including, but not limited to, any activity one of the purposes of which is to attract persons in an industry generally (without regard to membership in the sponsoring organization) as well as members of the public to the show for the purpose of displaying industry products or to stimulate interest in, and demand for, industry products or services, or to educate persons engaged in the industry in the development of new products and services or new rules and regulations affecting the industry.
Except as provided in this paragraph, a retailer is not “engaged in business in this state” based solely on the retailer's convention and trade show activities provided that: 
(1) For the period commencing on January 1, 1998 and ending on December 31, 2000, the retailer, including any of his or her representatives, agents, salespersons, canvassers, independent contractors, or solicitors, does not engage in those convention and trade show activities for more than seven days, in whole or in part, in this state during any 12-month period and did not derive more than ten thousand dollars ($10,000) of gross income from those activities in this state during the prior calendar year;
(2) For the period commencing on January 1, 2001, the retailer, including any of his or her representatives, agents, salespersons, canvassers, independent contractors, or solicitors, does not engage in those convention and trade show activities for more than fifteen days, in whole or in part, in this state during any 12-month period and did not derive more than one hundred thousand dollars ($100,000) of net income from those activities in this state during the prior calendar year.
A retailer coming within the provisions of this subdivision is, however, “engaged in business in this state,” and is liable for collection of the applicable use tax, with respect to any sale of tangible personal property occurring at the retailer's convention and trade show activities and with respect to any sale of tangible personal property made pursuant to an order taken at or during those convention and trade show activities.
(c) Retailers Not Engaged in Business in State. Retailers who are not engaged in business in this state may apply for a Certificate of Registration-Use Tax. Holders of such certificates are required to collect tax from purchasers, give receipts therefor, and pay the tax to the Board in the same manner as retailers engaged in business in this state. As used in this regulation, the term “Certificate of Registration-Use Tax” shall include Certificates of Authority to Collect Use Tax issued prior to September 11, 1957.
(d) Use Tax Direct Payment Permit Exemption Certificates. Notwithstanding subdivisions (a) and (b), a retailer who takes a use tax direct payment exemption certificate in good faith from a person holding a use tax direct payment permit is relieved from the duty of collecting use tax from the issuer on the sale for which the certificate is issued. Such certificate must comply with the requirements of Regulation 1699.6, Use Tax Direct Payment Permits.
(e) Tax as Debt. The tax required to be collected by the retailer and any amount unreturned to the customer which is not tax but was collected from the customer under the representation that it was tax constitute debts owed by the retailer to the state.
(f) Refunds of Excess Collections. Whenever the Board ascertains that a retailer has collected use tax from a customer in excess of the amount required to be collected or has collected from a customer an amount which was not tax but was represented by the retailer to the customer as being use tax, no refund of such amount shall be made to the retailer even though the retailer has paid the amounts so collected to the state. Section 6901 of the Revenue and Taxation Code requires that any overpayment of use tax be credited or refunded only to the purchaser who made the overpayment.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6203, 6204, 6226 and 7051.3, Revenue and Taxation Code; and Section 513(d)(3)(A), Internal Revenue Code (26 USC). 
HISTORY

1. Amendment and renumbering of former Section 2084 filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
2. Amendment of subsection (a) filed 10-12-88; operative 11-11-88 (Register 88, No. 43).
3. Amendment of subsection (a) and amendment of Note filed 10-28-97; operative 11-27-97 (Register 97, No. 44).
4. Change without regulatory effect amending subsection (a), adding subsection (c), relettering subsections and amending Note filed 10-5-99 pursuant to section 100, title 1, California Code of Regulations (Register 99, No. 41).
5. Change without regulatory effect amending section and Note filed 8-1-2001 pursuant to section 100, title 1, California Code of Regulations (Register 2001, No. 31).
§1684. Collection of Use Tax by Retailers. [Effective 9-15-2012]
Note     •     History

(a) Collection of Use Tax by Retailers Engaged in Business in this State. Retailers engaged in business in this state as defined in section 6203 of the Revenue and Taxation Code and making sales of tangible personal property, the storage, use, or other consumption of which is subject to the tax must register with the Board and, at the time of making the sales, or, if the storage, use or other consumption of the tangible personal property is not then taxable, at the time it becomes taxable, collect the tax from the purchaser and give the purchaser a receipt therefor.
(b) General Definition and Rebuttable Presumption. 
(1) A retailer is engaged in business in this state as defined in section 6203 of the Revenue and Taxation Code if the retailer has a substantial nexus with this state for purposes of the Commerce Clause (art. I, §8, cl. 3) of the United States Constitution or federal law otherwise permits this state to impose a use tax collection duty on the retailer. Retailers engaged in business in this state include, but are not limited to, retailers described in subdivision (c).
(2) Except as provided in subdivisions (c) and (d), there is a presumption that a retailer is engaged in business in this state as defined in section 6203 of the Revenue and Taxation Code if the retailer has any physical presence in California. A retailer may rebut the presumption if the retailer can substantiate that its physical presence is so slight that the United States Constitution prohibits this state from imposing a use tax collection duty on the retailer.
(3) A retailer does not have a physical presence in California solely because the retailer engages in interstate communications with customers in California via common carrier, the United States mail, or interstate telecommunication, including, but not limited to, interstate telephone calls and emails. The rebuttable presumption in subdivision (b)(2) does not apply to a retailer that does not have a physical presence in California.
(c) Nonexhaustive Examples of Retailers Engaged in Business in this State.
(1) A retailer is engaged in business in this state as defined in section 6203 of the Revenue and Taxation Code if:
(A) The retailer owns or leases real or tangible personal property, including, but not limited to, a computer server, in California; or
(B) The retailer derives rentals from a lease of tangible personal property situated in California (under such circumstances the retailer is required to collect the tax at the time rentals are paid by the lessee); or
(C) The retailer maintains, occupies, or uses, permanently or temporarily, directly or indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business in California; or
(D) The retailer has a representative, agent, salesperson, canvasser, independent contractor, solicitor, or any other person operating in California on the retailer's behalf, including a person operating in California under the authority of the retailer or its subsidiary, for the purpose of selling, delivering, installing, assembling, or the taking of orders for any tangible personal property, or otherwise establishing or maintaining a market for the retailer's products.
(2) A retailer is engaged in business in this state as defined in section 6203 of the Revenue and Taxation Code if:
(A) The retailer is a member of a commonly controlled group, as defined in Revenue and Taxation Code section 25105; and
(B) The retailer is a member of a combined reporting group, as defined in California Code of Regulations, title 18, section 25106.5, subdivision (b)(3), that includes another member of the retailer's commonly controlled group that, pursuant to an agreement with or in cooperation with the retailer, performs services in California in connection with tangible personal property to be sold by the retailer, including, but not limited to, design and development of tangible personal property sold by the retailer, or the solicitation of sales of tangible personal property on behalf of the retailer. For purposes of this paragraph: 
(i) Services are performed in connection with tangible personal property to be sold by a retailer if the services help the retailer establish or maintain a California market for sales of tangible personal property; and 
(ii) Services are performed in cooperation with a retailer if the retailer and the member of the retailer's commonly controlled group performing the services are working or acting together for a common purpose or benefit. 
(3) A retailer is engaged in business in this state as defined in section 6203 of the Revenue and Taxation Code if the retailer enters into an agreement or agreements under which a person or persons in this state, for a consideration that is based upon completed sales of tangible personal property, whether referred to as a commission, fee for advertising services, or otherwise, directly or indirectly refer potential purchasers of tangible personal property to the retailer, whether by an Internet-based link or an Internet website, or otherwise, provided that: 
(A) The total cumulative sales price of all of the tangible personal property the retailer sold to purchasers in California that were referred to the retailer by a person or persons in California pursuant to an agreement or agreements described above, in the preceding 12 months, is in excess of ten thousand dollars ($10,000); and 
(B) The retailer, within the preceding 12 months, has total cumulative sales of tangible personal property to purchasers in California in excess of one million dollars ($1,000,000). 
The determination as to whether a retailer has made the requisite amount of sales to purchasers in California during the preceding 12-month period shall be made at the end of each calendar quarter. A retailer is not engaged in business in this state pursuant to this paragraph if the total cumulative sales price of all of the tangible personal property the retailer sold to purchasers in California that were referred to the retailer by a person or persons in California pursuant to an agreement or agreements described above, in the preceding 12 months, is not in excess of ten thousand dollars ($10,000), or if the retailer's total cumulative sales of tangible personal property to purchasers in California were not in excess of one million dollars ($1,000,000) in the preceding 12 months. 
For purposes of this paragraph, the term “retailer” includes an entity affiliated with a retailer within the meaning of Internal Revenue Code section 1504, which defines the term “affiliated group” for federal income tax purposes. 
(4) Paragraph (3) does not apply to an agreement under which a retailer purchases advertisements from a person in California, to be delivered on television, radio, in print, on the Internet, or by any other medium, unless: 
(A) The advertisement revenue paid to the person in California consists of commissions or other consideration that is based upon completed sales of tangible personal property, and 
(B) The person entering into the agreement with the retailer also directly or indirectly solicits potential customers in California through the use of flyers, newsletters, telephone calls, electronic mail, blogs, microblogs, social networking sites, or other means of direct or indirect solicitation specifically targeted at potential customers in this state. 
(5) For purposes of paragraph (3):
(A) A person that is an individual is in this state when the person is physically present within the boundaries of California; and
(B) A person other than an individual is in this state when there is at least one individual physically present in California on the person's behalf. 
(6) Paragraph (3) does not apply to a retailer's agreement with any person, unless an individual solicits potential customers under the agreement while the individual is physically present within the boundaries of California, including, but not limited to, an individual who entered into the agreement directly with the retailer, an individual, such as an employee, who is performing activities in California directly for a person that entered into the agreement with the retailer, and any individual who is performing activities in California indirectly for any person who entered into the agreement with the retailer, such as an independent contractor or subcontractor. 
(7) Paragraph (3) does not apply if a retailer can demonstrate that all of the persons with whom the retailer has agreements described in paragraph (3) did not directly or indirectly solicit potential customers for the retailer in California. A retailer can demonstrate that an agreement is not an agreement described in paragraph (3) if:
(A) The retailer's agreement: 
(i) Prohibits persons operating under the agreement from engaging in any solicitation activities in California that refer potential customers to the retailer including, but not limited to, distributing flyers, coupons, newsletters and other printed promotional materials or electronic equivalents, verbal soliciting (e.g., in-person referrals), initiating telephone calls, and sending e-mails; and 
(ii) If the person in California with whom the retailer has an agreement is an organization, such as a club or a non-profit group, the agreement provides that the organization will maintain on its website information alerting its members to the prohibition against each of the solicitation activities described above; 
(B) The person or persons operating under the agreement in California certify annually under penalty of perjury that they have not engaged in any prohibited solicitation activities in California at any time during the previous year, and, if the person in California with whom the retailer has an agreement is an organization, the annual certification shall also include a statement from the organization certifying that its website includes information directed at its members alerting them to the prohibition against the solicitation activities described above; and
(C) The retailer accepts the certification or certifications in good faith and the retailer does not know or have reason to know that the certification or certifications are false or fraudulent.
A retailer is excused from the requirement to obtain a certification if the person from whom the certification is required is dead, lacks the capacity to make such certification, or cannot reasonably be located by the retailer and there is no evidence to indicate that such person did in fact engage in any prohibited solicitation activities in California at any time during the previous year. 
(8) For purposes of this subdivision:
(A) “Advertisement” means a written, verbal, pictorial, graphic, etc. announcement of goods or services for sale, employing purchased space or time in print or electronic media, which is given to communicate such information to the general public. Online advertising generated as a result of generic algorithmic functions that is anonymous and passive in nature, such as ads tied to Internet search engines, banner ads, click-through ads, Cost Per Action ads, links to retailers' websites, and similar online advertising services, are advertisements and not solicitations.
(B) “Individual” means a natural person.
(C) “Person” means and includes any individual, firm, partnership, joint venture, limited liability company, association, social club, fraternal organization, corporation, estate, trust, business trust, receiver, assignee for the benefit of creditors, trustee, trustee in bankruptcy, syndicate, the United States, this state, any county, city and county, municipality, district, or other political subdivision of the state, or any other group or combination acting as a unit.
(D) “Solicit” means to communicate directly or indirectly to a specific person or specific persons in California in a manner that is intended to and calculated to incite the person or persons to purchase tangible personal property from a specific retailer or retailers. 
(E) “Solicitation” means a direct or indirect communication to a specific person or specific persons done in a manner that is intended to and calculated to incite the person or persons to purchase tangible personal property from a specific retailer or retailers. 
(F) “Solicit,” “solicitation,” “refer,” and “referral” do not mean or include online advertising generated as a result of generic algorithmic functions that is anonymous and passive in nature, such as ads tied to Internet search engines, banner ads, click-through ads, Cost Per Action ads, links to retailers' websites, and similar online advertising services.
(9) Examples:
(A) Corporation X is physically located in California and maintains a website at www.corporationx.com. Corporation X enters into agreements with one or more hiking gear and accessories retailers under which Corporation X maintains click-through advertisements or links to each retailer's website on Corporation X's website at www.corporationx.com and Corporation X's webpage at www.socialnetwork.com/corporationx in return for commissions based upon the retailers' completed sales made to customers who click-through the ads or links on Corporation X's website and webpage. Corporation X also posts reviews at www.corporationx.com of the products sold through the click-through ads and links on its website and webpage. However, Corporation X does not engage in any solicitation activities in California that refer potential customers to the retailer or retailers who have click-through ads or links on its website or webpage. Therefore, paragraph (3) does not apply to the agreements between Corporation X and the retailer or retailers who have ads or links on Corporation X's website or webpage.
(B) Same as (A) above, except that Corporation X also enters into an agreement under which Advertising Corporation places advertisements for www.corporationx.com on other businesses' websites and webpages, and mails or emails advertisements for www.corporationx.com to anyone who signs up to receive such advertisements. However, Corporation X does not engage in any solicitation activities in California that refer potential customers to the retailer or retailers who have click-through ads or links on its website or webpage and Advertising Corporation's mailers and emails are advertisements, not solicitations. Therefore, paragraph (3) does not apply to the agreements between Corporation X and the retailer or retailers who have ads or links on Corporation X's website or webpage.
(C) Same as (B) above, except that an individual representative of Corporation X or any other individual acting on behalf of Corporation X, including, but not limited to, an employee or independent contractor of Corporation X or Advertising Corporation, engages in solicitation activities, such as soliciting customers in person, soliciting customers on the telephone, handing out flyers that are solicitations, or sending emails that are solicitations, while physically present in California that refer potential California customers to a retailer who has a click-through ad or link on Corporation X's website or webpage under Corporation X's agreement with that retailer. Therefore, paragraph (3) does apply to Corporation X's agreement with that retailer and that retailer will be required to register with the Board to collect use tax if: 
(i) The total cumulative sales price of all of the tangible personal property the retailer sold to purchasers in California that were referred to the retailer by a person or persons in California pursuant to an agreement or agreements described in paragraph (3), in the preceding 12 months, is in excess of ten thousand dollars ($10,000); and 
(ii) The retailer's total cumulative sales of tangible personal property to purchasers in California is in excess of one million dollars ($1,000,000) in the preceding 12 months. 
(d) Exceptions.
(1) Webpages and Internet Service Providers. The use of a computer server on the Internet to create or maintain a World Wide Web page or site by a retailer will not be considered a factor in determining whether the retailer has a substantial nexus with California, unless the computer server is located in California and the retailer owns or leases the computer server. No Internet Service Provider, On-line Service Provider, internetwork communication service provider, or other Internet access service provider, or World Wide Web hosting services shall be deemed the agent or representative of any out-of-state retailer as a result of the service provider maintaining or taking orders via a web page or site on a computer server that is physically located in this state.
(2) Warranty and Repair Services. A retailer is not “engaged in business in this state” based solely on its use of a representative or independent contractor in this state for purposes of performing warranty or repair services with respect to tangible personal property sold by the retailer, provided that the ultimate ownership of the representative or independent contractor so used and the retailer is not substantially similar. For purposes of this paragraph, “ultimate owner” means a stock holder, bond holder, partner, or other person holding an ownership interest.
(3) Convention and Trade Show Activities. For purposes of this subdivision, the term “convention and trade show activity” means any activity of a kind traditionally conducted at conventions, annual meetings, or trade shows, including, but not limited to, any activity one of the purposes of which is to attract persons in an industry generally (without regard to membership in the sponsoring organization) as well as members of the public to the show for the purpose of displaying industry products or to stimulate interest in, and demand for, industry products or services, or to educate persons engaged in the industry in the development of new products and services or new rules and regulations affecting the industry.
Except as provided in this paragraph, a retailer is not “engaged in business in this state” based solely on the retailer's convention and trade show activities provided that: 
(A) For the period commencing on January 1, 1998 and ending on December 31, 2000, the retailer, including any of his or her representatives, agents, salespersons, canvassers, independent contractors, or solicitors, does not engage in those convention and trade show activities for more than seven days, in whole or in part, in this state during any 12-month period and did not derive more than ten thousand dollars ($10,000) of gross income from those activities in this state during the prior calendar year;
(B) For the period commencing on January 1, 2001, the retailer, including any of his or her representatives, agents, salespersons, canvassers, independent contractors, or solicitors, does not engage in those convention and trade show activities for more than fifteen days, in whole or in part, in this state during any 12-month period and did not derive more than one hundred thousand dollars ($100,000) of net income from those activities in this state during the prior calendar year.
A retailer coming within the provisions of this subdivision is, however, “engaged in business in this state,” and is liable for collection of the applicable use tax, with respect to any sale of tangible personal property occurring at the retailer's convention and trade show activities and with respect to any sale of tangible personal property made pursuant to an order taken at or during those convention and trade show activities.
(e) Retailers Not Engaged in Business in State. Retailers who are not engaged in business in this state may apply for a Certificate of Registration-Use Tax. Holders of such certificates are required to collect tax from purchasers, give receipts therefor, and pay the tax to the Board in the same manner as retailers engaged in business in this state. As used in this regulation, the term “Certificate of Registration-Use Tax” shall include Certificates of Authority to Collect Use Tax issued prior to September 11, 1957.
(f) Use Tax Direct Payment Permit Exemption Certificates. Notwithstanding subdivisions (a) and (d)(3), a retailer who takes a use tax direct payment exemption certificate in good faith from a person holding a use tax direct payment permit is relieved from the duty of collecting use tax from the issuer on the sale for which the certificate is issued. Such certificate must comply with the requirements of Regulation 1699.6, Use Tax Direct Payment Permits.
(g) Tax as Debt. The tax required to be collected by the retailer and any amount unreturned to the customer which is not tax but was collected from the customer under the representation that it was tax constitute debts owed by the retailer to the state.
(h) Refunds of Excess Collections. Whenever the Board ascertains that a retailer has collected use tax from a customer in excess of the amount required to be collected or has collected from a customer an amount which was not tax but was represented by the retailer to the customer as being use tax, no refund of such amount shall be made to the retailer even though the retailer has paid the amounts so collected to the state. Section 6901 of the Revenue and Taxation Code requires that any overpayment of use tax be credited or refunded only to the purchaser who made the overpayment.
(i) Amendments. Statutes 2011, chapter 313 (Assem. Bill No. 155), section 3 re-enacted section 6203 of the Revenue and Taxation Code. Chapter 313, section 6, provides that the provisions of section 6203 of the Revenue and Taxation Code as re-enacted by chapter 313, section 3, shall become operative on September 15, 2012, or January 1, 2013. The 2012 amendments to this regulation adopted to implement, interpret, and make specific the provisions of section 6203 of the Revenue and Taxation Code as re-enacted by chapter 313, section 3, shall become operative on the same date as section 6203 of the Revenue and Taxation Code as re-enacted by chapter 313, section 3. Any amendment that implements, interprets and makes specific a use tax collection obligation that did not exist on June 27, 2011, upon becoming operative, shall not have any retroactive effect. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6203, 6204, 6226 and 7051.3, Revenue and Taxation Code; and Section 513(d)(3)(A), Internal Revenue Code (26 USC). 
HISTORY

1. Amendment filed 7-27-2012; operative on the same date as Revenue and Taxation Code section 6203 as re-enacted by Assembly Bill No. 155 (Stats. 2011, ch. 313): either 9-15-2012, if a federal law authorizing states to require a seller to collect taxes on sales of goods to in-state purchasers without regard to the location of a seller is not enacted on or before 7-31-2012, or 1-1-2013, if a federal law is enacted on or before 7-31-2012 and the state does not, on or before 9-14-2012, elect to implement that law (Register 2012, No. 30).
2. The amendment filed 7-27-2012 is operative 9-15-2012 based on certification provided on 8-15-2012 by the Director of the Department of Finance, as required by Assembly Bill No. 155 (Stats. 2011, ch. 313), that no federal law authorizing states to require a seller to collect taxes on sales of goods to in-state purchasers without regard to the location of a seller was enacted by the 7-31-2012 deadline (Register 2012, No. 34).
§1685. Payment of Tax by Purchasers.
Note     •     History

(a) Purchasers and lessees of tangible personal property, the storage, use, or other consumption of which is subject to the use tax, must pay the tax:
(1) To the person from whom such property is purchased or leased, if such person holds a seller's permit or a Certificate of Registration--Use Tax.
(2) Directly to the board if the person from whom the tangible personal property is purchased or leased does not hold such a permit or certificate.
Purchasers and lessees should not pay the tax to a person who does not hold either a seller's permit or a Certificate of Registration--Use Tax. Purchasers and lessees will be liable for payment of tax to the board unless receipts are obtained from sellers holding a seller's permit or a Certificate of Registration--Use Tax.
(b) Payment by Persons Holding Use Tax Direct Payment Permits. Notwithstanding the provisions of subdivision (a), persons who obtain use tax direct payment permits and issue use tax direct payment exemption certificates in good faith to the persons from whom tangible personal property, the storage, use, or other consumption of which is subject to the use tax is purchased, shall not pay the use tax to such persons but shall self-assess and pay state and local use tax under Part 1 (commencing with Section 6001), Part 1.5 (commencing with Section 7200), and, if applicable, Part 1.6 (commencing with Section 7251) directly to the Board. Use tax direct payment permits and exemption certificates must comply with the requirements of Regulation 1699.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6202, 6203, 6367, 6401 and 7051.3, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former Section 2085 filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Change without regulatory effect adding subsection (b) and amending Note filed 10-21-99 pursuant to section 100, title 1, California Code of Regulations (Register 99, No. 43).
§1685.5. Calculation of Estimated Use Tax -- Use Tax Table.
Note     •     History

(a) In General.
(1) Estimated Use Tax and Use Tax Table. The Board of Equalization (BOE) is required to annually calculate the estimated amount of use tax due according to a person's adjusted gross income (AGI) and make such amounts available to the Franchise Tax Board (FTB), by July 30 of each year, in the form of a use tax table for inclusion in the instructions to the FTB's returns. 
(2) Who is Eligible to Use BOE Use Tax Tables. 
(A) Consumers may elect to use the use tax tables included in the instructions to their FTB returns to report their estimated use tax liabilities for one or more single nonbusiness purchases of individual items of tangible personal property each with a sales price of less than one thousand ($1,000) on their FTB returns. However, eligible consumers may still calculate their actual use tax liabilities using the worksheets in the instructions to their FTB returns and report their actual use tax liabilities on their FTB returns. Consumers are not required to use the use tax tables included in the instructions to their FTB returns. 
(B) The use tax table may not be used to estimate use tax liabilities for business purchases, including purchases made by businesses required to hold a seller's permit or to register with the BOE under the Sales and Use Tax Law and report their use tax liabilities directly to the BOE. 
(3) Safe Harbor. If eligible consumers use the use tax tables included in the instructions to their FTB returns to estimate their use tax liabilities for qualified nonbusiness purchases and correctly report their estimated use tax liabilities for their qualified nonbusiness purchases in accordance with their AGI ranges, then the BOE may not assess the difference, if any, between the estimated use tax liabilities reported in accordance with the use tax tables and the consumers' actual use tax liabilities for qualified nonbusiness purchases. 
(b) Definitions and Data Sources.
(1) AGI Ranges. The use tax table shall be separated into fifteen (15) AGI ranges as follows:
(A) AGI less than $10,000;
(B) AGI of $10,000 to $19,999;
(C) AGI of $20,000 to $29,999; 
(D) AGI of $30,000 to $39,999;
(E) AGI of $40,000 to $49,999;
(F) AGI of $50,000 to $59,999; 
(G) AGI of $60,000 to $69,999; 
(H) AGI of $70,000 to $79,999;
(I) AGI of $80,000 to $89,999; 
(J) AGI of $90,000 to $99,999;
(K) AGI of $100,000 to $124,999; 
(L) AGI of $125,000 to $149,999; 
(M) AGI of $150,000 to $174,999; 
(N) AGI of $175,000 to $199,999; 
(O) AGI more than $199,999. 
(2) Use Tax Liability Factor or Use Tax Table Percentage. For the 2011 calendar year the use tax liability factor or use tax table percentage shall be 0.070 percent (.0007). On June 1, 2012, and each June 1 thereafter, the BOE shall calculate the use tax liability factor or use tax table percentage for the current calendar year by multiplying the percentage of income spent on taxable purchases for the preceding calendar year by 0.37, multiplying the product by the average state, local, and district sales and use tax rate, and then rounding the result to the nearest thousandth of a percent. 
(3) Total Personal Income. Total personal income shall be determined by reference to the most current personal income data published by the United States Bureau of Economic Analysis.
(4) Total Spending at Electronic Shopping and Mail Order Houses. Total spending at electronic shopping and mail order houses shall be determined by reference to the most current electronic shopping and mail order house spending data published by the United States Census Bureau.
(5) Total Spending on Taxable Purchases. Total spending on taxable purchases shall be determined by: 
(A) Determining the percentage, rounded to the nearest tenth of a percent, of total spending at electronic shopping and mail order houses that are not included in the following categories of items, by reference to the most current retail trade product lines statistics by kind of business data published by the United States Census Bureau: 
(i) Groceries and other foods for human consumption off premises, excluding bottled, canned, or packaged soft drinks; 
(ii) Prescriptions; 
(iii) Video content downloads; 
(iv) Audio content downloads;
(v) Prepackaged computer software, including software downloads; and
(vi) All nonmerchandise receipts. 
(B) Adding ten billion dollars ($10,000,000,000) to the total spending at electronic shopping and mail order houses to account for spending that is not included in the spending data published by the United States Census Bureau; and
(C) Multiplying the sum calculated in (B) by the percentage of total spending at electronic shopping and mail order houses that are not included in the categories of items listed in (A) above so that the result does not include spending on nontaxable purchases, and then rounding the result to the nearest tenth of a percent. 
(6) Percentage of Income Spent on Taxable Purchases. The percentage of income spent on taxable purchases during a calendar year shall be calculated by dividing the total spending on taxable purchases for that year by the total personal income for that year, multiplying the result by 100, and rounding the result to the nearest tenth of a percent.
(7) Average State, Local, and District Sales and Use Tax Rate. The average state, local, and district sales and use tax rate for a calendar year shall be the total of:
(A) The rates of the statewide sales and use taxes imposed under section 35 of article XIII of the California Constitution and the Sales and Use Tax Law (Rev. & Tax. Code, §6001 et seq.) in effect on January 1 of that year;
(B) The statewide rate of local tax imposed under the Bradley-Burns Uniform Local Sales and Use Tax Law (Rev. & Tax. Code, §7200 et seq.) in effect on January 1 of that year; and
(C) The weighted average rate of the district taxes imposed under the Transactions and Use Tax Law (Rev. & Tax Code, §7251 et seq.) in effect in the various jurisdictions throughout the state on January 1 of that year after taking into account the proportion of the total statewide taxable transactions (by dollar) reported for each jurisdiction during the fourth quarter of the calendar year that is two years prior to the calendar year for which the calculation is made. For example, the total reported taxable transactions (by dollar) for the fourth quarter of 2010 shall be used to determine the weighted average rate of the district tax rates in effect on January 1, 2012, to calculate the weighted average rate of district taxes for calendar year 2012. 
(c) Calculation of the Estimated Use Tax Liability.
(1) The estimated use tax liability for the AGI range described in subdivision (b)(1)(A) shall be determined by multiplying $5,000 by the use tax liability factor or use tax table percentage and then rounding the result to the nearest whole dollar.
(2) The estimated use tax liability for the AGI ranges described in subdivision (b)(1)(B) through (N) shall be determined by multiplying the midpoint of each AGI range by the use tax liability factor or use tax table percentage and then rounding the result to the nearest whole dollar. 
(3) The estimated use tax liability for the AGI range described in subdivision (b)(1)(O) shall be determined by multiplying each range member's actual AGI by the use tax liability factor or use tax table percentage and then rounding the result to the nearest whole dollar.
(d) Use Tax Table Format.
(1) The use tax table for calendar year 2011 shall provide as follows:

	Adjusted Gross Income
	(AGI) Range	Use Tax Liability
				
Less Than $20,000		$7
 $20,000	to	$39,999	$21
 $40,000	to	$59,999	$35
 $60,000	to	$79,999	$49
 $80,000	to	$99,999	$63
 $100,000	to	$149,999	$88
 $150,000	to	$199,999	$123
				
More than $199,999 -- Multiply AGI by 0.070% (.0007)
(2) The use tax tables for calendar year 2012 and subsequent years shall utilize the same format as follows:

	Adjusted Gross Income
	(AGI) Range	Use Tax Liability
				
Less Than $10,000
$10,000	to	$19,999	$
$20,000	to	$29,999	$
$30,000	to	$39,999	$
$40,000	to	$49,999	$
$50,000	to	$59,999	$
$60,000	to	$69,999	$
$70,000	to	$79,999	$
$80,000	to	$89,999	$
$90,000	to	$99,999	$
$100,000	to	$124,999	$
$125,000	to	$149,999	$
$150,000	to	$174,999	$
$175,000	to	$199,999	$
				
More than $199,999 -- Multiply AGI by % (.000)
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6452.1, Revenue and Taxation Code. 
HISTORY

1. New section filed 8-16-2011; operative 9-15-2011 (Register 2011, No. 33).
2. Amendment of subsection (a), new subsections (a)(1)-(3), amendment of subsection (b)(1), repealer and new subsections (b)(1)(A)-(H), new subsections (b)(1)(I)-(O), amendment of subsection (b)(2), new subsections (b)(5)-(b)(5)(C), subsection renumbering, amendment of newly designated subsection (b)(6) and subsections (c)(1)-(3) and (d)(2) filed 5-1-2012; operative 5-31-2012 (Register 2012, No. 18).
§1686. Receipts for Tax Paid to Retailers.
Note     •     History

(a) In General. Each retailer required to collect use tax from purchasers (including lessees) must give a receipt to each purchaser (or lessee) for the amount of the tax collected. The receipt need not be in any particular form but must show the following:
(1) The name and place of business of the retailer.
(2) The serial number of the retailer's permit to engage in business as a seller or the retailer's Certificate of Registration--Use Tax.
(3) The name and address of the purchaser or lessee.
(4) A description identifying the property sold to the purchaser or leased to the lessee.
(5) The date on which the property was sold or leased.
(6) The sale price of the property, or, in the case of rentals, the amount of the rental for the period covered by the invoice.
(7) The amount of tax collected from the purchaser or lessee.
For sales transactions, and rental transactions with respect to which use tax applies, an invoice showing the data required above, together with evidence of payment of such invoice, will constitute a receipt.
(b) Notice to Lessee. For lease or rental transactions with respect to which use tax does not apply, the inapplicability of the tax must be indicated by a statement on the invoice that the tax does not apply for one of the following reasons:
(1) The property leased is of a kind (specify) the lease of which is excluded from the definition of “sale” and “purchase” by sections 6006(g) and 6010(e), respectively, of the Sales and Use Tax Law.
(2) The property is being leased in substantially the same form as acquired by the lessor (or transferor) and the lessor (or transferor) acquired the property in a transaction that was a retail sale with respect to which the retailer reported and paid sales tax or as to which the lessor (or transferor) has paid use tax measured by the purchase price of the property.
(3) The property was acquired by the lessor in an exempt “occasional sale” and the lessor has paid, or elects to pay and will pay with his return for the period in which the property is first leased, use tax measured by the purchase price of the property in lieu of his rental charges.
(4) The amount of the rental payments is fixed by lease (or renewal thereof) prior to August 1, 1965, and the lessee does not have the unconditional right to terminate the lease upon notice.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6202, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former Section 2086 filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
2. Amendment of subsection (b)(2) filed 1-19-79; effective thirtieth day thereafter (Register 79, No. 3).
§1687. Information Returns.
Note     •     History

Information returns must be filed by all persons who solicit orders for the sale of tangible personal property the storage, use, or other consumption of which is subject to the tax if the seller does not hold a Certificate of Registration--Use Tax, unless the seller is engaged in business in this state and holds a seller's permit under the Sales and Use Tax Law. Such returns shall be for quarters of the calendar year and must be filed not later than the last day of the month following each three-month period ending in March, June, September and December. Such returns must show:
1. The name and address of each purchaser from whom an order was taken.
2. The description and sales price of the tangible personal property sold or to be sold pursuant to such order.
3. The date upon which the order is taken.
4. The date as nearly as can be determined at which the tangible personal property is to be delivered to the purchaser.
As used in this regulation, the term “Certificate of Registration--Use Tax” shall include Certificates of Authority to Collect Use Tax issued prior to September 11, 1957.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 7055, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former Section 2087 filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
Article 18. Administration--Miscellaneous
§1698. Records.
Note     •     History

(a) Definitions.
(1) “Database Management System” -- a software system that controls, relates, retrieves, and provides accessibility to data stored in a database.
(2) “Electronic data interchange” or “EDI technology” -- the computer to computer exchange of business transactions in a standardized structured electronic format.
(3) “Hardcopy” -- any document, record, report or other data maintained in a paper format.
(4) “Machine-sensible record” -- a collection of related information in an electronic format. Machine-sensible records do not include hardcopy records that are created or recorded on paper or stored in or by a storage-only imaging system such as microfilm or microfiche.
(5) “Taxpayer” -- every seller or retailer of tangible personal property in this state and every person storing, using or otherwise consuming in this state tangible personal property purchased from a retailer, and every lessor and lessee of tangible personal property for use in this state.
(b) General.
(1) A taxpayer shall maintain and make available for examination on request by the Board or its authorized representative, all records necessary to determine the correct tax liability under the Sales and Use Tax Law and all records necessary for the proper completion of the sales and use tax return. Such records include but are not limited to:
(A) Normal books of account ordinarily maintained by the average prudent businessperson engaged in the activity in question.
(B) Bills, receipts, invoices, cash register tapes, or other documents of original entry supporting the entries in the books of account.
(C) Schedules or working papers used in connection with the preparation of tax returns.
(2) Machine-sensible records are considered records under Revenue and Taxation Code sections 7053 and 7054.
(c) Machine-Sensible Records.
(1) General.
(A) Machine-sensible records used to establish tax compliance shall contain sufficient source document (transaction-level) information so that the details underlying the machine-sensible records can be identified and made available to the Board upon request. A taxpayer has discretion to discard duplicated records and redundant information provided the integrity of the audit trail is preserved and the responsibilities under this regulation are met.
(B) At the time of an examination, the retained records must be capable of being retrieved and converted to a standard magnetic record format, e.g., Extended Binary Coded Decimal Interchange Code (EBCDIC) or American Standard Code for Information Interchange (ASCII) flat file.
(C) Taxpayers are not required to construct machine-sensible records other than those created in the ordinary course of business. A taxpayer who does not create the electronic equivalent of a traditional paper document in the ordinary course of business is not required to construct such a record for tax purposes.
(2) Electronic Data Interchange Requirements.
(A) Where a taxpayer uses electronic data interchange (EDI) processes and technology, the level of record detail, in combination with other records related to the transactions, must be equivalent to that contained in an acceptable paper record. For example, the retained records should contain such information as vendor name, invoice date, product description, quantity purchased, price, amount of tax, indication of tax status (e.g., for resale), and shipping detail. Codes may be used to identify some or all of the data elements, provided the taxpayer maintains a method which allows the Board to interpret the coded information.
(B) The taxpayer may capture the information necessary to satisfy subdivision (c)(2)(A) at any level within the accounting system and need not retain the original EDI transaction records provided the audit trail, authenticity, and integrity of the retained records can be established. For example, a taxpayer using EDI technology receives electronic invoices from its suppliers. The taxpayer decides to retain the invoice data from completed and verified EDI transactions in its accounts payable system rather than to retain the EDI transactions themselves. Since neither the EDI transaction nor the accounts payable system capture information from the invoice pertaining to product description and vendor name (i.e., they contain only codes for that information), the taxpayer must also retain other records, such as its vendor master file and product code description lists, and make them available to the Board. In this example, the taxpayer need not retain its EDI transaction for tax purposes.
(3) Electronic Data Processing Systems Requirements. The requirements for an electronic data processing (EDP) accounting system should be similar to that of a manual accounting system, in that an adequately designed accounting system should incorporate methods and records that will satisfy the requirements of this regulation.
(4) Business Process Information.
(A) Upon request of the Board, the taxpayer shall provide a description of the business process that created the retained records. Such description shall include the relationship between the records and the tax documents prepared by the taxpayer and the measures employed to ensure the integrity of the records.
(B) The taxpayer shall be capable of demonstrating:
1. the functions being performed as they relate to the flow of data through the system;
2. the internal controls used to ensure accurate and reliable processing, and;
3. the internal controls used to prevent unauthorized addition, alteration, or deletion of retained records.
(C) The following specific documentation is required for machine sensible records retained pursuant to this regulation:
1. record formats or layouts;
2. field definitions (including the meaning of all codes used to represent information);
3. file descriptions (e.g., data set name); and
4. detailed charts of accounts and account descriptions.
(d) Machine-Sensible Records Maintenance Requirements.
(1) The taxpayer's computer hardware or software shall accommodate the extraction and conversion of retained machine-sensible records to a standard magnetic record format as provided in subdivision (c)(1)(B).
(2) The Board recommends but does not require that taxpayers refer to the National Archives and Record Administration's (NARA) standards for guidance on the maintenance and storage of electronic records, such as the labeling of records, the location and security of the storage environment, the creation of back-up copies, and the use of periodic testing to confirm the continued integrity of the records.
(e) Access to Machine-Sensible Records.
(1) The manner in which the Board is provided access to machine-sensible records may be satisfied through a variety of means that shall take into account a taxpayer's facts and circumstances through consultation with the taxpayer.
(2) Such access will be provided in one or more of the following manners:
(A) The taxpayer may arrange to provide the Board with the hardware, software, and personnel resources to access the machine-sensible records.
(B) The taxpayer may arrange for a third party to provide the hardware, software, and personnel resources necessary to access the machine-sensible records.
(C) The taxpayer may convert the machine-sensible records to a standard record format specified by the Board, including copies of files, on a magnetic medium that is agreed to by the Board.
(D) The taxpayer and the Board may agree on other means of providing access to the machine-sensible records.
(f) Taxpayer Responsibility and Discretionary Authority.
(1) In conjunction with meeting the requirements of subdivision (c), a taxpayer may create files solely for the use of the Board. For example, if a data base management system is used, it is consistent with this regulation for the taxpayer to create and retain a file that contains the transaction-level detail from the data base management system and that meets the requirements of subdivision (c). The taxpayer should document the process that created the separate file to show the relationship between that file and the original records.
(2) A taxpayer may contract with a third party to provide custodial or management services of the records. Such a contract shall not relieve the taxpayer of its responsibilities under this regulation.
(g) Hardcopy Records.
(1) Except as specifically provided, taxpayers are not relieved of the responsibility to retain hardcopy records that are created or received in the ordinary course of business as required by existing law and regulations. Hardcopy records may be retained on a record keeping medium as provided in subdivision (h).
(2) If hardcopy transaction level documents are not produced or received in the ordinary course of transacting business (e.g., when the taxpayer uses electronic data interchange technology), such hardcopy records need not be created.
(3) Hardcopy records generated at the time of a transaction using a credit or debit card must be retained unless all the details necessary to determine correct tax liability relating to the transaction are subsequently received and retained by the taxpayer in accordance with this regulation. Such details include those listed in subdivision (c)(2)(A).
(4) Computer printouts that are created for validation, control, or other temporary purposes need not be retained.
(h) Alternative Storage Media.
(1) For purposes of storage and retention, taxpayers may convert hardcopy documents received or produced in the normal course of business and required to be retained under this regulation to storage-only imaging media such as microfilm or microfiche and may discard the original hardcopy documents, provided the conditions of this subdivision are met. Documents which may be stored on these media include, but are not limited to general books of account, journals, voucher registers, general and subsidiary ledgers, and supporting records of details, such as sales invoices, purchase invoices, exemption certificates, and credit memoranda.
(2) Storage-only imaging media such as microfilm and microfiche systems shall meet the following requirements.
(A) Documentation establishing the procedures for converting the hardcopy documents to the storage-only imaging system must be maintained and made available on request. Such documentation shall, at a minimum, contain a sufficient description to allow an original document to be followed through the conversion system as well as internal procedures established for inspection and quality assurance.
(B) Procedures must be established for the effective identification, processing, storage, and preservation of the stored documents and for making them available for the period they are required to be retained under subdivision (i).
(C) Upon request by the Board, a taxpayer must provide facilities and equipment for reading, locating, and reproducing any documents maintained on storage-only imaging media.
(D) When displayed on such equipment or reproduced on paper, the documents must exhibit a high degree of legibility and readability. For this purpose, legibility is defined as the quality of a letter or numeral that enables the observer to identify it positively and quickly to the exclusion of all other letters or numerals. Readability is defined as the quality of a group of letters or numerals being recognizable as words or complete numbers.
(E) All data on storage-only imaging media must be maintained and arranged in a manner that permits the location of any particular record.
(F) There is no substantial evidence that the storage-only imaging medium lacks authenticity or integrity.
(i) Record Retention -- Time Period. All records required to be retained under this regulation must be preserved for a period of not less than four years unless the State Board of Equalization authorizes in writing their destruction within a lesser period.
For reporting periods beginning before January 1, 2003 that are subject to the extended ten year statute of limitations contained in Revenue and Taxation Code section 7073(d), records required to be retained under this regulation must be preserved for a period of not less than ten years.
(j) Record Retention Limitation Agreements.
(1) The Board has the authority to enter into or revoke a record retention limitation agreement with the taxpayer to modify or waive any of the specific requirements in this regulation. A taxpayer's request for an agreement must specify which records (if any) the taxpayer proposes not to retain and provide the reasons for not retaining such records, as well as, proposing any other terms of the requested agreement. The taxpayer shall remain subject to all requirements of this regulation that are not modified, waived, or superseded by a duly approved record retention limitation agreement.
(A) If a taxpayer seeks to limit its retention of machine-sensible records, the taxpayer may request a record retention limitation agreement, which shall;
1. document understandings reached with the Board, which may include, but is not limited to, any one or more of the following issues:
a. the conversion of files created on an obsolete computer system;
b. restoration of lost or damaged files and the actions to be taken;
c. use of taxpayer computer resources, and
2. specifically identify which of the taxpayer's records the Board determines are not necessary for retention and which the taxpayer may discard, and
3. authorize variances, if any, from the normal provisions of this regulation.
(B) The Board shall consider a taxpayer's request for a record retention limitation agreement and notify the taxpayer of the actions to be taken.
(C) The Board's decision to enter or not to enter into a record retention limitation agreement shall not relieve the taxpayer of the responsibility to keep adequate and complete records supporting entries shown on any tax or information return.
(2) A taxpayer's record retention practices shall be subject to evaluation by the Board when a record retention limitation agreement exists. The evaluation may include a review of the taxpayer's relevant data processing and accounting systems with respect to EDP systems, including systems using EDI technology.
(A) The Board shall notify the taxpayer of the results of any evaluation, including acceptance or disapproval of any proposals made by the taxpayer (e.g., to discard certain records) or any changes considered necessary to bring the taxpayer's practices into compliance with this regulation.
(B) Since the evaluation of a taxpayer's record retention practices is not directly related to the determination of tax reporting accuracy for a particular period or return, an evaluation made under this regulation is not an “examination of records” under section 7054 of the Revenue and Taxation Code.
(C) Unless otherwise specified, an agreement shall not apply to accounting and tax systems added subsequent to the completion of the record evaluation. All machine-sensible records produced by a subsequently added accounting or tax system shall be retained by the taxpayer in accordance with this regulation until a new evaluation is conducted by the Board.
(D) Unless otherwise specified, an agreement made under this subdivision shall not apply to any person, company, corporation, or organization that, subsequent to the taxpayer's signing of a record retention limitation agreement, acquires or is acquired by the taxpayer. All machine-sensible records produced by the acquired or the acquiring person, company, corporation, or organization, shall be retained pursuant to this regulation.
(3) In addition to the record retention evaluation under subdivision (j)(2), the Board may conduct tests to establish the authenticity, readability, completeness, and integrity of the machine-sensible records retained under a record retention limitation agreement. The state shall notify the taxpayer of the results of such tests. These tests may include the testing of EDI and other procedures and a review of the internal controls and security procedures associated with the creation and storage of the records.
(k) Failure to Maintain Records. Failure to maintain and keep complete and accurate records will be considered evidence of negligence or intent to evade the tax and may result in penalties or other appropriate administrative action.
NOTE

Authority cited: section 7051, Revenue and Taxation Code. Reference: Sections 6455, 7053 and 7054, Revenue and Taxation Code. 
HISTORY

1. Amendment and renumbering of former section 2098 filed 1-9-70; effective thirtieth day thereafter (registered 70, No. 2).
2. Amendment filed 7-25-88; operative 8-24-88 (Register 88, No. 32).
3. Repealer of subsections (a)-(e), new subsections (a)-(j)(3), subsection relettering, and amendment of NOTE filed 9-4-97; operative 10-4-97 (Register 97, No. 36).
4. Amendment filed 10-4-2005; operative 11-3-2005 (Register 2005, No. 40).
§1698.5. Audit Procedures.
Note     •     History

(a) Definitions.
(1) Board. For the purposes of this regulation, “Board” refers to the Board of Equalization.
(2) Audit Engagement Letter. An “audit engagement letter” is correspondence used by Board staff to confirm the start of an audit or establish contact with the taxpayer.
(3) Pre-audit Conference. A “pre-audit conference” is a meeting between the taxpayer and/or the taxpayer's representative or designated employee and Board staff prior to the opening conference to discuss the availability and production of records, including electronic records. This meeting may occur several months before the opening conference with Board staff. 
(4) Opening Conference. An “opening conference” is the first meeting between the taxpayer and/or the taxpayer's representative or designated employee and Board staff to discuss how the audit will be conducted and to begin the field audit work.
(5) Status Conferences. “Status conferences” are meetings between the taxpayer and/or the taxpayer's representative or designated employee and Board staff held throughout the audit to discuss audit issues and the progress of the audit. 
(6) Exit Conference. An “exit conference” is the meeting between the taxpayer and/or the taxpayer's representative or designated employee and Board staff at the conclusion of the audit to discuss the audit findings.
(7) Information/Document Request (IDR). An “Information/Document Request” (IDR) is correspondence Board staff may issue to request single or multiple documents, data, and other information from the taxpayer under audit. An IDR will be issued when the taxpayer fails to provide records in response to verbal requests. An audit engagement letter is not an IDR.
(8) Audit Findings Presentation Sheet (AFPS). An “Audit Findings Presentation Sheet” (AFPS) is correspondence used to present Board staff's findings for each area of the audit as it is completed. The audit working paper lead and subsidiary schedules are attached to AFPSs.
(9) Records. For the purposes of this regulation, “records” includes all records, including electronic (machine-sensible) records, necessary to determine the correct tax liability under the Sales and Use Tax Law and all records necessary for the proper completion of the sales and use tax return as provided in Regulation 1698.
(10) Day. For the purposes of this regulation, “day” means calendar day.
(b) General.
The Board has a duty and an obligation to utilize its audit resources in the most effective and efficient manner possible. This regulation provides taxpayers and Board staff with the necessary procedures and guidance to facilitate the efficient and timely completion of an audit. The regulation also provides for appropriate and timely communication between Board staff and the taxpayer of requests, agreements, and expectations related to an audit.
(1) The purpose of an audit is to efficiently determine whether or not the amount of tax has been reported correctly based on relevant tax statutes, regulations, and case law.
(2) The audit of a taxpayer's records shall be completed in sufficient time to permit the issuance of a Notice of Determination or Notice of Refund within the applicable statute of limitations. Audits of periods with potential liability shall be completed in sufficient time prior to the expiration of the statute of limitations to allow for the issuance of a determination, unless the taxpayer consents to extend the period by signing a waiver of limitation. 
(3) Waiver of Limitation. A waiver of limitation that is signed by the taxpayer prior to the statute expiration date extends the period in which a Notice of Determination or Notice of Refund may be issued. Auditors shall request taxpayers sign a waiver of limitation when there is sufficient information to indicate that an understatement or overstatement exists, but there is insufficient time to complete the audit before the expiration of the statute of limitations. The auditor should also request a waiver be signed when a taxpayer requests a postponement before the audit begins or while an audit is in process. If the taxpayer declines to sign a waiver, the Board may issue a determination for the expiring period(s).
Supervisory approval of the circumstances which necessitated the request for the waiver will be documented in the audit before the waiver is presented to the taxpayer for signature. If the extension of the statute of limitations totals two years or more, approval by the District Principal Auditor will be documented in the audit before the waiver is presented to the taxpayer for signature.
(4) Duty of Board Staff. 
(A) Apply and administer the relevant statutes and regulations fairly and consistently regardless of whether the audit results in a deficiency or refund of tax.
(B) Consider the materiality of an area being audited. Audit decisions are based on Board staff's determination of the amount of a potential adjustment balanced against the time required to audit the area and the duty to determine whether the correct amount of tax has been reported.
(C) Make information requests for the areas under audit as provided in Regulation 1698. The auditor will explain why records are being requested when asked to do so. The auditor will also work with the taxpayer to resolve difficulties a taxpayer has when responding to Board information requests, including the use of satisfactory alternative sources of information. 
(D) Do not directly access the taxpayer's computer system if the taxpayer objects to such access, except in the case of a search warrant. 
(E) Provide an audit plan to the taxpayer as provided in subdivision (c)(7) of this regulation.
(F) Adhere to the timelines set forth in the original audit plan, or in the audit plan as amended pursuant to subdivision (c)(7) of this regulation, and provide the resources to do so.
(G) Keep the taxpayer apprised of the status of the audit through status conferences and AFPSs.
(H) Inform the taxpayer of the audit findings at the exit conference.
(I) Copy taxpayers (e.g., owners, partners, or corporate officers) on all Board correspondence related to the audit when the taxpayer has authorized another party to represent them.
(J) Safeguard taxpayers' records while examining them.
(K) Inform the taxpayer of the audit process, the taxpayer's rights, and appeal rights at the beginning of the audit.
(5) Duty of Taxpayers. 
(A) Maintain records. Taxpayers have a duty to maintain the records and documents as required by Regulation 1698. 
(B) Provide records requested by the Board pursuant to Regulation 1698; and adhere to the timelines in the original audit plan, or in the audit plan as amended pursuant to subdivision (c)(7) of this regulation. 
(C) Make records available for photocopying or scanning. The Board may require the taxpayer to provide photocopies, or make available for photocopying or scanning, any specific documents requested by the Board that relate to questioned transaction(s) if necessary to determine the correct amount of tax, unless the Board is prohibited by law from requiring the specific documents. 
(6) Application of Timeframes. The timeframes in this regulation are intended to provide for an orderly process that leads to a timely conclusion of an audit and are not to be used to prevent or limit a taxpayer's right to provide information.
(A) Some AFPSs can be responded to in less than or more than the timeframe specified in this regulation. The auditor has discretion to adjust this timeframe as warranted. 
(B) Due dates for responses to IDRs and AFPSs shall be within the statute of limitations applicable to the audit. Auditors will consider late responses to IDRs and AFPSs, provided a period of the audit will not expire due to the statute of limitations.
(C) The timeframes provided in this regulation will have no effect on the statute of limitations as provided by the Revenue and Taxation Code or on any remedies available to the Board or rights of the taxpayer.
(c) Audits.
(1) Location of Audit. Audits generally take place at the location where the taxpayer's original books, records, and source documents relevant to the audit are maintained, which is usually the taxpayer's principal place of business. A taxpayer's request to conduct the audit at a different location shall include the reason(s) for the request. It is the taxpayer's responsibility to provide all requested records at that location. Requests will be granted unless Board staff determines the move will significantly delay the start or completion of the audit, or the Board does not have adequate resources available to conduct the audit at the requested location. 
If the taxpayer operates out of a private residence, or has a small office or work environment that will not accommodate the auditor(s), Board staff may require the records be brought to a Board office or taxpayer's representative's office. If the audit is conducted at a Board office, the taxpayer will be provided a receipt for records.
(2) Multiple Requests by Taxpayers to Change the Location of an Audit. After an initial request to change the audit location has been granted by Board staff, any subsequent requests for location changes in the same audit period shall be made in writing and include the reason(s) for the request. These subsequent requests will be considered on a case-by-case basis. Approval of these requests is at the discretion of Board staff. 
(3) Site Visitations. Regardless of where the audit takes place, Board staff may visit the taxpayer's place of business to gain a better understanding of the business' operations (for example, a plant tour to understand a manufacturing process, or a visit to a restaurant to observe seating facilities or volume of business). Board staff may not visit secure areas, or areas that are regulated by the federal government where federal security clearance is necessary, unless authorized by the taxpayer. Board staff generally will visit on a normal workday of the Board during the Board's normal business hours.
(4) Time of the Audit. Board staff will generally schedule the field audit work for full days during normal workdays and business hours of the Board. The Board will schedule audits throughout the year, without regard to seasonal fluctuations in the businesses of taxpayers or their representatives. However, the Board will work with taxpayers and their representatives in scheduling the date and time of an audit to try to minimize any adverse effects.
Generally, the Board will not hold in abeyance the start of an audit pending the conclusion of an audit of prior periods or pending completion of an appeal of a prior audit currently in the Board's appeals process. In cases where a prior audit is under appeal and the audit for the subsequent periods is not held in abeyance, the Board will begin the current audit by examining areas that are not affected by the outcome of the appeal.
(5) Pre-audit Conference. Taxpayers (e.g., owners, partners, or corporate officers) shall be invited and encouraged to attend the pre-audit conference, whether or not the taxpayer has authorized another party to represent them. On audits where electronic records are involved, the Board's computer audit specialist shall participate in the pre-audit conference and the taxpayer's appropriate information technology staff shall be invited and encouraged to attend. 
During the pre-audit conference, the items to be discussed include, but are not limited to: general audit procedures, availability and access of records, computer assisted audit procedures, relevant sampling issues, data transfer process, verification of data, security of data, timeframes for furnishing and reviewing records, and the name of the person designated to receive IDRs. 
(6) Opening Conference. Taxpayers (e.g., owners, partners, or corporate officers) shall be invited and encouraged to attend the opening conference, whether or not the taxpayer has authorized another party to represent them. During the opening conference, the items to be discussed include, but are not limited to: the scope of the audit, the audit plan, audit processes and procedures, claims for refund, estimated timeframes to complete the audit, the name of the person designated to receive IDRs, and the scheduling of future audit appointments. At the opening conference, the auditor shall provide in writing, the name and telephone number of the audit supervisor, and any Board staff assigned to the audit team.
(7) Audit Plan. All audits must be guided by an organized plan. The audit plan documents the areas under audit, the audit procedures, and the estimated timeframes to complete the audit. A carefully thought out, but flexible audit plan requires advance planning and a proper overview of the assignment as a whole. To facilitate the timely and efficient completion of an audit, Board staff shall develop an audit plan that strives for the completion of the audit within a two-year timeframe commencing with the date of the opening conference and ending with the date of the exit conference. Most audits will be completed in a much shorter timeframe and others may require a period beyond two years. Nothing in this subdivision shall be construed to extend the completion of an audit to two years when it can be completed in a shorter timeframe, nor limit the completion of an audit to two years when a longer timeframe is warranted.
An audit plan is required on all audits. The audit plan shall be discussed with, and a copy provided to, the taxpayer at the opening conference, or when it is necessary for the auditor to first review the taxpayer's records, within 30 days from the opening conference. The audit plan should be signed by the auditor and either the taxpayer or the taxpayer's representative to show a commitment by both parties that the audit will be conducted as described in the audit plan to allow for the timely completion of the audit. The audit plan is considered a guideline for conducting the audit and may be amended throughout the audit process as warranted. If the original audit plan is amended, the auditor shall provide the taxpayer with a copy of the amended plan. 
(8) Status Conferences. Taxpayers (e.g., owners, partners, or corporate officers) shall be invited and encouraged to attend status conferences, whether or not the taxpayer has authorized another party to represent them. Status conferences should be held throughout the audit to discuss the status of the audit, IDRs and AFPSs, and to ensure the audit is on track for completion within the estimated timeframes as outlined in the audit plan. 
(9) Record Requests. 
(A) Verbal Requests. Before auditors proceed with the IDR process, taxpayers shall be allowed to comply with verbal requests for records. When Board staff is unable to make verbal contact with the taxpayer, the auditor may proceed directly with the IDR process. The auditor has the discretion to determine response times for verbal requests. 
When records are not provided by the taxpayer in response to verbal requests for information as required by Regulation 1698 and subdivision (b)(5)(B) of this regulation, the auditor may proceed to the IDR process unless doing so results in a period of the audit expiring under the statute of limitations. If a period of the audit will expire, the Board may issue a determination for the expiring period(s).
(B) IDR Process. The IDR process includes the issuance of an initial IDR, a second IDR, and a formal notice and demand to furnish information.
1. Taxpayers will be allowed 30 days to respond to the initial IDR measured from the date the IDR is delivered or mailed to the taxpayer and the person designated by the taxpayer at the pre-audit or opening conference to receive IDRs. Any response other than full compliance with the IDR shall be reviewed by the District Principal Auditor who shall determine the course of action to be taken in response to any issues raised by the taxpayer.
2. Taxpayers will be allowed 15 days to provide records in response to the second IDR requesting the same records as the initial IDR. This date shall be measured from the date the second IDR is delivered or mailed to the taxpayer and the person designated by the taxpayer at the pre-audit or opening conference to receive IDRs.
3. Within 30 days of the taxpayer providing records in response to an IDR, the auditor will notify the taxpayer in writing if the documents provided are sufficient, if additional information is needed, or if the auditor requires additional time to determine the sufficiency of the records. 
4. A formal notice and demand to furnish information shall be issued upon the taxpayer's failure to furnish the requested records in response to the second IDR requesting the same records. The taxpayer will have 15 days to provide records in response to the notice and demand to furnish information before Board staff may issue a subpoena for those records or issue a determination based on an estimate, unless doing so results in a period of the audit expiring under the statute of limitations. This date shall be measured from the date the notice and demand is delivered or mailed to the taxpayer and the person designated by the taxpayer at the pre-audit or opening conference to receive IDRs.
(10) Audit Findings Presentation Sheet (AFPS). An AFPS should be used during the course of the audit as soon as each area of the audit is completed to provide the taxpayer with the proposed audit findings. Taxpayers will be asked to indicate whether they agree or disagree with the proposed findings. The taxpayer will be given an opportunity to provide additional information and documents to rebut the audit findings, generally within 30 days of the date the AFPS was delivered or mailed to the taxpayer, or the taxpayer's representative, or as otherwise provided for in subdivision (b)(6) of this regulation. Agreement to the audit findings does not preclude the taxpayer from appealing the issue(s) at a later date.
As a general rule, within 30 days of the taxpayer providing additional information in response to an AFPS, the auditor will notify the taxpayer if adjustment to the audit is warranted based on the information provided. 
(11) Exit Conference. Taxpayers (e.g., owners, partners, or corporate officers) shall be invited and encouraged to attend the exit conference, whether or not the taxpayer has authorized another party to represent them. During an exit conference, the items discussed include, but are not limited to: an explanation of the audit findings, the audit schedules, the review process, how to prepay a liability, and the Board's appeal procedures. 
The auditor shall provide the taxpayer and the taxpayer's representative with a complete copy of the audit working papers, including verification comments, which explain the basis for the audit findings. 
(A) Generally, taxpayers shall be given 30 days from the date of the exit conference to indicate whether they agree or disagree with the audit findings, unless doing so results in a period of the audit expiring under the statute of limitations. If the taxpayer disagrees with the audit findings, they may provide additional information within this 30 days for the auditor to consider. The auditor may adjust the audit findings if warranted based on the information provided.
(B) The audit findings are subject to additional review by Board staff to ensure that the audit findings are consistent with the Sales and Use Tax laws and regulations, and Board policies, practices, and procedures. A copy of any audit working papers adjusted as a result of the review process shall be provided to the taxpayer. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 7053 and 7054, Revenue and Taxation Code. 
HISTORY

1. New section filed 7-19-2010; operative 8-18-2010 (Register 2010, No. 30).
§1699. Permits.
Note     •     History

(a) Seller's Permit In General--Number of Permits Required. Every person engaged in the business of selling (or leasing under a lease defined as a sale in Revenue and Taxation Code section 6006(g)) tangible personal property of a kind the gross receipts from the retail sale of which are required to be included in the measure of the sales tax, and only a person actively so engaged, is required to hold a seller's permit for each place of business in this state at which transactions relating to sales are customarily negotiated with his or her customers. For example, a seller's permit is required for a branch sales office at which orders are customarily taken or contracts negotiated, whether or not merchandise is stocked there.
No additional permits are required for warehouses or other places at which merchandise is merely stored and which customers do not customarily visit for the purpose of making purchases and which are maintained in conjunction with a place of business for which a permit is held; but at least one permit must be held by every person maintaining stocks of merchandise in this state for sale. However, permits are required for warehouses or other places at which merchandise is stored and from which retail sales of such merchandise negotiated out-of-state are delivered or fulfilled.
If two or more activities are conducted by the same person on the same premises, even though in different buildings, only one seller's permit is required. For example, a service station operator having a restaurant in addition to the station on the same premises requires only one seller's permit for both activities.
(b) Persons Selling in Interstate Commerce or to United States Government. A seller's permit is not required to be held by persons all of whose sales are made exclusively in interstate or foreign commerce but a seller's permit is required of persons notwithstanding all their sales (or leases under a lease defined as a sale in Revenue and Taxation Code section 6006(g)) are made to the United States or instrumentalities thereof.
(c) Persons Selling Feed. Effective April 1, 1996, a seller's permit is not required to be held by persons whose sales consist entirely of sales of feed for any form of animal life of a kind the products of which ordinarily constitute food for human consumption (food animals), or for any form of animal life not of such a kind (nonfood animals) which are being held for sale in the regular course of business, provided no other retail sales of tangible personal property are made.
If a seller of hay is also the grower of the hay, this exemption shall apply only if either:
1. The hay is produced for sale only to beef cattle feedlots or dairies, or
2. The hay is sold exclusively through a farmer-owned cooperative.
(d) Concessionaires. For the purposes of this regulation, the term concessionaire is defined as an independent retailer who is authorized, through contract with, or permission of, another retail business enterprise (the prime retailer), to operate within the perimeter of the prime retailer's own retail business premises, which to all intents and purposes appear to be wholly under the control of that prime retailer, and to make retail sales that to the general public might reasonably be believed to be the transactions of the prime retailer. Some indicators that a retailer is not operating as a concessionaire are that he or she:
·Appears to the public to be a business separate and autonomous from the prime retailer. Examples of businesses that may appear to be separate and autonomous, while operating within the prime retailer's premises, are those with signs posted on the premises naming each of such businesses, those with separate cash registers, and those with their own receipts or invoices printed with their business name.
·Maintains separate business records, particularly with respect to sales.
·Establishes his or her own selling prices.
·Makes business decisions independently, such as hiring employees or purchasing inventory and supplies.
·Registers as a separate business with other regulatory agencies, such as an agency issuing business licenses, the Employment Development Department, and/or the Secretary of State.
·Deposits funds into a separate account.
In cases where a retailer is not operating as a concessionaire, the prime retailer is not liable for any tax liabilities of the retailer operating on his or her premises. However, if a retailer is deemed to be operating as a concessionaire, the prime retailer may be held jointly and severally liable for any sales and use taxes imposed on unreported retail sales made by the concessionaire while operating as a concessionaire. Such a prime retailer will be relieved of his or her obligation for sales and use tax liabilities incurred by such a concessionaire for the period in which the concessionaire holds a seller's permit for the location of the prime retailer or in cases where the prime retailer obtains and retains a written statement that is taken in good faith in which the concessionaire affirms that he or she holds a seller's permit for that location with the Board. The following essential elements must be included in the statement in order to relieve the prime retailer of his or her liability for any unreported tax liabilities incurred by the concessionaire:
·The seller's permit number of the concessionaire
·The location for which the permit is issued (must show the concessionaire's location within the perimeter of the prime retailer's location).
·Signature of the concessionaire
·Date
While any statement, taken timely, in good faith and containing all of these essential elements will relieve a prime retailer of his or her liability for the unreported sales or use taxes of a concessionaire, a suggested format of an acceptable statement is provided as Appendix A to this regulation. While not required, it is suggested that the statement from the concessionaire contain language to clarify which party will be responsible for reporting and remitting the sales and/or use tax due on his or her retail sales.
In instances where the lessor, or grantor of permission to occupy space, is not a retailer himself or herself, he or she is not liable for any sales or use taxes owed by his or her lessee or grantee. In instances where an independent retailer leases space from another retailer, or occupies space by virtue of the granting of permission by another retailer, but does not operate his or her business within the perimeter of the lessor's or grantor's own retail business, such an independent retailer is not a concessionaire within the meaning of this regulation. In this case, the lessor or grantor is not liable for any sales or use taxes owned by the lessee or grantee.
(e) Agents. If agents make sales on behalf of a principal and do not have a fixed place of business, but travel from house to house or from town to town, it is unnecessary that a seller's permit be obtained for each agent if the principal obtains a permit for each place of business located in California. If, however, the principal does not obtain a permit for each place of business located in California, it is necessary for each agent to obtain a seller's permit.
(f) Inactive Permits. A seller's permit may only be held by a person actively engaged in business as a seller of tangible personal property. The Board may revoke a seller's permit where it finds that the person holding the permit is not actively engaged in business as a seller of tangible personal property. 
(1) Any person who holds a seller's permit but is not actively engaged in business as a seller of tangible personal property shall promptly surrender the permit by notifying the Board to cancel it. 
(2) Except as explained in paragraph (3) of this subdivision, a person holding a seller's permit will be held liable for any taxes, interest, and penalties incurred, through the date on which the Board is notified to cancel the permit, by any other person who, with the permit holder's actual or constructive knowledge, uses the permit in any way. For example, a permit holder may be held liable for tax, interest, and penalty actually incurred by his or her transferee where the transferee displays the permit in his or her place of business, or uses the permit number on a resale certificate, or files sales and use tax returns under the permit number. The permit holder has the burden of establishing that the Board received notice to cancel the permit. 
(A) The seller's permit holder may notify the Board by delivering the actual seller's permit to the Board with the clear request that the permit be canceled. Where the reason for cancellation is that the permit holder transferred the business, the permit holder should identify the name and address of the transferee at the time the permit is surrendered to the Board. The permit holder may also notify the Board by delivering a written statement or email to the Board that the permit holder has transferred or otherwise ceased the business, or will do so at a specified time, and requesting that the permit be canceled. The statement should identify the name and address of the transferee, if any. The permit holder may also provide this notice to the Board orally, but it will be presumed that such notice was not provided unless the Board's records reflect that the permit holder clearly notified the Board of the cessation or transfer of the business for which the permit was held. 
(B) The Board will also be regarded as having received notice of cancellation of the seller's permit, and the permit holder will be excused from liability for the tax, interest, and penalty incurred by another person using the permit, as of the date the Board receives actual notice of transfer of the business for which the permit was issued. It will be presumed such notice was not received by the Board unless the Board's records reflect that the Board received a clear notice of the cessation or transfer of the business for which the permit was held. For example, the Board's receipt of an application for a seller's permit from the transferee constitutes sufficient notice if it contains adequate information to show that the application pertains to the same business for which the permit was held. Notice to another state agency of a transfer or cessation of a business does not constitute notice to the Board. Rather, the Board must itself receive actual notice of the transfer or cessation of business. 
(3) Where the seller's permit holder does not establish that the Board received actual notice of the transfer of the business for which the permit was held and is thus liable for the taxes, interest, and penalties incurred by another person using that permit, that liability is limited to the quarter in which the business was transferred and the three subsequent quarters, and shall not include any penalties imposed on the other person for fraud or intent to evade the tax. However, these limitations (liability only for the quarter in which the business was transferred and the three subsequent quarters and no fraud or intent to evade penalty) do not apply where, after the transfer of the business, 80 percent or more of the real or ultimate ownership of that business is held by the permit holder. For these purposes, stockholders, bondholders, partners, or other persons holding an ownership interest in an entity are regarded as having the “real or ultimate ownership” of that entity. 
(g) Due Date of Returns--Closeout of Account on Yearly Reporting Basis. Where a person authorized to file tax returns on a yearly basis transfers the business to another person or discontinues it before the end of the yearly period, a closing return shall be filed with the Board on or before the last day of the month following the close of the calendar quarter in which the business was transferred or discontinued.
(h) Buying Companies--General
(1) Definition. For the purpose of this regulation, a buying company is a legal entity that is separate from another legal entity that owns, controls, or is otherwise related to, the buying company and which has been created for the purpose of performing administrative functions, including acquiring goods and services, for the other entity. It is presumed that the buying company is formed for the operational reasons of the entity which owns or controls it or to which it is otherwise related. A buying company formed, however, for the sole purpose of purchasing tangible personal property ex-tax for resale to the entity which owns or controls it or to which it is otherwise related in order to re-direct local sales tax from the location(s) of the vendor(s) to the location of the buying company shall not be recognized as a separate legal entity from the related company on whose behalf it acts for purposes of issuing it a seller's permit. Such a buying company shall not be issued a seller's permit. Sales of tangible personal property to third parties will be regarded as having been made by the entity owning, controlling, or otherwise related to the buying company. A buying company that is not formed for the sole purpose of so re-directing local sales tax shall be recognized as a separate legal entity from the related company on whose behalf it acts for purposes of issuing it a seller's permit. Such a buying company shall be issued a seller's permit and shall be regarded as the seller of tangible personal property it sells or leases.
(2) Elements. A buying company is not formed for the sole purpose of re-directing local sales tax if it has one or more of the following elements:
(A) Adds a markup to its cost of goods sold in an amount sufficient to cover its operating and overhead expenses.
(B) Issues an invoice or otherwise accounts for the transaction.
The absence of any of these elements is not indicative of a sole purpose to redirect local sales tax.
(i) Web Sites. The location of a computer server on which a web site resides may not be issued a seller's permit for sales tax purposes except when the retailer has a proprietary interest in the server and the activities at that location otherwise qualify for a seller's permit under this regulation.
(j) Use Tax Permit -- Qualified Purchasers. Except for the purchase of a vehicle, vessel, or aircraft, a person who meets all of the following conditions is required to register and report and pay use tax directly to the Board:
(1) The person is not required to hold a seller's permit.
(2) The person is not required to be registered pursuant to Revenue and Taxation Code section 6226.
(3) The person is not a holder of a use tax direct payment permit as described in Revenue and Taxation Code section 7051.3.
(4) The person receives at least one hundred thousand dollars ($100,000) in gross receipts from business operations per calendar year.
(5) The person is not otherwise registered with the board to report use tax.
The return must show the total sales price of the tangible personal property purchased by the qualified purchaser, the storage, use, or other consumption of which became subject to the use tax during the preceding calendar year, for which the qualified purchaser did not pay tax to a retailer required to collect the tax or a retailer the qualified purchaser reasonably believed was required to collect the tax. Notwithstanding Revenue and Taxation Code sections 6451, 6452, 6452.1, and 6455, the returns for the 2009 calendar year and subsequent years shall be filed with the Board, together with a remittance of the amount of the tax due, on or before April 15 of the succeeding calendar year.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6066, 6067, 6070, 6071.1, 6072, 6073, 6075 and 6225, Revenue and Taxation Code. 
HISTORY

1. Amendment and renumbering of former Section 2099 filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
2. New subsection (f) filed 5-25-77; effective thirtieth day thereafter (Register 77, No. 22).
3. Amendment of subsection (e)(2) filed 5-1-85; effective thirtieth day thereafter (Register 85, No. 18).
4. Change without regulatory effect amending subsections (a), (c), (e), (e)(2) and Note filed 6-22-95 pursuant to section 100, title 1, California Code of Regulations (Register 95, No. 25).
5. Change without regulatory effect adding subsections (c)-(c)2., relettering subsections and amending Note filed 4-25-96 pursuant to section 100, title 1, California Code of Regulations (Register 96, No. 17).
6. Amendment of section and new Appendix A filed 8-8-2001; operative 9-7-2001 (Register 2001, No. 32).
7. New subsections (h)-(i) filed 5-15-2002; operative 6-14-2002 (Register 2002, No. 20).
8. Amendment of subsection (a) filed 11-13-2006; operative 12-13-2006 (Register 2006, No. 46).
9. Amendment of subsection (f) filed 1-24-2008; operative 2-23-2008 (Register 2008, No. 4).
10. Change without regulatory effect amending section and Note filed 3-17-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 12).

Appendix A

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§1699.5. Direct Payment Permits.
Note     •     History

(a) Definition. As used in this regulation, “direct payment permit” means a permit issued by the board which allows the holder to purchase tangible personal property for use without paying tax or tax reimbursement to the retailer from whom the purchase is made, and which relieves that retailer from liability for tax on the transaction provided that the retailer obtains an exemption certificate as provided herein from the purchaser.
(b) Requirements for Permit. A direct payment permit will be issued only if all of the following conditions are met:
(1) The applicant holds a valid seller's permit.
(2) The applicant agrees to report and pay directly to the board all tax liabilities which are transferred from retailers to the applicant as a result of exemption certificates issued in accordance with this regulation.
(3) The board determines that issuance of the direct payment permit will facilitate the collection of the tax. This requirement will be met only if the applicant has sufficient information processing resources to accurately and timely account for and report the tax liabilities assumed as a result of the direct payment permit (separately from other tax liabilities) and allocate the local tax portion of such liabilities to all of the cities, counties, redevelopment agencies, and districts involved.
(4) The board determines that issuance of the direct payment permit is to the mutual convenience of the board, the applicant, and the retailers whose tax liability will be reported and paid by the applicant. Issuance of the permit will not be deemed to be to the convenience of the board if the applicant is a government entity or if the applicant has had gross receipts from sales of tangible personal property of less than $75,000,000 and purchases of tangible personal property subject to sales or use tax of less than $75,000,000 in any calendar quarter during the twelve months immediately preceding the application for the permit.
(5) The applicant has a record of timely payment of tax liabilities and is in such financial condition that issuance of the direct payment permit will not result in a tax loss to the state.
(c)(1) Application for Permit. An application for a direct payment permit must be in writing and provide information which supports the claim that the applicant meets the requirements for a permit. The application must include a certified financial statement and a detailed description of the information processing system which will be used to account for the tax liabilities assumed and allocate the local taxes involved.
(2) Within 30 days of receipt of an application for a direct payment permit the board shall inform the applicant in writing either that the application is complete and has been accepted or that the application is deficient and what additional specific information is required to make the application complete. Within 60 days of acceptance of a complete application the board shall approve or deny the issuance of a direct payment permit and notify the applicant in writing of its decision.
(d) Revocation of Permit. Any direct payment permit issued pursuant to this regulation shall be revoked if the board determines that the holder no longer meets the requirements for the permit.
(e) Returns. On or before the last day of the month following each quarterly period, a holder of a direct payment permit shall file a return with the board in such form as the board may prescribe. The person required to file the return shall deliver it together with a remittance for the amount of tax due to the office of the board. The return shall show the aggregate gross receipts of retailers during the reporting period with respect to which the person filing the return has assumed responsibility for payment of the retailers' tax liabilities, the amount of such liabilities, and such other information as the board may require. This return shall be separate from and in addition to any returns required to be filed by the person to report his or her own sales and use tax liabilities.
(f) Prepayments. A holder of a direct payment permit shall make prepayments of the tax liabilities assumed in accordance with this regulation as prescribed in Section 6471 of the Revenue and Taxation Code. The prepayments shall be made as prescribed in Section 6472 of the Revenue and Taxation Code, except that the due dates of these prepayments shall be five days earlier than the due dates prescribed in that section. These prepayments shall be made separately from any prepayments of the person's own sales and use tax liabilities.
(g) Allocation of Local Tax. Every holder of a direct payment permit must include with each direct payment tax return a schedule approved by the board allocating all local sales and use taxes and district transactions and use taxes to the cities, counties, redevelopment agencies, and districts to which the tax would have been allocated if it had been reported and paid by the retailers involved. The allocation shall be based on the place of sale as provided in Regulation 1802 and Regulation 1822. The board may require that the schedule be provided on computer tape in a format prescribed by the Board. If the local and district taxes are misallocated due to negligence or intentional disregard of the law, a penalty of 10 percent of the amount misallocated may be imposed.
(h) Exemption Certificates. A holder of a direct payment permit may issue a direct payment exemption certificate to any retailer. The certificate shall be in substantially the following form and shall be valid only with respect to the calendar year for which it is issued.

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(i)(1) Effect of Certificate. A party who issues a direct payment of exemption certificate to a retailer shall be liable for the tax with respect to sales made pursuant to the certificate in the same manner as if the party were the retailer making the sale. The liability assumed by issuing the certificate must be included on the return filed for the period in which the sale was made rather than on the return for the period in which the property was used by the purchaser. The party who issued the exemption certificate is liable for the tax on the sale even if the property is lost, destroyed, removed from this state, or otherwise never used or consumed in this state.
(2) A direct payment exemption certificate shall not be substituted for a resale certificate because the tax consequences are different. Resale certificates shall only be issued with respect to property which the purchaser intends to resell and direct payment exemption certificates shall be issued only for property purchased for use or other consumption.
(3) A retailer who timely takes a direct payment exemption certificate in good faith from a person who holds a direct payment permit is relieved from liability for the sales tax and responsibility for collecting the use tax with respect to retail sales to the person who issued the certificate during the period covered by the certificate. A certificate will be considered timely if it is given at any time before the seller bills the purchaser for the property, or at any time within the seller's normal billing and payment cycle, or at any time at or prior to delivery of the property to the purchaser. The invoice or other evidence of sale issued by the retailer must clearly state that the sale was made pursuant to a direct payment exemption certificate in order to support a deduction on the retailer's sales tax return. If a retailer makes sales under both a direct payment exemption certificate and a resale certificate to the same customer, care must be exercised to identify which property is sold pursuant to each certificate. The retailer must segregate in his or her records, and on his or her sales tax return, sales made pursuant to a direct payment exemption certificate from sales for resale.
(j) Interest and Penalties. All provisions of the Sales and Use Tax Law relating to interest and penalties apply to tax liabilities incurred under the provisions of this regulation in the same manner as to other sales and use tax liabilities. (See Section 1703 of Title 18 of the California Code of Regulations.)
NOTE

Authority cited: Sections 7051 and 7051.1, Revenue and Taxation Code. Reference: Sections 7051.1 and 7051.2, Revenue and Taxation Code.
HISTORY

1. New section filed 12-15-88; operative 1-14-89 (Register 88, No. 52).
2. Editorial correction of subsection (a) (Register 95, No. 48).
§1699.6. Use Tax Direct Payment Permits.
Note     •     History

(a) Forward. “Use tax direct payment permit” means a permit issued by the board that allows a use tax direct payment permit holder to self-assess and pay state, local, and district use taxes under Part 1 (commencing with Section 6001), Part 1.5 (commencing with Section 7200), and, if applicable, Part 1.6 (commencing with Section 7251) directly to the board. The provisions of this regulation apply only to transactions subject to use tax.
(b)(1) Application for Permit. Persons seeking to pay use taxes directly to the board shall file an application for a use tax direct payment permit. An application for a use tax direct payment permit shall be made on Board of Equalization Form BOE-400-DP (no revision date). The application shall be signed by the owner, if a natural person; in the case of an association or partnership, by a member or partner; and in the case of a corporation, by an executive officer or some person specifically authorized by the corporation to sign the application.
(2) Within 30 days of receipt of an application for a direct payment permit the board shall inform the applicant in writing either that the application is complete and has been accepted or that the application is deficient and what additional specific information is required to make the application complete. Within 60 days of acceptance of a complete application the board shall approve or deny the issuance of a direct payment permit and notify the applicant in writing of its decision.
(c) Requirements for Permit. Pursuant to an application, a use tax direct payment permit shall be issued to any person who meets all of the following conditions:
(1) The applicant agrees to self-assess and pay directly to the board any use tax liability incurred under this regulation.
(2) The applicant certifies to the board either of the following:
(A) The applicant is the purchaser for its own use or is the lessee of tangible personal property subject to the use tax at a cost of five hundred thousand dollars ($500,000) or more in the aggregate, during the calendar year immediately preceding the application for the permit. Tangible personal property purchased for own use includes both property subject to use tax and property exempt from use tax except that it does not include property purchased for resale; or
(B) The applicant is a county, city, city and county, or redevelopment agency.
(d) Reporting of Local Use Tax. Any person who holds a valid use tax direct payment permit shall self-assess and pay directly to the board with each return the use taxes due under Division 2, Part 1 (commencing with Section 6001), Part 1.5 (commencing with Section 7200), and, if applicable, Part 1.6 (commencing with Section 7251), for all purchases subject to use tax for which a use tax direct payment exemption certificate was issued, and shall report the local use tax component to the jurisdiction in which the property is located at the time the state imposed use tax must be reported. Temporary storage for the purpose of reporting local tax shall be disregarded. Any tax so reported may be redistributed in accordance with law.
(e) Returns. On or before the last day of the month following each quarterly period, a holder of a direct payment permit shall file a return with the board. The person required to file the return shall deliver it together with a remittance for the amount of tax due to the board. The return shall show the aggregate sales price of tangible personal property purchased during the reporting period with respect to which the person filing the return has issued a use tax direct payment exemption certificate relieving the retailer of liability for reporting and paying use tax, and such other information as the board may require.
(f) Exemption Certificates. The board shall allow any holder of a use tax direct payment permit to issue a use tax direct payment certificate to any registered retailer or seller subject to all of the following:
(1) The use tax direct payment exemption certificate shall be in a form prescribed by the board, and shall be signed by, and bear the name, address, and permit number of, the holder of the use tax direct payment permit.
(2) Once a use tax direct payment exemption certificate has been issued by a holder of a use tax direct payment permit, it shall remain effective until revised or withdrawn by the holder of the permit or until the retailer or seller has received written notice that the permit has been revoked by the board.
(3) A use tax direct payment certificate relieves a person selling property from the duty of collecting use tax only if taken timely and in good faith from a person who holds a use tax direct payment permit. A certificate will be considered timely if it is taken at any time before the seller bills the purchaser for the property, or any time within the seller's normal billing and payment cycle, or any time at or prior to delivery of the property to the purchaser.
(4) A purchaser who issues a use tax direct payment certificate that is accepted in good faith by a seller or retailer of tangible personal property shall be the sole person liable for any sales tax and related interest and penalties with respect to any transaction that is subsequently determined by the board to be subject to sales tax and not use tax. The local sales tax portion so determined shall be allocated to the city, county, city and county, or redevelopment agency to which the tax would have been allocated if it had been reported and paid by the retailer in accordance with Part 1.5 (commencing with Section 7200). Such allocation shall be based on the place of sale as provided in Regulation 1802 and Regulation 1822.
(5) Any person who holds a use tax direct payment permit and gives a use tax direct payment certificate to a seller or retailer shall, in addition to any applicable use tax liabilities, be subject to the same penalty provisions that apply to a seller or retailer.
(g) Resale Transactions. A use tax direct payment exemption certificate shall not be substituted for a resale certificate, because the tax consequences are different. Resale certificates shall only be issued with respect to property which the purchaser intends to resell, and use tax direct payment exemption certificates shall be issued for property purchased for use or other consumption. If a retailer makes sales under both a use tax direct payment exemption certificate and a resale certificate to the same customer, an audit trail must be maintained to identify which property is sold pursuant to each certificate.
(h) Revocation of Permit. The board may revoke the use tax direct payment of any person who fails to purchase tangible personal property for own use of at least $500,000 per year. The permit shall remain valid for all transactions taking place prior to the date the permit is revoked.
(i) Successor Entities. A successor entity to a use tax direct payment permit holder shall qualify to obtain a use tax direct payment permit if the predecessor entity so qualified in the calendar year in which the succession occurred but must obtain its own permit.
(j) Operative Date. The provisions of this regulation apply only to purchases that occur on or after January 1, 1998.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6007, 6070 and 7051.3, Revenue and Taxation Code.
HISTORY

1. New section filed 6-9-99; operative 7-9-99 (Register 99, No. 24).
§1700. Reimbursement for Sales Tax.
Note     •     History

(a) Reimbursement for Sales Tax.
(1) Addition of Sales Tax Reimbursement. Whether a retailer may add sales tax reimbursement to the sales price of the tangible personal property sold at retail to a purchaser depends solely upon the terms of the agreement of sale.
(2) Presumptions. Certain presumptions concerning the addition of sales tax reimbursement are created by Civil Code Section 1656.1. It shall be presumed that the parties agreed to the addition of sales tax reimbursement to the sales price of tangible personal property sold at retail to a purchaser if:
(A) The agreement of sale expressly provides for such addition of sales tax reimbursement;
(B) Sales tax reimbursement is shown on the sales check or other proof of sale; or 
(C) The retailer posts in his or her premises in a location visible to purchasers, or includes on a price tag or in an advertisement or other printed material directed to purchasers, a notice to the effect that reimbursement for sales tax will be added to the sales price of all items or certain items, whichever is applicable.
It shall be presumed that the property, the gross receipts from the sale of which is subject to the sales tax, is sold at a price which includes tax reimbursement if the retailer posts in his or her premises, or includes on a price tag or in an advertisement (whichever is applicable) one of the following notices:
1. “All prices of taxable items include sales tax reimbursement computed to the nearest mill.”
2. “The price of this item includes sales tax reimbursement computed to the nearest mill.”
(3) Reimbursement Schedules. Each retailer who adds to the sales price of tangible personal property sold at retail an amount from a consumer in reimbursement of the sales tax upon gross receipts shall compute the amount of reimbursement by reference to schedules prepared by the board pursuant to Civil Code Section 1656.1 or by mathematical computation as described below. Schedules are available from the local district board offices for the various applicable rates. Reimbursement on sales prices in excess of those shown in the schedules provided by the board may be computed by applying the applicable tax rate to the sales price, rounded off to the nearest cent by eliminating any fraction less than one-half cent and increasing any fraction of one-half cent or over to the next higher cent.
(b) Excess Tax Reimbursement.
(1) Definition. When an amount represented by a person to a customer as constituting reimbursement for sales tax is computed upon an amount that is not taxable or is in excess of the taxable amount and is actually paid by the customer to the person, the amount so paid is excess tax reimbursement. Excess tax reimbursement is charged when reimbursement is computed on a transaction which is not subject to tax, when reimbursement is computed on an amount in excess of the amount subject to tax, when reimbursement is computed using a tax rate higher than the rate imposed by law, and when mathematical or clerical errors result in an overstatement of the reimbursement on a billing.
(2) Procedure upon Ascertainment of Excess Tax Reimbursement. Whenever the board ascertains that a person has collected excess tax reimbursement, the person will be afforded an opportunity to refund the excess collections to the customers from whom they were collected. In the event of failure or refusal of the person to make such refunds, the board will make a determination against the person for the amount of the excess tax reimbursement collected and not previously paid to the state, plus applicable interest and penalty.
(3) Evidence Sufficient to Establish that Excess Amounts have been or will be Returned to Customer.
(A) If a person already has refunded to each customer amounts collected as reimbursement for tax in excess of the tax due, this may be evidenced by any type of record which can be verified by audit such as:
1. Receipts or cancelled checks.
2. Books of account showing that credit has been allowed the customer as an offset against an existing indebtedness owed by the customer to the person.
(B) If a person has not already made sales tax reimbursement refunds to each customer but desires to do so rather than incur an obligation to the state, the person must:
1. Inform in writing each customer from whom an excess amount was collected that the excess amount collected will be refunded to the customer or that, at the customer's option, the customer will be credited with such amount, and
2. The person must obtain and retain for verification by the board an acknowledgement from the customer that the customer has received notice of the amount of indebtedness of the person to the customer.
(4) Offsets. If a person who has collected excess tax reimbursement on a transaction fails or refuses to refund it to the customer from whom it was collected, the excess tax reimbursement shall be offset against any tax liability of the taxpayer on the same transaction. Any excess tax reimbursement remaining after the offset must be refunded to the customer or paid to the state. The offset can be made when returns are filed, when a determination is issued, or when a refund is claimed. Such offsets can be made only on a transaction by transaction basis. Tax reimbursement collected on a specific transaction can be used only to satisfy a tax liability arising from the same transaction. The “same transaction” means all activities involved in the acquisition and disposition of the same property. The “same transaction” may involve several persons, such as a vendor, a subcontractor, a prime contractor, and the final customer; or a vendor, a lessor, and a series of sublessors. Tax reimbursement can be offset against the tax liability of the taxpayer whether the liability was satisfied by paying sales tax reimbursement to a vendor, paying use tax to a vendor, or paying use tax to the state.
An offset of a taxpayer's own tax liability against tax reimbursement collected from a customer can be made only with respect to transactions in which possession of the property upon which the taxpayer's tax liability is based is transferred, either permanently or temporarily, to the customer, as in the case of construction contracts or leases. A taxpayer such as a repairman or printer who uses shop supplies or printing aids in performing a job for a customer cannot offset the tax liability arising from the use of the supplies or aids against tax reimbursement collected from the customer.
A person who claims that a tax liability on a transaction should be offset against tax reimbursement paid to the state by another person has the burden of proving that tax reimbursement was in fact paid to the state on the same transaction by the other person. In the absence of such proof no offset will be allowed.
The offset allowances explained above are procedural changes mandated by statute and apply to all proceedings pending before the board on and after September 7, 1982.
(5) Particular Applications. (Examples at 8.25 percent tax rate.)
(A) Discounts and trading stamps.
1. Discounts. A retailer who allows discounts on sales prices but charges customers tax reimbursement computed upon the prices before the discount is deducted is collecting excess reimbursement.
For example, a sale is made for $100 plus $8.25 as tax reimbursement. Upon payment for the item the purchaser is allowed a discount of 20 percent of the sales price of $100 but the $8.25 tax reimbursement is excluded from the computation. Since the retailer is deducting the amount of the discount, $20, from taxable gross receipts, the retailer is actually paying a tax of only $6.60, i.e., 8.25 percent of $80, and has retained excessive tax reimbursement of $1.65. 
2. Trading Stamps. A retailer who issues trading stamps or similar evidences of patronage may deduct as cash discounts the cost to the retailer of the stamps or other indicia (hereinafter called “stamps”) issued in connection with taxable retail sales. A retailer who deducts the cost of stamps as a cash discount in computing the tax payable to the state, but who charges tax reimbursement on the full sales price of the goods, collects more tax reimbursement than the retailer pays to the state. The following illustration shows why this is true: If a retailer collects sales tax reimbursement of $8.25 on a $100 sale but gives the customer trading stamps which cost the retailer $2 and then deducts the $2 as a cash discount when reporting taxable receipts, the retailer will pay a tax of only $8.08 (8.25 percent of $98).
The retailer must follow one of the three following procedures:
a. Adjust the price upon which tax reimbursement is computed so it will correspond to the price upon which the retailer computes the tax paid by the retailer to the state.
b. Consider the price which determines the number of stamps to be given a customer as the total amount paid by the customer, inclusive of that portion charged as reimbursement for sales tax.
c. Take no deduction from gross receipts in computing tax to be paid to the state on account of the cost of stamps given to customers.
(B) Construction Contractors. (See Regulation 1521 (18 CCR 1521) for application of tax to construction contractors generally) A contractor furnishes and installs materials under a lump sum construction contract for the improvement of real property and collects tax reimbursement on the total contract price. As the contractor is the consumer of materials furnished and installed in the performance of the lump sum contract, the tax reimbursement collected on the total contract price constitutes excess tax reimbursement. Such excess tax reimbursement must be returned to the customer or paid to the state. However, offsets will be allowed as explained in (b)(4).
Under a lump sum contract to improve real property, a subcontractor furnishes and installs materials which were acquired without the payment of sales or use tax. The prime contractor collects tax reimbursement from the prime contractor's customer on the total contract price and pays all of the tax reimbursement collected to the state. The subcontractor's use tax liability on the materials consumed in performing the contract will be offset against the tax reimbursement paid to the state by the prime contractor, and the subcontractor has no further tax liability on the transaction. The tax reimbursement paid to the state by the prime contractor in excess of the use tax liability of the subcontractor will be refunded to the prime contractor only if it is returned to the customer.
(C) Lessors of Mobile Transportation Equipment. A lessor of mobile transportation equipment purchases such equipment under a resale certificate and collects tax reimbursement on the rental receipts, but pays no tax to the state. The lessor must pay tax on the purchase price of the equipment since a timely election to measure the tax by fair rental value was not made. The tax reimbursement collected on rental receipts is excess tax reimbursement. Such excess tax reimbursement must be returned to the lessee or paid to the state. However, offsets will be allowed as explained in (b)(4). (See Regulation 1661 (18 CCR 1661) for application of tax to leases of mobile transportation equipment)
(D) Other Lessors of Tangible Personal Property. A lessor purchases property and pays sales tax reimbursement to the vendor. The property is leased in the same form as acquired and tax reimbursement is collected on the rental receipts. Tax reimbursement collected on rental receipts must be returned to the lessee or paid to the state to the extent that it exceeds the tax liability measured by the purchase price. (See Regulation 1660 (18 CCR 1660) for application of tax to leases, generally)
(6) Rights of Customers. The provisions of this regulation with respect to offsets do not necessarily limit the rights of customers to pursue refunds from persons who collected tax reimbursement from them in excess of the amount due.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6901.5, Revenue and Taxation Code; and Section 1656.1, Civil Code. Leases, see also regulation 1660; Meals, tips and other charges as tax-included amounts, see regulation 1603; “Free meals,” charging reimbursement on, see regulation 1670; Trading stamps generally, see regulation 1671; Trade-ins generally, see regulation 1654.
HISTORY

1. New Appendices G and H filed 5-15-73 as an emergency; designated effective on the same date that any statute becomes operative on or after June 1, 1973, which increases the combined rates of the state and local sales and transaction taxes to 6 percent and 6 1/2 percent (Register 73, No. 20). For prior history, see Register 72, No. 45.
2. Certificate of Compliance filed 8-28-73 (Register 73, No. 35).
3. New subsection (c)(8) filed 5-30-75; effective thirtieth day thereafter (Register 75, No. 22).
4. Amendment filed 12-29-78; effective thirtieth day thereafter. Pursuant to Section 7051, Revenue and Taxation Code, order establishes an operative date of 1-1-79 for certain provisions (see subsection (a)) (Register 78, No. 52).
5. Editorial correction of subsections (b)(3)(B) and (b)(4)(B)2. (Register 79, No. 6).
6. Editorial correction filed 8-7-84 (Register 84, No. 32).
7. Editorial correction filed 6-26-85; effective thirtieth day thereafter (Register 85, No. 26). 
8. Change without regulatory effect amending subsections (a)(3) and (b)(5)(B)-(D) and  repealing appendices filed 11-17-94 pursuant to section 100, title 1, California Code of Regulations (Register 94, No. 46).
9. Change without regulatory effect amending subsections (b)(5) and (b)(5)(A)1.-2. filed 5-13-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 20).
§1701. “Tax-Paid Purchases Resold.”
Note     •     History

(a) Procedure in General. A retailer who resells tangible personal property before making any use thereof (other than retention, demonstration or display while holding it for sale in the regular course of business) may take a deduction of the purchase price of the property if, with respect to its purchase, he has reimbursed his vendor for the sales tax or has paid the use tax. If such a deduction is taken by the retailer, no refund or credit will be allowed to his vendor with respect to the sale of the property.
The deduction under the caption “Tax-paid purchases resold” must be taken on the retailer's return in which his sale of the property is included. If the deduction is not taken in the proper quarter, a claim for refund of tax must be filed.
(b) Circumstances Warranting Use. This procedure should be used in any of the following circumstances:
(1) The retailer when making the purchase intends to use the property rather than resell it, but later resells it before making any use thereof.
(2) The particular property is of a kind not ordinarily sold or stocked by the retailer, and not customarily covered by resale certificates given to his vendors and is the subject of an unusual sale, such as a sale for the accommodation of a customer, employee, etc.
(3) The particular property is generally for the use of the retailer, but a small portion is incidentally resold.
(4) Through error, sales tax reimbursement or use tax is paid by the retailer with respect to the purchase price of property purchased for resale in the regular course of business.
(c) Particular Application. “Standby Service.” Property purchased “tax paid” by a retailer and placed in “Standby Service,” located at the place of intended use and committed to that use, is considered used sufficiently to preclude a tax-paid purchase deduction when sold, even though never physically used there and ultimately removed and sold.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6012(a), Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former Section 2071 filed 8-7-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Amendment filed 9-6-83; effective thirtieth day thereafter (Register 83, No. 37).
§1702. Successor's Liability.
Note     •     History

(a) When Duty to Withhold Purchase Price Arises. The requirement that a successor or purchaser of a business or stock of goods withhold sufficient of the purchase price to cover the tax liability of the seller, arises only in the case of the purchase and sale of a business or stock of goods under a contract, providing for the payment to the seller or person designated by him of a purchase price in money or property or providing for the assumption of liabilities and only to the extent thereof, and does not arise in connection with other transfers of a business such as assignments for the benefit of creditors, foreclosures of mortgages, or sales by trustees in bankruptcy. 
(b) Amounts to Which Liability Extends. The liability of the successor or purchaser of a business or stock of goods extends to amounts incurred with reference to the operation of the business by the predecessor or any former owner, including the sale thereof, even though not then determined against him or her, which include taxes, interest thereon to the date of payment of the taxes, and penalties including penalties for nonpayment of taxes. Liability also extends to penalties determined and unpaid at the time of sale for negligence or intentional disregard of the Sales and Use Tax Law or authorized rules and regulations, and fraud or intent to evade the Sales and Use Tax Law or authorized rules and regulations. 
(c) Release from Obligation. The purchaser of the business or stock of goods will be released from further obligation to withhold the purchase price if he obtains a certificate from the board stating that no taxes, interest, or penalties are due from a predecessor. He will also be released if he makes a written request to the board for a certificate and if the board does not issue the certificate or mail to the purchaser a notice of the amount of the tax, interest, and penalties that must be paid as a condition of issuing the certificate within 60 days after the latest of the following dates: 
(1) The date the board receives a written request from the purchaser for a certificate. 
(2) The date of the sale of the business or stock of goods. 
(3) The date the former owner's records are made available for audit.
The certificate may be issued after the payment of all amounts due under the Sales and Use Tax Law, according to the records of the board as of the date of the certificate, or after the payment of the amounts, including amounts not yet ascertained, is secured to the satisfaction of the board. Such security is not subject to the limitations contained in section 6701 of the Revenue and Taxation Code.
(d) Enforcement of Obligation.
(1) The liability is enforced by service of a notice of successor liability not later than three years after the date the board receives written notice of the purchase of the business or stock of goods. The successor may petition the Board for reconsideration of the liability within 30 days after service. The liability becomes final, and the amount due and payable, in the same manner as determinations and redeterminations of other sales and use tax liability. 
(2) On or after January 1, 1990, a successor shall be relieved of any penalty originally imposed upon the predecessor included in the notice of successor liability regardless of when the notice was issued where there is no relationship between the successor and predecessor. A relationship exists between the successor and predecessor if there is any common ownership or if the successor was a responsible person as defined in Sales and Use Tax Regulation 1702.5(b)(1) in the predecessor entity. A successor seeking relief of a penalty must file a written statement with the board under penalty of perjury stating the facts upon which he or she bases the claim for relief.
(e) Separate Business Locations. 
Where one person operates several business establishments, each at a separate location, each establishment is a separate “business” and has a separate “stock of goods” for purposes of determining the liability of a successor. A purchaser of the business or stock of goods of any such establishment is subject to liability as a successor with respect to that establishment even if he does not purchase the business or stock of goods of all the establishments. 
(f) Purchase of a Portion of a Business. 
A person who purchases a portion of a business or stock of goods may become liable as a successor as, for example, where he purchases substantially all of the business or stock of goods or where the business or stock of goods is purchased by two or more persons. In cases of doubt as to possible liability, the purchaser should obtain a certificate as provided in subdivision (c) above. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6592, 6701, 6811, 6812, 6813 and 6814, Revenue and Taxation Code. 
HISTORY

1. Amendment and renumbering of Section 2102 filed 10-10-69; effective thirtieth day thereafter (Register 69, No. 41). 
2. Amendment of subsection (c) filed 12-20-77; effective thirtieth day thereafter (Register 77, No. 52). 
3. Amendment of subsection (c) filed 12-29-78; effective thirtieth day thereafter (Register 78, No. 52). 
4. Relettering of subsections (d) and (e) and new subsection (d) filed 2-28-80; effective thirtieth day thereafter (Register 80, No. 8). 
5. Amendment of subsection (c) filed 10-8-87; operative 11-7-87 (Register 87, No. 42). 
6. Amendment of subsections (b), (d), (e) and (f) and new subsection (d)(2) filed 9-13-90; operative 10-13-90 (Register 90, No. 44).
7. Amendment of subsections (c)(3)-(d), (d)(2) and (f) and amendment of Note filed 9-27-99; operative 10-27-99 (Register 99, No. 40).
§1702.5. Responsible Person Liability.
Note     •     History

(a) General. Any responsible person who willfully fails to pay or to cause to be paid, under circumstances set forth below, any taxes due from a corporation, partnership, limited partnership, limited liability partnership, or limited liability company pursuant to Part 1, Division 2, of the Revenue and Taxation Code shall be personally liable for any unpaid taxes and interest and penalties on those taxes not so paid upon termination, dissolution, or abandonment of the business of the corporation, partnership, limited partnership, limited liability partnership, or limited liability company.
Personal liability shall apply if the Board establishes that while the person was a responsible person, the corporation, partnership, limited partnership, limited liability partnership, or limited liability company:
1. sold tangible personal property in the conduct of its business and collected sales tax reimbursement on the selling price (whether separately itemized or included in the selling price) and failed to remit such tax when due; or
2. consumed tangible personal property and failed to pay the applicable tax to the seller or the Board; or
3. issued a receipt for use tax and failed to report and pay the tax.
(b) Definition of Terms.
(1) Responsible Person. As used herein, the term “responsible person” means any officer, member, manager, employee, director, shareholder, partner, or other person having control or supervision of, or who is charged with the responsibility for, the filing of returns or the payment of tax or who has a duty to act for the corporation, partnership, limited partnership, limited liability partnership, or limited liability company in complying with any provision of the Sales and Use Tax Law. The term “responsible person” does not include any person who would otherwise qualify but is serving in that capacity as an unpaid volunteer for a non-profit organization.
(2) Willful. As used herein, the term “willful” means voluntary, conscious and intentional. A failure to pay or to cause to be paid may be willful even though such failure was not done with a bad purpose or evil motive.
(3) Termination. As used herein, “termination” of the business of a corporation, partnership, limited partnership, limited liability partnership, or limited liability company includes discontinuance or cessation of business activities.
(c) Collection. 
(1) The Board may issue a Notice of Determination, in the manner provided in Chapter 5 of the Sales and Use Tax Law, for the amount of the personal liability of the responsible person, and penalties and interest shall be added to the amount due as applicable. The Board may collect the amounts due from the responsible person in the manner provided by Chapter 6 of the Sales and Use Tax Law for the collection of sales and use taxes.
(2) On or after January 1, 2009, a Notice of Determination shall be mailed within whichever of the following periods expires earlier:
(A) Three years after the last day of the calendar month following the quarterly period in which the Board obtains actual knowledge, through its audit or compliance activities, or by written communication by the business or its representative, of the termination, dissolution, or abandonment of the business of the corporation, partnership, limited partnership, limited liability partnership, or limited liability company; or
(B) Eight years after the last day of the calendar month following the quarterly period in which the business of the corporation, partnership, limited partnership, limited liability partnership, or limited liability company was terminated, dissolved, or abandoned.
(3) If a business or its representative files a notice of termination, dissolution, or abandonment of its business with a state or local agency other than the Board, this filing shall not constitute actual knowledge by the Board under this regulation.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6829, Revenue and Taxation Code.
HISTORY

1. New section filed 1-9-97; operative 2-8-97 (Register 97, No. 2).
2. Change without regulatory effect amending section filed 1-2-2009 pursuant to section 100, title 1, California Code of Regulations (Register 2009, No. 1).
§1702.6. Suspended Corporations.
Note     •     History

(a) General. A corporate officer or shareholder with control over operations or management of a closely held corporation during a time in which the corporation's powers, rights, and privileges are suspended or any responsible person who fails to pay or to cause to be paid any taxes due from a closely held corporation during a time in which the corporation's powers, rights, and privileges are suspended shall be personally liable under the circumstances set forth below for any unpaid sales or use tax liability of that suspended corporation incurred during the period of that suspension. The corporate officer, shareholder, or responsible person shall be liable for the unpaid tax, and interest and penalties on those taxes not so paid, regardless of the basis for the suspension of the corporation's powers, rights, and privileges.
Personal liability under this regulation applies only when the Board establishes that, during the period of suspension, the corporation:
(1) Sold tangible personal property in the conduct of its business and collected sales tax reimbursement on the selling price (whether separately itemized or included in the selling price) and failed to remit such tax when due; or
(2) Collected use tax and failed to report and pay the tax; or
(3) Consumed tangible personal property and failed to pay the applicable tax to the seller or the Board.
(b) Definitions of Terms.
(1) Responsible Person.  For the purposes of this regulation, the term “responsible person” means any officer or shareholder who is charged with the responsibility for the filing of returns or the payment of tax or who has a duty to act for the closely held corporation in complying with any provision of the Sales and Use Tax Law, and who derives a direct financial benefit from the failure to pay the tax liability.
(2) Closely Held. For the purposes of this regulation, the term “closely held” corporation means one in which ownership is concentrated in one individual, one family, or a small number of individuals and the majority stockholders manage the business.
(3) Control over Operations or Management. For the purposes of this regulation, the term “control over operations or management” means the power to manage or affect day to day operations of the business. For the purposes of this regulation, it is rebuttably presumed that a corporate officer has control over operations and management of the closely held corporation.
(c) Determination and Collection. The Board shall determine and collect the liability established under this regulation in the manner provided in Chapter 5 (commencing with section 6451) and Chapter 6 (commencing with section 6701) of Part 1, Division 2, of the Revenue and Taxation Code.
(d) Liability of the Corporation. A suspended corporation shall remain liable for the unpaid tax, interest, and penalties incurred during the period in which its corporate powers, rights, and privileges were suspended without regard to any personal liability determined under subdivision (a) of this regulation. Payments made pursuant to subdivision (a) shall be applied to the liability of the corporation.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section  6066, Revenue and Taxation Code.
HISTORY

1. New section filed 9-18-2000; operative 10-18-2000 (Register 2000, No. 38).
§1703. Interest and Penalties.
Note     •     History

(a) Statutory Provisions. Interest and penalties are prescribed in various sections of the Sales and Use Tax Law as follows:

View Graphic
(b) Interest.
(1) Interest Rates.
(A) In General. Interest is computed at the modified adjusted rate per month, or fraction thereof. “Modified adjusted rate per month, or fraction thereof” means the modified adjusted rate per annum divided by 12.
(B)  Underpayments. “Modified adjusted rate per annum” for underpayments of tax is the rate for underpayments determined in accordance with the provisions of section 6621 of the Internal Revenue Code plus three percentage points. Such rate is subject to semiannual modification pursuant to the provisions of subparagraph (c) of section 6591.5 of the Revenue and Taxation Code.
(C) Overpayments. Except as provided below, “modified adjusted rate per annum” for overpayments of tax is the bond equivalent rate of 13-week treasury bills auctioned, rounded to the nearest full percent (or to the next highest full percent if .50%), subject to semiannual modification pursuant to the provisions of subparagraph (d) of Section 6591.5 of the Revenue and Taxation Code. For the period July 1, 1991, through June 30, 1992, the modified adjusted rate per annum for overpayments is equal to the bond equivalent rate of 13-week treasury bills auctioned on July 1, 1991, rounded to the nearest full percent (or to the next highest full percent if .50%).
(D) Managed Audit Program. Upon completion of the managed audit and verification by the Board, interest shall be computed at one-half the rate that would otherwise be imposed for liabilities covered by the audit period.
(E) Error or Delay by Employee of Board or Department of Motor Vehicles. For tax liabilities that arise during taxable periods commencing on or after July 1, 1999, this subdivision is limited to interest imposed by sections 6480.4, 6480.8, 6513, 6591, and 6592.5 of the Revenue and Taxation Code. Effective January 1, 2002, this subdivision applies to interest imposed by any provision of the Sales and Use Tax Law. All or any part of such interest imposed may be relieved by the Board, in its discretion, under either of the following circumstances:
1. Where the failure to pay tax is due in whole or in part to an unreasonable error or delay by an employee of the Board acting in his or her official capacity.
2. Where failure to pay use tax on a vehicle or vessel registered with the Department of Motor Vehicles was the direct result of an error by the Department of Motor Vehicles in calculating the use tax.
For the purposes of this subdivision, an error or delay shall be deemed to have occurred only if no significant aspect of the error or delay is attributable to an act of, or a failure to act by, the taxpayer.
Any person seeking relief under this subdivision shall file with the Board a statement under penalty of perjury setting forth the facts on which the claim for relief is based and any other information which the Board may require.
(F) Erroneous Refund. Operative for any action for recovery under Revenue and Taxation Code section 6961 on or after July 1, 1999, no interest shall be imposed on the amount of an erroneous refund by the Board until 30 days after the date on which the Board mails a notice of determination for repayment of the erroneous refund if the Board finds that neither the person liable for payment of tax nor any party related to that person had in any way caused an erroneous refund for which an action for recovery is provided under section 6961 of the Revenue and Taxation Code. The act of filing a claim for refund shall not be considered as causing the erroneous refund.
(2) Late Payments Generally. Interest applies to the amount of all taxes, except prepayments of amounts of tax due and payable pursuant to section 6471 of the Revenue and Taxation Code, not paid within the time required by law from the date on which the amount of tax became due and payable until the date of payment.
Interest applies to amounts due but not paid by any distributor or broker of motor vehicle fuel who fails to make a timely remittance of the prepayment of tax required pursuant to sections 6480.1 and 6480.3 of the Revenue and Taxation Code.
Operative January 1, 1992, interest applies to amounts due but not paid by any producer, importer, or jobber of fuel as defined in section 6480.10 of the Revenue and Taxation Code who fails to make a timely remittance of the prepayment of tax required pursuant to sections 6480.16 and 6480.18 of the Revenue and Taxation Code.
(3) Determinations. Except as otherwise provided in subdivisions (b)(1)(E) and (b)(1)(F) above, interest applies to all determinations from the date on which the amount of tax becomes due and payable until the date of payment.
(4) Extensions of Time. In cases in which an extension of time for the filing of a return and the payment of tax has been granted, interest applies from the date on which the tax would have been due and payable had the extension not been granted until the date of payment. In cases in which an extension of time has been granted for making a prepayment of tax pursuant to section 6471 of the Revenue and Taxation Code, interest applies to the unpaid amount of the required prepayment at the same rate.
(5) Refunds and Credits.
(A) In General. If an overpayment is credited on amounts due from any person or is refunded, interest will be computed on the overpayment from the first day of the calendar month following the month during which the overpayment was made. A refund or credit shall be made of any interest imposed upon the person making the overpayment with respect to the amount being refunded or credited. Interest will be paid in the case of a refund, to the last day of the calendar month following the date upon which the person making the overpayment, if he or she has not already filed a claim, is notified by the board that a claim may be filed or the date upon which the refund is approved by the board, whichever date is the earlier; and in the case of a credit, to the same date as that to which interest is computed on the tax or amount against which the credit is applied.
(B) Intentional or Careless Overpayments. Credit interest will be allowed on all overpayments, except when statutorily prohibited or in cases of intentional overpayment, fraud, negligence, or carelessness. Carelessness occurs if a taxpayer makes an overpayment which: 1) is the result of a computational error on the return or on its supporting schedules or the result of a clerical error such as including receipts for periods other than that for which the return is intended, failing to take allowable deductions, or using an incorrect tax rate; and 2) is made after the taxpayer has been notified in writing by the Board of the same or similar errors on one or more previous returns.
(C) Waiver of Interest as Condition of Deferring Action on Claim. If any person who has filed a claim for refund requests the Board to defer action on the claim, the Board, as a condition to deferring action, may require the claimant to waive interest for the period during which the person requests the Board to defer action.
(6) Improper Use of Resale Certificate. Interest applies to the taxes imposed upon any person who knowingly issues a resale certificate for personal gain or to evade the payment of taxes while not actively engaged in business as a seller. The interest is computed from the last day of the month following the quarterly period for which a return should have been filed and the amount of tax or any portion thereof should have been paid.
(7) Untimeliness Caused by Disaster. A person may be relieved of the interest imposed by sections 6459, 6480.4, 6480.8, 6513, and 6591 of the Revenue and Taxation Code if the board finds that the person's failure to make a timely return or payment was occasioned by a disaster and was neither negligent nor willful. Such person shall file with the board a statement under penalty of perjury setting forth the facts upon which the claim for relief is based.
For purposes of this section “disaster” means fire, flood, storm, tidal wave, earthquake or similar public calamity, whether or not resulting from natural causes.
(c) Penalties.
(1) Late Payments Generally.
(A) Prepayments.
1. Any person required to make a prepayment who fails to make a prepayment before the last day of the monthly period following the quarterly period in which the prepayment became due and who files a timely return and payment for that quarterly period shall pay a penalty of 6 percent of the amount equal to 90 percent or 95 percent of the tax liability, as prescribed in Section 6471 of the Revenue and Taxation Code, for each of the periods during that quarterly period for which a required prepayment was not made.
2. If the failure to make a prepayment as described in (c)(1)(A)1. above is due to negligence or intentional disregard of the Sales and Use Tax Law or authorized regulations, the penalty shall be 10 percent instead of 6 percent.
3. Any person required to make a prepayment who fails to make a timely prepayment, but who makes such prepayment before the last day of the monthly period following the quarterly period in which the prepayment became due, shall pay a penalty of 6 percent of the amount of the prepayment.
4. If any part of a deficiency in prepayment is due to negligence or intentional disregard of the Sales and Use Tax Law or authorized regulations, a penalty of 10 percent of the deficiency shall be paid.
The penalties provided in subparagraphs 2 and 4 of this subsection shall not apply to amounts subject to the provisions of sections 6484, 6485, 6511, 6514, and 6591 of the Revenue and Taxation Code (subparagraphs (c)(1)(B), (c)(2)(A) and (c)(2)(B) of this regulation)
5. A penalty of 25% shall apply to the amount of prepayment due but not paid by any distributor or broker of motor vehicle fuel who fails to make a timely remittance of the prepayment as required pursuant to sections 6480.1 and 6480.3 of the Revenue and Taxation Code.
6. Operative January 1, 1992, a penalty of 10 percent shall apply to the amount of prepayment due but not paid by any producer, importer, or jobber of fuel as defined in section 6480.10 of the Revenue and Taxation Code who fails to make a timely remittance of the prepayment as required pursuant to sections 6480.16 and 6480.18 of the Revenue and Taxation Code. This penalty shall be 25 percent if the producer, importer, or jobber knowingly or intentionally fails to make a timely remittance.
(B) Other Late Payments. A penalty of 10 percent of the amount of all unpaid tax shall be added to any tax not paid in whole or in part within the time required by law.
(C) Vehicles, Vessels and Aircraft. A purchaser of a vehicle, vessel or aircraft who registers it outside this state for the purpose of evading the payment of sales or use taxes shall be liable for a penalty of 50 percent of any tax determined to be due on the sales price of the vehicle, vessel or aircraft.
(2) Late Return Forms Generally.
(A) Any person who fails to file a return in accordance with the due date set forth in section 6451 of the Revenue and Taxation Code or the due date established by the Board in accordance with section 6455 of the Revenue and Taxation Code, shall pay a penalty of 10 percent of the amount of taxes, exclusive of prepayments, with respect to the period for which the return is required.
(B) Any person remitting taxes by electronic funds transfer shall, on or before the due date of the remittance, file a return for the preceding reporting period in the form and manner prescribed by the Board. Any person who fails to timely file the required return shall pay a penalty of 10 percent of the amount of taxes, exclusive of prepayments, with respect to the period for which the return is required.
(3) Determinations.
(A) Negligence or Intentional Disregard. A penalty of 10 percent of the amount of the tax specified in the determination shall be added to deficiency determinations if any part of the deficiency for which the determination is imposed is due to negligence or intentional disregard of the Sales and Use Tax Law or authorized regulations.
(B) Failure to Make Return. A penalty of 10 percent of the amount of tax specified in the determination shall be added to all determinations made on account of the failure of any person to make a return as required by law.
(C) Fraud or Intent to Evade. A penalty of 25 percent of the amount of the tax specified in a deficiency determination shall be added thereto if any part of the deficiency for which the determination is made is due to fraud or intent to evade the Sales and Use Tax Law or authorized regulations. In the case of a determination for failure to file a return, if such failure is due to fraud or an intent to evade the Sales and Use Tax Law or authorized regulations, a penalty of 25 percent of the amount required to be paid, exclusive of penalties, shall be added thereto in addition to the 10 percent penalty for failure to file a return. Fraud or intent to evade shall be established by clear and convincing evidence.
A penalty of 50 percent applies to the taxes imposed upon any person who, for the purpose of evading the payment of taxes, knowingly fails to obtain a valid permit prior to the date in which the first tax return is due. The 50 percent penalty applies to the taxes determined to be due for the period during which the person engaged in business in this state as a seller without a valid permit and may be added in addition to the 10 percent penalty for failure to file a return. However, the 50 percent penalty shall not apply if the measure of tax liability over the period during which the person was engaged in business without a valid permit averaged $1000 or less per month. Also, the 50 percent penalty shall not apply to the amount of taxes due on the sale or use of a vehicle, vessel, or aircraft, if the amount is subject to the penalty imposed by section 6485.1 or 6514.1 of the Revenue and Taxation Code.
(D) Failure to timely remit collected sales tax reimbursement or use tax. With respect to Board-assessed determinations, except as provided below, for periods beginning on or after January 1, 2007, a person who knowingly collects sales tax reimbursement or use tax, and who fails to timely remit that sales tax reimbursement or use tax to the Board, shall be liable for a penalty of 40 percent of the amount not timely remitted. The penalty shall not apply if:
1. the person's liability for the unremitted sales tax reimbursement or use tax averages one thousand dollars ($1,000) or less per month, or does not exceed 5 percent of the total amount of tax liability for which the tax reimbursement was collected for the period in which tax was due, whichever is greater; or
2. the person's failure to make a timely remittance of sales tax reimbursement or use tax is due to a reasonable cause or circumstances beyond the person's control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect.
For purposes of this penalty, “reasonable cause or circumstances beyond the person's control” includes, but is not limited to, any of the following;
a. the occurrence of a death or serious illness of the person or the person's next of kin that caused the person's failure to make a timely remittance;
b. the occurrence of an emergency, as defined in section 8558 of the Government Code, that caused the person's failure to make a timely remittance;
c. a natural disaster or other catastrophe directly affecting the business operations of the person that caused the person's failure to make a timely remittance;
d. the Board's failure to send returns or other information to the correct address of record that caused the person's failure to make a timely remittance;
e. the person's failure to make a timely remittance occurred only once over a three-year period, or once during the period on which the person was engaged in business, whichever time period is shorter; or
f. the person voluntary corrected errors in remitting sales tax reimbursement or use tax collected that were made in previous reporting periods, and remitted payment of the liability owed as a result of those errors prior to being contacted by the Board regarding possible errors or discrepancies.
For purposes of this penalty, “sales tax reimbursement” is defined in section 1656.1 of the Civil Code, and also includes any sales tax that is advertised, held out, or stated to the public or any customer, directly or indirectly, that the tax or any part thereof will be assumed or absorbed by the retailer.
This penalty applies to determinations made by the Board pursuant to Article 2 (commencing with section 6481), Article 3 (commencing with section 6511), and Article 4 (commencing with section 6536) of Chapter 5, Part 1, Division 2 of the Revenue and Taxation Code.
(E) Nonpayment of Determinations. A penalty of 10 percent of the amount of the tax specified in the determination shall be added to any determination not paid within the time required by law.
(4) Improper Use of Resale Certificate. 
A penalty of 10 percent applies to the taxes imposed upon any person who knowingly issues a resale certificate for personal gain or to evade the payment of taxes while not actively engaged in business as a seller.
The penalty is 10 percent of the amount of tax or $500, whichever is greater, if the purchase is made for personal gain or to evade payment of taxes.
(5) Direct Payment Permits. Every holder of a direct payment permit who gives an exemption certificate to a retailer for the purpose of paying that retailer's tax liability directly to the Board must make a proper allocation of that retailer's local sales and use tax liability and also its district transactions and use tax liability if applicable. Such allocation must be made to the cities, counties, city and county, redevelopment agencies, and district to which the taxes would have been allocated if they had been reported by that retailer. Allocations must be submitted to the board in conjunction with the direct payment permit holder's tax return on which the taxes are reported. If the local and district taxes are misallocated due to negligence or intentional disregard of the law, a penalty of 10 percent of the amount misallocated shall be imposed.
(6) Failure to Obtain Evidence that Operator of Catering Truck Holds Valid Seller's Permit.  Any person making sales to an operator of a catering truck who has been required by the Board pursuant to section 6074  of the Revenue and Taxation Code to obtain evidence that the operator is the holder of a valid seller's permit issued pursuant to section 6067  of the Revenue and Taxation Code and who fails to comply with that requirement shall be liable for a penalty of five hundred dollars for each such failure to comply.
(7) Failure of Retail Florist to Obtain Permit. Any retail florist (including a mobile retail florist) who fails to obtain a seller's permit before engaging in or conducting business as a seller shall, in addition to any other applicable penalty, pay a penalty of five hundred dollars ($500). For purposes of this regulation, “mobile retail florist” means any retail florist who does not sell from a structure or retail shop, including, but not limited to, a florist who sells from a vehicle, pushcart, wagon, or other portable method, or who sells at a swap meet, flea market, or similar transient location. “Retail florist” does not include any flower or ornamental plant grower who sells his or her own products.
(8) Relief from Penalty for Reasonable Cause. If the Board finds that a person's failure to make a timely return, payment, or prepayment, or failure to comply with the provisions of section 6074 of the Revenue and Taxation Code is due to reasonable cause and circumstances beyond the person's control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect, the person may be relieved of the penalty provided by sections 6074, 6476, 6477, 6480.4, 6480.8, 6511, 6565, 6591, and 7051.2 of the Revenue and Taxation Code for such failure.
Any person seeking to be relieved of the penalty shall file with the Board a statement under penalty of perjury setting forth the facts upon which the claim for relief is based. Section 6592 of the Revenue and Taxation Code, providing for the relief of certain penalties does not apply to the 10 percent penalty imposed for failure to make a timely prepayment under section 6478 of the Revenue and Taxation Code.
(9) Tax Amnesty Program (Reporting Periods Beginning Before January 1, 2003).
(A) If on or after April 1, 2005, the Board issues a deficiency determination upon a return filed under the amnesty program or upon any other nonreporting or underreporting of tax liability by a person who could have otherwise been eligible for amnesty as specified in sections 7071, 7072 and 7073 of the Revenue and Taxation Code, the Board shall impose penalties at a rate that is double the rate of penalties normally applicable.
(B) Any taxpayer who could have applied for amnesty as specified in sections 7071, 7072 and 7073 of the Revenue Taxation Code but fails to do so, will be subject to a penalty of 50 percent of the interest computed under section 6591 of the Revenue and Taxation Code for the period beginning on the date the tax was due and ending on March 31, 2005.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6071, 6072, 6073, 6074, 6077, 6094.5, 6207, 6291-6294, 6422.1, 6452, 6455, 6459, 6476-6478, 6479.3, 6480.4, 6480.8, 6480.19, 6482, 6484, 6485, 6485.1, 6511-6514, 6514.1, 6537, 6565, 6591, 6591.5, 6592, 6593, 6593.5, 6596, 6597, 6901, 6907, 6908, 6936, 6964, 7051.2, 7073, 7074, 7076.5, 7101, 7152-7153, 7153.5 and 7155, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of section 2103 filed 11-5-69; effective thirtieth day thereafter (Register 69, No. 45).
2. Amendment of subsection (b) filed 12-26-75; effective thirtieth day thereafter. Note: Filing designates 1-1-76 as effective date (Register 75, No. 52).
3. Amendment filed 10-2-81; effective thirtieth day thereafter (Register 81, No. 40).
4. Amendment filed 6-3-83; effective thirtieth day thereafter (Register 83, No. 23).
5. Amendment filed 1-10-86; effective thirtieth day thereafter (Register 86, No. 2).
6. Amendment filed 10-16-87; operative 11-15-87 (Register 87, No. 45).
7. Amendment filed 10-12-88; operative 11-11-88 (Register 88, No. 43).
8. Amendment of subsection (a)'s Table, new subsections (b)(1)-(b)(1)(C) and renumbering, amendment of subsections (b)(2), (b)(5)(A), (b)(6) and (c)(1)(A)5., new subsection (c)(1)(A)6., and amendment of subsections (c)(2)(C), (c)(3), (c)(5)-(6) and Note  filed 12-21-92; operative 1-20-93 (Register 92, No. 52).
9. Change without regulatory effect amending subsection (a), adding new subsection (c)(6), renumbering subsections, and amending Note filed 5-19-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 21).
10. Change without regulatory effect amending subsection (a) table, adding subsections (b)(1)(D) and (c)(2)-(c)(2)(B), renumbering subsections and amending Note filed 9-2-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 36).
11. Change without regulatory effect amending section and Note filed 3-18-99 pursuant to section 100, title 1, California Code of Regulations (Register 99, No. 12).
12. Amendment of subsection (b)(5)(B) filed 12-9-99; operative 1-8-2000 (Register 99, No. 50).  
13. Amendment of subsection (c)(3)(C) filed 12-10-2002; operative 1-9-2003 (Register 2002, No. 50).
14. Change without regulatory effect amending section and Note filed 4-7-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 14).
15. Change without regulatory effect amending subsection (a), adopting subsection (c)(3)(D)-(c)(3)(D)2.f., relettering subsections and amending Note filed 5-15-2007 pursuant to section 100, title 1, California Code of Regulations (Register 2007, No. 20).
§1704. Whole Dollar Reporting--Computations on Returns or Other Documents.
Note     •     History

(a) General. Any amount required to be reported or shown on any form filed with the board, including any return, statement, supporting schedule, or other document, may be entered at the nearest whole dollar amount. For the purpose of the computation to the nearest whole dollar, a fractional part of a dollar shall be disregarded unless it amounts to one-half dollar ($0.50) or more, in which case the amount shall be increased to the next whole dollar.
(b) Election to Use Whole Dollar Amounts. The election to report using whole dollar amounts must be made at the time of filing the return statement or other document. The election is irrevocable as to that return, statement or other document. However, a new election may be made on the return, statement, or other document filed for a subsequent reporting period.
(c) Computation of Amount to be Reported or Shown. The provisions of paragraph (a) of this regulation apply only to cumulative amounts required to be reported or shown on a return, statement, or other document. The total amount to be reported at the nearest whole dollar must be computed from the aggregate sum of the individual items which include cents.
(d) Computation of Interest and Penalties. If a return, statement, or other document is not filed, or the tax due is not paid, within the time required by law, the computation of any interest and penalty due shall be made from the amount of tax due, computed as provided in this regulation. If the interest and penalty is entered on the return, statement or other document, it may be entered at the nearest whole dollar amount. If the interest and penalty is computed and billed by the board, the billing will be issued showing the full amount due, including cents.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code; and Section 16302.2, Government Code. References: Sections 6452, 6453, 6471 and 7055, Revenue and Taxation Code.
HISTORY

1. New section filed 10-9-87; operative 11-8-87 (Register 87, No. 42).
§1705. Relief From Liability.
Note     •     History

(a) In General. A person may be relieved from the liability for the payment of sales and use taxes, including any penalties and interest added to those taxes, when that liability resulted from the failure to make a timely return or a payment and such failure was found by the Board to be due to reasonable reliance on:
(1) Written advice given by the Board under the conditions set forth in subdivision (b) below, or
(2) Written advice in the form of an annotation or legal ruling of counsel under the conditions set forth in subdivision (d) below; or
(3) Written advice given by the Board in a prior audit of that person under the conditions set forth in subdivision (c) below. As used in this regulation, the term “prior audit” means any audit conducted prior to the current examination where the issue in question was examined.
Written advice from the Board may only be relied upon by the person to whom it was originally issued or a legal or statutory successor to that person. Written advice from the Board which was received during a prior audit of the person under the conditions set forth in subdivision (c) below, may be relied upon by the person audited or by a legal or statutory successor to that person.
The term “written advice” includes advice that was incorrect at the time it was issued as well as advice that was correct at the time it was issued, but, subsequent to issuance, was invalidated by a change in statutory or constitutional law, by a change in Board regulations, or by a final decision of a court of competent jurisdiction. Prior written advice may not be relied upon subsequent to: (1) the effective date of a change in statutory or constitutional law and Board regulations or the date of a final decision of a court of competent jurisdiction regardless that the Board did not provide notice of such action; or (2) the person receiving a subsequent writing notifying the person that the advice was not valid at the time it was issued or was subsequently rendered invalid. As generally used in this regulation, the term “written advice” includes both written advice provided in a written communication under subdivision (b) below and written advice provided in a prior audit of the person under subdivision (c) below.
(b) Advice Provided in a Written Communication. 
(1) Advice from the Board provided to the person in a written communication must have been in response to a specific written inquiry from the person seeking relief from liability, or from his or her representative. To be considered a specific written inquiry for purposes of this regulation, representatives must identify the specific person for whom the advice is requested. Such inquiry must have set forth and fully described the facts and circumstances of the activity or transactions for which the advice was requested.
(2) A person may write to the Board and propose a use tax reporting methodology for qualified purchases subject to use tax. If the Board concludes that the reporting method reflects the person's use tax liability for the defined population, then the Board may write to the person approving the use of the reporting method. The approval shall be subject to certain conditions. The following conditions shall be included in the approval:
(A) The defined population of the purchases that will be included in the reporting method;
(B) The percentage of purchases of the defined population that is subject to tax;
(C) The length of time the writing shall remain in effect;
(D) The definition of a significant or material change that will require rescinding the approved reporting method; and
(E) Other conditions as required.
The written approval of the use tax reporting methodology is void and shall not be relied upon for the purposes of Revenue and Taxation Code section 6596 if the taxpayer files a claim for refund for tax that had been reported based upon this reporting method.
(c) Written Advice Provided in a Prior Audit. Presentation of the person's books and records for examination by an auditor shall be deemed to be a written request for the audit report. If a prior audit report of the person requesting relief contains written evidence which demonstrates that the issue in question was examined, either in a sample or census (actual) review, such evidence will be considered “written advice from the Board” for purposes of this regulation. A census (actual) review, as opposed to a sample review, involves examination of 100% of the person's transactions pertaining to the issue in question. For written advice contained in a prior audit of the person to apply to the person's activity or transaction in question, the facts and conditions relating to the activity or transaction must not have changed from those which occurred during the period of operation in the prior audit. Audit comments, schedules, and other writings prepared by the Board that become part of the audit work papers which reflect that the activity or transaction in question was properly reported and no amount was due are sufficient for a finding for relief from liability, unless it can be shown that the person seeking relief knew such advice was erroneous.
(d) Annotations and Legal Rulings of Counsel. Advice from the Board provided to the person in the form of an annotation or legal ruling of counsel shall constitute written advice only if:
(1) The underlying legal ruling of counsel involving the fact pattern at issue is addressed to the person or to his or her representative under the conditions set forth in subdivision (b) above; or
(2) The annotation or legal ruling of counsel is provided to the person or his or her representative by the Board within the body of a written communication and involves the same fact pattern as that presented in the subject annotation or legal ruling of counsel.
(e) Trade or Industry Associations or Franchisors. A trade or industry association requesting advice on behalf of its member(s) must identify and include the specific member name(s) for whom the advice is requested for relief from liability under this regulation. A franchisor requesting advice on behalf of its franchisee(s) must identify and include the specific franchisee name(s) for whom the advice is requested for relief from liability under this regulation.
For an identified trade or industry member or franchisee to receive relief based on advice provided in the written communication to the trade or industry association or franchisor, the activity or transactions in question must involve the same facts and circumstances as those presented in the written inquiry by the association or franchisor.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 6596, Revenue and Taxation Code.
HISTORY

1. New section filed 10-10-97; operative 11-9-97 (Register 97, No. 41).
2. New subsection (a)(2), subsection renumbering, and new subsections (d)-(e) filed 12-8-99; operative 1-7-2000 (Register 99, No. 50).  
3. New subsections (b)(1)-(b)(2)(E) filed 5-23-2001; operative 6-22-2001 (Register 2001, No. 21).
4. Amendment of subsection (e) filed 3-11-2009; operative 4-10-2009 (Register 2009, No. 11).
§1705.1. Innocent Spouse or Registered Domestic Partner Relief from Liability.
Note     •     History

(a) In General. A spouse claiming relief from liability for any sales or use tax, interest, penalties, and other amounts shall be relieved from such liability where all of the following requirements are met:
(1) A liability is incurred under the Sales and Use Tax Law;
(2) The liability is attributable to the nonclaiming spouse;
(3) The spouse claiming relief establishes that he or she did not know of, and that a reasonably prudent person in the claiming spouse's circumstances would not have has reason to know of, the liability; and
(4) It would be inequitable to hold the claiming spouse liable for the liability, taking into account whether the claiming spouse significantly benefited directly or indirectly from the liability, and taking into account all other facts and circumstances.
(b) “Benefited.” Whether a claiming spouse has benefited directly or indirectly from the liability will be determined by a review by the Board of all of the available evidence. Normal support payment is not a significant benefit for purposes of this determination. Normal support is measured relative to each family's standard of living. The claiming spouse will not be deemed to have benefited directly or indirectly from the liability solely as a result of normal support unless his or her lifestyle significantly improved during the periods of liability. Gifts received by the claiming spouse, or lavish or luxury purchases made by either spouse may be evidence that the claiming spouse benefited directly or indirectly from the liability. Evidence of direct or indirect benefit may consist of transfers of property, including transfers which may be received several years after the calendar quarter in which the liability occurred. For example, if a claiming spouse receives from the other spouse an inheritance of property or life insurance proceeds which are traceable to the liability, the claiming spouse will be considered to have benefited from that liability. Other factors considered may include desertion of the claiming spouse by the other spouse or that the spouses have become divorced or separated subsequent to the periods of liability.
(c) Attribution. The determination of the spouse to whom items of liability are attributable shall be made without regard to community property laws.
(1) A claim may be filed if, at the time relief is requested, the claiming spouse is no longer married to or is legally separated from the nonclaiming spouse, or the claiming spouse is no longer a member of the same household as the nonclaiming spouse.
(2) With respect to a liability incurred as a result of a failure to file a return or an omission of an item from the return, attribution to one spouse may be determined by whether a spouse rendered substantial services as a retailer of taxable items related to the liability. If neither spouse rendered substantial services as a retailer, then the attribution of the liability shall be treated as community property. A liability incurred as a result of an erroneous deduction or credit shall be attributable to the spouse who caused that deduction or credit to be entered on the return.
(d) Written Request for Relief. To seek relief under these provisions, a claiming spouse may submit a written request for relief setting forth the seller's permit number, the period for which relief is requested, and the specific grounds upon which the request for relief is based.
(e) Statute of Limitations. These provisions shall apply to all calendar quarters for claims made no later than one year after the board's first contact with the spouse making the claim.
Claims made after one year from the board's first contact with the spouse making the claim shall not apply to any calendar quarter that is more than
five years from the return due date for nonpayment on a return, or
five years from the finality date on the board-issued determination,
whichever is later.
No calendar quarters shall be eligible for relief under this regulation that have been closed by res judicata.
(f) Refunds. A refund of any amounts under these provisions shall be subject to the requirements as set forth in Revenue and Taxation Code section 6901 through 6908, inclusive.
(g) This regulation shall apply retroactively to liabilities arising prior to January 1, 1994.
(h) Effective January 1, 2001, a spouse may be relieved of liability for any unpaid tax or deficiency under the Sales and Use Tax Law if, taking into account all the facts and circumstances, it is inequitable to hold the spouse liable for such amount attributable to any item for which relief is not available under subdivisions (a) through (d). A spouse may be considered for equitable relief under this subdivision only after a written claim for relief as an innocent spouse has been filed pursuant to subdivision (d). A spouse whose claim for equitable relief is denied may request that the claim be reconsidered by the Board.
(1) Criteria for Equitable Relief.
(A) Factors that may be considered for the purpose of granting equitable relief include, but are not limited to:
1. The claiming spouse is separated (whether legally or not) or divorced from the nonclaiming spouse.
2. The claiming spouse would suffer economic hardship if relief is not granted.
3. The claiming spouse, under duress from the nonclaiming spouse, did not pay the liability. To substantiate “duress,” the claiming spouse must provide objective evidence. “Objective evidence” can include, but is not limited to, such documents as police reports, restraining orders, or counseling reports.
4. The claiming spouse did not know and had no reason to know about the items causing the understatement or that the tax would not be paid.
5. The nonclaiming spouse has a legal obligation under a divorce decree or agreement to pay the tax. (This obligation will not be considered a positive factor if the claiming spouse knew or had reason to know, at the time the divorce decree or agreement was entered into, that the nonclaiming spouse would not pay the tax.)
6. The tax for which the claiming spouse is requesting relief is attributable to the nonclaiming spouse.
(B) Factors that may be considered for purposes of denying equitable relief include, but are not limited to:
1. The claiming spouse will not suffer economic hardship if relief is not granted.
2. The claiming spouse knew or had reason to know about the items causing the understatement or that the tax would be unpaid at the time the claiming spouse signed the return.
3. The claiming spouse received a significant benefit from the unpaid tax or items causing the understatement.
4. The claiming spouse has not made a good faith effort to comply with the Board's laws for the periods for which the claiming spouse is requesting relief or for subsequent periods of liability.
5. The claiming spouse has a legal obligation under a divorce decree or agreement to pay the tax.
6. The tax for which relief is being requested is attributable to the claiming spouse.
(2) Conditions for Relief. The following conditions apply to claims for equitable relief:
(A) The statutes of limitations provided for innocent spouse claims in subdivisions 1705.1(e) and (f) also apply to requests for equitable relief.
(B) Claims for equitable relief may be filed on liabilities incurred prior to January 1, 2001, including liabilities incurred prior to January 1, 1994, as provided in subdivision (g).
(i) The Board shall send notification by mail of the claim for relief from liability and the basis for that claim to the nonclaiming spouse.
(j) Registered Domestic Partners. Pursuant to Family Code section 297.5, on and after January 1, 2005, registered domestic partners shall have the same rights, protections, and benefits, and shall be subject to the same responsibilities, obligations, and duties under law, whether they derive from statutes, administrative regulations, court rules, government policies, common law, or any other provisions or sources of law, as are granted to and imposed upon spouses. Accordingly, for purposes of this regulation, on and after January 1, 2005, domestic partners, as defined in Family Code section 297, have the same rights, protections, and benefits, and are subject to the same responsibilities, obligations, and duties as stated herein with respect to spouses.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6066, 6067, 6456 and 6901-6908, Revenue and Taxation Code; and Sections 297 and 297.5, Family Code.
HISTORY

1. New section filed 11-5-97; operative 12-5-97 (Register 97, No. 45).
2. Amendment filed 9-20-2001; operative 10-20-2001 (Register 2001, No. 38).
3. Change without regulatory effect amending section heading, adding new subsection (j) and amending Note filed 1-3-2007 pursuant to section 100, title 1, California Code of Regulations (Register 2007, No. 1).
§1706. Drop Shipments.
Note     •     History

(a) Definitions. For purposes of this regulation:
(1) “Retailer engaged in business in this state” means and includes any person who would be so defined by Revenue and Taxation Code section 6203 if the person were a retailer.
(2) “True retailer” means and includes a retailer who is not a retailer engaged in business in this state and who makes a sale of tangible personal property to a consumer in California.
(3) “Drop shipment” means and includes a delivery of tangible personal property by an owner or former owner thereof, or factor or agent of that owner or former owner, to a California consumer pursuant to the instructions of a true retailer.
(4) “Drop shipper” means and includes an owner or former owner thereof, or factor or agent of that owner or former owner, who makes a drop shipment of tangible personal property.
(b) General. A drop shipment generally involves two separate sales. The true retailer contracts to sell tangible personal property to a consumer. The true retailer then contracts to purchase that property from a supplier and instructs that supplier to ship the property directly to the consumer. The supplier is a drop shipper. A drop shipper that is a retailer engaged in business in this state is reclassified as the retailer and is liable for tax as provided in this regulation. When more than two separate sales are involved, the person liable for the applicable tax as the drop shipper is the first person who is a retailer engaged in business in this state in the series of transactions beginning with the purchase by the true retailer.
(c) Application of Tax
(1) Unless the sale to the California consumer and the use by the California consumer are exempt from sales and use tax as otherwise provided in the Sales and Use Tax Law, a drop shipper must report and pay tax measured by the retail selling price of the property paid by the California consumer to the true retailer.
(2) Except as provided in subdivision (c)(3) of this regulation, for reporting periods commencing on or after January 1, 2001, a drop shipper may calculate the retail selling price of its drop shipments of property based on its selling price of the property to the true retailer plus a mark-up of 10 percent (10%). A drop shipper may use a mark-up percentage lower than 10 percent if the drop shipper can document that the lower mark-up percentage accurately reflects the retail selling price charged by the true retailer to the California consumer.
If a mark-up percentage lower than 10 percent is developed in an audit of the drop shipper, the drop shipper may use that percentage for the subsequent reporting periods provided the drop shipper has not had a significant change in business operations. Provided there is no significant change in business operations, if a later audit develops a higher percentage, the Board would not assess additional tax based on that newly computed mark-up percentage. However, for subsequent reporting periods, the lower mark-up from the previous audit cannot be used, and the drop shipper must instead use the higher percentage developed in the most recent audit or 10 percent, whichever is lower.
(3) The procedures set forth in subdivision (c)(2) of this regulation do not apply to drop shipments of vehicles, vessels, and aircraft (also known as “courtesy deliveries”). For purposes of this regulation, “vehicle,” “vessel,” and “aircraft” are defined in Sections 6272, 6273, and 6274 of the Revenue and Taxation Code, respectively.
(d) Examples.
(1) ABC Co. is not a retailer engaged in business in this state. It contracts to sell tangible personal property to a California consumer. ABC Co. then contracts with XYZ Inc. to purchase the tangible personal property. ABC Co. instructs XYZ Inc. to ship the property directly to the California consumer. XYZ Inc. is a retailer engaged in business in this state. XYZ Inc. is the drop shipper liable for the applicable tax as the retailer.
(2) ABC Co. is not a retailer engaged in business in this state. It contracts to sell tangible personal property to a California consumer. ABC Co. then contracts with XYZ Inc. to purchase the tangible personal property. ABC Co. instructs XYZ Inc. to ship the property directly to the California consumer. XYZ Inc. is a retailer engaged in business in California. XYZ Inc. then contracts with Supplies Corp. to purchase the tangible personal property, and instructs Supplies Corp. to ship the property directly to the California consumer. Whether or not Supplies Corp. is a retailer engaged in business in this state, XYZ Inc. is the drop shipper liable for the applicable tax as the retailer.
(3) ABC Co. is not a retailer engaged in business in this state. It contracts to sell tangible personal property to a California consumer. ABC Co. then contracts with XYZ Inc. to purchase the tangible personal property. ABC Co. instructs XYZ Inc. to ship the property directly to the California consumer. XYZ Inc. is not a retailer engaged in business in this state. XYZ Inc. then contracts with Supplies Corp. to purchase the tangible personal property, and instructs Supplies Corp. to ship the property directly to the California consumer. Supplies Corp. is a retailer engaged in business in this state. Supplies Corp. is the drop shipper liable for the applicable tax as the retailer.
(4) Dropshipper Company is a drop shipper of tangible personal property to California consumers on behalf of retailers who are not retailers engaged in business in this state. During its last audit, the Board developed and applied a mark-up of 81/2 percent. During the current audit, the Board develops a mark-up of 11 percent. The Board will apply a mark-up of 81/2 percent in the current audit provided there was no significant change in Dropshipper Company's business operations between the prior audit period and the current audit period. If there was a significant change in business operations, the Board will apply a mark-up percentage of 10 percent in the current audit. For periods after the current audit period, Dropshipper Company must use a 10 percent mark-up percentage.
(5) In the previous example, Dropshipper Company sold only computer hardware during the period covered by the prior audit, but in the period covered by the current audit, it also made considerable sales of computer software. Since there was a significant change in Dropshipper Company's business operations after the prior audit period, the mark-up of 81/2 percent developed during that audit does not apply. The Board will apply a mark-up of 10 percent (because it is lower than the 11 percent mark-up developed during the audit).
(e) Burden of Proof
(1) An owner or former owner of tangible personal property, or a factor or agent of that owner or former owner, who, upon the instructions of that person's customer, delivers property to a California consumer is presumed to be a drop shipper liable for the applicable tax as the retailer. A person  may overcome this presumption by accepting a timely resale certificate from that person's customer that includes a valid California seller's permit number. The acceptance of a resale certificate that does not include a valid California seller's permit number will not overcome the presumption.
(2) A person otherwise qualifying as a drop shipper under this regulation can overcome the presumption that the delivery is to a consumer by accepting a timely and valid resale certificate in good faith from the person in California to whom the property is delivered.
NOTE

Authority cited: Section 7051,  Revenue and Taxation Code. Reference: Sections 6007, 6091 and 6203, Revenue and Taxation, Code.
HISTORY

1. New section filed 11-28-2000; operative 12-28-2000 (Register 2000, No. 48).
§1707. Electronic Funds Transfer.
Note     •     History

(a) Definitions.
(1) “Electronic funds transfer” means any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, that is initiated through an electronic terminal, telephonic instrument, or computer or magnetic tape, so as to order, instruct, or authorize a financial institution to debit or credit an account. Electronic funds transfers shall be accomplished by an automated clearinghouse debit, an automated clearinghouse credit, or by Federal Reserve Wire Transfer.
(2) “Automated clearinghouse” means any federal reserve bank, or an organization established in agreement with the National Automated Clearing House Association, that operates as a clearinghouse for transmitting or receiving entries between banks or bank accounts and which authorizes an electronic transfer of funds between these banks or bank accounts.
(3) “Automated clearinghouse debit” means a transaction in which the state, through its designated depository bank, originates an automated clearinghouse transaction debiting the person's bank account and crediting the state's bank account for the amount due. Banking costs incurred for the automated clearinghouse debit transaction shall be paid by the state.
(4) “Automated clearinghouse credit” means an automated clearinghouse transaction in which the person through his or her own bank, originates an entry crediting the state's bank account and debiting his or her own bank account. Banking costs incurred for the automated clearinghouse credit transaction charged to the state shall be paid by the person originating the credit.
(5) “Federal Reserve Wire Transfer” means any transaction originated by a person and utilizing the national electronic payment system to transfer funds through the federal reserve banks, when that person debits his or her own bank account and credits the state's bank account. Electronic funds transfers pursuant to Revenue and Taxation Code section 6479.3 may be made by Federal Reserve Wire Transfer only if payment cannot, for good cause, be made according to subdivision (a)(1) of this regulation, and the use of Federal Reserve Wire Transfer is preapproved pursuant to subdivision (h) of this regulation. Banking costs incurred for the Federal Reserve Wire Transfer transaction charged to the person and to the state shall be paid by the person originating the transaction.
(b) Participation.
(1) Mandatory Participation. Prior to January 1, 2006, persons with an estimated monthly tax liability of twenty thousand dollars ($20,000) or more were required to remit amounts due by electronic funds transfer under procedures set forth in this regulation. Operative January 1, 2006, persons with an estimated monthly tax liability of ten thousand dollars ($10,000) or more are required to remit amounts due by electronic funds transfer under procedures set forth in this regulation. To identify mandatory participants, the Board shall conduct an annual review of all persons with sales and use tax permits. The review is performed by calculating an average monthly tax liability for a twelve-month period. Persons whose average monthly tax liability equals or exceeds the threshold for mandatory participation will be required to remit payments by electronic funds transfer. If a person did not begin making sales until after the beginning of the designated twelve-month review period, then the monthly tax liability will be calculated based upon the number of months in which sales were made (for example, in a calendar year review period, if the person obtains a seller's permit and begins making sales in May, the total tax liability would be divided by eight to determine the average monthly tax liability since there are eight months remaining in the evaluation period). Persons registering to report and pay sales or use tax for the first time, except certain successors, will not be required to participate in the electronic funds transfer program until an annual review is conducted.
A successor will be regarded as having an estimated tax liability that equals or exceeds the threshold for mandatory participation in the electronic funds transfer program when the monthly tax liability of the predecessor equalled or exceeded the threshold for mandatory participation or the predecessor was a mandatory participant in the electronic funds transfer program. If the successor purchases a portion of a business that is required to participate in the mandatory electronic funds transfer program (e.g. a multiple outlet business that only sells some, but not all, of its locations), the average monthly tax liability of the purchased locations will be computed to determine if the successor meets the threshold to be identified as a mandatory participant in the electronic funds transfer program.
After an annual review, if a person drops below the threshold for mandatory participation, the Board shall provide notification, in writing, that the status has been changed from mandatory participation to voluntary participation in the electronic funds transfer program. If, at that time, a person wishes to discontinue making electronic funds transfer payments, a written request must be made to the Board. Payments must continue to be remitted by electronic funds transfer until the taxpayer is notified by the Board, in writing, of an effective date of withdrawal from the program. Any person who fails to comply with the mandatory participation requirements under this subdivision shall be liable for penalty as provided under Revenue and Taxation Code section 6479.3.
(2) Voluntary Participation. Any person not meeting the criteria for mandatory participation set forth in subdivision (b)(1) may participate in the program on a voluntary basis. A person must register with the Board prior to participation. If a person wishes to discontinue making electronic funds transfer payments, a written request must be made to the Board. Payments must continue to be remitted by electronic funds transfer until notified by the Board, in writing, of an effective date of withdrawal from the program.
(c) Date of Payment. Payment is deemed complete on the date the electronic funds transfer is initiated, if the settlement to the state's demand account occurs on or before the banking day following the date the transfer is initiated. If the settlement to the state's demand account does not occur on or before the banking day following the date the transfer is initiated, payment is deemed to occur on the date settlement occurs.
(d) Filing of Returns. In addition to a tax payment made by electronic funds transfer, a return must be filed on or before the due date. Any person who fails to comply with this provision shall be subject to penalty charges as provided under Revenue and Taxation Code section 6479.3.
(e) Failure to Pay by Electronic Funds Transfer. Any person required to pay taxes by electronic funds transfer must continue to do so until the Board advises that person otherwise in writing. Any person required to pay taxes by electronic funds transfer, as set forth in subdivision (b)(1), who does not pay through electronic funds transfer but uses another means (e.g., pay by check), will be assessed a penalty as provided by Revenue and Taxation Code section 6479.3.
(f) Reporting Prepayments. Any person required to make prepayments will not receive and is not required to file prepayment forms; however, a payment must still be made by electronic funds transfer.
(g) Zero Amount Due. When no tax is due for a given period, a zero dollar transaction must be made by electronic funds transfer or the Board must receive written notification stating that no tax is due for that period.
(h) Emergencies. In emergency situations, a Federal Reserve Wire Transfer transaction may be used to transmit a payment. A Federal Reserve Wire Transfer is an electronic payment system used by federal reserve banks to transfer funds instantaneously. Generally, this method of payment is not approved for recurring transactions. Authorization must be received from the Board prior to making a payment by Federal Reserve Wire Transfer. The person who originates the transfer shall be responsible for any fees incurred by the Federal Reserve Wire Transfer transaction.
NOTE

Authority cited: Sections 7051 and 6479.3, Revenue and Taxation Code. Reference: Sections 6479.3 and 6479.5, Revenue and Taxation Code.
HISTORY

1. New section filed 5-27-2003; operative 6-26-2003 (Register 2003, No. 22).
2. Change without regulatory effect amending subsections (b)(1)-(2) filed 4-20-2006 pursuant to section 100, title 1, California Code of Regulations (Register 2006, No. 16).
Article 19. Bradley-Burns Uniform  Local Sales and Use Taxes
§1802. Place of Sale and Use for Purposes of Bradley-Burns Uniform Local Sales and Use Taxes.
Note     •     History

(a) In General.
(1) Retailers Having One Place of Business. For the purposes of the Bradley-Burns Uniform Local Sales and Use Tax Law, if a retailer has only one place of business in this state, all California retail sales of that retailer in which that place of business participates occur at that place of business unless the tangible personal property sold is delivered by the retailer or his or her agent to an out-of-state destination, or to a common carrier for delivery to an out-of-state destination.
(2) Retailers Having More Than One Place of Business. 
(A) If a retailer has more than one place of business in this state but only one place of business participates in the sale, the sale occurs at that place of business.
(B) If a retailer has more than one place of business in this state which participates in the sale, the sale occurs at the place of business where the principal negotiations are carried on. If this place is the place where the order is taken, it is immaterial that the order must be forwarded elsewhere for acceptance, approval of credit, shipment, or billing. For the purposes of this regulation, an employee's activities will be attributed to the place of business out of which he or she works.
(3) Place of Passage of Title Immaterial. If title to the tangible personal property sold passes to the purchaser in California, it is immaterial that title passes to the purchaser at a place outside of the local taxing jurisdiction in which the retailer's place of business is located, or that the property sold is never within the local taxing jurisdiction in which the retailer's place of business is located.
(b) Place of Sale in Specific Instances.
(1) Vending Machine Operators. The place of sale is the place at which the vending machine is located. If an operator purchases property under a resale certificate or from an out-of-state seller without payment of tax and the operator is the consumer of the property, for purposes of the use tax, the use occurs at the place where the vending machine is located.
(2) Itinerant Merchants. The place of sale with respect to sales made by sellers who have no permanent place of business and who sell from door to door for their own account shall be deemed to be in the county in which is located the seller's permanent address as shown on the seller's permit issued to him or her. If this address is in a county imposing sales and use taxes, sales tax applies with respect to all sales unless otherwise exempt. If this address is not in a county imposing sales and use taxes, he or she must collect the use tax with respect to property sold and delivered or shipped to customers located in a county imposing sales and use taxes.
(3) Retailers Under Section 6015. Persons regarded by the Board as retailers under section 6015(b) of the Revenue and Taxation Code are regarded as selling tangible personal property through salespersons, representatives, peddlers, canvassers or agents who operate under or obtain the property from them. The place of sale shall be deemed to be:
(A) the business location of the retailer if the retailer has only one place of business in this state, exclusive of any door-to-door solicitations of orders, or
(B) the business location of the retailer where the principal negotiations are carried on, exclusive of any door-to-door solicitations of orders, if more than one in-state place of business of the retailer participates in the sale.
The amendments to paragraph (b)(3) apply only to transactions entered into on or after July 1, 1990.
(4) Auctioneers. The place of sale by an auctioneer is the place at which the auction is held. Operative July 1, 1996, auctioneers shall report local sales tax revenue to the participating jurisdiction (as defined in subdivision (d) below) in which the sales take place, with respect to auction events which result in taxable sales in an aggregate amount of $500,000 or more.
(5) Factory-built School Buildings. The place of sale or purchase of a factory-built school building (relocatable classroom) as defined in paragraph (c)(4)(B) of Regulation 1521 (18 CCR 1521), Construction Contractors, is the place of business of the retailer of the factory-built school building regardless of whether sale of the building includes installation or whether the building is placed upon a permanent foundation.
(6) Jet Fuel.
(A) For sales of jet fuel prior to January 1, 2008, the place of sale or purchase of jet fuel is the city, county, or city and county which is the point of the delivery of the jet fuel to the aircraft, if both of the following conditions are met:
1. The principal negotiations for the sale are conducted at the retailer's place of business in this state; and
2. The retailer has more than one place of business in the state.
(B) For sales of jet fuel on or after January 1, 2008, the place of sale or purchase of jet fuel is the city, county, or city and county which is the point of the delivery of the jet fuel to the aircraft.
(C) The local sales or use tax revenue derived from the sale or purchase of jet fuel under the conditions set forth in this subdivision shall be transmitted by the Board, to the city, county, or city and county where the airport is located at which such delivery occurs.
(D) Multi-Jurisdictional Airports. For the purposes of this regulation, the term “multi-jurisdictional airport” means and includes an airport that is owned or operated by a city, county, or city and county, that has enacted a state-administered local sales and use tax ordinance and as to which the owning or operating city, county, or city and county is different from the city, county, or city and county in which the airport is located. Through June 30, 2004, the local tax rate is imposed at 1.25% by Revenue and Taxation Code section 7202(a). Operative July 1, 2004, the local tax rate is imposed at 1% by Revenue and Taxation Code section 7203.1. The local tax revenue derived from of sales of jet fuel at a “multi-jurisdictional airport” shall, notwithstanding subdivision (C), be transmitted by the Board as follows:
1. In the case of the 0.25% local sales tax imposed by counties under Government Code section 29530 and Revenue and Taxation Code section 7202(a), or operative July 1, 2004, imposed by counties under Revenue and Taxation Code section 7203.1(a)(1), half of the revenue to the county which owns or operates the airport (or in which the city which owns or operates the airport is located) and half to the county in which the airport is located.
2. In the case of the remaining 1% of the local sales tax imposed by counties under Revenue and Taxation Code section 7202(a), or operative July 1, 2004, the remaining 0.75%, imposed by counties under Revenue and Taxation Code section 7203.1(a)(2), and in the case of the local sales tax imposed by cities at a rate of up to 1%, or operative July 1, 2004, at a rate of up to 0.75% under Revenue and Taxation Code section 7203.1(a)(2), and offset against the local sales tax of the county in which the city is located under Revenue and Taxation Code section 7202(h), half of the revenue to the city which owns or operates the airport and half to the city in which the airport is located. If the airport is either owned or operated by a county or is located in the unincorporated area of a county, or is owned or operated by a county and is located in the unincorporated area of a different county, the local sales tax revenue which would have been transmitted to a city under this subdivision shall be transmitted to the corresponding county.
3. Notwithstanding the rules specified in subdivisions 1. and 2., the following special rules apply:
a. In the case of retail sales of jet fuel in which the point of the delivery of the jet fuel to the aircraft and place of sale or purchase, as described in subdivision (A) or (B), is San Francisco International Airport, the Board shall transmit one-half of the local sales tax revenues derived from such sales to the City and County of San Francisco, and the other half to the County of San Mateo.
b. In the case of retail sales of jet fuel in which the point of the delivery of the jet fuel to the aircraft and place of sale or purchase, as described in subdivision (A) or (B), is Ontario International Airport, the Board shall transmit local sales taxes with respect to those sales in accordance with both of the following:
c. All of the revenues that are derived from a local sales tax imposed by the City of Ontario shall be transmitted to that city.
d. All of the revenues that are derived from a local sales tax imposed by the County of San Bernardino shall be allocated to that county.
(E) Otherwise, as provided elsewhere in this regulation.
(c) Transactions Negotiated Out of State and Delivered from the Retailer's Stock of Tangible Personal Property in California.
(1) If an out-of-state retailer does not have a permanent place of business in this state other than a stock of tangible personal property, the place of sale is the city, county, or city and county from which delivery or shipment is made. Local tax collected by the Board for such sales will be distributed to that city, county, or city and county.
(2) If a retailer has a permanent place of business in this state in addition to its stocks of tangible personal property, the place of sale, in cases where the sale is negotiated out-of-state and there is no participation by the retailer's permanent place of business in this state, is the city, county, or city and county from which delivery or shipment is made. Local tax collected by the Board for such sales will be distributed to the city, county, or city and county from which delivery or shipment is made.
(d) Allocation of Sales Tax and Application of Use Tax. Local sales tax is allocated to the place where the sale is deemed to take place under the above rules. The local use tax ordinance of the jurisdiction where the property at issue is put to its first functional use applies to such use. As used in this subdivision, the term “participating jurisdiction” means any city, city and county, or county which has entered into a contract with the Board for administration of that entity's local sales and use tax.
(1) Direct Reporting By Retailers. Operative July 1, 1996, for transactions of $500,000 or more, except with respect to persons who register with the Board to collect use tax under Regulation 1684(c) (18 CCR 1684), the seller shall report the local use tax revenues derived therefrom directly to the participating jurisdiction where the first functional use is made.
Persons who voluntarily collect use tax under Regulation 1684(c) may, solely at their own discretion, report the local use tax revenues on transactions of $500,000 or more directly to the participating jurisdiction where first functional use is made.
(2) Direct Reporting By Purchasers. Operative July 1, 1996, if a person who is required to report and pay use tax directly to the Board makes a purchase in the amount of $500,000 or more, that person shall report the local use tax revenues derived therefrom to the participating jurisdiction in which the first functional use of the property is made.
The amendments to paragraph (b)(4) and paragraph (d) shall apply prospectively only to transactions entered into on or after July 1, 1996. Paragraph (d) shall not apply to lease transactions.
NOTE

Authority cited: Sections 7051 and 7205, Revenue and Taxation Code. Reference: Sections 6012.6, 6015, 6359, 6359.45, 7202, 7203, 7203.1, 7204.03 and 7205, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former section 2202 filed 1-26-70; effective thirtieth day thereafter (Register 70, No. 5).
2. Editorial correction of NOTE filed 2-2-83 (Register 83, No. 6).
3. Amendment of subsection (b) filed 9-19-83 as an emergency; designated effective 8-1-83 (Register 83, No. 40). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 11-29-83.
4. Reinstatement of subsection (b) as it existed prior to emergency amendment filed 9-19-83 by operation of Government Code section 11346.1(f) (Register 84, No. 27).
5. Amendment of subsection (b)(1) filed 8-13-84; effective thirtieth day thereafter (Register 84, No. 33).
6. Amendment filed 1-5-90; operative 2-4-90 (Register 90, No. 1).
7. Editorial correction of printing error in subsections (a)(1) and (b)(2) (Register 91, No. 32).
8. Amendment of section adding subsection (b)(6) filed 7-19-91; operative 8-19-91 (Register 91, No. 46).
9. Amendment of subsection (b)(3) filed 8-30-91 as an emergency; operative 8-30-91 (Register 92, No. 1). A Certificate of Compliance must be transmitted to OAL by 12-30-91 or emergency language will be repealed by operation of law on the following day.
10. Certificate of Compliance as to 8-30-91 order transmitted to OAL 12-13-91 and filed 1-9-92 (Register 92, No. 11).
11. Amendment of subsection (b)(5) filed 9-1-93; operative 10-1-93 (Register 93, No. 36).
12. Amendment of section heading and subsection (b)(4) and new subsections (c)-(c)(2) filed 7-12-96; operative 8-11-96 (Register 96, No. 28).
13. Editorial correction of printing errors in subsections (b)(4) and (c)(2) (Register 2000, No. 21).
14. Change without regulatory effect adding subsections (b)(7)-(b)(7)(D) and amending Note filed 5-26-2000 pursuant to section 100, title 1, California Code of Regulations (Register 2000, No. 28).
15. Amendment of subsection (a)(1), new subsection (a)(2)(A), redesignation of portion of subsection (a)(2) as new subsection (a)(2)(B) and amendment of Note filed 10-29-2003; operative 11-28-2003 (Register 2003, No. 44).
16. Change without regulatory effect amending subsections (b)(7)(C)-(b)(7)(C)3., (b)(7)(C)3.b. and (c)(1) filed 2-8-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 6).
17. Amendment of subsection (b)(4), repealer of subsection (b)(5), subsection renumbering, new subsections (c)-(c)(2), subsection relettering, amendment of newly designated subsection (d)(2) and amendment of Note filed 11-13-2006; operative 12-13-2006 (Register 2006, No. 46).
18. Change without regulatory effect amending subsection (b)(6)(A), adopting new subsection (b)(6)(B), relettering subsections and amending newly designated subsections (b)(6)(D), (b)(6)(D)3.a.-b., subsection (c) and Note filed 5-17-2007 pursuant to section 100, title 1, California Code of Regulations (Register 2007, No. 20).
19. Amendment of subsections (d)-(d)(2) filed 1-2-2008; operative 2-1-2008 (Register 2008, No. 1).
§1803. Application of Tax.
Note     •     History

(a) Sales Tax.
(1) In General. Except as stated below, in any case in which state sales tax is applicable, state-administered Bradley-Burns uniform local sales tax is also applicable, if the place of sale is in a county imposing a state-administered local tax. In any case in which state sales tax is inapplicable, state-administered local sales tax is also inapplicable. Thus, if title to the property sold passes to the purchaser at a point outside this state, state-administered local sales tax does not apply regardless of participation in the transaction by a California retailer. As explained in paragraphs (b) and (c), the use tax may apply. If so, the retailer is required to collect the use tax and pay it to the board.
Gross receipts from sales of tangible personal property subject to the local tax shall include delivery charges, when such charges are subject to the state sales or use tax.
(2) Exception. State-administered local sales tax does not apply to certain sales of tangible personal property to operators of aircraft to be used or consumed principally outside the county in which the sale is made if such property is to be used or consumed directly and exclusively in the use of the aircraft as common carriers of persons or property under the authority of the laws of the State of California, the United States, or any foreign government. On and after July 1, 1972, for county tax purposes this exemption is limited to 80 percent of the county tax.
(b) Use Tax. State-administered local use tax applies if the purchase is made from a retailer on or after the effective date of the local taxing ordinance and the property is purchased for use in a jurisdiction having a state-administered local tax and is actually used there, provided any one of the following conditions exist:
(1) Title to the property purchased passes to the purchaser at a point outside this state;
(2) The place of sale is in this state but not in a jurisdiction having a state-administered local tax;
(3) The place of sale is in a jurisdiction having a state-administered local tax and there is an exemption of the sale of the property from the sales tax but there is no exemption of the use of the property from the use tax;
(4) The property is purchased under a valid resale certificate.
State-administered local use tax does not apply to the storing, keeping, retaining, processing, fabricating or manufacturing of tangible personal property for subsequent use solely outside the state or for subsequent use solely in a county not imposing a local use tax.
(c) Collection of Use Tax by Retailers. Retailers engaged in business in this state and making sales of tangible personal property, the storage, use tax, are required to collect the tax from the purchaser. It is immaterial that the retailer might not be engaged in business in the particular county or city in which the purchaser uses the property.
Retailers who are not engaged in business in this state may apply for a certificate of Registration-Use Tax. Holders of such certificates are required to collect tax from purchasers, give receipts therefor, and pay tax to the board in the same manner as retailers engaged in business in this state.
As used in this regulation, the term “Certificate of Registration-Use Tax” shall include Certificate of Authority to Collect Use Tax issued prior to September 11, 1957.
(d) Leases. If a lease is continuing sale, or a continuing purchase, for the purposes of state tax, it shall be a continuing sale, or a continuing purchase, for the purpose of local tax. If a lease is neither a continuing sale nor a continuing purchase for the purposes of state tax, it shall be neither a continuing sale nor a continuing purchase for the purposes of local tax.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6008, 6009.1, 6203, 6352, 6385, 7202, 7203 and 7205, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former Section 2203 filed 1-26-70; effective thirtieth day thereafter (Register 70, No. 5).
2. Amendment of subsection (a) filed 5-19-72; effective thirtieth day thereafter (Register 72, No. 21).
3. Amendment of subsection (a) filed 12-19-73; effective thirtieth day thereafter (Register 73, No. 51).
4. Amendment of subsection (a)(2) and repealer of subsection (a)(2)(A) filed 5-16-88; operative 6-15-88 (Register 88, No. 21).
§1803.5. Long-Term Leases of Motor Vehicles.
Note     •     History

(a) PLACE OF USE. 
(1) With respect to the long-term lease of a new or used motor vehicle, the place of use for the reporting and transmittal of the local use tax shall be determined as follows. 
(A) If the lessor is a California new motor vehicle dealer or leasing company, the place of use of the leased new or used vehicle shall be deemed to be the participating jurisdiction in which is located the lessor's place of business at which the lease is negotiated (as determined under Regulation 1802). 
(B) If a lessor who is not a California new motor vehicle dealer or leasing company purchases the vehicle from a new motor vehicle dealer or leasing company, the place of use of the leased vehicle shall be deemed to be the participating jurisdiction in which is located the place of business of the new motor vehicle dealer or leasing company from which the lessor purchased the vehicle. 
(C) If a lessor who is not a California new motor vehicle dealer or leasing company purchases a new motor vehicle from a person other than a new motor vehicle dealer, or a used motor vehicle from any source, the place of use of the leased vehicle shall continue to be the participating jurisdiction in which the lessee resides and shall be distributed to that jurisdiction through the countywide pool of the county in which the jurisdiction is located. 
(2) The place of use as determined by subdivisions (a)(1)(A) and (a)(1)(B) shall be the place of use for the duration of the lease contract, notwithstanding the fact that the lessor may sell the vehicle and assign the lease contract to a third party or the lessee may change his or her place of residence. The fact that the lessor may sell the vehicle and assign the lease contract to a third party is also not relevant to the determination of the place of use under subdivision (a)(1)(C). 
(b) DEFINITIONS. 
(1) As used in this regulation, the term “motor vehicle” means a passenger vehicle (designed to carry no more than 10 persons, including the driver), such as an automobile, minivan, or sport-utility vehicle. The term also includes light-duty pickup trucks rated less than one (1) ton. The term does not include a house car. 
(2) Notwithstanding any other provision, as used in this regulation the term “long-term lease” means the lease of a motor vehicle for a term exceeding four months. 
(3) Notwithstanding any other provision, as used in this regulation the term “lessor” means a person who, for a term exceeding four months, leases or offers for lease, negotiates or attempts to negotiate a lease, or induce any person to lease a motor vehicle, and who receives or expects to receive a commission, money, brokerage fees, profit or any other thing of value from the lessee of that vehicle. 
(4) As used in this regulation, the term “dealer” means a person who, as defined under Vehicle Code section 285, is engaged wholly or in part in the business of selling motor vehicles or buying or taking in trade, motor vehicles for the purpose of resale, selling, or offering for sale, or consigned to be sold, or otherwise dealing in motor vehicles, whether or not such vehicles are owned by such person. The term “dealer” does not include a person who is solely engaged in the business of leasing. 
(5) As used in this regulation, the term “leasing company” is determined on a location-by-location basis. “Leasing company” means a location of a motor vehicle dealer who originates lease contracts with lessees and does not sell or assign such contracts, provided the annual lease receipts from leases of motor vehicles originated at that location are equal to or greater than $15 million, calculated for the previous calendar year. Once a location is a leasing company for purposes of this regulation, it remains a leasing company unless and until such status is expressly revoked in writing by the Board. 
(6) As used in this regulation, the term “new motor vehicle dealer” means a dealer as defined in subdivision (b)(4) who acquires for resale or lease new and unregistered motor vehicles from manufacturers or distributors of such motor vehicles. 
(7) The provisions of subdivision (a) do not apply to leases of motor vehicles that are considered mobile transportation equipment (MTE) under Regulation 1661, except for pickup trucks rated less than one (1) ton.  Although pickup trucks are still considered MTE, the local use tax revenues derived from qualifying leases of pickup trucks rated less than one (1) ton shall be reported pursuant to the terms of subdivision (a). 
(8) The “place of business” shall be determined under Regulation 1802. 
(c) If the lessor is located out of state and purchases the vehicle from a source other than one listed in subdivision (a)(1), the place of use of the vehicle shall remain the residence of the lessee, and the use tax revenue derived from such lease shall be distributed to that place through the countywide pool of the county in which the lessee resides. 
(d) The rules regarding local use tax distribution set forth in subdivision (a)(1) shall be applied each time a motor vehicle is leased for a long term, as defined in this regulation. As a result, when a lease is terminated and the vehicle is acquired by a new lessee, the local use tax revenue derived from that transaction shall be distributed to the participating jurisdiction entitled thereto under the facts and circumstances of that lease. Where, however, the lease is structured as a series of short-term leases but is in fact a long-term lease, as shown by the course of performance of the parties (for example, same lessor, same lessee, same lease terms), the local use tax revenues derived therefrom shall be distributed to the same participating jurisdiction throughout the duration of the transaction. For example, government agencies frequently structure their long-term leases as a series of one-year leases due to funding restrictions. In that case, the agency shall be treated as bound for the full term notwithstanding any right it may have to terminate the contract in the event that sufficient funds are not appropriated to pay amounts due under the contract. 
(e) OPERATIVE DATES. The provisions of this regulation applicable to leases by and purchases for lease from a California new motor vehicle dealer shall apply to lease transactions entered into on or after January 1, 1996. The provisions of this regulation applicable to leases by and purchases for lease from a leasing company shall apply to lease transactions entered into on or after January 1, 1999. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 7205.1, Revenue and Taxation Code.
HISTORY

1. New section filed 6-26-2003; operative 7-26-2003 (Register 2003, No. 26).
§1804. Public Utilities. [Repealed]
History

HISTORY

1. Repealer filed 12-19-73; effective thirtieth day thereafter (Register 73, No. 51). For prior history, see Register 72, No. 21.
§1805. Aircraft Common Carriers.
Note     •     History

(a) Definition--“Common Carriers.” As used herein, the term “common carriers” means persons who engage in the business of transporting persons or property for hire or compensation and who offer their services indiscriminately to the public or to some portion of the public.
(b) Aircraft Common Carriers.
(1) The state-administered Bradley-Burns local sales tax does not apply to sales of tangible personal property to operators of aircraft to be used or consumed principally outside the county in which the sale is made if such property is used or consumed directly and exclusively in the use of such aircraft as common carriers of persons or property under the laws of this state, the United States, or any foreign government. Tax applies, however, to sales of fuel and petroleum products on and after July 29, 1991. Exemption rates and their effective dates are provided in the Appendix.
(2) The state-administered Bradley-Burns local use tax does not apply to the storage, use, or other consumption of tangible personal property purchased by operators of aircraft when such property is used or consumed by such operators directly and  exclusively in the use of such aircraft as common carriers of persons or property for hire or compensation under a certificate of public convenience and necessity issued pursuant to the laws of this state, the United States, or any foreign government. Effective July 29, 1991, this exemption is not available for the storage, use, or other consumption of fuel and petroleum products. This exemption is in addition to that provided in sections 6366 and 6366.1 of the Revenue and Taxation Code.
(c) Conditions of Exemption. The exemption for operators of aircraft common carriers applies only if the property is used directly and exclusively in the exempt activity. This exemption is limited to supplies and equipment (excluding fuel and petroleum products effective July 29, 1991) used or consumed directly in the carriage of persons or property. It does not include office or shop equipment or supplies or any other property not directly used or consumed in the carriage of persons or property.
(d) Leases. If property is leased to an operator of an aircraft common carrier under a lease which is a continuing sale or a continuing purchase, unless otherwise exempted, either the use tax or sales tax applies to the gross receipts from the lease during such period of time that the property is in a taxing jurisdiction.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 7202, 7203 and 7203.1, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (c) filed 2-28-80; effective thirtieth day thereafter (Register 80, No. 9). For prior history, see Register 75, No. 44.
2. Amendment filed 10-14-83; effective thirtieth day thereafter (Register 83, No. 42).
3. Amendment of subsection (b) filed 4-16-85; effective thirtieth day thereafter (Register 85, No. 16).
4. Amendment of subsections (b) and (c) and Appendix filed 5-16-88; operative 6-15-88 (Register 88, No. 21).
5. Change without regulatory effect of Appendix pursuant to section 100, title 1, California Code of Regulations filed 7-26-88 (Register 88, No. 32).
6. New subsections (b)-(b)(2) and relettering, amendment of subsection (c) and form in Appendix filed 12-21-92; operative 1-20-93 (Register 92, No. 52).
7. Change without regulatory effect amending subsection (b)(1), Note and Appendix filed 1-12-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 2).

Appendix

Form of Exemption Certificate for Claiming Exemption
Under Regulations 1805 and 1825.
(a) Certificate Necessary to Support Exemption. All purchasers of tangible personal property claiming exemption from Bradley-Burns local taxes under the provisions of Regulation 1805 or from both Bradley-Burns local taxes and district transactions (sales) and use taxes under Regulation 1825 should file with the seller an exemption certificate in the form shown below. On and after July 1, 1972, for purposes of the Bradley-Burns local taxes, this exemption is limited to 80 percent of the 1.25 percent local tax (i.e., 1%); and, on and after July 1, 2004, until the rate modifications in subdivision (a) of Revenue and Taxation Code section 7203.1 cease to apply, this exemption is limited to 75 percent of the 1 percent local tax (i.e., .75%).
(b) Form of Certificate. Aircraft Common Carrier. The following certificate may be used by a purchaser claiming exemption under Regulation 1825 from district transactions (sales) and use taxes, and/or claiming partial exemption under Regulation 1805 from Bradley-Burns local taxes which: On or before June 30, 2004 is 1 percent; and, on and after July 1, 2004, until the rate modifications in subdivision (a) of Revenue and Taxation Code section 7203.1 cease to apply, is .75 percent:

View Graphic
§1806. Construction Contractors.
Note     •     History

(a) In General. All of the provisions of the state Sales and Use Tax Law and regulations adopted thereunder relating to construction contractors (other than those relating to the rate of tax) are applicable to state-administered local sales and use taxes.
(b) Jobsite Is Place of Business. The jobsite is regarded as a place of business of a construction contractor or subcontractor and is the place of sale of ”fixtures“ furnished and installed by contractors or subcontractors. The place of use of ``materials'' is the jobsite. Accordingly, if the jobsite is in a county having a state-administered local tax, the sales tax applies to the sale of the fixtures, and the use tax applies to the use of the materials unless purchased in a county having a state-administered local tax and not purchased under a resale certificate. If the jobsite is in a county without a state-administered local tax, state-administered local sales tax will not apply to the sale of the fixtures even though the contractor's principal place of business is in a county with such a tax.
If fixtures are purchased by a contractor tax paid in a county having a state-administered local tax, the contractor, upon installing the fixtures in a county without such a tax, is entitled to a credit for the local tax of the place of purchase.
The place of sale or purchase of a factory-built school building (relocatable classroom) as defined in paragraph (c)(4)(B) of Regulation 1521 (18 CCR 1521), Construction Contractors, is the place of business of the retailer of the factory-built school building regardless of whether sale of the building includes installation or whether the building is placed upon a permanent foundation.
(c) United States Contractors. United States contractors are consumers of both materials and fixtures, and the place of use of both is the jobsite. Accordingly, if the jobsite is in a county having a state-administered local tax, the use tax applies to the use of the materials and fixtures unless purchased in a county having a state-administered local tax and not purchased under a resale certificate.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006-6010, inclusive, 6012.6, 6015, 6384, 7202 and 7203, Revenue and Taxation Code.
HISTORY

1. Amendment and renumbering of former section 2206 filed 1-26-70; effective thirtieth day thereafter (Register 70, No. 5).
2. Amendment of subsection (a) filed 12-19-73; effective thirtieth day thereafter (Register 73, No. 51).
3. Amendment of subsection (b) and NOTE filed 7-19-91; effective 8-19-91 (Register 91, No. 46).
§1807. Petitions for Reallocation of Local Tax.
Note     •     History

(a) Definitions. 
(1) Local Tax. “Local tax” means a local sales and use tax adopted pursuant to Revenue and Taxation Code section 7200, et seq., and administered by the Board. 
(2) Jurisdiction. “Jurisdiction” means any city, county, city and county, or redevelopment agency which has adopted a local tax. 
(3) Petition. “Petition” means a request or inquiry from a jurisdiction, other than a submission under Revenue and Taxation Code section 6066.3, for investigation of suspected misallocation of local tax submitted in writing to the Allocation Group of the Sales and Use Tax Department. The petition must contain sufficient factual data to support the probability that local tax has been erroneously allocated and distributed. Sufficient factual data should include, for each business location being questioned: 
(A) Taxpayer name, including owner name and fictitious business name or dba (doing business as) designation. 
(B) Taxpayer's permit number or a notation stating “No Permit Number.” 
(C) Complete business address of the taxpayer. 
(D) Complete description of taxpayer's business activity or activities. 
(E) Specific reasons and evidence why the taxpayer's allocation is questioned. If the petition alleges that a misallocation occurred because a sale location is unregistered, evidence that the questioned location is a selling location or that it is a place of business as defined by California Code of Regulations, title 18, section 1802. If the petition alleges that a misallocation occurred because the tax for a sale shipped from an out-of-state location was actually sales tax and not use tax, evidence that there was participation in the sale by an in-state office of the retailer and that title to the goods passed to the purchaser inside California. 
(F) Name, title, and telephone number of the contact person. 
(G) The tax reporting periods involved. 
“Petition” also includes an appeal by a jurisdiction from a notification from the Local Revenue Allocation Unit of the Sales and Use Tax Department that local taxes previously allocated to it were misallocated and will be reallocated. Such a jurisdiction may object to that notification by submitting a written petition to the Allocation Group within 30 days of the date of mailing of the notification or within a period of extension described below. The petition must include a copy of the notification and specify the reason the jurisdiction disputes it. If a jurisdiction does not submit such a petition within 30 days of the date of mailing of the notification, or within a period of extension, the notification of the Local Revenue Allocation Unit is final as to the jurisdiction so notified. 
The jurisdiction may request a 30-day extension to submit a written objection to a notification of misallocation from the Local Revenue Allocation Unit. Such request must provide a reasonable explanation for the requesting jurisdiction's inability to submit its objection within 30 days and must be received by the Local Revenue Allocation Unit within 30 days of the date of mailing of its notification. Within five days of receipt of the request, the Local Revenue Allocation Unit will mail notification to the jurisdiction whether the request is granted or denied. If a timely request for an extension is submitted, the time for the jurisdiction to file a written objection is extended to 10 days after the mailing of the notice of whether the request is granted or denied. If the request is granted, the time for the jurisdiction to submit a written objection to the notification of the Local Revenue Allocation Unit is further extended to the 60th day after the date of mailing of the notification of misallocation. 
(4) Petitioner. “Petitioner” is a jurisdiction that has filed a valid petition pursuant to subdivision (a)(3). 
(5) Date of Knowledge. Unless an earlier date is operationally documented by the Board, “date of knowledge” is the date on which the Allocation Group receives a valid petition. Where a misallocation that is reasonably covered by the petition is confirmed based on additional facts or evidence supplied by the petitioner or otherwise learned as a direct result of investigating the petition, the date of knowledge is the date on which the Allocation Group received the petition. 
(6) Substantially Affected Jurisdiction. “Substantially affected jurisdiction” is a jurisdiction for which the decision on a petition would result in a decrease to its total allocation of 5 percent or more of its average quarterly allocation (generally determined with reference to the prior four calendar quarters) or of $50,000 or more, and includes a jurisdiction whose allocation will be decreased solely as the result of a reallocation from the statewide and applicable countywide pools. 
(7) Notified Jurisdiction. “Notified jurisdiction” is a jurisdiction that has been notified as a substantially affected jurisdiction. 
(b) Review by Sales and Use Tax Department. 
(1) The Allocation Group will promptly acknowledge a submission intended as a petition. If the submission does not contain the elements identified in subdivision (a)(3), the original submission will be returned to the submitting jurisdiction. The jurisdiction will have 30 days from the date of the correspondence from the Allocation Group requesting the missing information to make a supplemental submission. If the supplemental submission contains the necessary elements identified in subdivision (a)(3), then the date of receipt of the original submission will be regarded as the date of knowledge. In the event that a submission is not perfected within this 30 day period, it will not qualify as a valid petition. 
(2) The Sales and Use Tax Department will review the petition and issue to the petitioner a written decision to grant or deny the petition, including the basis for that decision. The written decision will also note the date of knowledge, and if other than the date the petition was received, will include the basis for that date. A reallocation will be made if the preponderance of evidence, whether provided by petitioner or obtained by Board staff as part of its investigation of the petition, shows that there was a misallocation. If the preponderance of evidence does not show that a misallocation occurred, the petition will be denied. 
(3) If the Sales and Use Tax Department does not issue a decision within six months of the date it receives a valid petition, the petitioner may request that the Sales and Use Tax Department issue its decision without regard to the status of its investigation. Within 90 days of receiving such a request, the Sales and Use Tax Department will issue its decision based on the information in its possession. 
(4) If the decision of the Sales and Use Tax Department is that the asserted misallocation did not occur and that the petition should be denied, in whole or in part, the petitioner may submit to the Allocation Group a written objection to the decision under subdivision (b)(6). 
(5) If the decision of the Sales and Use Tax Department is that a misallocation did occur, it will also mail a copy of its decision to any substantially affected jurisdiction. Any such notified jurisdiction may submit to the Allocation Group a written objection to the decision under subdivision (b)(6). 
(6) The petitioner or any notified jurisdiction may appeal the decision of the Sales and Use Tax Department by submitting a written objection to the Allocation Group within 30 days of the date of mailing of the Sales and Use Tax Department's decision, or within a period of extension authorized by subdivision (b)(10). If no such timely objection is submitted, the decision of the Sales and Use Tax Department is final as to the petitioner and all notified jurisdictions. 
(7) If the petitioner or a notified jurisdiction submits a timely written objection to the decision of the Sales and Use Tax Department, the Sales and Use Tax Department will consider the objection and issue a written supplemental decision to grant or deny the objection, including the basis for that decision. A copy of the supplemental decision will be mailed to the petitioner, to any notified jurisdiction, and to any other jurisdiction that is substantially affected by the supplemental decision. 
(8) If the Sales and Use Tax Department does not issue a supplemental decision within three months of the date it receives a written timely objection to the decision of the Sales and Use Tax Department, the petitioner or any notified jurisdiction may request that the Sales and Use Tax Department issue its supplemental decision without regard to the status of its investigation. Within 60 days of receiving such a request, the Sales and Use Tax Department will issue its supplemental decision based on the information in its possession. 
(9) The petitioner or any notified jurisdiction may appeal the supplemental decision of the Sales and Use Tax Department by submitting a written objection under subdivision (c)(1) within 30 days of the date of mailing of that supplemental decision, or within a period of extension authorized by subdivision (b)(10). If no such timely objection is submitted, the supplemental decision of the Sales and Use Tax Department is final as to the petitioner and all notified jurisdictions. 
(10) The petitioner or any notified jurisdiction may request a 30-day extension to submit a written objection under subdivision (b)(6) or under subdivision (b)(9), as applicable. Such request must provide a reasonable explanation for the requesting jurisdiction's inability to submit its objection within 30 days, must be copied to all other jurisdictions to whom the Sales and Use Tax Department mailed a copy of its decision or supplemental decision (to the extent known by the requesting jurisdiction), and must be received by the Allocation Group within 30 days of the date of mailing of the Sales and Use Tax Department's decision or supplemental decision. Within five days of receipt of the request, the Sales and Use Tax Department will mail notification to the petitioner and to all notified jurisdictions whether the request is granted or denied. If a timely request for an extension is submitted, the time for the petitioner and any notified jurisdiction to file a written objection to the decision or supplemental decision of the Sales and Use Tax Department is extended to 10 days after the mailing of the notice of whether the request is granted or denied. If the request is granted, the time for the petitioner and all notified jurisdictions to submit a written objection to the decision or supplemental decision of the Sales and Use Tax Department is further extended to the 60th day after the date of mailing of the decision or supplemental decision. 
(c) Review by Appeals Division. 
(1) The petitioner or any notified jurisdiction may appeal the supplemental decision of the Sales and Use Tax Department by submitting a written objection to the Allocation Group within 30 days of the date of mailing of the Sales and Use Tax Department's supplemental decision, or within a period of extension authorized by subdivision (b)(10). Such an objection must state the basis for the objecting jurisdiction's disagreement with the supplemental decision and include all additional information in its possession that supports its position. 
(2) If a timely objection to Sales and Use Tax Department's supplemental decision is submitted, the Allocation Group will, within 30 days of receipt of the objection, prepare the file and forward it to the Appeals Division. The petitioner, all notified jurisdictions, any other jurisdiction that would be substantially affected if the petition were granted, and the Sales and Use Tax Department will thereafter be mailed notice of the appeals conference, which will generally be sent at least 45 days prior to the scheduled date of the conference. 
(A) Petitioner or any notified jurisdiction may continue to discuss the dispute with staff of the Sales and Use Tax Department after the dispute is referred to the Appeals Division. If, as a result of such discussions or otherwise, the Sales and Use Tax Department decides the supplemental decision was incorrect or that further investigation should be pursued, it shall so notify the Appeals Division, the petitioner, and all notified jurisdictions. 
(B) If the Sales and Use Tax Department sends notice to the Appeals Division in accordance with the subdivision (c)(2)(A) no later than 30 days prior to the date scheduled for the appeals conference, the Appeals Division will suspend its review and the dispute will be returned to the Sales and Use Tax Department. The Sales and Use Tax Department will thereafter issue a second supplemental decision, or will return the dispute to the Appeals Division along with a report of its further investigation, if appropriate, for the review and decision of the Appeals Division. 
(C) If the Sales and Use Tax Department sends notice to the Appeals Division in accordance with subdivision (c)(2)(A) less than 30 days prior to the date scheduled for the appeals conference, the Appeals Division will decide whether the dispute should be returned to the Sales and Use Tax Department or remain with the Appeals Division, and notify the parties accordingly. If the dispute is returned to the Sales and Use Tax Department, the Sales and Use Tax Department will thereafter issue a second supplemental decision, or will return the dispute to the Appeals Division along with a report of its further investigation, if appropriate, for the review and decision of the Appeals Division. 
(D) Where the Sales and Use Tax Department issues a second supplemental decision in accordance with subdivision (c)(2)(B) or (c)(2)(C), it will send a copy of the decision to the petitioner, any notified jurisdiction, and any other jurisdiction that is substantially affected by the second supplemental decision, any of whom may appeal the second supplemental decision by submitting a written objection under subdivision (c)(1) within 30 days of the date of mailing of that supplemental decision, or within a period of extension authorized by subdivision (b)(10). If no such timely objection is submitted, the second supplemental decision is final as to the petitioner and all notified jurisdictions. 
(3) The appeals conference is not an adversarial proceeding, but rather is an informal discussion where the petitioner, any notified jurisdictions who wish to participate, and the Sales and Use Tax Department have the opportunity to explain their respective positions regarding the relevant facts and law to the Appeals Division conference holder. To make the conference most productive, each participant should submit all facts, law, argument, and other information in support of its position to the Appeals Division conference holder, and to the other participants, at least 15 days before the date of the appeals conference; however, relevant facts and arguments will be accepted at any time at or before the appeals conference. If, during the appeals conference, a participant requests permission to submit additional written arguments and documentary evidence, the conference holder may grant that participant 30 days after the appeals conference to submit to the conference holder, with copies to all other participants, such additional arguments and evidence. Any other participant at the conference who is in opposition to the requesting participant on the issue(s) covered by the additional submission is allowed 30 days to submit to the conference holder, with copies to all other participants, arguments and evidence in response. No request by a participant for further time to submit additional arguments or evidence will be granted without the approval of the Assistant Chief Counsel of the Appeals Division or his or her designee. The Appeals Division on its own initiative may also request, at or after the appeals conference, further submissions from any participant. 
(4) Within 90 days after the final submission authorized by subdivision (c)(3), the Appeals Division will issue a written Decision and Recommendation (D&R) setting forth the applicable facts and law and the conclusions of the Appeals Division. The Chief Counsel may allow up to 90 additional days to prepare the D&R upon request of the Appeals Division. Both the request and the Chief Counsel's response granting or denying the request for additional time must be in writing and copies provided to the petitioner, all notified jurisdictions, and the Sales and Use Tax Department. A copy of the D&R will be mailed to the petitioner, to all notified jurisdictions, to any other jurisdiction that will be substantially affected by the D&R, and to the Sales and Use Tax Department. 
(5) The petitioner or any notified jurisdiction may appeal the D&R by submitting a written request for Board hearing under subdivision (d)(1) within 60 days of the date of mailing of the D&R. 
(6) The petitioner, any notified jurisdiction, or the Sales and Use Tax Department may also appeal the D&R, or any Supplemental D&R (SD&R), by submitting a written request for reconsideration (RFR) to the Appeals Division before expiration of the time during which a timely request for Board hearing may be submitted, or if a Board hearing has been requested, prior to that hearing. If a jurisdiction or the Sales and Use Tax Department submits an RFR before the time for requesting a Board hearing has expired, the Appeals Division will issue an SD&R to consider the request, after obtaining whatever additional information or arguments from the parties that it deems appropriate. If an RFR is submitted after a jurisdiction has requested a Board hearing, the Appeals Division will determine whether it should issue an SD&R in response. A copy of the SD&R issued under this subdivision or under subdivision (c)(7) will be mailed to the petitioner, to all notified jurisdictions, to any other jurisdiction that will be substantially affected by the SD&R, and to the Sales and Use Tax Department. The petitioner or any notified jurisdiction may appeal the SD&R by submitting a written request for Board hearing under subdivision (d)(1) within 60 days of the date of mailing of the SD&R. 
(7) Whether or not an RFR is submitted, at any time prior to the time the recommendation in the D&R or prior SD&R is acted on by the Sales and Use Tax Department as a final matter or the Board has held an oral hearing on the petition, the Appeals Division may issue an SD&R as it deems necessary to augment, clarify, or correct the information, analysis, or conclusions contained in the D&R or any prior SD&R. 
(8) If no RFR is submitted under subdivision (c)(6) or request for Board hearing under subdivision (d)(1) within 60 days of the date of mailing of the D&R or any SD&R, the D&R or SD&R as applicable is final as to the petitioner and all notified jurisdictions unless the Appeals Division issues an SD&R under subdivision (c)(7). 
(d) Review by Board. 
(1) The petitioner or any notified jurisdiction may submit a written request for Board hearing if it does so to the Board Proceedings Division within 60 days of the date of mailing of the D&R or any SD&R. Such a request must state the basis for the jurisdiction's disagreement with the D&R or SD&R as applicable and include all additional information in its possession that supports its position. 
(2) If the Board Proceedings Division receives a timely request for hearing under subdivision (d)(1), it will notify the Sales and Use Tax Department, the petitioner, any notified jurisdiction, any other jurisdiction that would be substantially affected if the petition were granted, and the taxpayer(s) whose allocations are the subject of the petition, that the petition for reallocation of local tax is being scheduled for a Board hearing to determine the proper allocation. 
(3) The Sales and Use Tax Department, the petitioner, and all jurisdictions notified of the Board hearing pursuant to subdivision (d)(2) are parties and may participate in the Board hearing. The taxpayer is not a party to the Board hearing unless it chooses to actively participate in the hearing process by either filing a brief or making a presentation at the hearing. 
(4) Briefs may be submitted for the Board hearing in accordance with California Code of Regulations, title 18, sections 5270 and 5271. 
(5) To the extent not inconsistent with this regulation, the hearing will be conducted in accordance with Chapter 5 of the Board of Equalization Rules for Tax Appeals (Cal. Code Regs., tit. 18, §5510, et seq.). The Board will apply the preponderance of evidence rules set forth in subdivision (b)(2) in reaching its decision and not the burden of proof rules set forth in California Code of Regulations, title 18, section 5541. The Board's final decision on a petition for reallocation exhausts all administrative remedies on the matter for all jurisdictions. 
(e) Limitation Period for Redistributions. Redistributions shall not include amounts originally distributed earlier than two quarterly periods prior to the quarter of the date of knowledge. 
(f) Application to Section 6066.3 Inquiries. 
The procedures set forth herein for submitting a petition for reallocation of local tax are separate from those applicable to a submission under Revenue and Taxation Code section 6066.3. If a petition under the procedures set forth herein and a submission under section 6066.3 are both filed for the same alleged improper distribution, only the earliest submission will be processed, with the date of knowledge established under the procedures applicable to that earliest submission. However, the procedures set forth in subdivisions (b), (c), and (d) also apply to appeals from reallocation determinations made under section 6066.3. 
(g) Operative Date and Transition Rules. 
This regulation is intended to reduce the time required to decide the validity of reallocation petitions and otherwise improve the process for doing so. Regulation 1807 was repealed and readopted in 2008. The readopted regulation is intended to have a neutral impact only on the current dispute over the continuing validity of certain petitions that were governed by prior Regulation 1807 (effective February 22, 2003). 
(1) The operative date of this regulation as readopted in 2008 and any amendments thereto is the effective date under Section 11343.4 of the Government Code (thirty days after approval by the Office of Administrative Law and forwarding to the Secretary of State) and there shall be no retroactive effect. 
(2) Notwithstanding subdivision (g)(3), petitions shall be reviewed, appealed and decided in accordance with this regulation as to procedures occurring after its operative date or that of any amendments thereto. 
(3) All petitions filed prior to January 1, 2003 and denied by Board Management must have perfected any access they may have had to a Board Member hearing no later than 60 days after the September 10, 2008, operative date of this regulation. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 7209 and 7223, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 1-1-2003 pursuant to Revenue and Taxation Code section 7051 (Register 2003, No. 4). 
2. Repealer and new section filed 8-11-2008; operative 9-10-2008 (Register 2008, No. 33).
3. Amendment of subsections (a)(3)(G) and (b)-(b)(7), new subsection (b)(8), subsection renumbering, amendment of newly designated subsections (b)(9)-(10) and subsections (c)(1)-(3), (c)(7) and (g)-(g)(2) and new subsection (g)(3) filed 2-7-2012; operative 3-8-2012 (Register 2012, No. 6).
Article 20. Transactions (Sales)  and Use Taxes
§1821. Foreword.
Note     •     History

Transactions (sales) and use taxes imposed by certain special taxing districts are administered by the State Board of Equalization. These taxes incorporate most of the provisions of the state Sales and Use Tax Law and generally have the same tax base as the Bradley-Burns uniform local sales and use taxes adopted in accordance with the provisions of Part 1.5 of Division 2 of the Revenue and Taxation Code.
The primary differences between the transactions (sales) and use taxes and the state and Bradley-Burns uniform local sales and use taxes are:
(1) The transactions (sales) tax of a district is not applicable to the gross receipts from the sale or lease of tangible personal property which the seller or the lessor is obligated to furnish for a fixed price pursuant to a contract entered into prior to the operative date of the district transactions (sales) and use taxes ordinance.
(2) The transactions (sales) tax does not apply to gross receipts from the sale of property to be used outside the district when the property is shipped to a point outside the district, pursuant to the contract of sale, by delivery to such point by the retailer or his agent, or by delivery by the retailer to a carrier for shipment to a consignee at such point. If thereafter the purchaser brings the property into the district for use there and uses it there, the district use tax may apply and the purchaser may be required to pay that tax.
(3) The use tax of a district is not applicable to the storage, use or other consumption in the district of tangible personal property which the purchaser or lessee is obligated to purchase or lease for a fixed price pursuant to a contract or lease entered into prior to the operative date of the district transactions (sales) and use tax ordinance.
(4) The district use tax must be collected by retailers engaged in business in the district and paid to the board when the retailer ships or delivers the property sold into the district or participates within the district in making the sale. The state and Bradley-Burns uniform local use tax must be collected by retailers engaged in business in this state.
(5) Beginning January 1, 1988, retailers of vehicles, aircraft, or undocumented vessels described in paragraph (c)(4) of Regulation 1827 (18 CCR 1827) are engaged in business in a district imposing a state- administered transactions use tax and are required to collect the use tax from the purchaser and pay it to the board when such vehicles, aircraft or undocumented vessels are registered or licensed in that district.
The district use tax applies to the storage, use or other consumption in the district of tangible personal property purchased after the operative date of the ordinance for storage, use or other consumption in the district.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 7251-7273, Revenue and Taxation Code.
HISTORY

1. Amendment filed 12-19-73; effective thirtieth day thereafter (Register 73, No. 51). For prior history, see Register 70, No. 19.
2. Amendment of subsection (b) filed 6-25-76; effective thirtieth day thereafter (Register 76, No. 26).
3. New subsection (b)(3) filed 12-29-78; effective thirtieth day thereafter. Pursuant to Section 7051, Revenue and Taxation Code, order establishes an operative date of 1-1-79 (Register 78, No. 52).
4. Amendment filed 10-14-83; effective thirtieth day thereafter (Register 83, No. 43).
5. Amendment of section filed 7-12-91; operative 8-12-91 (Register 91, No. 43).
§1822. Place of Sale for Purposes of Transactions (Sales) and Use Taxes.
Note     •     History

(a) In General.
(1) Retailers Having One Place of Business. For the purposes of the Transactions (Sales) and Use Tax Law, if a retailer has only one place of business in this state, all California retail sales of that retailer occur at that place of business unless the tangible personal property sold is delivered by the retailer or his agent or her to an out-of-state destination, or to a common carrier for delivery to an out-of-state destination.
(2) Retailers Having More Than One Place of Business. If a retailer has more than one place of business in this state which participate in the sale, the sale occurs at the place of business where the principal negotiations are carried on. If this place is the place where the order is taken, it is immaterial that the order must be forwarded elsewhere for acceptance, approval of credit, shipment, or billing. For the purposes of this regulation, an employee's activities will be attributed to the place of business out of which he or she works.
(3) Place of Passage of Title Immaterial. If title to the tangible personal property sold passes to the purchaser in California, it is immaterial that title passes to the purchaser outside the taxing jurisdiction in which the retailer's place of business is located.
(b) Place of Sale in Specific Instances.
(1) Vending Machine Operators. The place of sale is the place at which the vending machine is located. If an operator purchases property under a resale certificate or from an out-of-district seller without payment of tax and the operator is the consumer of the property, for purposes of the use tax, the use occurs at the place where the vending machine is located.
(2) Itinerant Merchants. The place of sale with respect to sales made by sellers who have no permanent place of business and who sell from door to door for their own account shall be deemed to be at the location of the seller's permanent address as shown on the seller's permit issued to him or her. If this address is in a district imposing transactions (sales) and use taxes, the district transactions (sales) tax applies with respect to all sales unless otherwise exempt (i.e., when the property sold is shipped or delivered to a purchaser outside the district for use outside the district). If the address is outside such a district but the merchant solicits orders in a district imposing transactions (sales) and use taxes, he or she must collect the district use tax with respect to property sold and delivered or shipped to customers in the district.
(3) Retailers Under Section 6015. Persons regarded as retailers under Section 6015(b) are regarded as selling tangible personal property through salesmen, representatives, peddlers, canvassers, or agents who operate under or obtain the property from them. The place of sale is the place from which the salesperson, representative, peddler, canvasser, or agent who makes the sale operates. If this place is in a district imposing transactions (sales) and use taxes, the district transactions (sales) tax applies to all retail sales unless otherwise exempt (i.e., when property is shipped or delivered to a purchaser outside the district for use outside the district). If this place of business is outside such a district, but if any salesperson or representative solicits orders in a district imposing transactions (sales) and use taxes, the district use tax applies and must be collected with respect to property sold and delivered or shipped to customers in the district.
(4) Auctioneers. The place of sale by an auctioneer is the place at which the auction is held.
(5) Out-of-State Retailers Who Maintain a Stock of Tangible Personal Property in California. If an out-of-state retailer does not have a place of business in this state other than a stock of tangible personal property, the place of sale is the location of the stock of property from which delivery or shipment is made.
(6) Factory-Built School Buildings. The place of sale or purchase of a factory-built school building (relocatable classroom) as defined in paragraph (c)(4)(B) of Regulation 1521 (18 CCR 1521), “Construction Contractors”, is the place of business of the retailer of the factory-built school building regardless of whether sale of the building includes installation or whether the building is placed upon a permanent foundation.
NOTE

Authority cited: Sections 7051 and 7263, Revenue and Taxation Code. Reference: Sections 6012.6, 6015, 6359, 6359.45 and 7263, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (b) filed 9-19-83 as an emergency; designated effective 8-1-83 (Register 83, No. 40). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 11-29-83.
2. Reinstatement of subsection (b) as it existed prior to emergency amendment filed 9-19-83 by operation of Government Code Section 11346.1(f) (Register 84, No. 27).
3. Amendment of subsection (b)(1) filed 8-13-84; effective thirtieth day thereafter (Register 84, No. 33).
4. New subsection (b)(6) filed 7-19-91; operative 8-19-91 (Register 91, No. 45).
5. Amendment of subsections (a)(1)-(2), (b)(2)-(3) and (b)(6) filed 6-1-92; operative 7-1-92 (Register 92, No. 23).
§1823. Application of Transactions (Sales) Tax and Use Tax.
Note     •     History

(a) Transactions (Sales) Tax.
(1) In General. Except as stated below, in any case in which state sales tax is applicable, state-administered transactions (sales) tax is also applicable, if the place of sale is in a district imposing such a tax. In any case in which state sales tax is inapplicable, state-administered transactions (sales) tax is also inapplicable. Thus, if title to the property sold passes to the purchaser at a point outside this state, state-administered transactions (sales) tax does not apply regardless of participation in the transaction by a California retailer. As explained in paragraph (b), the use tax may apply. If so and if the retailer is engaged in business in the taxing jurisdiction, he is required to collect the use tax and pay it to the board when the retailer ships or delivers the property sold into the district or participates within the district in making the sale. Additionally, on and after January 1, 1988, any retailer of vehicles subject to registration pursuant to Chapter 1 (commencing with Section 4000) of Division 3 of the Vehicle Code, aircraft licensed in compliance with Section 21411 of the Public Utilities Code, or undocumented vessels registered under Division 3.5 (commencing with Section 9840) of the Vehicle Code, is a retailer engaged in business in any district where a transactions (sales) and use tax is imposed and is required to collect the use tax from the purchaser and pay it to the board when the vehicle, aircraft or undocumented vessel is registered or licensed in that district.
Gross receipts from sales of tangible personal property subject to the transactions (sales) tax shall include delivery charges, when such charges are subject to the state sales or use tax.
(2) Exceptions. State-administered transactions (sales) tax does not apply to gross receipts from sales of tangible personal property:
(A) To certain operators of aircraft common carriers to be used or consumed directly and exclusively in the operation of such aircraft common carriers and principally outside the county of sale;
(B) To be used outside the district when the property sold is shipped to a point outside the district pursuant to the contract of sale, by delivery to such point by the retailer or his agent, or by delivery by the retailer to a carrier for shipment to a consignee at such point. If the purchaser uses the property in a district imposing transactions (sales) and use taxes, the use tax may apply;
(C) If the seller is obligated to furnish the property for a fixed price pursuant to a contract entered into prior to the operative date of the ordinance imposing the transactions (sales) and use taxes; or
(D) Which are continuing sales of such property under a lease of such property, if the lessor is obligated to lease the property for an amount fixed by the lease prior to the operative date of the ordinance imposing the transactions (sales) and use taxes.
(b) Use Tax.
(1) In General. State-administered district use tax applies if tangible personal property is purchased from a retailer on or after the operative date of the district taxing ordinance and the property is purchased for use in the district and is actually used there, provided any one of the following conditions exist:
(A) Title to the property purchased passes to the purchaser at a point outside this state;
(B) The place of sale is in this state but not in a district having state-administered transactions (sales) and use taxes;
(C) The place of sale is in a district having state-administered transactions (sales) and use taxes and there is an exemption of the sale of the property from the transactions (sales) tax but there is no exemption of the use of the property from the use tax;
(D) The property is purchased under a valid resale certificate; or
(E) The place of sale is in a district having state-administered transaction (sales) and use taxes, but at a rate lower than the rate (or combined rate) in effect in the district (or districts) in which the property is purchased for use and actually used. The person liable for the use tax is entitled to a credit against the use tax liability equal to but not exceeding the transactions (sales) tax or transactions tax reimbursement paid to a district or to a retailer in the district where the sale occurred. If the taxable use occurs in two or more districts whose boundaries are overlapping or coextensive, the amount of the credit shall be applied as follows: first, against the use tax liability imposed in the district having the earliest enacted state-administered transactions (sales) and use tax ordinance; second, against the use tax liability imposed in the district having the next earliest state-administered transactions (sales) and use tax ordinance; and so forth, until the amount of the credit is exhausted.
(2) Exceptions. State-administered district use tax does not apply to:
(A) The storing, keeping, retaining, processing, fabricating or manufacturing of tangible personal property for subsequent use solely outside the state or for subsequent use solely outside any district imposing a use tax;
(B) The storage, use or other consumption of tangible personal property, the gross receipts from the sale of which have been subject to a transactions (sales) tax by the district in which the tangible personal property is stored, used, or consumed;
(C) The storage, use or other consumption of tangible personal property by certain operators of aircraft common carriers;
(D) The storage, use or other consumption of tangible personal property if the purchaser is obligated to purchase the property for a fixed price pursuant to a contract entered into prior to the operative date of the ordinance; or
(E) The possession of, or the exercise of any right or power over, tangible personal property under a lease which is a continuing purchase of such property for any period of time for which the lessee is obligated to lease the property for an amount fixed by a lease prior to the operative date of the ordinance.
(c) Leases. When a lease is a continuing sale or a continuing purchase, the use tax, rather than the sales tax, applies unless the lease is to the United States or an agency or instrumentality thereof, insurance company, federally chartered bank exempt from direct state taxation by federal law (such as a federal reserve bank, or federal home loan bank),1 or other lessee exempted from use tax, and the lessor is required to collect the use tax with respect to rentals collected while the property is in the district. If the lessee is exempted from use tax, the sales tax may apply. In the absence of evidence to the contrary, it shall be assumed that the use of property by the lessee occurs in the taxing district in which the lessor delivers, or to which the lessor ships the property to the lessee.
If a lease is a continuing sale, or a continuing purchase, for the purposes of state tax, it shall be a continuing sale, or a continuing purchase, for the purposes of the transactions (sales) and use taxes. If a lease is neither a continuing sale nor a continuing purchase for the purposes of the state tax, it shall be neither a continuing sale nor a continuing purchase for the purposes of the transactions (sales) and use taxes.
If a person purchases property state tax paid prior to the operative date of the district transactions (sales) and use tax ordinance and after such date leases the property in substantially the same form as acquired, neither the transactions (sales) tax nor use tax of the district is applicable to the sales price of the property to the lessor or to the rentals.
(d) When Property Is Deemed Obligated Pursuant to a Contract or Lease. For the purposes of this regulation, the sale or lease of tangible personal property shall be deemed not to be obligated pursuant to a contract or lease for any period of time for which any party to the contract or lease has the unconditional right to terminate the contract or lease upon notice, whether or not such right is exercised.
_______________
1 State banks and national banking associations are subject to sales and use taxes.
NOTE

Authority cited: Sections 7051, Revenue and Taxation Code. Reference: Sections 6008, 6009.1, 6203, 6352, 6385, 7202, 7203, 7261, 7262 and 7263, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (a)(1) filed 3-10-70 as an emergency; effective upon filing (Register 70, No. 11).
2. Certificate of Compliance--Section 11422.1, Gov. Code, filed 5-6-70 (Register 70, No. 19).
3. Amendment filed 12-19-73; effective thirtieth day thereafter (Register 73, No. 51).
4. Amendment of subsection (c) filed 5-20-80; effective thirtieth day thereafter (Register 80, No. 21). For technical reasons, printed in Register 80, No. 23.
5. Amendment of subsections (b)(1) and (b)(2)(B) and new subsection (b)(1)(E) filed 8-20-85; effective thirtieth day thereafter (Register 85, No. 34).
6. Amendment filed 5-17-88; operative 6-16-88 (Register 88, No. 21).
7. Amendment of subsections (a)(1), (c) and NOTE filed 5-17-89; operative 6-16-89 (Register 89, No. 20).
§1823.4. Place of Delivery of Tangible Personal Property Generally.
Note     •     History

(a) In General. A retailer engaged in business in a district (except retailers of certain vehicles, aircraft and vessels) is not required to collect use tax from the purchaser of tangible personal property unless the retailer ships or delivers the property into the district or participates within the district in making the sale of the property. The purpose of this regulation is to provide a sample declaration to be signed by a purchaser that retailers may use to support shipment or delivery of tangible personal property (other than vehicles, aircraft and vessels) to a purchaser outside of a district in order to be relieved of the obligation to collect the use tax imposed by that district. This regulation does not apply to the transactions (sales) tax. Under this regulation, the purchaser will be liable for and pay the use tax if the property is principally stored, used or otherwise consumed within a district.
(b) Delivery Outside District. For the purposes of the use tax, when a retailer ships or delivers tangible personal property to a purchaser's principal residence address or principal business address outside of a district, the retailer is relieved of the obligation to collect the use tax imposed by that district by accepting in good faith a declaration under penalty of perjury, signed by the buyer, stating that such address is, in fact, the buyer's principal place of residence or principal place of business; that the buyer's principal place of residence or principal place of business is located outside the boundaries of the district; and that the property was purchased for use at a designated point or points outside of a district imposing a district use tax.
(c) Records. Any seller claiming exemption under this regulation must retain in its records the declaration executed in compliance with subdivision (d).
(d) Form of Declaration. The declaration shall be in substantially the following form:

DECLARATION
I HEREBY CERTIFY THAT:
(1) The (here insert description of tangible personal property pur--chased) purchased from (insert name of seller) was delivered to the following address:

  			

(2) The above address is located outside the (name of district) District.
(3) The above address is my principal place of residence or principal place of business.
(4) The tangible personal property listed above is purchased for use at the following location(s), which is outside the (name of district) District.

   Street, City, State, Zip Code:				
I understand that this declaration is for the purpose of allowing the above named seller to treat the sale of the above-described tangible personal property as exempt from the use tax imposed by the (name of district) District. If the property is principally stored, used or otherwise consumed in that district, the purchaser shall be liable for and pay the use tax.
I have personal knowledge of the statements of fact contained in this declaration. I declare under penalty of perjury under the laws of the State of California and the United States that the foregoing statements are true and correct.

      ___________________________________________
            Name of Purchaser        

      ___________________________________________
        Name and Title of Authorized Agent
             (if applicable)

      ___________________________________________
       Signature of Purchaser or Authorized Agent 

__________________
   Date
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 7261 and 7262, Revenue and Taxation Code.
HISTORY

1. New section filed 12-27-2005; operative 1-26-2006 (Register 2005, No. 52).
§1823.5. Place of Delivery of Certain Vehicles, Aircraft and Undocumented Vessels.
Note     •     History

(a) In General. This regulation relates to the place of delivery of certain vehicles, aircraft, and undocumented vessels for the purpose of the transactions (sales) tax only. It does not apply to the use tax. Thus, even though the sale of the vehicle, aircraft or undocumented vessel is exempt from transactions (sales) tax under this regulation, the use tax will apply if the property is principally stored, used or otherwise consumed within the district. Beginning January 1, 1988, if the vehicle, aircraft or undocumented vessel is licensed or registered in any district imposing the tax, the retailer is considered as engaged in business in that district and is required to collect the use tax and pay it to the state.
(b) Delivery Outside District. For the purposes of the transactions (sales) tax, “delivery to a point outside the district” shall be satisfied:
(1) With respect to vehicles (other than commercial vehicles) subject to registration pursuant to chapter 1 (commencing with section 4000) of division 3 of the Vehicle Code, aircraft licensed in compliance with section 21411 of the Public Utilities Code, and undocumented vessels registered under Division 3.5 (commencing with Section 9840) of the Vehicle Code by registration to an out-of-district address and by a declaration under penalty of perjury, signed by the buyer, stating that such address is, in fact, his principal place of residence, and
(2) With respect to commercial vehicles by registration to a place of business outside the district and a declaration under penalty of perjury, signed by the buyer, that the vehicle will be operated from that address.
(c) Definition--“Commercial Vehicle.” For the purposes of this regulation, “commercial vehicle” means a vehicle of a type required to be registered under the Vehicle Code used or maintained for the transportation of persons for hire, compensation, or profit or designed, used, or maintained primarily for the transportation of property. Passenger vehicles which are not used for the transportation of persons for hire, compensation, or profit are not commercial vehicles.
(d) Records. Any seller claiming exemption under this regulation must retain in his records the declaration executed in the prescribed form. If the exemption claimed relates to the sale of a vehicle, the seller also must retain in his records a copy of either the Department of Motor Vehicles report of sale or other documentary evidence showing the out-of-district address to which the vehicle is registered.
(e) Form of Declaration. The declaration shall be in substantially the following form:
(1) For vehicles (other than commercial vehicles), aircraft and undocumented vessels: 

DECLARATION
(Vehicles, Aircraft, Undocumented Vessels) 
I HEREBY CERTIFY THAT:

(1) The (here insert description of vehicle, aircraft or undocumented vessel giving name of manufacturer and type) purchased from (insert name of seller) will be registered to the following address:

(2) The above address is outside the (name of district) District.
(3) The above address is my principal place of residence (or, in the case of a corporation, principal place of business).

(4) The vehicle, aircraft or undocumented vessel when not in use will be kept, garaged, hangared or docked at:

(5) The vehicle, aircraft or undocumented vessel will be stored, used or otherwise consumed principally outside the (name of district) District.

View Graphic
I understand that this declaration is for the purpose of allowing the above named seller to treat the sale of the above described tangible personal property as exempt from the transactions (sales) tax imposed by the (name of district) District. If the property is principally stored, used or otherwise consumed in that district, the purchaser shall be liable for and pay the use tax.
The foregoing declaration is made under penalty of perjury.

Purchaser 

Title

Authorized Agent 

________________ 
Date
(2) For commercial vehicles: 

DECLARATION 
(Commercial Vehicle) 
I HEREBY CERTIFY THAT:

(1) The (here insert description of commercial vehicle, giving name of manufacturer and type) purchased from (insert name of seller) will be registered to the following address: 

(2) The vehicle will be operated from the following address:

(3) The address from which the vehicle will be operated is outside the (name of district) District.

(4) When not in use, the vehicle will be kept or garaged at:

(5) The vehicle will be stored, used or otherwise consumed principally outside the (name of district ) District.

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I understand that this declaration is for the purpose of allowing the above named seller to treat the sale of the above described tangible personal property as exempt from the transactions (sales) tax imposed by the (name of district) District. If the property is principally stored, used or otherwise consumed in that district, the purchaser shall be liable for and pay the use tax.
The foregoing declaration is made under penalty of perjury.

Purchaser 

Title

                        Authorized Agent
Authorized Agent 

________________ 
Date
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 7261 and 7262, Revenue and Taxation Code.
HISTORY

1. New section filed 12-16-70; effective thirtieth day thereafter (Register 70, No. 51).
2. Amendment of subsections (a) and (b) filed 5-17-88; operative 6-16-88 (Register 88, No. 21).
3. Amendment of subsection (b) filed 4-28-89; operative 5-28-89 (Register 89, No. 18).
§1824. Public Utilities. [Repealed]
History

HISTORY

1. Repealer filed 12-19-73; effective thirtieth day thereafter (Register 73, No. 51).
§1825. Aircraft Common Carriers.
Note     •     History

(a) Definition--“Common Carriers.” As used herein, the term “common carriers” means persons who engage in the business of transporting persons or property for hire or compensation and who offer their services indiscriminately to the public or to some portion of the public.
(b) Aircraft Common Carriers.
(1) State-administered district transactions (sales) tax does not apply to sales of tangible personal property to operators of aircraft to be used or consumed principally outside the county in which the sale is made if such property is to be used or consumed directly and exclusively in the use of such aircraft as common carriers of persons or property under the laws of this state, the United States, or any foreign government. Tax applies, however, to sales of fuel and petroleum products on and after July 29, 1991.
(2) State-administered district use tax does not apply to the storage, use, or other consumption of tangible personal property purchased by operators of aircraft when such property is used or consumed by such operators directly and exclusively in the use of such aircraft as common carriers of persons or property for hire or compensation under a certificate of public convenience and necessity issued pursuant to the laws of this state, the United States, or any foreign government. Effective July 29, 1991, this exemption is not available for the storage, use, or other consumption of fuel and petroleum products. This exemption is in addition to that provided in sections 6366 and 6366.1 of the Revenue and Taxation Code.
(c) Conditions of Exemption. The exemption for operators of aircraft common carriers applies only if the property is used directly and exclusively in the exempt activity. This exemption is limited to supplies and equipment (excluding fuel and petroleum products effective July 29, 1991) used or consumed directly in the carriage of persons or property. It does not include office or shop equipment or supplies or any other property not directly used or consumed in the carriage of persons or property.
(d) Leases. If property is leased to an operator of an aircraft common carrier under a lease which is a continuing sale or a continuing purchase, unless otherwise exempted, either the use tax or transactions (sales) tax applies to the gross receipts from the lease during such period of time that the property is in a taxing jurisdiction. 
NOTE

Authority cited: Sections 7051, 7261 and 7262, Revenue and Taxation Code. Reference: Sections 7261 and 7262, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (c) filed 4-16-85; effective thirtieth day thereafter (Register 85, No. 16). For prior history, see Register 80, No. 9.
2. Editorial correction of subsection (c) filed 1-17-86; effective thirtieth day thereafter (Register 86, No. 3).
3. Amendment filed 5-9-88; operative 6-8-88 (Register 88, No. 20).
4. Change without regulatory effect pursuant to section 100, title 1, California Code of Regulations, and editorial correction to insert subsection (b)(2), which remained effective but was omitted due to clerical error, filed 7-26-88 (Register 88, No. 32).
5. Amendment of subsections (b)(1)-(c) and form in Appendix filed 12-9-92; operative 1-8-93 (Register 92, No. 50).
6. Change without regulatory effect amending Appendix filed 1-13-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 2).

Appendix

Form of Exemption Certificates for Claiming Exemption
Under Regulations 1805 and 1825
(a) Certificate Necessary to Support Exemption. All purchasers of tangible personal property claiming exemption from Bradley-Burns local taxes under the provisions of Regulation 1805 or from both Bradley-Burns local taxes and district transactions (sales) and use taxes under Regulation 1825 should file with the seller an exemption certificate in the form shown below. On and after July 1, 1972, for purposes of the Bradley-Burns local taxes, this exemption is limited to 80 percent of the 1.25 percent local tax (i.e., 1%); and, on and after July 1, 2004, until the rate modifications in subdivision (a) of Revenue and Taxation Code section 7203.1 cease to apply, this exemption is limited to 75 percent of the 1 percent local tax (i.e., .75%).
(b) Form of Certificate.
Aircraft Common Carrier. The following certificate may be used by a purchaser claiming exemption under Regulation 1825 from district transactions (sales) and use taxes, and/or claiming partial exemption under Regulation 1805 from Bradley-Burns local taxes which: On or before June 30, 2004 is 1 percent; and, on and after July 1, 2004, until the rate modifications in subdivision (a) of Revenue and Taxation Code section 7203.1 cease to apply, is .75 percent:

View Graphic
§1826. Construction Contractors.
Note     •     History

(a) In General. All of the provisions of the state Sales and Use Tax Law and regulations adopted thereunder relating to construction contractors, including subcontractors, (other than those relating to the rate of tax) are applicable to state-administered transactions (sales) and use taxes.
(b) Jobsite Is Place of Business.
(1) The jobsite is regarded as a place of business of a contractor and is the place of sale of “fixtures” furnished and installed by a contractor. The place of use of “materials” is the jobsite. Accordingly, if the jobsite is in a district (or districts) having state-administered transactions (sales) and use taxes, the transactions (sales) tax applies to the sale of the fixtures, and the use tax applies to the use of the materials. If the jobsite is not in a district with a state-administered tax, state-administered transactions (sales) tax will not apply to the sale of the fixtures even though the contractor's principal place of business is in a district with such a tax.
(2) The contractor is entitled to a credit against use tax liability for transactions tax reimbursement paid to the retailer of the materials in a district, under the conditions specified in paragraph (b)(1)(E) of Regulation 1823 (18 CCR 1823), Application of Transactions (Sales) Tax and Use Tax. If fixtures are purchased by a contractor tax paid in a district having state administered transactions (sales) and use taxes, the contractor, upon installing the fixtures in a county without such a tax, is entitled to a credit for the tax of the district of purchase. If the contractor installs the fixtures in a district (or districts) imposing transactions and use taxes at a rate (or combined rate) greater than the district in which the contractor purchased the fixtures tax paid, the contractor is also entitled to a credit for the tax of the district of purchase, but is liable for the transactions tax (or taxes) of the district (or districts) where the fixtures are installed.
(3) The place of sale or purchase of a factory-built school building (relocatable classroom) as defined in paragraph (c)(4)(B) of Regulation 1521 (18 CCR 1521), Construction Contractors, is the place of business of the retailer of the factory-built school building regardless of whether sale of the building includes installation or whether the building is placed upon a permanent foundation.
The district use tax of the district (or districts) where the building is installed or placed will apply, if the rate of tax (or combined rate) is greater than the rate of tax in the district of sale, or if the place of sale is not in a district. See paragraph (b) of Regulation 1823 (18 CCR 1823).
(c) United States Contractors. United States contractors are consumers of both materials and fixtures, and the place of use of both is the jobsite. Accordingly, if the jobsite is in a district having state-administered transactions (sales) and use taxes, the use tax applies to the use of the materials and fixtures. The contractor is entitled to a credit against use tax liability for transactions tax reimbursement paid to the retailer of the materials or fixtures in a district, under the conditions specified in paragraph (b)(1)(E) of Regulation 1823 (18 CCR 1823).
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006-6010, inclusive, 6012.6, 6015, 6384, 7261 and 7262, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (a) filed 12-19-73; effective thirtieth day thereafter (Register 73, No. 51).
2. Amendment of subsections (a), (b) and (c) filed 7-17-91; operative 8- 16-91 (Register 91, No. 45).
§1827. Collection of Use Tax by Retailers.
Note     •     History

(a) In General. Except as provided in subdivision (d) below, any retailer engaged in business in a district imposing transactions (sales) and use taxes and making sales of tangible personal property, the storage, use or other consumption of which is subject to the state-administered district use tax imposed by that district is required to register with the board, collect the use tax from the purchaser, give receipts therefor, and pay the tax to the board. Retailers to whom seller's permits have been or are issued under Section 6067 of the Revenue and Taxation Code and who are engaged in business in the district are registered to collect the district use tax.
Any retailer who is not engaged in business in the district imposing transactions (sales) and use taxes may apply for a Certificate of Registration--Use Tax. Holders of such certificates are required to collect tax from purchasers, give receipts therefor, and pay tax to the board in the same manner as retailers engaged in business in the district.
(b) When Collection of Use Tax is Required.
(1) Deliveries Into the District. A retailer engaged in business in the district (except retailers of certain vehicles, aircraft and vessels as described in paragraph (c)(4) below) shall not be required to collect use tax from the purchaser of tangible personal property unless the retailer ships or delivers the property into the district or participates within the district in making the sale of the property, including, but not limited to soliciting or receiving the order, either directly or indirectly, at a place of business of the retailer in the district or through any representative, agent, canvasser, solicitor, subsidiary or person in the district under authority of the retailer.
(2) Presumption of Use--Out-of-District Deliveries. It shall be presumed that tangible personal property (except for certain vehicles, aircraft and vessels described in paragraph (c)(4) below) delivered outside a district imposing transactions (sales) and use taxes to a purchaser known by the retailer to be a resident of a district imposing such taxes was purchased from a retailer for storage, use or other consumption in the district in which the purchaser resides and was stored, used or otherwise consumed in that district. If the retailer is engaged in business in that district and participates within the district in making the sale of the property, he shall collect the district use tax and pay it to the board. 
The presumption may be controverted and the retailer relieved of the duty of collecting the use tax if the retailer, in good faith, accepts from the purchaser a statement in writing that the property was purchased for use at a designated point or points outside a district imposing a use tax. The presumption may also be controverted by other evidence satisfactory to the board that the property was not purchased for storage, use or other consumption in a district imposing a use tax.
(3) Vehicles, Aircraft and Undocumented Vessels. Retailers of vehicles, aircraft or undocumented vessels described in paragraph (c)(4) below are engaged in business in a district imposing a state-administered transactions use tax and are required to collect the use tax from the purchaser and pay it to the board when such vehicles, aircraft or undocumented vessels are registered or licensed in that district.
(c) Definition--“Retailer Engaged in Business in District.” “Retailer engaged in business in the district” includes any of the following:
(1) Any retailer maintaining, occupying, or using, permanently or temporarily, directly or indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or place, warehouse or storage place or other place of business in the district.
(2) Any retailer having any representative, agent, salesman, canvasser or solicitor operating in the district under the authority of the retailer or its subsidiary for the purpose of selling, delivering, or the taking of orders for any tangible personal property.
(3) As respects a lease, any retailer deriving rentals from a lease of tangible personal property situated in the district.
(4) On and after January 1, 1988, any retailer of vehicles subject to registration pursuant to Chapter 1 (commencing with Section 4000) of Division 3 of the Vehicle Code, aircraft licensed in compliance with Section 21411 of the Public Utilities Code, or undocumented vessels registered under Division 3.5 (commencing with Section 9840) of the Vehicle Code.
(d) Sales to Persons Holding Use Tax Direct Payment Permits. Retailers selling tangible personal property, the storage, use or other consumption of which is subject to the use tax, who take in good faith use tax direct payment exemption certificates from persons holding use tax direct payment permits shall be relieved from the duty of collecting district use tax. Use tax direct payment permits and exemption certificates must comply with the requirements of Regulation 1699.6. This subdivision applies only to transfers that are subject to state and local use tax.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 7051.3 and 7262, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (b) filed 3-10-70 as an emergency; effective upon filing (Register 70, No. 11).
2. Certificate of Compliance--Section 11422.1, Gov. Code file 5-7-70 (Register 70, No. 19).
3. Amendment of subsections (b)(1) and (b)(2), and new subsections (b)(3) and (c)(4) filed 5-17-88; operative 6-16-88 (Register 88, No. 21).
4. Amendment of subsection (c)(4) filed 5-22-89; operative 6-21-89 (Register 89, No. 22).
5. Editorial correction of subsection (b)(3) printing error and History No. 4 (Register 89, No. 34).
6. Change without regulatory effect amending subsection (a), adding subsection (d) and amending Note filed 10-22-99 pursuant to section 100, title 1, California Code of Regulations (Register 99, No. 43).
§1828. Petitions for Distribution or Redistribution of Transactions and Use Tax.
Note     •     History

(a) Definitions. 
(1) District Tax. “District tax” means a transaction and use tax adopted pursuant to Revenue and Taxation Code section 7251, et seq., or pursuant to Revenue and Taxation Code section 7285, et seq., and administered by the Board. 
(2) District. “District” means any entity, including a city, county, city and county, or special taxing jurisdiction, which has adopted a district tax. 
(3) Petition. “Petition” means a request or inquiry from a district for investigation of suspected improper distribution or nondistribution of district tax submitted in writing to the Allocation Group of the Sales and Use Tax Department. The petition must contain sufficient factual data to support the probability that district tax has not been distributed or has been erroneously distributed. Sufficient factual data should include, for each business location being questioned: 
(A) Taxpayer name, including owner name and fictitious business name or dba (doing business as) designation. 
(B) Taxpayer's permit number or a notation stating “No Permit Number.” 
(C) Complete business address of the taxpayer. 
(D) Complete description of taxpayer's business activity or activities. 
(E) Specific reasons and evidence why the distribution or nondistribution is questioned, identifying the delivery location or locations of the property the sales of which are at issue. If the petition alleges that the subject transactions are subject to the district's use tax, evidence that the retailer is engaged in business in the district as provided in California Code of Regulations, title 18, section 1827, subdivision (c). 
(F) Name, title, and telephone number of the contact person. 
(G) The tax reporting periods involved. 
“Petition” also includes an appeal by a district from a notification from the Local Revenue Allocation Unit of the Sales and Use Tax Department that district taxes previously allocated to it were misallocated and will be reallocated. Such a district may object to that notification by submitting a written petition to the Allocation Group within 30 days of the date of mailing of the notification or within a period of extension described below. The petition must include a copy of the notification and specify the reason the district disputes it. If a district does not submit such a petition within 30 days of the date of mailing of the notification, or within a period of extension, the notification of the Local Revenue Allocation Unit is final as to the district so notified. 
The district may request a 30-day extension to submit a written objection to a notification of misallocation from the Local Revenue Allocation Unit. Such a request must provide a reasonable explanation for the requesting district's inability to submit its objection within 30 days and must be received by the Local Revenue Allocation Unit within 30 days of the date of mailing of its notification. Within five days of receipt of the request, the Local Revenue Allocation Unit will mail notification to the district whether the request is granted or denied. If a timely request for extension is submitted, the time for the district to file a written objection is extended to 10 days after the mailing of the notice of whether the request is granted or denied. If the request is granted, the time for the district to submit a written objection to the notification of the Local Revenue Allocation Unit is further extended to the 60th day after the date of mailing of the notification of misallocation. 
(4) Petitioner. “Petitioner” is a district that has filed a valid petition pursuant to subdivision (a)(3). 
(5) Date of Knowledge. Unless an earlier date is operationally documented by the Board, “date of knowledge” is the date on which the Allocation Group receives a valid petition. Where an error in distribution that is reasonably covered by the petition is confirmed based on additional facts or evidence supplied by the petitioner or otherwise learned as a direct result of investigating the petition, the date of knowledge is the date on which the Allocation Group received the petition. 
(6) Substantially Affected District. “Substantially affected district” is a district for which the decision on a petition would result in a decrease to its total distribution of 5 percent or more of its average quarterly distribution (generally determined with reference to the prior four calendar quarters) or of $50,000 or more. 
(7) Notified District. “Notified district” is a district that has been notified as a substantially affected district. 
(b) Review by Sales and Use Tax Department. 
(1) The Allocation Group will promptly acknowledge a submission intended as a petition. If the submission does not contain the elements identified in subdivision (a)(3), the original submission will be returned to the submitting jurisdiction. The jurisdiction will have 30 days from the date of the correspondence from the Allocation Group requesting the missing information to make a supplemental submission. If the supplemental submission contains the necessary elements identified in subdivision (a)(3), then the date of receipt of the original submission will be regarded as the date of knowledge. In the event that a submission is not perfected within this 30 day period, it will not qualify as a valid petition. 
(2) The Sales and Use Tax Department will review the petition and issue to the petitioner a written decision to grant or deny the petition, including the basis for that decision. The written decision will also note the date of knowledge, and if other than the date the petition was received, will include the basis for that date. A redistribution will be made if the preponderance of evidence, whether provided by petitioner or obtained by Board staff as part of its investigation of the petition, shows that there was an error in distribution. If the preponderance of evidence does not show that an error in distribution occurred, the petition will be denied. 
(3) If the Sales and Use Tax Department does not issue a decision within six months of the date it receives a valid petition, the petitioner may request that the Sales and Use Tax Department issue its decision without regard to the status of its investigation. Within 90 days of receiving such a request, the Sales and Use Tax Department will issue its decision based on the information in its possession. 
(4) If the decision of the Sales and Use Tax Department is that the asserted error in distribution did not occur and that the petition should be denied, in whole or in part, the petitioner may submit to the Allocation Group a written objection to the decision under subdivision (b)(6). 
(5) If the decision of the Sales and Use Tax Department is that an error in distribution did occur, it will also mail a copy of its decision to any substantially affected district. Any such notified district may submit to the Allocation Group a written objection to the decision under subdivision (b)(6). 
(6) The petitioner or any notified district may appeal the decision of the Sales and Use Tax Department by submitting a written objection to the Allocation Group within 30 days of the date of mailing of the Sales and Use Tax Department's decision, or within a period of extension authorized by subdivision (b)(10). If no such timely objection is submitted, the decision of the Sales and Use Tax Department is final as to the petitioner and all notified districts. 
(7) If the petitioner or a notified district submits a timely written objection to the decision of the Sales and Use Tax Department, the Sales and Use Tax Department will consider the objection and issue a written supplemental decision to grant or deny the objection, including the basis for that decision. A copy of the supplemental decision will be mailed to the petitioner, to any notified district, and to any other district that is substantially affected by the supplemental decision. 
(8) If the Sales and Use Tax Department does not issue a supplemental decision within three months of the date it receives a written timely objection to the decision of the Sales and Use Tax Department, the petitioner or any notified district may request that the Sales and Use Tax Department issue its supplemental decision without regard to the status of its investigation. Within 60 days of receiving such a request, the Sales and Use Tax Department will issue its supplemental decision based on the information in its possession. 
(9) The petitioner or any notified district may appeal the supplemental decision of the Sales and Use Tax Department by submitting a written objection under subdivision (c)(1) within 30 days of the date of mailing of that supplemental decision, or within a period of extension authorized by subdivision (b)(10). If no such timely objection is submitted, the supplemental decision of the Sales and Use Tax Department is final as to the petitioner and all notified districts. 
(10) The petitioner or any notified district may request a 30-day extension to submit a written objection under subdivision (b)(6) or under subdivision (b)(9), as applicable. Such request must provide a reasonable explanation for the requesting district's inability to submit its objection within 30 days, must be copied to all other districts to whom the Sales and Use Tax Department mailed a copy of its decision or supplemental decision (to the extent known by the requesting district), and must be received by the Allocation Group within 30 days of the date of mailing of the Sales and Use Tax Department's decision or supplemental decision. Within five days of receipt of the request, the Sales and Use Tax Department will mail notification to the petitioner and to all notified districts whether the request is granted or denied. If a timely request for an extension is submitted, the time for the petitioner and any notified district to file a written objection to the decision or supplemental decision of the Sales and Use Tax Department is extended to 10 days after the mailing of the notice of whether the request is granted or denied. If the request is granted, the time for the petitioner and all notified districts to submit a written objection to the decision or supplemental decision of the Sales and Use Tax Department is further extended to the 60th day after the date of mailing of the decision or supplemental decision. 
(c) Review by Appeals Division. 
(1) The petitioner or any notified district may appeal the supplemental decision of the Sales and Use Tax Department by submitting a written objection to the Allocation Group within 30 days of the date of mailing of the Sales and Use Tax Department's supplemental decision, or within a period of extension authorized by subdivision (b)(10). Such an objection must state the basis for the objecting district's disagreement with the supplemental decision and include all additional information in its possession that supports its position. 
(2) If a timely objection to the Sales and Use Tax Department's supplemental decision is submitted, the Allocation Group will, within 30 days of receipt of the objection, prepare the file and forward it to the Appeals Division. The petitioner, all notified districts, any other district that would be substantially affected if the petition were granted, and the Sales and Use Tax Department will thereafter be mailed notice of the appeals conference, which will generally be sent at least 45 days prior to the scheduled date of the conference. 
(A) Petitioner or any notified district may continue to discuss the dispute with staff of the Sales and Use Tax Department after the dispute is referred to the Appeals Division. If, as a result of such discussions or otherwise, the Sales and Use Tax Department decides the supplemental decision was incorrect or that further investigation should be pursued, it shall so notify the Appeals Division, the petitioner, and all notified districts. 
(B) If the Sales and Use Tax Department sends notice to the Appeals Division in accordance with the subdivision (c)(2)(A) no later than 30 days prior to the date scheduled for the appeals conference, the Appeals Division will suspend its review and the dispute will be returned to the Sales and Use Tax Department. The Sales and Use Tax Department will thereafter issue a second supplemental decision, or will return the dispute to the Appeals Division along with a report of its further investigation, if appropriate, for the review and decision of the Appeals Division. 
(C) If the Sales and Use Tax Department sends notice to the Appeals Division in accordance with subdivision (c)(2)(A) less than 30 days prior to the date scheduled for the appeals conference, the Appeals Division will decide whether the dispute should be returned to the Sales and Use Tax Department or remain with the Appeals Division, and notify the parties accordingly. If the dispute is returned to the Sales and Use Tax Department, the Sales and Use Tax Department will thereafter issue a second supplemental decision, or will return the dispute to the Appeals Division along with a report of its further investigation, if appropriate, for the review and decision of the Appeals Division. 
(D) Where the Sales and Use Tax Department issues a second supplemental decision in accordance with subdivision (c)(2)(B) or (c)(2)(C), it will send a copy of the decision to the petitioner, any notified district, and any other district that is substantially affected by the second supplemental decision, any of whom may appeal the second supplemental decision by submitting a written objection under subdivision (c)(1) within 30 days of the date of mailing of that supplemental decision, or within a period of extension authorized by subdivision (b)(10). If no such timely objection is submitted, the second supplemental decision is final as to the petitioner and all notified districts. 
(3) The appeals conference is not an adversarial proceeding, but rather is an informal discussion where the petitioner, any notified districts who wish to participate, and the Sales and Use Tax Department have the opportunity to explain their respective positions regarding the relevant facts and law to the Appeals Division conference holder. To make the conference most productive, each participant should submit all facts, law, argument, and other information in support of its position to the Appeals Division conference holder, and to the other participants, at least 15 days before the date of the appeals conference; however, relevant facts and arguments will be accepted at any time at or before the appeals conference. If, during the appeals conference, a participant requests permission to submit additional written arguments and documentary evidence, the conference holder may grant that participant 30 days after the appeals conference to submit to the conference holder, with copies to all other participants, such additional arguments and evidence. Any other participant at the conference who is in opposition to the requesting participant on the issue(s) covered by the additional submission is allowed 30 days to submit to the conference holder, with copies to all other participants, arguments and evidence in response. No request by a participant for further time to submit additional arguments or evidence will be granted without the approval of the Assistant Chief Counsel of the Appeals Division or his or her designee. The Appeals Division on its own initiative may also request, at or after the appeals conference, further submissions from any participant. 
(4) Within 90 days after the final submission authorized by subdivision (c)(3), the Appeals Division will issue a written Decision and Recommendation (D&R) setting forth the applicable facts and law and the conclusions of the Appeals Division. The Chief Counsel may allow up to 90 additional days to prepare the D&R upon request of the Appeals Division. Both the request and the Chief Counsel's response granting or denying the request for additional time must be in writing and copies provided to the petitioner, all notified districts, and the Sales and Use Tax Department. A copy of the D&R will be mailed to the petitioner, to all notified districts, to any other district that will be substantially affected by the D&R, and to the Sales and Use Tax Department. 
(5) The petitioner or any notified district may appeal the D&R by submitting a written request for Board hearing under subdivision (d)(1) within 60 days of the date of mailing of the D&R. 
(6) The petitioner, any notified district, or the Sales and Use Tax Department may also appeal the D&R, or any Supplemental D&R (SD&R), by submitting a written request for reconsideration (RFR) to the Appeals Division before expiration of the time during which a timely request for Board hearing may be submitted, or if a Board hearing has been requested, prior to that hearing. If a district or the Sales and Use Tax Department submits an RFR before the time for requesting a Board hearing has expired, the Appeals Division will issue an SD&R to consider the request, after obtaining whatever additional information or arguments from the parties that it deems appropriate. If an RFR is submitted after a district has requested a Board hearing, the Appeals Division will determine whether it should issue an SD&R in response. A copy of the SD&R issued under this subdivision or under subdivision (c)(7) will be mailed to the petitioner, to all notified districts, to any other district that will be substantially affected by the SD&R, and to the Sales and Use Tax Department. The petitioner or any notified district may appeal the SD&R by submitting a written request for Board hearing under subdivision (d)(1) within 60 days of the date of mailing of the SD&R. 
(7) Whether or not an RFR is submitted, at any time prior to the time the recommendation in the D&R or prior SD&R is acted on by the Sales and Use Tax Department as a final matter or the Board has held an oral hearing on the petition, the Appeals Division may issue an SD&R as it deems necessary to augment, clarify, or correct the information, analysis, or conclusions contained in the D&R or any prior SD&R. 
(8) If no RFR is submitted under subdivision (c)(6) or request for Board hearing under subdivision (d)(1) within 60 days of the date of mailing of the D&R or any SD&R, the D&R or SD&R as applicable is final as to the petitioner and all notified districts unless the Appeals Division issues an SD&R under subdivision (c)(7). 
(d) Review by Board. 
(1) The petitioner or any notified district may submit a written request for Board hearing if it does so to the Board Proceedings Division within 60 days of the date of mailing of the D&R or any SD&R. Such a request must state the basis for the district's disagreement with the D&R or SD&R as applicable and include all additional information in its possession that supports its position. 
(2) If the Board Proceedings Division receives a timely request for hearing under subdivision (d)(1), it will notify the Sales and Use Tax Department, the petitioner, any notified district, any other district that would be substantially affected if the petition were granted, and the taxpayer(s) whose distribution (or nondistribution) are the subject of the petition, that the petition for redistribution of district tax is being scheduled for a Board hearing to determine the proper distribution. 
(3) The Sales and Use Tax Department, the petitioner, and all districts notified of the Board hearing pursuant to subdivision (d)(2) are parties and may participate in the Board hearing. The taxpayer is not a party to the Board hearing unless it chooses to actively participate in the hearing process by either filing a brief or making a presentation at the hearing. 
(4) Briefs may be submitted for the Board hearing in accordance with California Code of Regulations, title 18, sections 5270 and 5271. 
(5) To the extent not inconsistent with this regulation, the hearing will be conducted in accordance with Chapter 5 of the Board of Equalization Rules for Tax Appeals (Cal. Code Regs., tit. 18, §5510, et seq.). The Board will apply the preponderance of evidence rules set forth in subdivision (b)(2) in reaching its decision and not the burden of proof rules set forth in California Code of Regulations, title 18, section 5541. The Board's final decision on a petition for redistribution exhausts all administrative remedies on the matter for all districts. 
(e) Limitation Period for Redistributions. 
For redistributions where the date of knowledge is prior to January 1, 2008, the standard three-year statute of limitations is applicable, based on the date of knowledge. For redistributions where the date of knowledge is on or after January 1, 2008, redistributions shall not include amounts originally distributed earlier than two quarterly periods prior to the quarter of the date of knowledge. 
(f) Operative Date and Transition Rules. 
This regulation is intended to reduce the time required to decide the validity of redistribution petitions and otherwise improve the process for doing so. Regulation 1828 was repealed and readopted in 2008. The readopted regulation is intended to have a neutral impact only on the current dispute over the continuing validity of certain petitions that were governed by prior Regulation 1828 (effective June 17, 2004). 
(1) The operative date of this regulation as readopted in 2008 and any amendments thereto is the effective date under Section 11343.4 of the Government Code (thirty days after approval by the Office of Administrative Law and forwarding to the Secretary of State) and there shall be no retroactive effect. 
(2) Notwithstanding subdivision (f)(3), petitions shall be reviewed, appealed and decided in accordance with this regulation as to procedures occurring after its operative date or that of any amendments thereto. 
(3) All petitions filed prior to July 1, 2004 and denied by Board Management must have perfected any access they may have had to a Board Member hearing no later than 60 days after the September 10, 2008, operative date of this regulation. 
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Section 7270, Revenue and Taxation Code. 
HISTORY

1. New section filed 5-18-2004; operative 6-17-2004 (Register 2004, No. 21).
2. Repealer and new section filed 8-11-2008; operative 9-10-2008 (Register 2008, No. 33).
3. Amendment of subsections (a)(3)(G) and (b)-(b)(7), new subsection (b)(8), subsection renumbering, amendment of newly designated subsections (b)(9)-(10) and subsections (c)(1)-(3), (c)(7) and (f)-(f)(2) and new subsection (f)(3) filed 2-7-2012; operative 3-8-2012 (Register 2012, No. 6).
Article 21. Service Enterprises--Unrevised Series [Repealed]
HISTORY

1. Repealer of article 21 (sections 1901-1910) filed 2-24-72; effective 3-25-72 (Register 72, No. 9). For prior history of article 21, see Register 69, No. 32, Register 69, No. 45, Register 70, No. 38 and Register 71, No. 45. 
Article 22. Contractors and Subcontractors--Unrevised Series [Repealed]
HISTORY

1. Repealer of article 22 (sections 1921-1923) filed 11-3-71; effective 12-3-71 (Register 71, No. 45).
Article 23. Manufacturers, Producers and Processors--Unrevised Series [Repealed]
HISTORY

1. Repealer of article 23 (sections 1924-1935) filed 11-3-71; effective 12-3-71 (Register 71, No. 45). For prior history of article 23, see Register 69, No. 32, Register 69, No. 50, Register 70, No. 14 and Register 70, No. 32. 
Article 24. Repairers and Reconditioners of Personal Property--Unrevised Series [Repealed]
HISTORY

1. Repealer of article 24 (sections 1946-1955) filed 11-3-71; effective 12-3-71 (Register 71, No. 45). For prior history of article 24, see Register 69, No. 32 and Register 69, No. 45. 
Article 25. Particular Classes of Retailers--Unrevised Series [Repealed]
HISTORY

1. Repealer of article 25 (sections 1966-1975) filed 11-3-71; effective 12-3-71 (Register 71, No. 45). For prior history of article 25, see Register 69, No. 32, Register 69, No. 35, Register 69, No. 45, Register 69, No. 50, Register 70, No. 24 and Register 71, No. 4. 
Article 26. Exemptions Generally--Unrevised Series [Repealed]
HISTORY

1. Repealer of Article 26 filed 8-6-70; effective thirtieth day thereafter (Register 70, No. 32). For history of former Article 26 (Secs. 1986 through 1992) see Registers 69, Nos. 32 and 45 and 70, Nos. 14 and 15.
Article 27. Food Products: Meals--Unrevised Series [Repealed]
HISTORY

1. Repealer of article 27 (sections 2002-2003) filed 11-3-71; effective 12-3-71 (Register 71, No. 45). For prior history of article 27, see Register 70, No. 24. 
Article 28. Matters Relating to the Federal Government--Unrevised Series [Repealed]
HISTORY

1. Repealer of article 28 (sections 2014-2017) filed 12-16-70; effective 1-15-71 (Register 70, No. 51). For prior history of article 28, see Register 69, No. 32 and Register 70, No. 8. 
Article 29. Matters Relating to Transportation of Property--Unrevised Series [Repealed]
HISTORY

1. Repealer of article 29 (sections 2028-2030) filed 11-3-71; effective 12-3-71 (Register 71, No. 45). For prior history of article 29, see Register 69, No. 32 and Register 71, No. 30. 
Article 30. Credit Sales; Lease Contracts--Unrevised Series [Repealed]
HISTORY

1. Repealer of article 30 (sections 2041-2043) filed 1-9-70; effective 2-8-70 (Register 70, No. 2). For prior history of article 30, see Register 65, No. 19. 
Article 31. Merchandise Returned, Traded In, or Found Defective--Unrevised Series [Repealed]
HISTORY

1. Repealer of article 31 (sections 2054-2057) filed 11-5-69; effective 12-5-69 (Register 69, No. 45).
Article 32. Resale Certificates--Consumption of Property Purchased for Resale--“Tax Paid Purchases Resold”--Gifts and Premiums--Unrevised Series [Repealed]
HISTORY

1. Repealer of article 32 (sections 2068-2073) filed 11-3-71; effective 12-3-71 (Register 71, No. 45). For prior history of article 32, see Register 69, No. 32 and Register 69, No. 45.
Article 33. Payment and Collection of Use Tax--Unrevised Series [Repealed]
HISTORY

1. Repealer of article 33 (sections 2083-2087) filed 1-19-71; effective 2-18-71 (Register 71, No. 4). For prior history of article 32, see Register 69, No. 32 and Register 69, No. 45.
Article 34. Administration-- Miscellaneous--Unrevised Series [Repealed]
HISTORY

1. Repealer of article 34 (sections 2101-2103) filed 8-6-70; effective 9-5-70 (Register 70, No. 32). For prior history of article 34, see Register 69, No. 41 and Register 69, No. 45.
Article 35. Local Sales and Use Tax--Unrevised Series [Repealed]
HISTORY

1. Repealer of article 35 (sections 2202-2206) filed 1-26-70; effective 2-25-70 (Register 70, No. 5). For prior history of article 35, see Register 65, No. 19.
Chapter 4.1. Lumber Products Assessment
§2000. Retailer Reimbursement Retention.
Note     •     History

Public Resources Code section 4629.5, as added by Statutes 2012, chapter 289, requires the Board of Equalization to adopt a regulation to determine the amount of reimbursement a retailer may retain for costs associated with the collection of the Lumber Products Assessment imposed by Public Resources Code section 4629.5. 
A retailer required to collect the Lumber Products Assessment may retain no more than $250 per location as reimbursement for startup costs associated with the collection of the assessment. Such reimbursement is to be taken on the retailer's first return on which the Lumber Products Assessment is reported or, if the amount of the collected assessment is less than the allowed reimbursement, on the retailer's next consecutive returns until the allowed reimbursement amount is retained. 
“Location” means and is limited to a business location registered under the retailer's seller's permit as of January 1, 2013, where sales of products subject to the assessment are made. 
NOTE

Authority cited: Section 4629.5, Public Resources Code. Reference: Section 4629.5, Public Resources Code. 
HISTORY

1. New chapter 4.1 (section 2000) and section filed 12-4-2012 as an emergency; operative 1-1-2013 (Register 2012, No. 49). A Certificate of Compliance must be transmitted to OAL by 7-1-2013 or emergency language will be repealed by operation of law on the following day.
Chapter 4.5. Oil Spill Prevention and Response Fees
Article 1. Oil Spill Prevention and Administration Fee
§2231. Oil Spill Prevention and Administrative Fee Return.
Note     •     History

(a) This regulation applies to the fees imposed for the period September 24, 1990 through December 12, 1990.
(b) Marine Terminal Operator - For the privilege of operating a marine terminal, an oil spill prevention and administration fee is imposed under article 6, section 8670.40 of chapter 7.4 of division 1 of Title 2 of the Government Code upon every marine terminal operator at the rate of four cents ($0.04) per barrel of oil delivered through the operator's marine terminal.
(c) Pipeline Operator - For the privilege of operating a pipeline, an oil spill prevention and administration fee is imposed under article 6, section 8670.40 of chapter 7.4 of division 1 of Title 2 of the Government Code upon every operator of a pipeline at the rate of four cents ($0.04) per barrel of oil transported into the state by means of a pipeline operating across, under, or through marine waters of this state.
(d) Each marine terminal operator and operator of a pipeline shall file a return with the State Board of Equalization on or before February 25, 1991 showing the number of barrels of oil delivered through a marine terminal or transported into the state by means of a pipeline operating across, under, or through marine waters of this state during the period September 24, 1990 through December 12, 1990. The fee due shall be remitted with the return.
NOTE

Authority cited: Section 8670.40, Government Code. Reference: Sections 8670.3 and 8670.48, Government Code.
HISTORY

1. New section filed 12-20-90 as an emergency; operative 12-20-90 (Register 91, No. 6). A Certificate of Compliance must be transmitted to OAL by 4-19-91 or emergency language will be repealed by operation of law on the following day.
2. Certificate of Compliance as to 12-20-91 order including amendment of subsections (a) and (d) transmitted to OAL on 4-19-91 and filed 5-20-91 (Register 91, No. 26).
Article 2. Oil Spill Response Fee
§2232. Oil Spill Response Fee Return.
Note     •     History

(a) This regulation applies to the fees imposed for the period September 24, 1990 through December 12, 1990.
(b) For the privilege of operating a marine terminal, an oil spill response fee is imposed under article 7, section 8670.48 of chapter 7.4 of division 1 of Title 2 of the Government Code upon every marine terminal operator at the rate of twenty five cents ($0.25) per barrel of petroleum products received at a marine terminal within the state by means of a vessel from a point of origin outside the state and of crude oil that is transported from within the state by means of vessel to a destination outside the state.
(c) For the privilege of operating a pipeline, an oil spill response fee is imposed under article 7, section 8670.48 of chapter 7.4 of division 1 of Title 2 of the Government Code upon every operator of a pipeline at the rate of twenty five cents ($0.25) per barrel of petroleum products transported into the state by means of a pipeline and of crude oil transported out of the state.
(d) For the privilege of operating a refinery, an oil spill response fee is imposed under article 7, section 8670.48 of chapter 7.4 of division 1 of Title 2 of the Government Code upon every operator of a refinery at the rate of twenty five cents ($0.25) per barrel of crude oil received at a refinery within the state.
(e) Each marine terminal operator and each operator of a pipeline shall file a return with the State Board of Equalization, on a form prescribed by the board, (Form ET-501-OR (12-90) California Oil Spill Response Fee Return), showing the number of barrels of petroleum products received at a marine terminal by means of a vessel from outside this state or transported into the state by means of a pipeline.
(f) Each operator of a refinery or pipeline and each marine terminal operator shall file a return with the State Board of Equalization, on a form prescribed by the board, (ET-501-OR (12-90) showing the number of barrels of crude oil received at a refinery within the state, transported out of state by means of a pipeline or transmitted from within the state by means of a vessel to a destination outside the state.
(g) The oil spill response fee returns (ET-501-OR (12-90) will be due on or before February 25, 1991 for the period September 24, 1990 through December 12, 1990. The fee due shall be remitted with the return.
NOTE

Authority cited: Section 8670.48, Government Code. Reference: Sections 8670.3 and 8670.48, Government Code.
HISTORY

1. New section filed 12-20-90 as an emergency; operative 12-20-90 (Register 91, No. 6). A Certificate of Compliance must be transmitted to OAL by 4-19-91 or emergency language will be repealed by operation of law on the following day.
2. Certificate of Compliance including amendment transmitted to OAL 4-19-91 and filed 5-20-91 (Register 91, No. 26).
Article 3. Definitions
§2240. Petroleum Products.
Note     •     History

(a) “Petroleum products” means a hydrocarbon product that is all of the following: 
(1) a liquid at standard conditions of temperature and pressure (60 degrees Fahrenheit and 14.7 pounds per square inch absolute); 
(2) the product of fractionation, distillation, or other refining or processing of crude oil; and 
(3) that is used as, useable as, or may be refined as, a fuel or fuel blendstock. 
(b) Petroleum products includes, but is not limited to, the following hydrocarbon products: 
(1) alcohol fuels containing petroleum products, 
(2) aviation fuel, 
(3) benzene and benzene hydrocarbon liquids, 
(4) bunker fuel, 
(5) crude hydrocarbon feedstock (containing butyraldehydes and ethylpropyl acrolein), 
(6) diesel fuel, 
(7) gasoline and gasoline feedstocks, 
(8) jet fuel, 
(9) methyltertiarybutylether (MTBE) produced from crude oil feedstocks, 
(10) naphtha, 
(11) oil (including base oil, sump, oil sludge, oil refuse, and oil mixed with waste) 
(12) toluene, and 
(13) transmix. 
(c) Petroleum products does not include: 
(1) Any hydrocarbon product that is not a liquid at standard temperature and pressure (for example asphalt, coke, liquid petroleum gas, solid greases and wax), 
(2) Ammonia, and 
(3) MTBE and other substances that are produced from non-crude oil derived feedstocks. MTBE will be considered a petroleum product produced from crude oil derived feedstocks and therefore subject to the fee unless the manufacturer or other party who has held title or possession to the MTBE has provided acceptable documentation to the feepayer, which documentation the feepayer has made available for inspection to the board, which indicates that the source of the feedstocks used to produce the MTBE was non-crude oil derived feedstocks. Acceptable documentation includes, but is not limited to, certifications, written statements, invoices, product descriptions, or any other representation which shows that the composition of the feedstocks used in manufacturing was non-crude oil derived and which documentation was provided to any person prior to the delivery of the product at any marine or other terminal. 
NOTE

Authority cited: Section 15606(a), Government Code; and Section 46601, Revenue and Taxation Code. Reference: Section 46021, Revenue and Taxation Code. 
HISTORY

1. New article 3 (sections 2240-2242) and section filed 6-6-2001; operative 7-6-2001 (Register 2001, No. 23).
§2241. Barrel of Crude Oil.
Note     •     History

“Barrel of crude oil” means 42 United States gallons of crude oil in its unrefined or natural state, including condensate and natural gasoline, at standard conditions of temperature and pressure (60 degrees Fahrenheit and 14.7 pounds per square inch absolute), and excluding such sediment and water which are present in the crude oil as the result of the production process. 
NOTE

Authority cited: Section 15606(a), Government Code; and Section 46601, Revenue and Taxation Code. References: Sections 46008 and 46010, Revenue and Taxation Code; and Sections 8670.40 and 8670.48, Government Code. 
HISTORY

1. New section filed 6-6-2001; operative 7-6-2001 (Register 2001, No. 23).
§2242. Barrel of Petroleum Products.
Note     •     History

“Barrel of petroleum products” means 42 United States gallons of petroleum product at standard conditions of temperature and pressure (60 degrees Fahrenheit and 14.7 pounds per square inch absolute) and excluding such sediment and water which are present in the petroleum products. 
NOTE

Authority cited: Section 15606(a), Government Code; and Section 46601, Revenue and Taxation Code. References: Section 46008 Revenue and Taxation Code; and Section 8670.40 and 8670.48, Government Code. 
HISTORY

1. New section filed 6-6-2001; operative 7-6-2001 (Register 2001, No. 23).
Article 4. Relief of Liability, Records, and Payment by Electronic Funds Transfer
§2250. Relief of Liability.
Note     •     History

A person may be relieved from the liability for the payment of the oil spill response fee and/or the oil spill prevention and administration fee including any penalties and interest added to those fees, when that liability resulted from the failure to make a timely return or a payment and such failure was found by the board to be due to reasonable reliance on written advice given by the board as described in California Code of Regulations, Title 18, Section 4902. 
NOTE

Authority cited: Section 15606(a), Government Code; and Section 46601, Revenue and Taxation Code. Reference: Section 46158, Revenue and Taxation Code. 
HISTORY

1. New article 4 (sections 2250-2255) and section filed 6-6-2001; operative 7-6-2001 (Register 2001, No. 23).
2. Amendment filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
3. Amendment of article heading filed 6-7-2005; operative 7-7-2005 (Register 2005, No. 23).
§2251. Innocent Spouse or Registered Domestic Partner Relief from Liability.
Note     •     History

A spouse or registered domestic partner claiming relief from liability for the oil spill response, prevention, and administration fees, interest, penalties, and other amounts shall be relieved from such liability where all the requirements set forth in California Code of Regulations, title 18, section 4903 are met.
NOTE

Authority cited: Section 46601, Revenue and Taxation Code. Reference: Sections 46159 and 46501-46507, Revenue and Taxation Code; and Sections 297, 297.5 and 308, Family Code.
HISTORY

1. New section filed 5-18-2010; operative 6-17-2010 (Register 2010, No. 21).
§2255. Records.
Note     •     History

(a) General. A feepayer shall maintain and make available for examination on request by the board or its authorized representatives, records in the manner set forth at California Code of Regulations, Title 18, Section 4901. 
(b) Specific Applications. In addition to the record keeping requirements set forth in subdivision (a), feepayers shall comply with the following requirements. 
In general, a person who is liable for payment of the oil spill response fee and/or the oil spill prevention and administration fee, would be expected to maintain some or all of the following records, as applicable: 
(1) Books of account pertaining to crude oil ( including condensate and natural gasoline) and petroleum products received at a marine terminal (including third-party terminals) or transported by pipeline across, under or through the marine waters of this state. 
(2) Shipping and discharge records. 
(3) Records evidencing ownership at the landside flange of crude oil or petroleum products received at marine terminals. 
(4) Records identifying all marine terminal/shipping dock locations owned or operated within the state. 
(5) Records identifying third party locations where crude oil or petroleum products are received and documentation or certification that the third-party terminal operator remitted the fee on the crude oil and petroleum products where applicable. 
(6) Third-party independent inspectors reports (e.g. Saybolt and Caleb Brett reports), where available, showing loading in the state of crude oil at marine terminals or discharge in the state of crude oil and other petroleum products at marine terminals/shipping docks. 
(7) Refinery records showing the receipt of crude oil used for processing. 
(8) Marine terminal records identifying the point of origin of crude oil and petroleum products received. 
(9) Records from production platforms operated in this state accounting for all crude oil and any other product extracted on the platform and their distribution. 
(10) Copies of all returns filed with the board and related schedules used to prepare the returns. 
NOTE

Authority cited: Section 15606(a), Government Code; and Section 46601, Revenue and Taxation Code. References: Sections 46602 and 46603, Revenue and Taxation Code.
HISTORY

1. New section filed 6-6-2001; operative 7-6-2001 (Register 2001, No. 23).
2. Amendment filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§2257. Payment by Electronic Funds Transfer.
Note     •     History

Payments by electronic funds transfer shall be made in accordance with California Code of Regulations, Title 18, Section 4905. 
NOTE

Authority cited: Section 46160, Revenue and Taxation Code. Reference: Sections 46160 and 46162, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-7-2005; operative 7-7-2005 (Register 2005, No. 23).
Chapter 5. Energy Resources Surcharge Law
Article 1. Collection of Surcharge by Electric Utilities
§2300. Collection of Surcharge.
Note     •     History

Every electric utility making sales of electrical energy to consumers in this state shall collect the surcharge from each consumer other than a consumer that is an electric utility or is exempt under Chapter 3 of Part 19 of Division 2 of the Revenue and Taxation Code, at the time it collects its billing from the consumer for the electrical energy sold. A consumer is any person receiving electrical energy furnished by an electric utility and includes a person receiving electrical energy for redistribution for the use of his tenants.
An electric utility may collect the surcharge on sales of electrical energy to another electric utility if the purchasing utility certifies in writing to the selling utility that all purchased electrical energy will be consumed by it in such a manner as to be subject to the surcharge, that all self-generated electrical energy will be sold to other electrical utilities without collection of the surcharge, and that purchased electrical energy will not be pooled with self-generated electrical energy.
For the purpose of the proper administration of this part, it shall be presumed that electrical energy sold by an electric utility in this state to other than an electric utility is consumed by the purchaser in this state until the contrary is established.
Whenever the rate of the surcharge is increased or decreased, the duty to collect the surcharge from a consumer at such new rate shall commence with the first regular billing period applicable to that consumer which begins on or after the effective date of the change of rate.
The surcharge required to be collected by the electric utility from the consumer shall be added to the charges to the consumer for the electrical energy sold. The amount of the surcharge may be stated separately. If the electric utility does not separately state the amount of the surcharge, the electric utility shall print on the billing a notice to the effect that the charges include energy resources surcharge computed at (applicable rate) mill per kilowatt-hour.
NOTE

Authority cited: Section 40171, Revenue and Taxation Code. Reference: Sections 40019, 40019.1, 40020 and 40045, Revenue and Taxation Code.
HISTORY

1. New Chapter 5 (Sections 2300-2346, not consecutive) filed 12-27-74; effective thirtieth day thereafter (Register 74, No. 52). For history of former Chapter 5, see Register 68, No. 13.
2. Amendment filed 5-22-78; effective thirtieth day thereafter (Register 78, No. 21).
3. Change without regulatory effect amending first paragraph and Note filed 3-30-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 14).
§2301. Due and Payable Dates.

The surcharges required to be collected by electric utilities are due quarterly on or before the last day of the month next succeeding each calendar quarter.
Amounts of surcharge due for which a billing for the electrical energy is issued by an electric utility to the consumer prior to the close of a calendar quarter are payable with the surcharge return for that quarter.
Any amounts of the surcharge required to be paid or collected that are not billed in the ordinary course of the billings by an electric utility may be determined by the Board against the utility or the consumer, or both.
§2302. Surcharge Collections a Debt.

The surcharge required to be collected by the electric utility, and any amount unreturned to the consumer which is not a surcharge but was collected from the consumer as representing a surcharge, constitute debts owed by the electric utility to this state.
Any amounts collected by an electric utility from a consumer on account of the purchase of electrical energy the consumption of which is subject to the surcharge shall be applied proportionately between the liability of the consumer on account of the purchase of the electrical energy and the liability of the consumer for the surcharge. An electric utility may not apply partial payments by a consumer preferentially to the amount owing the utility for electrical energy, even though the partial payment is in an amount equal to the charge for such energy.
§2303. Relief from Liability.
Note     •     History

A person may be relieved from the liability for the payment of the energy resources surcharge, including any penalties and interest added to the surcharge, when that liability resulted from the failure to make a timely return or a payment and such failure was found by the board to be due to reasonable reliance on written advice given by the board as described in California Code of Regulations, Title 18, Section 4902. 
NOTE

Authority cited: Section 40171, Revenue and Taxation Code. Reference: Section 40104, Revenue and Taxation Code. 
HISTORY

1. New section filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§2303.1. Innocent Spouse or Registered Domestic Partner Relief from Liability.
Note     •     History

A spouse or registered domestic partner claiming relief from liability for the energy resources surcharge, interest, penalties, and other amounts shall be relieved from such liability where all the requirements set forth in California Code of Regulations, title 18, section 4903 are met.
NOTE

Authority cited: Section 40171, Revenue and Taxation Code. Reference: Sections 40105 and 40111-40117, Revenue and Taxation Code; and Sections 297, 297.5 and 308, Family Code.
HISTORY

1. New section filed 5-18-2010; operative 6-17-2010 (Register 2010, No. 21).
§2304. Worthless Accounts.

An electric utility is relieved from liability to collect the surcharge insofar as the base upon which the surcharge is imposed is represented by accounts which have been found to be worthless and charged off in accordance with generally accepted accounting principles. If the electric utility has previously paid the amount of the surcharge, it may take as a deduction on its return the amount found to be worthless and charged off. If such accounts are thereafter collected in whole or in part, the surcharge so collected shall be paid with the first return filed after such collection.
Electric utilities may charge off their worthless accounts on the basis of their experience ratio provided the write-off percentage includes an allowance for collection on worthless accounts made subsequent to the write-off.
Article 2. Exemptions and Exclusions from Surcharge
§2315. Exemptions and Exclusions.

The consumption of electrical energy which this state is prohibited from taxing under the Constitution of the United States or under the Constitution of this state is exempt from the surcharge. The surcharge does not apply to the consumption of electrical energy by foreign governments or by any state of the United States other than the State of California. The surcharge applies to the consumption of purchased electrical energy by the State of California, by any county, city and county, municipality, district, public agency, or subdivision of this state unless otherwise exempt. The surcharge applies to the consumption of purchased electrical energy by charitable, religious, scientific, or educational corporations, funds, or foundations, whether or not the organizations qualify for exemption from property tax or franchise tax.
§2316. Specific Applications.
Note     •     History

The surcharge does not apply to the consumption of electrical energy by the following persons:
(1) The United States, its unincorporated agencies and instrumentalities;
(2) Any incorporated agency or instrumentality of the United States wholly owned by either the United States, or by a corporation wholly owned by the United States;
(3) The American National Red Cross, its chapters and branches;
(4) Insurance companies, including title insurance companies, subject to taxation under California Constitution, Article XIII, Section 28;
(5) Banks, including national banking associations, located within the limits of this state. The exemption for state banks and national banking associations has been repealed beginning with the bank's income year for Bank and Corporation Tax purposes commencing on or after January 1, 1981. The surcharge shall be collected by the electric utility from each state bank and each national banking association beginning with the first regular billing period applicable to that bank which commences on or after the date the bank becomes subject to the surcharge.
(6) Enrolled Indians purchasing and consuming electrical energy on Indian reservations;
(7) Career consular officers and employees of certain foreign governments who are exempt from tax by treaties and other diplomatic agreements with the United States;
(8) Federal credit unions organized in accordance with the provisions of the Federal Credit Union Act.
NOTE

Authority cited: Section 40171, Revenue and Taxation Code. Reference: Sections 40001-40191, Revenue and Taxation Code.
HISTORY

1. Amendment filed 1-30-80; effective thirtieth day thereafter (Register 80, No. 5).
§2317. Consumption by Electric Utilities.

The consumption by an electric utility of self-generated electrical energy is not subject to the surcharge. The consumption by an electric utility of purchased electrical energy that is used directly, lost by dissipation, or unaccounted for in accordance with generally accepted accounting principles by the electric utility in the process of generation, transmission, and distribution of electrical energy is exempt from the surcharge. However, the surcharge applies to the consumption by electric utilities of purchased electrical energy for any other purpose. (The term “consumption” does not include the receiving of purchased electrical energy by an electric utility for resale.)
When an electric utility purchases electrical energy and pools in its system the energy with electrical energy generated by it, the consumption of electrical energy in this state from the pool by the utility during any quarter shall be deemed to be a consumption of energy generated by it to the extent that the kilowatt-hours of the electrical energy generated by it during the quarter exceed the kilowatt-hours consumed by the electric utility. When an electric utility consumes electrical energy purchased from another electric utility, which has not been pooled in its system with electrical energy generated by it, the surcharge will apply to the consumption of the purchased electrical energy, unless the consumption is otherwise exempt.
§2318. Exemption Procedure. [Repealed]
History

HISTORY

1. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
Article 3. Registration, Returns, and Reports
§2329. Registration.

Every electric utility selling electric energy for consumption in this state shall register with the Board upon a form prescribed by the Board and shall set forth the name under which the utility transacts or intends to transact business, the principal office address and the mailing address of the utility, and such other information as the Board may require.
§2330. Electric Utility Returns.

Every electric utility shall file an electrical energy surcharge return on a form prescribed by the Board showing the number of kilowatt-hours of electrical energy generated, purchased, and used together with deductions claimed and the amount of surcharge due for the preceding quarterly period. The return shall be signed by a responsible officer or agent of the electric utility and shall be accompanied by a payment for the surcharge due.
The return and the payment shall be filed quarterly on or before the last day of the month next succeeding each calendar quarter. Amounts of surcharge due for which a billing for the electrical energy is issued by an electric utility to the consumer prior to the close of a calendar quarter are payable with the surcharge return for that quarter.
§2331. Consumer Returns.

Every person purchasing electrical energy the consumption of which is subject to the surcharge and who has not paid the surcharge billed and required to be collected by an electric utility shall file a return with the Board on or before the last day of the month following each calendar quarter for the preceding quarterly period. The return shall be filed in such form as the Board may prescribe and shall be filed by the person required to file the return or by his duly authorized agent. The person required to file a return shall deliver the return together with a remittance of the amount of the surcharge payable to the office of the Board. 
The Board may require the filing of returns by consumers in circumstances where it finds that consumers' liabilities are not being included in the return of an electric utility or it determines that consumer returns are necessary for the efficient administration of the electrical energy surcharge. The Board may require consumers' returns to cover periods other than calendar quarters.
§2332. Reports.
Note     •     History

Every electric utility registered with the Board shall annually file a report with the Board in such form as the Board may prescribe setting forth its estimate of the kilowatt-hours it will sell and use to which the surcharge will apply during the period September 1 through August 31 following the date of the estimate. The report shall be filed no later than June 30 of each year. In addition, every electric utility registered with the Board shall annually file a report with the Board in such form as the Board may prescribe setting forth its estimate of the kilowatt-hours it will sell and use to which the surcharge will apply during the period March 1 through the last day of February following the date of the estimate. This report shall be filed no later than December 31 of each year.
In addition to any other reports or returns required, the Board may require additional, supplemental, or other reports from electric utilities, consumers, and any other person generating,purchasing, transmitting, distributing, or consuming electrical energy, including verification of the information to be given on and the times for filing of such reports. The Board may require reports of estimates of future availability, generation, sales, and consumption of electrical energy from electric utilities and other persons as it may deem necessary.
NOTE

Authority cited: Section 40171, Revenue and Taxation Code. Reference: Sections 40001-40191, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-17-79; effective thirtieth day thereafter (Register 79, No. 33).
§2333. Payment by Electronic Funds Transfer.
Note     •     History

Payments by electronic funds transfer shall be made in accordance with California Code of Regulations, Title 18, Section 4905. 
NOTE

Authority cited: Section 40067, Revenue and Taxation Code. Reference: Sections 40067 and 40069, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-7-2005; operative 7-7-2005 (Register 2005, No. 23).
Article 4. Records
§2343. Records.
Note     •     History

(a) General. A taxpayer shall maintain and make available for examination on request by the board or its authorized representatives, records in the manner set forth at California Code of Regulations, Title 18, Section 4901. 
(b) Specific Applications. In addition to the record keeping requirements set forth in subdivision (a), a taxpayer shall comply with the following requirements. 
Every electric utility engaged in generating, purchasing, transmitting, distributing, consuming, or selling electrical energy in this state shall keep and maintain adequate and complete records showing:
(1) The electrical energy generated, purchased, transmitted, distributed, consumed, and sold in this state.
(2) Meter readings and other records as may be necessary for the accurate determination of the kilowatt-hours of electrical energy generated, purchased, consumed, or sold in this state. For sales or use measured by a basis other than metering, the records shall show the other measurement and the method of computing the kilowatt-hours of electrical energy so sold or used.
(3) All deductions allowed by law and claimed in filing returns, except for the electrical energy used or lost in generation, transmission, and/or distribution.
(4) The methods and amounts used in computing its reports of estimates of future availability, generation, sales, and consumption of electrical energy.
NOTE

Authority cited: Section 40171, Revenue and Taxation Code. Reference: Sections 40172, 40173, 40174 and 40175, Revenue and Taxation Code. 
HISTORY

1. New subsections (a) and (b) and new Note filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§2344. Microfilm Records. [Repealed]
History

HISTORY

1. Repealer filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§2345. Records Prepared by Automated Data Processing Systems. [Repealed]
History

HISTORY

1. Repealer filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§2346. Records Retention. [Repealed]
History

HISTORY

1. Repealer filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
Chapter 5.5. Emergency Telephone Users Surcharge Law
Article 1. Imposition of Surcharge
§2400. Foreword. [Repealed]
Note     •     History

NOTE

Authority cited for Chapter 5.5 (Sections 2400-2431, not consecutive): Section 41128, Revenue and Taxation Code. Reference: Sections 41003-41019, 41020-41049, 41052-41053, 41073-41095 and 41129, Revenue and Taxation Code.
HISTORY

1. New Chapter 5.5 (Sections 2400-2431, not consecutive) filed 4-15-77; effective thirtieth day thereafter (Register 77, No. 16).
2. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§2401. Definitions.
Note     •     History

(a) Service Supplier. 
(1) “Service Supplier” means both of the following:
(A) Any person supplying intrastate telephone communication services to any service user in this state and providing access to the “911” emergency system by utilizing the digits 9-1-1; and
(B) Any person supplying Voice over Internet Protocol (VoIP) service to any service user in this state and providing access to the “911” emergency system by utilizing the digits 9-1-1.
(2) Notwithstanding paragraph (1):
(A) Where intrastate telephone communication services are supplied through a prepaid telephone calling card, the “service supplier” means the person that provides access to its lines and switches for telephone services and is responsible for deducting the amounts charged for telephone services used from amounts of service available on the prepaid telephone calling card.
(B) A wholesaler or retailer of prepaid telephone calling cards is not a service supplier unless it provides access to its lines and switches for telephone services and is responsible for deducting the amounts charged for telephone services used from amounts of service available on the prepaid telephone calling card.
(b) Intrastate Telephone Communication Services. “Intrastate telephone communication services” means all local or toll telephone services where the point or points of origin and the point or points of destination of the services are all located in this state. It includes the access to a local telephone system, and the privilege of telephonic quality communication with substantially all persons having telephone or radiotelephone stations constituting a part of a local telephone system and any facility or service provided in connection with local telephone service. It also includes either:
(1) A telephonic quality communication for which there is a toll charge for the service that varies in amount with either the distance or elapsed transmission time, or the distance and elapsed transmission time, of each individual communication; or 
(2) A service which entitles the subscriber, upon payment of a periodic charge (whether a flat charge or a charge based upon total elapsed transmission time), to the privilege of a predetermined amount of units or dollars of telephonic communications or an unlimited number of telephonic communications to or from all or a substantial portion of the persons having telephone or radiotelephone stations in a specified area which is outside the local telephone system area in which the station provided with the service is located.
(c) Billing Agent. “Billing Agent” shall mean any person that submits a bill to a service user on behalf of another person who is a service supplier, reseller or billing aggregator. A billing agent is not considered to be a service supplier for intrastate telephone communication services provided by or billed on behalf of that person.
(d) Billing Aggregator. “Billing Aggregator” shall mean any person engaged in the business of facilitating the billing and collection of charges for intrastate telephone communication services by aggregating the information about telephone communication services provided by one or more service suppliers and submitting the combined information to one or more local exchange carriers for billing and collection. The billing aggregator may contract with service suppliers to:
(1) receive call information detail from one or more service suppliers and submit that call information detail to one or more local exchange carriers acting as billing agents;
(2) receive payments from local exchange carriers acting as billing agents for disbursement as directed by service suppliers; and
(3) prepare and file returns and remit the surcharge to the Board in the manner provided in the applicable contract.
A billing aggregator shall identify all service suppliers on whose behalf it will prepare and file returns at such time and in such form as the Board requests.
(e) Prepaid Telephone Calling Card. “Prepaid telephone calling card” means any card, or other identifier such as an authorization number or access code, which is purchased in advance of use of telephone services, and entitles the holder of the card or user of the authorization number or access code to a specified dollar amount or number of minutes of telephone service, where dollar amounts or minutes for telephone services used are deducted from the amount of prepaid service available on the prepaid telephone calling card as local and long distance telephone services are provided to the user of the prepaid telephone calling card.
NOTE

Authority cited: Section 41128, Revenue and Taxation Code. Reference: Sections 41007, 41011, 41015, 41016 and 41021, Revenue and Taxation Code.
HISTORY

1. New subsection (c) and new Note filed 4-1-97; operative 10-1-97 pursuant to Government Code section 11343.4(c) (Register 97, No. 14).
2. New subsections (d)-(d)(3) filed 4-27-2000; operative 5-27-2000 (Register 2000, No. 17).
3. Amendment of subsection (a), new subsections (a)(1)-(2) and (e) and amendment of  Note filed 10-2-2000; operative 11-1-2000 (Register 2000, No. 40).
4. Change without regulatory effect amending subsection (a), adopting new subsections (a)(1)-(a)(2), renumbering and amending former subsections (a)(1)-(2) to subsections (a)(2)(A)-(B), amending subsection (b), adopting new subsections (b)(1)-(2) and amending Note filed 3-30-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 14).
§2402. Imposition of the Surcharge. [Repealed]
History

HISTORY

1. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§2403. Prepaid Telephone Calling Cards.
Note     •     History

(a) The surcharge applies to the dollar amounts deducted or the value of the minutes deducted from the prepaid telephone calling card by the providing service supplier to the extent that those dollar amounts or minutes were deducted to pay for intrastate telephone communication services provided to the user of the prepaid telephone calling card. Dollar amounts or minutes deducted for interstate telephone communication services are exempt from the surcharge. Dollar amounts or minutes of telephone service which are forfeited because they have not been used prior to the expiration of the prepaid telephone calling card are not subject to the surcharge.
(b) Where intrastate telephone communication services are supplied through a prepaid telephone calling card, the providing service supplier may apply the surcharge to an estimate of the charges for intrastate services subject to the surcharge. The estimate of charges may be based on such call information as the providing service supplier reasonably believes demonstrates the approximate amount of intrastate telephone communication service charges subject to the surcharge.
(c) If a prepaid telephone calling card contains a statement that the price of the card includes applicable taxes and fees, the service supplier responsible for collecting and paying the surcharge on intrastate telephone communications services provided pursuant to the card may reduce the taxable measure of such services by taxes and fees which are not subject to the 911 surcharge. Taxes and fees which are not subject to the 911 surcharge include the federal excise tax and the 911 surcharge. Taxes and fees imposed on the service supplier by statute, such as those imposed by the California Public Utilities Commission, may not be deducted from the taxable measure.
NOTE

Authority cited: Section 41128, Revenue and Taxation Code. Reference: Sections 41011 and 41021, Revenue and Taxation Code.
HISTORY

1. New section filed 10-2-2000; operative 11-1-2000 (Register 2000, No. 40). For prior history see Register 82, No. 30.
§2404. Billing Presumed to Be Correct. [Repealed]
History

HISTORY

1. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§2405. Partial Payments.

Partial payments by a service user to a service supplier for intrastate charges for service shall be applied proportionately to the charges for service and to surcharge, unless the service user specifically directs otherwise in writing.
§2406. Liability for Surcharge Remitted by Billing Aggregator or Billed Through Billing Agents.
Note     •     History

(a) The surcharge is required to be remitted by the service supplier which provided the intrastate telephone communication services.
(b) Where a return is filed and surcharge remitted by a billing aggregator on behalf of one or more service suppliers, the service supplier will be deemed to have remitted the surcharge if all of the following conditions have been met:
(1) The service supplier has registered with the Board in accordance with Regulation 2421.
(2) The service supplier has notified the Board in writing that the billing aggregator is authorized to act on its behalf to prepare and file returns and remit the surcharge to the Board, and such authorization is still in effect. Where the service supplier authorizes the billing aggregator to act on its behalf concerning only a portion of the telephone communication services it provides, the service supplier shall so notify the Board and must report and remit directly to the Board the surcharge due on the remainder of the telephone communication services it provides.
(3) The service supplier has provided to the Board and to the billing aggregator its written consent for the billing aggregator to disclose to the Board any and all records concerning the activities conducted on behalf of the service supplier related to the surcharge.
(4) The billing aggregator does either (A) or (B).
(A) files a separate return for each service supplier on whose behalf the return is filed which includes the name, address, account number and amount of surcharge remitted; or
(B) files a single return for more than one service supplier; provided that the billing aggregator, at such time and in such form as the board requests, shall identify the service suppliers on whose behalf it filed the return and provide documentation supporting the return.
(c) A service supplier acting as a billing agent for another service supplier, reseller or billing aggregator is not liable for remitting the surcharge on services provided by or billed on behalf of the other service supplier, reseller or billing aggregator even though those charges may be included, as a separate part of a billing, with charges for services it did provide to the service user. A billing agent providing only billing services is not a service supplier and is not required to remit the surcharge collected on behalf of a service supplier that provided the service.
NOTE

Authority cited: Section 41128, Revenue and Taxation Code. Reference: Sections 41021 and 41023, Revenue and Taxation Code.
HISTORY

1. New section filed 4-1-97; operative 10-1-97 pursuant to Government Code section 11343.4(c) (Register 97, No. 14).
2. Amendment of section heading and section filed 4-27-2000; operative 5-27-2000 (Register 2000, No. 17).
Article 2. Exclusion and Exemptions
§2411. Exclusion from the Term “Person.” [Repealed]
History

HISTORY

1. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§2412. Exclusions from the Term “Charges for Service.” [Repealed]
History

HISTORY

1. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§2413. Exemptions from Surcharge.
Note     •     History

The surcharge does not apply to:
(a) Charges for service or equipment furnished by a service supplier subject to public utilities regulation during any period when the same or similar service or equipment is also available for sale or lease from other than a service supplier subject to public utility regulation.
(b) Charges for service when imposition of such surcharge would be in violation of the Constitution of the United States, the United States Code, or the laws of the State of California. These include charges for service to:
(1) The United States, its unincorporated agencies and instrumentalities, or any state of the United States.
(2) Any incorporated agency or instrumentality of the United States wholly owned by either the United States, or by a corporation wholly owned by the United States.
(3) The American National Red Cross, its chapters and branches.
(4) Insurance companies, including title insurance companies, subject to taxation under California Constitution, Article XIII, Section 28.
(5) Banks, including national banking associations, located within the limits of this state. The exemption for state banks and national banking associations has been repealed beginning with the bank's income year for Bank and Corporation Tax purposes commencing on or after January 1, 1981. The service supplier shall collect the surcharge from each state bank and each national banking association beginning with the first regular billing period applicable to that bank which commences on or after the date the bank becomes subject to the surcharge.
(6) Enrolled Indians who are service users subscribing for service from within the limits of an Indian reservation.
(7) Foreign governments and career consular officers and employees of certain foreign governments who are exempt from tax by treaties and other diplomatic agreements with the United States.
(8) Federal credit unions organized in accordance with the provisions of the Federal Credit Union Act.
(c) Toll charges used in the collection and dissemination of news for public press.
(d) Charges for wide-area telephone service used by common carriers in the conduct of their business.
(e) Charges for intrastate telephone communication services which are exempt from the federal communication services tax pursuant to Section 4253 of the Internal Revenue Code of 1954.
NOTE

Authority cited: Section 41128, Revenue and Taxation Code. Reference: Sections 41003-41019, 41020-41049, 41052-41053, 41073-41095, and 41129, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (b)(5) filed 1-30-80; effective thirtieth day thereafter (Register 80, No. 5).
§2414. Exemption Procedure. [Repealed]
History

HISTORY

1. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
Article 3. Registration, Returns and Reports
§2421. Registration.

Every service supplier supplying intrastate telephone communication service to any service user in this state shall register with the board upon a form prescribed by the board and shall set forth the name under which it transacts or intends to transact business, the principal office address and the mailing address of the service supplier, and such other information as the board may require. The registration form shall be signed by the owner, a general partner, or a responsible officer of the corporation, as the case may be.
§2422. Returns and Payment.
Note     •     History

On or before the last day of the second month of each calendar quarter every service supplier shall file an emergency telephone users surcharge return on a form prescribed by the board for the preceding calendar quarter. The return shall be signed by a responsible officer or agent of the service supplier and shall be accompanied by a payment for the surcharge due. All remittances shall be payable to the State Board of Equalization.
At the time of filing each surcharge return the service supplier shall provide the board with a list containing the names and addresses of any service users who have refused to pay the surcharge, the date the surcharge was billed to each customer, the amount of each unpaid surcharge, and the reasons, if any, given by the users for refusing to make such payment. On and after January 1, 1982, such information shall be provided for a service user only if the cumulative uncollected amount for that user totals $3.00 or more.
NOTE

Authority cited: Section 41128, Revenue and Taxation Code. Reference: Sections 41024, 41051 and 41052, Revenue and Taxation Code.
HISTORY

1. Amendment filed 11-5-82; effective thirtieth day thereafter (Register 82, No. 45).
2. Amendment filed 6-17-86; effective thirtieth day thereafter (Register 86, No. 25).
§2423. Refunds to Service User by Service Supplier. [Repealed]
History

HISTORY

1. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§2424. Service User Is Liable. [Repealed]
History

HISTORY

1. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§2425. Payment by Electronic Funds Transfer.
Note     •     History

Payments by electronic funds transfer shall be made in accordance with California Code of Regulations, Title 18, Section 4905. 
NOTE

Authority cited: Section 41060, Revenue and Taxation Code. Reference: Sections 41060 and 41062, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-7-2005; operative 7-7-2005 (Register 2005, No. 23). For prior history, see Register 83, No. 37.
Article 4. Records
§2431. Records.
Note     •     History

(a) General. A service supplier shall maintain and make available for examination on request by the board or its authorized representatives, records in the manner set forth at California Code of Regulations, Title 18, Section 4901. 
(b) Specific Applications. In addition to the record keeping requirements set forth in subdivision (a), service suppliers shall comply with the following requirements. 
Every service supplier liable for payment of the emergency telephone users surcharge which it collects from service users shall keep complete and accurate records showing:
(1) Totals for intrastate telephone communication in this state billed to service users.
(2) All exemptions allowed by law.
(3) Amounts of Emergency Telephone Users Surcharge collected. 
NOTE

Authority cited: Section 41128, Revenue and Taxation Code. Reference: Section 41056, Revenue and Taxation Code. 
HISTORY

1. Amendment of section and new Note filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§2432. Relief from Liability.
Note     •     History

A person may be relieved from the liability for the payment of the Emergency Telephone Users Surcharge, including any penalties and interest added to the surcharge, when that liability resulted from the failure to make a timely return or a payment and such failure was found by the board to be due to reasonable reliance on written advice given by the board as described in California Code of Regulations, Title 18, Section 4902. 
NOTE

Authority cited: Section 41128, Revenue and Taxation Code. Reference: Section 41098, Revenue and Taxation Code.
HISTORY

1. New section filed 10-2-2000; operative 11-1-2000 (Register 2000, No. 40).
2. Amendment filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§2433. Innocent Spouse or Registered Domestic Partner Relief from Liability.
Note     •     History

A spouse or registered domestic partner claiming relief from liability for the emergency telephone users surcharge, interest, penalties, and other amounts shall be relieved from such liability where all the requirements set forth in California Code of Regulations, title 18, section 4903 are met.
NOTE

Authority cited: Section 41128, Revenue and Taxation Code. Reference: Sections 41099 and 41100-41106, Revenue and Taxation Code; and Sections 297, 297.5 and 308, Family Code.
HISTORY

1. New section filed 5-18-2010; operative 6-17-2010 (Register 2010, No. 21).
Chapter 5.6. Litter Control, Recycling, and Resource Recovery Assessment [Repealed]
NOTE

Authority cited: Section 42600, Revenue and Taxation Code. Reference: Sections 42101-42103, 42103.5, 42104-42106 and 42108, Revenue and Taxation Code.
HISTORY

1. New Article 1 (Sections 2450-2454) filed 1-19-79; effective thirtieth day thereafter. Pursuant to Chapter 827, Statutes of 1978, order designates an operative date for certain provisions of Sections 2451 and 2452 as 1-1-79 (Register 79, No. 3).
2. Repealer of Chapter 5.6 (Article 1, Sections 2450-2454) filed 12-24-79 as an emergency; designated effective 12-31-79 (Register 79, No. 52). A Certificate of Compliance must be filed within 120 days or emergency language will be repealed on 4-30-80.
3. Certificate of Compliance filed 3-22-80 (Register 80, No. 12).
Chapter 6. Alcoholic Beverage Tax
Article 1. Records
§2500. Records.
Note     •     History

A taxpayer shall maintain and make available for examination on request by the board or its authorized representatives, records in the manner set forth at California Code of Regulations, Title 18, Section 4901. 
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32452 and 32453, Revenue and Taxation Code.
HISTORY

1. New Chapter 6 ( 2500, 2504 through 2509, 2512 through 2515, 2518, 2525, 2530, 2535 though 2543, 2550 through 2552, 2555, 2560, 2562 through 2567) filed 3-18-55; effective thirtieth day thereafter (Register 55, No. 4).
2. Amendment of section heading, repealer and new section and amendment of Note filed 2-4-2003; operative 3-6-2003 (Register 2003, No. 6).
3. Repealer and new section filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§2504. Distilled Spirits Produced, Packaged, or Bottled.
Note     •     History

Every distilled spirits manufacturer, manufacturer's agent, brandy manufacturer, and rectifier shall keep and preserve a record of all distilled spirits produced, manufactured, cut, blended, rectified, bottled, packaged, or otherwise acquired in this State. A daily record of such acquisitions shall be made in book forms prescribed by the board. All distilled spirits received from licensee's own bottling or packaging department shall be recorded in form BOE-240-A. Receipts from the bottling or packaging department shall include all distilled spirits bottled or packaged, whether or not the distilled spirits are owned by the licensee.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32211 and 32452, Revenue and Taxation Code.
HISTORY

1. Amendment filed 5-22-78; effective thirtieth day thereafter (Register 78, No. 21).
2. Change without regulatory effect amending section and Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2505. Bottled or Packaged Distilled Spirits Acquired in California.
Note     •     History

Every distilled spirits taxpayer shall keep a record in form BOE-241-A of all bottled or packaged distilled spirits acquired from other distilled spirits taxpayers in California and of all distilled spirits received from licensee's own branches in California.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32211 and 32452, Revenue and Taxation Code.
HISTORY

1. Amendment filed 5-22-78; effective thirtieth day thereafter (Register 78, No. 21).
2. Change without regulatory effect amending section and Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2506. Bottled or Packaged Distilled Spirits Imported.
Note     •     History

Every distilled spirits or brandy importer shall keep a record in form BOE-242-A of all bottled or packaged distilled spirits acquired by direct importation from without the State.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32211 and 32452, Revenue and Taxation Code.
HISTORY

1. Amendment filed 5-22-78; effective thirtieth day thereafter (Register 78, No. 21).
2. Change without regulatory effect amending section and Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2507. Distilled Spirits Sold or Exported.
Note     •     History

Every distilled spirits taxpayer shall keep a record of all distilled spirits sold, and in addition thereto, shall make a daily record in book forms prescribed by the board covering all distilled spirits sold or delivered to other taxpayers in California and all distilled spirits exported or sold for export from California, as follows:
(a) All sales or deliveries of distilled spirits to other California distilled spirits taxpayers, all transfers of distilled spirits to licensee's own branches in California, and all returns of distilled spirits to original vendors in California, shall be recorded in form BOE-243-B.
(b) All sales of distilled spirits exported or sold for export from California and actually exported and all sales of distilled spirits to common carriers engaged in interstate or foreign passenger service, shall be recorded in form BOE-244-B.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32211 and 32452, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect amending subsections (a) and (b) and adding Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2508. Distilled Spirits Invoices and Bottling or Packaging Records.
Note     •     History

All purchase invoices and bottling or packaging records covering distilled spirits acquisitions and all sales invoices, credit memoranda, or other data supporting such sales or deliveries, must be retained by the licensee and filed in such manner as to be readily available for verification by employees of the board.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32211 and 32452, Revenue and Taxation Code.
HISTORY

1. Amendment filed 5-22-78; effective thirtieth day thereafter (Register 78, No. 21).
2. Change without regulatory effect amending Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2509. Prepayment of Distilled Spirits Tax; Consolidated Returns.
Note     •     History

Any distilled spirits wholesaler may make an application to the board for permission to prepay the distilled spirits excise tax on his inventory of distilled spirits on hand as of the first day of any calendar month, and for permission thereafter to pay the excise tax levied on sales of distilled spirits on the basis of subsequent purchases and acquisitions of distilled spirits by him. Any wholesaler who has been granted such permission and who operates more than one location for which distilled spirits wholesalers' licenses are issued and who elects to file a consolidated tax return covering distilled spirits transactions for all of his branch premises, need not include in his forms BOE-241-A and BOE-243-B transfers of distilled spirits between his own premises as otherwise provided in this article.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32211 and 32452, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect amending section and adding Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2512. Beer and Wine Production; Beer Bottling; Wholesalers' Beer and Wine Purchases.
Note     •     History

Every beer manufacturer or wine grower shall keep and preserve a record of all beer or wine manufactured or produced in this State. Such record must show the quantity produced and the disposition thereof. Duplicates of federal production and bottling records, if available to employees of the board, shall suffice to comply with this regulation.
Every beer manufacturer shall keep and preserve separately a record of all beer received by the bottling, canning, and cooperage departments and packaged therein.
Every beer and wine wholesaler shall keep and preserve a record of all beer and wine purchased in this State. This record must show the kind and quantity of beer or wine purchased, the name and address of the person from whom purchased, and the date received. Purchase invoices containing all of the above information, if filed so as to be readily accessible for verification by employees of the board, shall suffice to comply with this regulation.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32171, 32173 and 32452, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect adding Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2513. Beer and Wine Imported.
Note     •     History

Every importer of beer and wine shall keep a record in form BOE-269-A of all beer and wine imported into this State. This record must be supported by purchase invoices filed in such manner as to be readily accessible for verification by employees of the board.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32175 and 32452, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect amending section and adding Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2514. Beer and Wine Sold.
Note     •     History

Every manufacturer, wine grower, importer, and beer and wine wholesaler shall keep and preserve a record of all beer and wine sold. This record must show the name and address of the purchaser, the date sold, the kind and quantity, the size and capacity of packages of beer or wine sold, the price, container charges or deposits and any discount offered.
Sales invoices containing all of the above information, if filed so as to be readily accessible for verification by employees of the board, shall suffice to comply with this regulation.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32171, 32173 and 32452, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect adding Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2515. Beer and Wine Exports. [Repealed]
History

HISTORY

1. Repealer filed 12-5-88; operative 1-4-89 (Register 89, No. 9).
§2518. Beer Sold to Instrumentalities of the Armed Forces. [Repealed]
Note     •     History

NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32151, 32177, and 32452, Revenue and Taxation Code.
HISTORY

1. Repealer filed 12-24-79 as an emergency; designated effective 1-1-80 (Register 79, No. 52). For prior history, see Registers 69, No. 32; 73, No. 23; 73, No. 39; and 75, No. 52. A Certificate of Compliance must be filed within 120 days or emergency language will be repealed on 5-1-80.
2. Certificate of Compliance filed 3-21-80 (Register 80, No. 12).
§2519. Distilled Spirits and Wine Sold to Instrumentalities of the Armed Forces. [Repealed]
Note     •     History

NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32177.5 and 32452, Revenue and Taxation Code.
HISTORY

1. New section filed 12-22-80 as an emergency; effective upon filing (Register 80, No. 52). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 4-21-81.
2. Order of Repeal of 12-22-80 order filed 12-26-80 by OAL pursuant to Government Code section 11349.6 (Register 80, No. 52).
3. New section filed 4-23-81; effective thirtieth day thereafter (Register 81, No. 17).
4. Repealer filed 9-12-90; operative 10-12-90 (Register 90, No. 43).
§2520. Payment by Electronic Funds Transfer.
Note     •     History

Payments by electronic funds transfer shall be made in accordance with California Code of Regulations, Title 18, Section 4905. 
NOTE

Authority cited: Section 32260, Revenue and Taxation Code. Reference: Sections 32260 and 32262, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-7-2005; operative 7-7-2005 (Register 2005, No. 23).
Article 2. Invoices
§2525. Contents.
Note     •     History

(a) Every sale or delivery of alcoholic beverages, except beer, from one licensee to another licensee must be recorded on a sales invoice, whether or not consideration is involved. Invoices covering the sale or purchase of alcoholic beverages must be filed in such manner as to be readily accessible for examination by employees of the board and shall not be commingled with invoices covering commodities other than alcoholic beverages.
Each sales invoice shall have printed thereon the name and address of the seller and shall show the following information:
(1) Name and address of the purchaser.
(2) Date of sale and invoice number.
(3) Kind, quantity, size, and capacity of packages of alcoholic beverages sold.
(4) The cost to the purchaser, together with any discount which at any time is to be given on or from the price as shown on the invoice.
(5) The place from which delivery of the alcoholic beverages was made unless delivery was made from the premises of the licensee or from a public warehouse located in the same county.
(6) Invoices covering sales of distilled spirits by distilled spirits taxpayers to other distilled spirits taxpayers shall show, in addition to the above, the total number of wine gallons covered by the invoice.
(b) Invoices covering sales of wine in internal revenue bond by a wine grower to another wine grower must also show that delivery was made “in bond.”
(c) Invoices covering sales of alcoholic beverages for use in trades, professions, or industries, and not for beverage use, must be marked or stamped: “No state tax--not for beverage use.”
(d) Invoices covering the sale of alcoholic beverages for export must be marked or stamped: “Sold for export.”
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32173, 32211 and 32452, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect adding Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
Article 3. Inventories
§2530. Inventories.
Note     •     History

(a) Distilled Spirits. Every distilled spirits taxpayer shall furnish to the board a statement of the gallonage of finished packaged distilled spirits on hand at the end of each month, or other reporting period authorized by the board. 
This statement shall be made on the Distilled Spirits Tax Return. Except as provided below, at least two of these statements shall be prepared from semi-annual physical inventories, a detailed record of which must be available at all times for verification by employees of the board. For taxpayers reporting on an annual basis, the statement shall be prepared from the December semi-annual physical inventory. A detailed record of the semi-annual physical inventories must be available at all times for verification by employees of the board.
A distilled spirits taxpayer shall be relieved of the requirement of taking one of the required semi-annual physical inventories upon the filing with the board of a copy of an order of the Federal Alcohol and Tobacco Tax and Trade Bureau (TTB) waiving the taking of such inventory and approving the taxpayer's taking of physical inventories on an annual basis. Said taxpayer may continue to take physical inventories on an annual basis until such waiver is rescinded by the board or by the TTB. The board may rescind the waiver and reimpose the requirement of semi-annual physical inventories if it finds that such semi-annual physical inventories are necessary to law enforcement or protection of the revenue. A distilled spirits taxpayer shall furnish to the board a copy of any order of the TTB affecting the taking of physical inventories by such taxpayer within 10 days of the taxpayer's receipt of such order.
(b) Beer. Every licensed beer manufacturer shall take a physical inventory monthly of bulk and bottled beer in the brewery bottling house in such manner as provided in Title 27, Code of Federal Regulations, Section 25.294 as it reads on April 1, 1989.
(c) Wine. Every licensed wine grower shall take a physical inventory of all wine and distilling material on hand in United States internal revenue bond on June 30th of each year or, if an annual inventory period ending on other than June 30 has been approved by the TTB, then the inventory shall be taken at the end of such annual inventory period.
(d) Supporting Records. All records used in preparing inventories for certification to the board shall be kept at the licensee's premises for verification by employees of the board. 
NOTE

Authority cited: Sections 32152 and 32451, Revenue and Taxation Code. Reference: Sections 32151, 32152, 32201, 32211, 32220 and 32452, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection(a) filed 8-6-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Amendment of subsection(a) filed 12-26-75; effective thirtieth day thereafter. Note: Filing designates 1-1-76 as effective date (Register 75, No. 52). 
3. Amendment of subsection(a) filed 9-6-78; effective thirtieth day thereafter (Register 78, No. 36).
4. Amendment of subsection(a) refiled 9-22-78 to correct Reference citation only; effective thirtieth day thereafter (Register 78, No. 38).
5. Amendment of subsections(b) and (c) filed 7-23-84; effective thirtieth day thereafter (Register 84, No. 30).
6. Amendment of subsections(a) and (b) filed 1-2-90; operative 2-1-90 (Register 90, No.1). 
7. Change without regulatory effect amending section and Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
Article 4. Reports
§2534. Reporting Periods for Tax Returns. [Repealed]
Note     •     History

NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32151, 32151.5, 32452, Revenue and Taxation Code.
HISTORY

1. New section filed 12-26-75; effective thirtieth day thereafter. NOTE: Filing designates 1-1-76 as effective date (Register 75, No. 52).
2. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§2535. Distilled Spirits.
Note     •     History

Every distilled spirits taxpayer shall, on or before the fifteenth day of each and every month, or, on or before the fifteenth day of the month following the close of such other reporting period authorized by the board, file with the board at Sacramento a tax return on the form prescribed by the board of all sales of distilled spirits for the reporting period, together with such other information as is required on said form.
Every distilled spirits taxpayer shall, immediately following the close of business on the last day of each month forward the original page, or pages, of forms BOE-241-A, BOE-242-A, BOE-243-B, and BOE-244-B to the board at Sacramento, provided that additional entries in these forms have been made since the last reporting date. 
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32201, 32211, 32220, 32251, 32251.5 and 32452, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-6-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Amendment filed 12-26-75; effective thirtieth day thereafter. NOTE: Filing designates 1-1-76 as effective date (Register 75, No. 52).
3. Amendment filed 5-9-84; effective thirtieth day thereafter (Register 84, No. 19).
4. Change without regulatory effect amending second paragraph and Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2536. Beer Manufacturers.
Note     •     History

Every licensed beer manufacturer shall, on or before the fifteenth of each and every month, or, on or before the fifteenth day of the month following the close of such other reporting period authorized by the board, file with the board at Sacramento a tax return on forms prescribed by the board of all sales of beer for the preceding reporting period together with such other information as is required on said forms.
In determining the tax due on the sale of beer in bottles or cans, the quantity sold shall be computed in accordance with the following table:

	Fluid Contents
   Number of 	(Ounces) of
   Bottles or	Each Bottle	Barrel
Cans Per Case	or Can	Equivalent

	4	64	0.06452
	6	64	.09677
	12	6	.01815
	12	7	.02117
	12	8	.02419
	12	12	.03629
	12	14	.04234
	12	30	.09073
	12	32	.09677
	24	6	.03629
	24	7	.04234
	24	8	.04839
	24	9	.05444
	24	10	.06048
	24	11	.06653
	24	12	.07258
	24	13	.07863
	24	14	.08468
	24	15	.09073
	24	16	.09677
	36	6	.05444
	36	7	.06351
	36	8	.07258
	48	12	.14516
	50	12	.15120
	
Since the determination of tax liability is based upon a count of cases of bottles or cans, only bottles or cans of uniform size and content may be packaged in the same case or shipping container.
If beer is to be packaged in cases of sizes other than those shown above, the beer manufacturer shall notify the board in advance and request to be advised of the proper fractional barrel equivalent of the proposed container. 
Reports of inventories required to be made on each tax return shall be in agreement with Federal Form TTB F 5130.9.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32151, 32152, 32175, 32176, 32220, 32251, 32251.5 and 32452, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-6-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Amendment filed 12-26-75; effective thirtieth day thereafter. NOTE: Filing designates 1-1-76 as effective date (Register 75, No. 52).
3. Amendment filed 12-15-88; operative 1-14-89 (Register 88, No. 52).
4. Amendment filed 12-28-89; operative 1-27-90 (Register 90, No. 1). 
5. Change without regulatory effect amending section and Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2537. Wine Growers.
Note     •     History

Every licensed wine grower shall, on or before the fifteenth day of each and every month, or, on or before the fifteenth day of the month following the close of such other reporting period authorized by the board, file with the board at Sacramento a tax return on forms prescribed by the board of all sales of wine for the preceding reporting period, together with such other information as is required on said form.
Reports of inventories required to be made on each tax return must be in agreement with the data on Federal Form TTB F 5120.17. The amounts reported must be book inventories for all months except for the end of the annual inventory period as described in Regulation 2530. The inventory reported in that month must be a physical inventory.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32151, 32152, 32173, 32174, 32175, 32176, 32220, 32251, 32251.5 and 32452, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-6-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Amendment filed 12-26-75; effective thirtieth day thereafter. NOTE: Filing designates 1-1-76 as effective date (Register 75, No. 52).
3. Amendment filed 7-23-84; effective thirtieth day thereafter (Register 84, No. 30).
4. Amendment filed 12-12-88; operative 1-1-89 (Register 88, No. 52).
5. Change without regulatory effect amending section and Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2538. Beer and Wine Importers.
Note     •     History

Every licensed beer and wine importer shall, on or before the fifteenth day of each and every month, or, on or before the fifteenth day of the month following the close of such other reporting period authorized by the board, file with the board at Sacramento a tax return on the form prescribed by the board of all sales of beer or wine for the preceding reporting period, together with such other information as is required on such form. 
A wine grower holding both a winegrower's license and a beer and wine importer's license shall include the total imports of wine for the reporting period on the “Winegrower Tax Return.”
A beer manufacturer holding both a beer manufacturer's license and a beer and wine importer's license shall include the total imports of beer on the “Beer Manufacturer Tax Return.”
Every licensed beer and wine importer shall on or before the fifteenth day of the month following the close of each reporting period, file form BOE-269-A.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32151, 32171, 32173, 32174, 32175, 32176, 32220, 32251, 32251.5 and 32452, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-6-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Amendment filed 12-26-75; effective thirtieth day thereafter. NOTE: Filing designates 1-1-76 as effective date (Register 75, No. 52).
3. Amendment filed 12-15-88; operative 1-14-89 (Register 89, No. 11).
4. Amendment filed 2-4-2003; operative 3-6-2003 (Register 2003, No. 6).
5. Change without regulatory effect amending section and Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2539. Tax Remittances. [Repealed]
Note     •     History

NOTE

Authority cited: Sections 32451 and 32452, Revenue and Taxation Code. Reference: Section 32251, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-6-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§2540. Common Carrier Receipts and Delivery Reports.
Note     •     History

Common carriers and holders of interstate alcoholic beverage transporters' permits, transporting alcoholic beverages into this State from without this State for delivery or use within this State, shall obtain from the licensed importer or customs broker a receipt for the alcoholic beverages so transported and delivered. This receipt must show the following information:
Name of shipper, point of origin, name of importer or customs broker to whom delivery is made, place of delivery, name of carrier making delivery, a complete description of the shipment, and the number of the waybill covering the shipments. In the case of rail shipments the receipt shall show also the car number and in the case of water shipments the receipt shall show also the name of the vessel and the number of the steamship bill of lading.
A copy of the freight bill or other shipping document containing all of this information shall be deemed to be compliance with this requirement. A copy of such receipt must be delivered to the importer or customs broker to whom delivery is made. With respect to pool shipments in which more than one licensed importer or customs broker participates, the common carrier shall furnish a copy of the receipt to each participating importer or customs broker.
All deliveries of alcoholic beverages, shipment of which originated outside California, made to California importers or customs brokers, shall be reported to the board at Sacramento by common carriers and holders of interstate alcoholic beverage transporters' permits. Such report shall be filed with the board on forms prescribed by the board not later than the fifteenth day of each month covering such deliveries made in the previous calendar month.
NOTE

Authority cited: Sections 32451 and 32452, Revenue and Taxation Code. Reference: Sections 32171, 32173, 32211 and 32452, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-6-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Change without regulatory effect amending Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2541. Common Carrier Tax Reports.
Note     •     History

Every common carrier engaged in interstate or foreign passenger service making sales of distilled spirits in California and every person licensed to sell distilled spirits aboard such a carrier, shall, on or before the first day of the second calendar month following the close of each calendar month, or such other reporting period as is authorized by the Board, file with the Board at Sacramento a report of all sales of distilled spirits in California for the preceding reporting period. The report shall be in such form as the Board shall prescribe and shall be accompanied by a remittance of the amount of tax due for the period covered by the report. 
For the purpose of making these reports, such common carrier or other licensed person may compute its sales of distilled spirits in California by allocating a portion of the total distilled spirits sales for the entire system served by the reporting taxpayer to California based on the ratio that passenger miles in California bears to total passenger miles for the entire system served by the reporting taxpayer. The ratio of passenger miles in California to total passenger miles may be determined by tests. New tests should be made when there is any significant change in routes, schedules, or other operating conditions. The tests will be made by the reporting taxpayer and will be subject to review by the Board. All detail and test data should be retained for inspection by the Board. 
This method of computing sales of distilled spirits in California is authorized only for the purpose of making reports under this regulation. Determinations may be imposed or refunds granted if the Board, upon audit of the taxpayer's accounts and records, or upon the basis of tests or other information, determines that the report did not disclose the correct amount of tax due.
A report must be filed for each reporting period even though no sales of distilled spirits were made in California during that period. Any person who fails to file a timely report and pay any tax that may be due shall be required to pay the applicable penalties and interest as provided by the Alcoholic Beverage Tax Law.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Section 32202, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-6-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Amendment filed 5-6-76; effective thirtieth day thereafter (Register 76, No. 19).
3. Amendment filed 7-13-79; effective thirtieth day thereafter (Register 79, No. 28).
4. Change without regulatory effect amending first paragraph filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2542. Public Warehouses.
Note     •     History

Licensed public warehouses shall report on or before January 15th and July 15th of each year, all distilled spirits held in storage by them, in bottled form, at the close of business on December 31st and June 30th. Such reports shall be filed with the board at Sacramento on forms prescribed by the board, and shall show the name of each person for whom distilled spirits are stored, the size of containers, number of cases, and the units per case stored for each such person.
NOTE

Authority cited: Sections 32451 and 32452, Revenue and Taxation Code. Reference: Sections 32211 and 32452, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect adding Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2543. Customs Brokers.
Note     •     History

Every person holding a Federal customhouse broker's license and making customs entries in connection with original importations of alcoholic beverages into California in customs bond for California licensed importers shall, on or before the fifteenth day of each month, report to the board in Sacramento on forms prescribed by the board, every such importation of alcoholic beverages handled by him as a customhouse broker during the preceding calendar month.
Every person holding a customs broker's license under the Alcoholic Beverage Control Act and making customs entries in connection with the importation of alcoholic beverages in customs bond into California for a person who does not hold the appropriate importer's license under the Alcoholic Beverage Control Act shall, on or before the fifteenth day of each month, report to the board in Sacramento on forms prescribed by the board, every such transaction in alcoholic beverages handled by him as a customs broker during the preceding calendar month.
NOTE

Authority cited: Sections 32451 and 32452, Revenue and Taxation Code. Reference: Sections 32171, 32173, 32211 and 32452, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-6-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Change without regulatory effect amending Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2544. Conversion of Liters to Gallons.
Note     •     History

The Federal Alcohol and Tobacco Tax and Trade Bureau (TTB) has authorized the bottling of wine and distilled spirits in standard metric sizes. Reports of California licensees must be in wine gallons. To convert liters to wine gallons for reporting purposes, licensees shall use the standards established by the TTB. These are:
(a) For wine, to convert liters to wine gallons on any record or report, the quantity in liters shall be multiplied by 0.26417 to determine the equivalent quantity in wine gallons. The resulting figure shall be rounded to the nearest one-hundredth of a gallon. 
(b) For distilled spirits, to convert liters to wine gallons on any record or report, the quantity in liters shall be multiplied by 0.264172 to determine the equivalent quantity in wine gallons. The resulting figure shall be rounded to the nearest one-hundredth of a gallon.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32151, 32152, 32201 and 32220, Revenue and Taxation Code.
HISTORY

1. New section filed 12-21-76; effective thirtieth day thereafter (Register 76, No. 52).
2. Change without regulatory effect amending first paragraph and Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
Article 5. Losses and Allowances
§2550. Destruction and Unaccounted for Losses of Distilled Spirits.
Note     •     History

(a) Unintentional Destruction. The term “unintentional destruction” shall mean destruction of distilled spirits by fire, earthquake, floods, breakage in transit, accident, or by any other cause, when the exact quantity destroyed is known. Claims for loss by unintentional destruction must be filed with the Board in Sacramento immediately following the close of business on the last day of the month in which the loss is discovered. The claim must state under oath of the licensee that the distilled spirits were so damaged that they could not be used for any purpose. Proof of loss satisfactory to the Board in the form of paid insurance or carrier claims, must be retained on the taxpayer's premises for verification.
(b) Unaccounted For Losses. Unaccounted for losses shall include all other losses disclosed by physical inventory due to pilferage, handling, etc. The allowable tolerance for unaccounted for losses of distilled spirits acquired by any distilled spirits taxpayer shall not exceed one-tenth of one percent of the total sales of the distilled spirits. In the case of distilled spirits taxpayer who holds licenses for two or more premises, the tolerance allowed by this rule shall be computed and applied separately to the transactions for each premises, unless the Board has granted the taxpayer permission to file a consolidated tax return.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Section 32211, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-6-69; effective thirtieth day thereafter (Register 69, No. 32).
2. Amendment filed 1-20-78; effective thirtieth day thereafter (Register 78, No. 3).
3. Amendment of section heading and section filed 11-29-95; operative 12-29-95 (Register 95, No. 48).
§2551. Unaccounted for Losses of Beer.
Note     •     History

There shall be no unaccounted for losses of beer other than those, if any, permitted under Federal law.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Section 32152, Revenue and Taxation Code.
HISTORY

1. Editorial correction filed 5-2-83 (Register 83, No. 19).
2. Amendment of section heading and section and new Note filed 12-8-95; operative 1-7-96 (Register 95, No. 49).
§2552. Spoiled Beer and Wine.
Note     •     History

A beer and wine importer will be allowed a credit for beer and wine sold and subsequently returned as spoiled, when the spoiled beer or wine is destroyed under the supervision of a representative of the board. For small quantities of beer or wine destroyed, which are not supervised by a representative of the Board, the exemption or credit is allowed only  after prior written approval is obtained from the Board.
To secure prior written approval, the beer and wine importer must submit a written request to the Board, listing the type of beverage, the number of containers, the container sizes and the total gallons to be destroyed.
After receiving approval from the Board and after destroying the beer or wine, the beer and wine importer must submit a declaration signed under penalty of perjury, listing the number of containers, the container sizes, the total gallons destroyed and the date and manner of destruction. The declaration must be signed by a person in authority in the importer's organization who witnessed the destruction of the beer or wine.
For the purposes of this regulation, small quantities means 2,500 gallons or less of beer, 2,500 gallons or less of still wine, and 1,500 gallons or less of champagne or sparkling wine by volume.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32171, 32173 and 32176, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-20-76; effective thirtieth day thereafter (Register 76, No. 34).
2. Amendment filed 5-20-80; effective thirtieth day thereafter (Register 80, No. 21). For technical reasons, printed in Register 80, No. 23.
3. Amendment of section and Note filed 2-7-96; operative 3-8-96 (Register 96, No. 6).
4. Amendment of first paragraph filed 2-4-2003; operative 3-6-2003 (Register 2003, No. 6).
§2553. Losses Resulting from Disaster, Vandalism, Malicious Mischief, or Insurrection.
Note     •     History

(a) In General. An amount equal to the state alcoholic beverage taxes included in the sales price of beverages to the licensee shall be refunded by the Board if:
(1) The beverages are lost, rendered unmarketable, or condemned by a duly authorized official by reason of fire, flood, casualty, or other disaster, or by reason of breakage, destruction, or other damage resulting from vandalism, malicious mischief, or insurrection;
(2) The beverages were held and intended for sale at the time of the disaster or other damage;
(3) The disaster or damage occurred in this state;
(4) The licensee has not and will not be compensated, by insurance or otherwise, for the loss in the amount of the tax included in the purchase price paid for the beverages;
(5) The disaster or other loss occurred on or after April 1, 1980; 
(6) The amount to be refunded with respect to a single disaster or other loss is two hundred fifty dollars ($250) or more; and
(7) A claim for refund is filed with the Board within six months after the date on which the beverages were lost, rendered unmarketable, or condemned by a duly authorized official.
The refund shall be made to the licensee holding the beverages for sale at the time of the loss, and no interest shall be paid on the amount refunded. No refund shall be made with respect to losses resulting from theft.
(b) Claims for Refund. A claim for refund under this regulation must be in writing and must state all of the facts upon which the claim is based, including the type and date of occurrence of the disaster or other cause of loss and the location of the beverages at the time. The claim must specify the amount of the state tax included in the purchase price paid for the beverages lost, rendered unmarketable, or condemned and contain a certification under penalty of perjury that such amount has not and will not be compensated by insurance or otherwise. The claim must be accompanied by a record of the inventory of the beverages lost, rendered unmarketable, or condemned showing the size and number of containers of each kind of beverage and the total wine gallons of each kind of beverage.
(c) Proof of Loss. Claims for refund under this regulation will be approved only upon proof satisfactory to the Board that the beverages were destroyed or so damaged that they could not be sold. In the case of beverages lost due to a disaster or other specified cause the claim must be supported by inventory records, purchase invoices, container labels, settled insurance claims, or similar evidence which establishes the quantity and kind of beverages lost. In the case of beverages which are rendered unmarketable or condemned, but not lost, the claim must be supported by evidence that the beverages were destroyed under the supervision of a state or federal official responsible for witnessing such destruction. Proof of refund of federal alcoholic beverage taxes pursuant to the disaster, vandalism, or malicious mischief loss provisions of 26 United States Code Section 5064 will constitute proof of loss satisfactory to the Board.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Section 32407, Revenue and Taxation Code.
HISTORY

1. New section filed 5-20-80; effective thirtieth day thereafter (Register 80, No. 21). For technical reasons, printed in Register 80, No. 23.
§2554. Consumption of Beer on Brewery Premises.
Note     •     History

All beer consumed on a brewery's premises shall be accounted for.
(a) Except as provided in Subdivision (b), tax shall be paid on all beer consumed by brewery employees, visitors and others in a brewery tavern. Beer manufactured by the brewery for consumption in a brewery tavern, and which is placed in a storage tank designed for this purpose, shall be subject to tax at the time it is placed in the storage tank. For purposes of this Regulation, a “tavern” means a federally approved portion of the brewery premises where beer is sold to consumers.
(b) Beer consumed by brewery employees, visitors and others is not subject to tax if consumed without charge within the brewery's bonded premises and not in a brewery tavern.
NOTE

Authority cited: Sections 32152 and 32451, Revenue and Taxation Code. Reference: Sections 32171 and 32172, Revenue and Taxation Code.
HISTORY

1. New section filed 3-1-99; operative 3-31-99 (Register 99, No. 10).
Article 6. Classification of Particular Beverages
§2555. Closures.
Note     •     History

Bitters, Chinese liquors, and other products which bear the federal closure or other device as provided in Title 27 Code of Federal Regulation, Part 19 shall, for tax purposes, be deemed to be distilled spirits.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Section 23005, Business and Professions Code; and 27 CFR 19.661 and 19.662.
HISTORY

1. Amendment filed 12-28-89; operative 1-27-90 (Register 90, No. 1). 
§2557. Powdered Distilled Spirits.
Note     •     History

(a) In General. The Alcoholic Beverage Tax Law and Alcoholic Beverage Tax Regulations apply with respect to powdered distilled spirits in the same manner and to the same extent as with respect to other distilled spirits. Tax will be paid at the same rate per wine gallon, and at a proportionate rate for any quantity, as for distilled spirits of the same proof strength in liquid form.
(b) Records and Reports. Transactions involving powdered distilled spirits, including any powdered alcoholic beverage containing powdered distilled spirits, must be stated by volume in wine gallons to the nearest one-hundredth of a gallon in all required records and reports. The importer, in the case of powdered distilled spirits imported into California packaged in containers for sale to the general public, and the rectifier in the case of powdered distilled spirits packaged within California shall:
(1) Label the outside of each case with the volume in wine gallons of the powdered product contained in the case and of the powdered product contained in each individual package within the case.
(2) Print on each invoice, credit memorandum, or similar document the total volume in wine gallons of the powdered product or products listed on that document.
(3) Print on each invoice, credit memorandum, or similar document the volume in wine gallons of the powdered product contained in each size case and in each individual package listed on that document.
(c) Conversion of Weight to Volume.
The weight of powdered distilled spirits, and powdered distilled spirits products, shall be converted to volume as follows:
(1) One pound equals .16 wine gallons;
(2) One ounce equals .01 wine gallons;
(3) One gram equals .000353 wine gallons.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32201, 32211 and 32452, Revenue and Taxation Code.
HISTORY

1. New section filed 5-22-78; effective thirtieth day thereafter (Register 78, No. 21).
2. Change without regulatory effect amending Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2558. Distilled Spirits.
Note     •     History

Effective October 1, 2008, any alcoholic beverage, except wine as defined by Business and Professions Code section 23007, which contains 0.5 percent or more alcohol by volume derived from flavors or other ingredients containing alcohol obtained from the distillation of fermented agricultural products, is a distilled spirit. 
NOTE

Authority cited: California Constitution, Article XX, Section 22; and Section 32451, Revenue and Taxation Code. Reference: Section 32002, Revenue and Taxation Code; and Sections 23004, 23005, 23006 and 23007, Business and Professions Code.
HISTORY

1. New section filed 6-10-2008; operative 7-10-2008 (Register 2008, No. 24).
§2558.1. Wine.
Note     •     History

(a) Effective January 1, 2012, wine as defined by Business and Professions Code section 23007 does not include any alcoholic beverage containing 0.5 percent or more alcohol by volume obtained from the distillation of fermented agricultural products other than from the particular agricultural product or products of which the wine is made. 
(b) Except as provided in subdivision (a), wine-based products authorized for sale as wine by the Department of Alcoholic Beverage Control are deemed to be wine as defined by Business and Professions Code section 23007 for purposes of the Alcoholic Beverage Tax Law. 
NOTE

Authority cited: California Constitution, Article XX, Section 22; and Section 32451, Revenue and Taxation Code. Reference: Section 23007, Business and Professions Code; and Sections 32002 and 32152, Revenue and Taxation Code. 
HISTORY

1. New section filed 7-8-2011; operative 8-7-2011 (Register 2011, No. 27).
§2559. Presumption -- Distilled Spirits.
Note     •     History

Effective October 1, 2008, any alcoholic beverage, except wine as defined by Business and Professions Code section 23007, is presumed to contain 0.5 percent or more alcohol by volume derived from flavors or other ingredients containing alcohol obtained from the distillation of fermented agricultural products, unless this presumption is rebutted pursuant to Regulation 2559.1. 
NOTE

Authority cited: California Constitution, Article XX, Section 22; and Section 32451, Revenue and Taxation Code. Reference: Section 32002, Revenue and Taxation Code; and Sections 23004, 23005, 23006 and 23007, Business and Professions Code.
HISTORY

1. New section filed 6-10-2008; operative 7-10-2008 (Register 2008, No. 24).
§2559.1. Rebuttable Presumption -- Distilled Spirits.
Note     •     History

(a) On or after July 10, 2008, the presumption in Regulation 2559 may be rebutted by the manufacturer of the alcoholic beverage filing a report, under penalty of perjury, with the Board stating that the alcoholic beverage contains less than 0.5 percent alcohol by volume derived from flavors or other ingredients containing alcohol obtained from the distillation of fermented agricultural products and specifying the sources of the alcohol content of the alcoholic beverage, including the alcohol by volume derived from flavors or other ingredients containing alcohol obtained by distillation. 
(b) The Board shall require a manufacturer's “Statement of Process” or “Formula” filed with the Alcohol and Tobacco Tax Trade Bureau, its predecessor agency or successor, under the following circumstances: (1) if the Board obtains information that casts doubt on the accuracy or truthfulness of a report filed under subdivision (a); or (2) for purposes of verifying any report filed under subdivision (a). 
(c)(1) If the Board determines that a manufacturer has not successfully rebutted the presumption in Regulation 2559, the Board shall notify the manufacturer of such determination, and the manufacturer may petition for a redetermination. 
(2) Upon receiving notice from the Board, the manufacturer may petition the Board's determination within 30 days. If a petition for redetermination is not filed within the 30-day period, the determination becomes final at the expiration of the 30-day period. 
(3) Every petition for redetermination shall be in writing and shall state the specific grounds upon which the petition is founded. 
(4) The Board shall reconsider the determination pursuant to its administrative appeals process set forth in California Code of Regulations, title 18, sections 5260-5271 and shall grant the applicant an oral hearing if timely requested within 30 days of the date the Decision and Recommendation issued by the Appeals Division is mailed to the manufacturer. Any Board hearing will be governed by the rules set forth in California Code of Regulation, title 18, sections 5510-5576. 
(5) The order or decision of the Board upon a petition for redetermination becomes final 30 days after the date notice thereof is mailed to the manufacturer, except as provided in California Code of Regulations, title 18, section 5560. 
(6) Any notice required by this section shall be placed in a sealed envelope, with postage paid, addressed to the manufacturer at the manufacturer's last known address as it appears in the records of the Board. The giving of notice shall be deemed complete at the time of deposit of the notice at a United States Post Office, mailbox, sub-post office, substation, mail chute, or other facility regularly maintained or provided by the United States Postal Service, without extension of time for any reason. In lieu of mailing, notice may be served personally by delivery to the person to be served and service shall be deemed complete at the time of such delivery. Personal delivery to a corporation may be made by delivery of a notice to any person designated to be served for the corporation with summons and complaint in a civil action, pursuant to the Code of Civil Procedure, title 5, chapter 4 (§416.10 et seq.). 
NOTE

Authority cited: California Constitution, Article XX, Section 22; and Section 32451, Revenue and Taxation Code. Reference: Sections 32002, 32452 and 32453, Revenue and Taxation Code; and Sections 23004, 23005, 23006 and 23007, Business and Professions Code.
HISTORY

1. New section filed 6-10-2008; operative 7-10-2008 (Register 2008, No. 24).
§2559.3. Internet List.
Note     •     History

(a) Not later than October 1, 2008, and updated on a quarterly basis thereafter to add or remove from the list, the Board shall develop, publish and maintain on its Internet site a listing of all alcoholic beverages that have been found to have successfully rebutted the presumption set forth in Regulation 2559. 
(b) Notwithstanding the addition of an alcoholic beverage to the list, the Board shall require a manufacturer's “Statement of Process” or “Formula” filed with the Alcohol and Tobacco Tax Trade Bureau, its predecessor agency or successor, under the following circumstances: (1) if the Board obtains information that casts doubt on the accuracy or truthfulness of a report filed under Regulation 2559.1, subdivision (a); or (2) for purposes of verifying any report filed under Regulation 2559.1, subdivision (a). 
(c) The Board shall remove from the list an alcoholic beverage that is finally determined under subdivision (d) to contain 0.5 percent or more alcohol by volume derived from flavors or other ingredients containing alcohol obtained from the distillation of fermented agricultural products, as set forth in Regulation 2558. Before the removal may take effect, the Board shall notify the manufacturer of this determination. 
(d)(1) Upon receiving notice from the Board, the manufacturer may petition the Board's determination within 30 days. If a petition for redetermination is not filed within the 30-day period, the determination becomes final at the expiration of the 30-day period. 
(2) Every petition for redetermination shall be in writing and shall state the specific grounds upon which the petition is founded. 
(3) The Board shall reconsider the determination pursuant to its administrative appeals process set forth in California Code of Regulations, title 18, sections 5260-5271 and shall grant the applicant an oral hearing if timely requested within 30 days of the date the Decision and Recommendation issued by the Appeals Division is mailed to the manufacturer. Any Board hearing will be governed by the rules set forth in California Code of Regulation, title 18, sections 5510-5576. 
(4) The order or decision of the Board upon a petition for redetermination becomes final 30 days after the date notice thereof is mailed to the manufacturer, except as provided in California Code of Regulations, title 18, section 5560. 
(5) Any notice required by this section shall be placed in a sealed envelope, with postage paid, addressed to the manufacturer at the manufacturer's last known address as it appears in the records of the Board. The giving of notice shall be deemed complete at the time of deposit of the notice at a United States Post Office, mailbox, sub-post office, substation, mail chute, or other facility regularly maintained or provided by the United States Postal Service, without extension of time for any reason. In lieu of mailing, notice may be served personally by delivery to the person to be served and service shall be deemed complete at the time of such delivery. Personal delivery to a corporation may be made by delivery of a notice to any person designated to be served for the corporation with summons and complaint in a civil action, pursuant to the Code of Civil Procedure, title 5, chapter 4 (§416.10 et seq.). 
NOTE

Authority cited: California Constitution, Article XX, Section 22; and Section 32451, Revenue and Taxation Code. Reference: Section 32002, Revenue and Taxation Code; and Sections 23004, 23005, 23006 and 23007, Business and Professions Code.
HISTORY

1. New section filed 6-10-2008; operative 7-10-2008 (Register 2008, No. 24).
§2559.5. Correct Classification.
Note     •     History

Effective October 1, 2008, for purposes of tax reporting, a taxpayer will be deemed to have correctly classified an alcoholic beverage as not being a distilled spirit, as defined by Business and Professions Code section 23005, if at the time taxes are imposed, as set forth in the Revenue and Taxation Code, division 2, part 14, chapters 4, 5 and 5.5, the alcoholic beverage was included on the Board's list pursuant to Regulation 2559.3. 
NOTE

Authority cited: California Constitution, Article XX, Section 22; and Section 32451, Revenue and Taxation Code. Reference: Section 32002, Revenue and Taxation Code; and Sections 23004, 23005, 23006 and 23007, Business and Professions Code.
HISTORY

1. New section filed 6-10-2008; operative 7-10-2008 (Register 2008, No. 24).
Article 7. Samples
§2560. Treated As Sales.
Note     •     History

Samples and donations of alcoholic beverages shall be reported as sales.
Each transfer of samples between licensees authorized to possess alcoholic beverages on which the California state alcoholic beverages taxes have not been paid (manufacturers, manufacturers' agents, distilled spirits wholesalers and rectifiers) shall be on an ex-tax basis, and shall be recorded on an invoice marked: “Samples.”
Distilled spirits taxpayers receiving samples from other licensees in California shall record the receipt in form BOE-241-A. Samples received by direct importation shall be recorded in form BOE-242-A.
Distilled spirits picked up at the licensed premises of a distilled spirits rectifier or wholesaler by a representative of a manufacturer or of a manufacturer's agent to be used by him for sampling purposes, shall not be considered to be a transfer of samples between the licensees referred to in the second paragraph of this rule. Such deliveries of distilled spirits shall be reported as taxable sales by the rectifier or wholesaler.
NOTE

Authority cited: Sections 32451 and 32452, Revenue and Taxation Code. Reference: Sections 32003, 32151, 32201 and 32220, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-6-69; effective thirtieth day thereafter (Register 69, No. 32). and Sales for Export
2. Change without regulatory effect amending third paragraph and Note filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
§2561. Exports and Sales for Export.
Note     •     History

(a) Proof of Claim for Exemption for Exports and Sales for Export. The claim for exemption from tax for exports of alcoholic beverages or sales of alcoholic beverages for export shall be allowed only when the alcoholic beverages are actually exported to a point outside this state (and, in the case of distilled spirits sold for export, actually exported to a point outside this state within 90 days from the date of the sale) and one or more of the following conditions is met:
(1) The beverages are delivered to an armed force of the United States at a depot of the armed force in this state for transport out of the state, and the taxpayer's record of such sales is supported by a copy of the official purchase order and documentary evidence of export.
(2) The beverages are shipped to a point in a foreign country, and the federal tax on alcoholic beverages is not imposed or is refunded.
(3) The beverages are shipped to a point outside this state by a carrier who is independent of the buyer and the seller and the claim for tax exemption is supported by a copy of the shipping documents receipted for by the carrier. For purposes of this regulation, the term “carrier” means a person or firm regularly engaged in the business of transporting for compensation property owned by other persons.
(4) The beverages are shipped to or delivered to a point outside this state by any means, and the claim for tax exemption is supported by documentation signed by the purchaser and containing the certificate of the appropriate liquor control or tax authority of the state in which the beverages have been delivered to the effect that receipt of the delivery of the beverages has been reported to such authority by the purchaser.
(b) Sales Which Are Not Exports. Alcoholic beverages on which federal taxes have been paid and which are sold to persons operating commercial fishing boats or private carrier freight vessels for use as ships' stores outside of the state upon the high seas are not exports and are subject to tax.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32171, 32173, 32175, 32176, 32179, 32211 and 32212, Revenue and Taxation Code.
HISTORY

1. New section filed 6-13-79; effective thirtieth day thereafter (Register 79, No. 24).
2. Change without regulatory effect amending subsection (a)(4) filed 1-25-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 5).
Article 8. Exports and Sales for Export [Repealed]
HISTORY

1. Repealer of article 8 (sections 2562-2567) filed 6-13-79; operative 7-13-79 (Register 79, No. 24). For prior history of Article 8, see Register 69, No. 32  and Register 79, No. 2.
Article 9. Miscellaneous
§2570. Relief from Liability.
Note     •     History

A person may be relieved from the liability for the payment of alcoholic beverage taxes, including any penalties and interest added to those taxes, when that liability resulted from the failure to make a timely return or a payment and such failure was found by the Board to be due to reasonable reliance on written advice given by the board as described in California Code of Regulations, Title 18, Section 4902.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Section 32257, Revenue and Taxation Code.
HISTORY

1. New article 9 (section 2570) and section filed 2-4-2003; operative 3-6-2003 (Register 2003, No. 6).
2. Amendment filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§2571. Innocent Spouse or Registered Domestic Partner Relief from Liability.
Note     •     History

A spouse or registered domestic partner claiming relief from liability for the alcoholic beverage tax, interest, penalties, and other amounts shall be relieved from such liability where all the requirements set forth in California Code of Regulations, title 18, section 4903 are met.
NOTE

Authority cited: Section 32451, Revenue and Taxation Code. Reference: Sections 32258 and 32401-32407, Revenue and Taxation Code; and Sections 297, 297.5 and 308, Family Code.
HISTORY

1. New section filed 5-18-2010; operative 6-17-2010 (Register 2010, No. 21).
Chapter 7. Universal Telephone Service Tax
Article 1. General
§2610. Credit for Tax-Paid Telecommunication Services.
Note     •     History

A service supplier that uses the telecommunications services of another service supplier to furnish services to its customers may take as a deduction on its return from gross revenues subject to the tax imposed by Section 44030 of the Revenue and Taxation Code the amount paid to another service supplier for intrastate telecommunications services with respect to which that other service supplier has paid the tax imposed by Section 44030 and which tax is not subject to refund.
NOTE

Authority cited: Section 44170, Revenue and Taxation Code. Reference: Section 44030, Revenue and Taxation Code.
HISTORY

1. Repealer filed 4-28-67; effective thirtieth day thereafter (Register 67, No. 17). For former Chapter 7 see Register 64, No. 4. (See Article 1 of Chapter 4, of Chapter 2, for related regulations.)
2. New Chapter 7 (Article 1, Section 2610) filed 2-8-85; effective thirtieth day thereafter (Register 85, No. 6).
Chapter 8. Hazardous Substances Tax
§3000. Generator of Hazardous Waste.
Note     •     History

(a) Scope
The provisions contained herein shall apply to the collection of the generator fee imposed pursuant to Health and Safety Code 25205.5. Regulations concerning the manifesting of hazardous waste, enforcement of hazardous waste management requirements and standards, and other regulatory activities conducted by the Department of Toxic Substances Control (DTSC) are contained in Title 22 of the California Code of Regulations. Nothing in this section shall grant any benefit or exemption to a generator, subject a generator to any duty or liability, or infer that any person is or is not a generator, except for the purpose of determining whether a person is subject to, or exempted from, the generator fee.
(b) Definitions
(1) “Generator” means any person, by site, whose act or process produces hazardous waste or causes hazardous waste to become subject to regulatory control by a government agency authorized to regulate hazardous waste. If more than one person is liable for the same generator fee for the same load of hazardous waste, that liability shall be joint and several. A generator includes, but is not limited to:
(A) a person identified on a hazardous waste manifest as the generator and whose Environmental Protection Agency (EPA) identification number is listed on that manifest, if that identifying information was provided by that person or by an agent or employee of that person;
(B) except as provided in subdivision (b)(1)(G) below, a person who cleans up a release of hazardous waste caused by another, including a property owner who cleans up contamination caused by a tenant or lessee and an owner or lessee who cleans up property contaminated by a previous owner or lessee;
(C) a person who contracts with an environmental cleanup to clean up property;
(D) a person who places hazardous waste into repositories at the same site where the waste was generated, including but not limited to, a site or portion of a site that has been designated as a corrective action management unit (CAMU) by the Department of Toxic Substances Control; however, a person will not be considered the generator of hazardous waste if the person removes hazardous waste (for example, contaminated soil or groundwater) from a site, treats it at the same site until it is non-hazardous, and returns it to the same location from which it was removed at the site;
(E) a person who excavates contaminated soil that is hazardous waste during cleanup activities, regardless of whether the soil became contaminated over a period of time or when the property was under the control of another person;
(F) any person who is expressly identified as a generator pursuant to the Health and Safety Code or Title 22 of the California Code of Regulations.
(G) Notwithstanding subdivisions (b)(1)(A) through (b)(1)(F) above, “generator” does not include an entity such as an environmental clean-up company or an emergency response contractor, when that entity, pursuant to contract, cleans up a release of hazardous waste for another person, unless the entity is identified on a hazardous waste manifest as the generator as described in subdivision (b)(1)(A) above.
(2) “Site or onsite” means the location at which hazardous waste is generated. Contiguous properties, divided by public or private right-of-way, may be considered one site, provided entry to and exit from the properties are gained by traveling across, as opposed to going along, the right-of-way.
(c) Reporting Period During which Hazardous Waste is Generated
If the hazardous waste remains permanently at the site where it was generated, the generation of the waste shall be reported on the generator fee return for the calendar year during which the waste was produced or first brought subject to regulation. If the hazardous waste is removed from the site where it was generated, the generation of the waste shall be reported on the generator fee return for the calendar year during which the waste was removed from the site.
(d) Commingled Waste
Where hazardous waste is commingled with non-hazardous waste and manifested on a hazardous waste manifest, the entire mixture constitutes hazardous waste.
(e) Exemptions from the Generator Fee
The following persons and waste are exempt from the generator fee:
(1) Facilities. A hazardous waste facility that pays the facility fee pursuant to Health and Safety Code Section 25205.2 for the site for which the facility fee is paid. However, fees paid pursuant to Health and Safety Code Section 25205.14 for permit-by-rule, conditional authorization or conditional exemption are not facility fees, and therefore sites paying such fees are also liable for the generator fee.
(2) Government Cleanups. Hazardous wastes which result when a government agency, or its contractor, removes or remedies a release of hazardous waste in the state caused by another person, or natural disaster. A government agency that produces hazardous waste as a result of its normal operations, including but not limited to accidental releases that occur in the course of normal operations, or as part of a cleanup of a release of hazardous waste it caused, is subject to the fee. However, the government agency is not subject to the fee if the release of hazardous waste is caused by the public during public use of services provided by the government agency as part of its governmental activities, such as the providing of sewer service or roads used by the public.
(3) Household Hazardous Waste. Hazardous waste generated or disposed of by a public agency, or by any person under an agreement with a public agency, operating a household hazardous waste facility in the state pursuant to Division 1, Chapter 6.5, Article 10.8 of the Health and Safety Code (commencing with Section 25218), including hazardous waste received from conditionally exempt small quantity commercial generators, authorized pursuant to Health and Safety Code Section 25218.3.
(4) Local Vector Control. Hazardous waste generated or disposed of by local vector control agencies which have entered into a cooperative agreement pursuant to Health and Safety Code Section 116180, or by county agricultural commissioners, if the hazardous wastes result from their control or regulatory activities and if they comply with the requirements of Division 20, Chapter 6.5 of the Health and Safety Code and regulations adopted pursuant to that code.
(5) Load Checking Program. Hazardous waste disposed of, or submitted for disposal or treatment, by any person, which is discovered and separated from solid waste as part of a load checking program.
(6) Recycled Used Motor Oil. Used oil which is removed from a motor vehicle and which is subsequently recycled by a recycler permitted pursuant to Article 13 (commencing with Section 25250) of Chapter 6.5, Division 20 of the Health and Safety Code. “Motor vehicle” includes locomotives, vessels and self-propelled, off-road equipment, whether or not the equipment moves or is permitted to move on public highways.
(7) Hazardous Waste Recycled and Used Onsite. Hazardous waste which is recycled, used onsite, and not transferred offsite.
(8) Aqueous Waste. Aqueous waste treated in a treatment unit operating, or which subsequently operates, pursuant to a permit by rule, conditional authorization or conditional exemption. However, hazardous waste generated by the treatment process is subject to the generator fee.
(9) Underground Storage Tank. Hazardous waste generated during the removal of an underground storage tank if the generator of the waste acquired land for the sole purpose of owner-occupied single-family residential use, without actual or constructive notice or knowledge that there was a tank containing hazardous waste on or under the property.
(10) Waste Imported from Outside California. On and after January 1, 1996, no generator fee is due concerning any hazardous waste imported into this state from other states, territories, or possessions of the United States for purposes of treatment, recycling or disposal, and no generator fee is due concerning non-RCRA hazardous waste imported into this state from any source for purposes of treatment, recycling or disposal.
(11) Banks and Financial Institutions. A bank or financial institution that pays an “in lieu” tax, pursuant to Article XIII, Section 27 of the California Constitution (codified as Revenue and Taxation Code Section 23182) is not subject to the generator fee for hazardous waste which is generated during an activity performed by, or in a business conducted by, the bank or a department or division of the bank, regardless of whether the activity or business is directly related to banking.
(12) Insurance Companies. An insurance company that pays an “in lieu” tax, pursuant to Article XIII, Section 28 of the California Constitution (codified as Revenue and Taxation Code Section 12204) is not subject to the generator fee for hazardous waste which is generated during an activity performed by, or in a business conducted by, the insurance company or a department or division of the insurance company, regardless of whether the activity or business is directly related to providing insurance.
(13) Exempt Waste. A waste is not subject to the generator fee if it is exempt from regulation or classification as a hazardous waste under Chapter 6.5 of Division 20 of the Health and Safety Code (commencing with Section 25100) or the regulations promulgated thereunder. A waste is exempt from regulation or classification as a hazardous waste for purposes of this paragraph if the waste is exempt from all provisions of Chapter 6.5 of Division 20 of the Health and Safety Code and the regulations promulgated thereunder, except those provisions which are necessary in order for DTSC to make or rescind the determination that the waste is exempt from regulation or classification as a hazardous waste, or to compensate DTSC for making or rescinding such a determination.
NOTE

Authority cited: Section 43501, Revenue and Taxation Code. Reference: Sections 25174.7, 25205.1(e), 25205.5, 25205.22 and 25250.24, Health and Safety Code; and Sections 43152.7 and 43152.15, Revenue and Taxation Code.
HISTORY

1. New chapter 8 (section 3000) and section filed 9-8-99; operative 10-8-99 (Register 99, No. 37). For prior history of chapter 8 see Register 67, No. 17.
2. Change without regulatory effect amending subsection (b)(1)(B) filed 8-5-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 32).
§3005. Payment by Electronic Funds Transfer.
Note     •     History

Payments by electronic funds transfer shall be made in accordance with California Code of Regulations, Title 18, Section 4905. 
NOTE

Authority cited: Section 43170, Revenue and Taxation Code. Reference: Sections 43170 and 43172, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-7-2005; operative 7-7-2005 (Register 2005, No. 23).
§3020. Records.
Note     •     History

(a) General. A taxpayer shall maintain and make available for examination on request by the board or its authorized representatives, records in the manner set forth at California Code of Regulations, Title 18, Section 4901. 
(b) Specific Applications. In addition to the record keeping requirements set forth in subdivision (a), taxpayers shall comply with the following requirements. 
(1) Hazardous Substance Tax. A taxpayer shall keep complete records, including but not limited to: 
(A) Uniform Hazardous Waste Manifests. 
(B) Transporter billings or invoices. 
(C) Weight tickets. 
(D) Waste profile analysis reports. 
(2) Environmental Fee. A taxpayer shall keep complete records, including but not limited to: 
(A) Payroll reports and all other documents listing employees, wages, and hours worked. 
(B) Employment agreements or contracts. 
(3) Occupational Lead Poisoning Prevention Fee. A taxpayer shall keep complete records, including but not limited to: 
(A) Fee waiver requests and California Department of Public Health responses. 
(B) Payroll reports and all other documents listing employee names, wages paid, and hours worked. 
NOTE

Authority cited: Section 43501, Revenue and Taxation Code. Reference: Section 43502, Revenue and Taxation Code. 
HISTORY

1. New section filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
2. Change without regulatory effect amending subsection (b)(3)(A) filed 10-10-2011 pursuant to section 100, title 1, California Code of Regulations (Register 2011, No. 41).
§3021. Relief From Liability.
Note     •     History

A person may be relieved from the liability for the payment of the taxes or fees required to be collected pursuant to the Hazardous Substances Tax Law, Part 22 (commencing with Section 43001) of Division 2 of the Revenue and Taxation Code, including any penalties and interest added to the taxes or fees, when that liability resulted from the failure to make a timely return or a payment and such failure was found by the board to be due to reasonable reliance on written advice given by the board as described in California Code of Regulations, Title 18, Section 4902. 
The fees and taxes collected pursuant to the Hazardous Substances Tax Law include the Hazardous Substance Taxes (Disposal Fee, Environmental Fee, Facility Fee, Generator Fee and Activity Fee), Childhood Lead Poisoning Prevention Fee and Occupational Lead Poisoning Prevention Fee. 
NOTE

Authority cited: Section 43501, Revenue and Taxation Code. Reference: Section 43159, Revenue and Taxation Code. 
HISTORY

1. New section filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§3022. Innocent Spouse or Registered Domestic Partner Relief from Liability.
Note     •     History

A spouse or registered domestic partner claiming relief from liability for the hazardous substances tax, interest, penalties, and other amounts shall be relieved from such liability where all the requirements set forth in California Code of Regulations, title 18, section 4903 are met.
NOTE

Authority cited: Section 43501, Revenue and Taxation Code. Reference: Sections 43159.1, 43159.2 and 43451-43456, Revenue and Taxation Code; and Sections 297, 297.5 and 308, Family Code.
HISTORY

1. New section filed 5-18-2010; operative 6-17-2010 (Register 2010, No. 21).
Chapter 8.3. Integrated Waste Management Fee Law
§3301. Records.
Note     •     History

(a) General. A feepayer shall maintain and make available for examination on request by the board or its authorized representatives, records in the manner set forth at California Code of Regulations, Title 18, Section 4901. Notwithstanding the record keeping requirements of the Department of Resources Recycling and Recovery set forth at California Code of Regulations, Title 14, Section 17414, for fee collection purpose the feepayer shall retain and preserve records for a period of not less than four years except as provided in Section 4901. 
(b) Specific Applications. In addition to the record keeping requirements set forth in subdivision (a), feepayers shall comply with the following requirements. A feepayer shall keep complete records, including but not limited to: 
(1) Weight tickets or other source documents recording amounts of waste entering the landfill. 
(2) Documentation supporting the validity of volumetric conversion factors used as an alternative to actual weight to report waste tonnage. 
(3) Reports to other local and state agencies of waste tonnage disposed. 
NOTE

Authority cited: Section 45851, Revenue and Taxation Code. Reference: Section 45852, Revenue and Taxation Code. 
HISTORY

1. New chapter 8.3 (sections 3301-3302) and section filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
2. Change without regulatory effect amending subsection (a) filed 10-10-2011 pursuant to section 100, title 1, California Code of Regulations (Register 2011, No. 41).
3. Change without regulatory effect amending subsections (a) and (b) filed 7-3-2012 pursuant to section 100, title 1, California Code of Regulations (Register 2012, No. 27).
§3302. Relief From Liability.
Note     •     History

A person may be relieved from the liability for the payment of the integrated waste management fee, including any penalties and interest added to those fees, when that liability resulted from the failure to make a timely return or a payment and such failure was found by the board to be due to reasonable reliance on written advice given by the board as described in California Code of Regulations, Title 18, Section 4902. 
NOTE

Authority cited: Section 45851, Revenue and Taxation Code. Reference: Section 45157, Revenue and Taxation Code. 
HISTORY

1. New section filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§3302.1. Innocent Spouse or Registered Domestic Partner Relief from Liability.
Note     •     History

A spouse or registered domestic partner claiming relief from liability for the integrated waste management fee, interest, penalties, and other amounts shall be relieved from such liability where all the requirements set forth in California Code of Regulations, title 18, section 4903 are met.
NOTE

Authority cited: Section 45851, Revenue and Taxation Code. Reference: Sections 45158 and 45651-45656, Revenue and Taxation Code; and Sections 297, 297.5 and 308, Family Code.
HISTORY

1. New section filed 5-18-2010; operative 6-17-2010 (Register 2010, No. 21).
§3303. Payment by Electronic Funds Transfer.
Note     •     History

Payments by electronic funds transfer shall be made in accordance with California Code of Regulations, Title 18, Section 4905. 
NOTE

Authority cited: Section 45160, Revenue and Taxation Code. Reference: Sections 45160 and 45162, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-7-2005; operative 7-7-2005 (Register 2005, No. 23).
Chapter 8.5. Fee Collection Procedures Law
§3500. Application of the Fee Collection Procedures Law.
Note     •     History

The fees and taxes collected pursuant to the Fee Collection Procedures Law include the California Tire Fee, Covered Electronic Waste Recycling Fee, Marine Invasive Species Fee, Natural Gas Surcharge, and Water Rights Fee. 
NOTE

Authority cited: Section 55301, Revenue and Taxation Code. Reference: Sections 42464.2 and 42882, Public Resources Code; Section 892, Public Utilities Code; Section 44003, Revenue and Taxation Code; Section 1537, Water Code.
HISTORY

1. Change without regulatory effect adopting section filed 3-30-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 14).
§3501. Records.
Note     •     History

(a) General. A feepayer shall maintain and make available for examination on request by the board or its authorized representatives, records in the manner set forth at California Code of Regulations, Title 18, Section 4901. 
(b) Specific Applications. In addition to the record keeping requirements set forth in subdivision (a), feepayers subject to the Ballast Water Management Fee shall keep records documenting ballast water loading and discharge, ship schedules, ports of call and routes taken. 
NOTE

Authority cited: Section 55301, Revenue and Taxation Code. Reference: Section 55302, Revenue and Taxation Code. 
HISTORY

1. New chapter 8.5 (sections 3501-3502) and section filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§3502. Relief from Liability.
Note     •     History

A person may be relieved from the liability for the payment of the taxes or fees required to be collected pursuant to the Fee Collection Procedures Law, Part 30, (commencing with Section 55001) of Division 2 of the Revenue and Taxation Code, including any penalties and interest added to the taxes or fees, when that liability resulted from the failure to make a timely return or a payment and such failure was found by the board to be due to reasonable reliance on written advice given by the board described in California Code of Regulations, Title 18, Section 4902. 
NOTE

Authority cited: Section 55301, Revenue and Taxation Code. Reference: Section 55045, Revenue and Taxation Code. 
HISTORY

1. New section filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
2. Change without regulatory effect repealing second paragraph filed 3-30-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 14).
§3502.1. Innocent Spouse or Registered Domestic Partner Relief from Liability.
Note     •     History

A spouse or registered domestic partner claiming relief from liability for tax, fees, or surcharge under the fee collection procedures law, interest, penalties, and other amounts shall be relieved from such liability where all the requirements set forth in California Code of Regulations, title 18, section 4903 are met.
NOTE

Authority cited: Section 55301, Revenue and Taxation Code. Reference: Sections 55045.1 and 55221-55226, Revenue and Taxation Code; and Sections 297, 297.5 and 308, Family Code.
HISTORY

1. New section filed 5-18-2010; operative 6-17-2010 (Register 2010, No. 21).
§3503. Payment by Electronic Funds Transfer.
Note     •     History

Payments by electronic funds transfer shall be made in accordance with California Code of Regulations, Title 18, Section 4905. 
NOTE

Authority cited: Section 55050, Revenue and Taxation Code. Reference: Sections 55050 and 55052, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-7-2005; operative 7-7-2005 (Register 2005, No. 23).
Chapter 9. Cigarette and Tobacco Products Tax Law Regulations
NOTE

Authority cited for Chapter 9: Sections 30001 to 30479, inclusive, Revenue and Taxation Code.
HISTORY

1. New Chapter 9 (Sections 4001 through 4099, inclusive) filed 8-19-59 as an emergency; designated effective 9-1-59 (Register 59, No. 14). Certificate of Compliance, Section 11422.1, Government Code filed 8-19-59 (Register 59, No. 14). For prior history, see Register 59, No. 14.
2. Amendment of chapter 9 heading filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3). For prior history of article 1, see Register 82, No. 30. For prior history of article 2, see Register 68, No. 13 and Register 82, No. 30. For prior history of article 3, see Register 68, No. 38.
Article 3. Distributor's and Wholesaler's License
§4011. Distributors Not Engaged in Business in This State.
Note     •     History

Persons who are not engaged in business in this state may apply for a distributor's license. Holders of such licenses are required to file a certified monthly report or return with the Board on Board of Equalization Form BOE-501-CTS entitled “Cigarette and Tobacco Products Tax Return for Shipments to California Consumers” reporting the following: distributor's name, account number, his or her total number of distributions of cigarettes, total excise tax due on cigarettes, total cost of tobacco purchased, total excise tax due on cost of tobacco products, total excise tax due for all cigarettes and tobacco products, remitting payment of taxes, including any applicable interest or penalty, the name and address of each purchaser from whom an order is taken, the number of cigarettes and/or type, quantity, and wholesale cost of tobacco products sold and delivered pursuant to each order, and the amount of tax required to be collected from each purchaser. Further, the licensee is required to collect the tax, give receipts for the collected tax, and pay the tax to the Board in the same manner as licensees engaged in business in this state.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30108 and 30140.1, Revenue and Taxation Code.
HISTORY

1. New article 3 (section 4011) and section filed 5-13-2002; operative 6-12-2002 (Register 2002, No. 20).
Article 4. Distributor's Bond
§4016. Bond of Distributor. [Repealed]
Note     •     History

NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30141, 30145, 30182 and 30183, Revenue and Taxation Code.
HISTORY

1. Amendment filed 10-10-68; designated effective 11-13-68 (Register 68, No. 38). For prior history see Register 68, No. 13.
2. Amendment filed 4-14-72; effective thirtieth day thereafter (Register 72, No. 16).
3. Repealer filed 9-6-83; effective thirtieth day thereafter (Register 83, No. 37).
§4017. Deposits in Lieu of Surety Bonds. [Repealed]
Note     •     History

NOTE

Authority cited: Section 30451, Revenue and Taxation Code.
HISTORY

1. Amendment adopting subsection (c) filed 10-10-68; designated effective 11-13-68 (Register 68, No. 38). For prior history, see Register 68, No. 13.
2. Amendment filed 11-10-70; effective thirtieth day thereafter (Register 70, No. 46).
3. Repealer filed 10-31-72; effective thirtieth day thereafter (Register 72, No. 45).
§4018. Amount of Security.
Note     •     History

(a) The amount of security shall be fixed by the board. The board may increase or reduce the amount of security at any time, but in no event shall the amount of security be less than $1,000.
(b) When a distributor is authorized to purchase stamps or meter register settings on the deferred payment basis, the security shall be fixed in an amount no less than 70 percent of the amount, and no more than twice the amount, as fixed by the board, of deferred payment purchases which the distributor may have unpaid at anytime.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30141, 30142 and 30167, Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-13-61 as an emergency; effective upon filing (Register 61, No. 18).
2. Certificate of Compliance--Section 11422.1, Government Code, filed 11-9-61 (Register 61, No. 22).
3. Amendment filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).
4. Certificate of Compliance filed 3-27-68 (Register 68, No. 13).
5. Amendment of section heading, section and Note filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
Article 5. Inventories
§4021. Opening Inventory.
Note     •     History

Every distributor or wholesaler engaged in the sale of cigarettes shall take a physical inventory of cigarettes on hand as of the time the distributor or wholesaler first engages in the sale of cigarettes as a distributor or wholesaler. A report of a first physical inventory taken shall be filed with the board on or before the 25th day of the calendar month following the calendar month in which the distributor or wholesaler first engages in the sale of cigarettes as a distributor or wholesaler.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30182, 30188, 30453, and 30454, Revenue and Taxation Code.
HISTORY

1. Amendment adopting subsection (b) filed 10-10-68; designated effective 11-13-68 (Register 18, No. 38). For prior history see Register 68, No. 13.
2. Amendment of section and Note filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
§4022. Inventories of Cigarettes.
Note     •     History

Every distributor and wholesaler engaged in the sale of cigarettes shall furnish with his or her monthly certified report to the board, on Board of Equalization Form BOE-501-CD entitled “Cigarette Distributor's Tax Report” or Board of Equalization Form BOE-501-CW entitled “Cigarette Wholesaler's Report,” a statement of the cigarettes on hand at the end of the month covered by the report, showing the number of cigarettes on hand contained in packages to which tax stamps or meter impressions are affixed and the number not bearing tax stamps or meter impressions. The statement shall be furnished in one of the following manners:
(a) If the distributor or wholesaler has a cycle count inventory system and perpetual inventory system in place, the monthly statement shall be based on the perpetual inventory report run on the last business day of the month for which the distributor's or wholesaler's report is filed. However, at least once every calendar year, the monthly statement shall be based on a physical inventory of cigarettes on hand on the last business day of the month for which the distributor's or wholesaler's report is filed.
A “cycle count inventory system” is a system that provides evidence that all cigarettes are counted on a regular basis, with each item being counted at least once every three-month period.
A “perpetual inventory system” is a system in which inventory records are maintained and updated continuously as items are purchased or sold.
(b) If the distributor or wholesaler does not have a cycle count inventory system and perpetual inventory system in place, the monthly statement shall be based on the inventory on hand at the end of the month covered by the report. However, at least once every six months, the monthly statement shall be based on a physical inventory of cigarettes on hand performed within the last five days of the month for which the distributor's or wholesaler's report is filed.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30182, 30188, 30453 and 30454, Revenue and Taxation Code.
HISTORY

1. Amendment filed 10-10-68; designated effective 11-13-68 (Register 68, No. 38).
2. Repealer and new section and new Note filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
§4023. Inventories of Stamps and Meter Units.
Note     •     History

Every distributor engaged in the sale of cigarettes shall keep daily records of the number of tax stamps and meter units used in the distributor's affixing operations and shall record daily the meter register readings of the meters employed. The distributor shall take physical inventories of unused tax stamps on hand as of the end of each month and shall furnish, with his or her monthly report to the board, a statement of all unaffixed and affixed tax stamps and meter units on hand at the end of the month covered by the report.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30182, 30453, and 30454, Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-13-61 as an emergency; effective upon filing (Register 61, No. 18).
2. Certificate of Compliance--Section 11422.1, Government Code, filed 11-9-61 (Register 61, No. 22).
3. Amendment filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
Article 6. Records
§4026. Records.
Note     •     History

(a) General. Every distributor, every wholesaler, and every manufacturer, of cigarettes and tobacco products, shall maintain and make available for examination on request by the board or its authorized representatives, records in the manner set forth at California Code of Regulations, Title 18, Section 4901. 
(b) Specific Applications. In addition to the record keeping requirements set forth in subdivision (a), every cigarette manufacturer and every tobacco products manufacturer shall comply with the following requirements: 
Every cigarette manufacturer or tobacco products manufacturer dealing in, transporting, storing or warehousing cigarettes or tobacco products in this state or otherwise engaged in business in this state as a distributor shall keep and maintain at his or her place of business in this state, or at the warehouses or storage places from which cigarettes or tobacco products are released or delivered by the manufacturer, a record of all releases or deliveries of cigarettes or tobacco products from each storage place or warehouse in this state and shall keep and maintain either within the state or at the manufacturer's home office, a record of all the manufacturer's shipments of cigarettes or tobacco products from points outside this state to points within this state. Such records shall be made available at any time during normal business hours to the board or its authorized representatives for examination upon request. 
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30453 and 30454, Revenue and Taxation Code.
HISTORY

1. Amendment of section heading, repealer and new section, and new Note filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
2. Repealer and new section filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§4027. Manufacturer's Monthly Report.
Note     •     History

(a) Each cigarette or tobacco products manufacturer shall file with the board by the 20th day of each calendar month a certified report with respect to all releases and deliveries of cigarettes or tobacco products in this state and all shipments of cigarettes or tobacco products from a point outside this state to a point within this state made or authorized by the manufacturer during the preceding calendar month. The releases, deliveries and shipments for each purchaser shall be grouped together in the report. The report shall be on Board of Equalization Form BOE-501-MC entitled “Manufacturer's Report of Cigarettes Released from Storage in California or Shipped into California” or Board of Equalization Form BOE-501-MT entitled “Manufacturer's Report of Tobacco Products Released from Storage in California or Shipped into California” and shall show the following information with respect to each release, delivery or shipment:
(1) the date of the release, delivery or shipment;
(2) the location from which the release, delivery or shipment was made;
(3) the name and address of the purchaser;
(4) the address of the place to which the cigarettes or tobacco products were shipped, released or consigned;
(5) the number of cigarettes or type, quantity and wholesale cost of tobacco products released, delivered or shipped;
(6) the invoice or document number and date thereof representing the release, delivery or shipment;
(7) if released to a licensed distributor, the license number of such distributor; and
(8) in the case of a cancellation of any release, delivery or shipment, information indicating the transaction was cancelled.
The above information need not be supplied with respect to cigarettes or tobacco products which are non-tax-paid under the provisions of chapter 52 of the Internal Revenue Act of 1954, as amended, and are released, delivered or shipped in internal revenue bond or customs control.
(b) In lieu of the monthly reports required by paragraph (a) of this section, a manufacturer may arrange with the board to supply the required information by supplying data processing media or other data in such manner and in such format as is satisfactory to the board.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30453 and 30454, Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-13-61 as an emergency; effective upon filing (Register 61, No. 18).
2. Certificate of Compliance--Section 11422.1, Government Code, filed 11-9-61 (Register 61, No. 22).
3. Amendment filed 10-4-67; effective thirtieth day thereafter (Register 67, No. 40).
4. Amendment of subsections (a), (b), (b)(4)-(5) and (b)(8) filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
5. Amendment of section heading, repealer of subsection (a), subsection relettering and amendment of newly designated subsections (a) and (b) filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§4028. Period for Which Records to Be Kept. [Repealed]
History

HISTORY

1. Amendment filed 10-10-68; designated effective 11-13-68 (Register 68, No. 38).
2. Repealer filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
§4029. Failure to Keep Records. [Repealed]
History

HISTORY

1. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§4030. Wholesaler's Records. [Repealed]
History

HISTORY

1. New section filed 10-10-68; designated effective 11-13-68 (Register 68, No. 38).
2. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
Article 7. Tax Reports
§4031. Distributor's and Wholesaler's Report.
History

(a) Every distributor required to be licensed shall on or before the 25th day of each calendar month, file a report with the board of all acquisitions and distributions of cigarettes for the preceding calendar month, together with such other information as is required on the report form. The report shall be made on a form prescribed by the board.
(b) Every wholesaler required to be licensed shall on or before the 25th day of each calendar month, file a report with the board of all acquisitions and sales of cigarettes for the preceding calendar month, together with such other information as is required on the report form. The report shall be made on a form prescribed by the board.
HISTORY

1. Amendment filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).
2. Certificate of Compliance filed 3-27-68 (Register 68, No. 13).
3. Amendment filed 10-10-68; designated effective 11-13-68 (Register 68, No. 38).
§4031.1. Payment by Electronic Funds Transfer.
Note     •     History

Payments by electronic funds transfer shall be made in accordance with California Code of Regulations, Title 18, Section 4905. 
NOTE

Authority cited: Section 30190, Revenue and Taxation Code. Reference: Sections 30190 and 30192, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-7-2005; operative 7-7-2005 (Register 2005, No. 23).
§4032. Passenger Common Carrier Report. [Repealed]
History

HISTORY

1. Amendment filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).
2. Certificate of Compliance filed 3-27-68 (Register 68, No. 13).
3. Amendment filed 10-10-68; designated effective 11-13-68 (Register 68, No. 38).
4. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§4033. Consumer's or User's Report. [Repealed]
History

HISTORY

1. Amendment filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).
2. Certificate of Compliance filed 3-27-68 (Register 68, No. 13).
3. Amendment filed 10-10-68; designated effective 11-13-68 (Register 68, No. 38).
4. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§4034. Report of Sales to Consumers.
Note     •     History

(a) Every person engaged in business in this state who sells or solicits orders for cigarettes, the use or consumption of which is subject to the tax, must file a certified return with the board, on Board of Equalization Form BOE-501-CI entitled “Cigarette and Tobacco Products Excise Tax Return, on or before the 25th day of the calendar month following the calendar month in which the cigarettes were delivered in this state showing: 
(1) the name and address of each purchaser from whom an order was taken; 
(2) the number of cigarettes sold and delivered pursuant to each order; and 
(3) the amount of tax required to be collected from each purchaser, together with a remittance of such tax. 
(b) Every person engaged in business in this state who sells or solicits orders for tobacco products, the use or consumption of which is subject to the tax, must file a return with the board as follows: 
(1) If the person is required to be a licensed tobacco products distributor, he or she shall report on the tobacco products distributor's monthly certified tax return (Board of Equalization Form BOE-501-CT entitled “Tobacco Products Distributor Tax Return”) the wholesale cost of all tobacco products distributed to consumers, together with a remittance of the tax due. The return shall be filed on or before the 25th day of the calendar month following the calendar month in which the tobacco products were delivered in this state. 
(2) If the person is required to be a registered tobacco products distributor, he or she shall file a certified return with the board, on Board of Equalization Form BOE-501-CTS entitled “Cigarette and Tobacco Products Tax Return”, on or before the 25th day of the calendar month following the calendar month in which the tobacco products were delivered in this state showing: 
(A) the name and address of each purchaser from whom an order was taken; 
(B) the type, quantity, and wholesale cost of tobacco products sold and delivered pursuant to each order; and 
(C) the amount of tax required to be collected from each purchaser, together with a remittance of such tax. 
(c) Every person engaged in business in this state who, as permitted by state law and the terms of the November 23, 1998 Master Settlement Agreements with the state which are applicable to the signatories to those Agreements, makes gifts of untaxed cigarettes or tobacco products as samples by means of shipment from an out-of-state point directly to a donee in this state shall collect the tax from the donee if the donee is other than a licensed distributor and shall give the donee a receipt showing the name and place of business of the donor, the name and address of the donee, the number of cigarettes donated, and the amount of tax required to be collected, or the type, quantity and wholesale cost of the tobacco products donated and a statement indicating that the tobacco products tax has been paid. 
Each package of sample cigarettes shall have imprinted on it: “Not for Sale. Applicable state tax has been paid.” and each package of sample tobacco products shall be clearly marked as a sample. 
Donors of sample cigarettes shall notify the board in writing in advance of the shipment of the cigarettes into the state giving information as to the approximate date or dates, location or locations, brand, and the method of shipment into the state. Each donor of cigarettes and tobacco products shall file a return with the board on or before the 25th day of the calendar month following the calendar month in which the cigarettes or tobacco products were delivered in this state showing the number of cigarettes shipped into the state or the type, quantity and wholesale cost of the tobacco products and the amount of tax required to be collected from each donee, together with a remittance of such tax. 
(d) The taxes required to be collected constitute debts owed by the distributor, or other person required to collect the taxes, to this state.
(e) “Engaged in business in the state” means and includes any of the following:
(1) Maintaining, occupying, or using, permanently or temporarily, directly or indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or place, warehouse or storage place or other place of business.
(2) Having any representative, agent, salesperson, canvasser or solicitor operating in this state under the authority of the distributor or its subsidiary for the purpose of selling, delivering, or the taking of orders for cigarettes.
(f) The requirements of this regulation do not apply to those distributions of federally tax-free cigarettes or tobacco products which are exempt from tax under section 30105.5 of the Revenue and Taxation Code.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30105.5, 30108, 30140, 30151, 30182, 30183, 30453 and 30454, Revenue and Taxation Code.
HISTORY

1. Amendment filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).
2. Certificate of Compliance filed 3-27-68 (Register 68, No. 13). 
3. Amendment filed 10-10-68; designated effective 11-13-68 (Register 68, No. 38).
4. Amendment filed 4-14-72; effective thirtieth day thereafter (Register 72, No. 16).
5. Amendment of section and new Note filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
§4035. Tax Remittances. [Repealed]
History

HISTORY

1. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§4036. Cigarette and Tobacco Products Floor Stock and Indicia Adjustment Tax. [Repealed]
Note     •     History

NOTE

Authority cited: Sections 30131.6 and 30451, Revenue and Taxation Code. Reference: Sections 30131.2 and 30166, Revenue and Taxation Code.
HISTORY

1. New section filed 12-17-98 as an emergency; operative 12-17-98 (Register 98, No. 51). A Certificate of Compliance must be transmitted to OAL by 4-16-99 or emergency language will be repealed by operation of law on the following day. For prior history, see Register 88, No. 52.
2. Repealed by operation of Government Code section 11346.1(g) (Register 2000, No. 8).  
Article 8. Other Reports
§4041. Common Carrier Delivery Reports.
Note     •     History

Every common carrier making a delivery of cigarettes to a consignee in this State, the shipment of which originated outside this State, shall report to the board not later than the 25th day of the calendar month following the calendar month in which the delivery of the cigarettes or tobacco products was made, the following information concerning the shipment:
(a) the name of the shipper and the point of origin;
(b) the name of the consignee and the address to which delivered;
(c) the date and number of the waybill covering the shipment;
(d) the number of cases, bales or other containers of cigarettes delivered, the quantity of cigarettes contained therein, and the quantity of tobacco products delivered, as shown by the shipping documents; and
(e) in the case of rail shipments, the car initials and number; and
(f) in the case of water shipments, the name of the vessel and the number of the steamship bill of lading.
This report shall be made on a form prescribed by the Board, which may include, but not be limited to, electronic media, and filed with the Board at Sacramento.
NOTE

Authority cited: Sections 30451, Revenue and Taxation Code. Reference: Sections 30186 and 30454, Revenue and Taxation Code.
HISTORY

1. Amendment filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).
2. Certificate of Compliance filed 3-27-68 (Register 68, No. 13).
3. Amendment filed 10-10-68; designated effective 11-13-68 (Register 68, No. 38).
4. Change without regulatory effect amending first paragraph and subsections (d) and (f) and adding new Note filed 3-30-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 14).
Article 9. Stamps
§4046. Sale of Stamps. [Repealed]
History

HISTORY

1. Repealer filed 9-13-61 as an emergency; effective upon filing (Register 61, No. 18).
2. Certificate of Compliance--Section 11422.1, Government Code, filed 11-9-61 (Register 61, No. 22).
§4047. Transfer of Stamps.
Note     •     History

Without prior written approval of the board, a distributor may not sell to, transfer to, or exchange with another distributor or any other person stamps issued by the board, and may not sell, transfer or distribute packages of cigarettes accompanied by unaffixed stamps.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Section 30164, Revenue and Taxation Code.
HISTORY

1. Amendment of section and new Note filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
§4048. Manner of Affixing Stamps.

Tax stamps shall be securely affixed to the bottom end of each standard package of 20 cigarettes. When affixed to “flats” or “rounds” the stamps shall be securely affixed to the lid or top of the individual package. Tax stamps shall not be affixed to the carton or larger container of cigarettes.
§4049. Adherence of Stamps.

Tax stamps shall be affixed in such manner as to adhere securely to each package of cigarettes. If packages of cigarettes are wrapped in or covered by some substance to which the stamps do not readily adhere, such wrapper or covering must be roughened or treated so that the stamps will adhere securely thereto.
Article 10. Metering Machines and Impressions
§4051. Metering Machines.

Only those metering machines as are approved by the board shall be employed for affixing meter impressions to packages of cigarettes. A distributor shall not affix meter impressions to packages of cigarettes unless he has first obtained authorization from the board to employ this method of affixation.
§4052. Metering Machine Requirements.
History

A distributor desiring to use a metering machine shall apply to the board for authorization. The following terms and conditions are applicable to the use of metering equipment by a distributor:
(a) Impressions will be made only by means of machines approved by the board and meters registered with the board;
(b) Only clear and legible imprints will be used on packages of cigarettes distributed;
(c) Impressions by a meter registered to the distributor will be made only on packages of cigarettes owned by that distributor;
(d) Only ink approved by the board will be used;
(e) Each meter will be kept in a safe place when not in use, and will be safeguarded when being transported;
(f) In case of theft, loss or mysterious disappearance of a meter or tampering therewith, the incident will be immediately reported to the board, to proper police authorities, and to the meter manufacturer;
(g) No meter will be transferred or otherwise disposed of without prior written permission of the board;
(h) No repairs will be made to a meter except by a duly authorized representative of the meter manufacturer and upon prior approval of the board; and
(i) Any meter having a broken seal will be immediately reported to the board and to the manufacturer and will not be used by the distributor.
HISTORY

1. Amendment filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).
2. Certificate of Compliance filed 3-27-68 (Register 68, No. 13).
§4053. Revocation of Permission.

If a distributor issues illegible meter impressions or violates any regulation of the board relative to the use of metering machines, the board may revoke its authorization to the distributor to affix meter impressions to packages of cigarettes.
§4054. Manner of Affixing Meter Impressions.
Note     •     History

Tax meter impressions shall be clearly imprinted to the bottom end of each standard package of 20 cigarettes. Meter impressions shall not be imprinted on any package, carton, or container of cigarettes containing other than 20 cigarettes. All dies and other equipment must be regularly serviced and cleaned according to the instructions issued by the manufacturers of the equipment.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30162, 30163 and 30164, Revenue and Taxation Code.
HISTORY

1. Repealer of former Section 4054 and renumbering former Section 4055 filed 9-13-61 as an emergency; effective upon filing (Register 61, No. 18).
2. Certificate of Compliance--Section 11422.1, Government Code, filed 11-9-61 (Register 61, No. 22).
Article 10.5. Purchase of Tax Indicia
§4055. Where Purchased; Distributors' Discount.
Note     •     History

Cigarette tax stamps and meter register settings allowing the imprinting of meter impressions may be purchased by licensed distributors through stamp orders submitted to the board. Orders must include the distributor's account number, distributor's name and address, the quantity of stamps for each denomination, order date and the signature of the authorized individual. The tax stamps and meter register settings may be purchased for cash, and when authority has been granted in writing to a distributor, the tax stamps and meter register settings may be purchased on a deferred payment basis. In either case, a discount as provided by law will be allowed to a licensed distributor.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30161, 30162, 30166 and 30167, Revenue and Taxation Code.
HISTORY

1. New Article 10.5 (#T18 4055 through 4060) filed 9-13-61 as an emergency; effective upon filing (Register 61, No. 18).
2. Certificate of Compliance--Section 11422.1, Government Code, filed 11-9-61 (Register 61, No. 22).
3. Amendment filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).
4. Certificate of Compliance filed 3-27-68 (Register 68, No. 13).
5. Amendment filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
6. Amendment of section and Note filed 2-9-2006; operative 3-11-2006 (Register 2006, No. 6).
§4056. Units of Sale; Minimum Sales.
Note     •     History

Cigarette tax stamps designated for packages containing 10 cigarettes, 20 cigarettes and 25 cigarettes will be sold in rolls containing 1,200 or 30,000 stamps. Such stamps are sold in full rolls only and the smallest sale unit is one roll. The Board, at its discretion, may authorize the use of stamps of other denominated values and specifications.
NOTE

Authority cited: Sections 30451 and 30162, Revenue and Taxation Code. Reference: Sections 30161 and 30162, Revenue and Taxation Code.
HISTORY

1. New section filed 9-13-61 as an emergency; effective upon filing (Register 61, No. 18).
2. Certificate of Compliance--Section 11422.1, Government Code, filed 11-9-61 (Register 61, No. 22).
3. Amendment filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).
4. Certificate of Compliance filed 3-27-68 (Register 68, No. 13).
5. Amendment filed 9-6-83; effective thirtieth day thereafter (Register 83, No. 37).
6. Amendment of section and Note filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
7. Amendment filed 2-9-2006; operative 3-11-2006 (Register 2006, No. 6).
§4056.1. Expiration of Heat-Applied Decal Tax Stamps. [Repealed]
Note     •     History

NOTE

Authority cited: Sections 30162 and 30451, Revenue and Taxation Code. Reference: Sections 30161 and 30162, Revenue and Taxation Code; and Section 6 of Statutes 2004, Chapter 822.
HISTORY

1. New section filed 12-27-2004 as an emergency; operative 1-1-2005 (Register 2004, No. 53). A Certificate of Compliance must be transmitted to OAL by 5-2-2005 or emergency language will be repealed by operation of law on the following day.
2. New section refiled 4-29-2005 as an emergency, including amendments; operative 4-29-2005 (Register 2005, No. 17). A Certificate of Compliance must be transmitted to OAL by 8-29-2005 or emergency language will be repealed by operation of law on the following day.
3. New section, including further amendments, refiled 7-8-2005 as an emergency; operative 7-8-2005 (Register 2005, No. 27). A Certificate of Compliance must be transmitted to OAL by 11-7-2005 or emergency language will be repealed by operation of law on the following day.
4. Repealed by operation of Government Code section 11346.1(g) (Register 2006, No. 8).
§4057. Cash Sales of Tax Stamps or Meter Register Settings.
Note     •     History

Every distributor desiring to purchase tax stamps or meter register settings for cash shall file an application to register the individual authorized to order cigarette tax stamps, on a form approved by the board. The distributor shall identify and authorize in writing on the form the individual who may order stamps or meter register settings for this distributor's account and include the signature of the individual authorized to submit the tax stamp orders. If a distributor wishes to allow multiple individuals to submit cigarette tax stamp orders, a separate application is required for each individual authorized to order cigarette tax stamps. Orders for stamps or meter register settings shall be made by the distributor on order forms approved by the board. The distributor's authorization of such individual(s) shall continue in effect until written notice of revocation of the authority is delivered to the board by registered mail or until written acknowledgment of receipt of the revocation is given by the board. Payment must be made for cash purchases at the time the stamps or meter register settings are ordered. The board may require cash, electronic fund transfer or certified or cashier's checks in payment of such purchases.
NOTE

Authority cited: Section 30451, Revenue and Taxation  Code. Reference: Sections 30161, 30162 and 30166, Revenue and Taxation Code.
HISTORY

1. New section filed 9-13-61 as an emergency; effective upon filing (Register 61, No. 18).
2. Certificate of Compliance--Section 11422.1, Gov. Code, filed 11-9-61 (Register 1, No. 22).
3. Amendment of section heading, section and Note filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
4. Amendment of section and Note filed 2-9-2006; operative 3-11-2006 (Register 2006, No. 6).
§4058. Application for Credit Purchases.
Note     •     History

Every distributor desiring to purchase tax stamps or meter register settings on the deferred payment basis shall request the board to set the maximum amount of such purchases the distributor may have unpaid at any time and the amount of the required security.
The board shall set the amounts and notify the distributor by mail of the maximum amount of deferred payment purchases that the distributor may have unpaid at any time and the amount of the required security. The maximum amount of tax stamps or meter register setting purchases for which the distributor may defer payment as determined by the board shall not exceed twice the distributor's average monthly tax liability, based on the distributor's previous six months' experience, or in the case of a distributor not previously authorized to make deferred payment purchases or a distributor the character of whose business has changed substantially, the maximum amount shall not exceed twice the estimated average monthly tax liability as determined by the board.
The distributor shall provide to the board a surety bond or deposit in lieu of security in an amount equal to not less than 70 percent of the maximum amount, or more than twice the amount, of deferred payment purchases the distributor may have unpaid at any time as determined by the board.
If the distributor elects, under Section 30168, to make payments on a twice-monthly basis, the distributor shall provide to the board a surety bond or deposit in lieu of security in an amount equal to not less than 50 percent of the maximum amount, or more than twice the amount, of deferred payment purchases the distributor may have unpaid at any time as determined by the board.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30142, 30162, 30167 and 30168, Revenue and Taxation Code
HISTORY

1. Amendment filed 10-31-72; effective thirtieth day thereafter (Register 72, No. 45). For prior history, see Register 68, No. 13.
2. Amendment filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
3. Amendment adding last paragraph and amending Note filed 2-9-2006; operative 3-11-2006 (Register 2006, No. 6).
§4059. Authorization for Credit Purchases.
Note     •     History

(a) Upon approval of a distributor's request to purchase tax stamps or meter register settings on the deferred payment basis, and receipt of the required security, the board shall give written authorization to the distributor for the amount of deferred payment purchases the distributor may have unpaid at any time.
(b) Before making deferred payment purchases of tax stamps and meter register settings, the distributor shall file an application to register the person authorized to order cigarette tax stamps on behalf of the distributor on a form approved by the board. The distributor shall identify and authorize in writing on the form the individual who may order purchases of stamps or meter register settings for this distributor's account and include the signature of the individual authorized to submit the tax stamp orders. If a distributor wishes to allow multiple individuals to submit cigarette tax stamp orders, a separate application form must be submitted for each individual. The distributor's authorization of such individual(s) shall continue in effect until written notice of revocation of the authority is delivered to the board by registered or certified mail or until written acknowledgment of receipt of the revocation is given by the board.
(c) Orders for stamps or meter register settings shall be made by the distributor on order forms approved by the board.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30162, 30167 and 30169, Revenue and Taxation Code.
HISTORY

1. New section filed 9-13-61 as an emergency; effective upon filing (Register 61, No. 18).
2. Certificate of Compliance--Section 11422.1, Gov. Code, filed 11-9-61 (Register 61, No. 22).
3. Amendment filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).
4. Certificate of Compliance filed 3-27-68 (Register 68, No. 13).
5. Amendment filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
6. Amendment of section and Note filed 2-9-2006; operative 3-11-2006 (Register 2006, No. 6).
§4060. Payment for Credit Purchases.
Note     •     History

Payment for all deferred payment purchases of tax stamps or meter register settings made during each calendar month must be made to the board or the board's designee by the 25th day of the calendar month following the month in which the purchases were made. Remittance for such purchases shall be made payable to “State Board of Equalization.” The privilege of making deferred payment purchases shall be suspended as long as a delinquent balance is owing therefor.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30162, 30167 and 30168, Revenue and Taxation Code.
HISTORY

1. Amendment filed 10-10-68; designated effective 11-13-68 (Register 68, No. 38). For prior history, see Register 68, No. 13.
2. Amendment of section and Note filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
3. Amendment of section and Note filed 2-9-2006; operative 3-11-2006 (Register 2006, No. 6).
Article 11. Refunds for Stamps and Meter Impressions
§4061. Unused Stamps and Unused Meter Settings.
Note     •     History

(a) The board will refund or credit to a distributor the denominated value, less the purchase discount, of any identifiable unused stamps which are returned to the board. The board will refund or credit to a distributor the denominated value, less the purchase discount, of any verifiable meter setting remaining on a meter when the meter is returned to the bank for cancellation of the meter setting. A claim for refund or credit must be made on Board of Equalization Form BOE-1024 entitled “Claim For Refund For California Cigarette Tax Stamps” and filed with the board, providing the following information: distributor's name, account number, address, telephone number, date, district office, number and type of cigarette tax stamps being claimed for refund, amount of claim for each type of cigarette tax stamp being claimed for refund, total amount of claim less discount of .0085, and reason for claim. The form further requires acknowledgement by a board representative and his or her supervisor of receipt of the cigarette tax stamps being claimed for refund and certification by a board representative of the receipt and destruction of the cigarette tax stamps being claimed for refund.
(b) “Unused stamp” means a tax stamp on a tax stamp roll or on a package of cigarettes which is not yet distributed and includes only those stamps on which 4 of the 5 characters of the stamp's serial number can be identified. If fewer than 4 characters in the stamp's serial number can be identified, the distributor shall provide evidence concerning the remainder of the tax stamp to show that the remainder of the stamp is not affixed to a package of cigarettes that has been distributed. Such proof may include, but is not limited to, the paper from the stamp roll or package of cigarettes to which the remainder of the stamp is affixed. If the stamp is of a design generated by a technology capable of being read by a scanning or similar device, a majority of the stamp must be present and should be able to be read by a scanning or similar device in accordance with Section 30162. Alternatively, as evidence of unused stamps, a distributor may return damaged stamps in such a form that a board representative is otherwise able to verify authenticity and that the stamps have not been used.
(c) If the refund or credit is for tax stamps that are affixed to packages of cigarettes, an authorized board employee, upon verification that the refund or credit is due, shall ensure that the distributor obliterated the stamp with the use of a permanent marker.
(d) If the refund or credit is for tax stamps remaining on a roll, upon verification that the refund or credit is due, the roll shall be returned to the board for destruction.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30162 and 30176, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-3-60 as an emergency; effective upon filing (Register 60, No. 17).
2. Certificate of Compliance--Government Code Section 11422.1, filed 9-14-60 (Register 60, No. 20).
3. Amendment filed 9-31-61 as an emergency; effective upon filing (Register 61, No. 18).
4. Certificate of Compliance--Section 11422.1, Gov. Code, filed 11-9-61 (Register 61, No. 22).
5. Amendment filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).
6. Certificate of Compliance filed 3-27-68 (Register 68, No. 13).
7. Redesignation and amendment of former section as subsection (a) and new subsections (b)-(d) filed 5-13-2002; operative 6-12-2002 (Register 2002, No. 20).
8. Amendment of subsection (b) and Note filed 2-9-2006; operative 3-11-2006 (Register 2006, No. 6).
§4062. Destroyed Stamps and Meters.
Note     •     History

The board will refund or credit to a distributor the denominated value, less the purchase discount, of any stamps, or unused meter register settings, when the stamps or the meter have been destroyed by fire, flood or other casualty prior to the affixation of the tax stamps or meter impressions to packages of cigarettes. The distributor must establish by clear and convincing evidence that the stamps or meter were destroyed by fire, flood or other casualty and the denominated value of the stamps or remaining meter register balance. Theft or mysterious disappearance of unaffixed stamps or of a meter shall not constitute a casualty for which refund or credit will be given.
NOTE

Authority cited: Sections 30451 and 30176, Revenue and Taxation Code. Reference: Section 30176, Revenue and Taxation Code.
HISTORY

1. New section filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).
2. Certificate of Compliance filed 3-27-68 (Register 68, No. 13).
3. Amendment of section and Note filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
§4063. Destroyed Cigarettes.
Note     •     History

The board will refund or credit to a distributor the denominated value, less the purchase discount, of stamps or meter impressions affixed to packages of cigarettes which have been destroyed by fire, flood or other casualty, prior to distribution. The distributor must establish by clear and convincing evidence that the cigarettes were destroyed by fire, flood or other casualty prior to distribution and the denominated value of the affixed tax stamps or meter impressions. The theft or mysterious disappearance of packages of cigarettes shall not constitute a casualty for which refund or credit will be given.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Section 30177, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-3-60 as an emergency; effective upon filing (Register 60, No. 17).
2. Certificate of Compliance--Government Code Section 11422.1, filed 9-14-60 (Register 60, No. 20).
3. Amendment filed 9-13-61 as an emergency; effective upon filing (Register 61, No. 18).
4. Certificate of Compliance--Section 11422.1, Gov. Code, filed 11-9-61 (Register 61, No. 22).
5. Amendment filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).
6. Certificate of Compliance filed 3-27-68 (Register 68, No. 13).
7. Amendment filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
§4063.5. Exported Tax-Paid Tobacco Products.
Note     •     History

The board will refund or credit to a distributor the tax paid on tobacco products which are:
(a) Shipped to a point outside this state, pursuant to a contract of sale, by delivery by the distributor to such point by means of:
(1) facilities operated by the distributor;
(2) delivery by the distributor to a carrier for shipment to a consignee at such point, or
(3) delivery by the distributor to a customs broker or forwarding agent for shipment outside this state.
(b) Sold to a foreign purchaser for shipment abroad and delivered to a ship, airplane, or other conveyance furnished by the purchaser for the purpose of carrying the cigarettes or tobacco products abroad and actually carried to a foreign destination.
(c) Sold for use solely outside this state and delivered to a forwarding agent, export packer, or other person engaged in the business of preparing goods for export or arranging for their exportation, and actually delivered to a port outside the continental limits of the United States.
The distributor must file the claim for refund on Board of Equalization Form BOE-1024-T entitled “Claim for Refund -- Exported Tax-Period Tobacco Products” and provide copies of documentation to support payment of taxes, as well as bills of lading or other documentary evidence of the delivery of the tobacco products to a carrier, customs broker or forwarding agent for shipments outside this state. The original documents must be retained by the distributor for inspection by employees of the board. In the case of tobacco products for foreign export, copies of United States Customs shipper's export declarations filed with the Collector for Customs or other documentary evidence of export must be obtained and retained. No refund or credit will be given if the tobacco products are diverted in transit or for any reason are not actually delivered outside the state pursuant to the contract of sale or are not shipped abroad by a foreign purchaser. Any application for refund or credit based upon the exportation of tax-paid tobacco products from this state shall be filed with the board within three months after the close of the calendar month in which the tobacco products are exported.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30176.1, 30178.1, 30178.2 and 30179.1, Revenue and Taxation Code.
HISTORY

1. New section filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
§4064. Claim Forms.
Note     •     History

A claim for refund or credit made pursuant to Sections 4061, 4062, 4063 or 4063.5 must be made on a form prescribed by and filed with the board.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30176, 30176.1 and 30177, Revenue and Taxation Code.
HISTORY

1. New section filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).
2. Certificate of Compliance filed 3-27-68 (Register 68, No. 13).
3. Amendment of section and Note filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
§4065. Unsalable Cigarettes.
Note     •     History

The board will refund or credit to a distributor the denominated value, less the purchase discount, of identifiable stamps or meter impressions affixed to packages of cigarettes which have become unfit for use or unsalable before distribution, or after distribution if the cigarettes have been returned for credit or have been replaced and proof is submitted to the board showing that the cigarettes have not been used for smoking in California. Claim for refund or credit must be made on a form prescribed by the board and shall be accompanied by a properly executed receipt and a copy of the credit memorandum of the manufacturer for returned stock, or by proof of destruction of the cigarettes with the tax stamps or meter impressions thereon in the presence of an employee of the board authorized to witness the destruction.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Section 30177, Revenue and Taxation Code.
HISTORY

1. Renumbering from Section 4062 and amendment filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).For prior history, see Register 61, No. 22.
2. Certificate of Compliance--Section 11422.1, Govt. Code, filed 3-27-68 (Register 68, No. 13).
3. Amendment of section heading and section filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
§4066. Stolen Indicia.
Note     •     History

Refund or credit will not be given for stamps, meter settings or meter impressions which are lost through theft or mysterious disappearance of any unaffixed stamps, any meter, or any packages of cigarettes to which stamps or meter impressions have been affixed. If identifiable stamps, meter settings or meter impressions which have been lost through theft or mysterious disappearance are later recovered, credit or refund may be given under Sections 4061 or 4065. 
NOTE

Authority cited: Section 30451, Revenue and Taxation Code.
HISTORY

1. New section filed 1-12-68 as an emergency; effective upon filing (Register 63, No. 2).
2. Certificate of Compliance--Section 11422.1, Govt. Code, filed 3-27-68 (Register 68, No. 13).
§4067. Provisions Limited to Distributors. [Repealed]
Note     •     History

NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30176, 30177, Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-13-61 as an emergency; effective upon filing (Register 61, No. 18).
2. Certificate of compliance--Section 11422.1, Gov. Code, filed 11-9-61 (Register 61, No. 22).
3. Renumbered from Section 4064 and filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).
4. Certificate of Compliance filed 3-27-68 (Register 68, No. 13).
5. Repealer filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
Article 12. Refunds of Affixation Costs [Repealed]
HISTORY

1. Repealer of article 12 (sections 4071-4073) filed 8-3-60 as an emergency; operative 8-3-60 (Register 60, No. 17). 
2. Certificate of Compliance as to 8-3-60 order filed 9-14-60 pursuant to Government Code section 11422.1 (Register 60, No. 20).
Article 13. Particular Transactions
§4076. Sales by Manufacturers. [Repealed]
Note     •     History

NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Section 30103, Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-13-61 as an emergency; effective upon filing (Register 61, No. 18).
2. Certificate of Compliance--Section 11422.1, Gov. Code, filed 11-9-61 (Register 61, No. 22).
3. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, NO. 30).
§4077. Sales to the United States. [Repealed]
Note     •     History

NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Section 30102, Revenue and Taxation Code.
HISTORY

1. Amendment filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2). For prior history, see Register 61, No. 22.
2. Certificate of Compliance filed 3-27-68 (Register 68, No. 13).
3. Repealer filed 12-26-75; effective thirtieth day thereafter. NOTE: Filing designates 1-1-76 as effective date (Register 75, No. 52).
4. New section filed 8-20-76; effective thirtieth day thereafter (Register 76, No. 34).
5. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§4078. Sales to the State. [Repealed]
Note     •     History

NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30008, 30105.5, Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-13-61 as an emergency; designated effective 9-15-61 (Register 61, No. 18).
2. Certificate of Compliance--Section 11422.1, Gov. Code, filed 11-9-61 (Register 61, No. 22).
3. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§4079. In Bond Federal Tax-Free Cigarettes. [Repealed]
Note     •     History

NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Article 1, Section 8, Clause 3, United States Constitution.
HISTORY

1. Amendment filed 8-3-60 as an emergency; effective upon filing (Register 60, No. 17).
2. Certificate of Compliance--Government Code Section 11422.1, filed 9-14-60 (Register 60, No. 20).
3. Repealer filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
§4080. Interstate and Foreign Commerce.
Note     •     History

The tax does not apply to sales of cigarettes or tobacco products which are:
(a) Shipped to a point outside this State, pursuant to a contract of sale, by delivery by the seller to such point by means of:
(1) Facilities operated by the seller;
(2) Delivery by the seller to a carrier for shipment to a consignee at such point, or
(3) Delivery by the seller to a customs broker or forwarding agent for shipment outside this State.
(b) Sold to a foreign purchaser for shipment abroad and delivered to a ship, airplane, or other conveyance furnished by the purchaser for the purpose of carrying the cigarettes or tobacco products abroad and actually carried to a foreign destination.
(c) Sold for use solely outside this State and delivered to a forwarding agent, export packer, or other person engaged in the business of preparing goods for export or arranging for their exportation, and actually delivered to a port outside the continental limits of the United States.
Bills of lading or other documentary evidence of the delivery of the cigarettes or tobacco products to a carrier, customs broker or forwarding agent for shipments outside the State must be retained by the distributor for inspection by employees of the board. In the case of cigarettes or tobacco products for foreign export, copies of United States customs shippers' export declaration filed with the Collector of Customs or other documentary evidence of export must be obtained and retained. The tax applies to the transaction if the cigarettes or tobacco products are diverted in transit or for any reason are not actually delivered outside the State pursuant to the contract of sale or are not shipped abroad by a foreign purchaser, regardless of documentary evidence held by the distributor.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Section 30008, Revenue and Taxation Code.
HISTORY

1. Amendment of section and new Note filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
§4081. Sample Cigarettes and Tobacco Products.
Note     •     History

The giving away in this state of untaxed cigarettes or tobacco products as samples is a taxable distribution.
Manufacturers' agents or representatives may for advertising purposes, as permitted by state law and the terms of the November 23, 1998 Master Settlement Agreements with the state which are applicable to the signatories to those Agreements, distribute to consumers packages of cigarettes without stamps or meter impressions affixed to the packages or untaxed tobacco products. However, the manufacturer giving away such sample cigarettes or tobacco products must report the distribution on its monthly report or return and pay the tax due. Each package of such samples shall have imprinted on it: “Not for sale. Applicable state tax has been paid.” and each package of sample tobacco products shall be clearly marked as a sample.
Cigarette manufacturers shall notify the board in writing in advance of the sampling, giving information as to the approximate date or dates, location or locations, brand, and method of distribution.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30005, 30005.5, 30008 and 30009, Revenue and Taxation Code.
HISTORY

1. Amendment filed 4-14-72; effective thirtieth day thereafter (Register 72, No. 16). For prior history, See Register 68, No. 13.
2. Amendment of section heading, section and new Note filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
§4082. Cigarettes for Hospitalized Veterans. [Repealed]
Note     •     History

NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30102.5 and 30105.5, Revenue and Taxation Code.
HISTORY

1. New section filed 9-13-61 as an emergency; designated effective 9-15-61 (Register 61, No. 18).
2. Certificate of Compliance--Section 11422.1, Gov. Code, filed 11-9-61 (Register 61, No. 22).
3. Repealer filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
Article 14. Transactions Without Stamps or Meter Impressions [Repealed]
HISTORY

1. Repealer of article 14 (section 4086) filed 8-3-60 as an emergency; operative 8-3-60 (Register 60, No. 17). 
2. Certificate of Compliance as to 8-3-60 order filed 9-14-60 pursuant to Government Code section 11422.1 (Register 60, No. 20).
Article 15. Vending Machines
§4089. Statement of Operator.
History

A statement in substantially the following form must be affixed by the operator thereof upon each cigarette vending machine in a conspicuous place:
“This vending machine is operated by

Name of Operator

Place of Business of Operator

who holds Permit No. 	 , issued pursuant to the Sales and 
Use Tax Law.”
Article 16. Payment by Consumer or User
§4091. Payment by Consumer.
Note     •     History

(a) Each consumer or user of cigarettes or tobacco products subject to the tax, resulting from the consumer having: 
(1) purchased cigarettes or tobacco products in any quantity, when such cigarettes or tobacco products are shipped to the consumer from out of state, 
(2) personally transported or brought into the state untaxed cigarettes in quantities of more than 400 cigarettes in a single lot for his or her own use or consumption, or 
(3) obtained more than 400 untaxed cigarettes at one time from a federal instrumentality listed in Revenue and Taxation Code section 30102 must pay the tax either to the licensed or registered distributor under the Cigarette and Tobacco Products Tax Law from whom the cigarettes or tobacco products were purchased, or directly to the board if the person from whom the cigarettes or tobacco products were purchased is not a licensed or registered distributor. A person who pays the tax directly to the Board must file a certified Board of Equalization Form BOE-501-CI entitled “Cigarette and Tobacco Products Excise Tax Return,” and report the brand name, seller's name, seller's internet address or phone number, date received, and number of cartons or type and cost of tobacco products received. 
(b) Consumers or users will be liable for payment of the tax to the board unless receipts as provided by regulation 4092 are obtained for payment of the tax to the distributor.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30005, 30005.5, 30106, 30107 and 30108, Revenue and Taxation Code.
HISTORY

1. Amendment filed 11-10-70; effective thirtieth day thereafter (Register 70, No. 46). For prior history see Register 68, No. 38.
2. Amendment of section and Note filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
§4092. Receipts for Tax Paid to Distributors.
Note     •     History

Every distributor required to collect the tax under Revenue and Taxation Code Section 30108 must give a receipt to each purchaser for the amount of tax collected. The receipt need not be in any particular form but must show the following:
(a) The name and place of business of the distributor making the sale or accepting the order for cigarettes or tobacco products;
(b) The license number or registration number of the distributor;
(c) The name and address of the purchaser;
(d) The number of cigarettes or type, quantity, and wholesale cost of all tobacco products purchased;
(e) The date the cigarettes or tobacco products were purchased; and
(f) The amount of tax collected by the distributor or statement indicating that the tobacco products tax has been paid.
A sales invoice containing the data required above, together with evidence of payment thereof, will constitute a receipt.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Section 30108, Revenue and Taxation Code.
HISTORY

1. Amendment of section and new Note filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
Article 17. Interest and Penalties
§4096. Table of Applicable Sections. [Repealed]
Note     •     History

NOTE

Authority cited: Section 30451, Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-13-61 as an emergency; effective upon filing (Register 61, No. 18).
2. Certificate of Compliance--Section 11422.1, Gov. Code, filed 11-9-61 (Register 61, No. 22).
3. Repealer of Article 17 (Section 4096) filed 1-12-68 as an emergency; effective upon filing (Register 68, No. 2).
4. Certificate of Compliance filed 3-27-68 (Register 68, No. 13).
§4098. Relief from Liability.
Note     •     History

(a) In General. A person may be relieved from the liability for the payment of cigarette and tobacco products taxes, including any penalties and interest added to those taxes, when that liability resulted from the failure to make a timely return or a payment and such failure was found by the board to be due to reasonable reliance on: 
(1) Written advice given by the board under the conditions set forth in subdivision (b) below; or 
(2) Written advice in the form of an annotation or legal ruling of counsel under the conditions set forth in subdivision (d) below; or 
(3) Written advice given by the board in a prior audit of that person under the conditions set forth in subdivision (c) below. As used in this regulation, the term “prior audit” means any audit conducted prior to the current examination where the issue in question was examined. 
Written advice from the board may only be relied upon by the person to whom it was originally issued or a legal or statutory successor to that person. Written advice from the board which was received during a prior audit of the person under the conditions set forth in subdivision (c) below, may be relied upon by the person audited or by a legal or statutory successor to that person. 
The term “written advice” includes advice that was incorrect at the time it was issued as well as advice that was correct at the time it was issued, but, subsequent to issuance, was invalidated by a change in statutory or constitutional law, by a change in board regulations, or by a final decision of a court of competent jurisdiction. Prior written advice may not be relied upon subsequent to: (1) the effective date of a change in statutory or constitutional law and board regulations or the date of final decision of a court of competent jurisdiction regardless that the board did not provide notice of such action; or (2) the person receiving a subsequent writing notifying the person that the advice was not valid at the time it was issued or was subsequently rendered invalid. As generally used in this regulation, the term “written advice” includes both written advice provided in a written communication under subdivision (b) below and written advice provided in a prior audit of the person under subdivision (c) below. 
(b) Advice Provided in a Written Communication. Advice from the board provided to the person in a written communication must have been in response to a specific written inquiry from the person seeking relief from liability, or from his or her representative. To be considered a specific written inquiry for purposes of this regulation, representatives must identify the specific person for whom the advice is requested. Such inquiry must have set forth and fully described the facts and circumstances of the activity or transactions for which the advice was requested. 
(c) Written Advice Provided in a Prior Audit. Presentation of the person's books and records for examination by an auditor shall be deemed to be written request for the audit report. If a prior audit report of the person requesting relief contains written evidence which demonstrates that the issue in question was examined, either in a sample or census (actual) review, such evidence will be considered “written advice from the board” for purposes of this regulation. A census (actual) review, as opposed to a sample review, involves examination of 100% of the person's transactions pertaining to the issue in question. For written advice contained in a prior audit of the person to apply to the person's activity or transaction in question, the facts and conditions relating to the activity or transaction must not have changed from those which occurred during the period of operation in the prior audit. Audit comments, schedules, and other writings prepared by the board that become part of the audit work papers which reflect that the activity or transaction in question was properly reported and no amount was due are sufficient for a finding for relief from liability, unless it can be shown that the person seeking relief knew such advice was erroneous. 
(d) Annotations and Legal Rulings of Counsel. Advice from the board provided to the person in the form of an annotation or legal ruling of counsel shall constitute written advice only if: 
(1) The underlying legal ruling of counsel involving the fact pattern at issue is addressed to the person or to his or her representative under the conditions set forth in subdivision (b) above; or 
(2) The annotation or legal ruling of counsel is provided to the person or his or her representative by the board within the body of a written communication and involves the same fact pattern as that presented in the subject annotation or legal ruling of counsel. 
(e) Trade or Industry Associations. A trade or industry association requesting advice on behalf of its member(s) must identify and include the specific member names(s) for whom the advice is requested for relief from liability under this regulation. 
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Section 30284, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-16-2002; operative 2-15-2002 (Register 2002, No. 3).
Article 18. Miscellaneous
§4099. Affixing of Stamps or Meter Impressions Out-of-State.

Any person who maintains a place of business in the United States and distributes cigarettes in this State may obtain a distributor's license and, when authorized in writing, may affix stamps or meter impressions to packages of cigarettes at such place of business before the cigarettes are brought to this State.
§4100. Purchases of Cigarettes by a Retailer. [Repealed]
History

HISTORY

1. New section filed 10-10-68; designated effective 11-13-68 (Register 68, No. 38).
2. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§4101. Cigarette Transporter's Permit. [Repealed]
History

HISTORY

1. New section filed 10-10-68; designated effective 11-13-68 (Register 68, No. 38).
2. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§4102. Application Form. [Repealed]
History

HISTORY

1. New section filed 10-10-68; designated effective 11-13-68 (Register 68, No. 38).
2. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§4103. Invoices, Bills of Lading or Delivery Tickets. [Repealed]
History

HISTORY

1. New section filed 10-10-68; designated effective 11-13-68 (Register 68, No. 38).
2. Repealer filed 7-20-82; effective thirtieth day thereafter (Register 82, No. 30).
§4105. Relief from Liability.
Note     •     History

A person may be relieved from the liability for the payment of the Cigarette and Tobacco Products Tax, including any penalties and interest added to the tax, when that liability resulted from the failure to make a timely return or a payment and such failure was found by the board to be due to reasonable reliance on written advice given by the board as described in California Code of Regulations, Title 18, Section 4902. 
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Section 30284, Revenue and Taxation Code. 
HISTORY

1. New section filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§4106. Innocent Spouse or Registered Domestic Partner Relief from Liability.
Note     •     History

A spouse or registered domestic partner claiming relief from liability for the cigarette and tobacco products tax, interest, penalties, and other amounts shall be relieved from such liability where all the requirements set forth in California Code of Regulations, title 18, section 4903 are met.
NOTE

Authority cited: Section 30451, Revenue and Taxation Code. Reference: Sections 30285 and 30361-30384, Revenue and Taxation Code; and Sections 297, 297.5 and 308, Family Code.
HISTORY

1. New section filed 5-18-2010; operative 6-17-2010 (Register 2010, No. 21).
Chapter 9.5. Cigarette and Tobacco Products Licensing Act of 2003
Article 1. Definitions and Citations
§4500. Definitions.
Note     •     History

In addition to the definitions in Business and Professions Code section 22971, the following definitions shall apply to this chapter:
(a) “Act” means the Cigarette and Tobacco Products Licensing Act of 2003, set forth in division 8.6 of the Business and Professions Code.
(b) “Appeals Division staff” means an employee or employees of the State Board of Equalization assigned to the Appeals Division of the Legal Department.
(c) “Applicant” means a retailer, wholesaler, distributor, importer or manufacturer who has applied for a license pursuant to the Act, and, if the retailer, wholesaler, distributor, importer or manufacturer is not an individual, the term includes any person controlling such entity.
(d) “Arm's length transaction” means a sale in good faith and for valuable consideration that reflects the fair market value in the open market between two informed and willing parties, neither under any compulsion to participate in the transaction.
(e) “Board” means the Board Members of the State Board of Equalization meeting as a body or the agency created by article XIII, section 17, of the California Constitution, as the context indicates.
(f) “Board Proceedings Division staff” means an employee or employees of the State Board of Equalization assigned to the Board Proceedings Division of the Legal Department.
(g) “Business” means a business operated by a licensee and/or the property upon which or location at which such licensed business is operated.
(h) “Citation” means a civil notice of violation(s) or a criminal misdemeanor notice to appear.
(i) “Control” or “controlling” means control or controlling as defined in Business and Professions Code section 22971, subdivision (d).
(j) “Conviction” means a judgment of guilt of a criminal offense.
(k) “Finding” or “Findings” means a determination that a violation of the Act has occurred. This can occur by default if no appeal is made from a Notice of Violation or Warning Notice, or by a final decision made pursuant to Regulations 4700, 4701, or 4702.
(l) “Fine” means any fine imposed by the Board pursuant to the Act.
(m) “Investigations Division staff” means an employee or employees of the State Board of Equalization assigned to the Investigations Division of the Legal Department.
(n) “Licensee” means a licensee as defined in Business and Professions Code section 22971, subdivision (k).
(o) “License subject to a civil or criminal citation” means a license as to which a citation has been issued but no final determination of violation has yet been entered into the licensee's or unlicensed person's permanent record.
(p) “Notice of Violation” means the document sent to a licensee or unlicensed person referring to the citation issued, the charged violation(s), the penalty or penalties to be imposed, and the licensee's or unlicensed person's appeal rights.
(q) “Offense” means a criminal conviction of violations of the Act and/or civil findings of violations of the Act.
(r) “Person” means a person as defined in Revenue and Taxation Code section 30010.
(s) “Regulation” means a section of title 18 of the California Code of Regulations.
(t) “Special Taxes and Fees Division” means the Special Taxes and Fees Division of the State Board of Equalization's Property and Special Taxes Department.
(u) “Unlicensed Person” means any person not holding a valid license issued by the Board pursuant to the Act.
(v) “Warning Notice” means the document advising a licensee or unlicensed person that the stated violation(s) of the Act will be entered into the licensee's or unlicensed person's permanent record as a first offense and that future violations will result in civil penalties.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22970, 22971, 22974.5, 22978.7 and 22979.7, Business and Professions Code; and Section 30010, Revenue and Taxation Code.
HISTORY

1. New chapter 9.5 (articles 1-6, sections 4500-4703), article 1 (sections 4500-4501) and section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
2. Change without regulatory effect amending subsection (e) and Note filed 3-30-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 14).
3. Change without regulatory effect amending subsection (i), repealing subsection (k), adding subsection (t), relettering subsections and amending newly designated subsection (n) filed 10-10-2011 pursuant to section 100, title 1, California Code of Regulations (Register 2011, No. 41).
§4501. Citations.
Note     •     History

(a) Issuance of a Civil or Criminal Citation.
The Investigations Division may issue a citation to a licensee or unlicensed person if the licensee or unlicensed person is determined to be in violation of any provision of the Act.
(b) Contents and Service of a Civil Citation.
The citation shall be in writing and shall describe the nature and facts of the violation, including a reference to the statute(s) violated. The citation shall state that the Board will mail a notice regarding the citation and information about any penalties, if applicable, and appeal rights. The citation shall be placed in a sealed envelope, with postage paid, addressed to the owner of record at the owner's last known address as it appears in the records of the Board. The giving of notice shall be deemed complete at the time of deposit of the notice at a United States Post Office, mailbox, sub-post office, substation, mail chute, or other facility regularly maintained or provided by the United States Postal Service, without extension of time for any reason. In lieu of mailing, notice may be served personally by delivery to the person to be served and service shall be deemed complete at the time of such delivery. Personal delivery to a corporation may be made by delivery of a notice to any person designated to be served for the corporation with summons and complaint in a civil action, pursuant to the Code of Civil Procedure.
(c) Contents and Service of a Criminal Citation.
A criminal citation shall state the appearance date and the appropriate jurisdiction. The citation shall be served in accordance with Penal Code section 853.6.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22973(a)(5), 22974, 22974.3, 22974.4, 22974.5, 22974.7, 22974.8, 22978.1, 22978.2, 22978.4, 22978.5, 22978.6, 22978.7, 22979, 22979.4, 22979.5, 22979.6, 22979.7, 22980, 22980.1, 22980.2. 22980.3 and 22981, Business and Professions Code; and Section 853.6, Penal Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
Article 2. Licenses -- Issuance, Transfer and Denial
§4502. Denial of License.
Note     •     History

A new license shall not be issued to an applicant when any of the following apply: (1) a license subject to civil or criminal citation has been issued for the same location; (2) a license for the same location is suspended; (3) a license for the same location has been revoked any time within the preceding five years; or (4) any person controlling the applicant has been convicted of a felony pursuant to Revenue and Taxation Code section 30473 or 30480.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22971, 22973.1, 22977.2 and 22979, Business and Professions Code.
HISTORY

1. New article 2 (sections 4502-4509) and section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
§4503. Issuance of License -- Transfer of Business.
Note     •     History

Notwithstanding the provisions of Regulation 4502 and if all other statutory requirements are met, a new license will be issued for a business with a license subject to a civil or criminal citation, if the applicant acquired the business pursuant to an arm's length transaction after the violations contained in the citation were committed.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22973.1, 22977.2 and 22979, Business and Professions Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
§4504. Determination of Arm's Length Transaction.
Note     •     History

The Special Taxes and Fees Division shall determine whether the transfer of a business was pursuant to an arm's length transaction, utilizing the criteria set forth in Regulations 4505 and 4506.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22973.1, 22977.2 and 22979, Business and Professions Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
2. Change without regulatory effect amending section filed 10-10-2011 pursuant to section 100, title 1, California Code of Regulations (Register 2011, No. 41).
§4505. Transfers or Sales Between Related Parties.
Note     •     History

(a) Presumption -- Not Arm's Length. When a violation or violations of the Act have occurred at a licensed location, the sale of the business between and among relatives (by blood or marriage, which relationships include, but are not limited to, spouses, parents, children and siblings), a partnership and its partners, a limited liability company or association and its members, a corporation and its shareholders, and persons and entities under their control, is presumed to be a sale for the primary purpose of avoiding the effects of violations of the Act and not at arm's length.
(b) This presumption may be rebutted only by clear and convincing evidence to the contrary.
(c) The purchaser has the burden of proving that the transaction was an arm's length transaction.
NOTE

Authority cited: Section 22971.2. Business and Professions Code.  Reference: Sections 22973.1, 22977.2 and 22979, Business and Professions Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
§4506. Evidence of a Non-Arm's Length Transaction.
Note     •     History

Evidence that a sale is a non-arm's length transaction, includes, but is not limited to, the following:
(a) Inadequate consideration was paid for the assets of the prior licensee (former owner).
(b) No bill of sale, sales contract or escrow account was prepared or executed for the sale of the business.
(c) The former owner holds an equity interest in the inventory of products for sale, fixtures or equipment.
(d) The purchaser was or is an employee, co-owner or independent contractor with the former owner.
(e) The ownership of the real property at which the business is located, or a master leasehold interest therein, remains with the former owner, with no lease, sublease or lease assignment having been executed with the purchaser providing for the payment of reasonable rentals, subrentals, or other consideration to the former owner.
(f) The business license for the business remains in the name of the former owner.
(g) The purchaser holds itself out as being the same business as that operated by the former owner or as being affiliated with the former owner in the business; and the former owner:
(1) Is present at the business on a regular basis;
(2) Continues to contract with suppliers to purchase products for use at the business;
(3) Assumes personal liability for services, supplies or inventory for the business;
(4) Continues to sign checks on one or more of the business's bank accounts; or
(5) Maintains the authority to hire and fire business employees.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22973.1, 22977.2 and 22979, Business and Professions Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
§4507. Request for Information and Records.
Note     •     History

When a business's license is suspended, revoked, or is subject to civil or criminal citation, then the parties to a proposed or completed transfer or sale of the business must, at the Board's request, provide all relevant information on the transfer or sale to the Special Taxes and Fees Division, including, but not limited to, the purchase agreement, all escrow documents and proof of payment or tender of the purchase consideration.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22973.1, 22977.2 and 22979, Business and Professions Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
2. Change without regulatory effect amending section filed 10-10-2011 pursuant to section 100, title 1, California Code of Regulations (Register 2011, No. 41).
§4508. Appeal -- Denial of License.
Note     •     History

(a) If the Special Taxes and Fees Division determines that a new license should not be issued pursuant to Regulation 4503, then it shall notify the applicant of such determination and deny the application for issuance of a new license for the applicant's business. The applicant may petition for a redetermination within 30 days from the date notice of the denial is mailed or personally delivered to the applicant. The denial of the application shall become final if a petition for redetermination is not filed before the expiration of the 30-day period.
(b) Every petition for redetermination shall be in writing and shall state the specific grounds upon which the petition is founded.
(c) The Board shall reconsider the determination of the Special Taxes and Fees Division pursuant to its administrative appeals process set forth in article 6 (commencing with Regulation 5260) of chapter 2 of division 2.1 of title 18 of the California Code of Regulations and shall grant the applicant an oral hearing if timely requested within 30 days of the date the Decision and Recommendation issued by the Appeals Division is mailed to the applicant. Any Board hearing will be governed by the rules set forth in Regulations 5270, 5271, 5522.4 through 5523.1, 5523.4 through 5523.7, 5541 through 5551, 5563, subdivisions (a) and (b), 5561 through 5563, 5571, 5572, and 5576.
(d) The order or decision of the Board upon a petition for redetermination becomes final 30 days after the date notice thereof is mailed to the applicant, except as provided in Regulation 5560, subdivision (b).
(e) Any notice required by this section shall be placed in a sealed envelope, with postage paid, addressed to the applicant at the applicant's last known address as it appears in the records of the Board. The giving of notice shall be deemed complete at the time of deposit of the notice at a United States Post Office, mailbox, sub-post office, substation, mail chute, or other facility regularly maintained or provided by the United States Postal Service, without extension of time for any reason. In lieu of mailing, notice may be served personally by delivery to the person to be served and service shall be deemed complete at the time of such delivery. Personal delivery to a corporation may be made by delivery of a notice to any person designated to be served for the corporation with summons and complaint in a civil action, pursuant to the Code of Civil Procedure.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22973.1, 22977.2 and 22979, Business and Professions Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
2. Change without regulatory effect amending subsections (c) and (d) and Note filed 3-30-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 14).
3. Change without regulatory effect amending subsections (a) and (c) filed 10-10-2011 pursuant to section 100, title 1, California Code of Regulations (Register 2011, No. 41).
§4509. Non-Arm's Length Transfer -- Sales.
Note     •     History

The Special Taxes and Fees Division's determination that a licensee's transfer of a business with a suspended or revoked license was not at arm's length may establish grounds for an additional violation of the Act. The Investigations Division may issue a citation for a violation of Business and Professions Code section 22980.2, subdivision (c), if the business is found selling cigarettes or tobacco products without a license or after a notification of suspension or revocation of a license.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22973.1, 22977.2, 22979 and 22980.2, Business and Professions Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
2. Change without regulatory effect amending section filed 10-10-2011 pursuant to section 100, title 1, California Code of Regulations (Register 2011, No. 41).
Article 3. Notices of Violations or Warning Notices
§4600. Issuance and Contents of a Notice of Violation or Warning Notice.
Note     •     History

The Investigations Division shall forward a copy of a citation issued to a licensee or unlicensed person to the Special Taxes and Fees Division, which shall prepare and mail a Notice of Violation or Warning Notice to the cited licensee or unlicensed person.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22974.7, 22978.7 and 22979.7, Business and Professions Code.
HISTORY

1. New article 3 (sections 4600-4602) and section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
2. Change without regulatory effect amending section filed 10-10-2011 pursuant to section 100, title 1, California Code of Regulations (Register 2011, No. 41).
§4601. Service of a Notice of Violation or Warning Notice.
Note     •     History

The Notice of Violation or Warning Notice shall be placed in a sealed envelope, with postage paid, addressed to the licensee or unlicensed person at his or her last known address as it appears in the records of the Board. The giving of notice shall be deemed complete at the time of deposit of the notice at a United States Post Office, a mailbox, sub-post office, substation, mail chute, or other facility regularly maintained or provided by the United States Postal Service, without extension of time for any reason. In lieu of mailing, a Notice of Violation may be served personally by delivery to the person to be served and service shall be deemed complete at the time of such delivery. Personal delivery to a corporation may be made by delivery of a notice to any person designated to be served for the corporation with summons and complaint in a civil action, pursuant to the Code of Civil Procedure.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22974.7, 22978.7 and 22979.7, Business and Professions Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
§4602. Finality.
Note     •     History

The penalty or penalties stated in the Notice of Violation or Warning Notice shall become final as provided in Regulations 4700 and 4701, unless an appeal is filed with the Board within the applicable time periods provided therein.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22974.7, 22974.8 and 22979.7, Business and Professions Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
Article 4. Penalties and Fines
§4603. Penalties for Licensed or Unlicensed Retailers.
Note     •     History

The following penalties shall be assessed in addition to any other civil or criminal penalty provided by law upon a finding that a retailer has violated any provision of the Act:
(a) A first offense of a violation of any of the following provisions shall result in the issuance of a Warning Notice to the licensee or unlicensed person:
(1) Business and Professions Code section 22974 (retailer's failure to retain purchase invoices).
(2) Business and Professions Code section 22980.1, subdivision (c), (d) or (e) (purchase from unlicensed person or person with suspended or revoked license).
(3) Business and Professions Code section 22980.1, subdivision (g) (purchase of cigarettes to which a stamp may not be affixed in accordance with Rev. & Tax. Code, § 30163, subd. (b)).
(4) Business and Professions Code section 22980.2, subdivision (a) (sales of cigarettes or tobacco products by an unlicensed person or person with suspended or revoked license).
(b) A first offense of a violation of any of the following provisions shall result in the issuance of a 20-day suspension:
(1) Business and Professions Code section 22973, subdivision (a)(5) (retailer's false statement on application).
(2) Business and Professions Code section 22980, subdivision (b) (any person's refusal to allow inspection).
(c) A second or subsequent offense for a violation of the provisions listed in subdivision (a) or (b) above, shall result in both a 30-day suspension or revocation and a fine. The fine shall be determined in accordance with Regulation 4607.
(d) A violation of Business and Profession Code section 22974.3 (possession of unstamped cigarettes or untaxed tobacco products) shall result in the following:
(1) Notwithstanding paragraphs (2) and (3) below, a Warning Notice for a first offense when the licensee has been in business for less than one month and there has been no purchase of new cigarette or tobacco product inventory during that period.
(2) A 10-day suspension for a first offense for a seizure of less than 20 packages of cigarettes, or the equivalent amount of tobacco products based on wholesale cost.
(3) A 20-day suspension for a first offense for a seizure of 20 packages of cigarettes or more, or the equivalent amount of tobacco products based on wholesale cost.
(4) Both a 30-day suspension or revocation and a fine for a second or subsequent offense. The fine shall be determined in accordance with Regulation 4607.
(e) In cases involving multiple violations, the violation punishable by the most severe penalty will be used for purposes of determining the penalty assessed.
(f) Notwithstanding subdivisions (b) through (e) above, a reduction in the length of a suspension period may be warranted if mitigating circumstances are present, as set forth in Regulation 4606. If any suspension period is reduced, the redetermined period of suspension shall be 0 days, 10 days, or 20 days. The existence of mitigating circumstances may also warrant reducing a revocation penalty to a 30-day suspension, unless revocation is mandated pursuant to Business and Professions Code section 22974.4, 22978.6, or 22980.3, subdivision (a)(2).
NOTE

Authority cited: Section 22971.2, Business and Professions Code.Reference: Sections 22973(a)(5), 22974, 22974.3, 22974.4, 22974.7, 22980.1(c), (d), (e) and (g), 22980(b), 22980.2(a) and 22980.3(a)(2), Business and Professions Code.
HISTORY

1. New article 4 (sections 4603-4608) and section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
§4604. Penalties for Licensed or Unlicensed Wholesalers and Distributors.
Note     •     History

The following penalties shall be assessed in addition to any other civil or criminal penalty provided by law upon a finding that a wholesaler or distributor has violated any provision of the Act:
(a) A first offense of a violation of any of the following provisions will result in the issuance of a Warning Notice to the licensee or unlicensed person:
(1) Business and Professions Code section 22978.1 (distributor's or wholesaler's failure to retain purchase invoices).
(2) Business and Professions Code section 22978.4, subdivision (c) (distributor's or wholesaler's failure to comply with invoice requirements).
(3) Business and Professions Code section 22978.5. subdivision (b) (distributor's or wholesaler's failure to retain sales records).
(4) Business and Professions Code section 22980.1, subdivision (b), (c), (d), (e) (sales to or purchases from unlicensed person or person with suspended or revoked license) or (f) (sales of cigarettes or tobacco products to retailer or wholesaler revoked or suspended until debts are clear).
(5) Business and Professions Code section 22980.2, subdivision (a) (sales of cigarettes or tobacco products by unlicensed person or person with suspended or revoked license).
(b) A first offense of a violation of any of the following provisions will result in the issuance of a 20-day suspension:
(1) Business and Professions Code section 22977, subdivision (a)(5) (distributor's or wholesaler's false statement on application).
(2) Business and Professions Code section 22980, subdivision (b) (any person's refusal to allow inspection).
(3) Business and Professions Code section 22980.1, subdivision (g) (purchase of cigarettes to which a stamp may not be affixed in accordance with Rev. & Tax. Code, § 30163, subd. (b)).
(c) A second or subsequent offense for a violation of the provisions listed in subdivision (a) or (b) above shall result in both a 30-day suspension or revocation, and a fine. The fine shall be determined in accordance with Regulation 4607.
(d) A violation of Business and Profession Code section 22978.2 (possession of counterfeit stamped cigarettes by distributors, unstamped cigarettes by wholesalers or untaxed tobacco products) shall result in the following:
(1) Notwithstanding paragraphs (2) and (3) below, a Warning Notice for a first offense when the licensee or unlicensed person has been in business for less than one month and there has been no purchase of new cigarette or tobacco product inventory during the month.
(2) A 10-day suspension for a first offense for a seizure of less than 20 packages of cigarettes, or the equivalent amount of tobacco products based on wholesale cost.
(3) A 20-day suspension for a first offense for a seizure of 20 packages of cigarettes or more, or the equivalent amount of tobacco products based on wholesale cost.
(4) Both a 30-day suspension or revocation and a fine for a second or subsequent offense. The fine will be determined in accordance with section 4607.
(e) In cases involving multiple violations, the violation punishable by the most severe penalty will be used for purposes of determining the penalty assessed.
(f) Notwithstanding subdivisions (b) through (e) above, a reduction in the length of a suspension period may be warranted if mitigating circumstances are present, as set forth in Regulation 4606. If any suspension period is reduced, the redetermined period of suspension shall be 0 days, 10 days, or 20 days. The existence of mitigating circumstances may also warrant reducing a revocation penalty to a 30-day suspension, unless revocation is mandated pursuant to Business and Professions Code section 22974.4, 22978.6, or 22980.3. subdivision (a)(2).
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22974.7, 22977(a)(5), 22978.1, 22978.2, 22978.7, 22978.5(b), 22979.7, 22980(b), 22980.1(b), (c), (d), (e), (f) and (g) and 22980.2(a), Business and Professions Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
§4605. Penalties for Licensed or Unlicensed Manufacturers and Importers.
Note     •     History

The following penalties shall be assessed in addition to any other civil or criminal penalty provided by law upon a finding that a manufacturer or importer has violated any provision of the Act:
(a) A first offense of a violation of any of the following provisions will result in the issuance of a Warning Notice to the licensee or unlicensed person:
(1) Business and Professions Code section 22979.4 (importer's failure to retain purchase invoices on premises).
(2) Business and Professions Code section 22979, subdivision (b)(1) (participating manufacturer's false statement on certification to the Board).
(3) Business and Professions Code section 22979.5, subdivision (b) (manufacturer's or importer's failure to retain sales records on premises).
(4) Business and Professions Code section 22980.1, subdivision (a), (e) or (f) (purchases or sales from or to an unlicensed person or person with suspended or revoked license).
(5) Business and Professions Code section 22980.2, subdivision (a) (sales of cigarettes or tobacco products by unlicensed person or person with suspended or revoked license).
(6) Business and Professions Code section 22979.6, subdivision (c) (manufacturer's or importer's failure to comply with invoice requirements).
(b) A first offense of a violation of Business and Professions Code section 22980.1, subdivision (g) (purchase of cigarettes to which a stamp may not be affixed in accordance with Rev. & Tax. Code, § 30163, subd. (b)) shall result in a 20-day suspension.
(c) A second or subsequent offense for a violation of the provisions listed in subdivision (a) or (b) above shall result in both a 30-day suspension or revocation and a fine.
(d) In cases involving multiple violations, the violation punishable by the most severe penalty will be used for purposes of determining the penalty assessed.
(e) Notwithstanding subdivisions (b) through (d) above, a reduction in the length of a suspension period may be warranted if mitigating circumstances are present, as set forth in Regulation 4606. If any suspension period is reduced, the redetermined period of suspension shall be 0 days, 10 days, or 20 days. 
The existence of mitigating circumstances may also warrant reducing a revocation penalty to a 30-day suspension, unless revocation is mandated pursuant to Business and Professions Code section 22974.4, 22978.6, or 22980.3, subdivision (a)(2).
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22974.7, 22978.7, 22979.4. 22979(b)(1), 22979.5(b), 22979.7, 22980.1(a), (e) and (f), 22980.2(a) and 22979.6(c), Business and Professions Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
§4606. Mitigating Circumstances.
Note     •     History

Factors including, but not limited to, the following may be considered for purposes of determining whether mitigating circumstances exist pursuant to Regulations 4603, 4604 and 4605:
(a) How recently the licensee purchased the business or began operations and acquired inventory of cigarettes and/or tobacco.
(b) The amount of cigarettes without tax stamps and with counterfeit tax stamps in relation to the size of the licensee's overall inventory.
(c) The size of the licensee's cigarette and/or tobacco product business.
(d) The retail value of any cigarettes or tobacco products seized.
(e) An absence of prior seizures.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22974.7, 22978.7 and 22979.7, Business and Professions Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
§4607. Determination of Fine.
Note     •     History

(a) The fine for Business and Professions Code section 22974.5 (retailer's failure to display a license) is $500.
(b) The fine for all other violations of the Act shall be determined as follows:
(1) Any second or subsequent offense of a violation of any of the following provisions shall result in a fine of $1,000:
(A) Business and Professions Code section 22973, subdivision (a)(5) (retailer's false statement on application).
(B) Business and Professions Code section 22977, subdivision (a)(5) (distributor's or wholesaler's false statement on application).
(C) Business and Professions Code section 22979, subdivision (b)(1) (participating manufacturer's false statement on certification to the Board).
(2) A second offense of a violation of any of the following provisions shall result in a $1,000 fine, and each subsequent offense shall increase the fine by an increment of $1,000, up to a maximum fine of $5,000:
(A) Business and Professions Code section 22974 (retailer's failure to retain purchase invoices).
(B) Business and Professions Code section 22974.3, subdivision (b) (retailer's sale or possession of untaxed tobacco products).
(C) Business and Professions Code section 22978.1 (distributor's or wholesaler's failure to retain purchase invoices).
(D) Business and Professions Code section 22978.2, subdivision (b) (distributor's or wholesaler's sale or possession of untaxed tobacco products).
(E) Business and Professions Code section 22978.4, subdivision (c) (distributor's or wholesaler's failure to comply with invoice requirements).
(F) Business and Professions Code section 22978.5, subdivision (b) (distributor's or wholesaler's failure to retain sales records).
(G) Business and Professions Code section 22979.4 (importer's failure to retain purchase invoices on premises).
(H) Business and Professions Code section 22979.5, subdivision (b) (manufacturer's or importer's failure to retain sales records on premises).
(I) Business and Professions Code section 22979.6, subdivision (c) (manufacturer's or importer's failure to comply with invoice requirements).
(J) Business and Professions Code section 22980, subdivision (b) (any person's refusal to allow inspection).
(K) Business and Professions Code sections 22980.1, subdivisions (a), (b), (c), (d), (e), (f), and (g) (sales or purchases of cigarettes or tobacco products to or from an unlicensed person or person with suspended or revoked license).
(L) Business and Professions Code section 22980.2, subdivision (a) (sales of cigarettes or tobacco products by unlicensed person or person with suspended or revoked license).
(3) A second offense of any of the following provisions shall result in a $2,000 fine, and each subsequent offense shall increase the fine by $1,000, up to a maximum of $5,000 per offense:
(A) Business and Professions Code section 22974.3, subdivision (a)(2) (second seizure from retailer within five years of less than 20 packs of untaxed cigarettes).
(B) Business and Professions Code section 22978.2, subdivision (a)(2) (second seizure from a distributor or wholesaler within five years of less than 20 packs of untaxed cigarettes).
(4) A second offense of any of the following provisions shall result in a fine of $5,000 or five times the retail value of any cigarettes or tobacco products seized, whichever is greater, and the $5,000 fine shall be increased to $10,000 for the third offense, $15,000 for the fourth offense, $20,000 for the fifth offense, and $50,000 for the sixth and subsequent offenses:
(A) Business and Professions Code section 22974.3, subdivision (a)(4) (second seizure within five years from retailer or any other person of 20 or more packs of untaxed cigarettes).
(B) Business and Professions Code section 22978.2, subdivision (a)(4) (second seizure within five years from a distributor or wholesaler of 20 or more packs of untaxed cigarettes).
(5) Fines are reduced by the amount of any fine imposed as a result of a misdemeanor citation issued for the same violation of the Act.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22973(a)(5), 22974, 22974.3(a), 22974.3(b), 22974.7, 22977(a)(5), 22978.1, 22978.2(a), 22978.2(b), 22978.4(c), 22978.5(b), 22978.7, 22979(b)(1), 22979.4, 22979.5(b), 22979.6(c), 22979.7, 22980(b), 22980.1 and 22980.2(a), Business and Professions Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
§4608. Collection of Fines.
Note     •     History

The Board shall collect fees, fines and penalties in compliance with Revenue and Taxation Code, division 2, part 30, chapter 4, commencing with section 55121.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22974.7, 22978.7 and 22979.7, Business and Professions Code; Sections 55121, 55122, 55141, 55142, 55161, 55162, 55163, 55181, 55182, 55183, 55184, 55201, 55202, 55203, 55204, 55205, 55205.5, 55206, 55207, 55208, 55209 and 55209.5, Revenue and Taxation Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
Article 5. Appeal Procedures
§4609. Right to Appeal.
Note     •     History

(a) Every licensee or unlicensed person has the right to appeal any alleged violation of the Act, and may appeal a Warning Notice or Notice of Violation issued by the Special Taxes and Fees Division, as specified below:
(1) If the Notice of Violation contains a penalty of revocation and/or a fine of more than $2,500, the Notice of Violation may be appealed as follows:
(A) The first appeal shall be to the Special Taxes and Fees Division;
(B) If the licensee or unlicensed person disagrees with the Notice of First Decision, as specified in Regulation 4700, subdivision (h), issued by the Special Taxes and Fees Division, the licensee or unlicensed person may make a second appeal to the Appeals Division; and
(C) If the licensee or unlicensed person disagrees with the Notice of Second Decision, as specified in Regulation 4701, subdivision (c), issued by the Appeals Division, the licensee or unlicensed person may make a third appeal to the Board for a final decision.
(2) If the Notice of Violation or Warning Notice does not contain a penalty of revocation or a fine of more than $2,500, the Notice of Violation or Warning Notice may be appealed as follows:
(A) The first appeal shall be to the Special Taxes and Fees Division; and
(B) If the licensee or unlicensed person disagrees with the Notice of First Decision issued by the Special Taxes and Fees Division, the licensee or unlicensed person may make a second appeal to the Appeals Division for a final decision.
(b) If a timely appeal is made, a conference and/or hearing will be scheduled to allow the licensee or unlicensed person requesting an appeal an opportunity to contest the violation(s) and show cause why the penalties should not apply or should be reduced.
(c) Burden of Proof. The licensee or unlicensed person shall have the burden of proof as to the grounds for dismissal of any violations or for the reduction of penalties.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22974.7, 22978.7 and 22979.7, Business and Professions Code.
HISTORY

1. New article 5 (sections 4609-4702) and section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
2. Change without regulatory effect amending subsections (a), (a)(1)(A)-(B) and (a)(2)(A)-(b) filed 10-10-2011 pursuant to section 100, title 1, California Code of Regulations (Register 2011, No. 41).
§4700. Appeal -- Special Taxes and Fees Division.
Note     •     History

(a) Time For Filing. A written Request for Appeal, as defined in subdivision (c), below, must be filed within 10 days of the date the Warning Notice or Notice of Violation was mailed to or personally delivered to the licensee or unlicensed person.
(b) Failure to File a Timely Appeal. If a written Request for Appeal is not filed within the 10-day period, the licensee or unlicensed person shall be deemed to have waived his or her right to an appeal and the Warning Notice or Notice of Violation, and the penalty or penalties stated therein, shall become final.
(c) Request for a Special Taxes and Fees Division Appeal. The Request for Appeal shall state the specific grounds upon which the licensee or unlicensed person is contesting the Warning Notice or Notice of Violation and shall be accompanied by any and all documentation and written argument to be considered in support of the appeal. The Request for Appeal shall be signed by the licensee or unlicensed person or by an authorized representative.
(d) Notice of Conference. After receiving a timely Request for Appeal the Special Taxes and Fees Division will schedule a conference and send a Notice of Conference stating the date and time of the scheduled conference to the licensee or unlicensed person. The Notice of Conference shall be sent to the licensee or unlicensed person at least 15 days prior to the date of the scheduled conference.
(e) Conference. The conference is intended to be an informal, non-adversarial proceeding with a discussion of the relevant facts and applicable laws and regulations. Written statements made under penalty of perjury may be submitted, but subpoenas are not issued for conferences, nor is sworn testimony required. The conference will be conducted by telephone and shall not be recorded and/or transcribed by the Special Taxes and Fees Division. The conference may be recorded and/or transcribed by the licensee or unlicensed person, but only if the licensee or unlicensed person agrees to provide a copy of the recording or transcript to the Special Taxes and Fees Division.
(f) The Special Taxes and Fees Division may grant one request to reschedule or postpone a conference. If a request is granted, the conference shall be rescheduled or postponed so that it can be held within 15 days of the date the conference was scheduled to be held prior to the granting of the request, unless the Chief of the Special Taxes and Fees Division or his or her designee approves of a later date.
(g) During a conference, the Special Taxes and Fees Division may grant a request for additional time to submit additional evidence. If additional time is granted, the evidence shall be submitted to the Special Taxes and Fees Division no later than 7 days after the conference date.
(h) Decision. Following the conference, the Special Taxes and Fees Division shall issue a Notice of First Decision. The Notice of First Decision will set forth the Special Taxes and Fees Division's decision, the applicable penalty or penalties, and the licensee's or unlicensed person's appeal rights.
(i) A licensee or unlicensed person who receives a Notice of First Decision may appeal the decision within 10 days of the date the Notice of First Decision was mailed or personally delivered to the licensee or unlicensed person by timely filing a Request for Appeals Conference, as specified in Regulation 4701, subdivision (a), with the Board Proceedings Division.
(j) Failure to File a Timely Appeal. If a Request for Appeals Conference is not filed within the 10-day period provided in subdivision (i), then the licensee or unlicensed person shall be deemed to have waived his or her right to an appeal and the Notice of First Decision, and the penalty or penalties stated therein shall become final.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22974.7, 22978.7 and 22979.7, Business and Professions Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
2. Change without regulatory effect amending section heading and subsections (c)-(h) filed 10-10-2011 pursuant to section 100, title 1, California Code of Regulations (Register 2011, No. 41).
§4701. Appeal -- Appeals Division.
Note     •     History

(a) Request for Appeals Conference. The Request for Appeals Conference shall state the specific grounds upon which the licensee or unlicensed person is contesting the Warning Notice, Notice of Violation, or Notice of First Decision, and shall be accompanied by any and all documentation and written argument to be considered in the appeal. The Request for Appeals Conference shall be signed by the licensee or unlicensed person or by an authorized representative.
(b) Conference. Upon receipt of a Request for Appeals Conference, a conference will be scheduled and held as set forth in article 6 (commencing with Regulation 5260) of chapter 2 of division 2.1 of title 18 of the California Code of Regulations, unless otherwise provided herein. The conference shall allow a licensee or unlicensed person an opportunity to show cause why the Warning Notice, Notice of Violation, or Notice of First Decision, and the penalty or penalties imposed therein, should not be upheld.
(1) The conference will be held by telephone and shall be recorded by the Appeals Division. A licensee or unlicensed person may request a copy or transcript of the recording, at his or her expense.
(2) The Appeals Division may grant a request to reschedule or postpone a conference. If a request is granted, the conference shall be rescheduled or postponed so that it can be held within 15 days of the date the conference was scheduled to be held prior to the granting of the request, unless the Chief Counsel or his or her designee approves of a later date.
(3) During a conference, the Appeals Division may grant a request for additional time to submit additional evidence. If such additional time is granted, the evidence shall be submitted to the Appeals Division no later than 7 days after the conference date.
(c) Decision. The Appeals Division shall issue a Notice of Second Decision following the conference. The Notice of Second Decision will set forth the Appeals Division's decision, the applicable penalty or penalties, and the licensee's or unlicensed person's appeal rights, if any, as set forth in subdivisions (e) and (f) below.
(d) No later than 35 days after the Notice of Second Decision is issued, the Appeals Division may, in its sole discretion, issue a Notice of Second Decision -- Reconsideration to correct any mistakes of law and/or facts.
(e) A Notice of Second Decision or Notice of Second Decision -- Reconsideration that upholds a penalty of revocation and/or a fine of more than $2,500 may be appealed by timely filing a Request for Board Hearing. A Notice of Second Decision or Notice of Second Decision -- Reconsideration that upholds a penalty of suspension and/or a fine of $2,500 or less is final and may not be appealed further.
(f) Failure to File. When applicable, a Request for Board Hearing must be filed within 10 days of the date the Notice of Second Decision is mailed or personally delivered to the licensee or unlicensed person. If a Request for a Board Hearing is not filed within the 10-day period, then the licensee or unlicensed person shall be deemed to have waived his or her right to an appeal and the Notice of Second Decision, and the penalty or penalties stated therein, shall become final. If a hearing is not requested or is waived, then official notice of the Board's action on the appeal will be mailed to the licensee or unlicensed person.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22974.7, 22978.7 and 22979.7, Business and Professions Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
2. Change without regulatory effect amending subsections (b) and (c) filed 3-30-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 14).
§4702. Appeal -- Board Hearing.
Note     •     History

(a) Request for Board Hearing. The Request for Board Hearing shall:
(1) State the specific grounds upon which the licensee or unlicensed person is contesting the Notice of Violation or Notice of Second Decision;
(2) State whether an oral hearing is requested;
(3) Be accompanied by any and all documentation and written argument to be considered in support of the licensee's or unlicensed person's contentions; and
(4) Be signed by the licensee or unlicensed person or by an authorized representative.
(b) When applicable, upon receipt of the Request for Board Hearing, a Board hearing shall be scheduled and conducted in accordance with the procedures as set forth in Regulations 5270, 5271, 5522.4 through 5523.1, 5523.4 through 5523.7, 5541 through 5551, 5563, subdivisions (a) and (b), 5561 through 5563, 5571, 5572, and 5576, to allow the licensee or unlicensed person an opportunity to show cause why the Notice of Violation or Notice of Second Decision, and the penalty or penalties imposed therein, should not be upheld. Following the Board hearing, a Notice of Board Decision will be mailed to the licensee or unlicensed person.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22974.7, 22978.7 and 22979.7, Business and Professions Code.
HISTORY

1. New section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
2. Change without regulatory effect amending subsection (b) filed 3-30-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 14).
Article 6. Seizure and Forfeiture
§4703. Seizures and Forfeitures.
Note     •     History

(a) Seizures. The seizure of cigarette and tobacco products is authorized under the Cigarette and Tobacco Products Licensing Act Law and the Cigarette and Tobacco Products Tax Law.
(b) Seizure of Untaxed Products.
(1) In the absence of an applicable exemption from tax or other lawful possession of unstamped product under Revenue and Taxation Code (e.g., Revenue and Taxation Code sections 30102 through 30106 or 30431), the Board or a law enforcement agency shall be authorized to seize cigarettes and tobacco products that cannot be sold legally in California, including, but not limited to the following:
(A) Cigarette packages without any cigarette tax stamp that are possessed, stored, owned or for sale by a retailer, wholesaler, or any other person except when possessed by a licensed distributor.
(B) Cigarette packages with another state's tax stamp or the stamp of another taxing jurisdiction that are possessed, stored, owned or for sale by a retailer, wholesaler, or any other person except when possessed by a licensed distributor.
(C) Cigarette packages with a California tax stamp affixed and marked “Not for sale in the United States,” “For Export Only” or similar wording indicating the manufacturer did not intend the product to be sold in the United States, that are possessed, stored, owned by a retailer, wholesaler, distributor, manufacturer importer, or any other person.
(D) Tobacco products for which the California excise tax is due but has not been paid that are possessed, stored, owned, or for sale by a retailer, wholesaler or any other person except when possessed by a licensed distributor.
(2) Forfeiture. Cigarettes or tobacco products as described in subsection (b) for which the California excise tax has not been paid that are seized by the Board or seized and delivered to the Board by a law enforcement agency shall be forfeited to the state.
(3) Petition Procedure. The Board's seizure of such products as described under subsection (b) shall comply with the procedures set forth in Revenue and Taxation Code, Division 2, Part 13, Chapter 7.5, commencing with section 30435.
(A) An owner or any person owning an interest in the seized property may file a petition with the Board to request recovery of the seized property as permitted by Revenue and Taxation Code section 30438.
(B) The petitioner has the burden of proving in the petition that the seized cigarettes and/or tobacco products are legal to possess, store, own or sell and that taxes have been paid to obtain the recovery of the seized product(s).
(c) Seizure of Product From Persons Without a Valid License. The Board or a law enforcement agency shall be authorized to seize cigarettes and tobacco products, whether or not the California excise taxes have been paid, when the owner does not have a valid license under the Cigarette and Tobacco Products Licensing Act Law. Seizures shall include, but are not limited to the following:
(1) Unlicensed Persons.
(A) Stamped cigarettes that are possessed, stored, owned or for sale by an unlicensed retailer, distributor, wholesaler, manufacturer, importer, or any other person after notice by the Board or a law enforcement agency.
(B) Tobacco products for which the California excise tax has been paid, that are possessed, stored, owned or for sale by an unlicensed retailer, distributor, wholesaler, or any other person after notice by the Board or a law enforcement agency.
(2) Persons with Suspended or Revoked Licenses.
(A) Stamped or unstamped cigarettes offered for sale at the time of seizure by a retailer, distributor, wholesaler, manufacturer or importer with a suspended or revoked license after notice by the Board of the suspension or revocation.
(B) Tobacco products, regardless of whether the California excise taxes have been paid, that are offered for sale at the time of seizure by a retailer, distributor or wholesaler with a suspended or revoked license after notice by the Board of the suspension or revocation.
(3) Forfeiture. Any cigarettes and tobacco products seized by the Board or a law enforcement agency as described under subsection (c) shall be deemed forfeited to the state.
(4) Petition Procedure. The petitioner may file a petition to contest the citation(s) resulting in the suspension or revocation of the license issued under the Cigarette and Tobacco Products Licensing Act Law pursuant to Article 5 of these regulations.
(d) Evidence Relevant to Recovery of Product. Depending on the circumstances, evidence that may be relevant to the issue of whether or not the cigarettes or tobacco products were erroneously or illegally seized, includes, but is not limited to the following:
(1) The cigarette packages had valid California tax stamps affixed and the petitioner held a valid license under the Cigarette and Tobacco Products Licensing Act Law at the time of seizure.
(2) The cigarette packages had valid California tax stamps affixed and the petitioner was not operating at the time of seizure with a suspended or revoked license after notice by the Board of the suspension or revocation.
(3) The cigarette packages without California tax stamps affixed were in the possession of a cigarette distributor, manufacturer or importer with a valid license under the Cigarette and Tobacco Products Licensing Act Law at the time of seizure.
(4) Cigarette packages that bear another state's tax stamp or the stamp of another taxing jurisdiction were in the possession of a cigarette distributor, manufacturer or importer with a valid license under the Cigarette and Tobacco Products Licensing Act Law at the time of seizure.
(5) Cigarette packages without a California tax stamp affixed and marked “Not for sale in the United States” or similar wording indicating that the manufacturer did not intend the product to be sold in the United States were in the possession of a distributor, manufacturer or importer with a valid license under the Cigarette and Tobacco Products Licensing Act Law and intended for sale outside of California at the time of seizure.
(6) The petitioner held a valid license under the Cigarette and Tobacco Products Licensing Act Law and the tax was paid for the seized tobacco products at the time of seizure.
(7) The petitioner was not operating with a suspended or revoked license after notice by the Board of the suspension or revocation and the tax was paid for the seized tobacco products at the time of seizure.
(8) The untaxed tobacco products were in the possession of a tobacco products distributor with a valid license under the Cigarette and Tobacco Products Licensing Act Law at the time of seizure.
(e) Counterfeit Products. Counterfeit cigarette and tobacco products are defined as those with false manufacturing labels or false or fraudulent stamps, or both false labels and false stamps.
(1) The Board shall be authorized to seize counterfeit cigarette and tobacco products that are possessed, stored, owned or for sale by a retailer, distributor, wholesaler, manufacturer, importer, or any other person.
(2) The Board is not authorized to return seized counterfeit cigarettes and tobacco products as defined in this part as such products are illegal under California law.
(f) Additional grounds for seizure. The California Cigarette and Tobacco Products Tax Law at Revenue and Taxation Code section 30436 sets forth additional circumstances under which cigarettes or tobacco products may be seized by the Board and forfeited to the state.
NOTE

Authority cited: Section 22971.2, Business and Professions Code. Reference: Sections 22971(l) and (m), 22974.3(a) and (b), 22978.2(a) and (b) and 22980.2(c), Business and Professions Code; and Sections 30102, 30102.5, 30103, 30103.5, 30104, 30105, 30105.5, 30106, 30109, 30163, 30431, 30435, 30436, 30438, 30473 and 30474.1, Revenue and Taxation Code.
HISTORY

1. New article 6 (section 4703) and section filed 3-22-2007; operative 4-21-2007 (Register 2007, No. 12). 
2. Amendment of subsections (b)(1)-(b)(1)(D) and amendment of Note filed 11-21-2007; operative 12-21-2007 (Register 2007, No. 47).
3. Change without regulatory effect amending subsections (b)(2), (c)(3) and (d) filed 3-30-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 14).
Chapter 9.9. Special Taxes Administration-Miscellaneous
§4901. Records.
Note     •     History

(a) Definitions. 
(1) “Applicable Tax Laws” means any of the following: 
(A) Aircraft Jet Fuel Tax, Revenue and Taxation Code Sections 7385-7398, 7486-8406; 
(B) Alcoholic Beverage Tax, Revenue and Taxation Code Sections 32001-32557; 
(C) Marine Invasive Species Fee, Public Resources Code Sections 71200-71271; Revenue and Taxation Code Sections 44000-44008, 55001-55381; 
(D) California Tire Fee, Public Resources Code Sections 42860-42895; Revenue and Taxation Code Sections 55001-55381; 
(E) Childhood Lead Poisoning Prevention Fee, Health and Safety Code Section 105310; Revenue and Taxation Code Sections 43001-43651; 
(F) Cigarette and Tobacco Products Tax, Revenue and Taxation Code Sections 30001-30481; 
(G) Diesel Fuel Tax, Revenue and Taxation Code Sections 60001-60709; 
(H) Emergency Telephone Users Surcharge, Revenue and Taxation Code Sections 41001-41176; 
(I) Energy Resources Surcharge, Revenue and Taxation Code Sections 40001-40216; 
(J) Hazardous Substances Tax, Health and Safety Code Sections 25174.1, 25205.2, 25205.5, 25205.6, and 25205.7; Revenue and Taxation Code Sections 43001-43651; 
(K) Integrated Waste Management Fee, Public Resources Code Sections 40000-48008; Revenue and Taxation Code Sections 45001-45984; 
(L) Motor Vehicle Fuel Tax, Revenue and Taxation Code Sections 7301-8526; 
(M) Natural Gas Surcharge, Public Utilities Code Sections 890-900; Revenue and Taxation Code Sections 55001-55381; 
(N) Occupational Lead Poisoning Prevention Fee, Health and Safety Code Section 105190; Revenue and Taxation Code Sections 43001-43651; 
(O) Oil Spill Response, Prevention, and Administration Fees, Revenue and Taxation Code Sections 46001-46751; 
(P) Underground Storage Tank Maintenance Fee, Revenue and Taxation Code Sections 50101-50162; 
(Q) Use Fuel Tax, Revenue and Taxation Code Sections 8601-9355;
(R) Covered Electronic Waste Recycling Fee, Health and Safety Code Sections 25214.9-25214.10.2; Public Resources Code Sections 42460-42486; Revenue and Taxation Code Sections 55001-55381;
(S) Water Rights Fee, Water Code Sections 1525-1552, 13050, 13160.1; Revenue and Taxation Code Sections 55001-55381.
(2) “Database Management System” -- a software system that controls, relates, retrieves, and provides accessibility to data stored in a database. 
(3) “Electronic data interchange” or “EDI technology” -- the computer to computer exchange of business transactions in a standardized structured electronic format. 
(4) “Hardcopy” -- any document, record, report or other data maintained in a paper format. 
(5) “Machine-sensible record” -- a collection of related information in an electronic format. Machine-sensible records do not include hardcopy records that are created or recorded on paper or stored in or by a storage-only imaging system such as microfilm or microfiche. 
(6) “Taxpayer” includes “fee payer” and means any person liable for the payment of a tax or a fee specified under any of the applicable tax laws. 
(7) “Tax” includes “fee” and means any amount of tax or fee specified under any of the applicable tax laws. 
(b) General. 
(1) A taxpayer shall maintain and make available for examination on request by the board or its authorized representative, all records necessary to determine the correct tax liability under the applicable tax laws and all records necessary for the proper completion of the required tax return or report. Such records include but are not limited to: 
(A) Books of account or other similar summary information ordinarily maintained by the taxpayer as required by law or practice or otherwise in the possession of the taxpayer or third party at the direction or request of the taxpayer. 
(B) Bills, receipts, invoices, cash register tapes, or other documents of original entry supporting the entries in the books of account. 
(C) Schedules or working papers used in connection with the preparation of tax returns and reports. 
(2) Machine-sensible records are considered records under Revenue and Taxation Code Sections 8301-8306, 9253, 9254, 30453, 30454, 32551, 32453, 40172-40175, 41056, 41073, 41129.30, 43502, 45852, 46602, 46603, 50153, 55302, 60604-60606, Revenue and Taxation Code. 
(c ) Machine-Sensible Records. 
(1) General. 
(A) Machine-sensible records used to establish tax compliance shall contain sufficient source document (transaction-level) information so that the details underlying the machine-sensible records can be identified and made available to the board upon request. A taxpayer has discretion to discard duplicated records and redundant information provided the integrity of the audit trail is preserved and the responsibilities under this regulation are met. 
(B) At the time of an examination, the retained records must be capable of being retrieved and converted to a standard magnetic record format which the board has the technological capability to use, such as Extended Binary Coded Decimal Interchange Code (EBCDIC) or American Standard Code for Information Interchange (ASCII) flat file. 
(C) Taxpayers are not required to construct machine-sensible records other than those created in the ordinary course of business. A taxpayer who does not create the electronic equivalent of a traditional paper document in the ordinary course of business is not required to construct such a record for tax purposes. 
(2) Electronic Data Interchange Requirements. 
(A) Where a taxpayer uses electronic data interchange (EDI) processes and technology, the level of record detail, in combination with other records related to the transactions, must be equivalent to that contained in an acceptable paper record. For example, the retained records should contain such information as vendor name, invoice date, product description, quantity purchased, price, amount of tax, indication of tax status (e.g., exempt), and shipping detail. Codes may be used to identify some or all of the data elements, provided the taxpayer maintains a method which allows the board to interpret the coded information. 
(B) The taxpayer may capture the information necessary to satisfy subdivision (c)(2)(A) at any level within the accounting system and need not retain the original EDI transaction records provided the audit trail, authenticity, and integrity of the retained records can be established. For example, a taxpayer using EDI technology receives electronic invoices from its suppliers. The taxpayer decides to retain the invoice data from completed and verified EDI transactions in its accounts payable system rather than to retain the EDI transactions themselves. Since neither the EDI transaction nor the accounts payable system capture information from the invoice pertaining to product description and vendor name (i.e., they contain only codes for that information), the taxpayer must also retain other records, such as its vendor master file and product code description lists, and make them available to the board. In this example, the taxpayer need not retain its EDI transaction for tax purposes. 
(3) Electronic Data Processing Systems Requirements. The requirements for an electronic data processing (EDP) accounting system should be similar to that of a manual accounting system, in that an adequately designed accounting system should incorporate methods and records that will satisfy the requirements of this regulation. 
(4) Business Process Information. 
(A) Upon request of the board, the taxpayer shall provide a description of the business process that created the retained records. Such description shall include the relationship between the records and the tax documents prepared by the taxpayer and the measures employed to ensure the integrity of the records. 
(B) The taxpayer shall be capable of demonstrating: 
1. the functions being performed as they relate to the flow of data through the system; 
2. the internal controls used to ensure accurate and reliable processing, and; 
3. the internal controls used to prevent unauthorized addition, alteration, or deletion of retained records. 
(C) The following specific documentation is required for machine sensible records retained pursuant to this regulation: 
1. record formats or layouts; 
2. field definitions (including the meaning of all codes used to represent information); 
3. file descriptions (e.g., data set name); and 
4. detailed charts of accounts and account descriptions. 
(d) Machine-Sensible Records Maintenance Requirements 
(1) The taxpayer's computer hardware or software shall accommodate the extraction and conversion of retained machine-sensible records to a standard magnetic record format as provided in subdivision (c)(1)(B). 
(2) The board recommends but does not require that taxpayers refer to the National Archives and Record Administration's (NARA) standards for guidance on the maintenance and storage of electronic records, such as the labeling of records, the location and security of the storage environment, the creation of back-up copies, and the use of periodic testing to confirm the continued integrity of the records. 
(e) Access to Machine-Sensible Records. 
(1) The manner in which the board is provided access to machine-sensible records may be satisfied through a variety of means that shall take into account a taxpayer's facts and circumstances through consultation with the taxpayer. 
(2) Such access will be provided in one or more of the following manners: 
(A) The taxpayer may arrange to provide the board with the hardware, software, and personnel resources to access the machine-sensible records. 
(B) The taxpayer may arrange for a third party to provide the hardware, software, and personnel resources necessary to access the machine-sensible records. 
(C) The taxpayer may convert the machine-sensible records to a standard record format specified by the board, including copies of files, on a magnetic medium that is agreed to by the board. 
(D) The taxpayer and the board may agree on other means of providing access to the machine-sensible records. 
(f) Taxpayer Responsibility and Discretionary Authority. 
(1) In conjunction with meeting the requirements of subdivision (c), a taxpayer may create files solely for the use of the board. For example, if a data base management system is used, it is consistent with this regulation for the taxpayer to create and retain a file that contains the transaction-level detail from the data base management system and that meets the requirements of subdivision (c). The taxpayer should document the process that created the separate file to show the relationship between that file and the original records. 
(2) A taxpayer may contract with a third party to provide custodial or management services of the records. Such a contract shall not relieve the taxpayer of its responsibilities under this regulation. 
(g) Hardcopy Records. 
(1) Except as specifically provided, taxpayers are not relieved of the responsibility to retain hardcopy records that are created or received in the ordinary course of business as required by existing law and regulations. Hardcopy records may be retained on a record keeping medium as provided in subdivision (h). 
(2) If hardcopy transaction level documents are not produced or received in the ordinary course of transacting business (e.g., when the taxpayer uses electronic data interchange technology), such hardcopy records need not be created. 
(3) Hardcopy records generated at the time of a transaction using a credit or debit card must be retained unless all the details necessary to determine correct tax liability relating to the transaction are subsequently received and retained by the taxpayer in accordance with this regulation. Such details include those listed in subdivision (c)(2)(A). 
(4) Computer printouts that are created for validation, control, or other temporary purposes need not be retained. 
(h) Alternative Storage Media. 
(1) For purposes of storage and retention, taxpayers may convert hardcopy documents received or produced in the normal course of business and required to be retained under this regulation to storage-only imaging media such as microfilm, microfiche or other media used in electronic imaging and may discard the original hardcopy documents, provided the conditions of subdivision (h) are met. Documents which may be stored on these media include, but are not limited to general books of account, journals, voucher registers, general and subsidiary ledgers, and supporting records of details, such as sales invoices, purchase invoices, exemption certificates, and credit memoranda. 
(2) Storage-only imaging media such as microfilm, microfiche or other media used in electronic imaging systems shall meet the following requirements. 
(A) Documentation establishing the procedures for converting the hardcopy documents to the storage-only imaging system must be maintained and made available on request. Such documentation shall, at a minimum, contain a sufficient description to allow an original document to be followed through the conversion system as well as internal procedures established for inspection and quality assurance. 
(B) Procedures must be established for the effective identification, processing, storage, and preservation of the stored documents and for making them available for the period they are required to be retained under subdivision (i). 
(C) Upon request by the board, a taxpayer must provide facilities and equipment for reading, locating, and reproducing any documents maintained on storage-only imaging media 
(D) When displayed on such equipment or reproduced on paper, the documents must exhibit a high degree of legibility and readability. For this purpose, legibility is defined as the quality of a letter or numeral that enables the observer to identify it positively and quickly to the exclusion of all other letters or numerals. Readability is defined as the quality of a group of letters or numerals being recognizable as words or complete numbers. 
(E) All data on storage-only imaging media must be maintained and arranged in a manner that permits the location of any particular record. 
(F) There is no substantial evidence that the storage-only imaging medium lacks authenticity or integrity. 
(i) Record Retention -- Time Period. All records required to be retained under this regulation must be preserved for a period of not less than four years unless the State Board of Equalization authorizes in writing their destruction within a lesser period. 
(j) Record Retention Limitation Agreements. 
(1) The board has the authority to enter into or revoke a record retention limitation agreement with the taxpayer to modify or waive any of the specific requirements in this regulation. A taxpayer's request for an agreement must specify which records (if any) the taxpayer proposes not to retain and provide the reasons for not retaining such records, as well as, proposing any other terms of the requested agreement. The taxpayer shall remain subject to all requirements of this regulation that are not modified, waived, or superseded by a duly approved record retention limitation agreement. 
(A) If a taxpayer seeks to limit its retention of machine-sensible records, the taxpayer may request a record retention limitation agreement, which shall; 
1. document understandings reached with the board, which may include, but is not limited to, any one or more of the following issues: 
a. the conversion of files created on an obsolete computer system; 
b. restoration of lost or damaged files and the actions to be taken; 
c. use of taxpayer computer resources, and 
2. specifically identify which of the taxpayer's records the board determines are not necessary for retention and which the taxpayer may discard, and 
3. authorize variances, if any, from the normal provisions of this regulation. 
(B) The board shall consider a taxpayer's request for a record retention limitation agreement and notify the taxpayer of the actions to be taken. 
(C) The board's decision to enter or not to enter into a record retention limitation agreement shall not relieve the taxpayer of the responsibility to keep adequate and complete records supporting entries shown on any tax or information return. 
(2) A taxpayer's record retention practices shall be subject to evaluation by the board when a record retention limitation agreement exists. The evaluation may include a review of the taxpayer's relevant data processing and accounting systems with respect to EDP systems, including systems using EDI technology. 
(A) The board shall notify the taxpayer of the results of any evaluation, including acceptance or disapproval of any proposals made by the taxpayer (e.g., to discard certain records) or any changes considered necessary to bring the taxpayer's practices into compliance with this regulation. 
(B) Since the evaluation of a taxpayer's record retention practices is not directly related to the determination of tax reporting accuracy for a particular period or return, an evaluation made under this regulation is not an “examination of records” under the applicable tax law. 
(C) Unless otherwise specified, an agreement shall not apply to accounting and tax systems added subsequent to the completion of the record evaluation. All machine-sensible records produced by a subsequently added accounting or tax system shall be retained by the taxpayer in accordance with this regulation until a new evaluation is conducted by the board. 
(D) Unless otherwise specified, an agreement made under this subdivision shall not apply to any person, company, corporation, or organization that, subsequent to the taxpayer's signing of a record retention limitation agreement, acquires or is acquired by the taxpayer. All machine-sensible records produced by the acquired or the acquiring person, company, corporation, or organization, shall be retained pursuant to this regulation 
(3) In addition to the record retention evaluation under subdivision (j)(2), the board may conduct tests to establish the authenticity, readability, completeness, and integrity of the machine-sensible records retained under a record retention limitation agreement. The state shall notify the taxpayer of the results of such tests. These tests may include the testing of EDI and other procedures and a review of the internal controls and security procedures associated with the creation and storage of the records. 
(k) Failure to Maintain Records. Failure to maintain and keep complete and accurate records will be considered evidence of negligence or intent to evade the tax and may result in penalties or other appropriate administrative action. 
NOTE

Authority cited: Sections 8251, 9251, 30451, 32451, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. References: Sections 8301, 8302, 8303, 8304, 9253, 9254, 30453, 30454, 32551, 32453, 40172, 40173, 40174, 40175, 41056, 41073, 41129.30, 43502, 45852, 46602, 46603, 50153, 55302, 60604, 60605 and 60606, Revenue and Taxation Code. 
HISTORY

1. New chapter 9.9 (sections 4901-4902) and section filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
2. Change without regulatory effect amending subsections (a)(1)(C) and (a)(1)(Q) and adopting subsections (a)(1)(R)-(S) filed 3-30-2010 pursuant to section 100, title 1, California Code of Regulations (Register 2010, No. 14).
§4902. Relief from Liability.
Note     •     History

(a) General. A person may be relieved from the liability for the payment of tax, defined in section 4901(a)(7), imposed pursuant to applicable tax laws, defined in section 4901(a)(1), including any penalties and interest added to the tax, when that liability resulted from the failure to make a timely return or a payment and such failure was found by the board to be due to reasonable reliance on: 
(1) Written advice given by the board under the conditions set forth in subdivision (b) below, or 
(2) Written advice in the form of an annotation or legal ruling of counsel under the conditions set forth in subdivision (d) below; or 
(3) Written advice given by the board in a prior audit of that person under the conditions set forth in subdivision (c) below. As used in this regulation, the term “prior audit” means any audit conducted prior to the current examination where the issue in question was examined. 
Written advice from the board may only be relied upon by the person to whom it was originally issued or a legal or statutory successor to that person. Written advice from the board which was received during a prior audit of the person under the conditions set forth in subdivision (c) below, may be relied upon by the person audited or by a legal or statutory successor to that person. 
The term “written advice” includes advice that was incorrect at the time it was issued as well as advice that was correct at the time it was issued, but, subsequent to issuance, was invalidated by a change in statutory or constitutional law, by a change in board regulations, or by a final decision of a court of competent jurisdiction. Prior written advice may not be relied upon subsequent to: (1) the effective date of a change in statutory or constitutional law and board regulations or the date of a final decision of a court of competent jurisdiction regardless that the board did not provide notice of such action; or (2) the person receiving a subsequent writing notifying the person that the advice was not valid at the time it was issued or was subsequently rendered invalid. As generally used in this regulation, the term “written advice” includes both written advice provided in a written communication under subdivision (b) below and written advice provided in a prior audit of the person under subdivision (c) below. 
(b) Advice Provided in a Written Communication. Advice from the board provided to the person in a written communication must have been in response to a specific written inquiry from the person seeking relief from liability, or from his or her representative. To be considered a specific written inquiry for purposes of this regulation, representatives must identify the specific person for whom the advice is requested. Such inquiry must have set forth and fully described the facts and circumstances of the activity or transactions for which the advice was requested. 
(c) Written Advice Provided in a Prior Audit. Presentation of the person's books and records for examination by an auditor shall be deemed to be a written request for the audit report. If a prior audit report of the person requesting relief contains written evidence which demonstrates that the issue in question was examined, either in a sample or census (actual) review, such evidence will be considered “written advice from the board” for purposes of this regulation. A census, (actual) review, as opposed to a sample review, involves examination of 100% of the person's transactions pertaining to the issue in question. For written advice contained in a prior audit of the person to apply to the person's activity or transaction in question, the facts and conditions relating to the activity or transaction must not have changed from those which occurred during the period of operation in the prior audit. Audit comments, schedules, and other writings prepared by the board that become part of the audit work papers which reflect that the activity or transaction in question was properly reported and no amount was due are sufficient for a finding for relief from liability, unless it can be shown that the person seeking relief knew such advice was erroneous. 
(d) Annotations and Legal Rulings of Counsel. Advice from the board provided to the person in the form of an annotation or legal ruling of counsel shall constitute written advice only if: 
(1) The underlying legal ruling of counsel involving the fact pattern at issue is addressed to the person or to his or her representative under the conditions set forth in subdivision (b) above. 
(2) The annotation or legal ruling of counsel is provided to the person or his or her representative by the board within the body of a written communication and involves the same fact pattern as that presented in the subject annotation or legal ruling of counsel. 
(e) Trade or Industry Associations. A trade or industry association requesting advice on behalf of its member(s) must identify and include the specific member name(s) for whom the advice is requested for relief from liability under this regulation. 
NOTE

Authority cited: Sections 8251, 9251, 30451, 32451,40171, 41128, 43501, 45851, 46601, 50152 and 60601, Revenue and Taxation Code. References: Sections 7657.1, 8879, 30284, 32257, 40104, 41098, 43159, 45157, 46158, 50112.5, 55045 and 60210, Revenue and Taxation Code.
HISTORY

1. New section filed 4-28-2003; operative 5-28-2003 (Register 2003, No. 18).
§4903. Innocent Spouse or Registered Domestic Partner Relief from Liability.
Note     •     History

(a)(1) In General. A spouse claiming relief from liability for any tax, fee, or surcharge, interest, penalties, and other amounts shall be relieved from such liability where all the following requirements are met:
(A) A liability is incurred under the Alcoholic Beverage Tax Law, Cigarette and Tobacco Products Tax Law, Diesel Fuel Tax Law, Emergency Telephone Users Surcharge Law, Energy Resources Surcharge Law, Fee Collection Procedures Law, Hazardous Substances Tax Law, Integrated Waste Management Fee Law, Motor Vehicle Fuel Tax Law, Oil Spill Response, Prevention, and Administration Fees Law, Private Railroad Car Tax Law, Timber Yield Tax Law, Underground Storage Tank Maintenance Fee Law, or Use Fuel Tax Law;
(B) The liability is attributable to the nonclaiming spouse;
(C) The spouse claiming relief establishes that he or she did not know of, and that a reasonably prudent person in the claiming spouse's circumstances would not have had reason to know of, the liability; and
(D) It would be inequitable to hold the claiming spouse liable for the liability, taking into account whether the claiming spouse significantly benefited directly or indirectly from the liability, and taking into account all other facts and circumstances.
(2) For purposes of this section, the word “tax” shall mean “tax, fee, or surcharge.”
(b) Benefited. Whether a claiming spouse has benefited directly or indirectly from the liability will be determined by a review by the board of all of the available evidence. Normal support payment is not a significant benefit for purposes of this determination. Normal support is measured relative to each family's standard of living. The claiming spouse will not be deemed to have benefited directly or indirectly from the liability solely as a result of normal support unless his or her lifestyle significantly improved during the periods of liability. Gifts received by the claiming spouse, or lavish or luxury purchases made by either spouse may be evidence that the claiming spouse benefited directly or indirectly from the liability. Evidence of direct or indirect benefit may consist of transfers of property, including transfers which may be received several years after the calendar quarter in which the liability occurred. For example, if a claiming spouse receives from the other spouse an inheritance of property or life insurance proceeds which are traceable to the liability, the claiming spouse will be considered to have benefited from that liability. Other factors considered may include desertion of the claiming spouse by the other spouse or that the spouses have become divorced or separated subsequent to the periods of liability.
(c) Attribution. The determination of the spouse to whom items of liability are attributable shall be made without regard to community property laws.
(1) A claim may be filed if, at the time relief is requested, the claiming spouse is no longer married to or is legally separated from the nonclaiming spouse, or the claiming spouse is no longer a member of the same household as the nonclaiming spouse.
(2) With respect to a liability incurred as a result of a failure to file a return or an omission of an item from the return, attribution to one spouse may be determined by whether a spouse rendered substantial services as a taxpayer, feepayer, or surcharge payer engaged in an activity or transaction that is subject to a tax administered under the laws specified in paragraph (1) of subdivision (a) and related to the liability. If neither spouse rendered substantial services as a taxpayer, feepayer, or surcharge payer, then the attribution of the liability shall be treated as community property. A liability incurred as a result of an erroneous deduction or credit shall be attributable to the spouse who caused that deduction or credit to be entered on the return.
(d) Written Request for Relief. To seek relief under these provisions, a claiming spouse may submit a written request for relief setting forth the tax account number, the period for which relief is requested, and the specific grounds upon which the request for relief is based.
(e) Statute of Limitations. These provisions shall apply to all calendar months, quarters, or years for claims made no later than one year after the board's first contact with the spouse making the claim.
Claims made after one year from the board's first contact with the spouse making the claim shall not apply to any calendar month, quarter, or year that is
more than five years from the return due date for nonpayment on a return, or
more than five years from the finality date on the board-issued determination or similar billing document for collection of a tax or fee,

whichever is later.
No calendar months, quarters, or years shall be eligible for relief under this regulation that have been closed by res judicata.
(f) Refunds. A refund of any amounts under these provisions shall be subject to the requirements as set forth in the refund provisions of the applicable tax, fee, and surcharge law, as specified in paragraph (1) of subdivision (a).
(g) This regulation shall apply retroactively to liabilities arising prior to January 1, 2008.
(h) A spouse may be relieved of liability for any unpaid tax or deficiency under the laws specified in paragraph (1) of subdivision (a) if, taking into account all the facts and circumstances, it is inequitable to hold the spouse liable for such amount attributable to any item for which relief is not available under subdivisions (a) through (d). A spouse may be considered for equitable relief under this subdivision only after a written claim for relief as an innocent spouse has been filed pursuant to subdivision (d). A spouse whose claim for equitable relief is denied may request that the claim be reconsidered by the board.
(1) Criteria for Equitable Relief.
(A) Factors that may be considered for the purpose of granting equitable relief include, but are not limited to:
1. The claiming spouse is separated (whether legally or not) or divorced from the nonclaiming spouse.
2. The claiming spouse would suffer economic hardship if relief is not granted.
3. The claiming spouse, under duress from the nonclaiming spouse, did not pay the liability. To substantiate “duress,” the claiming spouse must provide objective evidence. “Objective evidence” can include, but is not limited to, such documents as police reports, restraining orders, or counseling reports.
4. The claiming spouse did not know and had no reason to know about the items causing the understatement or that the tax would not be paid.
5. The nonclaiming spouse has a legal obligation under a divorce decree or agreement to pay the tax. (This obligation will not be considered a positive factor if the claiming spouse knew or had reason to know, at the time the divorce decree or agreement was entered into, that the nonclaiming spouse would not pay the tax.)
6. The tax for which the claiming spouse is requesting relief is attributable to the nonclaiming spouse.
(B) Factors that may be considered for purposes of denying equitable relief include, but are not limited to:
1. The claiming spouse will not suffer economic hardship if relief is not granted.
2. The claiming spouse knew or had reason to know about the items causing the understatement or that the tax would be unpaid at the time the claiming spouse signed the return.
3. The claiming spouse received a significant benefit from the unpaid tax or items causing the understatement.
4. The claiming spouse has not made a good faith effort to comply with the board's laws for the periods for which the claiming spouse is requesting relief or for subsequent periods of liability.
5. The claiming spouse has a legal obligation under a divorce decree or agreement to pay the tax.
6. The tax for which relief is being requested is attributable to the claiming spouse.
(2) Conditions for Relief. The following conditions apply to claims for equitable relief:
(A) The statutes of limitations provided for innocent spouse claims in subdivisions (e) and (f) also apply to requests for equitable relief.
(B) Claims for equitable relief may be filed on liabilities incurred prior to January 1, 2008, as provided in subdivision (g).
(i) The board shall send notification by mail of the claim for relief from liability and the basis for that claim to the nonclaiming spouse.
(j) Registered Domestic Partners. Pursuant to Family Code section 297.5, registered domestic partners shall have the same rights, protections, and benefits, and shall be subject to the same responsibilities, obligations, and duties under law, whether they derive from statutes, administrative regulations, court rules, government policies, common law, or any other provisions or sources of law, as are granted to and imposed upon spouses. Accordingly, for purposes of this regulation, domestic partners, as defined in Family Code section 297, have the same rights, protections, and benefits, and are subject to the same responsibilities, obligations, and duties as stated herein with respect to spouses.
NOTE

Authority cited: Sections 8251, 9251, 11651, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 7657.5, 8101-8131, 8880, 9151-9156, 11408.5, 11551-11555, 30285, 30361-30384, 32258, 32401-32407, 38454.5, 38601-38607, 40105, 40111-40117, 41099, 41100-41106, 43159.1, 43159.2, 43451-43456, 45158, 45651-45656, 46159, 46501-46507, 50112.6, 50139-50142.2, 55045.1, 55221-55226, 60210.5 and 60501-60512, Revenue and Taxation Code; and Sections 297, 297.5 and 308, Family Code.
HISTORY

1. New section filed 5-18-2010; operative 6-17-2010 (Register 2010, No. 21).
§4905. Electronic Funds Transfer.
Note     •     History

(a) Definitions. 
(1) “Electronic funds transfer” means any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, that is initiated through an electronic terminal, telephonic instrument, or computer or magnetic tape, so as to order, instruct, or authorize a financial institution to debit or credit an account. Electronic funds transfers shall be accomplished by an automated clearinghouse debit, an automated clearinghouse credit, or by Federal Reserve Wire Transfer. 
(2) “Automated clearinghouse” means any federal reserve bank, or an organization established in agreement with the National Automated Clearing House Association, that operates as a clearinghouse for transmitting or receiving entries between banks or bank accounts and which authorizes an electronic transfer of funds between these banks or bank accounts. 
(3) “Automated clearinghouse debit” means a transaction in which the state, through its designated depository bank, originates an automated clearinghouse transaction debiting the person's bank account and crediting the state's bank account for the amount of tax or fee. Banking costs incurred for the automated clearinghouse debit transaction shall be paid by the state. 
(4) “Automated clearinghouse credit” means an automated clearinghouse transaction in which the person through his or her own bank, originates an entry crediting the state's bank account and debiting his or her own bank account. Banking costs incurred for the automated clearinghouse credit transaction charged to the state shall be paid by the person originating the credit. 
(5) “Federal Reserve Wire Transfer” means any transaction originated by a person and utilizing the national electronic payment system to transfer funds through the federal reserve banks, when that person debits his or her own bank account and credits the state's bank account. Electronic funds transfers pursuant to Revenue and Taxation Code sections 7659.9, 8760, 30190, 32260, 40067, 41060, 43170, 45160, 46160, 50112.7, 55050, and 60250 may be made by Federal Reserve Wire Transfer only if payment cannot, for good cause, be made according to subdivision (a) (1) of this regulation, and the use of Federal Reserve Wire Transfer is preapproved pursuant to subdivision (g) of this regulation. Banking costs incurred for the Federal Reserve Wire Transfer transaction charged to the person and to the state shall be paid by the person originating the transaction. 
(b) Participation. 
(1) Mandatory Participation. Persons with an estimated monthly tax or fee liability of twenty thousand dollars ($20,000) or more under the applicable part of the Revenue and Taxation Code, are required to remit amounts due by electronic funds transfer under procedures set forth in this regulation. To identify mandatory participants, the Board shall conduct a periodic review of all persons with licenses, permits, or other authorization under sections 7659.9, 8760, 30190, 32260, 40067, 41060, 43170, 45160, 46160, 50112.7, 55050, and 60250. The review is performed by calculating an average monthly tax or fee liability for a twelve-month period. Persons whose average monthly tax or fee liability equals or exceeds twenty thousand dollars will be required to remit payments by electronic funds transfer. If a person did not engage in a covered activity until after the beginning of the designated twelve-month review period, then the monthly tax or fee liability will be calculated based upon the number of months in which covered activites occurred (for example, in a calendar year review period, if the person obtains a permit or license and begins operations for which a tax or fee may be imposed in May, the total tax or fee liability would be divided by eight to determine the average monthly tax or fee liability since there are eight months remaining in the evaluation period). Persons registering to report and pay a tax or fee for the first time, except certain successors, will not be required to participate in the electronic funds transfer program until a review is conducted. 
A successor will be regarded as having an estimated tax or fee liability of twenty thousand dollars ($20,000) or more per month when the monthly tax or fee liability of the predecessor equaled or exceeded twenty thousand dollars per month or the predecessor was a mandatory participant in the electronic funds transfer program. If the successor purchases a portion of a business that is required to participate in the mandatory electronic funds transfer program (e.g. a multiple outlet business that only sells some, but not all of its locations), the average monthly tax or fee liability of the purchased business will be computed to determine if the successor meets the threshold to be identified as a mandatory participant in the electronic funds transfer program. 
After review, if a person drops below the threshold for mandatory participation, the Board shall provide notification, in writing, that the status has been changed from mandatory participation to voluntary participation in the electronic funds transfer program. If, at that time, a person wishes to discontinue making electronic funds transfer payments, a written request must be made to the Board. Payments must continue to be remitted by electronic funds transfer until the taxpayer or feepayer is notified by the Board, in writing, of an effective date of withdrawal from the program. Any person who fails to comply with the mandatory participation requirements under this section shall be liable for a penalty as provided under the applicable Revenue and Taxation Code sections 7659.9, 8760, 30190, 32260, 40067, 41060, 43170, 45160, 46160, 50112.7, 55050, and 60250. 
(2) Voluntary Participation. Any person not meeting the criteria for mandatory participation set forth in subdivision (b)(1) of this regulation may participate in the program on a voluntary basis. A person must register with the Board prior to participation. If a person wishes to discontinue making electronic funds transfer payments, a written request must be made to the Board. Payments must continue to be remitted by electronic funds transfer until notified by the Board, in writing, of an effective date of withdrawal from the program. 
(c) Date of Payment. Payment is deemed complete on the date the electronic funds transfer is initiated, if the settlement to the state's demand account occurs on or before the banking day following the date the transfer is initiated. If the settlement to the state's demand account does not occur on or before the banking day following the date the transfer is initiated, payment is deemed to occur on the date settlement occurs. 
(d) Filing of Returns. In addition to a tax or fee payment made by electronic funds transfer, a return must be filed on or before the due date. Any person who fails to comply with this provision shall be subject to penalty charges as provided under Revenue and Taxation Code sections 7659.9(d), 8760(d), 30190(d), 32260(d), 40067(d), 41060(d), 43170(d), 45160(d), 46160(d), 50112.7(d), 55050(d), and 60250(d). 
(e) Failure to Pay by Electronic Funds Transfer. Any person required to pay tax or fee by electronic funds transfer must continue to do so until the Board advises them otherwise in writing. Any person required to pay taxes or fees by electronic funds transfer, as set forth in subdivision (b)(1), who does not pay through electronic funds transfer but uses another means (e.g., pay by check), will be assessed a penalty as provided by Revenue and Taxation Code sections 7659.9(e), 8760(e), 30190(e), 32260(e), 40067(e), 41060(e), 43170(e), 45160(e), 46160(e), 50112.7(e), 55050(e), and 60250(e). 
(f) Zero Amount Due. When no tax is due for a given period, a zero dollar transaction must be made by electronic funds transfer or the Board must receive written notification stating that no tax is due for that period. 
(g) Emergencies. In emergency situations, a Federal Reserve Wire Transfer transaction may be used to transmit a payment. A Federal Reserve Wire Transfer is an electronic payment system used by federal reserve banks to transfer funds instantaneously. Generally, this method of payment is not approved for recurring transactions. Authorization must be received from the Board prior to making a payment by Federal Reserve Wire Transfer. The person who originates the transfer shall be responsible for any fees incurred in paying by a Federal Reserve Wire Transfer transaction. 
NOTE

Authority cited: Sections 7659.9, 8760, 30190, 32260, 40067, 41060, 43170, 45160, 46160, 50112.7, 55050 and 60250, Revenue and Taxation Code. Reference: Sections 7659.9, 7659.92, 8760, 8762, 30190, 30192, 32260, 32262, 40067, 40069, 41060, 41062, 43170, 43172, 45160, 45162, 46160, 46162, 50112.7, 50112.9, 55050, 55052, 60250 and 60252, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-7-2005; operative 7-7-2005 (Register 2005, No. 23).
2. Change without regulatory effect amending subsection (b)(2) filed 4-20-2006 pursuant to section 100, title 1, California Code of Regulations (Register 2006, No. 16).
Chapter 10. Petition and Hearing Procedures [Repealed]
HISTORY

1. Repealer of chapter 10 (articles 1-9, sections 5010-5200), including renumbering of former sections 5090, 5091, 5092, 5093, 5094, 5095 and 5200 to new division 2.1, chapter 6, sections 5600, 5601, 5602, 5603, 5604, 5605 and 5700, respectively, filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2). For prior history of former sections 5010-5200, see Register 96, No. 1; Register 98, No. 11; Register 98, No. 12; Register 2000, No. 26; Register 2001, No. 23; Register 2001, No. 24; Register 2004, No. 31; Register 2005, No. 1 and Register 2005, No. 13.
Chapter 11. Subscription Television Tax [Repealed]
HISTORY

1. Repealer of Subchapter 11 (Sections 6001 through 6012) filed 2-14-67; effective thirtieth day thereafter (Register 67, No. 7). For prior history, see Register 64, No. 22.
Division 2.1. State Board of Equalization -- Rules for Tax Appeals
Chapter 1. Title of Division
§5000. Statement of Intent; Title of Division.
Note     •     History

In fulfillment of its constitutional and statutory duties, the State Board of Equalization hereby promulgates this division to provide regulations governing the administrative and appellate review processes for all of the tax and fee programs administered by the Board. These regulations shall be known as the Board of Equalization Rules for Tax Appeals (RTA). It is the intent of the State Board of Equalization that these regulations specifically address public concerns regarding its administrative and appellate review processes and improve the relationship between tax and fee payers and the State Board of Equalization. 
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Section 15606, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Article XIII, Section 11, California Constitution; Section 15606, Government Code; Sections 251, 1840, 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code; and Sections 42464.2 and 42882, Public Resources Code.
HISTORY

1. Renumbering of former division 2.1 (section 6000) to division 2.2 (section 6000) and new division 2.1 (chapters 1-6, sections 5000-5700), chapter 1 (section 5000) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Chapter 2. Sales and Use Tax, Timber Yield Tax, and Special Taxes and Fees
Article 1. Application of Chapter 2 and Definitions
§5200. Application of Chapter 2 and Definitions.
Note     •     History

This chapter applies to petitions for redetermination, administrative protests, applications for administrative hearings, claims for refund, and requests for relief filed with the Board under the:
(a) Sales and Use Tax Law. Part 1 of division 2 of the Revenue and Taxation Code.
(b) Motor Vehicle Fuel Tax Law. Part 2 of division 2 of the Revenue and Taxation Code.
(c) Use Fuel Tax Law. Part 3 of division 2 of the Revenue and Taxation Code.
(d) Tax on Insurers Law. Part 7 of division 2 of the Revenue and Taxation Code.
(e) Cigarette and Tobacco Products Tax Law. Part 13 of division 2 of the Revenue and Taxation Code.
(f) Alcoholic Beverage Tax Law. Part 14 of division 2 of the Revenue and Taxation Code.
(g) Timber Yield Tax Law. Part 18.5 of division 2 of the Revenue and Taxation Code.
(h) Energy Resources Surcharge Law. Part 19 of division 2 of the Revenue and Taxation Code.
(i) Emergency Telephone Users Surcharge Law. Part 20 of division 2 of the Revenue and Taxation Code.
(j) Hazardous Substances Tax Law, which is also applicable to the Childhood Lead Poisoning Prevention Fee and Occupational Lead Poisoning Prevention Fee. Part 22 of division 2 of the Revenue and Taxation Code.
(k) Integrated Waste Management Fee Law. Part 23 of division 2 of the Revenue and Taxation Code.
(l) Oil Spill Response, Prevention, and Administration Fees Law. Part 24 of division 2 of the Revenue and Taxation Code.
(m) Underground Storage Tank Maintenance Fee Law. Part 26 of division 2 of the Revenue and Taxation Code.
(n) Fee Collection Procedures Law. Part 30 of division 2 of the Revenue and Taxation Code.
(o) Diesel Fuel Tax Law. Part 31 of division 2 of the Revenue and Taxation Code.
The definitions in sections 5511 and 5512 of this division apply to this chapter. Where section 5511 conflicts with this chapter, this chapter controls.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6561, 6814, 6902, 7710, 8128, 8851, 9152, 12428, 12978, 30261, 30362, 32301, 32402, 38441, 38602, 40091, 40112, 41085, 41101, 43301, 43452, 45301, 45652, 46351, 46502, 50114, 50140, 55081, 55222, 60350 and 60522, Revenue and Taxation Code. 
HISTORY

1. New Chapter 2 (articles 1-7), article 1 (sections 5200-5202) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5201. Application of the International Fuel Tax Agreement.
Note     •     History

To the extent that sections in this chapter conflict with the International Fuel Tax Agreement, the provisions of the International Fuel Tax Agreement control.
NOTE

Authority cited: Section 15606(a), Government Code; Sections 105190 and 105310, Health and Safety Code; Sections 7051, 7202, 7203, 7261, 7262, 7270, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 44003, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code; and Section 893, Public Utilities Code. Reference: Sections 6561, 6814, 6902, 7710, 8128, 8851, 9152, 12428, 12978, 30261, 30362, 32301, 32402, 38441, 38602, 40091, 40112, 41085, 41101, 43301, 43452, 45301, 45652, 46351, 46502, 50114, 50140, 55081, 55222, 60350 and 60522, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial correction of Note (Register 2011, No. 5).
§5202. Notice Requirements.
Note     •     History

Any notice given under this chapter must be served personally or by mail in the manner prescribed by statute for service of notice of a deficiency determination.
NOTE

Authority cited: Section 15606(a), Government Code; Sections 105190 and 105310, Health and Safety Code; Sections 7051, 7202, 7203, 7261, 7262, 7270, 8251, 9251, 11651, 30451, 32451, 38701, 43501, 44003, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code; Section 893, Public Utilities Code. Reference: Sections 6538.5, 7700.5, 8828.5, 11352, 30243.5, 32313, 38434, 43352, 45353, 46303, 50120.3, 55103 and 60333, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 2A. Petitioning Notices of Determination and Notices of Deficiency Assessment
§5210. Persons Who May File Petitions for Redetermination.
Note     •     History

(a) Any person, supplier, distributor, insurer, surplus line broker, user, or tax or fee payer against whom a notice of determination or notice of deficiency assessment is issued, or a representative who requested a notice of determination pursuant to Revenue and Taxation Code sections 7675.1, 8782.1, or 60316, that disagrees with any item included in the notice of determination or notice of deficiency assessment (except an item described in section 5215.6) may file a petition for redetermination requesting that the Board reconsider the notice of determination or notice of deficiency assessment.
(b) Any person directly interested in a notice of determination issued against a person described in subdivision (a) may file a petition for redetermination requesting that the Board reconsider the notice of determination, but only if the notice of determination was issued under one of the following sections of the Revenue and Taxation Code:
(1) Sales and Use Tax Law. Sections 6481 or 6511.
(2) Alcoholic Beverage Tax Law. Sections 32271 or 32291.
(3) Timber Yield Tax Law. Sections 38416 and 38425.
(4) Hazardous Substances Tax Law. Section 43201.
(5) Integrated Waste Management Fee Law. Section 45201.
(6) Oil Spill Response, Prevention, and Administration Fees Law. Sections 46201 or 46251.
(7) Underground Storage Tank Maintenance Fee Law. Section 50113.
(8) Fee Collection Procedures Law. Section 55061.
A person is directly interested in a notice of determination if the person would have an interest in the subject matter of potential litigation involving the determination that would permit the person to intervene in such potential litigation under Code of Civil Procedure section 387, subdivision (b). Such persons include, without limitation, predecessors, successors, receivers, trustees, executors, administrators, assignees, and guarantors. A person directly interested does not include a consumer who owes or has paid tax reimbursement to a retailer, or persons such as lienholders.
NOTE

Authority cited: Section 15606, Government Code; Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6561, 7710, 8851, 12428, 30175, 30261, 32301, 38441, 40091, 41085, 43301, 45301, 46351, 50114, 55081 and 60350, Revenue and Taxation Code.
HISTORY

1. New article 2A (sections 5210-5219) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5210.5. Successor's Petition for Reconsideration.
Note     •     History

A successor served with a notice of successor liability under Revenue and Taxation Code sections 6814, 9024, 38564, 46454, or 60474 may file a petition for reconsideration of successor liability in the manner provided in this article for petitioning any other liability imposed under the Sales and Use Tax Law, Use Fuel Tax Law, Timber Yield Tax Law, Oil Spill Response, Prevention, and Administration Fees Law, or Diesel Fuel Tax Law, respectively. 
NOTE

Authority cited: Section 15606, Government Code; Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6814, 9024, 38564, 46454 and 60474, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5211. Limitation Period for Filing Petitions and Stay of Collection Activities.
Note     •     History

(a) A petition for redetermination must be filed within 30 days from the date that the notice of determination or notice of deficiency assessment was mailed to the person, supplier, distributor, insurer, surplus line broker, user, or tax or fee payer against which the notice was issued.
(b) Notwithstanding subdivision (a), petitions for redetermination of determinations issued under Revenue and Taxation Code section 30173 (Cigarette and Tobacco Products Tax Law) must be filed within 10 days from the date that the notice of determination was mailed to the distributor.
(c) A determination contained within a notice of determination or notice of deficiency assessment becomes final if a petition for redetermination is not filed within the time periods provided for in subdivisions (a) and (b).
(d) A petition for redetermination is premature and not valid if it is filed before a notice of determination, notice of deficiency assessment, or notice of successor liability is issued. However, a premature petition for redetermination may be treated as an administrative protest under section 5220.
(e) The filing of a timely petition for redetermination will stay collection activities with regard to amounts contained in the notice of determination or notice of deficiency assessment being petitioned, until after the petition has been acted upon and the action becomes final.
NOTE

Authority cited: Section 15606, Government Code; Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6561, 7710, 8851, 12428, 30174, 30175, 30261, 32301, 38441, 40091, 41085, 43301, 45301, 46351, 50114, 55081 and 60350, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5212. Contents of Petitions for Redetermination, and Supporting Arguments and Evidence.
Note     •     History

(a) Every petition for redetermination must:
(1) Be in writing.
(2) Identify the amounts the petitioner wishes to contest (petitioners may contest all or a portion of the amount shown on a notice), if known.
(3) State the specific grounds or reasons why the notice of determination or notice of deficiency assessment should be reconsidered.
(4) Be signed by the petitioner or the petitioner's authorized representative.
(b) A petition for redetermination may include a request for an appeals conference conducted under article 6 of this chapter, a request for an oral hearing before the Board, or both. If a petition for redetermination only includes a request for an appeals conference, an oral hearing before the Board may still be requested in accordance with section 5266.
(c) The filing of a completed form provided by the Board for use as a petition for redetermination will satisfy the requirements of subdivision (a).
(d) A petitioner may submit copies of any supporting written arguments or documentary evidence along with its petition for redetermination.
NOTE

Authority cited: Section 15606, Government Code; Sections 7051, 8251, 9251, 13170, 30451, 32451, 38442, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6561.5, 7710.5, 8851.5, 12428, 30261.5, 32301.5, 38442, 40092, 41086, 43302, 45302, 46352, 50115, 55082 and 60351, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5212.5. Amendments to Petitions for Redetermination.
Note     •     History

A petition for redetermination may be amended to state additional grounds or reasons why the notice of determination or notice of deficiency assessment should be reconsidered at any time prior to the date on which the Board issues its order or decision upon the petition for redetermination.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6561.5, 7710.5, 8851.5, 12428, 30261.5, 32301.5, 38442, 40092, 41086, 43302, 45302, 46352, 50115, 55082 and 60351, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5213. Accrual of Interest.
Note     •     History

The filing of a petition for redetermination does not stop the accrual of interest.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6482, 6513, 7674, 7661, 8777, 8803, 12632, 30171, 30202, 30223, 32271, 32291, 38412, 38423, 40072, 40083, 41071, 41082, 43201, 45201, 46201, 46253, 50113, 55061, 60302 and 60314, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5214. Additional Copy of Petitions for Redetermination Filed Under the Tax on Insurers Law.
Note     •     History

An insurer or surplus line broker filing a petition for redetermination of a deficiency assessment issued under the Tax on Insurers Law must file a copy of its petition with the Commissioner of Insurance, c/o Premium Tax Audit Bureau, at the same time it files its petition for redetermination in accordance with section 5216.
NOTE

Authority cited: Section 15606, Government Code; Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Section 12428, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5215. Scope of Petitions for Redetermination Filed Under Hazardous Substances Tax Law.
Note     •     History

(a) Hazardous or Extremely Hazardous Waste. All petitions for redetermination filed under Revenue and Taxation Code section 43301 will be acknowledged. However, no determination will be made as to whether any substance is a hazardous or extremely hazardous waste. A petition for redetermination based upon such grounds will be forwarded to the Director of Toxic Substances Control for determination in accordance with Revenue and Taxation Code section 43301, and may not be considered until after the Director of Toxic Substances Control has made his or her determination.
(b) Childhood Lead Poisoning Prevention Fee.
(1) A petition for redetermination of the Childhood Lead Poisoning Prevention Fee may be founded upon any grounds, including such grounds as:
(A) The petitioner's industry did not contribute in any manner to environmental lead contamination; 
(B) The petitioner's lead or lead containing product does not currently or did not historically result in quantifiable persistent lead contamination; or 
(C) The amount of the fee assessed does not reflect the petitioner's market share or is incorrectly computed.
(2) A petition founded upon grounds described in subparagraphs (A), (B), or (C) of paragraph (1) will not be acted upon until after the State Director of Health Services has acted upon the petitioner's application for exemption from the fee or reassessment of the fee. Applications for exemption should be submitted to the State Department of Health Care Services in the manner provided in California Code of Regulations, title 17, section 33040. Applications for reassessment should be submitted to the State Department of Health Services in the manner provided in California Code of Regulations, title 17, section 33050.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43301, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Section 43301, Revenue and Taxation Code; and Section 105310, Health and Safety Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5215.4. Scope of Petitions for Redetermination Filed Under Covered Electronic Waste Recycling Fee.
Note     •     History

All petitions for redetermination of the Covered Electronic Waste Recycling Fee filed in accordance with section 5216 will be acknowledged. However, no determination will be made as to whether an item is or is not a covered electronic device. A petition for redetermination based upon such grounds will be forwarded to the Department of Toxic Substances Control for determination in accordance with Public Resources Code section 42464.6. 
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Section 42464.6, Public Resources Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5215.6. Scope of Petition for Redetermination Filed Under Water Rights Fee Law.
Note     •     History

Under Water Code section 1537, a petition for redetermination under the Fee Collection Procedures Law should be filed with the State Water Resources Board if the petition requests reconsideration of a determination by the State Water Resources Control Board regarding the amount of the water rights fee or that a person or entity is required to pay such fee.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Section 1537, Water Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5216. Filing Petitions for Redetermination.
Note     •     History

(a) The Board encourages the use of electronic means (e.g., facsimile, e-mail, etc.) for the filing of petitions and related documents. A petition or related document may be filed electronically under this section if an electronic copy of such document is transmitted to the appropriate section or group identified in subdivision (b) for the tax or fee law at issue in accordance with instructions provided on the Board's website at www.boe.ca.gov. 
(b) Petitions for redetermination and related documents may also be hand delivered to the Board's headquarters at 450 N Street, in Sacramento, California, or mailed to the address provided below for the particular tax or fee law at issue:
(1) Sales and Use Tax Law. 

PETITIONS SECTION, MIC: 38
STATE BOARD OF EQUALIZATION
P.O. BOX 942879
SACRAMENTO, CA 94279-0038
(2) Hazardous Substances Tax Law (Except Childhood Lead Poisoning Prevention Fee), Occupational Lead Poisoning Prevention Fee, Water Rights Fee, Covered Electronic Waste Recycling Fee, Tire Recycling Fee, Integrated Waste Management Fee, and Marine Invasive Species Fee Collection Law

ENVIRONMENTAL FEES DIVISION, MIC: 57
AUDIT UNIT
STATE BOARD OF EQUALIZATION
P.O. BOX 942879
SACRAMENTO, CA 94279-0057
(3) Tax on Insurers Law, Cigarette and Tobacco Products Tax Law, Alcoholic Beverage Tax Law, Energy Resources Surcharge Law, Emergency Telephone Users Surcharge, and Natural Gas Surcharge.

EXCISE TAXES DIVISION, MIC: 56
REFUND AND PETITION GROUP
STATE BOARD OF EQUALIZATION
P.O. BOX 942879
SACRAMENTO, CA 94279-0056
(4) Motor Vehicle Fuel Tax Law, Use Fuel Tax Law, Oil Spill Response, Prevention, and Administration Fees Law, Underground Storage Tank Maintenance Fee Law, Diesel Fuel Tax Law, and Childhood Lead Poisoning Prevention Fee.

FUEL TAX DIVISION, MIC: 30
PETITION GROUP
STATE BOARD OF EQUALIZATION
P.O. BOX 942879
SACRAMENTO, CA 94279-0030
(5) Timber Yield Tax Law.

TIMBER YIELD TAX SECTION, MIC: 60
STATE BOARD OF EQUALIZATION
P. O. BOX 942879
SACRAMENTO, CA 94279-0060
(c) The Chief of Board Proceedings may reject any petition for redetermination or related document filed in any manner that is not authorized by this section. 
NOTE

Authority cited: Section 15606, Government Code; Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6561, 6814, 7710, 8851, 12428, 30175, 30261, 32301, 38441, 40091, 41085, 43301, 45301, 46351, 50114, 55081 and 60350, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Change without regulatory effect amending subsection (b)(2) filed 7-16-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 29).
§5217. Assignment and Acknowledgment of Petitions for Redetermination.
Note     •     History

(a) After receipt, a petition for redetermination will be assigned to the appropriate section or group listed in section 5216 based upon the type of tax or fee at issue. 
(b) Once a petition for redetermination is assigned, Board Staff from the assigned section or group will promptly send the petitioner a letter acknowledging receipt of the petition for redetermination, which will contain the contact information for the assigned section or group.
(c) If necessary, the acknowledgement letter may request additional documentary evidence to support the petition for redetermination.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6562, 7711, 8852, 12429, 30175, 30262, 32302, 38443, 40093, 41087, 43303, 45303, 46353, 50116, 55083 and 60352, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5218. Review of the Petition by the Assigned Section.
Note     •     History

(a) Initial Review of Petition. Board Staff from the assigned section must review the petition, notice of determination, and any other relevant information.
(b) Referral to District Office or Board Section. Board Staff from the assigned section may refer the petition to Board Staff in the district office or Board Section that issued the notice being petitioned for further investigation and comment.
(c) Scope of Review. Board Staff from the assigned section must look for consistency, adequacy of procedures, proper application of law, and consideration of any recent law changes or Board Memorandum Opinions that may affect the audit or investigation findings, where appropriate.
(d) Findings. Upon completion of the review, Board Staff from the assigned section must present its findings to the petitioner.
(e) Agreement or Disagreement. If the petitioner agrees with the Board staff's findings, or fails to request an appeals conference and/or oral hearing, a notice of redetermination will be issued in accordance with such findings. If the petitioner disagrees with any portion of Board staff's findings, and indicates that disagreement by requesting an appeals conference conducted under article 6 of this chapter, or by requesting or confirming a previous request for an oral hearing, Board Staff from the assigned section must prepare a summary analysis.
(f) The summary analysis is a written summary of the petitioner's contentions regarding the notice of determination or notice of deficiency assessment, the position of the Department that issued the notice, and the reasons Board Staff from the assigned section believes that the Department's position should be sustained in whole or in part.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6562, 7711, 8852, 12429, 30175, 30262, 32302, 38443, 40093, 41087, 43303, 45303, 46353, 50116, 55083 and 60352, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5219. Mailing the Summary Analysis and Scheduling the Appeals Conference.
Note     •     History

Once the summary analysis is completed, Board Staff from the assigned section or group will forward the petition file to the Board Proceedings Division and mail a copy of the summary analysis to the petitioner. An appeals conference will then be scheduled in accordance with article 6 of this chapter. 
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6562, 7711, 8852, 12429, 30175, 30262, 32302, 38443, 40093, 41087, 43303, 45303, 46353, 50116, 55083 and 60352, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 2B. Treatment of Premature or Untimely Petition as an Administrative Protest
§5220. Premature or Untimely Petition May Be Treated as an Administrative Protest.
Note     •     History

(a) If a petition for redetermination is filed prior to or after the expiration of the applicable time periods provided for in section 5211, the premature or untimely petition may be treated as an administrative protest when determined by the Deputy Director of the Department that issued the petitioned notice. Board Staff shall advise persons filing premature petitions to file timely petitions. 
(b) If a premature or untimely petition is treated as an administrative protest, the administrative protest will be reviewed in the same manner as a petition for redetermination.
(c) Notwithstanding subdivision (b) of this section: 
(1) A request for an appeals conference conducted under article 6 of this chapter may be denied on an administrative protest, however, such requests will be liberally granted; and
(2) A request for an oral hearing before the Board may be denied on an administrative protest, however, such requests will be liberally granted.
(d) A claim for refund should be filed for each payment made on an administrative protest.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6981, 8191, 9196, 12951, 30421, 32440, 38631, 40121, 41107, 43491, 45801, 46551, 50151, 55281 and 60581, Revenue and Taxation Code.
HISTORY

1. New article 2B (sections 5220-5220.6) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5220.4. Accrual of Interest.
Note     •     History

The treatment of a premature or untimely petition for redetermination as an administrative protest does not stop the accrual of interest. 
NOTE

Authority cited: Section 15606, Government Code; Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6482, 6513, 7674, 7661, 8777, 8803, 12632, 30171, 30202, 30223, 32271, 32291, 38412, 38423, 40072, 40083, 41071, 41082, 43201, 45201, 46201, 46253, 50113, 55061, 60302 and 60314, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5220.6. No Stay of Collection Activities.
Note     •     History

In general, the treatment of a premature or untimely petition for redetermination as an administrative protest does not stay efforts to collect any unpaid amounts at issue in the administrative protest. This is because the amounts contained in the notice of determination or notice of deficiency assessment being protested became final and collectible when the time to file a timely petition for redetermination expired.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6561, 7710, 8851, 12428, 30174, 30261, 32301, 38441, 40091, 41085, 43301, 45301, 46351, 50114, 55081 and 60350, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 2C. Contesting a Jeopardy Determination
§5221. Notice of Jeopardy Determination.
Note     •     History

(a) If the collection of any tax or fee or any amount of tax or fee required to be collected and paid to the state, or of any determination or other amount required to be paid to the state will be jeopardized by delay, a notice of jeopardy determination may be issued.
(b) The notice of jeopardy determination shall state the tax or fee, or amount of tax or fee required to be collected or other amount.
(c) The amounts stated in the notice of jeopardy determination are immediately due and payable.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6536, 7698, 8826, 30241, 32311, 38431, 43350, 45351, 46301, 50120.1, 55101 and 60330, Revenue and Taxation Code.
HISTORY

1. New article 2C (sections 5221-5229) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5222. Persons Who May File a Petition for Redetermination of a Jeopardy Determination.
Note     •     History

(a) The person against whom a jeopardy determination is made or the person's authorized representative may file a petition for redetermination of the jeopardy determination and related documents. 
(b) The Board encourages the use of electronic means (i.e., facsimile, e-mail, etc.) to file petitions for redetermination and related documents. A petition for redetermination of a jeopardy determination or related document may be filed electronically if an electronic copy of such document is transmitted to the appropriate section identified in the notice of jeopardy determination in accordance with instructions provided on the Board's website at www.boe.ca.gov.
(c) A petition for redetermination of a jeopardy determination and related documents may also be hand delivered to the Board's headquarters at 450 N Street in Sacramento, California, or mailed to the address provided on the notice of jeopardy determination. The Chief of Board Proceedings may reject any petition for redetermination of a jeopardy determination or related document filed in any manner that is not authorized by this section. 
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6538, 7700, 8828, 30243, 32312, 38433, 43351, 45352, 46302, 50120.2, 55102 and 60332, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5222.4. Contents of Petition for Redetermination of Jeopardy Determination.
Note     •     History

A petition for redetermination of a jeopardy determination must satisfy all the requirements for a petition for redetermination as provided in article 2A of this chapter. 
NOTE

Authority cited: Section 15606,  Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6538, 7700, 8828, 30243, 32312, 38433, 43351, 45352, 46302, 50120.2, 55102 and 60332, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5222.6. Limitation Period for Petition for Redetermination of Jeopardy Determination.
Note     •     History

(a) A petition for redetermination of a jeopardy determination must be filed within the earlier of 10 days from the date that the notice of jeopardy determination was mailed or personally served.
(b) The provisions of article 2A of this chapter do not apply to the time period in which to file a petition for redetermination of a jeopardy determination. 
NOTE

Authority cited: Section 15606,  Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6538, 7700, 8828, 30243, 32312, 38433, 43351, 45352, 46302, 50120.2, 55102 and 60332, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5223. Security Requirement for Petition.
Note     •     History

A petition for redetermination of a jeopardy determination will not be accepted unless the petitioner deposits the amount of security indicated in the notice of jeopardy determination within the 10-day period specified in section 5222.6.
NOTE

Authority cited: Section 15606,  Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6538, 7700, 8828, 30243, 32312, 38433, 43351, 45352, 46302, 50120.2, 55102 and 60332, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5224. Review of Petition for Redetermination of Jeopardy Determination.
Note     •     History

(a) A petition for redetermination of a jeopardy determination may raise any objections the petitioner has to the notice of jeopardy determination, including objections to the appropriateness of issuing the notice of jeopardy determination.
(b) The administrative review of a petition for redetermination of a jeopardy determination follows the same procedures applicable to the review of other petitions for redetermination under article 2A of this chapter and will be done promptly.
(c) A petition for redetermination of a jeopardy determination issued under the Hazardous Substances Tax Law or Covered Electronic Waste Recycling Fee will be reviewed in accordance with sections 5215 and 5215.4, respectively. 
NOTE

Authority cited: Section 15606,  Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6538, 7700, 8828, 30243, 32312, 38433, 43351, 45352, 46302, 50120.2, 55102 and 60332, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5225. Persons Who May File an Application for Administrative Hearing; Manner of Filing; and Consolidation with Petition.
Note     •     History

(a) The person against whom a jeopardy determination is made may file an application for an administrative hearing for one or more of the following purposes:
(1) To establish that the jeopardy determination is excessive.
(2) To establish that the sale of the property that may be seized after issuance of the jeopardy determination, or any part thereof, should be delayed pending the administrative hearing because the sale would result in irreparable injury to the person.
(3) To request the release of all or part of the property to the person.
(4) To request a stay of collection activities.
(5) To request administrative review of any other issue raised by the jeopardy determination.
(b) The Board encourages the use of electronic means (e.g., facsimile, e-mail, etc.) for the filing of applications for administrative hearings and related documents. An application for an administrative hearing or related document may be filed electronically under this section if an electronic copy of such document is transmitted to the appropriate section or group identified in the notice of jeopardy determination in accordance with instructions provided on the Board's website at www.boe.ca.gov. An application for an administrative hearing and related documents may also be filed by mailing the application and related documents to the address shown on the notice of jeopardy determination, or hand delivering the application and related documents to the Board's headquarters at 450 N Street in Sacramento, California. The Chief of Board Proceedings may reject any application for an administrative hearing or related document filed in any manner that is not authorized by this section. 
(c) If an application is filed under this section and a petition is filed under section 5222, the application and petition will be consolidated into one administrative hearing.
(d) A petition for redetermination of a jeopardy determination issued under the Tax on Insurers Law or Water Rights Fee Law must be filed in accordance with section 5214 and 5215.6, respectively.
NOTE

Authority cited: Section 15606, Government Code; and Sections 6538.5, 7051, 7700.5, 8251, 8828.5, 9251, 13170, 30243.5, 30451, 32313, 32451, 38435, 38701, 40171, 41128, 43352, 45353, 43501, 45851, 46601, 50120.3, 50152, 55103, 55301, 60333 and 60601, Revenue and Taxation Code. Reference: Sections 6538.5, 7700.5, 8828.5, 30243.5, 32313, 38435, 43352, 45353, 50120.3, 55103 and 60333, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5226. Limitation Period for Filing Application for Administrative Hearing.
Note     •     History

(a) An application for administrative hearing shall be filed within the earlier of 30 days from the date that the notice of jeopardy determination was mailed or personally served.
(b) An application for administrative hearing filed after the expiration of the time period provided for in subdivision (a) should be accompanied by a statement demonstrating why the person believes there was good cause for the person's failure to file a timely application.
(c) If good cause existed for failing to file a timely application, an administrative hearing may still be granted.
NOTE

Authority cited: Section 15606, Government Code; and Sections 6538.5, 7051, 7700.5, 8251, 8828.5, 9251, 13170, 30243.5, 30451, 32313, 32451, 38435, 38701, 40171, 41128, 43352, 45353, 43501, 45851, 46601, 50120.3, 50152, 55103, 55301, 60333 and 60601, Revenue and Taxation Code. Reference: Sections 6538.5, 7700.5, 8828.5, 30243.5, 32313, 38435, 43352, 45353, 46303, 50120.3, 55103 and 60333, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5227. Contents of Application for Administrative Hearing.
Note     •     History

Every application for administrative hearing must:
(a) Be in writing.
(b) Identify the purpose for which the person has applied for an administrative hearing.
(c) State the specific factual or legal grounds upon which the application is founded.
(d) Be signed by the person or the person's authorized representative.
NOTE

Authority cited: Section 15606, Government Code; and Sections 6538.5, 7051, 7700.5, 8251, 8828.5, 9251, 13170, 30243.5, 30451, 32313, 32451, 38435, 38701, 40171, 41128, 43352, 45353, 43501, 45851, 46303, 46601, 50120.3, 50152, 55103, 55301, 60333 and 60601, Revenue and Taxation Code. Reference: Sections 6538.5, 7700.5, 8828.5, 30243.5, 32313, 38435, 43352, 45353, 46303, 50120.3, 55103 and 60333, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5228. Option to Post Security with Application for Administrative Hearing.
Note     •     History

(a) A person is not required to post security to obtain an administrative hearing.
(b) Property seized under a notice of jeopardy determination or jeopardy assessment may not be sold without the consent of the owner during the first 30 days after service of such notice, nor while a timely application for administrative hearing is pending. The storing of the property during the period the application is pending will be at the applicant's expense. Storage expenses may be waived, credited, or refunded.
(c) The filing of an application for an administrative hearing will not stay other collection activities not identified in subdivision (b). A stay of other collection activities will only arise if the person deposits the amount of security indicated in the notice of jeopardy determination within the 10-day period specified in section 5223.
NOTE

Authority cited: Section 15606, Government Code; and Sections 6538.5, 7051, 7700.5, 8251, 8828.5, 9251, 13170, 30243.5, 30451, 32313, 32451, 38435, 38701, 40171, 41128, 43352, 45353, 43501, 45851, 46303, 46601, 50120.3, 50152, 55103, 55301, 60333 and 60601, Revenue and Taxation Code. Reference: Sections 6538.5, 7700.5, 8828.5, 30243.5, 32313, 38435, 43352, 45353, 46303, 50120.3, 55103 and 60333, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5229. Assignment of Application for Administrative Hearing to Appeals Division for Appeals Conference.
Note     •     History

(a) Upon receipt of an application for administrative hearing, Board Staff shall promptly:
(1) Acknowledge its receipt;
(2) Assign the application to the Appeals Division for an appeals conference;
(3) Schedule an appeals conference; and
(4) Notify the applicant regarding the date, time and location of the appeals conference.
(b) Upon completion of the appeals conference, Appeals Staff will promptly issue a determination as to each issue raised in the application and provide notice of the determination to the applicant in a Decision and Recommendation. Appeals Staff may find that the applicant is not entitled to the relief requested or may order that one or more of the following types of relief be granted: that the sale of the property will irreparably damage the applicant and that the property will not be sold; that the property, or a portion thereof, be released to the applicant or to the person from whom it was seized; that the tax as determined is excessive and that the amount of the determination be reduced.
(c) If the applicant disagrees with the Decision and Recommendation in whole or in part, the applicant may request an oral hearing before the Board. A request for an oral hearing may be denied on an application for administrative hearing. If an oral hearing is granted, the matter shall be scheduled for hearing as soon as practicable.
NOTE

Authority cited: Section 15606, Government Code; and Sections 6538.5, 7051, 7700.5, 8251, 8828.5, 9251, 13170, 30243.5, 30451, 32313, 32451, 38435, 38701, 40171, 41128, 43352, 45353, 43501, 45851, 46303, 46601, 50120.3, 50152, 55103, 55301, 60333 and 60601, Revenue and Taxation Code. Reference: Sections 6538.5, 7700.5, 8828.5, 30243.5, 32313, 38435, 43352, 45353, 46303, 50120.3, 55103 and 60333, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 3. Claims for Refund
§5230. Persons Who May File a Claim for Refund; Limitations on Certain Claims.
Note     •     History

(a) Any person, supplier, distributor, insurer, surplus line broker, user, or tax or fee payer who believes that it has overpaid a tax or fee, or interest or penalty thereon, or other refundable amount to the Board may file a claim for refund. An authorized representative may file a claim for refund on such persons' behalf.
(b) Motor Vehicle Fuel Tax Law. A claim for refund based upon the following grounds should be filed with the Controller and is not governed by this chapter:
(1) The motor vehicle fuel was purchased and used for a purpose other than operating motor vehicles on public highways in California.
(2) The motor vehicle fuel was exported for use outside of California.
(3) The motor vehicle fuel was sold to the armed forces of the United States for use in ships or aircraft, or for use outside of California in a manner that would qualify for an exemption under Revenue and Taxation Code section 7401.
(4) The motor vehicle fuel was purchased for and used in construction equipment, which is exempt from vehicle registration under the Vehicle Code.
(5) The claimant is a supplier who sold motor vehicle fuel to a consulate office or consulate employee under circumstances that would have entitled the supplier to an exemption under Revenue and Taxation Code section 7401, subdivision (a)(4).
(6) The claimant is a supplier that:
(A) Removed motor vehicle fuel from a rack and paid tax on that removal, or purchased tax-paid motor vehicle fuel outside the bulk transfer/terminal system; and
(B) Delivered the tax-paid motor vehicle fuel to another approved terminal from which the supplier subsequently removed the tax-paid motor vehicle fuel at the terminal rack and paid a second tax on the same amount of motor vehicle fuel.
(7) The claimant is a supplier who purchased tax-paid motor vehicle fuel in the bulk transfer/terminal system and subsequently removed the tax-paid motor vehicle fuel at the terminal rack, and paid tax upon the same amount of motor vehicle fuel twice.
(8) The claimant used tax-paid motor vehicle fuel to propel passenger carrying vehicles used for the transportation of persons for hire, compensation, or profit.
(9) The claimant paid tax attributable to the distribution of motor vehicle fuel for use or used in propelling a vessel operated by its owner on waters located on private property owned or controlled by it. 
(c) Hazardous Substances Tax Law. 
(1) All claims for refund filed under Revenue and Taxation Code section 43452 will be acknowledged. However, no determination will be made as to whether any substance is a hazardous or extremely hazardous waste. A claim for refund based upon such grounds will be forwarded to the Director of Toxic Substances Control for determination in accordance with Revenue and Taxation Code section 43452. 
(2) A claim for refund required to be forwarded to the Director of Toxic Substances Control under paragraph (1) will not be considered until after the Director of Toxic Substances Control has made his or her determination.
(3) Childhood Lead Poisoning Prevention Fee. 
(A) All claims for refund of the Childhood Lead Poisoning Prevention Fee will be acknowledged. A claim for refund of the Childhood Lead Poisoning Prevention Fee may be founded upon any grounds, including such grounds as:
(i) The petitioner's industry did not contribute in any manner to environmental lead contamination; 
(ii) The petitioner's lead or lead containing product does not currently or did not historically result in quantifiable persistent lead contamination; or
(iii) The amount of the fee assessed does not reflect the petitioner's market share or is incorrectly computed.
(B) A claim for refund described in clauses (i), (ii), or (iii) of subparagraph (A) will not be acted upon until after the State Director of Health Services has acted upon the claimant's application for exemption from the fee or reassessment of the fee. Applications for exemption should be submitted to the State Department of Health Care Services in the manner provided in California Code of Regulations, title 17, section 33040. Applications for reassessment should be submitted to the State Department of Health Services in the manner provided in California Code of Regulations, title 17, section 33050.
(d) Covered Electronic Waste Recycling Fee. All claims for refund of the Covered Electronic Waste Recycling Fee will be acknowledged. However, no determination will be made as to whether an item is or is not a covered electronic device. Claims for refund based upon such grounds will be forwarded to the Department of Toxic Substances Control for determination in accordance with Public Resources Code section 42464.6.
(e) Water Rights Fee Law. A claim for refund filed under the Fee Collection Procedures Law that is based upon the assertion that the State Water Resources Control Board improperly or erroneously determined that a person or entity was required to pay a water rights fee or the amount of such fee will not be accepted. A claim for refund based upon these grounds should be directed to the State Water Resources Control Board. This prohibition does not apply if the determination has already been set aside by the State Water Resources Control Board or a court reviewing the determination. 
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6901, 6902, 8101, 8101.1, 8101.6, 8101.7, 8102, 8126, 8128, 9151, 9152, 12977, 12978, 30176, 30176.1, 30176.2, 30177, 30361, 30362, 32401, 32402, 32407, 38601, 38602, 40111, 40112, 41100, 41101, 43451, 43452, 45651, 45652, 46501, 46502, 50139, 50140, 55221, 55222, 60501, 60502, 60507, 60521 and 60522,  Revenue and Taxation Code.
HISTORY

1. New article 3 (sections 5230-5239) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial correction of Note (Register 2011, No. 21).
§5231. Limitation Period for Claim for Refund.
Note     •     History

(a) A refund requested in a claim for refund cannot be approved, unless the claim for refund is filed within the time periods provided in this section.
(b) General Limitation Periods. In general, a claim for refund is timely if it is filed prior to the expiration of the last of the following time periods:
(1) Three years from the last day of the calendar month following the close of the reporting period for which the overpayment was made;
(2) Six months from the date the determination became final, if the overpayment was made under the notice of determination; or
(3) Six months from the date of the overpayment.
(c) Alcoholic Beverages Tax Law. Subdivision (b)(1) does not apply to claims for refund filed under the Alcoholic Beverage Tax Law. In lieu thereof, any such claim for refund is timely if filed within three years from the 15th day of the calendar month following the close of the period for which the overpayment being claimed was made.
(d) Cigarette and Tobacco Products Tax Law.
(1) Stamps and Meter Register Settings. Subdivision (b)(1) does not apply to claims for refund for overpayments made with regard to purchases of stamps or meter register settings. In lieu thereof, a claim for refund for an overpayment made with regard to a purchase of stamps or meter register settings is timely if filed within three years from the due date for the payment of the purchase for which the overpayment was made.
(2) Other Claims for Refund. Subdivision (b)(1) does not apply to claims for refund filed under the Cigarette and Tobacco Products Tax Law, which are not described in paragraph (1) of this subdivision. In lieu thereof, a claim for refund described in this paragraph (2) is timely if filed within three years from the 25th day after the close of the monthly period for which the overpayment being claimed was made.
(3) Exported Tobacco Products. Notwithstanding subdivision (b) and paragraphs (1) and (2) of this subdivision, claims for refund based upon the grounds that the tobacco products upon which the tax was paid were exported, must be filed within three months after the close of the calendar month in which the tobacco products were exported.
(e) Tax on Insurers Law. Subdivision (b)(1) does not apply to claims for refund filed under the Tax on Insurers Law. In lieu thereof, any such claim for refund is timely if filed within four years after April 1st of the year following the year for which the overpayment was made. A claim for refund filed under the Tax on Insurers Law may be filed in accordance with section 5233 or may be filed with the Commissioner of Insurance.
(f) Emergency Telephone Users Surcharge Law. Subdivision (b)(1) does not apply to claims for refund filed under the Emergency Telephone Users Surcharge Law. In lieu thereof, any such claim is timely if filed within three years after the last day of the second month following the close of the month for which the overpayment being claimed was made.
(g) Hazardous Substances Tax Law. Subdivision (b)(1) does not apply to claims for refund filed under the Hazardous Substances Tax Law. In lieu thereof, any such claim is timely if filed within three years after the date taxes were due and payable for the period for which the overpayment was made.
(h) Fee Collection Procedures Law, Integrated Waste Management Fee Law, Underground Storage Tank Maintenance Fee Law, and Oil Spill Response, Prevention, and Administration Fees Law. Subdivision (b)(1) does not apply to claims for refund filed under the Fee Collection Procedures Law, Integrated Waste Management Fee Law, Underground Storage Tank Maintenance Fee Law, and Oil Spill Response, Prevention, and Administration Fees Law. In lieu thereof, any such claim is timely if filed within three years after the due date of the payment for the period for which the overpayment was made.
(i) Diesel Fuel Tax Law. Subdivision (b) does not apply to claims for refund filed under Revenue and Taxation Code section 60501 (diesel fuel lost sold or removed) or 60502 (ultimate vendor claims). In lieu thereof, any such claim for refund is timely if filed within three years from the date of the purchase of the diesel fuel to which the claim relates, or, if the tax was not invoiced at the time of the purchase of the diesel fuel, six months after the receipt of an invoice for the tax, whichever period expires later.
(j) Waivers. 
(1) In addition, where a claimant has executed a waiver extending the statute of limitation for assessment applicable to a reporting period, any claim for refund filed with regard to that reporting period during the time agreed to in the waiver will be timely filed.
(2) This subdivision regarding waivers does not apply to claims for refund filed under the Tax on Insurers Law or the Emergency Telephone Users Surcharge Law, or claims described in subdivision (i) of this section.
(k) Financially Disabled Individuals. 
(1) The periods described in subdivisions (b), (c), (d)(2), (f), (g), and (h) of this section are suspended during any period of an individual's life that the individual is financially disabled.
(2) An individual is financially disabled if:
(A) The individual is unable to manage his or her financial affairs by reason of a medically determinable physical or mental impairment of the individual that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months; and
(B) Proof of the individual's impairment is provided.
(3) An individual is not financially disabled during any period that the individual's spouse or any other person is authorized to act on behalf of the individual in financial matters.
(4) This subdivision does not apply to claims for refund filed under the Tax on Insurers Law or claims for refund of overpayments made with respect to purchases of stamps or meter register settings filed under the Cigarette and Tobacco Products Tax Law.
(l) Levies and Liens. A claim for refund for an overpayment of a sales or use tax collected by means of levy, through the use of liens, or by other enforcement procedures is timely if filed within three years of the overpayment. 
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6902, 6902.3, 6902.4, 8128, 8128.1, 9152, 9152.1, 12978, 30178, 30178.1, 30362, 30362.1, 32402, 32402.1, 32407, 38602, 38602.5, 40112, 40112.1, 41101, 41101.1, 43452, 43452.1, 45652, 45652.1, 50140, 50140.1, 55222, 55222.1, 60507, 60522 and 60522.1, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5231.5. Failure to File Timely Claim for Refund.
Note     •     History

A claim for refund must be reviewed to determine whether it is timely. The claimant's failure to file a claim within the applicable time period, as provided for in section 5231, is a waiver of any demand against the State on account of the overpayment.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6905, 8128, 9152, 12980, 30178, 30178.1, 30364, 32403, 38604, 40114, 41103, 43453, 45653, 46504, 50141, 55223, 60507 and 60522, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5232. General Contents of Claims for Refund.
Note     •     History

(a) All Claims. Every claim for refund must be in writing, must be signed by the claimant or the claimant's authorized representative, and must include:
(1) The specific grounds or reasons upon which the claim is founded. 
(2) The reporting period with regard to which the claimant made the overpayment being claimed as a refund.
(3) The amount of the refund being claimed, if known.
(4) Information necessary to contact the claimant or claimant's authorized representative.
(b) Sales and Use Tax Claims. Claims for refund filed under the Sales and Use Tax Law may also break down the claimed refund into state, local, and district tax amounts. 
(c) Multiple Claims. If a single claim for refund is filed for more than one reporting period, the claimant may separately state the information required by subdivisions (a) and (b) for the periods of the claim.
(d) Supporting Documentation. Claims for refund may be accompanied by whatever copies of supporting written arguments and documentary evidence is necessary to verify and approve the claim. Failure to include such information along with a claim may delay its processing.
(e) Forms. The use of a completed form provided by the Board for use as a claim for refund will satisfy the requirements of this section (other than subdivision (d)). However, this subdivision does not require taxpayers to use a form.
(f) Returns and Payments. In no event may the claimant deduct amounts included in a claim for refund from the amount required to be reported and paid for any reporting period. 
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6904, 8129, 9153, 12979, 30176, 30176.1, 30176.2, 30177, 30363, 32402, 32402.1, 32407, 38603, 40113, 41102, 43452, 45652, 46503, 50140, 55222, 60501, 60502, 60505, 60505.5 and 60523, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5232.4. Contents of Claims for Refund Under Diesel Fuel Tax Law.
Note     •     History

Notwithstanding section 5232, claims for refund of payments made with respect to the Diesel Fuel Tax Law must be prepared and filed in the following manner:
(a) Diesel Fuel that is Lost, Sold, or Removed. 
(1) A claim for refund must satisfy the requirements of paragraph (2) if it is based upon the grounds that:
(A) Tax was imposed on the diesel fuel to which the claim relates; and
(B) The claimant bought or produced the diesel fuel to which the claim relates and the same diesel fuel was:
(i) Used for purposes other than operating motor vehicles upon the public highways of California;
(ii) Exported for use outside of California;
(iii) Used in construction equipment that is exempt from registration under the Vehicle Code;
(iv) Used in the operation of a motor vehicle on any highway that is under the jurisdiction of the United States Department of Agriculture;
(v) Used in any motor vehicle owned by any county, city and county, city, district, or other political subdivision or public agency;
(vi) Sold by a supplier to any consulate office or consulate employee;
(vii) Lost in the ordinary course of handling, transportation, or storage;
(viii) Sold to the United States, its agencies, or instrumentalities;
(ix) Sold to a train operator for use in a diesel-powered train or other off-highway use; or
(x) Removed from an approved terminal at the terminal rack.
(2) A claim for refund based upon the grounds described in paragraph (1) must:
(A) Be prepared and filed on a form prescribed by the Board.
(B) Be accompanied by the original invoice showing the purchase, or, if no original invoice was created, an electronic invoice and the original bill of lading or fuel manifest.
(C) Include the name, address, telephone number, and permit number of the person that sold the diesel fuel to the claimant and the date of the purchase.
(D) Include the claimant's statement that the diesel fuel covered by the claim did not contain visible evidence of dye.
(E) Include a statement by the person who sold the diesel fuel to the claimant that the diesel fuel did not contain visible evidence of dye.
(F) Identify the total amount of diesel fuel covered by the claim.
(G) Describe the use made of the diesel fuel.
(H) Be accompanied by proof that the diesel fuel was exported, if the claim is based upon the grounds that the diesel fuel was exported.
(3) Claims for refund based upon the grounds provided for in paragraph (1) must be filed on a calendar year basis, except that claims for refund of more than $750 may be filed for a quarter of a calendar year.
(b) Ultimate Vendors of Diesel Fuel. A claim for refund based upon the grounds that the claimant was an ultimate vendor that sold tax-paid diesel fuel to an ultimate purchaser for use on a farm for farming purposes, or use in an exempt bus operation may not be filed for an amount less than $200 or a period shorter than one week and must:
(1) Be prepared and filed on a form prescribed by the Board.
(2) Contain the claimant's permit number.
(3) Include the name, address, telephone number, and permit number of the person that sold the diesel fuel to the claimant and the date of the purchase.
(4) Include the name, address, telephone number, and federal taxpayer identification number of each farmer or the permit number of each exempt bus operator that bought the diesel fuel from the claimant and the number of gallons of diesel fuel the claimant sold to each.
(5) Include the claimant's statement that the diesel fuel covered by the claim did not contain evidence of visible dye.
(6) Identify the total amount of diesel fuel covered by the claim.
(7) Include the claimant's statement that it has an unexpired exemption certificate described in Revenue and Taxation Code section 60503 and has no reason to believe the certificate is false.
(8) Include the claimant's statement that the amounts claimed have not been refunded to the claimant previously.
(c) Persons filing claims for refund under this section must use the proper form prescribed by the Board and should contact the Fuel Taxes Division for the appropriate form. 
(d) Other Claims. Claims for refund under the Diesel Fuel Tax Law that are not described in subdivision (a) or (b) may be filed in the manner provided for in section 5232. 
NOTE

Authority cited: Section 15606, Government Code; and Section 60601, Revenue and Taxation Code. Reference: Sections 60501, 60502, 60505, 60505.5 and 60523, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5232.6. Requirements for Claims for Refund Regarding Lost, Unmarketable or Condemned Alcoholic Beverages.
Note     •     History

A claim for refund based upon the grounds provided for in Revenue and Taxation Code section 32407 must satisfy the requirements of California Code of Regulations, title 18, section 2553.
NOTE

Authority cited: Section 15606, Government Code; and Section 32451, Revenue and Taxation Code. Reference: Section 32407, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5232.8. Additional Requirements for Claims for Refund Filed under the Cigarette and Tobacco Products Tax Law.
Note     •     History

In addition to the requirements of section 5232, claims for refund of amounts paid with regard to purchases of stamps or meter register settings must satisfy the requirements of and be prepared and filed on any form required by California Code of Regulations, title 18, sections 4061 through 4065. All other claims for refund filed under the Cigarette and Tobacco Products Tax Law are not required to comply with this additional requirement. Contact the Excise Taxes and Fees Division for the appropriate form.
NOTE

Authority cited: Section 15606, Government Code; and Section 30451, Revenue and Taxation Code. Reference: Sections 30176, 30176.1, 30176.2, 30177 and 30363, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5233. Filing Claims for Refund.
Note     •     History

(a) The Board encourages the use of electronic means (i.e., facsimile, e-mail, etc.) for the filing of claims for refund and related documents. A claim for refund or related document may be filed electronically under this section if an electronic copy of such document is transmitted to the appropriate section or group identified in subdivision (b) or (c) for the tax or fee law at issue in accordance with instructions provided on the Board's website at www.boe.ca.gov.
(b) Claims for refund and related documents filed under the Sales and Use Tax Law may also be mailed to the:

AUDIT DETERMINATION AND REFUND SECTION, MIC: 39
BOARD OF EQUALIZATION
P.O. BOX 942879
SACRAMENTO, CA 94279-0039
(c) Other claims for refund and supporting documents may be mailed to the address provided in this subdivision for the particular tax or fee law at issue:
(1) Hazardous Substances Tax Law (Except Childhood Lead Poisoning Prevention Fee), Covered Electronic Waste Recycling Fee, Integrated Waste Management Fee Law, Tire Recycling Fee, Occupational Lead Poisoning Prevention Fee, Water Rights Fee Law, and Marine Invasive Species Fee Collection Law.

ENVIRONMENTAL FEES DIVISION, MIC: 57
AUDIT UNIT
STATE BOARD OF EQUALIZATION
P.O. BOX 942879
SACRAMENTO, CA 94279-0057
(2) Tax on Insurers Law, Cigarette and Tobacco Products Tax Law, Alcoholic Beverage Tax Law, Energy Resources Surcharge Law, Emergency Telephone Users Surcharge, and Natural Gas Surcharge.

EXCISE TAXES DIVISION, MIC: 56
REFUND AND PETITION GROUP
STATE BOARD OF EQUALIZATION
P.O. BOX 942879
SACRAMENTO, CA 94279-0056
(3) Motor Vehicle Fuel Tax Law, Use Fuel Tax Law, Oil Spill Response, Prevention, and Administration Fees Law, Underground Storage Tank Maintenance Fee Law, Diesel Fuel Tax Law, and Childhood Lead Poisoning Prevention Fee.

FUEL TAX DIVISION, MIC: 30
REFUND GROUP
STATE BOARD OF EQUALIZATION
P.O. BOX 942879
SACRAMENTO, CA 94279-0030
(4) Timber Yield Tax Law.

TIMBER YIELD TAX SECTION, MIC: 60
STATE BOARD OF EQUALIZATION
P. O. BOX 942879
SACRAMENTO, CA 94279-0060
(d) A claim for refund and related documents may also be hand delivered to the Board's headquarters at 450 N Street in Sacramento, California.
(e) The Chief of Board Proceedings may reject any claim for refund or related document filed in any manner that is not authorized by this section. 
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6902, 8128, 9152, 12978, 30178, 30178.1, 30362, 32402, 32402.1, 32407, 38602, 40112, 41101, 43452, 45652, 46502, 50140, 55222, 60501, 60502, 60507, 60521 and 60522, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5234. Assignment and Acknowledgment of Claim for Refund.
Note     •     History

Once a claim for refund is received, it will be assigned to the appropriate section or group listed in section 5233 based upon the type of tax or fee at issue, and Board Staff from the assigned section will promptly send the claimant a letter acknowledging the claim, which will contain the contact information for the assigned section or group. 
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6901, 6902, 8126, 8128, 9151, 9152, 12977, 12978, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30361, 30362, 32401, 32402, 32402.1, 32407, 38601, 38602, 40111, 40112, 41100, 41101, 43451, 43452, 45651, 45652, 46501, 46502, 50139, 50140, 55221, 55222, 60501, 60502, 60507, 60521 and 60522, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5234.5. Review Process for Claims for Refund and Requests for Additional Information.
Note     •     History

Claims for refund are generally reviewed in the order that they are received. If additional documentary evidence is needed to verify and approve a claim, Board Staff from the assigned section or group will contact the claimant and request such information. The failure to provide such information upon request may result in a denial of the claim for refund.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6901, 6902, 6906, 8126, 8128, 9151, 9152, 12977, 12978, 12981, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30361, 30362, 30365, 32401, 32402, 32402.1, 32404, 32407, 38601, 38602, 38605, 40111, 40112, 40115, 41100, 41101, 41101.1, 41104, 43451, 43452, 43454, 45651, 45652, 45654, 46501, 46502, 46505, 50139, 50140, 50142, 55221, 55222, 55224, 60501, 60502, 60506, 60507, 60521 and 60522, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5235. Action on the Claim for Refund.
Note     •     History

(a) Once a claim for refund has been reviewed, Board Staff from the assigned section will recommend that the claim be:
(1) Granted in its entirety.
(2) Granted in part and denied in part.
(3) Denied in its entirety.
(b) If Board Staff in the assigned section or group recommends that a claim be granted in its entirety, Board Staff will:
(1) Send the claimant a notice of refund showing the amount to be refunded (subject to the requirements of section 5237); and
(2) Have a refund warrant prepared and sent to the claimant after determining if such amounts should be credited or offset against other liabilities as provided in section 5238.
(c) If Board Staff in the assigned section recommends that any claim be denied, Board Staff will send the claimant a letter containing its recommendation and an explanation of its reasons for making such recommendation.
(d) A claimant receiving a letter described in subdivision (c) may choose to agree or disagree with the recommendation in whole or in part.
(1) If the claimant agrees with a recommendation to grant a partial refund, Board Staff in the appropriate section will send the claimant a notice of refund showing the partial refund (subject to the requirements of section 5237). Thereafter, Board Staff in the assigned section or group will have a refund warrant prepared and sent to the claimant, but only after determining if such amounts should be credited or offset against other liabilities as provided in section 5238.
(2) If the claimant agrees with a recommendation to deny a refund in its entirety, Board Staff in the assigned section will send the claimant a notice of denial of claim for refund.
(3) If the claimant disagrees with a proposed recommendation to grant a partial refund or deny a refund in its entirety, the claimant may request that the recommendation be reconsidered in an:
(A) Appeals conference conducted under article 6 of this chapter; and/or
(B) Oral hearing before the Board. 
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6901, 6902, 6906, 8126, 8128, 9151, 9152, 12977, 12978, 12981, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30361, 30362, 30365, 32401, 32402, 32402.1, 32404, 32407, 38601, 38602, 38605, 40111, 40112, 40115, 41100, 41101, 41101.1, 41104, 43451, 43452, 43454, 45651, 45652, 45654, 46501, 46502, 46505, 50139, 50140, 50142, 55221, 55222, 55224, 60501, 60502, 60507, 60521 and 60522, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5236. Discretion to Grant or Deny Appeals Conferences and Oral Hearings on Claims for Refund.
Note     •     History

A request for an appeals conference conducted under article 6 of this chapter or oral hearing before the Board may be denied on a claim for refund. Requests will be liberally granted, however, requests may be denied if the claimant has already been provided with an appeals conference and oral hearing on the same issue, and has not submitted any additional arguments or evidence.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6901, 6902, 6906, 8126, 8128, 9151, 9152, 12977, 12978, 12981, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30361, 30362, 30365, 32401, 32402, 32402.1, 32404, 32407, 38601, 38602, 38605, 40111, 40112, 40115, 41100, 41101, 41101.1, 41104, 43451, 43452, 43454, 45651, 45652, 45654, 46501, 46502, 46505, 50139, 50140, 50142, 55221, 55222, 55224, 60501, 60502, 60507, 60521 and 60522, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5237. Board Approval Required for Refunds Over $100,000.
Note     •     History

(a) If Board Staff in the assigned section or group determines that a refund in excess of $100,000 should be granted, the recommendation for the proposed refund must be submitted to the Board.
(b) Once the recommendation is submitted to the Board, the Board has discretion to make its own determination as to whether a refund is warranted and in what amount, and will do so without further documentation or testimony from the claimant.
(c) Proposed determinations to grant claims for refund of duplicate or erroneous payments made through the electronic funds transfer program are exempt from the requirements of subdivision (a).
(d) Proposed determinations to grant claims for refund of duplicate or erroneous payments made through the electronic funds transfer program in excess of $100,000 must be submitted to the Executive Director for approval. If the Executive Director approves, Board Staff in the assigned section will send the claimant a notice of refund showing the amount to be refunded, and shall have a refund warrant prepared and sent to the claimant.
(e) Diesel Fuel Tax Law. Claims for refund filed under Revenue and Taxation Code sections 60501 and 60502 may be approved without complying with the requirements of this section.
(f) If Board Staff in the assigned section determines that a refund in excess of $100,000 should be denied, and the claimant has not disagreed with such determination by requesting an appeals conference with the Appeals Division or oral hearing before the Board, or confirmed a prior request for such a conference or hearing, or such prior requests were denied, the recommendation to deny the refund must be submitted to the Board for approval as provided in subdivision (a). 
(g) If Board Staff determines that a refund in excess of $50,000 should be granted and the determination is not required to be submitted to the Board, the proposed determination must be available as a public record for at least 10 days prior to its effective date.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6901, 8126, 9151, 12977, 30361, 32401, 38601, 40111, 41100, 43451, 45651, 46501, 50139, 55221 and 60521, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Amendment of section heading and subsections (a), (d) and (f) and new subsection (g) filed 1-20-2010; operative 2-19-2010 (Register 2010, No. 4).
§5238. Credits and Offsets May Reduce Refunds.
Note     •     History

(a) The amount shown as a refund on a notice of refund is the amount due to the claimant. However, that amount will not be paid directly to the claimant if it is subject to being credited or offset against other amounts owed by the claimant, which are then due and payable.
(b) Any portion of a claimant's refund remaining after the refund has been credited or offset against other amounts that are then due and payable from the claimant will be refunded to the claimant and paid to the claimant.
(c) Diesel Fuel Tax Law. Credits claimed on a return in lieu of claiming a refund under Revenue and Taxation Code sections 60501 and 60502 are not subject to the requirements of this section.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6483, 6512, 6901, 8126, 8778, 8802, 9151, 12426, 12977, 30176, 30176.1, 30176.2, 30177, 30203, 30222, 30361, 38413, 38422, 38601, 40073, 40082, 40111, 41072, 41081, 41100, 43201, 43451, 45201, 45651, 46201, 46252, 46501, 50113, 50139, 55001, 55221 and 60521, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5239. Combined Claims for Refund on Behalf of Class of Taxpayers.
Note     •     History

(a) This section only applies to combined claims for refund of the Sales and Use Tax, including State-administered local sales, transactions, and use taxes.
(b) Procedures Required of Class Representative. The representative claiming a refund on behalf of members of a class must establish:
(1) It is more beneficial to the class and to the State to proceed as a combined claim for refund rather than individually.
(2) The existence and the composition of the class, including:
(A) A description of the members sufficient to identify the persons making up the class.
(B) The approximate number of persons in the class.
(C) The manner in which and the time when the class members shall be identified and notified of the pendency of the combined claim.
(3) The issues of law and fact that are or are not common to all class members, and the approximate number of class members affected by each issue that is not common to all.
(4) The representative's written authority to act as representative for each class member, which authority must authorize Board Staff to release to the representative any confidential information in the Board's files that may be required in connection with the claim. This statement may include a separate claim for refund by the class member or may state that the class member joins in the combined claim.
(5) The representative is a member of the class and when and how the representative became a member. In addition, any unique legal or factual issues pertaining to the representative's claim and any differences between the representative's status as a class member and that of any other class member shall be described.
(6) The representative can fairly and adequately protect the interests of each member of the class and the representative's interests are not antagonistic to members of the class.
(7) When requested by Board Staff, that each member of the class has been notified of the pendency of the claim and each member has had a reasonable opportunity to join in or be excluded from the combined claim.
(c) Action to be Taken by Board Staff.
(1) If Board Staff finds that the claim is a proper combined claim it will, to the extent possible, act upon the claim in the same manner that it would act on any other claim. If Board Staff finds that the claim is not a proper combined claim, it will act only on claims by individual members and notify the representative that the claim is not valid as to others. In determining the amount of any refund due to any member of the class, the refund is limited to the amount of tax overpayment by that member under the tax law under which the claim was filed.
(2) Before a refund will be made to any member of the class, the amount of the tax overpayment by the member must be established and the representative or member must furnish or make available to Board Staff all contracts, documents, or records (or copies thereof) necessary to verify the overpayment and the amount thereof. If such contracts, documents, or records are not presented to or made available to Board Staff, the representative or member, will be deemed to have failed to exhaust the administrative remedies.
(d) Effect of Action on Combined Claims.
(1) Failure to commence a court action within 90 days after the mailing of the notice of the Board's action on a refund claim as provided in the tax law under which the claim was filed constitutes a waiver of any demand against the state on account of alleged overpayments. This waiver, however, does not apply to persons who have not previously been notified of the claim, or who have notified Board Staff that they desire to be excluded from the combined claim. Nor does the waiver apply to persons involved in a claim to the extent it has been declared invalid as distinguished from persons as to whom a claim has been denied.
(2) A judgment in any court action filed with respect to the denial of any claim is res judicata as to the claimant's tax liability or overpayments for the period involved.
NOTE

Authority cited: Section 15606(a), Government Code; and Sections 7051, 7202, 7203, 7261, 7262 and 7270, Revenue and Taxation Code. Reference: Sections 6814, 6904 and 6932, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 4A. Requests for Innocent Spouse Relief Under the Sales and Use Tax Law
§5240. Persons Who May File, Contents of, and Manner of Filing Requests for Innocent Spouse Relief (Sales and Use Tax, Including State-Administered Local Sales, Transactions, and Use Taxes).
Note     •     History

(a) Who May Request Relief. A divorced or separated individual that has a sales or use tax liability and meets the requirements of California Code of Regulations, title 18, section 1705.1, subdivision (a), may file a request for innocent spouse relief with the Board.
(b) Request Requirements. A request for innocent spouse relief must be:
(1) In writing.
(2) Signed and dated by the individual requesting relief.
(3) Specifically request innocent spouse tax relief.
(4) Identify the tax from which relief is sought.
(5) Contain all of the information requested on Form BOE-682-A, including a specific explanation as to why the individual requesting relief believes he or she should not be held responsible for the tax liability at issue.
(c) Use of Forms. A request for innocent spouse relief prepared and filed on a completed Form BOE-682-A satisfies the requirements of subdivision (b). 
(d) Limitation Period. A request for innocent spouse relief must be filed with the Board within the time periods provided in California Code of Regulations, title 18, section 1705.1, subdivision (e).
(e) Filing Requests. The Board encourages the use of electronic means (i.e., facsimile, e-mail, etc.) for the filing of request for innocent spouse relief and related documents. A request for innocent spouse relief or related document may be filed electronically under this section if a copy of the document is transmitted to the Offer in Compromise Section in accordance with instructions provided on the Board's website at www.boe.ca.gov. Requests for innocent spouse relief may be mailed to the Offer in Compromise Section at the following address:

OFFER IN COMPROMISE SECTION, MIC: 52
STATE BOARD OF EQUALIZATION
P.O. BOX 942879
SACRAMENTO, CA 94279-0052
A request for innocent spouse relief and related documents may also be hand delivered to the Board's headquarters at 450 N Street in Sacramento, California. The Chief of Board Proceedings may reject any request for innocent spouse relief or related document filed in any manner that is not authorized by this section. 
NOTE

Authority cited: Section 15606, Government Code; and Section 7051, Revenue and Taxation Code. Reference: Sections 6456, 7202, 7203, 7261, 7262 and 7270, Revenue and Taxation Code.
HISTORY

1. New article 4A (sections 5240-5242) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5241. Acknowledgement and Review of Requests for Innocent Spouse Relief.
Note     •     History

(a) Assignment and Review. Once received, a request for innocent spouse relief will be assigned to Board Staff in the Offer in Compromise Section who will:
(1) Send the individual requesting relief an acknowledge letter containing the contact information for the Offer in Compromise Section.
(2) Inform the non-requesting spouse that the request has been filed and the basis for the request, and permit the non-requesting spouse to submit information to support or counter the request.
(3) Evaluate the merits of the request.
(4) Request additional documentation from the individual requesting relief, if necessary.
(b) Granted Request for Innocent Spouse Relief. If Board Staff in the Offer in Compromise Section approves a request for innocent spouse relief, Board Staff will prepare and send the individual who requested relief a letter explaining the relief that was granted.
(c) Denied Request for Innocent Spouse Relief. If Board Staff in the Offer in Compromise Section denies a request for innocent spouse relief, Board Staff will:
(1) Prepare and send the individual requesting relief a letter explaining why the request was denied; and
(2) If it appears that the individual requesting relief might be eligible for other equitable relief as provided in California Code of Regulations, title 18, section 1705.1, subdivision (h), Board Staff in the Offer in Compromise Section will include a questionnaire and financial statement for the individual requesting relief to complete and return.
(d) Requests for Other Equitable Relief. If the individual requesting relief returns a completed questionnaire and financial statement, Board Staff in the Offer in Compromise Section will review the documents to see if other equitable relief is warranted using the factors provided in California Code of Regulations, title 18, section 1705.1, subdivision (h). Once this review is completed, Board Staff will mail the individual requesting relief a letter granting or denying equitable relief and explaining why such relief was granted or denied. 
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, Revenue and Taxation Code. Reference: Section 6456, 7202, 7203, 7261, 7262 and 7270, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5242. Requests for Reconsideration by the Board.
Note     •     History

(a) If a request for other equitable relief is denied, the individual requesting relief may request that the denial be reconsidered by the Board at an oral hearing as provided in California Code of Regulations, title 18, section 1705.1, subdivision (h). A request for an oral hearing may be denied on a request for other equitable relief, however, requests will be liberally granted.
(b) An oral hearing may be requested by following the instructions contained on the denial letter described in section 5241, subdivision (d). 
(c) If a request for an oral hearing is granted, the individual requesting relief may be required to participate in an appeals conference with the Appeals Division prior to the oral hearing.
NOTE

Authority cited: Section 15606, Government Code; and Section 7051, Revenue and Taxation Code. Reference: Section 6456, 7202, 7203, 7261, 7262 and 7270, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial correction providing inadvertently omitted History 1 (Register 2008, No. 41).
Article 4B. Successor's Request for Relief of Penalty Under the Sales and Use Tax Law
§5243. Successor's Request for Relief.
Note     •     History

A successor requesting relief from penalties as provided in California Code of Regulations, title 18, section 1702, subdivision (d)(2), may include its request for relief in its petition for reconsideration or amend its previously filed petition to include such request. If the successor has not filed a petition for reconsideration and does not intend to do so, the successor may file a request for relief from penalties without filing a petition for reconsideration. Every successor's request for relief filed under this section must include a written statement signed under penalty of perjury stating the facts upon which the claim for relief is based, regardless of whether the request is included in a petition for reconsideration. Such request for relief must be filed in accordance with the procedures in article 2A of this chapter for filing a petition for redetermination under the Sales and Use Tax Law.
NOTE

Authority cited: Section 15606, Government Code; and Section 7051, Revenue and Taxation Code. Reference: Section 6814, Revenue and Taxation Code.
HISTORY

1. New article 4B (section 5243) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 4C. Other Requests for Relief of Penalties and Interest
§5244. No Independent Right to Oral Board Hearing on a Request for Relief; Applicable Procedures for Requests Included in Petitions or Claims; and Association with Related Petitions or Claims.
Note     •     History

(a) In general, a person filing a request for relief described in this article does not have a right to an oral hearing before the Board on such request. A request for an oral hearing on a request for relief may be granted or denied.
(b) If a request for relief described in this article is included in a timely filed petition for redetermination or petition for reconsideration, or claim for refund, the procedures applicable to such petitions or claims apply to the request for relief. A request for relief included in a petition for redetermination or petition for reconsideration, or claim for refund must satisfy the requirements of this article applicable to such request. 
(c) Any request for relief filed under this article may be associated with any pending petition for redetermination, petition for reconsideration, or claim for refund filed by the same person and covering the same periods as the request for relief. 
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6592, 6593, 6593.5, 6596, 7657, 7657.1, 7658, 7658.1, 8877, 8878, 8878.1, 8879, 12636, 12637, 30282, 30283, 30283.5, 30284, 32255, 32256, 32256.5, 32257, 38452, 38453, 38454, 38455, 40102, 40103, 40103.5, 40104, 41096, 41097, 41097.5, 41098, 43157, 43158, 43158.5, 43159, 45155, 45156, 45156.5, 45157, 46156, 46157, 46157.5, 46158, 50112.2, 50112.3, 50112.4, 50112.3, 50112.4, 50112.5, 55044, 55045, 55046, 55046.5, 60209, 60210, 60211 and 60212, Revenue and Taxation Code.
HISTORY

1. New article 4C (sections 5244-5249.6) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5245. Authority to Grant Relief for Reasonable Cause and Contents of Requests for Relief for Reasonable Cause.
Note     •     History

(a) Authority to Grant Relief. If a person's failure to make a timely return, report, payment, or prepayment, or failure to comply with a written notice issued under Revenue and Taxation Code section 6074, subdivision (a) is due to reasonable cause and circumstances beyond the person's control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect, the person may be relieved of the following penalties imposed under:
(1) Sales and Use Tax Law. Revenue and Taxation Code sections 6074, 6476, 6477, 6479.3, 6480.4, 6480.8, 6511, 6565, 6591, 7051.2, 7073, and 7074.
(2) Motor Vehicle Fuel Tax Law. Revenue and Taxation Code sections 7655, 7659.5, 7659.6, 7659.9, 7660, 7705, 7713, 7726, and 7727.
(3) Use Fuel Tax Law. Revenue and Taxation Code sections 8760, 8801, 8854, and 8876.
(4) Tax on Insurers Law. Revenue and Taxation Code sections 12258, 12282, 12287, 12631, 12632, and 12633.
(5) Cigarette and Tobacco Products Tax Law. Revenue and Taxation Code sections 30171, 30190, 30221, 30264, and 30281.
(6) Alcoholic Beverage Tax Law. Revenue and Taxation Code sections 32252, 32260, 32291, and 32305.
(7) Timber Yield Tax Law. Revenue and Taxation Code sections 38421 and 38451.
(8) Energy Resources Surcharge Law. Revenue and Taxation Code sections 40067, 40081, 40096, and 40101.
(9) Emergency Telephone Users Surcharge Law. Revenue and Taxation Code sections 41060, 41080, 41090, and 41095.
(10) Hazardous Substances Tax Law. Revenue and Taxation Code sections 43155, 43170, and 43306.
(11) Integrated Waste Management Fee Law. Revenue and Taxation Code sections 45153, 45160, and 45306.
(12) Oil Spill Response, Prevention, and Administration Fees Law. Revenue and Taxation Code sections 46154, 46154.1, 46160, 46251, and 46356.
(13) Underground Storage Tank Maintenance Fee Law. Revenue and Taxation Code sections 50112, 50112.7, and 50119.
(14) Fee Collection Procedures Law. Revenue and Taxation Code sections 55042, 55050, and 55086.
(15) Diesel Fuel Tax Law. Revenue and Taxation Code sections 60207, 60250, 60301, 60338, 60355, 60361, and 60361.5.
(b) Contents of Request. 
(1) A request for relief based upon reasonable cause and circumstances beyond the person's control must be in writing, identify the penalty from which relief is sought, state the specific facts upon which the request is based, and be signed by the person requesting relief under penalty of perjury.
(2) Form BOE-735, Request for Relief of Penalty, may be used to prepare and submit a request for relief under this section. 
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6592, 7657, 8877, 12636, 30282, 32255, 38452, 40102, 41096, 43157, 45155, 46156, 50112.2, 55044 and 60209, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5246. Authority to Grant Relief Due to Unreasonable Error or Delay and Contents of Requests for Relief Due to Unreasonable Error or Delay.
Note     •     History

(a) A person may be relieved of interest imposed under the tax and fee laws described in subdivision (b), if the person was charged interest due to:
(1) Unreasonable error or delay:
(A) By Board Staff acting in his or her official capacity; and
(B) No significant aspect of the error or delay is attributable to an act or failure to act by the tax or fee payer.
(2) An error by an employee of the Department of Motor Vehicles in calculating the use tax due on a vehicle or vessel registered with the Department of Motor Vehicles.
(b) This section applies to interest imposed under the Sales and Use Tax Law, Motor Vehicle Fuel Tax Law, Use Fuel Tax Law, Cigarette and Tobacco Products Tax Law, Alcoholic Beverage Tax Law, Timber Yield Tax Law, Energy Resources Surcharge Law, Emergency Telephone Users Surcharge Law, Hazardous Substances Tax Law, Integrated Waste Management Fee Law, Oil Spill Response, Prevention, and Administration Fees Law, Underground Storage Tank Maintenance Fee Law, Fee Collection Procedures Law, and Diesel Fuel Tax Law.
(c) A request for relief of interest based upon the ground set forth in subdivision (a) of this section must:
(1) Be in writing;
(2) Specifically identify the error or delay that caused the person requesting relief to be charged interest;
(3) Specifically identify the period for which interest relief is sought; and
(4) Be signed by the person requesting relief under penalty of perjury.
(d) Form BOE 735-A, Request for Relief of Interest Unreasonable Error or Delay, may be used to prepare and submit a request for relief under this section.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6593.5, 7658.1, 8878.5, 30283.5, 32256.5, 38455, 40103.5, 41097.5, 43158.5, 45156.5, 46157.5, 50112.4, 55046 and 60212, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5247. Authority to Grant Relief Due to Reasonable Reliance on Written Advice and Contents of Requests for Relief Due to Reasonable Reliance on Written Advice.
Note     •     History

(a) A person may be relieved from liability for the payment of a tax or fee imposed under the tax and fee laws identified in subdivision (c), including any penalties and interest added thereto, where the liabilities resulted from the person's failure to make a timely report, return or payment and such failure is found to be due to reasonable reliance on:
(1) Written advice given under the conditions set forth in California Code of Regulations, title 18, section 1705, subdivision (b) or section 4902, subdivision (b); or
(2) Written advice in the form of an annotation or legal ruling of counsel under the conditions set forth in California Code of Regulations, title 18, section 1705, subdivision (c) or section 4902, subdivision (c); or
(3) Written advice given in a prior audit of that person under the conditions set forth in California Code of Regulations, title 18, section 1705, subdivision (d) or 4902, subdivision (d).
(b) Written advice may only be relied upon by the person to whom it was originally issued or a legal or statutory successor to that person.
(c) This section applies to taxes and fees imposed under the Sales and Use Tax Law, Motor Vehicle Fuel Tax Law, Use Fuel Tax Law, Cigarette and Tobacco Products Tax Law, Alcoholic Beverage Tax Law, Timber Yield Tax Law, Energy Resources Surcharge Law, Emergency Telephone Users Surcharge Law, Hazardous Substances Tax Law, Integrated Waste Management Fee Law, Oil Spill Response, Prevention and Administration Fee Law, Underground Storage Tank Maintenance Fee Law, Fee Collection Procedures Law, and the Diesel Fuel Tax Law.
(d) A request for relief due to reasonable reliance upon written advice must:
(1) Be in writing;
(2) Include the specific facts upon which the request for relief is based;
(3) Be signed by the person requesting relief under penalty of perjury; and
(4) Include an attached copy of the person's written request for written advice and a copy of the written advice relied upon.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6596, 7657.1, 8879, 30284, 32257, 38454, 40104, 41098, 43159, 45157, 46158, 50112.5, 55045 and 60210, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5248. Authority to Grant Relief Due to Disaster and Contents of Requests for Relief Due to Disaster.
Note     •     History

(a) If a person's failure to make a timely return or payment was due to a disaster, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect, the person may be relieved of interest imposed under:
(1) Sales and Use Tax Law. Revenue and Taxation Code sections 6459, 6480.4, 6480.8, 6513, 6591, and 6592.5.
(2) Motor Vehicle Fuel Tax Law. Revenue and Taxation Code sections 7655, 7656, 7659.9, 7661, and 7706.
(3) Use Fuel Tax Law. Revenue and Taxation Code sections 8754, 8760, 8803, and 8876.
(4) Tax on Insurers Law. Revenue and Taxation Code sections 12258, 12287, 12307, 12631, and 12632.
(5) Cigarette and Tobacco Products Tax Law. Revenue and Taxation Code sections 30815, 30190, 30223, and 30281.
(6) Alcoholic Beverage Tax Law. Revenue and Taxation Code sections 32252, 32253, 32260, and 32291. 
(7) Timber Yield Tax Law. Revenue and Taxation Code sections 38405, 38423, and 38451.
(8) Energy Resources Surcharge Law. Revenue and Taxation Code sections 40065, 40067, 40083, and 40101.
(9) Emergency Telephone Users Surcharge Law. Revenue and Taxation Code sections 41054, 41060, 41082, and 41095.
(10) Hazardous Substances Tax Law. Revenue and Taxation Code sections 43154, 43155, 43170, and 43201.
(11) Integrated Waste Management Fee Law. Revenue and Taxation Code sections 45152, 45153, 45160, and 45201.
(12) Oil Spill Response, Prevention, and Administration Fees Law. Revenue and Taxation Code sections 46153, 46154, 46160, and 46253. 
(13) Underground Storage Tank Maintenance Fee Law. Revenue and Taxation Code sections 50111, 50112, and 50112.7.
(14) Fee Collection Procedures Law. Revenue and Taxation Code sections 55041, 55042, 55050, and 55061.
(15) Diesel Fuel Tax Law. Revenue and Taxation Code sections 60207, 60208, 60250, 60302, and 60339.
(b) A request for relief of interest due to a disaster must:
(1) Be in writing;
(2) Identify the disaster due to which relief is sought;
(3) Identify the period for which relief is sought; and
(4) Be signed by the person requesting such relief under penalty of perjury.
(c) Form BOE-27, Penalty and Interest Relief for Disaster Victims, may be used to prepare and submit a request for relief under this section.
NOTE

Authority cited: Section 15606, Government Code; and sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6593, 7658, 8878, 12637, 30283, 32256, 38453, 40103, 41097, 43158, 45156, 46157, 50112.3, 55046.5 and 60211, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5249. Filing Requests for Relief.
Note     •     History

(a) A request for relief of an unpaid amount may be filed in the manner provided in section 5216 for the filing of a petition for redetermination concerning the same tax or fee law at issue in the request for relief.
(b) A request for relief of a previously paid amount may be filed in the manner provided in section 5233 for the filing of a claim for refund concerning the same tax or fee law at issue in the request for relief.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6592, 6593, 6593.5, 6596, 7657, 7657.1, 7658, 7658.1, 8877, 8878, 8878.1, 8879, 12636, 12637, 30282, 30283, 30283.5, 30284, 32255, 32256, 32256.5, 32257, 38452, 38453, 38454, 38455, 40102, 40103, 40103.5, 40104, 41096, 41097, 41097.5, 41098, 43157, 43158, 43158.5, 43159, 45155, 45156, 45156.5, 45157, 46156, 46157, 46157.5, 46158, 50112.2, 50112.3, 50112.4, 50112.5, 55044, 55045, 55046, 55046.5, 60209, 60210, 60211 and 60212, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5249.4. Assignment and Acknowledgement of Requests for Relief.
Note     •     History

(a) Sales and Use Tax Law.
(1) Generally, a request for relief of an unpaid amount filed under the Sales and Use Tax Law will be assigned to and reviewed by Board Staff in the Petitions Section. However, a request for relief of an amount included in a return, will be assigned to and reviewed by Board Staff in the Return Analysis Section regardless of whether the amount is paid. 
(2) A request for relief of a previously paid amount filed under the Sales and Use Tax Law may be treated as a claim for refund, and assigned to and reviewed by Board Staff in the Audit Determination and Refund Section under the procedures contained in article 3 of this chapter.
(b) Special Taxes. 
(1) A request for relief filed under any tax or fee law governed by this chapter (other than the Sales and Use Tax Law), will be assigned to and reviewed by Board Staff in the appropriate section responsible for the particular tax or fee law concerned.
(2) If the request for relief concerns previously paid amounts, the request will be treated as a claim for refund and assigned to and reviewed by Board Staff in the appropriate section under the procedures contained in article 3 of this chapter. 
(c) Once the request for relief is assigned, the assigned Board Staff will promptly send the person requesting relief an acknowledgement letter containing the contact information for the assigned section, which may include a request for additional information.
(d) This section does not apply to requests for relief included in a petition for redetermination, petition for reconsideration, or claim for refund that are reviewed in accordance with the procedures applicable to such petitions or claims.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6592, 6593, 6593.5, 6596, 7657, 7657.1, 7658, 7658.1, 8877, 8878, 8878.1, 8879, 12636, 12637, 30282, 30283, 30283.5, 30284, 32255, 32256, 32256.5, 32257, 38452, 38453, 38454, 38455, 40102, 40103, 40103.5, 40104, 41096, 41097, 41097.5, 41098, 43157, 43158, 43158.5, 43159, 45155, 45156, 45156.5, 45157, 46156, 46157, 46157.5, 46158, 50112.2, 50112.3, 50112.4, 50112.5, 55044, 55045, 55046, 55046.5, 60209, 60210, 60211 and 60212, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5249.6. Reviewing Requests for Relief.
Note     •     History

(a) The assigned Board Staff will review a request for relief to:
(1) Determine if the request satisfies the requirements of this article 4C; and
(2) Determine if relief is warranted.
(b) In reviewing a request for relief, the assigned Board Staff may request additional information from the person requesting relief.
(c) Once the review is completed, the assigned Board Staff may determine that:
(1) No relief is warranted;
(2) Partial relief is warranted; or
(3) Full relief is warranted.
(d) Once the determination in subdivision (c) is made, the assigned Board Staff shall prepare and mail the person requesting relief a letter containing his or her decision and an explanation thereof. 
(e) If the person requesting relief disagrees with the assigned Board Staff's decision, the person requesting relief may request reconsideration of the decision by the Deputy Director of the Sales and Use Tax or Special Taxes Department, as appropriate. Thereafter, the Deputy Director responsible for the tax or fee law concerned will prepare and mail the person requesting reconsideration a letter containing his or her decision on the request for reconsideration.
(f) If the person requesting relief disagrees with the Deputy Director's decision under subdivision (e), the person may request an oral hearing before the Board. While a person requesting relief under this section does not have a right to an oral hearing before the Board, a request for an oral hearing on a request for relief may be granted. If a request for an oral hearing is granted, the Board may require that the person requesting relief participate in an appeals conference conducted under article 6 of this chapter prior to the oral hearing.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6592, 6593, 6593.5, 6596, 7657, 7657.1, 7658, 7658.1, 8877, 8878, 8878.1, 8879, 12636, 12637, 30282, 30283, 30283.5, 30284, 32255, 32256, 32256.5, 32257, 38452, 38453, 38454, 38455, 40102, 40103, 40103.5, 40104, 41096, 41097, 41097.5, 41098, 43157, 43158, 43158.5, 43159, 45155, 45156, 45156.5, 45157, 46156, 46157, 46157.5, 46158, 50112.2, 50112.3, 50112.4, 50112.5, 55044, 55045, 55046, 55046.5, 60209, 60210, 60211 and 60212, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 5. Claims (Inquiries) of Incorrect or Non-Distribution of Local and District Taxes
§5250. Filing and Reviewing Claims and Inquiries Regarding Incorrect or Non-Distribution of Local and District Taxes.
Note     •     History

(a) A claim or inquiry regarding the incorrect or non-distribution of local or district taxes must meet the requirements of California Code of Regulations, title 18, sections 1807 and 1828, respectively. 
(b) The Board encourages the use of electronic means for the filing of claims and inquiries. A claim or inquiry, or supporting document, may be filed electronically under this section if it is transmitted to the Allocation Group in accordance with instructions provided on the Board's website at www.boe.ca.gov. A claim or inquiry, or supporting document, may also be hand delivered to the Board's headquarters at 450 N Street in Sacramento, California, or mailed to the:

ALLOCATION GROUP
AUDIT DETERMINATION AND REFUND SECTION, MIC: 39
BOARD OF EQUALIZATION
P.O. BOX 942879
SACRAMENTO, CA 94279-0039
The Chief of Board Proceedings may reject any claim or inquiry, or related document, filed in any manner that is not authorized by this section. 
(c) A claim or inquiry will be acknowledged and reviewed in accordance with the procedures contained in California Code of Regulations, title 18, section 1807 or 1828.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7202, 7203, 7261, 7262, 7270, Revenue and Taxation Code. Reference: Sections 7209 and 7223, Revenue and Taxation Code.
HISTORY

1. New article 5 (section 5250) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 6. Appeals Conferences
§5260. Referral to Appeals Division for Appeals Conference; Preferred Location for Appeals Conference.
Note     •     History

(a) If a petition for redetermination, petition for reconsideration, claim for refund, or request for innocent spouse or other equitable relief is referred to the Appeals Division for an appeals conference, Board Staff will contact the petitioner, claimant, or person requesting relief:
(1) To verify and update the person's contact information; and 
(2) Inquire as to whether the person would prefer that the appeals conference be held at a specific location.
(b) Unless the petitioner, claimant, or person requesting relief indicates another preference, the appeals conference will be held in the district office that conducted the petitioner's audit, recommended denial of the claimant's claim for refund, or recommended denial of a person's request for relief.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6456, 6538, 6562, 6592, 6593, 6593.5, 6596, 6814, 6901, 6902, 6906, 6981, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46511, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New article 6 (sections 5260-5268) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5261. Notice of Appeals Conference: Response to Notice of Appeals Conference; Submission of Additional Arguments and Evidence; Recording Appeals Conferences.
Note     •     History

(a) Board Proceedings Staff will prepare and mail the petitioner, claimant, or person requesting relief a Notice of Appeals Conference, which must include the date, time, and location of the appeals conference.
(b) Board Proceedings Staff will include a Response to Notice of Conference form with each Notice of Appeals Conference. A recipient of a Notice of Appeals Conference should complete and return the Response to Notice of Conference within 15 days of the date Board Proceedings Staff mailed the Notice of Appeals Conference.
(c) If the petitioner, claimant, person requesting relief, or other person described in section 5264 (other than the conference holder) has not already submitted all of its written arguments and documentary evidence prior to the issuance of the Notice of Appeals Conference, the arguments and evidence should be submitted to the Appeals Division within 15 days of the date Board Proceedings Staff mailed the Notice of Appeals Conference. 
(d) Appeals conferences are not recorded. If the petitioner, claimant or person requesting relief would like to record the appeals conference the person must check the appropriate box on the Response to Notice of Conference and agree to provide a copy of any recording or transcript to the Appeals Division upon request.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6456, 6538, 6562, 6592, 6593, 6593.5, 6596, 6814, 6901, 6902, 6906, 6981, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46511, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5262. Requests to Reschedule or Postpone Appeals Conferences.
Note     •     History

(a) The Board encourages the use of electronic means (i.e., facsimile, e-mail, etc.) for the filing of requests to postpone or reschedule an appeals conference. A request to postpone or reschedule an appeals conference may be filed electronically under this section if it is transmitted to the Board Proceedings Division in accordance with instructions provided on the Board's website at www.boe.ca.gov. Requests to postpone or reschedule an appeals conference may also be hand delivered to the Board's headquarters at 450 N Street in Sacramento, California, or mailed to the:

BOARD PROCEEDINGS DIVISION, MIC: 97
STATE BOARD OF EQUALIZATION
P.O. BOX 942879
SACRAMENTO, CA 94279-0097
The Chief of Board Proceedings may reject any request to postpone or reschedule an appeals conference filed in any manner that is not authorized by this section. 
(b) Rescheduling. If there is a scheduling conflict for an appeals conference scheduled to be held in-person at headquarters, by videoconference or by telephone, the appeals conference may be rescheduled with the same conference holder generally within 30 days to accommodate the parties. At the discretion of the Chief Counsel, a second rescheduling may be allowed. Board Proceedings Staff may reschedule an appeals conference scheduled to be heard at a district office to a different district office, to headquarters, to a videoconference, or a telephone conference, or may postpone the appeals conference to the same district office as provided in subdivision (c).
(c) Postponement. Postponements are only applicable to appeals conferences that are scheduled at a district office. A postponement results in the case being placed back into the inventory of unassigned cases and reassigned when appeals conferences are subsequently held at such district office. If a party requests a postponement of an appeals conference to be held at a district office within 15 days after the date of the Notice of Appeals Conference sent by Board Proceedings Staff and has sufficient justification for requesting the postponement, the Chief of Board Proceedings may allow the postponement. If a party requests a postponement of the appeals conference later than 15 days after the date of the Notice of Appeals Conference, and can demonstrate extreme hardship (e.g., illness, death, disaster) for requesting the postponement, the Chief Counsel may allow the postponement. The Chief Counsel may only grant a party's second or subsequent request to postpone a previously postponed appeals conference if the party requesting postponement can demonstrate extreme hardship, however, a previously postponed appeals conference may be rescheduled as provided in subdivision (b).
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6456, 6538, 6562, 6592, 6593, 6593.5, 6596, 6814, 6901, 6902, 6906, 6981, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46511, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5263. Ways to Expedite an Appeals Conference.
Note     •     History

(a) Board Proceedings Staff will schedule an appeals conference within 60 days of receiving written notice that the petitioner, claimant, or person requesting relief has agreed to:
(1) Attend an appeals conference at the Board's headquarter located at 450 N Street, Sacramento, California;
(2) Attend a video conference at one of the Board's district offices with the necessary equipment; or
(3) Participate in a telephone conference (Board Staff will place the call).
(b) Subdivision (a) only applies to written notices sent to the Board Proceedings Division at or before the due date of the Response to Notice of Conference. Such a written notice may be included in the Response to Notice of Conference.
(c) Once the deadline to file the written notice described in subdivision (a) has expired, Board Proceedings Staff will attempt to schedule an appeals conference as soon as practicable, if the petitioner, claimant, or person requesting relief notifies the Board Proceedings Division that it is willing to appear on shortened notice.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6456, 6538, 6562, 6592, 6593, 6593.5, 6596, 6814, 6901, 6902, 6906, 6981, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46511, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5264. Conducting the Appeals Conference; Parties to the Appeals Conference; Nature of the Appeals Conference; Failure to Appear.
Note     •     History

(a) Appeals Staff. The appeals conference will be held by Appeals Staff that has not had any prior involvement in the matter being discussed at the appeals conference. It is the responsibility of Appeals Staff to take a fresh look at the law and the facts and make Appeals Staff's own objective recommendation.
(b) Department Representative. Generally, Board Staff from the appropriate Department will be present at the appeals conference to provide the reasons for determining that a tax or fee is due, a claim for refund should be denied, or a request for relief should not be granted. Where appropriate, other Board Staff may be present at the appeals conference. 
(c) Other Agency Representatives. A representative from another state agency may be present at appeals conferences where the tax or fee at issue is administered by the representative's agency. Such a representative will provide his or her agency's reasons for determining that the tax or fee at issue is due or should not be refunded.
(d) Nature of Appeals Conference. The appeals conference is not an adversarial proceeding; it is an informal discussion of the relevant facts and applicable laws. As such, it is important that all relevant information be presented to Appeals Staff.
(1) A party may submit additional written arguments and documentary evidence to Appeals Staff at any time before or during the appeals conference. (When possible, such arguments and evidence should be submitted within 10 days of receipt of a Notice of Appeals Conference.)
(2) If any party requests permission to submit additional written arguments and documentary evidence at the appeals conference, Appeals Staff may grant that party 15 days after the appeals conference to submit such arguments and evidence. If there is sufficient justification, Appeals Staff may also grant the requesting party an additional 15 days to submit additional written arguments and documentary evidence. Appeals Staff may not grant further extensions of time to submit additional written arguments and documentary evidence without the approval of the Assistant Chief Counsel of the Appeals Division or his or her designee.
(3) If a party submits additional written arguments and documentary evidence after the appeals conference, the other party will be granted 15 days to respond to such arguments and evidence.
(e) Failure to Appear. If a petitioner, claimant, or person requesting relief, or an authorized representative fails to appear at an appeals conference, Appeals Staff will still hold the appeals conference as scheduled. 
(f) Once the appeals conference is concluded, Appeals Staff will take the petition, claim for refund, or request for relief under consideration.
NOTE

Authority cited: Section 15606,  Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6456, 6538, 6562, 6592, 6593, 6593.5, 6596, 6814, 6901, 6902, 6906, 6981, 7081, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46511, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5265. Issuance and Contents of a Decision and Recommendation.
Note     •     History

(a) Within 90 days after the submission of any additional documents as authorized in section 5264, subdivision (d), Appeals Staff must issue a written report containing Appeals Staff's findings, called a Decision and Recommendation, copies of which must be sent to all parties. The Chief Counsel may allow additional time beyond the 90 days to prepare the Decision and Recommendation. Both the request for additional time and the granting of additional time must be in writing and copies provided to all parties to the appeals conference.
(b) If a party does not appear at the appeals conference, the Decision and Recommendation will be based on all of the information in the file and any additional information provided by the parties, including information provided at the appeals conference. 
(c) The Decision and Recommendation must include all of the following:
(1) A concise statement of each issue raised by the petitioner, claimant, or person requesting relief;
(2) The position of Board Staff in the appropriate Department on each issue raised by the petitioner, claimant, or person requesting relief;
(3) A statement of the relevant law applicable to each issue raised by the petitioner, claimant, or person requesting relief;
(4) A clear application of the relevant law to all the relevant information presented to Appeals Staff;
(5) Appeals Staff's conclusions and recommendations after applying the relevant law to all of the relevant information; and
(6) A summary of any additional information or documentation that was not presented to Appeals Staff, which might be relevant to a resolution of the issues raised by the petitioner, claimant, or person requesting relief.
(d) Any party receiving a Decision and Recommendation that discovers a significant factual error should contact Appeals Staff immediately. Appeals Staff may revise the Decision and Recommendation or issue a supplemental Decision and Recommendation to correct such errors.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6456, 6538, 6562, 6592, 6593, 6593.5, 6596, 6814, 6901, 6902, 6906, 6981, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46511, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5266. Appeals Staff Recommendations; Requests for Reconsideration; Requests for Oral Hearings.
Note     •     History

(a) Appeals Staff may make the following recommendations in the Decision and Recommendation:
(1) Deny the petition, claim, or request for relief in its entirety.
(2) Grant the petition, claim, or request for relief in its entirety.
(3) Grant the petition, claim, or request for relief in part.
(4) That Board Staff in the appropriate Department re-audit the issues raised in the petition, claim, or request for relief as specified in the Decision and Recommendation.
(b) If the Decision and Recommendation recommends denial of the petition, claim, or request for relief in whole or in part, the petitioner, claimant or person requesting relief may:
(1) File a written request for Appeals Staff to reconsider the petition, claim, or request for relief no later than 30 days after the Decision and Recommendation was issued. 
(2) Disagree and file a written request for an oral hearing before the Board no later than 30 days after the Decision and Recommendation was issued. (A petitioner, claimant, or person requesting relief who has previously requested an oral hearing before the Board on the same petition, claim, or request for relief does not need to request an oral hearing at this time.)
(A) If an oral hearing is or was requested, Board Proceedings Staff will schedule an oral hearing before the Board, unless that request is waived. However, an oral hearing will not be provided if a request for a discretionary oral hearing is denied. 
(B) If an oral hearing has been requested, but it is unclear whether the petitioner, claimant or person requesting relief disagrees with any portion of its Decision and Recommendation (or supplemental Decision and Recommendation) Board Staff will:
(i) Contact the petitioner, claimant, or person requesting relief to inquire as to the existence of such disagreement; and
(ii) Only schedule an oral hearing before the Board if the petitioner, claimant, or person requesting relief confirms that such disagreement exists.
(3) Agree with the Decision and Recommendation. 
(c) If the Decision and Recommendation recommends that a petition, claim, or request for relief be granted in whole or in part, the Department represented at the appeals conference, and any state agency represented at the appeals conference, may:
(1) File a written request for Appeals Staff to reconsider the petition, claim, or request for relief within 30 days after the Decision and Recommendation was issued.
(2) Agree with the Decision and Recommendation.
(d) Notwithstanding subdivision (c), if the Decision and Recommendation recommends that a petition, claim for refund, or request for relief be granted in whole or in part, any state agency represented at the appeals conference may file a written request for an oral hearing before the Board no later than 30 days after the Decision and Recommendation was issued. If an oral hearing is requested, Board Proceedings Staff will schedule an oral hearing before the Board, unless that request is waived. However, an oral hearing will not be provided if a request for a discretionary oral hearing is denied. 
(e) If Appeals Staff receive a request for reconsideration, Appeals Staff will prepare a Supplemental Decision and Recommendation addressing any new information provided in the request for reconsideration, copies of which will be sent to all parties. Appeals Staff may also issue a Supplemental Decision and Recommendation as necessary to clarify or correct the information, analysis, or conclusion contained in a Decision and Recommendation or prior Supplemental Decision and Recommendation. A Supplemental Decision and Recommendation must satisfy all the requirements of section 5265, subdivision (c).
(f) If a Decision and Recommendation or Supplemental Decision and Recommendation recommends that a petition, claim, or request for relief be granted in whole or in part and the amount granted exceeds $100,000, the recommendation will be sent to the Board for approval. Once the recommendation is submitted to the Board, the Board has discretion to make its own determination as to whether the petition, claim, or request should be granted and in what amount, and will do so without further documentation or testimony from the claimant, unless the claimant has requested and been granted an oral hearing before the Board regarding a partial denial of the same claim for refund.
(g) If a Decision and Recommendation or Supplemental Decision and Recommendation recommends that an amount that exceeds $50,000 be refunded, credited or canceled and the recommendation does not require Board approval, the proposed determination to refund, credit, or cancel such amount must be available as a public record for at least 10 days prior to its effective date. If a Decision and Recommendation or Supplemental Decision and Recommendation recommends that an amount that exceeds $15,000, which was determined pursuant to the Integrated Waste Management Fee Law, be canceled and the recommendation does not require Board approval, the proposed determination to cancel such amount must be available as a public record for at least 10 days prior to its effective date.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6456, 6538, 6562, 6592, 6593, 6593.5, 6596, 6814, 6901, 6902, 6906, 6981, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46511, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Amendment of subsection (f) and new subsection (g) filed 1-20-2010; operative 2-19-2010 (Register 2010, No. 4).
§5267. Issuance of Post Appeals Conference Notices.
Note     •     History

(a) A Notice of Redetermination, Statement of Account, Notice of Refund, or Denial of Claim will be issued based on a Decision and Recommendation if:
(1) The petitioner, claimant, or person requesting relief and the department or other agency represented at the appeals conference agree with the Decision and Recommendation in its entirety;
(2) The petitioner, claimant, person requesting relief, or another agency represented at the appeals conference do not request an oral hearing before the Board; or
(3) The petitioner, claimant, or person requesting relief's request for a discretionary oral hearing is denied.
(b) Notwithstanding the provisions of subdivision (a), a Notice of Determination, Statement of Account, or Notice of Refund will not be issued based upon a Decision and Recommendation if:
(1) The Decision and Recommendation recommends granting a petition or claim for refund because the petitioner or claimant:
(A) Accepted a valid resale or exemption certificate; or
(B) Did not issue a valid resale or exemption certificate.
(2) Appeals Staff recommends imposing a related liability on:
(A) The person who issued the resale or exemption certificate described in subparagraph (A) of paragraph (1) of this subdivision; or
(B) The person who sold tangible personal property without receiving a valid resale or exemption certificate from the petitioner or claimant described in paragraph (1) of this subdivision;
(3) The person described in paragraph (2) has requested and been granted an oral hearing to contest Appeals Staff's recommendation; and 
(4) The Chief Counsel determines that both matters should be consolidated for an oral hearing before the Board.
(c) For purposes of this section, references to “Decision and Recommendation” include Supplemental Decisions and Recommendations described in section 5266.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6456, 6538, 6562, 6592, 6593, 6593.5, 6596, 6814, 6901, 6902, 6906, 6981, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46511, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5268. Procedures for Conducting Board Hearings.
Note     •     History

Board hearings will be conducted under the hearing procedures set forth in chapter 5 of this division. 
NOTE

Authority cited: Section 15606(a), Government Code; Sections 105190 and 105310, Health and Safety Code; Sections 7051, 7202, 7203, 7261, 7262, 7270, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 44003, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code; and Section 893, Public Utilities Code. Reference: Sections 6561, 6814, 6902, 7710, 8128, 8851, 9152, 12428, 12978, 30261, 30362, 32301, 32402, 38441, 38602, 40091, 40112, 41085, 41101, 43301, 43452, 45301, 45652, 46351, 46502, 50114, 50140, 55081, 55222, 60350 and 60522, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 7. Optional Briefs for Board Hearings
§5270. Requirements for Briefs; Briefing Schedule; Non-Party Briefs; Additional Briefing.
Note     •     History

(a) Optional Briefing. If a party to an Appeals Conference or person requesting relief is granted a hearing before the Board, the parties to such hearing may submit briefs in accordance with the rules set forth in this section. However, all briefs permitted to be filed under this section, other than briefs required by paragraphs (1) and (3) of subdivision (f), are optional.
(b) Requirements for Briefs. 
(1) Timeliness. All briefs must be filed within the time periods provided in this section unless an extension is granted by the Chief Counsel in accordance with section 5271. 
(2) Filing. 
(A) Electronic Filing. The Board encourages the use of electronic means (i.e., facsimile, e-mail, etc.) for the filing of briefs and related documents. Briefs and related documents may be filed electronically under this section if they are transmitted to the Chief of Board Proceedings in accordance with instructions provided on the Board's website at www.boe.ca.gov. 
(B) Other Methods. Briefs and related documents may also be hand delivered to the Board's headquarters at 450 N Street in Sacramento, California, or mailed to the Chief of Board Proceedings, at the following address: 

CHIEF OF BOARD PROCEEDINGS, MIC: 80
STATE BOARD OF EQUALIZATION
P.O. BOX 942879
SACRAMENTO, CA 94279-0080
(C) The Chief of Board Proceedings may reject any brief or related document filed in any manner that is not authorized by this section. 
(D) Notice. All briefs shall also be mailed or personally delivered to the other parties to the Board hearing, other than the Department represented at the appeals conference under section 5264, subdivision (b). 
(3) Format. Briefs may not exceed:
(A) 30 typed or handwritten, double-spaced, or 15 typed or handwritten, single-spaced;
(B) 8 1/2” by 11” pages;
(C) Printed only on one side in a type-font size of at least 10 points or 12 characters per inch, or the equivalent;
(D) Excluding exhibits. 
(4) The Chief Counsel may extend the page limit in paragraph (3) prior to the deadline for filing a brief based upon a written application setting forth circumstances that justify additional pages. In the event a brief does not conform to the form and page limits specified above, the submitted brief may be returned by the Chief of Board Proceedings. If a brief is so returned, the party will be given 10 days to comply with the form and page limits, and failure to do so within the 10-day period constitutes a waiver of the opportunity to submit the brief.
(c) Opening Briefs. Any party that requested a Board hearing under section 5266 may file an opening brief. An opening brief must contain a statement of the issues, a statement of the facts, and a discussion of the legal authorities, including statutes and regulations, relied on by the party submitting the opening brief. Opening briefs must be filed with the Chief of Board Proceedings no later than 55 days before the Board hearing.
(d) Reply Briefs. Any party to a Board hearing may file a reply brief in response to any opening brief. A reply brief must contain a statement of the issues, including relevant issues not raised by the opening brief, a statement of the facts as understood by the party submitting the reply brief, a discussion of the legal authorities, including relevant statutes and regulations, relied on by the party submitting the reply brief, and the assertion of any affirmative defenses. Reply briefs must be filed with the Chief of Board Proceedings no later than 35 days before the Board hearing.
(e) Response to Reply Brief. Any party to a Board hearing may file a response to a reply brief. A response to a reply brief may only address new issues or arguments raised in the reply brief to which it responds. A response to a reply brief must be filed with the Chief of Board Proceedings no later than 20 days before the Board hearing. The Chief of Board Proceedings must reject a response to a reply brief that exceeds the scope permitted by this subdivision.
(f) Additional Briefing.
(1) Post-Hearing Briefs. The Board may permit or require the filing of post-hearing briefs and memoranda of legal authorities, including relevant statutes and regulations, on any matters considered at a Board hearing. However, any post-hearing submissions are permitted only by order of the Board, on the subject matter specified, and within the time limits prescribed by the Board.
(2) Non-Party (Amicus) Briefs. A person that is not a party to a Board hearing may file a brief or letter with the Chief of Board Proceedings no later than 20 days before the Board hearing, and the parties may file responses to such brief or letter with the Chief of Board Proceedings no later than 10 days before the hearing. The response by any party may address only the points of disagreement the party has with the non-party brief or letter. A non-party post-hearing brief or letter may be filed only if the Board has requested post-hearing briefing from the parties and then no later than the end of the post-hearing briefing period prescribed by the Board for the parties. A non-party brief must conform to the general requirements set forth in subdivision (b). A non-party brief or letter must contain a statement regarding the nature of the non-party's interest in the outcome of the proceeding.
(3) Additional briefing. In extraordinary situations, the Board or Appeals Staff may request additional briefing from either party after the briefing period is ordinarily complete. Any such requested briefing must be filed within the time specified by the Board or Appeals Staff.
(g) Briefs Filed by Unrepresented Parties. Notwithstanding subdivisions (c), (d), and (e), a party who appears at a Board hearing without a representative, and who has not employed a representative to prepare a brief, may, at the discretion of the Board, submit a brief on the day of the hearing. A party who receives representation from a Board-approved pro bono or clinical program is considered to be unrepresented for purposes of this subdivision.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6456, 6538, 6562, 6592, 6593, 6593.5, 6596, 6814, 6901, 6902, 6906, 6981, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46511, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New article 7 (sections 5270-5271) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5271. Extensions of Time for Filing Briefs.
Note     •     History

The Chief Counsel may grant a reasonable extension of time for the filing of any brief, upon a showing of reasonable cause. The request for an extension of time must be submitted in writing before the scheduled due date of any brief. If an extension of time is granted for the filing of any brief, the Chief Counsel will also grant an appropriate extension of time for filing a response to such brief. 
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6456, 6538, 6562, 6592, 6593, 6593.5, 6596, 6814, 6901, 6902, 6906, 6981, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46511, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Chapter 3. Property Taxes
Article 1. Application of Chapter and Definitions
§5310. Application of Chapter.
Note     •     History

(a) This chapter applies to:
(1) Petitions for reassessment of unitary and nonunitary assessed value and escaped or excessive assessment of state-assessed properties (including petitions for abatement of penalty), petitions for correction of assessment allocation, petitions for reassessment of private railroad car value, and assessment factor hearings for state-assessed properties and private railroad cars;
(2) Applications for review, equalization, and adjustment of the assessment of publicly-owned lands and improvements under subdivision (g) of section 11 of article XIII of the California Constitution;
(3) Petitions objecting to the County-Assessed Properties Division's findings of ineligibility for an organizational clearance certificate under section 254.6 of the Revenue and Taxation Code, denials of claims for supplemental clearance certificates under Revenue and Taxation Code section 214, subdivision (g), and claims for the veterans' organization exemption under Revenue and Taxation Code section 215.1.
(4) Petitions filed with the Board by county assessors under Government Code section 15640 et seq.
(b) To the extent this chapter does not contain a specific rule or procedure, the rules and procedures in chapter 5 (commencing with section 5510) of this division apply. Where there is a conflict between chapter 5 and this chapter, the provisions of this chapter control.
NOTE

Authority cited: Sections 15606 and 15640, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270, 721, 721.5, 747, 759, 1840 and 11251, Revenue and Taxation Code.
HISTORY

1. New chapter 3 (articles 1-4), article 1 (sections 5310-5312) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Change without regulatory effect amending subsection (a)(3) filed 7-16-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 29).
§5311. Definitions.
Note     •     History

(a) The definitions contained in sections 5511 and 5512 of this division apply to this chapter unless otherwise indicated.
(b) The following definitions also apply to this chapter:
(1) “Appeals Conference” means a conference conducted by the Appeals Division, at which all parties are entitled to attend and at which issues raised in the petition are to be discussed, and if possible, resolved.
(2)”Appraisal Data Report” means, for state assesses subject to the provisions of article 2 of this chapter, a document and data sheet that accompany the Board's value determination required to be mailed to each state assessee between the first day of January and the first day of June of each year. The appraisal data report sets forth the State-Assessed Properties Division's value recommendation to the Board and a summary of the State-Assessed Properties Division's value indicators. 
(3) “County-Assessed Properties Division” means the unit of the Board's Property and Special Taxes Department responsible for making determinations of eligibility for organizational clearance certificates and supplemental clearance certificates.
(4) “County-Assessed Properties Division” means the unit of the Board's Property and Special Taxes Department responsible for reviewing the assessment practices of county assessors under Government Code section 15640 et seq. 
(5) A “Hearing Summary” is a written document intended to assist the Board in its consideration of and decision on a petition for which an oral hearing has been scheduled. The Hearing Summary will contain:
(A) Sufficient facts, contentions, law, and evidence to enable the Board to conduct an informed oral hearing;
(B) A discussion of the appeals conference, if one was held, including any additional information, stipulations, and resolutions resulting therefrom;
(C) The Appeals Division's analysis and comments, including questions to be posed to the parties; and
(D) Conclusions and recommendations of the Appeals Division after applying the relevant law to all of the relevant information.
(6) “Organizational Clearance Certificate” means a certificate issued by the Board under Revenue and Taxation Code section 254.6.
(7) “Party” means:
(A) For petitions described in section 5310, subdivision (a)(1), the petitioner and the State-Assessed Properties Division; 
(B) For applications described in section 5310, subdivision (a)(2), the petitioner and the county assessor and tax agency whose assessment is questioned by a petition described in section 5310, subdivision (a)(2);
(C) For petitions described in section 5310, subdivision (a)(3), the petitioner and the County-Assessed Properties Division;
(D) For petitions described in section 5310, subdivision (a)(4), the petitioner and the County-Assessed Properties Division.
(8) “Petition” means a petition or application described in section 5310.
(9) “Petitioner” means an individual or entity that filed a petition described in section 5310, and the individual or entity's authorized representative where appropriate, and includes:
(A) A county, city, city and county, or municipal corporation that filed a petition with the Board under subdivision (g) of section 11 of article XIII of the California Constitution.
(B) The claimant of an Organizational Clearance Certificate for the property tax welfare exemption under Revenue and Taxation Code section 254.6 or Supplemental Clearance Certificate under Revenue and Taxation Code section 214, subdivision (g). For purposes of a petition from the denial of a Supplemental Clearance Certificate under Revenue and Taxation Code section 214, subdivision (g), the limited partnership is the petitioner.
(C) The county assessor and the taxing agency that filed a petition described in section 5310, subdivision (a)(4).
(10) “Respondent” means:
(A) For petitions described in section 5310, subdivision (a)(1), the State-Assessed Properties Division; 
(B) For applications described in section 5310, subdivision (a)(2), the county assessor and tax agency whose assessment is questioned by a petition described in section 5310, subdivision (a)(2);
(C) For petitions described in section 5310, subdivision (a)(3), the County-Assessed Properties Division;
(D) For petitions described in section 5310, subdivision (a)(4), the County-Assessed Properties Division.
(11) “Sample finding” refers to the sampling of assessments from the county assessment roll under Government Code section 15640, subdivision (c). 
(12) “Summary Decision” means a written document intended to assist the Board in its consideration of and decision on a petition without an oral hearing. The Summary Decision must contain:
(A) Sufficient facts, contentions, law, and evidence to enable the Board to evaluate the merits of the petition;
(B) A discussion of the appeals conference or other Appeals Division review, including any findings, stipulations, and resolutions resulting therefrom; and
(C) The Appeals Division's analysis and recommended decision.
(13) “Supplemental Clearance Certificate” means a certificate issued by the Board under Revenue and Taxation Code section 214, subdivision (g).
(14) “Tax and Fee Programs Division” means the unit of the Board's Legal Department responsible for representing the Department, as defined in Chapter 5, General Board Hearing Procedures, in responding to petitions described in section 5310, subdivision (a)(1), (a)(3), and (a)(4).
(15) “State-Assessed Properties Division” means the unit in the Board's Property and Special Taxes Department responsible for determining value indicators and recommending values of property under the Board's assessment jurisdiction and for administering the Board's state assessment responsibilities.
(16) “State-Assessed Properties Division's Analysis” means a written summary that sets forth an analysis of all of the issues raised in the petition and the State-Assessed Properties Division's recommendation. 
(17) “Written Findings and Decision” means a document prepared by the Appeals Division that sets forth the Board's decision on a petition and the supporting reasons therefor. 
NOTE

Authority cited: Sections 15606 and 15640, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270, 721, 721.5, 747, 759, 1840 and 11251, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Change without regulatory effect amending subsection (b)(7)(B) filed 7-16-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 29).
§5312. Application of Articles 2, 3, and 4.
Note     •     History

(a) State-Assessed Property and Private Railroad Cars. The provisions of article 2 of this chapter apply to petitions described in section 5310, subdivision (a)(1), and do not apply to any other petitions. 
(b) Other Property Tax Petitions. The provisions of article 3 of this chapter apply to petitions described in section 5310, subdivision (a)(2), (a)(3), and (a)(4), and do not apply to any other petitions. 
(c) General Board Hearing Procedures. The provisions of article 4 of this chapter apply to all petitions described in section 5310.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 721, 721.5, 747, 759 and 11251, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 2. Petitions for Reassessment of State-Assessed Property and Private Railroad Cars
Subarticle 1. Application of Article
§5321. Application of Article.
Note     •     History

This article applies to petitions for reassessment of unitary and nonunitary assessed value and escaped or excessive assessment of state-assessed properties (including petitions for abatement of penalty), petitions for correction of assessment allocation, petitions for reassessment of private railroad car value, and assessment factor hearings for state-assessed properties and private railroad cars.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 721, 721.5, 747, 759 and 11251, Revenue and Taxation Code.
HISTORY

1. New article 2 (subchapters 1-8), subchapter 1 (section 5321) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 1 to subarticle 1 (Register 2008, No. 13).
Subarticle 2. Assessments and Assessment Factor Hearings
§5322. Information Available to Assessees; Assessment Factor Hearings.
Note     •     History

(a) Each year, the State-Assessed Properties Division must perform capitalization rate studies and develop value indicators applicable to the valuation of the unitary property of each state assessee. The capitalization rate study, the value indicators, and all other appraisal data, calculations, and information developed or used by the State-Assessed Properties Division with respect to the valuation of the assessee's state-assessed property must be made available to the state assessee upon a written request to the Chief of the State-Assessed Properties Division. 
(b) At the discretion of the Board, but generally at the Board's February meeting in Sacramento, the Board may annually hold Assessment Factor Hearings to receive public testimony on issues relating to capitalization rates and other factors affecting values of state-assessed property and private railroad cars. At least 30 days before the Assessment Factor Hearing date, state assessees and private railroad car taxpayers, or other persons wishing to be listed on the agenda, must notify the Chief of Board Proceedings if they intend to make an oral presentation at the hearing. Testimony of persons who do not notify the Chief of Board Proceedings as set forth above may be heard after those on the agenda have completed their oral presentations. The Board may place reasonable time limits on any presentation. In lieu of oral presentations, state assessees, private railroad car taxpayers, or other persons may submit written presentations to the Chief of Board Proceedings no later than the date of the hearing.
(c) At the discretion of the Board, but generally at the Board's April meeting in Sacramento, every state assessee may be given an opportunity to make an oral presentation to the Board in a public meeting regarding the value indicators to be used to value its state-assessed unitary property, or the value of its property. In lieu of an oral presentation, a state assessee may submit a written presentation to the Chief of Board Proceedings no later than the date of the hearing. 
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 110, 721, 721.5, 722, 723, 724, 725, 731, 746, 11251, 11291, 11292 and 11293, Revenue and Taxation Code.
HISTORY

1. New subchapter 2 (sections 5322-5322.5) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 2 to subarticle 2 (Register 2008, No. 13).
§5322.5. Validity of Assessment.
Note     •     History

Validity of Assessment or Taxes. The failure to receive any notice required to be given by the Board or the failure of the Board to complete any action by a date specified under this article does not affect the validity of an assessment or the validity of any taxes levied pursuant thereto. 
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Section 725, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Subarticle 3. Contents of Petitions and Filing Deadlines
§5323. Time for Filing of Petitions.
Note     •     History

(a) Unitary Value or Penalty. If a state assessee disagrees with the value or penalty determined by the Board as set forth in the Notice of Unitary Assessed Value, the assessee must file a Petition for Reassessment of Unitary Value by July 20 of the calendar year in which the Notice of Unitary Assessed Value was issued. 
(b) Correction of Assessment Allocation. If a state assessee disagrees with an assessment allocation, the assessee must file a Petition for Correction of Assessment Allocation by July 20 of the calendar year in which the Notice of Assessment Allocation was issued.
(c) Nonunitary Value or Penalty. If a state assessee disagrees with the value or penalty determined by the Board as set forth in the Notice of Nonunitary Assessed Value, the assessee must file a Petition for Reassessment of Nonunitary Value by September 20 of the calendar year in which the Notice of Nonunitary Value was issued.
(d) Escaped/Excessive Assessment. If a state assessee disagrees with the value or penalty determined by the Board as set forth in the notice of escaped or excessive assessment, the assessee must file a petition for reassessment of escaped or excessive assessment no later than the date stated in the notice of escaped or excessive assessment mailed to the assessee at its address shown in the records of the Board.
(e) Private Railroad Cars. 
(1) If an owner or assessee disagrees with a value or penalty determined by the Board, the owner or assessee must file a Petition for Reassessment of Private Railroad Car Value on or before September 20 (or October 5, if extended in writing by the Board or its designee) of the year in which the Notice of Private Railroad Car value is issued. 
(2) If the Board fails to complete the private railroad car tax assessments on or before August 1 but completes the assessments in the following month under section 11651.5 of the Revenue and Taxation Code, the date for filing a petition for reassessment will be extended to October 20 (or November 4, if extended by the Board or its designee). 
(3) For any assessment made outside the regular assessment period, the Petition for Reassessment must be filed on or before the 50th day following the notice of the assessment. 
(4) If a petition is not timely received, the Board may consider the petition to be a claim for refund.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 731, 732, 741, 758, 11338, 11339 and 11651.5, Revenue and Taxation Code.
HISTORY

1. New subchapter 3 (sections 5323-5323.8) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 3 to subarticle 3 (Register 2008, No. 13).
§5323.2. Filing Requirements and Procedures for Contesting Private Railroad Car Jeopardy Assessments.
Note     •     History

The contesting of Private Railroad Car Tax jeopardy assessments is governed by the procedures set forth in chapter 2, article 2C of this division, except that if any of those procedures is inconsistent with Revenue and Taxation Code section 11351 et seq., the Revenue and Taxation Code sections control.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 11351, 11352, 11353 and 11354, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5323.4. Contents of the Petition.
Note     •     History

(a) All petitions must conform to the requirements in this section. 
(b) A valid and complete petition must:
(1) Be in writing and state the name and address of the petitioner, the Board-adopted value, the petitioner's opinion of value, and the precise elements of the Board's valuation or penalty that petitioner is contesting (including, for nonunitary property, the property identification information and location).
(2) State whether the petition constitutes a claim for refund under Revenue and Taxation Code section 5148, subdivision (f).
(3) State the facts relied upon to support the requested change in value and include supporting documents, including appraisal reports, financial studies, and any other materials relevant to determining the value of the petitioner's property or reasons why the penalty should be abated.
(4) State whether any or all of the following are requested: an appeals conference, oral hearing, or Written Findings and Decision. 
(5) Be signed by the petitioner or by an authorized representative. If the petition is signed by an agent, including an attorney licensed to practice law in the State of California, the agent must be authorized by the petitioner before the time the petition is filed. Both the petitioner's mailing address and the agent's mailing address must be provided in the petition. The following language must be contained in the signature block of the petition:
I certify (or declare) under penalty of perjury under the laws of the State of California that the foregoing and all information herein, including any accompanying statements or documents, is true, correct, and complete to the best of my knowledge and belief and that I am: (1) an officer, partner, or employee of the petitioner authorized to sign this petition; (2) an agent authorized by the petitioner; or (3) an agent who is any attorney licensed to practice law in the State of California, State Bar No. __________, who has been retained by the petitioner and has been authorized by the petitioner to file this petition.
(6) Be accompanied by a statement of authorization, if required as specified herein, or as specified in section 5323.8, Duplicate Petitions. If the petition is signed by an agent, other than an attorney licensed to practice law in the State of California, a statement of authorization, as described herein, or a power of attorney, as defined in chapter 5, General Board Hearing Procedures, is required. A statement of authorization must be in writing and must include the following information:
(A) Name and address of the petitioner;
(B) Petitioner's State Board of Equalization company identification number;
(C) Name, address, and telephone and facsimile numbers of the agent;
(D) Statement that the agent is authorized to file the petition and represent the petitioner in the petition; and
(E) Signature of an officer, partner, or an employee who has been designated by petitioner in writing to sign such statement on behalf of the petitioner.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 741, 744, 747 and 11340, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5323.6. Submission of Petition.
Note     •     History

The original petition and supporting documents, together with 10 copies thereof, must be submitted by mail or in person to the Chief of Board Proceedings as provided in section 5335. A compact disc containing an electronic file conforming to the requirements of the Board Proceedings Division will be accepted in lieu of the copies if submitted with the original petition.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Section 741, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5323.8. Duplicate Petitions.
Note     •     History

(a) In the event duplicate petitions are filed with the Chief of Board Proceedings, the Chief of Board Proceedings will determine which petition was authorized by petitioner. 
(b) The Chief of Board Proceedings will contact the petitioner and/or the agent who filed the duplicate petitions by telephone, electronic mail, or facsimile machine and by registered or certified mail with return receipt, and will allow 10 days for a written response. In the event no written response is received after 10 days, the first petition received will be accepted and all other petitions will be rejected as duplicate petitions.
(c) For purposes of this regulation, “duplicate petition” means a petition filed by the petitioner, or its agent on its behalf, subsequent to the petition previously filed by or on behalf of the same petitioner for the same assessment year at issue. A subsequent petition that seeks to correct or supplement a previously filed petition will not be considered a duplicate petition for purposes of this regulation.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Section 741, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Subarticle 4. Timeliness, Acceptance, and Dismissal of Petitions
§5324. Timeliness of Petition.
Note     •     History

(a) A petition is considered filed timely if it is addressed and transmitted to the address set forth in section 5335, or deposited personally at the headquarters office of the Board in Sacramento, no later than the date provided in section 5323 or, if an extension is received, section 5324.2. 
(b) Timely performance and mailing date will be determined under the provisions of chapter 5 of this division. 
(c) If the Chief of Board Proceedings determines that the Board requires original versions of documents filed by electronic or facsimile transmission, the original documents must be mailed or delivered to the address set forth in section 5335 or deposited personally at the headquarters office of the Board in Sacramento no later than the business day immediately following the electronic or facsimile transmission date.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 733, 741, 743, 746, 747, 758, 759, 11338 and 11339, Revenue and Taxation Code.
HISTORY

1. New subchapter 4 (sections 5324-5324.8) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 4 to subarticle 4 (Register 2008, No. 13).
§5324.2. Extensions of Time.
Note     •     History

(a) Filing of Petition. The Chief Counsel may extend the deadline to file a petition once for a period not to exceed 15 days, provided that the petitioner files a written or electronic request for the extension with the Chief of Board Proceedings no later than the due date of the petition.
(b) Supporting Documents. The Chief Counsel may grant a reasonable extension of time for reasonable cause to allow the petitioner to file supporting documentation, provided that the petitioner files a written or electronic request for the extension with the Chief of Board Proceedings no later than the due date of the petition.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 733, 746, 759 and 11338, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5324.4. Accepting or Rejecting a Petition.
Note     •     History

(a) Determination that the Petition is Valid, Complete, and Timely. Upon receipt of the petition, the Chief of Board Proceedings will determine whether the petition is valid and complete, including whether the petition is timely. If any question arises as to the timeliness of a petition or whether a petition is valid and complete, the Chief of Board Proceedings will refer the petition to the Chief Counsel.
(b) Accepting the Petition. If the Chief of Board Proceedings, or the Chief Counsel, determines that the petition is valid and complete and that the petition is timely, or that there is a genuine, material issue relating to validity, completeness or timeliness, the Chief of Board Proceedings must accept the petition. The Chief of Board Proceedings will provide written acknowledgement of the acceptance to the petitioner and the Respondent. 
(c) Issues relating to Validity, Completeness, and Timeliness. If the Chief Counsel determines that there is a genuine, material issue relating to validity, completeness, or timeliness, such matters will be considered to be at issue in the petition and will be decided by the Board.
(d) Rejecting the Petition. If the Chief of Board Proceedings and the Chief Counsel determine that the petition is not valid or complete or that the petition is not timely, and that there is no genuine, material issue relating to validity, completeness, or timeliness, the Chief of Board Proceedings must reject the petition. The Chief of Board Proceedings must provide written notification to the petitioner and the Respondent.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 733, 746, 759 and 11338, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5324.6. Submission of Additional Supporting Documents by Petitioner.
Note     •     History

(a) A petitioner's appraisal reports, financial studies, and other materials relevant to value may not be presented as evidence at the hearing unless such documents were provided to the Chief of Board Proceedings at the time the petitioner filed its petition or within a subsequent time extension, or was requested by and timely provided to the State-Assessed Properties Division or the Appeals Division. However, any Board Member may, before or at the hearing, permit or request the submission of evidence that was not previously filed with the Board.
(b) The State-Assessed Properties Division or the Appeals Division may also request additional evidence in order to evaluate the petitioner's opinion of value as set forth in its petition. The State-Assessed Properties Division or the Appeals Division may request such evidence in writing or by electronic means to the petitioner or its authorized representative and provide a deadline for the submission of such additional evidence by petitioner.
(c) All evidence, including both information and exhibits, must be accompanied by a declaration signed under penalty of perjury that the information contained in the petitioner's submitted evidence is true, correct, and complete to the best knowledge and belief of the person submitting the documents. 
(d) Except as specified above, any submitted evidence received by the Chief of Board Proceedings from the petitioner subsequent to the filing of the petition and after the expiration of the deadline applicable to such submission will be returned to the petitioner by the Chief of Board Proceedings.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 741, 747, 759 and 11340, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5324.8. Dismissal of Petition.
Note     •     History

(a) A petition will be dismissed if:
(1) The petition is not timely; or
(2) The petitioner fails to timely cure the defects in an invalid or incomplete petition.
(b) The Chief of Board Proceedings will send written notice of the dismissal and supporting reasons therefore to the petitioner. 
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 733, 746, 759 and 11338, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Subarticle 5. Prehearing Meetings and Review of Petitions
§5325. Prehearing Meeting and Exchange of Information Between State-Assessed Properties Division, Tax and Fee Programs Division, and Petitioner.
Note     •     History

(a) If requested by petitioner, the State-Assessed Properties Division and the Tax and Fee Programs Division will meet with the petitioner, either in person or by other means convenient to both parties, before the scheduled hearing date. The purpose of the meeting or meetings is to exchange relevant information and evidence, identify issues, and, if possible, enter into stipulations to resolve all or some of the issues. 
(b) At any time, the State-Assessed Properties Division or the Tax and Fee Programs Division may request additional information from the petitioner to assist in resolving any issue raised by the petitioner.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 741,747 and 11340, Revenue and Taxation Code.
HISTORY

1. New subchapter 5 (sections 5325-5325.6) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 5 to subarticle 5 (Register 2008, No. 13).
§5325.4. Petitions Resolved Before Appeals Division Review.
Note     •     History

With respect to all petitions as to which the petitioner and the State-Assessed Properties Division have agreed to a joint recommendation on a proposed resolution of all issues presented in the petition before the petitioner's appeals conference or petitioner's reply brief, if no appeals conference is scheduled, the Tax and Fee Programs Division will prepare and submit the “State-Assessed Properties Division's Recommendation for Property Tax Petition” on the “Property Tax Matters Nonappearance Calendar” to the Chief of Board Proceedings. This recommendation will include a brief analysis of the petition and the related supporting documents, if any, as well as a statement confirming petitioner's agreement with such recommendation. The Board, however, is not required to adopt the recommendation or take the recommended Board action. 
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 741, 747 and 11340, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5325.6. Prehearing Review of All Other Petitions.
Note     •     History

(a) The Appeals Division will review and prepare a Hearing Summary or Summary Decision for all petitions for which the Tax and Fee Programs Division does not prepare the recommendation described in section 5325.4. 
(b) If there has been a partial or complete resolution of issues between petitioner and the State-Assessed Properties Division after the Appeals Division has issued its Hearing Summary or Summary Decision, the Appeals Division will draft a Revised Hearing Summary or Revised Summary Decision if time permits. The Revised Hearing Summary or Revised Summary Decision will state: 
(1) The issues which have been resolved;
(2) Staff's revised analysis and/or recommendation; and
(3) The issues remaining for decision by the Board, if any. 
The case will remain on the agenda for Board action.
(c) At any time, the Appeals Division may request additional information or analysis from the petitioner or the State-Assessed Properties Division to assist in resolving any issue to be decided by the Board.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 741, 747 and 11340, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Subarticle 6. Briefing Schedules and Appeals Conferences
§5326. General Briefing Procedures for Petitions Reviewed by the Appeals Division.
Note     •     History

(a) A valid and complete petition as defined in section 5323.4 is considered the petitioner's opening brief.
(b) The State-Assessed Properties Division's Analysis is the State-Assessed Properties Division's written response to the petition.
(c) The petitioner's reply to the State-Assessed Properties Division's Analysis is optional.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 741, 747 and 11340, Revenue and Taxation Code.
HISTORY

1. New subchapter 6 (sections 5326-5326.6) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 6 to subarticle 6 (Register 2008, No. 13).
§5326.2. Briefing Schedule if no Appeals Conference Is Scheduled.
Note     •     History

(a) The State-Assessed Properties Division's Analysis will be submitted to the Chief of Board Proceedings no less than 45 days before the date on which the petition is scheduled for Board action.
(b) The petitioner may submit to the Chief of Board Proceedings a reply to the State-Assessed Properties Division's Analysis within 15 days after the Board Proceedings Division mails the State-Assessed Properties Division's Analysis to the petitioner. The petitioner may not submit new or additional evidence with its reply brief unless the State-Assessed Properties Division or Appeals Division previously requested new or additional information, but the petitioner may dispute or agree with the analysis and recommendations set forth in the State-Assessed Properties Division's Analysis.
(c) At least 10 days before the Board meeting date for which the petition is scheduled for Board action, the Appeals Division will submit a Hearing Summary or Summary Decision to the Chief of Board Proceedings.
(d) The Chief Counsel, upon a showing of reasonable cause, may grant an extension of the time provided in subdivisions (a), (b) and (c) above.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 741, 747 and 11340, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5326.4. General Appeals Conference Procedures.
Note     •     History

(a) An appeals conference will be held if requested by any of the following:
(1) By the petitioner in the petition;
(2) By the State-Assessed Properties Division no later than August 15 for petitions for reassessment of unitary value or October 15 for petitions for reassessment of nonunitary value;
(3) By the Assistant Chief Counsel of the Appeals Division; or
(4) By any Board Member.
(b) If an appeals conference is requested under subdivision (a)(3) or (a)(4), or for a petition for reassessment of nonunitary value under subdivision (a)(2), the Chief Counsel may modify the time periods provided in sections 5326.6 and 5327. 
(c) An appeals conference will consider all issues raised in the petition. The purpose of an appeals conference is to obtain additional facts and evidence, obtain stipulations of fact, and narrow questions of law, in order to facilitate a more efficient and productive oral hearing or other Board action on the petition.
(d) The parties may attend the appeals conference in person or by telephone. The Appeals Division will attempt to conduct the appeals conference at a time and in a manner that is convenient for both the petitioner and the State-Assessed Properties Division. 
(e) The petitioner and the State-Assessed Properties Division will be notified of the date, time, and place of the appeals conference in writing or by electronic mail or facsimile. The petitioner and the State-Assessed Properties Division must confirm their participation in writing or by electronic mail or facsimile. Once the parties agree to attend an appeals conference, the Appeals Division, at its discretion, may choose to hold the appeals conference at the stated date, time, and place even if one party does not appear. 
(f) An attorney from the Appeals Division (conference holder) will conduct the appeals conference. To the extent practicable, the conference holder will ensure that the appeals conference is informal and non-adversarial in nature.
(g) The petitioner must be represented at the conference by an agent or employee who is thoroughly familiar with the facts and issues and has been authorized to represent the petitioner. The State-Assessed Properties Division will be represented by an appraiser.
(h) The conference holder will not record, videotape, or arrange for court reporting of the appeals conference. Any party may arrange for the appeals conference to be recorded or reported, at that party's expense. If the appeals conference is recorded or reported, a transcript must be made available to all participants. A recording or transcript of an appeals conference becomes a disclosable public record, if and when the petition being discussed on the record or transcript becomes a disclosable public record under chapter 5 of this division.
(i) If an appeals conference is scheduled, the Chief Counsel may shorten the time period provided in section 5327.4, subdivision (c), for issuing the notice of hearing. 
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 741, 747 and 11340, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Change without regulatory effect amending subsections (a)(2) and (b) filed 7-16-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 29).
§5326.6. Scheduling of Appeals Conference; Briefing Schedule for Petitions for Which an Appeals Conference Is Scheduled.
Note     •     History

(a) The Appeals Division will generally hold an appeals conference at least 30 days before the Board meeting at which the petition is scheduled for hearing or other Board action. The Appeals Division has broad discretion in determining the briefing schedules and the deadlines for submitting additional information. 
(b) The State-Assessed Properties Division's Analysis must be submitted to the Chief of Board Proceedings no later than 35 days before the scheduled appeals conference date.
(c) The petitioner must submit to the Chief of Board Proceedings a reply to the State-Assessed Properties Division's Analysis within 15 days after the Board Proceedings Division mails the State-Assessed Properties Division's Analysis to the petitioner. The petitioner may not submit new or additional evidence with its reply brief unless the State-Assessed Properties Division or Appeals Division conference holder previously requested new or additional information, but the petitioner may dispute or agree with the analysis and recommendations set forth in the State-Assessed Properties Division's Analysis.
(d) The Appeals Division may request additional information or briefing to be provided by the petitioner or the State-Assessed Properties Division before, during, or after the Appeals conference. 
(1) The Appeals Division should provide written confirmation of its request for additional information within two business days of the request. 
(2) Unless otherwise permitted by the Appeals Division, all requested information must be provided no later than seven days after the date of the request.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 741, 747 and 11340, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Change without regulatory effect redesignating subsections (d)(i)-(ii) as subsections (d)(1)-(2) filed 7-16-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 29).
Subarticle 7. Preparing Summaries, Scheduling Hearings, and Distributing Documents
§5327. Appeals Division Hearing Summary or Summary Decision.
Note     •     History

(a) Except as provided in subdivision (b), the Appeals Division will submit to the Chief of Board Proceedings a Hearing Summary or Summary Decision no later than 10 days before the Board hearing at which the petition is scheduled for hearing or other Board action.
(b) The Chief Counsel, upon a showing of reasonable cause, may grant an extension of a reasonable period of time for the issuance of the Hearing Summary or the Summary Decision. For purposes of this section “reasonable cause” includes, but is not limited to, an appeals conference being held less than 30 days before the hearing at which the petition is scheduled for hearing or other Board action.
(c) If prepared, a Revised Hearing Summary or Revised Summary Decision will be promptly submitted to the Chief of Board Proceedings by the Appeals Division.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 741, 747 and 11651, Revenue and Taxation Code.
HISTORY

1. New subchapter 7 (sections 5327-5327.6) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 7 to subarticle 7 (Register 2008, No. 13).
§5327.4. Oral Hearings -- Scheduling of Hearings.
Note     •     History

(a) The Board must hear and decide all petitions for reassessment of unitary or nonunitary values and correction of allocated values by December 31 of the year in which the notice of assessment was issued and render its decisions no later than December 31 that year, except for petitions of escape assessments described in Revenue and Taxation Code section 758.
(b) The Board must hear petitions for reassessment of private railroad car values and render its decisions by January 31 of the year following the year in which the notice was issued. If the assessment was made outside the regular assessment period, the Board must hear the petition within 90 days of the date on which the petition was filed and render its decision within 45 days of the date of the hearing on the petition.
(c) If petitioner requests an oral hearing in its petition, the Chief of Board Proceedings will mail a Notice of Board Hearing to the petitioner at least 45 days before the scheduled hearing date. 
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 734, 741, 742, 748, 749, 758, 11338, 11339 and 11341, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5327.6. Distribution of Documents.
Note     •     History

The Chief of Board Proceedings will promptly distribute the following documents to the petitioner, Board Members, the State-Assessed Properties Division, the Tax and Fee Programs Division, and the Appeals Division, as appropriate (the documents may be distributed separately): 
(a) Petition and supporting documentation;
(b) State-Assessed Properties Division's Analysis;
(c) Petitioner's Reply Brief, if any; and
(d) Appeals Division's Hearing Summary or Summary Decision (and Revised Hearing Summary or Summary Decision, if prepared).
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 731, 732, 733, 741, 742, 743, 744, 746, 747, 748, 11338, 11339, 11340 and 11353, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Subarticle 8. Consolidation and Withdrawal of Petitions
§5328. Consolidation of Petitions into a Single Hearing.
Note     •     History

(a) Multiple petitions may be consolidated for hearing or decision as provided in chapter 5 of this division.
(b) If petitions are consolidated, the State-Assessed Properties Division's will draft a single Analysis to address and analyze the issues presented in all of the petitions. At the hearing, the Board may grant additional time, in equal amounts, to the petitioners' representative(s) and the State-Assessed Properties Division to present their respective cases. The Appeals Division will draft one Hearing Summary for all of the consolidated petitions.
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 731, 732, 733, 741, 742, 743, 744, 746, 747 and 748, Revenue and Taxation Code. 
HISTORY

1. New subchapter 8 (sections 5328-5328.5) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 8 to subarticle 8 (Register 2008, No. 13).
§5328.5. Withdrawal of a Petition.
Note     •     History

A petitioner may withdraw its petition at any time, up to and including the date of the scheduled Board hearing, by notifying the Chief of Board Proceedings in writing, including by electronic mail or facsimile. 
NOTE

Authority cited: Section 15606, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Section 733, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 3. Other Property Tax Petitions
Subarticle 1. Application of Article
§5331. Application of Article.
Note     •     History

This article applies to:
(a) Applications for review, equalization, and adjustment of the assessment of publicly-owned lands and improvements filed under subdivision (g) of section 11 of article XIII of the California Constitution;
(b) Petitions objecting to the County-Assessed Properties Division's findings of ineligibility for an organizational clearance certificate under section 254.6 of the Revenue and Taxation Code, denials of claims for supplemental clearance certificates under Revenue and Taxation Code section 214, subdivision (g), and claims for the veteran's organization exemption under Revenue and Taxation Code section 215.1; and
(c) Petitions filed with the Board by county assessors under Government Code section 15640 et seq.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; and Sections 15606 and 15640, Government Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6 and 1840, Revenue and Taxation Code. 
HISTORY

1. New article 3 (subchapters 1-8), subchapter 1 (section 5331) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 1 to subarticle 1 (Register 2008, No. 13).
Subarticle 2. Appeal of Assessment of Publicly-Owned Property -- Contents of Applications, Filing Deadlines, and Board-Appraised Property
§5332. Time of Filing of Application.
Note     •     History

(a) If any county, city, city and county, or municipal corporation wants to secure a review, equalization, or adjustment of the assessment of its property by the Board under subdivision (g) of section 11 of article XIII of the California Constitution, it must file an application with the Board on or before the later of: 
(1) July 20 of the year in which the assessment is made if the assessment appealed is made during the regular period for such assessments; or 
(2) Within two weeks after the completion and delivery by the county assessor of the local roll containing the assessment to the county auditor as provided in Revenue and Taxation Code section 617.
(b) If the assessment appealed is made outside the regular period for such assessments, the application must be filed with the Board within 60 days from the date the tax bill was mailed to the applicant.
(c) An application is filed timely if it is mailed to or received at the address provided in section 5335 within the time specified by this section.
(d) Failure to provide a timely application bars the applicant from relief under subdivision (g) of section 11 of article XIII of the California Constitution.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; and Section 15606, Government Code. Reference: Section 1840, Revenue and Taxation Code.
HISTORY

1. New subchapter 2 (sections 5332-5332.6) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 2 to subarticle 2 (Register 2008, No. 13).
§5332.4. Contents of Application.
Note     •     History

Every application must: 
(a) Be in writing;
(b) Be authorized by the governing body of the county, city, city and county, or municipal corporation seeking relief;
(c) Include the official document authorizing the application;
(d) Show the facts claimed to require action by the Board; 
(e) Include a statement of legal authorities, which includes relevant statutes and regulations;
(f) Indicate whether a written findings and decision is desired; and
(g) Be signed by petitioner or an authorized representative of the petitioner. 
NOTE

Authority cited: Article XIII, Section 11, California Constitution; and Section 15606, Government Code. Reference: Section 1840, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5332.6. Submission of Application and Board-Appraised Property.
Note     •     History

(a) The application and supporting documents, including the proof of filing under subdivision (b), must be submitted by mail or in person to the Chief of Board Proceedings as provided in section 5335.
(b) A copy of the application, together with its separate statement of legal authorities, must also be filed by the applicant with the county assessor whose assessment is questioned and with the county board of supervisors. A proof of filing with the county assessor and the county board of supervisors must be enclosed with the application filed with the Board.
(c) Board-Appraised Property. If a property that has been appraised by the State-Assessed Properties Division becomes the subject of a proceeding under this article, both parties to the proceedings will be informed of the fact that the appraisal has been made. 
(1) Each party, upon request, will have access to the appraisal records. 
(2) Either party or the Board may call the State-Assessed Properties Division as a witness and may offer the appraisal records as an exhibit. 
(d) A party desiring to call an employee of the State-Assessed Properties Division as a witness must notify the Chief of Board Proceedings of its intention to call such witness at least ten days before the hearing.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; and Section 15606, Government Code. Reference: Section 1840, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Subarticle 3. Contents of Property Tax Welfare and Veterans' Organization Exemption Petitions and Filing Deadlines
§5333. Time for Filing of Petitions.
Note     •     History

(a) A petitioner has 60 days from the date of mailing of a final notice denying a claim for an Organizational Clearance Certificate or Supplemental Clearance Certificate or from the date of mailing of a notice of revocation of an Organizational Clearance Certificate or, Supplemental Clearance Certificate to petition the Board for hearing on the denial of the claim or revocation of the certificate. 
(b) A petition is timely if it is mailed to or received at the headquarters office of the Board within the time specified by subdivision (a).
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 214, 254.6 and 270, Revenue and Taxation Code.
HISTORY

1. New subchapter 3 (sections 5333-5333.6) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 3 to subarticle 3 (Register 2008, No. 13).
3. Change without regulatory effect amending Note filed 7-16-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 29).
§5333.4. Contents of Petition.
Note     •     History

The petition must:
(a) Be in writing and state all of the specific grounds upon which qualification is claimed;
(b) Include all documents the petitioner wishes the Board to consider in deciding the petition;
(c) Indicate whether an oral hearing is desired; 
(d) Indicate whether a written findings and decision is desired; and
(e) Be signed by petitioner or an authorized representative of the petitioner. The Chief Counsel may require the representative to demonstrate the representative's authority to represent the petitioner.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 214, 254.6 and 270, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Change without regulatory effect amending Note filed 7-16-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 29).
§5333.6. Submission of Petition.
Note     •     History

The original petition and supporting documents must be submitted by mail or in person to the Chief of Board Proceedings as provided in section 5335. 
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 214, 254.6 and 270, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Change without regulatory effect amending Note filed 7-16-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 29).
Subarticle 4. Contents of Property Tax Sampling Program Petitions and Filing Deadlines
§5334. Time for Filing of Petitions.
Note     •     History

(a) Any county assessor may file a petition to appeal appraisals made within his or her county where differences have not been resolved before completion of the field review of county assessment procedures by the County-Assessed Properties Division.
(b) A petition must be filed within 30 days from the date that the Deputy Director of the Property and Special Taxes Department mails the final notice of sample finding to the county assessor.
(c) The determination contained within the final notice of sample finding becomes final if a petition is not filed within the time period provided in subdivision (b).
(d) A petition or supporting document is timely if it is mailed to or received at the address provided in section 5335 within the time specified in subdivision (b).
NOTE

Authority cited: Sections 15606 and 15640, Government Code. Reference: Sections 15640 and 15645, Government Code. 
HISTORY

1. New subchapter 4 (sections 5334-5334.6) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 4 to subarticle 4 (Register 2008, No. 13).
§5334.4. Contents of the Petition.
Note     •     History

(a) The petition must:
(1) Be in writing;
(2) Identify the assessor's parcel number or assessment number and sample item number the county assessor is contesting;
(3) State the specific issue(s) being appealed and the specific adjustment requested; 
(4) Indicate whether an oral hearing is desired; and
(5) Be signed by the county assessor or his or her authorized representative.
(b) The filing of a completed form provided by the Board for use as a petition will satisfy the requirements of subdivision (a). 
(c) The county assessor is required to submit any supporting evidence with the petition.
NOTE

Authority cited: Sections 15606 and 15640, Government Code. Reference: Sections 15640 and 15645, Government Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2)
2. Editorial correction providing inadvertently omitted History 1 (Register 2008, No. 41).
§5334.6. Submission of Petition.
Note     •     History

The petition and supporting documents must be submitted by mail or in person to the Chief of Board Proceedings as provided in section 5335.
NOTE

Authority cited: Sections 15606 and 15640, Government Code. Reference: Sections 15640 and 15645, Government Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Subarticle 5. Filing and Distribution of Petitions, Briefs, and Other Documents
§5335. Submission of Petitions, Briefs, and Related Documents.
Note     •     History

(a) Original petitions, briefs, and related documents must be submitted by mail or in person to the Chief of Board Proceedings, at the mailing address provided in chapter 5 of this division. 
(b) Petitions, briefs, and related documents may be filed electronically under this section only if they are transmitted to and received by the Chief of Board Proceedings in accordance with instructions provided by the Board, including, but not limited to, the provisions of chapter 5 of this division. 
(c) Applications and Other Submissions. For applications described in section 5310, subdivision (b), both the petitioner and the Respondent must file their submissions with the other party and enclose a proof of filing with the other party in each submission to the Board Proceedings Division.
NOTE

Authority cited: Sections 15606 and 15640, Government Code. Reference: Section 15640, Government Code; and Sections 214, 254.6, 270 and 1840, Revenue and Taxation Code.
HISTORY

1. New subchapter 5 (sections 5335-5335.6) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 5 to subarticle 5 (Register 2008, No. 13).
§5335.4. Timely Performance; Mailing Date.
Note     •     History

Timely performance and mailing date will be determined under the provisions of section 5571 of this division.
NOTE

Authority cited: Sections 15606 and 15640, Government Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270 and 1840, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5335.6. Distribution of Documents.
Note     •     History

The Board Proceedings Division will promptly distribute the petition, briefs, related documents, and the Hearing Summary or Summary Decision (and Revised Hearing Summary or Summary Decision, if prepared) to the petitioner, the Respondent, the Tax and Fee Programs Division, the Appeals Division, and the Board Members, as appropriate.
NOTE

Authority cited: Sections 15606 and 15640, Government Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270 and 1840, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Subarticle 6. Accepting, Rejecting, and Perfecting Petitions and Applications
§5336. Accepting or Rejecting a Petition.
Note     •     History

(a) Determination that the Petition is Valid, Complete, and Timely. Upon receipt of the petition, the Chief of Board Proceedings will determine whether the petition is valid and complete, including whether the petition is timely. If any question arises as to the timeliness of a petition or whether a petition is valid and complete, the Chief of Board Proceedings will refer the petition to the Chief Counsel.
(b) Accepting the Petition. If the Chief of Board Proceedings, or the Chief Counsel, determines that the petition is valid and complete and that the petition is timely, or that there is a genuine, material issue relating to validity, completeness or timeliness, the Chief of Board Proceedings must accept the petition. The Chief of Board Proceedings will provide written acknowledgement of the acceptance to the petitioner and the Respondent. Upon acceptance of a valid and complete property tax sampling program petition, the Chief of Board Proceedings will also notify the owner of the sampled property of the filing of the petition by the county assessor.
(c) Issues relating to Validity, Completeness, and Timeliness. If the Chief Counsel determines that there is a genuine, material issue relating to validity, completeness, or timeliness, such matters will be considered to be at issue in the petition and will be decided by the Board.
(d) Rejecting the Petition. If the Chief of Board Proceedings and the Chief Counsel determine that the petition is not valid or complete or that the petition is not timely, and that there is no genuine, material issue relating to validity, completeness, or timeliness, the Chief of Board Proceedings must reject the petition. The Chief of Board Proceedings will provide written notification to the petitioner and the Respondent.
NOTE

Authority cited: Sections 15606 and 15640, Government Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270 and 1840, Revenue and Taxation Code.
HISTORY

1. New subchapter 6 (sections 5336-5336.5) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 6 to subarticle 6 (Register 2008, No. 13).
§5336.5. Perfecting a Petition.
Note     •     History

(a) Generally. The briefing and resolution of a petition cannot begin until the petition is perfected. For purposes of this part, a petition is “perfected” if it contains substantially all the information required by section 5332.4, 5333.4, or 5334.4, whichever is applicable. In addition, a petition is not “perfected” until it contains sufficient information to identify and contact each petitioner or authorized representative, along with the signature of each petitioner or authorized representative.
(b) Time to Perfect the Petition. If the Chief of Board Proceedings receives an incomplete petition, the Chief of Board Proceedings will notify the petitioner in writing of the need to perfect the petition. The notification will be included in the acknowledgement letter issued under section 5336, subdivision (b). The notification will explain what information is necessary to perfect the petition.
(1) The petitioner must perfect the petition not later than 30 days from the date of the acknowledgement letter. The Chief of Board Proceedings may extend the deadline for perfecting the petition upon a showing of reasonable cause or upon written agreement by the parties. All parties must be notified in writing of any extension.
(2) Perfecting the petition is accomplished by submitting the information necessary to perfect the petition to the Chief of Board Proceedings.
(3) If the petitioner fails to perfect the petition within the 30-day period, or within any extension period granted by the Chief of Board Proceedings, the petition must be dismissed. All parties will be notified in writing of the dismissal.
NOTE

Authority cited: Sections 15606 and 15640, Government Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270 and 1840, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Subarticle 7. Prehearing Meetings and Briefing Schedules
§5337. Prehearing Meeting and Exchange of Information Between Respondent and Petitioner.
Note     •     History

(a) If requested by the petitioner with regard to a petition described in section 5310, subdivision (a)(3) or (a)(4), the Respondent and the Tax and Fee Programs Division will meet with the petitioner, either in person or by other means convenient to all parties, before the scheduled hearing date. The purpose of the meeting or meetings is to exchange relevant information and evidence, identify issues, and, if possible, enter into stipulations to resolve all or some of the issues. 
(b) At any time, the Respondent or the Tax and Fee Programs Division may request additional information from the petitioner to assist in resolving any issue raised by the petitioner.
NOTE

Authority cited: Sections 15606 and 15640, Government Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270 and 1840, Revenue and Taxation Code.
HISTORY

1. New subchapter 7 (sections 5337-5337.6) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 7 to subarticle 7 (Register 2008, No. 13).
§5337.4. Briefing: General Requirements.
Note     •     History

(a) Submissions in the form of briefs are required for consideration of all petitions. The parties must adhere to the briefing schedules and other requirements set forth in this article.
(b) Upon receipt of a perfected petition, the Chief of Board Proceedings will provide written notification to each party that a perfected petition has been filed and that briefing will begin under the applicable briefing schedule, as determined by the Chief of Board Proceedings. The notification may be included, if appropriate, in the acknowledgement letter issued under section 5336, subdivision (b). Throughout the briefing schedule, the Chief of Board Proceedings will inform the parties of applicable deadlines, extensions, and other requirements by written notification, and will ensure that all parties receive copies of any correspondence.
(c) Any request to extend the period for filing a brief must be in writing. The Chief Counsel, in his or her discretion, may grant such a request upon a showing of reasonable cause or based upon the written agreement of the parties and the Appeals Division.
(d) The party filing a brief is responsible for submitting one copy of the brief and any supporting exhibits to the Board Proceedings Division. Upon receipt of any brief filed within the scope of the applicable briefing schedule, including any applicable deadlines and extensions, the Chief of Board Proceedings will provide written acknowledgement of receipt to all parties and provide each opposing party with a copy of the brief and any supporting exhibits.
(e) General Requirements. All briefs permitted to be filed under this section must follow the requirements listed below:
(1) Length. 
(A) Not exceed 30 typed or handwritten, double-spaced 8 1/2” by 11” pages, printed on one side only; or
(B) Not exceed 15 typed or handwritten, single-spaced 8 1/2” by 11” pages, printed on one side only;
(2) Type-font size of at least 10 points or 12 characters per inch;
(3) The Table of Contents, Table of Authorities, and exhibits are not included in the page count;
(4) Exception. An exception to these requirements may be granted before the deadline for filing a brief. Exceptions may be requested by submitting a written request establishing reasonable circumstances that justify the necessity for additional pages to the Chief of Board Proceedings. It is at the discretion of the Chief Counsel or his or her designee to approve a request.
(f) The failure to file a brief within the scope of the applicable briefing schedule, including any applicable deadlines, extensions, and other requirements, is a waiver of the right to file that brief. Such a failure will also conclude the briefing schedule, except as otherwise provided in the applicable briefing schedule. 
(g) Any individual or entity may file a non-party (amicus) brief regarding a petition or application described in section 5310, subdivision (a)(2), (a)(3), or (a)(4), subject to any generally applicable conditions of this section and the specific conditions of this subdivision. 
(1) No individual or entity will be permitted to file more than one non-party brief. Briefs filed by unidentified individuals or entities will not be accepted.
(2) All non-party briefs must be filed before the conclusion of the applicable briefing schedule. However, the Board in its discretion may choose to accept for consideration a non-party brief filed after the conclusion of the applicable briefing schedule. For purposes of this paragraph, the conclusion of the applicable briefing schedule will be determined without regard to the filing of any non-party brief or reply thereto. There will not be any extensions of time for the filing of non-party briefs. 
(3) If a non-party brief is filed, the Chief of Board Proceedings will acknowledge receipt of the brief and provide one copy to each party. Each party may file a reply to the non-party brief not later than 30 days from the date the Chief of Board Proceedings acknowledges receipt of the non-party brief.
(4) The applicable briefing schedule is not concluded until the deadline for replying to all non-party briefs has passed.
NOTE

Authority cited: Sections 15606 and 15640, Government Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270 and 1840, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5337.6. General Briefing Schedule.
Note     •     History

(a) Application. The briefing schedule in this section applies to all petitions and applications described in section 5310, subdivision (a)(2), (a)(3), and (a)(4).
(b) Opening Briefs. 
(1) Petitioner's Opening Brief. The perfected petition is the Petitioner's Opening Brief.
(2) Respondent's Opening Brief. The Respondent must file an Opening Brief not later than 90 days from the date the Chief of Board Proceedings acknowledges receipt of the Petitioner's Opening Brief.
(c) Reply Briefs. 
(1) Petitioner's Reply Brief. The petitioner must file a Reply Brief not later than 30 days from the date the Chief of Board Proceedings acknowledges receipt of the Respondent's Opening Brief. The Petitioner's Reply Brief, if filed, must address only points of disagreement with the Respondent's Opening Brief. 
Except as provided in paragraph (2) of this subdivision, the filing of the Petitioner's Reply Brief concludes the briefing schedule.
(2) Respondent's Reply Brief. The Respondent may file a Reply Brief only upon written permission from the Chief Counsel. The Respondent's Reply Brief, if filed, must address only points of disagreement with the Petitioner's Reply Brief.
(A) The Respondent will have 15 days from the date the Chief of Board Proceedings acknowledges receipt of the Petitioner's Reply Brief in which to file a written request for permission to file its Reply Brief.
(B) Upon receipt of the Respondent's written request, the Chief Counsel will determine whether additional briefing is necessary. Factors to be considered in determining whether additional briefing is necessary include, but are not limited to:
(i) Whether the Petitioner's Reply Brief raised new facts, arguments, or evidence that are essential to the resolution of the petition;
(ii) Whether the briefing filed to date has provided sufficient information for the Board to resolve the petition;
(iii) Whether the facts and issues in the petition are so complex as to require additional discussion or clarification.
(C) If the Chief Counsel determines that additional briefing is necessary, he or she will grant the Respondent's request to file a Reply Brief. The Respondent may file its Reply Brief not later than 30 days from the date on which its request is granted.
(D) If the Chief Counsel determines that additional briefing is not necessary, he or she will deny the Respondent's request to file a Reply Brief and the briefing process is concluded.
(3) Petitioner's Supplemental Brief. If the Respondent files a Reply Brief, the petitioner may file a Supplemental Brief not later than 30 days from the date the Chief of Proceedings acknowledges receipt of the Respondent's Reply Brief. The petitioner's Supplemental Brief, if filed, shall address only points of disagreement with the Respondent's Reply Brief. The filing of the petitioner's Supplemental Brief concludes the briefing schedule.
NOTE

Authority cited: Sections 15606 and 15640, Government Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270 and 1840, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Subarticle 8. Appeals Division Review, Prehearing Conferences, and Summaries
§5338. Appeals Division Review.
Note     •     History

(a) At the conclusion of the general briefing schedule under section 5337.6, the Appeals Division will review the record and determine whether the briefing on file adequately addresses all relevant factual and legal issues. If the briefing on file does not adequately address all relevant factual and legal issues, the Appeals Division may request additional briefing under section 5523.4. 
(b) When the Appeals Division determines that all relevant factual and legal issues have been addressed and completes the appeals conference required by section 5338.4, the Appeals Division will notify the Chief of Board Proceedings that the petition is ready to be scheduled for an oral hearing.
(c) Upon notification from the Appeals Division that the petition is ready to be scheduled for an oral hearing, the Chief of Board Proceedings will schedule and notice an oral hearing under section 5522.6. 
NOTE

Authority cited: Sections 15606 and 15640, Government Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270 and 1840, Revenue and Taxation Code.
HISTORY

1. New subchapter 8 (sections 5338-5338.6) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 8 to subarticle 8 (Register 2008, No. 13).
§5338.4. Appeals Conference.
Note     •     History

(a) Purpose. The purpose of an appeals conference is to obtain additional facts and evidence, obtain stipulations of fact, and narrow questions of law, in order to facilitate a more efficient and productive oral hearing or other Board action on the petition.
(b) When to Hold an Appeals Conference. An appeals conference will be held for all petitions described in section 5310, subdivision (a)(2), (a)(3), and (a)(4). An appeals conference may be held only after the briefing schedule provided in section 5337.6 has concluded.
(c) Determining the Time and Location of the Appeals Conference. The Appeals Division will determine the time and location of the appeals conference. Consistent with workload constraints, the Appeals Division will attempt to ensure that the appeals conference is held at a time convenient to the petitioner. The appeals conference will ordinarily be held at the Board's headquarters in Sacramento, and may be conducted in person, by videoconference, by teleconference, or by means of a secure electronic connection. However, an in-person appeals conference may be held outside of Sacramento if the Chief Counsel determines that there is reasonable cause and that the Board has the resources to conduct an appeals conference outside of Sacramento.
(d) Notice and Scheduling. The Board Proceedings Division will schedule the appeals conference in accordance with information provided to it by the Appeals Division and will issue appropriate written notification to all parties.
(e) Conduct and Nature of the Appeals Conference. A conference holder assigned to the Appeals Division will conduct the appeals conference. To the extent practicable, the conference holder will ensure that the appeals conference is informal and non-adversarial in nature.
(f) Recording. The conference holder will not record, videotape, or arrange for court reporting of the appeals conference. Any party may arrange for the appeals conference to be recorded or reported, at that party's expense. If the appeals conference is recorded or reported, a copy of the transcript or recording must be promptly provided to all participants. A recording or transcript of an appeals conference becomes a disclosable public record, if and when the petition being discussed on the record or transcript becomes a disclosable public record under chapter 5 of this division.
(g) Additional Briefing and Evidence. If at any time before the submittal of the Hearing Summary or Summary Decision under section 5338.6, the Assistant Chief Counsel for the Appeals Division, or his or her designee, determines that insufficient briefing or evidence has been provided, the Appeals Division may request additional briefing or evidence from any party. The Appeals Division may set forth the order, deadlines, and conditions for briefing that it deems appropriate. The Appeals Division will administer any request made under this subdivision and may extend deadlines under this subdivision upon a showing of reasonable cause.
NOTE

Authority cited: Sections 15606 and 15640, Government Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270 and 1840, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5338.6. Preparing and Revising Hearing Summaries.
Note     •     History

(a) Preparing the Hearing Summary. The Appeals Division will prepare and submit a Hearing Summary to the Chief of Board Proceedings within 90 days after each appeals conference held under section 5338.4, or within any other period specified by the Chief of Board Proceedings, which provides the Appeals Division with at least 30 days to prepare and submit the Hearing Summary. The Chief Counsel may extend the time for submitting the Hearing Summary upon a showing of reasonable cause. Upon receipt of the Hearing Summary, the Chief of Board Proceedings will provide one copy to each party.
(b) If the petition is submitted for decision without an oral hearing before the Appeals Division prepares a Hearing Summary, the Appeals Division will prepare a Summary Decision under section 5343.
(c) If there has been a partial or complete resolution of issues between petitioner and the Respondent after the Appeals Division has issued its Hearing Summary or Summary Decision, the Appeals Division will draft a Revised Hearing Summary or Revised Summary Decision if time permits. The Revised Hearing Summary will state: 
(1) The issues which have been resolved;
(2) The Appeals Division's revised recommendation; and
(3) The issues remaining for decision by the Board, if any. 
NOTE

Authority cited: Sections 15606 and 15640, Government Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270 and 1840, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 4. General Board Hearing and Notice Procedures
§5340. Relation to General Board Hearing Procedures.
Note     •     History

The procedures in chapter 5 of this division apply to the conduct of oral Board hearings on petitions described in section 5310. To the extent this chapter does not set forth a specific rule or procedure, the rules and procedures set forth in chapter 5 will apply to this article. Where there is a conflict between chapter 5 and this chapter, the provision of this chapter control.
NOTE

Authority cited: Sections 15606 and 15640, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270, 721, 721.5, 747, 759, 1840 and 11251, Revenue and Taxation Code.
HISTORY

1. New article 4 (sections 5340-5345) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5341. Additional Briefing.
Note     •     History

(a) Staff Requests for Additional Briefing. If the Assistant Chief Counsel of the Appeals Division, or his or her designee, determines that insufficient briefing or evidence has been provided, the Appeals Division may request additional briefing or evidence from any party. The Appeals Division will determine the order, deadlines, and conditions under which any briefing or evidence must be submitted. Deadlines under this subdivision may be extended upon a showing of reasonable cause.
(b) Individual Board Member's Request for Additional Briefing. Any individual Board Member may contact the Appeals Division in order to request additional briefing or evidence from any party. The Appeals Division will determine the order, deadlines, and conditions under which any briefing or evidence must be submitted. Deadlines under this subdivision may be extended upon a showing of reasonable cause.
(c) Board Requests for Additional Briefing. If the Board determines that insufficient briefing or evidence has been provided, the Board may request additional briefing or evidence from any party. The Board will determine the order, deadlines, and conditions under which any briefing or evidence must be submitted. The Chief of Board Proceedings may extend deadlines set by the Board under this subdivision only upon a showing of extreme hardship and with the consent of the Board Chair.
(d) Timing of Request. A request under this section may be made during or after the applicable briefing schedule has concluded. Additional briefs or evidence provided in response to such a request are not subject to the requirements of the applicable briefing schedule.
(e) Notification of Board Chair. The Board Chair must be notified promptly of any request made under this section and may postpone the scheduling or hearing of an appeal.
NOTE

Authority cited: Sections 15606 and 15640, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270, 721, 721.5, 747, 759, 1840 and 11251, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5342. Notice of Hearing.
Note     •     History

(a) Notice of Hearing. All parties to a petition or application will receive written notice of the date and time their petition is scheduled for oral hearing before the Board in accordance with chapter 5 of this division.
(b) Notice of Hearing on Applications. The notice of hearing for a hearing on an application described in section 5310, subdivision (a)(2), must contain a statement that, subject to the limitations of section 3, subdivision (b), and section 11 of article XIII, and of article XIIIA of the California Constitution, the Board is required to determine the full cash value of the property that is the subject of the hearing and that this determination may exceed the value on which the assessment is based.
NOTE

Authority cited: Sections 15606 and 15640, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270, 721, 721.5, 747, 759, 1840 and 11251, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5343. Submission for Decision Without Oral Hearing.
Note     •     History

(a) A petition will be submitted for decision based upon the written records on file and without an oral hearing under any of the following circumstances:
(1) The petitioner does not request an oral hearing or waives a requested oral hearing under chapter 5 of this division.
(2) The petitioner fails to respond to a Hearing Notice as provided in section 5522.6.
(b) Preparing the Summary Decision. Where a petition is submitted for decision without an oral hearing, the Appeals Division will prepare a Summary Decision summarizing the relevant facts and law and providing a recommendation for Board action.
NOTE

Authority cited: Sections 15606 and 15640, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270, 721, 721.5, 747, 759, 1840 and 11251, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5344. Notice of Board Decisions.
Note     •     History

(a) The petitioner and all other parties to a petition or application will be notified in writing of the Board's decision in accordance with chapter 5 of this division.
(b) Decisions on Applications. When the review, equalization and adjustment of the taxable property of a county, city, city and county, or municipal corporation is completed, the Board will mail to the assessor, the county board of supervisors, the auditor of the taxing agency, and the taxpayer, a copy of the Board's findings and decision with respect to the assessment.
(c) Decisions on Property Tax Welfare and Veterans' Organization Exemption Claims. Written notice of the Board's decision on a petition described in section 5310, subdivision (a)(3), will also be sent to the county assessor for the county in which the property is located.
(d) Decisions on Property Tax Sampling Program Petitions. The Notice of Board Action issued with regard to a petition described in section 5310, subdivision (a)(4), will be mailed to the county assessor and the property owner by the Board Proceedings Division. 
NOTE

Authority cited: Sections 15606 and 15640, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270, 721, 721.5, 747, 759, 1840, 1841 and 11251, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5345. Finality of Board Action; Written Findings and Decision.
Note     •     History

(a) The following provisions apply to all petitions filed under this chapter:
(1) The decision of the Board upon a property tax petition is final.
(2) The Board may not reconsider or rehear a petition.
(3) The Board may modify a decision on a petition to correct a clerical error.
(b) If requested by the petitioner at any point before the commencement of the oral hearing or the commencement of the meeting at which the petition is scheduled for Board action, the Board will prepare and send to the petitioner a Written Findings and Decision according to the following procedure:
(1) After the Board has decided the petition, the Appeals Division will draft the Written Findings and Decision.
(2) The Chief of Board Proceedings will schedule the Written Findings and Decision for Board consideration. 
(3) Once the Board adopts the Written Findings and Decision, the Chief of Board Proceedings will promptly mail a copy of the Written Findings and Decision to petitioner. 
The petitioner may waive its right to its requested Written Findings and Decision any time before Board approval of the petitioner's Written Findings and Decision.
NOTE

Authority cited: Sections 15606 and 15640, Government Code; and Section 11651, Revenue and Taxation Code. Reference: Sections 15640 and 15645, Government Code; and Sections 214, 254.6, 270, 721, 721.5, 747, 759, 1840, 1841 and 11251, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Chapter 4. Appeals from Actions of the Franchise Tax Board
Article 1. Application of Chapter 4, Definitions, and Jurisdiction
§5410. Application of Chapter 4.
Note     •     History

(a) This chapter applies to appeals and petitions for rehearing filed with the Board pursuant to the:
(1) Administration of Franchise and Income Tax Laws. Part 10.2 of division 2 of the Revenue and Taxation Code.
(2) Senior Citizens Homeowners and Renters Property Tax Assistance Law. Chapter 1 and chapter 4 of part 10.5 of division 2 of the Revenue and Taxation Code.
(b) To the extent this chapter does not contain a specific rule or procedure, the rules and procedures in chapter 5 (commencing with section 5510) of this division apply. Where there is a conflict between chapter 5 and this chapter, the provisions of this chapter control.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New chapter 4 (articles 1-6), article 1 (sections 5410-5412) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5411. Definitions.
Note     •     History

The definitions contained in sections 5511 and 5512 of chapter 5 apply to this chapter. In addition, the following definitions apply to this chapter and to any documents prepared pursuant to this chapter:
(a) The term “appellant” means an individual or business entity who files an appeal from an action of the Franchise Tax Board. The term “appellant” also includes multiple individuals or business entities filing an appeal jointly and, where appropriate, an authorized representative or representatives thereof.
(b) The term “respondent” means the Franchise Tax Board and, where appropriate, an authorized representative or representatives thereof.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5412. Jurisdiction.
Note     •     History

(a) Appeals from the Franchise Tax Board. In General, the Board has jurisdiction to hear and decide a timely filed appeal under any of the following circumstances:
(1) The Franchise Tax Board mails a Notice of Action on a proposed deficiency assessment of additional tax, which may also include penalties, fees and interest.
(2) The Franchise Tax Board mails a Notice of Action on a proposed carryover adjustment. 
(3) The Franchise Tax Board mails a Notice of Action on Cancellation, Credit, or Refund, or any other notice, which denies any portion of a perfected claim for a refund of tax, penalties, fees, or interest.
(4) The Franchise Tax Board fails to act on a claim for a refund of tax, penalties, fees, or interest, within six months after the claim is perfected with the Franchise Tax Board. 
(5) The Franchise Tax Board mails a Notice of Determination Not to Abate Interest, or any other notice, that denies an abatement, in whole or in part, of paid or unpaid interest, under Revenue and Taxation Code section 19104.
(6) The Franchise Tax Board fails to act on a request for abatement of interest within six months after the request is filed with the Franchise Tax Board under Revenue and Taxation Code section 19104. This paragraph does not apply to requests for interest abatement made in connection with a protest or an appeal from a Notice of Action on a protest.
(7) The Franchise Tax Board mails a notice that disallows interest on a refund.
(8) The Franchise Tax Board mails any notice that grants or denies, in whole or in part, innocent spouse relief under Revenue and Taxation Code section 18533, subdivision (b) or (c), or section 19006, subdivision (c).
(9) The Franchise Tax Board mails a notice of determination, or fails to act within 90 days, on a petition for review of the Franchise Tax Board's finding of jeopardy.
(10) The Franchise Tax Board mails any notice that denies, in whole or in part, a claim for assistance under the Senior Citizens Homeowners and Renters Property Tax Assistance Law.
(b) Issues that will not be considered. The Board's jurisdiction is limited to determining the correct amount owed by, or due to, the appellant for the year or years at issue in the appeal. The Board has determined that it does not have jurisdiction to consider the following issues:
(1) Whether a California statute or regulation is invalid or unenforceable under the Federal or California Constitutions, unless a federal or California appellate court has already made such a determination.
(2) Whether a provision of the California Constitution is invalid or unenforceable under the Federal Constitution, unless a federal or California appellate court has already made such a determination.
(3) Whether a liability has been or should have been discharged in bankruptcy.
(4) Whether the Franchise Tax Board violated the Information Practices Act (Civil Code sections 1798 et seq.), the Public Records Act (Government Code sections 6250 et seq.), or any similar provision of the law.
(5) Whether the appellant is entitled to a remedy for the Franchise Tax Board's actual or alleged violation of any substantive or procedural right, unless the violation affects the adequacy of a notice, the validity of an action from which a timely appeal was made, or the amount at issue in the appeal.
(c) This section contains general rules governing the Board's jurisdiction. Changes in the law may expand or limit the Board's jurisdiction.
NOTE

Authority cited: Section 15606, Government Code; Section 19570, Revenue and Taxation Code; and Article III, Section 3.5, California Constitution. Reference: Sections 18533, 19006, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19322.1, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 2. How to File an Appeal from the Franchise Tax Board
§5420. Appeal Filing Requirements.
Note     •     History

(a) Franchise and Income Tax Appeals. Except as provided in subdivision (b), every appeal from an action of the Franchise Tax Board must be in writing, must meet the formatting requirements of section 5430, subdivision (e), and must contain the following:
(1) The name of the appellant, or appellants, filing the appeal;
(2) The social security number or taxpayer identification number, whichever is applicable, of each appellant filing the appeal;
(3) The address and telephone number of each appellant and, if applicable, each appellant's authorized representative;
(4) The amount involved, including tax, penalties, fees, and interest (whichever is applicable);
(5) The year(s) involved;
(6) A copy of the Franchise Tax Board's notice from which the appeal is made, unless the Franchise Tax Board has failed to act on a claim for refund or a request for interest abatement, in which case the appellant must provide a copy of the claim for refund or request for interest abatement;
(7) The facts involved and the legal authorities upon which the appellant relies, including any relevant statutes, regulations, and judicial and administrative decisions;
(8) Any portion of the amount at issue conceded by the appellant; and
(9) The signature of each appellant who is filing the appeal, whether jointly or separately, or the signature of an authorized representative made on behalf of each appellant who is filing the appeal.
(b) Senior Citizens Homeowners and Renters Property Tax Assistance Appeals. Every appeal from the Franchise Tax Board's denial, in whole or in part, of a claim for assistance under the Senior Citizens Homeowners and Renters Property Tax Assistance Law must be in writing, must meet the formatting requirements of section 5430, subdivision (e), and must contain the following:
(1) The name of the appellant, or appellants, filing the appeal;
(2) The social security number or taxpayer identification number, whichever is applicable, of each appellant filing the appeal;
(3) The address and telephone number of the appellant and, if applicable, the appellant's authorized representative;
(4) The amount of property tax assistance claimed;
(5) The claim year(s) involved;
(6) A copy of the Franchise Tax Board's notice from which the appeal is made;
(7) The reasons the appellant is entitled to property tax assistance; and
(8) The signature of each appellant who is filing the appeal, whether jointly or separately, or the signature of an authorized representative made on behalf of each appellant who is filing the appeal.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New article 2 (sections 5420-5424) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5421. Methods for Delivery of Written Documents and Correspondence.
Note     •     History

(a) The Board encourages the use of electronic means (e.g., facsimile, e-mail, etc.) for the filing of appeals, petitions for rehearing, briefs, and related documents and correspondence. Any document may be filed electronically pursuant to this section if an electronic copy of such document is transmitted to the Board Proceedings Division in accordance with instructions provided on the Board's website at www.boe.ca.gov.
(b) Appeals, petitions for rehearing, briefs, and related documents and correspondence may also be hand delivered to the Board's headquarters at 450 N Street in Sacramento, California, or mailed to:

BOARD PROCEEDINGS DIVISION, MIC: 81
STATE BOARD OF EQUALIZATION
450 N STREET
PO BOX 942879
SACRAMENTO, CA 94279-0081
(c) Where Board Staff is required to provide written notification or written acknowledgement to one or more parties during the course of an appeal under this chapter, Board Staff will use mail or personal delivery, unless the party to whom the document is provided consents to delivery by facsimile or secure electronic means.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5422. Time for Filing an Appeal.
Note     •     History

An appeal is timely if it is mailed to or received by the Board Proceedings Division within the time period specified by the Revenue and Taxation Code, or as provided by this section.
(a) Statutory Deadlines. The Revenue and Taxation Code requires that any appeal must be filed:
(1) Not later than the later of: (A) 30 days from the date the Franchise Tax Board mails a Notice of Action upon the protest of an unpaid assessment, or (B) the date indicated on the notice as the deadline for filing an appeal.
(2) Not later than the later of (A): 30 days from the date the Franchise Tax Board mails a Notice of Action affirming a proposed carryover adjustment, or (B) the date indicated on the notice as the deadline for filing an appeal.
(3) Not later than 90 days from the date the Franchise Tax Board mails a Notice of Action on Cancellation, Credit, or Refund, or any other notice, that denies a claim for a refund of tax, penalties, fees, or interest.
(4) At any time, if the Franchise Tax Board failed to act on a claim for a refund of tax, penalties, fees, or interest within six months after the claim was perfected. However, if the Franchise Tax Board denies the claim for refund in writing, the appeal must be filed not later than 90 days from the date the Franchise Tax Board mails notice of the denial.
(5) Not later than 30 days from the date the Franchise Tax Board mails a Notice of Determination Not to Abate Interest, or any other notice, that specifically denies the abatement of unpaid interest.
(6) Not later than 90 days from the date the Franchise Tax Board mails a Notice of Determination Not to Abate Interest, or any other notice, that specifically denies the abatement of paid interest.
(7) At any time, if the Franchise Tax Board failed to act on a request to abate interest within six months after the request was filed. However, if the Franchise Tax Board denies a request to abate interest in writing, the appeal must be filed within the time period specified in paragraph (5) in the case of unpaid interest, or within the time period specified in paragraph (6) in the case of paid interest.
(8) Not later than 90 days from the date the Franchise Tax Board mails a notice that disallows interest on a refund.
(9) Not later than 30 days from the date the Franchise Tax Board mails any notice that grants or denies, in whole or in part, innocent spouse relief.
(10) Not later than 60 days from the earlier of: (A) the date the Franchise Tax Board mails a notice of its determination on a petition for review of a finding of jeopardy, or (B) the 91st day after a petition for review of a finding of jeopardy was filed with the Franchise Tax Board.
(11) Not later than 90 days from the date the Franchise Tax Board mails any notice that denies, in whole or in part, a claim for homeowners' or renters' property tax assistance.
(b) Extensions. Unless a statute or regulation provides otherwise, the statutory deadlines for filing an appeal are extended, pursuant to Code of Civil Procedure section 1013, as follows:
(1) Five days if the Franchise Tax Board's notice being appealed was mailed to an address within California; 
(2) Ten days if the Franchise Tax Board's notice being appealed was mailed to an address outside California, but within the United States; or
(3) Twenty days if the Franchise Tax Board's notice being appealed was mailed to an address outside the United States.
(c) Date of Mailing. In the absence of other evidence, the filing date is the post-mark date, the date of delivery to a “delivery service” as defined in section 5511, or the date of receipt if the document is filed pursuant to section 5421, subdivision (a). If the last day for mailing or delivering an appeal falls on a Saturday, Sunday or holiday, the filing deadline is extended to the next business day.
NOTE

Authority cited: Section 15606, Government Code; and Section 1013, Code of Civil Procedure. Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5423. Accepting or Rejecting an Appeal.
Note     •     History

(a) Determination of Jurisdiction and Timeliness. Upon receipt of the appeal, the Chief of Board Proceedings must determine whether the Board has jurisdiction to hear the appeal under section 5412, subdivision (b), including whether the appeal is timely under the provisions of section 5422. If any question arises as to the timeliness of an appeal or the Board's jurisdiction to hear an appeal, the Chief of Board Proceedings will refer the appeal to the Chief Counsel. The Chief of Board Proceedings and the Chief Counsel may request any relevant information from the Franchise Tax Board in order to perform their duties under this section.
(b) Accepting the Appeal. If the Chief of Board Proceedings or the Chief Counsel determines that the Board has jurisdiction to hear the appeal and that the appeal is timely, or that there is a genuine, material issue relating to jurisdiction or timeliness, the Chief of Board Proceedings must accept the appeal. The Chief of Board Proceedings then will provide written acknowledgement of the acceptance to the appellant and the Franchise Tax Board. The written acknowledgement will notify the appellant and the Franchise Tax Board of their rights and obligations under this chapter. The Chief of Board Proceedings will provide one copy of the appeal and any supporting documents to the Franchise Tax Board.
(c) Issues Relating to Jurisdiction and Timeliness. If the Chief Counsel determines that there is a genuine, material issue relating to jurisdiction or timeliness, such matters will be at issue in the appeal and will be decided by the Board.
(d) Rejecting the Appeal. If the Chief of Board Proceedings or the Chief Counsel determine that the Board does not have jurisdiction to hear the appeal or that the appeal is not timely, and that there is no genuine, material issue relating to jurisdiction or timeliness, the Chief of Board Proceedings must reject the appeal. The Chief of Board Proceedings then will notify the appellant and the Franchise Tax Board in writing of the rejection and the reasons therefor.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5424. Perfecting an Appeal.
Note     •     History

(a) Generally. The briefing and resolution of an appeal cannot begin until the appeal is perfected. For purposes of this chapter, an appeal is “perfected” if it contains substantially all of the information required by section 5420. In addition, an appeal is not “perfected” until it contains sufficient information to identify and contact each appellant or authorized representative, along with the signature of each appellant or authorized representative.
(b) Time to Perfect the Appeal. If the Chief of Board Proceedings accepts an appeal, and such appeal is not perfected, the Chief of Board Proceedings will notify the appellant in writing of the need to perfect the appeal. The notice will explain what information is necessary to perfect the appeal.
(1) The appellant must perfect the appeal not later than 90 days from the date of the notice. The Chief of Board Proceedings may extend the deadline for perfecting an appeal upon a showing of extreme hardship or upon written agreement by the parties. All parties will be notified in writing of any extension.
(2) Perfecting the appeal is accomplished by submitting the information necessary to perfect the appeal to the Chief of Board Proceedings.
(3) If the taxpayer fails to perfect the appeal within the 90-day period, or within any extension period granted by the Chief of Board Proceedings, the appeal will be dismissed. All parties will be notified in writing of the dismissal.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 3. Briefing Schedules and Procedures
§5430. General Requirements.
Note     •     History

(a) Generally. Submissions in the forms of briefs are required in all appeals from actions of the Franchise Tax Board. The parties to an appeal must adhere to the briefing schedules and other requirements set forth in this article. Unless otherwise provided, the rules contained in this section apply to all briefs and briefing schedules.
(b) Determining the briefing schedule; notification. Upon receipt of a perfected appeal, the Chief of Board Proceedings will provide written notification to each party that a perfected appeal has been filed and that briefing will begin under section 5431 or section 5432, whichever is applicable.
(1) If an appeal involves a jeopardy determination, the Chief Counsel will compose a suitable briefing schedule after due consideration of all the facts and circumstances of that appeal.
(2) The notification issued under this section may be included, if appropriate, in the acknowledgment letter issued under section 5423.
(3) Throughout the briefing schedule, the Chief of Board Proceedings will inform the parties of applicable deadlines, extensions, and other requirements by written notification, and will ensure that all parties receive copies of any correspondence.
(c) Extensions. Any request to extend the period for filing a brief must be in writing and must be made prior to the scheduled due date for that brief. Extensions and deferrals of briefing may be granted under the provisions of section 5522.8.
(d) Submission and acknowledgment. The party filing a brief is responsible for submitting one copy of the brief and any supporting exhibits to the Board Proceedings Division. Upon receipt of any brief filed within the scope of the applicable briefing schedule, including any applicable deadlines and extensions, the Chief of Board Proceedings will provide written acknowledgement of receipt to all parties and will provide each opposing party with a copy of the brief and any supporting exhibits.
(e) Formatting. All briefs must be no longer than 30 double-spaced 81/2” by 11” pages, or 15 single-spaced 8 1/2” by 11” pages, excluding any table of contents, table of authorities, and exhibits. All briefs must be handwritten or typed, and printed only on one side in a type-font size of at least 10 points or 12 characters per inch. The Chief of Board Proceedings may grant an exception to these requirements upon written request that establishes why an exception is necessary. If a brief is filed that does not comply with the requirements of this subdivision, the Chief of Board Proceedings may, in his or her discretion, return the brief to the filing party and grant 10 days in which to file a corrected brief. Failure to file a corrected brief within the 10-day period is a waiver of the right to file that brief. Except as otherwise provided in the applicable briefing schedule, that waiver will conclude the briefing schedule.
(f) Failure to file a brief. The failure to file a brief within the scope of the applicable briefing schedule, including any applicable deadlines, extensions, and other requirements, is a waiver of the right to file that brief. Except as otherwise provided in the applicable briefing schedule, that waiver will conclude the briefing schedule. However, the Board, in its discretion, may accept any documentary evidence and related arguments submitted at a hearing pursuant to section 5523.6.
(g) Non-party briefing. Non-Party (Amicus) Briefs may be filed, subject to any generally applicable conditions of this section and the specific conditions of this subdivision.
(1) Any individual or entity may file a Non-Party Brief, whether unsolicited or upon request of the Appeals Division. No individual or entity may file more than one Non-Party Brief, unless the Appeals Division specifically allows otherwise.
(2) Unless the Appeals Division specifically allows otherwise, all Non-Party Briefs must be filed prior to the conclusion of briefing under section 5431 or section 5432, whichever is applicable. 
(3) If a Non-Party Brief is filed, the Chief of Board Proceedings will acknowledge receipt of the brief and provide one copy to each party. Each party may file a reply to the Non-Party Brief not later than 30 days from the date the Chief of Board Proceedings acknowledges receipt of the Non-Party Brief.
(4) For purposes of articles 4 and 5 of this chapter, briefing is considered concluded when the deadline for replying to all unsolicited Non-Party Briefs has passed.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New article 3 (sections 5430-5435) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5431. General Briefing Schedule.
Note     •     History

(a) Application. The briefing schedule in this section applies to all appeals from actions of the Franchise Tax Board, unless the appeal involves an innocent spouse determination or a jeopardy determination.
(b) Opening Briefs.
(1) Appellant's Opening Brief. The perfected appeal is the Appellant's Opening Brief.
(2) Respondent's Opening Brief. The Franchise Tax Board may file an Opening Brief not later than 90 days from the date the Chief of Board Proceedings acknowledges receipt of the Appellant's Opening Brief.
(c) Reply Briefs.
(1) Appellant's Reply Brief. The appellant may file a Reply Brief not later than 30 days from the date the Chief of Board Proceedings acknowledges receipt of the Respondent's Opening Brief. The Appellant's Reply Brief, if filed, may only address points of disagreement with the Respondent's Opening Brief. Except as provided in paragraph (2), the filing of the Appellant's Reply Brief concludes the briefing schedule.
(2) Respondent's Reply Brief. The Franchise Tax Board may file a Reply Brief only upon written permission from the Chief Counsel. The Respondent's Reply Brief, if filed, may only address points of disagreement with the Appellant's Reply Brief.
(A) The Franchise Tax Board has 15 days from the date the Chief of Board Proceedings acknowledges receipt of the Appellant's Reply Brief in which to file a written request to file its Reply Brief.
(B) Upon receipt of the Franchise Tax Board's written request, the Chief Counsel will determine whether additional briefing is necessary. Factors to be considered in determining whether additional briefing is necessary include, but are not limited to:
(i) Whether the Appellant's Reply Brief raised new facts, arguments, or evidence that are essential to the resolution of the appeal;
(ii) Whether the briefing filed to date has provided sufficient information for the Board to resolve the appeal; and
(iii) Whether the facts and issues in the appeal are so complex as to require additional discussion or clarification.
(C) If the Chief Counsel determines that additional briefing is necessary, he or she will grant the Franchise Tax Board's request to file a Reply Brief. The Franchise Tax Board may file its Reply Brief not later than 30 days from the date on which its request is granted.
(D) If the Chief Counsel determines that additional briefing is not necessary, he or she will deny the Franchise Tax Board's request to file a Reply Brief. That denial concludes the briefing schedule.
(3) Appellant's Supplemental Brief. If the Franchise Tax Board files a Reply Brief, the appellant may file a Supplemental Brief not later than 30 days from the date the Chief of Board Proceedings acknowledges receipt of the Respondent's Reply Brief. The Appellant's Supplemental Brief, if filed, may only address points of disagreement with the Respondent's Reply Brief. The filing of the Appellant's Supplemental Brief concludes the briefing schedule.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5432. Briefing Schedule for Innocent Spouse Appeals.
Note     •     History

(a) Application. The briefing schedule in this section applies to all appeals from notices that grant or deny, in whole or in part, innocent spouse relief pursuant to Revenue and Taxation Code sections 18533 or 19006.
(b) Definitions. For purposes of this section:
(1) The “Appealing Spouse” is the individual who files an appeal from the Franchise Tax Board's grant or denial, in whole or in part, of innocent spouse relief.
(2) The “Non-Appealing Spouse” is the individual with whom the Appealing Spouse filed a joint return for the year(s) at issue.
(3) The “requesting spouse” is the individual who requested relief from the joint and several liability imposed by Revenue and Taxation Code section 19006. The requesting spouse may be either the Appealing or Non-Appealing Spouse, depending upon whether the Franchise Tax Board granted or denied innocent spouse relief.
(4) The “non-requesting spouse” is the individual with whom the requesting spouse filed a joint return for the year(s) at issue. The non-requesting spouse may be either the Appealing or Non-Appealing Spouse, depending upon whether the Franchise Tax Board granted or denied innocent spouse relief.
(c) Special Rules and Procedures.
(1) If both spouses file timely appeals from the Franchise Tax Board's partial grant or partial denial of innocent spouse relief, then the appeals will be consolidated for briefing, hearing, and decision. Each spouse will be treated as an “Appealing Spouse” under this section and will have an equal opportunity to file briefs.
(2) If only one spouse files a timely appeal, then upon receipt of a perfected appeal from the Appealing Spouse, the Chief of Board Proceedings will provide one copy of the perfected appeal to the Non-Appealing Spouse and notify the Non-Appealing Spouse of his or her right to participate in the appeal.
(3) The Chief of Board Proceedings will use the best available information to contact the Non-Appealing Spouse.
(d) Protection of confidential information. The Board Proceedings Division will take reasonable steps, including redaction where appropriate, to ensure that the personal identifying information of one spouse is not provided to the other spouse. “Personal identifying information” includes, but is not limited to, a mailing address, electronic mail address, telephone number, and social security number.
(e) Opening Briefs.
(1) Appealing Spouse's Opening Brief. The Appealing Spouse's perfected appeal is the Appealing Spouse's Opening Brief. 
(2) Respondent's Opening Brief. The Franchise Tax Board may file an Opening Brief not later than 90 days from the date the Chief of Board Proceedings acknowledges receipt of the Appealing Spouse's Opening Brief.
(3) Non-Appealing Spouse's Opening Brief. The Non-Appealing Spouse may file an Opening Brief not later than 90 days from the date of the notification of his or her right to participate in the appeal. The filing of the Non-Appealing Spouse's Opening Brief will join the Non-Appealing Spouse as a party to the appeal. The failure to file the Non-Appealing Spouse's Opening Brief within the time provided is a waiver of the right to participate in the appeal, unless such failure is due to reasonable cause.
(f) Reply Briefs.
(1) Appealing Spouse's Reply Brief. The Appealing Spouse may file a Reply Brief not later than 30 days from the later of:
(A) The date the Chief of Board Proceedings acknowledges receipt of the Respondent's Opening Brief;
(B) The date the Chief of Board Proceedings acknowledges receipt of the Non-Appealing Spouse's Opening Brief, if one is filed; or
(C) The date on which it becomes known that the Non-Appealing Spouse will not file an Opening Brief.
The Appealing Spouse's Reply Brief, if filed, may only address points of disagreement with the Respondent's Opening Brief and the Non-Appealing Spouse's Opening Brief. Except as provided in paragraphs (2) and (3), the filing of the Appealing Spouse's Reply brief concludes the briefing schedule.
(2) Non-Appealing Spouse's Reply Brief. If the Appealing Spouse files a Reply Brief, the Non-Appealing Spouse may file a Reply Brief not later than 30 days from the date the Chief of Board Proceedings acknowledges receipt of the Appealing Spouse's Reply Brief. The Non-Appealing Spouse's Reply Brief, if filed, may only address points of disagreement with the Appealing Spouse's Reply Brief.
(3) Respondent's Reply Brief. The Franchise Tax Board may file a Reply Brief only upon written permission from the Chief Counsel. The Respondent's Reply Brief, if filed, may only address points of disagreement with the Appealing Spouse's Reply Brief and the Non-Appealing Spouse's Opening and Reply Briefs. The rules in section 5431, subdivision (c)(2), apply to this paragraph. However, the 15-day period described in section 5431, subdivision (c)(2)(A), begins on the later of: 
(A) The date the Chief of Board Proceedings acknowledges receipt of the Appealing Spouse's Reply Brief;
(B) The date the Chief of Board Proceedings acknowledges receipt of the Non-Appealing Spouse's Reply Brief, if one is filed; or
(C) The date on which it becomes known that the Non-Appealing Spouse will not file a Reply Brief.
(4) If neither the Non-Appealing Spouse nor the Franchise Tax Board file a Reply Brief, the briefing schedule is concluded.
(5) Appealing Spouse's Supplemental Brief. If the Franchise Tax Board or the Non-Appealing Spouse file a Reply Brief, the Appealing Spouse may file a Supplemental Brief not later than 30 days from the later of:
(A) The date the Chief of Board Proceedings acknowledges receipt of the Non-Appealing Spouse's Reply Brief;
(B) The date the Chief of Board Proceedings acknowledges receipt of the Respondent's Reply Brief; or
(C) The date on which it becomes known that the Franchise Tax Board will not file a Reply Brief.
The Appealing Spouse's Supplemental Brief, if filed, may only address points of disagreement with the Respondent's Reply Brief and the Non-Appealing Spouse's Reply Brief. The filing of the Appealing Spouse's Supplemental Brief concludes the briefing schedule.
(g) Conformity with Federal Action. If, prior to the Board's decision on the appeal, any party to the appeal receives notification that the requesting spouse has been granted relief under Internal Revenue Code section 6015, the following procedures will apply in addition to the other procedures set forth in this section:
(1) The party who receives notification that relief has been granted under Internal Revenue Code section 6015 must submit proof of such notification to the Chief of Board Proceedings as soon as is practical.
(2) Regardless of whether the non-requesting spouse has joined the appeal, the Chief of Board Proceedings will notify the Franchise Tax Board and the non-requesting spouse of the federal grant of innocent spouse relief. Not later than 30 days from the date of the notification, the Franchise Tax Board and the non-requesting spouse may provide “information that indicates that relief should not be granted,” as that phrase is defined in Revenue and Taxation Code section 18533, subdivision (i)(2).
(3) If the Franchise Tax Board and/or the non-requesting spouse provides information as permitted by paragraph (2) of this subdivision, the requesting spouse may file an additional brief. If the Franchise Tax Board did not provide information as permitted by paragraph (2), it may also file an additional brief. Additional briefs must be filed not later than 30 days from the date the Chief of Board Proceedings acknowledges receipt of the information described in paragraph (2) of this subdivision. Any brief filed pursuant to this paragraph may only address points of disagreement with the information described in paragraph (2) of this subdivision.
(4) If this subdivision becomes applicable after the briefing schedule has concluded, then briefing will be reopened for the purpose of complying with this subdivision and any hearing or decision will be postponed as appropriate.
(5) If this subdivision becomes applicable before the briefing schedule has concluded, then the briefing schedule will not be concluded until the requirements of this subdivision are satisfied.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 18533, 19006, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5435. Additional Briefing.
Note     •     History

(a) Staff Requests for Additional Briefing. If the Assistant Chief Counsel of the Appeals Division, or his or her designee, determines that insufficient briefing or evidence has been provided, the Appeals Division may request additional briefing or evidence from any party. The Appeals Division will determine the order, deadlines, and conditions under which any briefing or evidence must be submitted. Deadlines under this subdivision may be extended upon a showing of reasonable cause.
(b) Individual Board Member's Request for Additional Briefing. Any individual Board Member may contact the Appeals Division in order to request additional briefing or evidence from any party. The Appeals Division will determine the order, deadlines, and conditions under which any briefing or evidence must be submitted. Deadlines under this subdivision may be extended upon a showing of reasonable cause.
(c) Board Requests for Additional Briefing. If the Board determines that insufficient briefing or evidence has been provided, the Board may request additional briefing or evidence from any party. The Board will determine the order, deadlines, and conditions under which any briefing or evidence must be submitted. The Chief of Board Proceedings may extend deadlines set by the Board under this subdivision only upon a showing of extreme hardship and with the consent of the Board Chair.
(d) Timing of Request. A request under this section may be made during or after the applicable briefing schedule has concluded. Additional briefs or evidence provided in response to such a request are not subject to the requirements of the applicable briefing schedule.
(e) Notification of Board Chair. The Board Chair must be notified promptly of any request made under this section and may postpone the scheduling or hearing of an appeal.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 4. Requesting and Scheduling Oral Hearings
§5440. Right to Request an Oral Hearing.
Note     •     History

(a) Written Request Required. Every appellant has the right to an oral hearing before the Board upon written request, except as otherwise provided in any statute or regulation. 
(1) In order to obtain an oral hearing, the appellant must file a written request not later than 30 days from the conclusion of briefing.
(2) Upon receipt of a timely request, the Chief of Board Proceedings will send written acknowledgment of the request to all parties pursuant to section 5522.1.
(3) An untimely request may be accepted and acknowledged if the Chief Counsel determines that the failure to make a timely request was due to reasonable cause.
(b) Innocent Spouse Appeals. Both the Appealing Spouse and the Non-Appealing Spouse, as those terms are defined in section 5432, subdivision (b), may request an oral hearing pursuant to subdivision (a) of this section. The Non-Appealing Spouse may request an oral hearing only if he or she has been joined as a party to the appeal. If such a request is made by either or both spouses, the Board typically will conduct one oral hearing and invite both spouses to appear. However, the Board will conduct separate oral hearings if:
(1) A court order would prohibit the spouses from appearing at the same hearing; or
(2) The Chief of Board Proceedings, after consulting with the Board Chair, determines that conducting one oral hearing is likely to be unsafe, disruptive, or unjust.
If the Board conducts separate oral hearings, the Board will not decide the appeal until both hearings have concluded.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New article 4 (sections 5440-5444) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5441. Submission for Decision Without Oral Hearing.
Note     •     History

(a) Generally. If the appellant does not request an oral hearing under section 5440, or if the appellant does not respond to a Notice of Hearing under section 5522.6, the appeal will be submitted for decision based upon the written record on file and without an oral hearing.
(b) Innocent Spouse Appeals. If neither the Appealing Spouse nor the Non-Appealing Spouse request an oral hearing under section 5440, or neither spouse responds to their Notice of Hearing under section 5522.6, the appeal will be submitted for decision based upon the written record on file and without an oral hearing.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5442. Appeals Review; Scheduling the Oral Hearing.
Note     •     History

(a) If an oral hearing is granted under section 5440, the Appeals Division will review the record and determine whether the briefing on file adequately addresses all relevant factual and legal issues. If the briefing on file does not adequately address all relevant factual and legal issues, the Appeals Division may request additional briefing under section 5435, or may order a pre-hearing conference under section 5443, or both. When the Appeals Division determines that all relevant factual and legal issues have been addressed, then the Appeals Division will notify the Chief of Board Proceedings that the appeal is ready to be scheduled for an oral hearing.
(b) Upon notification from the Appeals Division that the appeal is ready to be scheduled for an oral hearing, the Chief of Board Proceedings will schedule and notice an oral hearing under section 5522.6.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5443. Pre-Hearing Conference.
Note     •     History

(a) Purpose. The purpose of a pre-hearing conference is to obtain additional facts and evidence, obtain stipulations of fact, and narrow questions of law, in order to facilitate a more efficient and productive oral hearing.
(b) When to Hold a Pre-hearing Conference. A pre-hearing conference may be held only when an oral hearing has been granted under section 5440, and after the conclusion of briefing.
(1) The Appeals Division may order a pre-hearing conference in its discretion.
(2) Any party may make a written request for a pre-hearing conference. The request must be made not later than 15 days from the date on which the Chief of Board Proceedings acknowledges the request for an oral hearing. The Appeals Division may deny the request, with the approval of the Chief Counsel, if the Appeals Division determines that a pre-hearing conference is likely to be unproductive.
(3) The Board, at the oral hearing on the appeal, may order that a pre-hearing conference be held. In that circumstance, the hearing will be postponed until after the conclusion of the pre-hearing conference.
(c) Determining the Time and Location of the Pre-Hearing Conference. The Appeals Division will determine the time and location of the pre-hearing conference. Consistent with workload constraints, the Appeals Division will ensure that the pre-hearing conference is held at a time convenient to the appellant. The pre-hearing conference ordinarily must be held at the Board's headquarters in Sacramento, and may be conducted in person, by videoconference, by teleconference, or by means of a secure electronic connection. With good cause and with the approval of the Chief Counsel, an in-person pre-hearing conference may be held outside of Sacramento.
(d) Notice and Scheduling. The Board Proceedings Division will schedule the pre-hearing conference in accordance with information provided to it by the Appeals Division and will issue appropriate written notification to all parties. The parties will be given notice no less that 15 days before the date of the pre-hearing conference, provided that the notice period may be waived upon agreement by all parties.
(e) Conduct and Nature of the Pre-hearing Conference. An employee of the Appeals Division will conduct the pre-hearing conference. To the extent possible, the conference holder will ensure that the pre-hearing conference is informal and non-adversarial. However, if the conference holder determines that the pre-hearing conference is unproductive or that a party is uncooperative, the conference holder may terminate the pre-hearing conference.
(f) Recording or Transcription. The conference holder will not record, videotape, or transcribe the pre-hearing conference. Any party may arrange for the pre-hearing conference to be recorded or transcribed, at that party's expense. If a transcript is made, the transcript must be made available to all participants and it will become a public record. However, in all cases, statements made by participants during the pre-hearing conference are not binding upon the Board.
(g) Additional Briefing and Evidence. The holding of a pre-hearing conference does not prevent the Appeals Division from requesting additional briefing or evidence under section 5435.
NOTE

Authority cited: Section 15606, Government Code.  Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5444. Hearing Summary.
Note     •     History

(a) Definition. For purposes of this chapter, a “Hearing Summary” is a written document intended to assist the Board in its consideration and decision of an appeal at an oral hearing. The Hearing Summary will contain:
(1) Sufficient facts, contentions, law, and evidence to enable the Board to conduct an informed oral hearing;
(2) The Appeals Division's recommendation for or against the adoption of a Formal Opinion under section 5452, if the Appeals Division determines that such a recommendation is appropriate;
(3) A discussion of the pre-hearing conference, if one was held, including any additional information, stipulations, and concessions resulting therefrom; and
(4) The Appeals Division's analysis and comments, including any questions posed to the parties.
(b) Preparing the Hearing Summary. Upon the scheduling and noticing of an oral hearing pursuant to section 5522.6, the Appeals Division will prepare a Hearing Summary and submit the Hearing Summary to the Chief of Board Proceedings. Except in the case of an appeal that involves a jeopardy determination, the Appeals Division will have at least 30 days in which to prepare and submit the Hearing Summary. The Chief Counsel may extend the time for submitting the Hearing Summary upon a showing of reasonable cause. Upon receipt of the Hearing Summary, the Chief of Board Proceedings will provide one copy to each party.
(c) Citation prohibited. Hearing Summaries may not be cited as precedent in any appeal or other proceeding before the Board.
NOTE

Authority cited: Section 15606, Government Code.  Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 5. Decisions, Opinions, and Frivolous Appeal Penalties
§5450. Letter Decisions.
Note     •     History

(a) Definition. A “Letter Decision” is a written decision that contains a short explanation of the reasons for the Board's decision on an appeal.
(b) Preparing the Letter Decision. Whenever the Board decides an appeal without adopting, or directing the preparation of, a Summary Decision or Formal Opinion, the Appeals Division will prepare a Letter Decision. The Appeals Division will provide one copy of a Letter Decision to each party not later than three business days from the date of the Board's decision.
(c) Date of Decision. The date on which the Board votes to decide the appeal is the date of the decision for purposes of this chapter.
(d) Citation prohibited. Letter Decisions may not be cited as precedent in any appeal or other proceeding before the Board.
NOTE

Authority cited: Section 15606, Government Code.  Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New article 5 (sections 5450-5454) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5451. Summary Decisions.
Note     •     History

(a) Definition. A “Summary Decision” is a written decision that contains the findings of fact and conclusions of law that form the basis of the Board's decision on an appeal. The Summary Decision does not represent or reflect the Board's decision on the appeal unless and until it is adopted by the Board.
(b) Preparing the Summary Decision. The Appeals Division will prepare a Summary Decision when an appeal is submitted for decision under section 5441, or when the Board orders the preparation of a Summary Decision. The Appeals Division must submit the Summary Decision to the Board Proceedings Division either upon completion or within any deadline set by the Board. The Chief Counsel may extend the time period for submitting the Summary Decision upon a showing of reasonable cause and with the consent of the Board Chair.
(c) Adoption; Date of Decision. When the appeals Division prepares a Summary Decision, the Decision will be submitted to the Board for adoption as a non-appearance matter and remains confidential until adopted by the Board. The date on which the Board votes to adopt the Summary Decision, or votes to decide the appeal without adopting the Summary Decision, is the date of the Board's decision for purposes of this chapter.
(d) Citation prohibited. Summary Decisions may not be cited as precedent in any appeal or other proceeding before the Board.
NOTE

Authority cited: Section 15606, Government Code.  Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5452. Formal Opinions.
Note     •     History

(a) Definition. A “Formal Opinion” is a written decision that contains the findings of fact and conclusions of law that form the basis of the Board's decision on an appeal and which is intended to set precedent. The Formal Opinion does not represent or reflect the Board's decision on the appeal unless and until it is adopted by the Board.
(b) Preparing the Formal Opinion. The Appeals Division will prepare a Formal Opinion when an appeal is submitted for decision under section 5441 and the Appeals Division determines that a Formal Opinion might be appropriate, or when the Board orders the preparation of a Formal Opinion. The Appeals Division must submit the Formal Opinion to the Board Proceedings Division either upon completion or within any deadline set by the Board. The Chief Counsel may extend the time period for submitting the Formal Opinion upon a showing of reasonable cause and with the consent of the Board Chair.
(c) Notice of Formal Opinion. When the Board orders the Appeals Division to prepare a Formal Opinion, the Appeals Division will promptly send a written notice to the parties that contains the following:
(1) A brief explanation of any Board action taken on the appeal, including any decision on the outcome of the appeal and the order to prepare a Formal Opinion;
(2) A statement that the time period for filing a Petition for Rehearing will not begin until the Board adopts the Formal Opinion, or until the Board otherwise decides the appeal without adopting the Formal Opinion; and
(3) If the appeal involves an unpaid liability that is subject to the accrual of interest, a statement that interest will continue to accrue until the liability is paid in full.
(d) Adoption; Date of Decision. When the Appeals Division prepares a Formal Opinion, the Opinion will be submitted to the Board for adoption as a non-appearance matter and remains confidential until adopted by the Board. The date on which the Board votes to adopt the Formal Opinion, or votes to decide the appeal without adopting the Formal Opinion, is the date of the Board's decision for purposes of this chapter.
(e) Reasons for Issuing a Formal Opinion. In determining whether a Formal Opinion might be appropriate, the following factors are considered:
(1) Whether the Opinion would establish a new rule of law, apply an existing rule to a set of facts significantly different from those stated in published opinions, or modify or repeal an existing rule;
(2) Whether the Opinion would resolve or create an apparent conflict in the law;
(3) Whether the Opinion would involve a legal issue of continuing public interest; and
(4) Whether the Opinion would make a significant contribution to the law by reviewing either the development of a common law rule or the legislative or judicial history of a provision of a constitution, statute, or other written law.
The list of factors in this subdivision is not intended to be exclusive. The Board and the Appeals Division may consider other relevant factors.
(f) Citation permitted. Any Formal Opinion may be cited as precedent in any appeal or other proceeding before the Board, unless the Opinion has been depublished, overruled, or superseded.
NOTE

Authority cited: Section 15606, Government Code.  Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5454. Frivolous Appeal Penalty.
Note     •     History

(a) Generally. If the Board determines that an appeal is frivolous or is maintained for the purpose of delay, the Board may impose a penalty, under Revenue and Taxation Code section 19714, on the appellant or appellants that filed the appeal. The Board may impose a frivolous appeal penalty on its own or upon the recommendation of the Appeals Division.
(b) Factors Considered. The following factors are considered in determining whether, and in what amount, to impose a frivolous appeal penalty:
(1) Whether the appellant is making arguments that the Board, in a Formal Opinion, or courts have rejected;
(2) Whether the appellant is making the same arguments that the same appellant made in prior appeals;
(3) Whether the appellant filed the appeal with the intent of delaying legitimate tax proceedings or the legitimate collection of tax owed;
(4) Whether the appellant has a history of filing frivolous appeals or failing to comply with California's tax laws.
The list of factors in this subdivision is not intended to be exclusive. The Board and the Appeals Division may consider other relevant factors.
NOTE

Authority cited: Section 15606, Government Code.  Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 6. Petitions for Rehearing and Rehearings
§5460. Finality of Decision.
Note     •     History

(a) Finality. The Board's decision under article 5 of this chapter becomes final 30 days from the date of the decision unless, within that 30-day period, a party to the appeal files a Petition for Rehearing.
(b) Finality Independent of Notice. The finality of the Board's decision is not dependent upon the date of any notice of the decision. In addition, the decision may become final even though Board Staff fails to send, or a party fails to receive, notice of the decision.
(c) Number of Filings. The filing of a Petition for Rehearing by one party does not prevent the filing of a Petition for Rehearing by another party, provided that each Petition for Rehearing is filed on time. However, no party may file more than one Petition for Rehearing.
NOTE

Authority cited: Section 15606, Government Code.  Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New article 6 (sections 5460-5465) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5461. Petitions for Rehearing.
Note     •     History

(a) Definitions. For purposes of this article:
(1) The “Filing Party” is the party who files a Petition for Rehearing.
(2) The “Non-Filing Party” is the party who does not file a Petition for Rehearing.
(b) Time for Filing. A Petition for Rehearing is timely if it is mailed within the 30-day period described in section 5460, subdivision (a). The date of mailing is determined under section 5422, subdivision (c).
(c) Format and Contents of the Petition for Rehearing. Every Petition for Rehearing must be in writing, must meet the formatting requirements of section 5430, subdivision (e), and must contain the following:
(1) The name or names of the party or parties filing the Petition for Rehearing;
(2) The address and telephone number of each party and, if applicable, each party's authorized representative;
(3) Any portion of the amount at issue conceded by the party;
(4) The signature of each party or the signature of an authorized representative made on behalf of each party filing the Petition for Rehearing; and
(5) All the facts and legal authorities necessary to:
(A) Identify an irregularity in the Board's proceedings that prevented the fair consideration of the appeal;
(B) Identify an accident or surprise that occurred, which ordinary caution could not have prevented;
(C) Identify newly discovered, relevant evidence, which the Filing Party could not have reasonably discovered and provided prior to the Board's decision; or
(D) Demonstrate there was insufficient evidence to justify the Board's decision or the decision is contrary to law.
(d) Accepting or Rejecting the Petition for Rehearing.
(1) Upon receipt of a Petition for Rehearing, the Chief of Board Proceedings must determine whether the Petition for Rehearing is timely. If any question arises as to the timelines of a Petition for Rehearing, the Chief of Board Proceedings will refer the Petition to the Chief Counsel.
(2) If the Chief of Board Proceedings or the Chief Counsel determines that the Petition for Rehearing is timely, the Chief of Board Proceedings must accept the Petition for Rehearing. The Chief of Board Proceedings then will notify all parties in writing of the acceptance. The notice will explain each party's rights and obligations under this article. The Chief of Board Proceedings will provide one copy of the Petition for Rehearing and any supporting documents to the Non-Filing Party.
(3) If the Chief of Board Proceedings or the Chief Counsel determines that the Petition for Rehearing is not timely, the Chief of Board Proceedings must reject the Petition for Rehearing. The Chief of Board Proceedings then will notify all parties in writing of the rejection and the reasons therefor.
(e) Perfecting the Petition for Rehearing.
(1) The briefing and resolution of a Petition for Rehearing cannot begin until the Petition for Rehearing is perfected. A Petition for Rehearing is “perfected” if it contains substantially all of the information required by subdivision (c). A Petition for Rehearing is not perfected until it contains sufficient information to identify and contact each Filing Party or authorized representative, along with the signature of each Filing Party or authorized representative. 
(2) If a timely Petition for Rehearing is not perfected, the Chief of Board Proceedings will notify the Filing Party in writing of the need to perfect the Petition for Rehearing. That notice will explain what information is necessary to perfect the Petition for Rehearing.
(A) The Filing Party must perfect the Petition for Rehearing not later than 30 days from the date of the notice. The Chief of Board Proceedings may extend the deadline for perfecting a Petition for Rehearing upon a showing of extreme hardship or upon written agreement by the parties. All parties will be notified in writing of any extension.
(B) Perfecting the Petition for Rehearing is accomplished by submitting the information necessary to perfect the Petition for Rehearing to the Chief of Board Proceedings.
(C) If the Filing Party fails to perfect the Petition for Rehearing within the 30-day period, or within any extension period granted by the Chief of Board Proceedings, the Petition for Rehearing will be rejected. All parties will be notified in writing of the rejection.
NOTE

Authority cited: Section 15606, Government Code.  Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5462. Briefing on Petition for Rehearing.
Note     •     History

(a) Subdivisions (b)(3), (c), (d), (e), (f), and (g) of section 5430 apply to the administration of this section and to any documents filed under this section. When applied to this section, provisions of section 5430 must be interpreted within the context of this section.
(b) Briefing Schedule.
(1) Unless otherwise directed by Board Staff, the Filing Party will not be permitted to submit any additional briefing after the submission of a perfected Petition for Rehearing.
(2) Not later than 30 days from the date on which the Chief of Board Proceedings acknowledges receipt of a perfected Petition for Rehearing, the Non-Filing Party may file a Reply to the Petition for Rehearing.
(3) If there is more than one Filing Party, then each party may file a Reply to each Petition for Rehearing under the requirements of paragraph (2).
(c) Additional Briefing. This section does not prevent a request for additional briefing under section 5435.
NOTE

Authority cited: Section 15606, Government Code.  Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5463. Decisions on Petitions for Rehearing.
Note     •     History

(a) Definition. A “Decision on Petition for Rehearing” is a written decision that contains the findings of fact and conclusions of law that form the basis of the Board's decision to grant or deny a rehearing. The Decision on Petition for Rehearing does not represent or reflect the Board's decision to grant or deny the rehearing unless and until it is adopted by the Board
(b) Preparing the Decision on Petition for Rehearing. Upon the conclusion of briefing under section 5462, the Appeals Division will prepare a Decision on Petition for Rehearing. Upon completion, the Appeals Division will submit the Decision on Petition for Rehearing to the Chief of Board Proceedings.
(c) Adoption; Date of Decision. The Decision on Petition for Rehearing will be submitted to the Board for adoption as a non-appearance matter and remains confidential until adopted by the Board.
(1) If the Board grants a Petition for Rehearing, then the Board's decision under article 5 of this chapter will be held in abeyance pending resolution of the rehearing. The Board, in its discretion, may limit the scope of the rehearing.
(2) If the Board denies a Petition for Rehearing, then the Board's decision to deny the petition becomes final 30 days from the date on which the Board voted to deny the rehearing.
(d) Citation. Decisions on Petition for Rehearing may not be cited as precedent in any appeal or other proceeding before the Board, unless the Board adopts the Decision on Petition for Rehearing as a Formal Opinion.
NOTE

Authority cited: Section 15606, Government Code. Reference: Section 657, Code of Civil Procedure; and Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5464. Briefing on Rehearing.
Note     •     History

(a) Section 5430, subdivisions (b)(3), (c), (d), (e), (f), and (g) apply to the administration of this section and to any documents filed under this section. When applied to this section, provisions of section 5430 must be interpreted within the context of this section.
(b) Briefing Schedule; Single Petition Granted. If the Board grants a single Petition for Rehearing, the following briefing schedule applies:
(1) Filing Party's Opening Brief. The Filing Party may file an Opening Brief not later than 30 days from the date on which the Board voted to grant the Petition for Rehearing.
(2) Non-Filing Party's Reply Brief. The Non-Filing Party may file a Reply Brief not later than 30 days from the date on which the Chief of Board Proceedings acknowledges receipt of the Filing Party's Opening Brief.
(3) Filing Party's Reply Brief. The Filing Party may file a Reply Brief not later than 30 days from the date on which the Chief of Board Proceedings acknowledges receipt of the Non-Filing Party's Reply Brief.
(c) Briefing Schedule; Multiple Petitions Granted. If there is more than one Filing Party and the Board grants more than one Petition for Rehearing, the following briefing schedule applies:
(1) Opening Briefs. Each party may file an Opening Brief not later than 30 days from the date on which the Board voted to grant the Petitions for Rehearing.
(2) Reply Briefs. Each party may file a Reply Brief not later than 30 days from the date on which the Chief of Board Proceedings acknowledges receipt of the last brief filed pursuant to paragraph (1).
(d) Additional Briefing. This section does not prevent a request for additional briefing under section 5435.
(e) Alternate Briefing Schedule on Rehearing. Notwithstanding subdivisions (b) and (c), the Board may order any briefing schedule that it deems appropriate.
NOTE

Authority cited: Section 15606, Government Code.  Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5465. Decision on Rehearing.
Note     •     History

(a) Hearing and Decision. At the conclusion of briefing under section 5464, the provisions of articles 4 and 5 of this chapter will apply, except that any reference to a “decision” or “opinion” is deemed a reference to a decision or opinion on rehearing, and any reference to the briefing schedule is deemed a reference to the briefing schedule under section 5464.
(b) Finality of Decision. The Board's decision on rehearing is the Board's decision on the appeal and becomes final 30 days from the date of the decision.
NOTE

Authority cited: Section 15606, Government Code.  Reference: Sections 18533, 19043.5, 19045, 19047, 19048, 19084, 19085, 19087, 19104, 19324, 19331, 19333, 19334, 19335, 19343, 19345, 19346 and 20645, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Chapter 5. General Board Hearing Procedures
Article 1. Application of Chapter and Definitions
§5510. General Application of Chapter 5.
Note     •     History

(a) This chapter applies to Board hearings under any of the following laws:
(1) Administration of Franchise and Income Tax Laws 
Revenue and Taxation Code sections 18401-19802
(2) Alcoholic Beverage Tax Law 
California Constitution, article XX, section 22; 
Revenue and Taxation Code sections 32001-32557
(3) California Tire Fee 
Public Resources Code sections 42860-42895; 
Revenue and Taxation Code sections 55001-55381
(4) Childhood Lead Poisoning Prevention Fee  
Health and Safety Code sections 105275-105310; 
Revenue and Taxation Code sections 43001-43651
(5) Cigarette and Tobacco Products Tax Law 
California Constitution, article XIIIB, section 12; 
Health and Safety Code sections 104555-104558; 
Revenue and Taxation Code sections 30001-30482
(6) Diesel Fuel Tax Law 
Revenue and Taxation Code sections 9401-9433 and 60001-60708
(7) Emergency Telephone Users Surcharge Law 
Revenue and Taxation Code sections 41001-41176
(8) Energy Resources Surcharge Law 
Revenue and Taxation Code sections 40001-40216
(9) Hazardous Substances Tax Law 
Revenue and Taxation Code sections 43001-43651
(10) Integrated Waste Management Fee Law 
Public Resources Code sections 40000-40201, 44001-44006, and 48000-48008; 
Revenue and Taxation Code sections 45001-45984
(11) Marine Invasive Species Fee Collection Law 
Public Resources Code sections 71200-71271; 
Revenue and Taxation Code sections 44000-44008, 55001-55381
(12) Motor Vehicle Fuel Tax Law 
California Constitution, article XIX, sections 1-9; 
Revenue and Taxation Code sections 7301-8526
(13) Natural Gas Surcharge Law 
Public Utilities Code sections 890-900; 
Revenue and Taxation Code sections 55001-55381
(14) Occupational Lead Poisoning Prevention Fee 
Health and Safety Code sections 105175-105197; 
Revenue and Taxation Code sections 43001-43651
(15) Oil Spill Response, Prevention, and Administration Fees Law 
Government Code sections 8670.1-8670.51.1 
Revenue and Taxation Code sections 46001-46751
(16) Private Railroad Car Tax 
California Constitution, article XIII, section 19; 
Revenue and Taxation Code sections 11201-11702
(17) Publicly Owned Property 
California Constitution, article XIII, section 11(g); 
Revenue and Taxation Code sections 1840 and 1841
(18) Sales and Use Tax Law, Bradley-Burns Uniform Sales and Use Tax Law, and Transactions and Use Tax Law 
Revenue and Taxation Code sections 6001-7176, 7200-7226, and 7251-7279.6, respectively
(19) Senior Citizens Homeowners and Renters Property Tax Assistance Law 
Revenue and Taxation Code sections 20501-20646
(20) State-Assessed Property 
California Constitution, article XIII, section 19; 
Revenue and Taxation Code sections 721-868, 4876-4880, 5011-5014
(21) Tax on Insurers Law 
California Constitution, article XIII, section 28; 
Revenue and Taxation Code sections 12001-13170
(22) Timber Yield Tax 
Revenue and Taxation Code sections 423.5, 431-437, 38101-38908
(23) Underground Storage Tank Maintenance Fee 
Health and Safety Code sections 25280-25299.99.3 
Revenue and Taxation Code sections 50101-50162
(24) Use Fuel Tax 
Revenue and Taxation Code sections 8601-9433 
(25) Welfare Exemption 
California Constitution, article XIII, section 4(b); 
Revenue and Taxation Code sections 214-214.15, 254.5-254.6, 270-272
(b) This chapter sets forth rules of general application for all Board hearings conducted under the laws listed in subdivision (a) of this section. Where the procedure for a specific law differs from the general rule, the more specific procedure will be provided or cross-referenced.
(c) The rules and procedures in chapter 4 (commencing with section 5410) apply to appeals from the actions of the Franchise Tax Board. To the extent that provisions in this chapter conflict with chapter 4, the provisions of chapter 4 control.
(d) To the extent that provisions in this chapter conflict with the International Fuel Tax Agreement, the provisions of the International Fuel Tax Agreement control.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code.
HISTORY

1. New chapter 5 (articles 1-7), article 1 (sections 5510-5512) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5511. Definitions.
Note     •     History

The following definitions apply to this chapter, and also apply to chapters 2, 3, and 4 of this division as provided therein:
(a) “Appeals Division” means the Appeals Division of the Board of Equalization's Legal Department. “Appeals Staff” means an employee or employees of the State Board of Equalization assigned to the Appeals Division of the Legal Department.
(b) “Board” means the Board Members of the State Board of Equalization meeting or acting as a body, or the agency created by article XIII, section 9, of the California Constitution, as the context indicates.
(c) “Board Chair” or “Chair” means the Chairperson of the State Board of Equalization, whom the Board may choose from time to time. 
(d) “Board Member” means an individual Member of the State Board of Equalization. “Board Member” includes a deputy appointed by the Controller pursuant to Government Code section 7.6 or 7.9 (as interpreted by the Attorney General), when the deputy is performing the Controller's statutory duties on the Board.
(e) “Board Proceedings Division” means the Board Proceedings Division of the State Board of Equalization. “Board Proceedings Staff” means an employee or employees of the Board Proceedings Division.
(f) “Board Staff” means an employee or employees of the State Board of Equalization. “Board Member's Staff” refers to Board Staff assigned to the office of a Board Member.
(g) “Brief” means a written document that contains an argument supporting a party's position, including arguments on how laws or regulations apply to the facts presented in a party's matter. Notwithstanding this definition, affidavits and declarations submitted by parties, and documents produced by the Appeals Division, including, but not limited to, hearing summaries and final action recommendations, are not briefs.
(h) “Chief Counsel” means the Chief Counsel of the State Board of Equalization and any person to whom the Chief Counsel may delegate his or her official duties from time to time.
(i) “Claimant” means a taxpayer whose matter involves the denial of a claim under any of the laws listed in section 5510. The term “claimant” includes a taxpayer's authorized representative, where appropriate.
(j) “Chief of Board Proceedings” means the Chief of the Board Proceedings Division and any person to whom the Chief of Board Proceedings may delegate his or her official duties from time to time. The Chief of Board Proceedings acts as the Clerk of the Board and establishes policy for the management of the matters to be heard by the Board, including but not limited to scheduling, issuance of notices, preparation of minutes, and the review and monitoring of documents. 
(k) “Delivery Service” means a trade or business, if such trade or business delivers documents in the ordinary course of its business, makes its delivery services available to the general public, and records electronically to its data base, kept in the regular course of its business, or marks on the cover in which any item is delivered, the date on which such item was received by the trade or business for delivery.
(l) “Department” means the Property and Special Taxes Department of the Board of Equalization, Sales and Use Tax Department of the Board of Equalization, Energy Commission, Department of Fish and Game, Franchise Tax Board, Department of Health Services, Department of Insurance, Integrated Waste Management Board, Public Utilities Commission, Department of Toxic Substances Control and Water Resources Control Board, where appropriate.
(m) “Deputy Director” means the Deputy Director of the State Board of Equalization's Sales and Use Tax Department or Property and Special Taxes Department and any person to whom the Deputy Director delegates his or her official duties from time to time.
(n) “Executive Director” means the Executive Director of the State Board of Equalization and any person to whom the Executive Director may delegate his or her official duties from time to time.
(o) “Extreme hardship” means that a person exercising ordinary care is unable to or restricted from complying with a provision of this division due to extraordinary circumstances beyond the person's control.
(p) “Hearing” means a taxpayer's opportunity to appear before the Board during a Board meeting and present oral arguments regarding issues of fact and law relevant to the taxpayer's matter.
(q) “Hearing Summary” is an objective, written document intended to assist the Board in its consideration of and decision on a matter for which an oral hearing has been requested.
(r) “Matter” means:
(1) Any petition, including, but not limited to, a petition for redetermination, petition for reassessment, petition for reconsideration of successor liability, petition for review of local tax reallocation inquiries, or petition for review of district tax redistribution inquiries; 
(2) Claim, including a claim for refund; 
(3) Appeal from an action of the Franchise Tax Board and related proceedings provided under chapter 4; 
(4) Application for administrative hearing; 
(5) Petition for rehearing; and
(6) Any other item scheduled for a Board hearing in any program listed in section 5510, including, but not limited to, requests for relief of taxes, interest, or penalties. 
(s) “Party” means the taxpayer and the Department as defined in this section. 
(1) In any matter where an agency has requested an oral hearing in accordance with chapter 2 and the taxpayer has not requested an oral hearing, the agency requesting the oral hearing shall be the Department for purposes of this chapter, and neither the Property and Special Taxes Department nor the Appeals Division shall be the Department. 
(2) For purposes of claims or inquiries regarding the incorrect or non-distribution of local or district taxes, the term “party” means those persons defined as parties in California Code of Regulations, title 18, section 1807 or 1828.
(t) “Person” shall have the same definition as that used in Revenue and Taxation Code section 19.
(u) “Reasonable cause” means such circumstances as would prevent an ordinarily prudent and competent person exercising ordinary care and diligence from complying with a provision of this division.
(v) “Tax” means any tax, fee, surcharge, assessment, appraisal review, or exemption program administered by the Board or another agency and which is the subject of a matter before the Board.
(w) “Taxpayer” means an individual or business entity that is a taxpayer, feepayer, surcharge payer, appellant, petitioner, claimant, or any other person who has a liability, assessment, or other matter for Board hearing such as an appeal from the actions of the Franchise Tax Board, or who is a person directly interested in any matter before the Board under any of the programs listed in section 5510. A taxpayer is not a party to a claim or inquiry regarding the incorrect or non-distribution of local or district taxes except as provided in California Code of Regulations, title 18, section 1807 or 1828. The term “taxpayer” also includes, where appropriate, the taxpayer's authorized representative.
(x) “Section” means a section of title 18 of the California Code of Regulations, unless otherwise specified.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. References: Article XIII, Section 17, California Constitution; Sections 15606 and 15640, Government Code; and Sections 20, 254.5, 254.6, 742, 748, 1840, 5107, 5148, 6074, 6456, 6538, 6538.5, 6562, 6592, 6593, 6593.5, 6596, 6901, 6902, 6906, 6981, 7209, 7223, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 18533, 19047, 19085, 19104, 19333, 19345, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5512. Construction.
Note     •     History

The following provisions of this division must be construed and applied in accordance with the following terminology:
(a) “Must” is mandatory.
(b) “May” is permissive.
(c) “May not” means not permitted to.
(d) “Will” expresses a future contingency or predicts an action in the ordinary course of events, but does not signify a mandatory duty.
(e) “Should” expresses a preference or a nonbinding recommendation.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 2. Requirements for Scheduling Board Meetings and Hearings
Subarticle 1. Meeting Calendars
§5521. Monthly Board Meetings.
Note     •     History

(a) Monthly Meetings. The Board holds monthly Board meetings. Board meetings are conducted in Sacramento and at other locations within the state for the convenience of taxpayers and their representatives residing outside the Sacramento area.
(b) Additional Meetings. At the discretion of the Board Chair, additional meetings may be conducted at such times and places as needed within the state.
(c) Teleconference Board Meetings. When circumstances require, the Board may hold meetings via teleconference as provided in Government Code section 11123.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 15609 and 15610, Government Code.
HISTORY

1. New article 2 (subchapters 1-3), subchapter 1 (sections 5521-5521.5) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 1 to subarticle 1 (Register 2008, No. 13).
§5521.5. Adoption of Board Meeting Calendar.
Note     •     History

(a) The Board generally adopts a meeting calendar for the following calendar year, but may adopt a meeting calendar for any appropriate period.
(b) Within 15 days of adoption, the meeting calendar will be available for viewing by the public on the Board's website at www.boe.ca.gov.
(c) The Chief of Board Proceedings may cancel a portion of a Board meeting listed on a previously adopted meeting calendar after giving notice to the Board Chair. A majority vote of the Board may cancel or change a meeting date or location identified on a previously adopted meeting calendar. Board Proceedings Staff must promptly amend the publicly available meeting calendar to reflect any changes made pursuant to this subdivision.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Section 15609 and 15610, Government Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Subarticle 2. Requesting and Scheduling an Oral Hearing
§5522. Right to Request an Oral Hearing.
Note     •     History

(a) Every taxpayer may file a written request for an oral hearing before the Board regarding any matter subject to the provisions of this chapter.
(b) Written requests for an oral hearing must be granted where the Board is required to grant an oral hearing on the taxpayer's matter by a statute or regulation, and will be liberally granted with regard to discretionary matters, unless an oral hearing is being requested for the primary purpose of delay or the taxpayer's position is frivolous or groundless.
(c) Business and Special Taxes: A written request for an oral hearing must be filed no later than 30 days after the date the Appeals Division issues its Decision and Recommendation pursuant to chapter 2 of this division.
(d) Property Taxes: A written request for an oral hearing must be included in the taxpayer's petition or application pursuant to chapter 3 of this division.
(e) Appeals from Actions of the Franchise Tax Board: A written request for an oral hearing before the Board must be filed in accordance with section 5440 of chapter 4 of this division.
(f) The Board may hold an oral hearing to discuss any matter whether or not an oral hearing has been timely requested in accordance with subdivisions (c), (d), and (e). 
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 15606, 15640, Government Code; Sections 254.5, 254.6, 742, 748, 1840, 5148, 6074, 6456, 6538, 6538.5, 6562, 6592, 6593, 6593.5, 6596, 6901, 6902, 6906, 6981, 7209, 7223, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 18533, 19047, 19085, 19104, 19333, 19345, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New subchapter 2 (sections 5522-5522.8) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 2 to subarticle 2 (Register 2008, No. 13).
§5522.2. Acknowledgement of Request for Oral Hearing.
Note     •     History

(a) If Board Staff receives a written request for an oral hearing or confirmation that a previously requested hearing is still desired, the Board Proceedings Division must issue a letter acknowledging the request. The acknowledgment letter will indicate whether an oral hearing before the Board has been granted, and, if granted, will also provide the location where the oral hearing will be scheduled. 
(b) Taxpayers must submit requests to change the location where an oral hearing is scheduled to the Board Proceedings Division upon receipt of the acknowledgement letter. Upon receipt of a request to change location, the Chief of Board Proceedings will review the request, prepare a recommendation, and submit the request and recommendation to the Board Chair for decision.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 15606 and 15640, Government Code; and Sections 254.5, 254.6, 742, 748, 1840, 5148, 6074, 6456, 6538, 6538.5, 6562, 6592, 6593, 6593.5, 6596, 6901, 6902, 6906, 6981, 7209, 7223, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 18533, 19047, 19085, 19104, 19333, 19345, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5522.4. Consolidation for Hearing or Decision.
Note     •     History

(a) Multiple matters may be consolidated for hearing or decision if the facts and issues are similar and no substantial right of any party will be prejudiced.
(b) The Board Members, Appeals Staff, or any party may request a consolidation, or object to a consolidation of, matters for hearing or decision.
(c) Requests for and objections to the consolidation of matters for hearing or decision must be submitted in writing to the Board Proceedings Division and to all parties to the matters at issue. 
(1) A request for consolidation should establish that the relevant facts and issues in each matter to be heard or decided are similar, and that no substantial right of any party would be prejudiced by consolidation. 
(2) An objection to the consolidation of matters to be heard or decided should establish that consolidation would have an adverse affect on a substantial right of the objecting party. 
(d) If the Chief Counsel determines that consolidation would not prejudice a substantial right of any party, or all of the parties to such matters agree to consolidation, the Chief of Board Proceedings will consolidate such matters and notify all of the parties. If the Chief Counsel determines that consolidation would have an adverse effect on a substantial right of any party, the matters may not be consolidated regardless of the parties' consent. 
(e) Any party may file an objection to consolidation not later than 15 days from the date the Chief of Board Proceedings issues the notice described in subdivision (d). Upon receipt of an objection, the matters must be deconsolidated unless the Chief Counsel determines that the objection is frivolous or deconsolidation would result in the misuse of administrative resources. 
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 15606 and 15640, Government Code; and Sections 254.5, 254.6, 742, 748, 1840, 5148, 6074, 6456, 6538, 6538.5, 6562, 6592, 6593, 6593.5, 6596, 6901, 6902, 6906, 6981, 7209, 7223, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 18533, 19047, 19085, 19104, 19333, 19345, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5522.6. Notice of Board Hearing and Response.
Note     •     History

(a) General Procedure. 
(1) Except as provided in paragraph (2) of this subdivision, Board Proceedings Staff must mail a Notice of Board Hearing along with a Response to Notice of Board Hearing to each party and each party's authorized representative at least 75 days in advance of the parties' scheduled hearing date.
(2) With regard to State Assessee and Private Railroad Car Matters, Board Proceedings Staff must mail a Notice of Board Hearing along with a Response to Notice of Board Hearing to each party and each party's authorized representative at least 45 days in advance of the parties' scheduled hearing date.
(b) Notice of Board Hearing. The notice must contain the following information:
(1) The name, address, and case identification number of the taxpayer;
(2) The session, date, and location of the hearing;
(3) The due date of the Response to Notice of Board Hearing;
(4) The Board Proceedings Division's contact name, email address, mailing address, telephone number, and fax number; and
(5) The date the Notice of Board Hearing was mailed.
(c) Response to Notice of Board Hearing. Each party or each party's authorized representative must return the Response to Notice of Board Hearing no later than 15 days from the date the Notice of Board Hearing was mailed. Each party or party's authorized representative must respond to the Notice of Board Hearing by indicating that:
(1) The party or party's authorized representatives will appear at the hearing at the time and place noted;
(2) The party waives the opportunity to appear and be represented at the hearing and requests the Board to decide the matter on the basis of the written record on file and without an oral hearing; or
(3) The party withdraws the party's request for a hearing.
A party or party's representative may also include a request for an interpreter in the Response to Notice of Board Hearing. Persons participating in Board meetings who speak a language other than English and require an interpreter are entitled to an interpreter at no charge.
(d) Waiver of Notice. The 75-day and 45-day notice periods may be waived upon agreement among all parties and the Chief Counsel. If the 75-day or 45-day notice period is waived, the Chief of Board Proceedings will modify any briefing schedule as appropriate.
(e) Failure to Respond to Notice of Board Hearing.
(1) If the party or parties who requested an oral hearing all fail to return the Response to Notice of Board Hearing by the deadline stated in the Notice of Board Hearing, the matter will be submitted to the Board for decision on the basis of the written record on file without an oral hearing.
(2) Board Proceedings Staff will notify the taxpayer, and any state agency that is a party to a matter in writing that the matter has been removed from the oral hearing calendar and placed on a consent calendar for Board decision.
(3) Prior to a Board decision, the Chief Counsel, in his or her discretion, may make exceptions to return the matter to the oral hearing calendar upon a showing of reasonable cause. 
(4) If the Chief Counsel makes an exception, the Board Proceedings Division must promptly provide notice to all the parties to such matter.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 15606 and 15640, Government Code; and Sections 254.5, 254.6, 742, 748, 1840, 5148, 6074, 6456, 6538, 6538.5, 6562, 6592, 6593, 6593.5, 6596, 6901, 6902, 6906, 6981, 7209, 7223, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 18533, 19047, 19085, 19104, 19333, 19345, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5522.8. Dismissal, Deferral, and Postponement.
Note     •     History

(a) Dismissal. The Chief of Board Proceedings will dismiss a matter under any of the following circumstances:
(1) The taxpayer or the taxpayer's authorized representative submits a written, signed request for dismissal;
(2) The Department submits a written concession of the entire amount of the deficiency, refund, or claim at issue; or
(3) The parties submit a written stipulation, signed by all the parties, in which all parties agree to dismissal.
(b) Deferral or Postponement of Hearing or Briefing. A Board Member, Appeals Staff, or any party to a matter may request that a hearing or the due date of any brief be deferred or postponed for reasonable cause. Requests for deferral or postponement must be submitted to the Chief of Board Proceedings.
(1) Deferral or Postponement for Short Periods of Time. The Chief of Board Proceedings may grant a deferral or postponement for a period of 90 days or less in his or her sole discretion, or for a period of more than 90 days with the consent of the Chief Counsel in any of the following circumstances:
(A) A party or a representative of a party cannot appear at a hearing or meet a briefing deadline due to the illness of that person or a member of that person's immediate family;
(B) A party or a representative of a party cannot appear at a hearing or meet a briefing deadline due to an unavoidable scheduling conflict; 
(C) A party has obtained a new representative who requires additional time to become familiar with the case;
(D) The Chief of Board Proceedings has been informed that all parties desire a deferral or postponement;
(E) The Chief of Board Proceedings has been informed by the Franchise Tax Board that the matter is being reviewed for possible settlement consideration; or
(F) Any other facts or circumstances determined by the Chief of Board Proceedings and the Chief Counsel to constitute reasonable cause. 
(2) Deferral or Postponement for Formal Settlement Negotiations. The Chief of Board Proceedings may, in his or her discretion, grant a deferral or postponement for an initial period of up to nine months, and thereafter, for additional periods of time in 160 day increments, if the parties to the matter have entered into formal settlement negotiations.
(3) Deferral or Postponement for Other Actions. The Chief Counsel may, in his or her discretion, grant a deferral or postponement for a determined period of time due to the following circumstances:
(A) The Chief Counsel determines that related civil or criminal litigation is pending in state or federal court, the outcome of which is likely to have a bearing on the matter being deferred or postponed.
(B) The Chief Counsel determines that unrelated civil or criminal litigation pending in federal or state court contains similar issues to those claimed by parties to a matter and that the outcome of the unrelated litigation is likely to have a bearing on the matter being deferred or postponed.
(4) Deferral or Postponement for Bankruptcy Action. The Chief of Board Proceedings shall postpone a matter that is subject to chapter 4 of this division upon receiving notice that the taxpayer is a debtor in a bankruptcy proceeding. The Chief of Board Proceedings shall notify the Board and the parties that the matter is postponed until the taxpayer's bankruptcy is concluded. 
(5) The Chief Counsel may, with the consent of the Board Chair, grant a deferral or postponement for any reason.
(c) Additional Deferrals or Postponements. After the initial deferral or postponement period, the Chief Counsel may grant additional deferrals and postponements that are not described in subdivisions (a) and (b) of this section upon a showing of extreme hardship and only with the consent of the Board Chair.
(d) The Chief of Board Proceedings must provide written notification to the parties if a deferral or postponement has been granted.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 15606 and 15640, Government Code; and Sections 254.5, 254.6, 742, 748, 1840, 5148, 6074, 6456, 6538, 6538.5, 6562, 6592, 6593, 6593.5, 6596, 6901, 6902, 6906, 6981, 7209, 7223, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 15640, 18533, 19047, 19085, 19104, 19333, 19345, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Subarticle 3. Representation, Prehearing Documents, and Preparation for Hearing
§5523. Representation at Hearings.
Note     •     History

(a) Representation. During the hearing, taxpayers may be represented by any authorized person or persons, at least eighteen years of age, of the taxpayer's choosing, including, but not limited to, an attorney, appraiser, accountant, bookkeeper, employee or business associate. For purposes of this section, a person whose only function is to interpret for the taxpayer is not a representative.
(b) Recognition. The Board will recognize all authorized representatives who are identified in writing or orally by the taxpayer. Authorized representatives shall be permitted to receive confidential information relating to the taxpayer they represent, and to perform on behalf of the taxpayer all acts that the taxpayer may perform in preparation for and during the hearing.
(c) Substitution or Withdrawal. Taxpayers must promptly notify the Chief of Board Proceedings in writing of any substitutions or withdrawals of representation and must also notify the Franchise Tax Board in all matters that are subject to chapter 4 of this division.
(d) Suspended or Disbarred Representatives. A person suspended or disbarred from practice before the Franchise Tax Board pursuant to Revenue and Taxation Code section 19523.5 may not represent any taxpayer in a matter that is subject to chapter 4 of this division after the Franchise Tax Board gives the Chief of Board Proceedings notice of the suspension or disbarment.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 15606 and 15640, Government Code; and Sections 254.5, 254.6, 742, 748, 1840, 5148, 6074, 6456, 6538, 6538.5, 6562, 6592, 6593, 6593.5, 6596, 6901, 6902, 6906, 6981, 7209, 7223, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 15640, 18533, 19047, 19085, 19104, 19333, 19345, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New subchapter 3 (sections 5523-5523.8) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Editorial change renaming subchapter 3 to subarticle 3 (Register 2008, No. 13).
§5523.1. Power of Attorney.
Note     •     History

(a) Requirement. The Board or Board Staff may require a taxpayer to complete a Board approved Power of Attorney in order to authorize another person or persons to act on the taxpayer's behalf. The Power of Attorney must be a standard form adopted in conjunction with the Franchise Tax Board to be used in either State Board of Equalization or Franchise Tax Board matters. 
(b) Form. The Power of Attorney must shall include the following information: 
(1) Taxpayer's name, telephone number, taxpayer identification number(s), account or permit number(s) and mailing address;
(2) The name, address (including e-mail, if any), and telephone and FAX number of the appointed representative(s);
(3) The tax matters in which the representative is authorized to represent the taxpayer; the scope of the representative's authority; and the tax period(s) for which the authorization is granted;
(4) A statement that the Power of Attorney revokes all prior Powers of Attorney, with any exceptions to the revocation;
(5) The time period during which the Power of Attorney shall be in effect; and
(6) The signature(s) and title of all affected taxpayers and the date of signature.
(c) In lieu of the standard form described in subdivision (a), Board Staff will accept any written document containing substantially all of the provisions required by subdivision (b), including but not limited to a statutory form power of attorney complying with the provisions of Probate Code section 4401.
(d) If an issue arises as to a representative's authorization under any power of attorney, Board Staff will forward the document to the Chief Counsel, who will determine its legal effect. 
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 15606 and 15640, Government Code; and Sections 254.5, 254.6, 742, 748, 1840, 5148, 6074, 6456, 6538, 6538.5, 6562, 6592, 6593, 6593.5, 6596, 6901, 6902, 6906, 6981, 7209, 7223, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 15640, 18533, 19047, 19085, 19104, 19333, 19345, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5523.2. Contribution Disclosure Forms.
Note     •     History

(a) The Board is subject to the Quentin L. Kopp Conflict of Interest Act of 1990 (Gov. Code, §15626) as interpreted by California Code of Regulations, title 18, sections 7001 through 7011, which requires Board Members to disclose certain political contributions and disqualifies Board Members from participating in certain adjudicatory proceedings (as defined in Gov. Code, §15626, subd. (h)(5)). In order to comply with the provisions of the Quentin L. Kopp Conflict of Interest Act of 1990:
(1) Every Board Member must make the disclosures required by California Code of Regulations, title 18, section 7009; and
(2) Every party, participant and agent as defined in California Code of Regulations, title 18, sections 7004 through 7006 must complete a contribution disclosure form as required by California Code of Regulations, title 18, section 7011. 
(b) Approximately 45 days prior to a hearing, Board Proceedings Staff will mail contribution disclosure forms to all parties, participants, and agents as defined in California Code of Regulations, title 18, sections 7004 through 7006, inquiring as to whether contributions have been made to one or more Board Members.
(c) Contribution disclosure forms should be returned to the Board Proceedings Division prior to the recipient's scheduled hearing.
(d) The rules and definitions contained in Government Code section 15626 and California Code of Regulations, title 18, sections 7001 through 7011 apply to this section.
NOTE

Authority cited: Section 15606, Government Code. Reference: Sections 15606 and 15626, Government Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5523.3. Hearing Summary.
Note     •     History

(a) Preparation. The Appeals Division should prepare and submit an objective Hearing Summary to the Chief of Board Proceedings:
(1) Generally within 40 days of the oral hearing date, with respect to matters arising under chapter 2 of this division;
(2) As provided in chapter 3 of this division, with respect to matters arising under chapter 3; or 
(3) As provided in section 5444, with respect to matters arising under chapter 4 of this division.
If the Appeals Division determines that a Hearing Summary requires modification after initial distribution, the Appeals Division will promptly provide the modifications to the Chief of Board Proceedings.
(b) Date of Mailing. The Board Proceedings Division must mail, transmit via electronic means (e.g., facsimile, e-mail, etc.), or otherwise provide the taxpayer and the Department with a copy of the Hearing Summary, generally within 30 days of the oral hearing date. Modifications to a Hearing Summary after initial distribution must be mailed, transmitted via electronic means (e.g., facsimile, e-mail, etc.), or otherwise provided to the taxpayer and the Department promptly after the modified Hearing Summary is provided to the Chief of Board Proceedings in a manner intended to provide prompt notice. 
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 15606 and 15640, Government Code; and Sections 254.5, 254.6, 742, 748, 1840, 5148, 6074, 6456, 6538, 6538.5, 6562, 6592, 6593, 6593.5, 6596, 6901, 6902, 6906, 6981, 7209, 7223, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 15640, 18533, 19047, 19085, 19104, 19333, 19345, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5523.4. Additional Briefing.
Note     •     History

(a) Additional Briefing. If the Board, a Board Member, or the Assistant Chief Counsel for the Appeals Division or his or her designee determines that insufficient briefing has been provided under chapter 2 of this division after issuance of the Hearing Summary, but prior to an oral hearing before the Board, a Board Member or the Assistant Chief Counsel for the Appeals Division or his or her designee may request additional briefing from either party in a writing addressed to the Chief of Board Proceedings.
(b) Briefing Schedule. Upon receipt of a request for additional briefing described in subdivision (a), the Chief of Board Proceedings will set a briefing schedule and notify the parties that additional briefing is required.
(c) General Requirements. All briefs permitted to be filed pursuant to this section must follow the requirements listed below:
(1) Be addressed and mailed to the Chief of Board Proceedings;
(2) Be mailed or personally delivered to the other parties;
(3) Length. 
(A) Not exceed 30 typed or handwritten, double-spaced 8 1/2” by 11” pages, printed on one side only; or
(B) Not exceed 15 typed or handwritten, single-spaced 8 1/2” by 11” pages, printed on one side only;
(C) Type-font size of at least 10 points or 12 characters per inch;
(D) The Table of Contents, Table of Authorities, and exhibits are not included in the page count;
(4) Exception. An exception to the requirements of paragraph (3) may be granted prior to the deadline for filing a brief. Exceptions may be requested by submitting a written request establishing reasonable circumstances that justify the necessity for additional pages to the Chief of Board Proceedings. It is at the discretion of the Chief Counsel or his or her designee to approve a request.
(d) Appeals from the Actions of the Franchise Tax Board: This section does not apply to additional briefing in matters that are subject to the provisions of chapter 4 of this division. Section 5435 of chapter 4 of this division applies to such additional briefing.
(e) Property Tax Matters. This section applies to additional briefing in matters that are subject to chapter 3, article 3 of this division, and does not apply to matters subject to chapter 3, article 2 of this division.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 15606 and 15640, Government Code; and Sections 254.5, 254.6, 742, 748, 1840, 5148, 6074, 6456, 6538, 6538.5, 6562, 6592, 6593, 6593.5, 6596, 6901, 6902, 6906, 6981, 7209, 7223, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 15640, 18533, 19047, 19085, 19104, 19333, 19345, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
2. Change without regulatory effect redesignating subsections (e)-(f) as subsections (d)-(e) filed 7-16-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 29).
§5523.5. Preparation for Board Hearing and Subpoenas.
Note     •     History

(a) Scope of Hearing. An oral hearing will be limited to consideration of the facts, issues, values, or precise elements in dispute in a taxpayer's matter. The Board may ask the parties questions during an oral hearing, and will afford the parties an opportunity to respond.
(b) Subpoenas. The Board may issues subpoenas for the attendance of witnesses or the production of books, records, accounts and papers before the Board, the Board's Executive Director, individual Board Members, or any other representative of the Board in accordance with Government Code section 15613. An application for a subpoena for the production of books, records, accounts and papers must be supported by an affidavit showing good cause and containing the information prescribed by Code of Civil Procedure section 1985. Any affidavit filed in support of an application for a subpoena must be served with the subpoena. A subpoena must be signed by a Board Member, the Board's Executive Director, or other person designated by the Executive Director. Taxpayers are required to serve subpoenas issued pursuant to their request upon the witnesses identified in the subpoenas and will bear any expenses incurred.
(c) Time Allocation. The Chief of Board Proceedings will generally allocate a total of 35 minutes per hearing. The Chief of Board Proceedings will inform the parties and the Board of the time allocations prior to the hearing.
(d) Additional Time. A party may request additional time to present a complex matter. A request for additional time must be submitted to the Board Proceedings Division in writing no less than 15 days prior to the hearing, and state the reason(s) why additional time is needed. The Chief of Board Proceedings must submit requests for additional time to the Board Chair for approval. The Board Chair may grant a party whatever additional time the Board Chair determines the party needs to present a complex matter. Board Proceedings Staff will inform all the parties and the Board in writing as to whether a request for additional time has been granted or denied.
(e) Modification. At the oral hearing, the Board Chair may limit the time for a party's presentation if, in his or her discretion, the Board Chair determines that the party's presentation has no purpose other than to delay the proceedings. The Board Chair may, in his or her discretion, grant a party additional time to complete its presentation during the hearing. 
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 15606, 15613 and 15640, Government Code; and Sections 254.5, 254.6, 742, 748, 1840, 5148, 6074, 6456, 6538, 6538.5, 6562, 6592, 6593, 6593.5, 6596, 6901, 6902, 6906, 6981, 7081, 7209, 7223, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 15640, 18533, 19047, 19085, 19104, 19333, 19345, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5523.6. Presentation of Evidence or Exhibits.
Note     •     History

(a) Admissible Evidence. Any relevant evidence, including affidavits, declarations under penalty of perjury, and hearsay evidence, may be presented to the Board at a hearing. Each party will be permitted to comment on or respond to any affidavits, declarations, or any other evidence submitted.
(b) Submission of Evidence. Parties should submit documentary evidence to the Board Proceedings Division and to the opposing party at least 14 days prior to the hearing in order to facilitate the orderly consideration of the issues at the hearing. Although the Board may permit a party to submit documentary evidence at the hearing, the Board is not required to delay or postpone the hearing in order to consider evidence submitted at the hearing. The Board will consider any objections to, and comments on, the evidence presented at the oral hearing in assigning weight to such evidence. The Board may refuse to allow the presentation of evidence that it considers irrelevant, untrustworthy, or unduly repetitious.
(c) Stipulation of Facts. The taxpayer and the Department may file, at any time prior to submission of the matter for decision, a stipulation of the facts upon which they agree, the facts which are in dispute, and the reasons for the dispute. The Board or the Chief Counsel may require the parties to file such a stipulation where appropriate.
(d) Official Notice. The Board may on its own or at the request of a party take official notice of any fact that may be judicially noticed by the courts of this State. Any party may, at the hearing or in its petition for rehearing, refute any matter thus noticed.
(e) Distribution. Board Proceedings Staff must provide copies of any documentary evidence that has been submitted or officially noticed, any written arguments concerning the relevance of the evidence, and any stipulations to the Board Members, each party, and the Appeals Division. 
NOTE

Authority cited: California Constitution, article XIII, section 11; Government Code section 15606, 15640; Revenue and Taxation Code sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301, 60601. Reference: Sections 15606 and 15640, Government Code; Sections 254.5, 254.6, 742, 748, 1840, 5148, 6074, 6456, 6538, 6538.5, 6562, 6592, 6593, 6593.5, 6596, 6901, 6902, 6906, 6981, 7081, 7209, 7223, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 15640, 18533, 19047, 19085, 19104, 19333, 19345, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5523.7. Witnesses.
Note     •     History

(a) Witnesses. The taxpayer and the Department may offer the testimony of any person who can provide relevant information concerning the matter, including representatives of the taxpayer and the Department who have knowledge concerning the facts at issue in the matter. 
(b) If a witness refuses to testify or produce books, records, accounts, or papers pursuant to a Board issued subpoena, the Board may initiate contempt proceedings as provided in Government Code section 15614 to compel compliance. A person found guilty of contempt may be punished by a fine and imprisonment in the county jail.
(c) As part of the Response to Notice of Board Hearing, the parties should provide the Board Proceedings Division and the opposing party with the name and address of any witness who will testify, and a brief description of the purpose of their testimony, in advance of the hearing.
(d) The Board Chair may, at the Board Chair's discretion, direct any witness to testify under oath or affirmation, and any Board Member or party to a matter may request that any witness testify under oath or affirmation.
(e) Each party may cross-examine opposing witnesses. However, the Board will not compel witnesses to answer questions in any particular manner.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 15606 and 15640, Government Code; and Sections 254.5, 254.6, 742, 748, 1840, 5148, 6074, 6456, 6538, 6538.5, 6562, 6592, 6593, 6593.5, 6596, 6901, 6902, 6906, 6981, 7081, 7209, 7223, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 15640, 18533, 19047, 19085, 19104, 19333, 19345, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5523.8. Communications with Board Members.
Note     •     History

The Board Members shall remain accessible to their constituents, their subordinates, other governmental agencies, and taxpayers at all times in order to execute their constitutional and statutory duties. Therefore, such persons and their authorized representatives, including members of the State Bar, may contact Board Members and a Board Member's Staff at any time, including while a matter involving such persons is awaiting an oral hearing before the Board. 
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 15609.5, 15610 and 15623, Government Code; and Section 7081, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 3. Public Notification of Board Meeting
§5530. Public Agenda Notice.
Note     •     History

(a) Board Proceedings Staff must mail a Public Agenda Notice showing the matters and other items of business scheduled to be conducted at an upcoming Board meeting to those interested parties who have requested such notice in writing. The Public Agenda Notice may be mailed via electronic mail or the U.S. Postal Service, and must be mailed at least 10 days prior to the scheduled Board meeting to which it relates. The Public Agenda Notice must also be available for public viewing on the Internet at www.boe.ca.gov.
(b) The Public Agenda Notice must include:
(1) The name, address, and telephone number of Board Proceedings Staff who can provide further information prior to the meeting;
(2) The address of the Internet site where notices are made available; and
(3) A specific agenda for the meeting, containing a brief description of the matters and other items of business to be conducted or discussed in either open or closed session. A description of a matter or other item of business to be conducted or discussed in closed session shall include a citation to the specific statutory authority under which a closed session is being held.
(c) A Public Agenda Notice may contain additional information that is not described in subdivision (b).
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Section 11125, Government Code.
HISTORY

1. New article 3 (section 5530) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 4. Conduct of the Board Meeting and Burden of Proof
§5540. Conduct of the Board Meeting.
Note     •     History

(a) Board meetings are conducted in accordance with the following laws:
(1) Bagley-Keene Open Meeting Act (Gov. Code, §§11120-11132), which requires the Board to hold public meetings;
(2) Government Code section 15625, which prohibits Board Members and Board employees from engaging in certain economic activities that are incompatible with their duties to the Board and create a conflict of interest;
(3) The Quentin L. Kopp Conflict of Interest Act of 1990 (Gov., Code §15626), as interpreted by California Code of Regulations, title 18, sections 7001 through 7011, which requires Board Members to disclose certain political contributions and disqualifies Board Members from participating in certain adjudicatory proceedings; and
(4) The Political Reform Act (Gov. Code, §81000, et seq.), which requires Board Members and Board employees to disclose certain financial interests that may create a conflict of interest, and prohibits Board Members and Board employees from making, participating in making, or in any way using their official position to influence a decision in which they know or should know that they have a financial interest.
(b) The public may attend those portions of Board meetings that are conducted during open session. If a person or persons, including a party or parties to a matter, willfully interrupt any portion of a Board meeting, the Board Chair may order the removal of such person or persons from the meeting. 
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Section 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 11120-11132, 15609, 15625, 15626 and 81000-91014, Government Code.
HISTORY

1. New article 4 (sections 5540-5541) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5541. Burden of Proof.
Note     •     History

(a) Except as otherwise specifically provided by law, the burden of proof is upon the taxpayer as to all issues of fact.
(b) In any proceeding involving the issue of fraud with intent to evade tax, the burden of proof as to that issue is upon the Department.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 15606 and 15640, Government Code; and Sections 254.5, 270, 742, 1840, 6562, 7711, 8852, 11340, 12429, 19047, 19048, 19072, 19084, 19085, 19087, 19333, 19334, 19345, 19346, 20645, 30262, 32302, 38443, 40093, 41087, 43303, 45303, 46353, 50116, 55083 and 60352, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 5. Voting and Decisions
§5550. Quorum.
Note     •     History

A quorum must be present for the Board to take any action.
(a) Any three Board Members present at a meeting constitutes a quorum. For purposes of this chapter, a Board Member is present at a meeting, if the Board Member is participating in the meeting via teleconference pursuant to section 5521.
(b) When a Board Member is disqualified from participating in a decision under the contribution disclosure statute (Gov. Code, §15626), or the Political Reform Act (Gov. Code, §81000, et seq.), that Board Member is not counted for purposes of a quorum. 
(c) If a deputy designated by the Controller pursuant to Government Code section 7.6 or 7.9 (as interpreted by the Attorney General) is not authorized to participate in a decision because the matter before the Board is a constitutional matter, the deputy is not counted for purposes of a quorum.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Article XIII, Section 17, California Constitution; and Sections 7.6, 7.9, 11122.5, 15606, 15626 and 81000-91014, Government Code.
HISTORY

1. New article 5 (sections 5550-5551) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5551. Voting and Decisions.
Note     •     History

(a) At the conclusion of an oral hearing, the Board may vote to decide the matter, take it under submission and decide it later at the same meeting or at a subsequent meeting, or continue the hearing to a later date. The Board may also adopt a Memorandum Opinion in a matter subject to chapter 2 or 3 of this division, or a Summary Decision or Formal Opinion in a matter subject to chapter 4 of this division, or direct Appeals Staff to draft a Memorandum Opinion, Formal Opinion, or Summary Decision and submit the opinion or decision to the Board for consideration as a non-appearance matter at a subsequent meeting. A Formal Opinion or Memorandum Opinion adopted by the Board may be cited as precedent in any matter or other proceeding before the Board, unless the opinion has been depublished, overruled, or superseded. Summary Decisions may not be cited as precedent in any matter or other proceeding before the Board.
(b) Dissenting and Concurring Opinions. 
(1) If a Memorandum Opinion or Formal Opinion is presented to the Board for adoption, any Board Member may:
(A) Submit a Dissenting Opinion setting forth the Board Member's rationale for disagreeing with the Memorandum Opinion or Formal Opinion; or
(B) Submit a Concurring Opinion setting forth the Board Member's rationale for agreeing with the result reached in the decision, if different than the rationale set forth in the Memorandum Opinion or Formal Opinion. 
(2) A Dissenting Opinion or Concurring Opinion submitted under paragraph (1) of this subdivision is deemed to be adopted on the same date as the Memorandum Opinion or Formal Opinion to which it relates is adopted, and is publishable as a supplement to the Memorandum Opinion or Formal Opinion. A Dissenting Opinion or Concurring Opinion may be cited and relied upon in the same manner as a dissent or concurrence published in an opinion of the California Supreme Court or California Courts of Appeal.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Article XIII, Section 17, California Constitution; Sections 7.9, 11122.5, 11125, 15606 and 15640, Government Code; and Sections 254.5, 254.6, 742, 748, 1840, 5148, 6074, 6456, 6538, 6538.5, 6562, 6592, 6593, 6593.5, 6596, 6901, 6902, 6906, 6981, 7209, 7223, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8128, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9152, 9196, 12429, 12636, 12637, 12951, 12977, 12978, 12981, 18533, 19047, 19085, 19104, 19333, 19345, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30178, 30178.1, 30243, 30243.5, 30262, 30282, 30283, 30283.5, 30284, 30361, 30362, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32312, 32313, 32401, 32402, 32402.1, 32404, 32407, 32440, 38433, 38435, 38443, 38452, 38453, 38454, 38455, 38601, 38602, 38605, 38631, 40093, 40102, 40103, 40103.5, 40104, 40111, 40112, 40115, 40121, 41087, 41096, 41097, 41097.5, 41098, 41100, 41101, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43351, 43352, 43451, 43452, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45352, 45353, 45651, 45652, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46501, 46502, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50120.2, 50120.3, 50139, 50140, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55102, 55103, 55221, 55222, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60501, 60502, 60506, 60507, 60521, 60522 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 6. Post Hearing Notices and Petitions for Rehearing
§5560. Notice of Board Decision.
Note     •     History

(a) Generally. All parties to a proceeding will be notified in writing of the Board's decision. The notice will contain the determined value, tax, fee, penalty or interest owed.
(1) Business Taxes: In general, notice of the Board's decision will be mailed to all parties within 45 days from the date of the Board's decision. Notice of a decision denying a claim for refund will be mailed to all parties within 30 days from the date of the Board decision.
(2) Appeals from actions of the Franchise Tax Board: In general, a copy of the decision or opinion prepared pursuant to article 5 of chapter 4 will be mailed to all parties within 3 business days from the date of the Board's decision.
(3) Property Tax: In general, a Notice of Decision will be mailed within 30 days from the date of the Board's decision.
(b) Finality of Business Taxes Decisions. The Board's decision on a matter subject to chapter 2 of this division shall become final 30 days after the date notice of the Board's decision is mailed to the taxpayer unless, within that 30-day period, one of the following occurs:
(1) A party to the petition or appeal files a Petition for Rehearing.
(2) The Board Chair orders the Chief of Board Proceedings to hold the decision in abeyance and notify all parties of the order.
(c) Finality of Property Tax Decisions. Chapter 3 of this division applies to the finality of decisions on property tax petitions. 
(d) Appeals from the Franchise Tax Board. Chapter 4 of this division applies to the finality of decisions and requests for rehearings on appeals from actions of the Franchise Tax Board.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 15606 and 15640, Government Code; and Sections 254.5, 254.6, 744, 749, 1842, 5148, 6074, 6456, 6538, 6562, 6592, 6593, 6593.5, 6596, 6814, 6906, 6981, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9196, 12429, 12431, 12636, 12637, 12951, 12981, 18533, 19047, 19085, 19104, 19333, 19345, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30243, 30243.5, 30262, 30263, 30282, 30283, 30283.5, 30284, 30361, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32304, 32312, 32313, 32401, 32404, 32407, 32440, 38433, 38435, 38443, 38445, 38452, 38453, 38454, 38455, 38601, 38605, 38631, 40093, 40095, 40102, 40103, 40103.5, 40104, 40111, 40115, 40121, 41087, 41089, 41096, 41097, 41097.5, 41098, 41100, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43305, 43351, 43352, 43451, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45305, 45352, 45353, 45651, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46355, 46501, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50118, 50120.2, 50120.3, 50139, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55085, 55102, 55103, 55221, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60354, 60501, 60502, 60521 and 60581, Revenue and Taxation Code.
HISTORY

1. New article 6 (sections 5560-5563) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5561. Petition for Rehearing.
Note     •     History

(a) Generally. A taxpayer with a matter subject to chapter 2 of this division may file a Petition for Rehearing within 30 days of the date on which notice of the Board's decision is mailed to the taxpayer. The petition must:
(1) Identify an irregularity in the Board's proceedings that prevented the fair consideration of the matter;
(2) Identify an accident or surprise that occurred, which ordinary caution could not have prevented;
(3) Identify newly discovered, relevant evidence, which the party requesting the rehearing could not have reasonably discovered and provided prior to the Board's decision; or
(4) Demonstrate that there is insufficient evidence to justify the decision or the decision is contrary to law.
(b) The Board encourages the use of electronic means (e.g., facsimile, e-mail, etc.) for the filing of Petitions for Rehearing and related documents. A Petition for Rehearing or related document may be filed electronically pursuant to this section if an electronic copy of such document is transmitted to the Board Proceedings Division in accordance with instructions provided on the Board's website at www.boe.ca.gov. 
A Petition for Rehearing or related document may also be hand delivered to the Board's headquarters at 450 N Street, in Sacramento, California, or mailed to the address provided below:

BOARD PROCEEDINGS DIVISION, MIC: 80
STATE BOARD OF EQUALIZATION
450 N STREET
P.O. BOX 942879
SACRAMENTO, CA 94279-0081
(c) Acceptance or Rejection of the Petition for Rehearing.
(1) Upon receipt of a Petition for Rehearing, the Chief of Board Proceedings must determine whether the Petition for Rehearing is timely. The Chief of Board Proceedings may consult with Appeals Staff in making this determination.
(2) If the Petition for Rehearing is found to be timely, the Chief of Board Proceedings must accept the Petition for Rehearing and mail a letter to all parties acknowledging the acceptance.
(3) If the Chief of Board Proceedings determines that the Petition for Rehearing is not timely, the Chief of Board Proceedings must reject the Petition for Rehearing and will advise the taxpayer regarding alternative rights or remedies.
(d) Chapter 4 of this division applies to Petitions for Rehearing filed with regard to appeals from actions of the Franchise Tax Board. 
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6456, 6538, 6562, 6592, 6593, 6593.5, 6596, 6814, 6981, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9196, 12429, 12431, 12636, 12637, 12951, 12977, 19048, 19104, 19334, 19346, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30243, 30243.5, 30262, 30263, 30282, 30283, 30283.5, 30284, 30361, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32304, 32312, 32313, 32401, 32404, 32407, 32440, 38433, 38435, 38443, 38445, 38452, 38453, 38454, 38455, 38601, 38605, 38631, 40093, 40095, 40102, 40103, 40103.5, 40104, 40111, 40115, 40121, 41087, 41089, 41096, 41097, 41097.5, 41098, 41100, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43305, 43351, 43352, 43451, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45305, 45352, 45353, 45651, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46355, 46501, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50118, 50120.2, 50120.3, 50139, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55085, 55102, 55103, 55221, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60354, 60501, 60502, 60521 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5562. Recommendation on Petition for Rehearing.
Note     •     History

(a) The Appeals Division should prepare and submit a recommendation to grant or deny a Petition for Rehearing to the Chief of Board Proceedings and parties to the matter at issue generally within 90 days from the date of the letter accepting the Petition for Rehearing.
(b) The recommendation on Petition for Rehearing will be submitted to the Board for consideration as a non-appearance matter.
(c) The Chief of Board Proceedings must notify all the parties to the matter at issue of the Board's decision.
(1) If the Board grants a rehearing based on the recommendation of the Appeals Division, or another rationale, then the Board's prior decision will be held in abeyance pending the resolution of the rehearing.
(2) If the Board denies a rehearing based on the recommendation of the Appeals Division, or another rationale, then the Board's prior decision becomes final 30 days from the date the Chief of Board Proceedings mails the notice of the denial of the Petition for Rehearing.
(d) Chapter 4 of this division applies to Decisions on Petitions for Rehearing with regard to appeals from the actions of the Franchise Tax Board. 
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6456, 6538, 6562, 6592, 6593, 6593.5, 6596, 6814, 6981, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9196, 12429, 12431, 12636, 12637, 12951, 12977, 19048, 19104, 19334, 19346, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30243, 30243.5, 30262, 30263, 30282, 30283, 30283.5, 30284, 30361, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32304, 32312, 32313, 32401, 32404, 32407, 32440, 38433, 38435, 38443, 38445, 38452, 38453, 38454, 38455, 38601, 38605, 38631, 40093, 40095, 40102, 40103, 40103.5, 40104, 40111, 40115, 40121, 41087, 41089, 41096, 41097, 41097.5, 41098, 41100, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43305, 43351, 43352, 43451, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45305, 45352, 45353, 45651, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46355, 46501, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50118, 50120.2, 50120.3, 50139, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55085, 55102, 55103, 55221, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60354, 60501, 60502, 60521 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5563. Rehearings.
Note     •     History

(a) If the Board grants a rehearing in a matter subject to chapter 2 of this division, the Chief of Board Proceedings will:
(1) Consult with the Appeals Staff to determine a briefing schedule appropriate for the rehearing; and
(2) Inform all parties regarding such briefing schedule in writing. 
(b) Chapter 4 of this division applies to rehearings granted in appeals from actions of the Franchise Tax Board.
NOTE

Authority cited: Section 15606, Government Code; and Sections 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 6074, 6456, 6538, 6562, 6592, 6593, 6593.5, 6596, 6814, 6981, 7657, 7657.1, 7658, 7658.1, 7700, 7700.5, 7711, 8126, 8191, 8828, 8828.5, 8852, 8877, 8878, 8878.1, 8879, 9151, 9196, 12429, 12431, 12636, 12637, 12951, 12977, 19048, 19104, 19334, 19346, 20645, 30175, 30176, 30176.1, 30176.2, 30177, 30243, 30243.5, 30262, 30263, 30282, 30283, 30283.5, 30284, 30361, 30365, 30421, 32255, 32256, 32256.5, 32257, 32302, 32304, 32312, 32313, 32401, 32404, 32407, 32440, 38433, 38435, 38443, 38445, 38452, 38453, 38454, 38455, 38601, 38605, 38631, 40093, 40095, 40102, 40103, 40103.5, 40104, 40111, 40115, 40121, 41087, 41089, 41096, 41097, 41097.5, 41098, 41100, 41104, 41107, 43157, 43158, 43158.5, 43159, 43303, 43305, 43351, 43352, 43451, 43454, 43491, 45155, 45156, 45156.5, 45157, 45303, 45305, 45352, 45353, 45651, 45654, 45801, 46156, 46157, 46157.5, 46158, 46302, 46303, 46353, 46355, 46501, 46505, 46551, 50112.2, 50112.3, 50112.4, 50112.5, 50116, 50118, 50120.2, 50120.3, 50139, 50142, 50151, 55044, 55045, 55046, 55046.5, 55083, 55085, 55102, 55103, 55221, 55224, 55281, 60209, 60210, 60211, 60212, 60332, 60333, 60352, 60354, 60501, 60502, 60521 and 60581, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Article 7. Correspondence, Public Hearing Records, and Copies
§5570. Mailing Address.
Note     •     History

The Board encourages the use of electronic means (e.g., facsimile, e-mail, etc.) for the filing of all correspondence during the hearing process. Correspondence may be filed electronically pursuant to this section if an electronic copy of such correspondence is transmitted to the Board Proceedings Division in accordance with instructions provided on the Board's website at www.boe.ca.gov. 
Correspondence during the hearing process may also be hand delivered to the Board's headquarters at 450 N Street, in Sacramento, California, or mailed to the following address:

BOARD PROCEEDINGS DIVISION, MIC: 80
STATE BOARD OF EQUALIZATION
450 N STREET
P. O. BOX 942879
SACRAMENTO, CA 94279-0081
NOTE

Authority cited: Article XIII, Section 11, California Constitution; sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code.
HISTORY

1. New article 7 (sections 5570-5576) and section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5571. Timeliness of Documents.
Note     •     History

(a) A document or other correspondence is timely if it is mailed to or received at the headquarters office of the State Board of Equalization within the time specified by the particular statute or regulation under which the document is filed. 
(b) In the absence of other evidence, the post-mark date or the date of delivery to a delivery service, as defined in section 5511 of this chapter, is considered the mailing date. If the last day for mailing or delivering a document falls on a Saturday, Sunday or holiday, the time for mailing or delivering such document is extended to the next business day.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 15606 and 15640, Government Code; and Section 254.5, 270, 724, 742, 1840, 6562, 7711, 8852, 11340, 12429, 19047, 19048, 19072, 19084, 19085, 19087, 19333, 19334, 19345, 19346, 20645, 30262, 32302, 38443, 40093, 41087, 43303, 45303, 46353, 50116, 55083 and 60352, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5572. Hearing Record.
Note     •     History

(a) Meetings of the Board are held in accordance with the Bagley-Keene Open Meeting Act (Gov. Code, §§11120-11132). Public Agenda Notices issued for, minutes and transcripts of, and documents incorporated into the record of oral hearings conducted during open session at public meetings are public records and open to public inspection. Documents to which a waiver described in section 5573 applies are also disclosable public records.
(b) Minutes of public meetings are the official record of each meeting. Minutes are presented to the Board for approval. The approved minutes are posted on the Internet at www.boe.ca.gov and a complete set of approved minutes are bound into one or more volumes. The bound volumes of Board minutes are the permanent record of Board actions. They are available for review in the Board Proceedings Division and the State Archives.
(c) Transcripts.
(1) In general, the Board records its oral hearings. However, the recordings are not generally transcribed. Transcripts of hearings, administrative sessions, and Chief Counsel Matters are prepared only upon written request. 
(2) Interested persons may submit a written request for Board Staff to prepare transcripts described in paragraph (1) of this subdivision. Such requests must specifically identify the matters to be transcribed.
(3) If Board Staff is able to prepare a transcript of a recorded hearing, the Board will charge a fee to prepare the requested transcript in accordance with section 5576.
(4) The Board encourages the use of electronic means (e.g., facsimile, e-mail, etc.) for the filing of requests for transcripts. A request for a transcript may be filed electronically pursuant to this section if an electronic copy of such document is transmitted to the Board Proceedings Division in accordance with instructions provided on the Board's website at www.boe.ca.gov. Written requests for transcripts may also be hand delivered to the Board's headquarters at 450 N Street, in Sacramento, California, or mailed to the following address:

STATE BOARD OF EQUALIZATION
ATTN: TRANSCRIPT COORDINATOR
BOARD PROCEEDINGS DIVISION, MIC: 80
P. O. BOX 942879
SACRAMENTO, CA 94279-0081
(5) A transcript prepared pursuant to this section is a public record and subject to disclosure. 
(6) Completed transcripts, untranscribed shorthand notes, and recordings are retained up to 12 years following the hearing date. Written requests for copies of previously completed transcripts should be sent to the address provided in paragraph (4) of this subdivision. The Board will charge a fee in accordance with section 5576 for copying a completed transcript.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Article XIII, Section 11, California Constitution; Sections 6254, 11124.1, 11125.1, 15606, 15619 and 15640, Government Code; and Sections 251, 833, 1840, 7051, 7056, 8251, 8255, 9251, 9255, 11651, 11655, 13170, 19542, 19545, 30451, 30455, 32451, 32455, 38701, 38705, 38706, 40171, 41128, 43501, 45851, 46601, 50152, 55301, 60601 and 60609, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5573. Waiver of Confidentiality.
Note     •     History

Oral hearings are generally conducted during open session at public meetings held in accordance with Government Code sections 11120 and 11123.
(a) Appeals from Actions of the Franchise Tax Board. The filing of an appeal under chapter 4 constitutes a waiver of the appellant's right to confidentiality with regard to all of the information provided to the Board by the appellant or the Franchise Tax Board, including information contained in a hearing summary prepared under section 5444.
(b) Sales and Use Tax, Timber Yield Tax, and Special Taxes and Fees. The filing of a written request for an oral hearing before the Board under chapter 2 constitutes a waiver of the taxpayer's right to confidentiality with regard to information provided to or obtained by the Board that is actually disclosed on the transcript of the taxpayer's oral hearing before the Board or included in the hearing summary prepared for the taxpayer's oral hearing before the Board.
(c) Property Taxes. 
(1) A taxpayer waives its right to confidentiality when the taxpayer:
(A) Files a petition described in section 5310, subdivision (a)(1), (3), or (4) of chapter 3, and submits a written request for an oral hearing before the Board; or
(B) Files an application described in section 5310, subdivision (a)(2) of chapter 3.
(2) The waiver described in paragraph (1) of this subdivision only applies to:
(A) The taxpayer's petition or application filed under chapter 3 of this division, and any documents filed in support of the petition or application;
(B) Any briefs filed in response to or in support of the taxpayer's petition or application, and any documents filed in support of such briefs;
(C) The hearing summary or summary decision prepared for the taxpayer's oral hearing before the Board; and
(D) Any other information provided to or obtained by the Board that is actually disclosed on the transcript of the taxpayer's oral hearing before the Board.
(d) Effective Date of Waiver. 
(1) A waiver described in subdivision (b) or (c) of this section is effective on the date the Board issues its first Public Agenda Notice providing public notice of the date and time of the taxpayer's oral hearing to which the waiver applies.
(2) A waiver described in subdivision (b) or (c) may be rescinded by the taxpayer at any time before it becomes effective, if the taxpayer agrees to waive its oral hearing before the Board. At the time a taxpayer waives an oral hearing under this paragraph, the taxpayer may request that the Board decide the taxpayer's matter on the basis of the written record on file without an oral hearing or dismiss the taxpayer's matter. 
(e) Exceptions.
(1) Protection from Identity Theft. 
(A) The waivers described in subdivisions (a), (b), and (c) do not apply to any person's address, telephone number, social security number, federal identification number, or other account number, and such information will not be provided to the public in response to a request made pursuant to the California Public Records Act (Gov. Code, §§6250 et seq.).
(B) Nothing in this paragraph prohibits any party to a Board hearing, Board Members, or Board Staff from referring to information described in this paragraph in briefs filed under this division, or in a manner that will not disclose any person's actual address, telephone number, social security number, federal identification number, or bank account number at an oral hearing conducted during an open session at a public meeting. 
(2) Closed Session. The waivers described in subdivisions (b) and (c) do not apply to:
(A) Information that is only discussed during a portion of an oral hearing conducted during a closed session held pursuant to Government Code section 11126, and the procedures contained in section 5574; and 
(B) The portion of a hearing summary, if any, containing information that is only scheduled to be discussed during a closed session. 
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Article XIII, Section 11, California Constitution,; Sections 6254, 11124.1, 11125.1, 15606, 15619 and 15640, Government Code; and Sections 251, 743, 833, 1840, 7051, 7056, 8251, 8255, 9251, 9255, 11651, 11655, 13170, 19542, 19545, 30451, 30455, 32451, 32455, 38701, 38705, 38706, 40171, 41128, 43501, 45851, 46601, 50152, 55301, 60601 and 60609, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5574. Request for Portion of Oral Hearing Conducted During Closed Session.
Note     •     History

(a) Board's Discretion to Conduct Oral Hearings During Closed Session. 
(1) In general, the Board may conduct portions of oral hearings requested under chapter 2 or chapter 3 of this division during a closed session held under Government Code section 11126.
(2) The Board may not conduct oral hearings requested under the following provisions during a closed session:
(A) Article 2 of chapter 3 of this division regarding the assessment of unitary or non-unitary property, or an electric generation facility as defined in Revenue and Taxation Code section 721.5.
(B) Chapter 4 of this division regarding appeals from the actions of the Franchise Tax Board.
(b) Contents of Requests. Taxpayers may request that the Board conduct a portion of an oral hearing requested under chapter 2 or chapter 3 during a closed session. Such a request must be in writing, specifically identify the matter for which the taxpayer's oral hearing was requested, and describe the trade secrets or other confidential research, development, or commercial information, which is likely to be presented at the taxpayer's oral hearing, the disclosure of which will cause unwarranted annoyance, embarrassment, or oppression. 
(c) Manner of Filing and Due Date for Requests. Requests described in subdivision (b) must be filed with the Chief of Board Proceedings in the manner provided in section 5570 no later than the due date of the Response to Notice of Board Hearing provided in section 5522.6.
(d) Review of Requests. 
(1) Chief Counsel's Review and Recommendation. Upon receipt of a taxpayer's request for the Board to conduct a portion of an oral hearing during a closed session, the Chief Counsel will:
(A) Review the request to determine whether the matter involves trade secrets or other confidential research, development, or commercial information the disclosure of which would cause unwarranted annoyance, embarrassment, or oppression to any person;
(B) Prepare a written recommendation to grant or deny the request; and
(C) Submit the taxpayer's request along with the recommendation to the Board Chair.
(2) Board Chair's Discretion. Upon receipt of a taxpayer's request under subdivision (b) and the Chief Counsel's recommendation to grant or deny the request, the Board Chair may direct the Chief of Board Proceedings to schedule the taxpayer's oral hearing so that a portion of the hearing is conducted during a closed session, if the Board Chair determines that: 
(A) The matter involves trade secrets or other confidential research, development, or commercial information the disclosure of which would cause unwarranted annoyance, embarrassment, or oppression to any person; and
(B) Such information is likely to be disclosed if the taxpayer's oral hearing is conducted solely during an open session at a public meeting.
(3) If a portion of an oral hearing is scheduled to be conducted during a closed session pursuant to paragraph (2) of this subdivision, that portion of the oral hearing must proceed in closed session unless a majority of the quorum present during the closed session votes in favor of a motion to conduct the entire oral hearing during an open session.
(4) If a motion is passed in accordance with paragraph (3) of this subdivision, the taxpayer's oral hearing must be rescheduled so that the entire hearing can be conducted during an open session at a public meeting, and the Chief of Board Proceedings shall issue a new Notice of Board Hearing in accordance with section 5522.6.
(A) The waivers described in subdivision (b) or (c) of section 5573 are effective on the date the Board issues its first Public Agenda Notice providing public notice of the date and time of the taxpayer's rescheduled oral hearing.
(B) The waivers described in subdivision (b) or (c) of section 5573 may be rescinded by the taxpayer at any time before they become effective, if the taxpayer agrees to waive its oral hearing before the Board. 
(e) Notice of Board Chair's Decision. The Chief of Board Proceedings must notify the taxpayer of the Board Chair's decision on a request to conduct a portion of an oral hearing during a closed session no later than five days prior to the issuance of the Public Agenda Notice described in section 5573, subdivision (d). 
(f) Definitions. The phrase “trade secrets or other confidential research, development, or commercial information the disclosure of which will cause unwarranted annoyance, embarrassment, or oppression” must be interpreted in the same manner as the terms used therein are interpreted or defined for purposes of Code of Civil Procedure section 2031.060.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Article XIII, Section 11, California Constitution; Sections 6254, 11124.1, 11125.1, 15606, 15619 and 15640, Government Code; and Sections 251, 743, 833, 1840, 7051, 7056, 8251, 8255, 9251, 9255, 11651, 11655, 13170, 19542, 19545, 30451, 30455, 32451, 32455, 38701, 38705, 38706, 40171, 41128, 43501, 45851, 46601, 50152, 55301, 60601 and 60609, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5575. Privilege.
Note     •     History

The waivers provided for in section 5573 do not abrogate the Board's privileges with regard to memoranda from attorneys in the Board's Legal Department and the Attorney General to Board Members that are confidential communications between client and lawyer as defined in Evidence Code section 952.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Section 6254, Government Code; and Sections 952 and 954, Evidence Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5576. Fees: Filing, Transcripts, and Copies.
Note     •     History

(a) The Board does not charge a fee for the filing of any paper or the issuance of a subpoena.
(b) Charges for transcripts of testimony heard before the Board shall be made at the rates specified in Government Code section 69950.
(c) Copies, including certified copies, of records that the Board is permitted by law to divulge will be furnished to taxpayers and other interested persons at cost as specified in Government Code section 6253 and Civil Code section 1798.33.
NOTE

Authority cited: Article XIII, Section 11, California Constitution; Sections 15606 and 15640, Government Code; and Sections 251, 1840, 7051, 8251, 9251, 11651, 13170, 30451, 32451, 38701, 40171, 41128, 43501, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Section 1798.33, Civil Code; and Section 15613, Government Code.
HISTORY

1. New section filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Chapter 6. Taxpayer Bill of Rights Reimbursement Claims
§5600. Definitions, Board Hearing Procedures; Taxes Affected by This Article.
Note     •     History

(a) The definitions in sections 5511 and 5512 apply to this chapter, and Board hearings on claims filed under this chapter will be conducted under the hearing procedures set forth in chapter 5 of this division, commencing with section 5510, except as otherwise noted.
(b) This chapter applies to reimbursement claims under any of the following programs:

Corporate Franchise Income Tax--
Personal Income and Bank and Corporation Income Tax
Revenue and Taxation Code Sections 18401-19802

Business and Property Taxes--
Alcoholic Beverage Tax
California Constitution Article XX, Section 22;
Revenue and Taxation Code Sections 32001-32557
California Tire Fee
Public Resources Code Sections 42860-42895;
Revenue and Taxation Code Sections 55001-55381
Childhood Lead Poisoning Prevention Fee
Health and Safety Code Section 105310;
Revenue and Taxation Code Sections 43001-43651
Cigarette and Tobacco Products Tax
California Constitution Article XIIIB, Section 12;
Revenue and Taxation Code Sections 30001-30481
Diesel Fuel Tax
Revenue and Taxation Code Sections 60001-60709
Emergency Telephone Users Surcharge
Revenue and Taxation Code Sections 41001-41176
Energy Resources Surcharge
Revenue and Taxation Code Sections 40001-40216
Hazardous Substances Tax
Revenue and Taxation Code Sections 43001-43651
Integrated Waste Management Fee
Revenue and Taxation Code Sections 45001-45984
Marine Invasive Species Fee Collection Law
Public Resources Code Sections 71200-71271;
Revenue and Taxation Code Sections 44000-44008, 55001-55381
Motor Vehicle Fuel Taxes
California Constitution Article XIX, Sections 1-9;
Revenue and Taxation Code Sections 7301-8526
Natural Gas Surcharge
Public Utilities Code Sections 890-900;
Revenue and Taxation Code Sections 55001-55381
Occupational Lead Poisoning Prevention Fee
Health and Safety Code Section 105190;
Revenue and Taxation Code Sections 43001-43651
Oil Spill Response, Prevention and Administration Fees
Revenue and Taxation Code Sections 46001-46751
Private Railroad Car Tax
California Constitution Article XIII, Section 19;
Revenue and Taxation Code Sections 11201-11702
Sales and Use Tax (including State-administered local sales,
transactions, and use taxes)
Revenue and Taxation Code Sections 6001-7279.6
Timber Yield Tax
Revenue and Taxation Code 
   Sections 423.5, 431-437, 38101-38908
Underground Storage Tank Maintenance Fee
Revenue and Taxation Code Sections 50101-50162
Use Fuel Tax Law
Revenue and Taxation Code Sections 8601-9355
(c) To the extent that provisions in this chapter are in conflict with the International Fuel Tax Agreement, the provisions of the International Fuel Tax Agreement are controlling.
NOTE

Authority cited: Section 15606(a), Government Code; Section 893, Public Utilities Code; and Sections 7051, 8251, 9251, 11651, 30451, 32451, 38701, 40171, 41128, 43501, 44003, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 7091, 8269, 9269, 11657, 21013, 30458.9, 32469, 38708, 40209, 41169, 43520, 45865, 46620, 50156.9, 55330 and 60630, Revenue and Taxation Code.
HISTORY

1. Renumbering of former division 2, chapter 10 article 9 to new chapter 6 (sections 5600-5700) and renumbering of former section 5090 to new section 5600, including amendment of section and Note, filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5601. Eligible Claims.
Note     •     History

Only those expenses that were incurred after the date of the notice of determination, jeopardy determination or claim for refund in business or property tax cases and after the date of filing an appeal to the Board in corporate franchise and income tax cases are eligible for reimbursement. Expenses incurred in a business tax or Timber Yield Tax case are “related to a hearing before the board” and reimbursable only if the claimant sought Board review of an unfavorable Decision and Recommendation issued by the Appeals Division and only if the Board finds that the action taken by Board Staff was unreasonable. To determine whether Board Staff has been unreasonable, the Board will consider whether Board Staff has established that its position was substantially justified. This means that a taxpayer whose petition for redetermination or claim for refund is not granted does not have an eligible claim. All expenses incurred in corporate franchise or income tax appeals to the Board are “related to a hearing before the board.”
NOTE

Authority cited: Section 15606(a), Government Code; Section 893, Public Utilities Code; and Sections 7051, 8251, 9251, 11651, 30451, 32451, 38701, 40171, 41128, 43501, 44003, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 7091, 8269, 9269, 11657, 21013, 30458.9, 32469, 38708, 40209, 41169, 43520, 45865, 46620, 50156.9, 55330 and 60630, Revenue and Taxation Code.
HISTORY

1. Renumbering of former section 5091 to new section 5601, including amendment of section and Note, filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5602. Reasonable Fees.
Note     •     History

Reasonable fees for professional representation before the Board shall be as provided in Revenue and Taxation Code section 7156, subdivision (c)(1)(B)(iii).
NOTE

Authority cited: Section 15606(a), Government Code; Section 893, Public Utilities Code; Sections 7051, 8251, 9251, 11651, 30451, 32451, 38701, 40171, 41128, 43501, 44003, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 7091, 7156, 8269, 9269, 11657, 21013, 30458.9, 32469, 38708, 40209, 41169, 43520, 45865, 46620, 50156.9, 55330 and 60630, Revenue and Taxation Code.
HISTORY

1. Renumbering of former section 5092 to new section 5602, including amendment of Note, filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5603. Claim Procedure.
Note     •     History

(a) Claim Form. The claim must be filed with the Chief of Board Proceedings on the Taxpayers' Bill of Rights Reimbursement Claim form (7/98), which is hereby incorporated by reference.
(b) One Year Filing Deadline; Complete Claim Form. The completed claim form must be filed within one year of the date the decision of the Board becomes final. The Chief of Board Proceedings, in his or her discretion, may grant extensions of time to file a completed claim form upon a showing of reasonable cause, if the written request is filed with the Chief of Board Proceedings prior to the scheduled due date of the claim form. If the claim form filed is incomplete, the claimant will be granted 30 days additional time to complete the claim form. Failure to file a complete claim within the time granted will result in dismissal of the claim by the Chief of Board Proceedings.
(c) Dismissal of Ineligible Claim. The Chief of Board Proceedings must dismiss a claim when the Board previously disposed of the case at hearing without granting the petition for redetermination or claim for refund.
(d) Staff Statement. Within 60 days of the filing of a complete claim form, Board Staff and when applicable, Franchise Tax Board staff, must submit a statement in response to the claim. The Chief of Board Proceedings, in his or her discretion, may grant extensions of time to file a staff statement upon a showing of reasonable cause, if a written request is filed with the Chief of Board Proceedings before the scheduled due date of the staff statement.
(e) Claimant Response. The staff statement(s) must be mailed to the claimant, who must be given the opportunity to respond within 60 days of service of the staff statement with additional written argument and/or documentation, including but not limited to, declarations under penalty of perjury. The Chief of Board Proceedings, in his or her discretion, may grant extensions of time to file a response upon a showing of reasonable cause if the written request for extension is filed with the Chief of Board Proceedings before the scheduled due date of the response. If the claimant submits new information or documentation in the response, Board Staff or Franchise Tax Board Staff may be given an additional 30 days to respond to the new material.
NOTE

Authority cited: Section 15606(a), Government Code; Section 893, Public Utilities Code; and Sections 7051, 8251, 9251, 11651, 30451, 32451, 38701, 40171, 41128, 43501, 44003, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 7091, 8269, 9269, 11657, 21013, 30458.9, 32469, 38708, 40209, 41169, 43520, 45865, 46620, 50156.9, 55330 and 60630, Revenue and Taxation Code.
HISTORY

1. Renumbering of former section 5093 to new section 5603, including amendment of section and Note, filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5604. Oral Hearing on Reimbursement Claim.
Note     •     History

After the submission of documents described in section 5603, the claim will be scheduled for oral hearing before the Board. The claimant and, when applicable, the Franchise Tax Board will receive 60 days notice of the hearing date and time, and the procedures will be governed by chapter 5 of this division. Oral hearing may be waived by the taxpayer and the matter submitted for decision on the basis of the written submissions.
NOTE

Authority: Section 15606(a), Government Code; Section 893, Public Utilities Code; and Sections 7051, 8251, 9251, 11651, 30451, 32451, 38701, 40171, 41128, 43501, 44003, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 7091, 8269, 9269, 11657, 21013, 30458.9, 32469, 38708, 40209, 41169, 43520, 45865, 46620, 50156.9, 55330 and 60630, Revenue and Taxation Code.
HISTORY

1. Renumbering of former section 5094 to new section 5604, including amendment of section and Note, filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5605. Notice of Decision.
Note     •     History

Whether or not an oral hearing is held on the claim, the Board will send written notice of its decision to the claimant, and, where applicable, to the Franchise Tax Board. Notwithstanding chapter 5 of this division, the Board's decision on the claim is final 30 days from the date it is mailed. Any proposed award of reimbursement must be available as a public record for at least 10 days prior to the effective date of the award, except appeals from actions of the Franchise Tax Board, which must be available as a public record for at least 10 days prior to the effective date of the determination.
NOTE

Authority: Section 15606(a), Government Code; Section 893, Public Utilities Code; and Sections 7051, 8251, 9251, 11651, 30451, 32451, 38701, 40171, 41128, 43501, 44003, 45851, 46601, 50152, 55301 and 60601, Revenue and Taxation Code. Reference: Sections 7091, 8269, 9269, 11657, 21013, 30458.9, 32469, 38708, 40209, 41169, 43520, 45865, 46620, 50156.9, 55330 and 60630, Revenue and Taxation Code.
HISTORY

1. Renumbering of former section 5095 to new section 5605, including amendment of section and Note, filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§5700. Annotations.
Note     •     History

(a) Definitions. For purposes of this regulation, the following definitions shall apply:
(1) “Annotations” are published in either the Business Taxes Law Guide or the Property Taxes Law Guide and are summaries of the conclusions reached in selected legal rulings of counsel. Annotations do not embellish or interpret the legal rulings of counsel which they summarize and do not have the force and effect of law.
(2) “Legal ruling of counsel” means a legal opinion written and signed by the Chief Counsel or an attorney who is the Chief Counsel's designee, addressing a specific tax application inquiry from a taxpayer or taxpayer representative, a local government agency, or board staff.
(3) “Current Legal Digest” means a publication containing drafts of new annotations proposed to be added, and/or annotations proposed to be amended or deleted in the Business Taxes Law Guide or Property Taxes Law Guide.
(4) “Tax” means any tax, fee, surcharge, assessment, assessment review, or exemption program administered by the Board or any tax over which the Board has oversight or advisory responsibility.
(5) “Taxpayer” means person liable for the payment of any tax as the term tax is defined above.
(6) “Board” means the State Board of Equalization.
(b) Elements of Annotated Legal Rulings of Counsel. In order to qualify for annotation, a legal ruling of counsel must include the following elements:
(1) A summary of pertinent facts,
(2) An analysis of the issue(s),
(3) References to any applicable statutes, regulations, or case law, and
(4) A conclusion supported by the analysis of the issue(s).
(c) Use of Annotations.
(1) Annotations provide notice of the existence of and conclusions reached in selected legal rulings of counsel regarding the application of the statutory law, regulatory law, or judicial opinions to a particular factual circumstance.
(2) Annotations are a research tool to locate selected legal rulings of counsel and thus provide guidance regarding the interpretation of statutes and Board regulations as applied by the Board staff to specific factual situations in legal ruling of counsel.
(3) Except as provided in Regulation 1705, following the advice provided in an annotation is not reasonable reliance upon written advice for purposes of obtaining relief from a failure to pay tax, interest and penalty.
(d) Publication of Annotations.
(1) Before new annotations are added, or existing annotations are amended or deleted, the Board shall publish the proposed changes in a Current Legal Digest and shall provide interested persons not less than 30 days to comment on and, if necessary, challenge the proposed changes.
(2) Any person may request, and shall be entitled to receive, Current Legal Digests. Requests to be added to the mailing list to receive Current Legal Digests may be directed to the Board's Legal Division.
(e) Request for Depublication of an Annotation. An annotation published in the Business Taxes Law Guide or the Property Taxes Law Guide believed to be in error and/or appearing to conflict with another annotation may be depublished using the following procedure:
(1) A request for depublication of an annotation shall be directed to the Chief Counsel.
(2) A request for depublication of an annotation shall be approved or denied by the Chief Counsel within sixty (60) days from the date the request is received.
(3) If a request for the depublication of an annotation is approved by the Chief Counsel, the Board shall publish the proposed depublication in a Current Legal Digest.
(4) If a request for the depublication of an annotation is denied, the requestor may bring the request before the Board's Business Taxes or Property Taxes Committee for consideration.
(f) Copies of Legal Rulings of Counsel. Any person may request, and shall be entitled to receive, a copy of a legal ruling of counsel, with confidential taxpayer information excised, that has been annotated in the Business Taxes Law Guide or Property Taxes Law Guide. Requests may be directed to the Board's Legal Division.
NOTE

Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 15606(c) and (e), Government Code; and Sections 6596, 7051, 7084, 8262, 9262, 13170, 30458.2, 32462, 40202, 41162, 43513, 45858, 46613, 50156.2 and 55323, Revenue and Taxation Code.
HISTORY

1. Renumbering of former section 5200 to new section 5700, including amendment of Note, filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
Division 2.2. State Board of Equalization--Conflict of Interest Code

(Originally Printed 5-15-76)
§6001. General Provisions.
Note     •     History

The Political Reform Act (Government Code Sections 81000, et seq.) requires state and local government agencies to adopt and promulgate conflict of interest codes. The Fair Political Practices Commission has adopted a regulation (2 Cal. Code of Regs. Section 18730) containing the terms of a standard conflict of interest code, which can be incorporated by reference, and which may, after public notice and hearings,  be amended by the Fair Political Practices Commission to conform to amendments in the Political Reform Act. Therefore, the terms of 2 Cal. Code of Regs. Section 18730 and any amendments to it duly adopted by the Fair Political Practices Commission are hereby incorporated by reference. This regulation and the attached Appendices A and B constitute the conflict of interest code of the State Board of Equalization.
All designated employees of the State Board of Equalization shall file statements of economic interests with the State Board of Equalization. Upon receipt of the a statement of the Executive Director, the State Board of Equalization shall make and retain a copy and forward the original to the Fair Political Practices Commission. Statements of all other designated employees will be retained by the State Board of Equalization
NOTE

Authority cited: Sections 87300-87311, Government Code. Reference: Sections 87302 and 87303, Government Code.
HISTORY

1. New Chapter 2.1 (Sections 6001-6006) filed 5-10-76; effective thirtieth day thereafter (Register 76, No. 20). 
2. New Chapter 2.1 (Sections 6001-6006) refiled 2-14-77; effective thirtieth day thereafter. Approved by Fair Political Practices Commission 1-4-77 (Register 77, No. 8).
3. Repealer of Chapter 2.1 (Sections 6001-6006) and new Chapter 2.1 (Sections 6001-6010, Appendices A and B) filed 9-17-80; effective thirtieth day thereafter. Approved by Fair Political Practices Commission 6-4-80 (Register 80, No. 38).
4. Repealer of Chapter 2.1 (Sections 6001-6010 and Appendix A only) and new Chapter 2.1 (Section 6001 and Appendix A) filed 11-5-82; effective thirtieth day thereafter. Approved by Fair Political Practices Commission 5-4-82 (Register 82, No. 45). 
5. Editorial correction of History 1 and 4 (Register 95, No. 9).
6. Amendment of section, repealer of Appendices A and B and new Appendices A and B filed 3-2-95; operative 4-3-95. Submitted to OAL for printing only pursuant to Government Code section 11343 (Register 95, No. 9).
7. Amendment of Appendices A and B filed 11-5-97; operative 12-5-97. Approved by Fair Political Practices Commission 8-22-97 (Register 97, No. 45).
8. Amendment of Appendices A and B filed 4-8-98; operative 5-8-98. Approved by Fair Political Practices Commission 2-6-98 (Register 98, No. 15).
9. Amendment of Appendix A filed 7-13-99; operative 8-12-99. Approved by Fair Political Practices Commission 5-21-99 (Register 99, No. 29).
10. Amendment of Appendices A and B filed 3-13-2000; operative 4-12-2000. Approved by Fair Political Practices Commission 2-28-2000  (Register 2000, No. 11). 
11. Amendment of Appendices A and B filed 3-12-2001; operative 4-11-2001. Approved by Fair Political Practices Commission 1-22-2001  (Register 2001, No. 11). 
12. Amendment of Appendices A and B filed 3-8-2002; operative 4-7-2002. Approved by Fair Political Practices Commission 1-10-2002 (Register 2002, No. 10). 
13. Amendment of Appendix A filed 3-13-2003; operative 4-12-2003. Approved by Fair Political Practices Commission 1-20-2003 (Register 2003, No. 11). 
14. Amendment of Appendices A and B filed 5-6-2004; operative 6-5-2004. Approved by Fair Political Practices Commission 3-10-2004  (Register 2004, No. 19). 
15. Amendment of section and Appendices A and B filed 5-4-2005; operative 6-3-2005. Approved by Fair Political Practices Commission 2-24-2005  (Register 2005, No. 18). 
16. Renumbering of former division 2.2 to division 2.3 and renumbering of former division 2.1 to division 2.2 filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).

Appendix A

Designated Positions	Disclosure Categories

Board
Deputy to Board Member		All
Administrative Assistant to Board Member		All
Assistant to Board Member		 All
CEA 		All
Administrative Assistant		1-8
Staff Services Manager		1-8
Tax Counsel		1-6
Tax Consultant Expert		1-6
Tax Services Specialist		1-6
Assistant Tax Services Specialist		1-6
Associate Governmental Program Analyst		1-6
Business Taxes Representative		1-6
Business Taxes Specialist II		1-6
Information Officer II		1-6

Executive
Executive Director		 All
Administrative Assistant		All
CEA (Communications Office)		All

Board Proceedings Division
CEA		All
Staff Services Manager 		All
Associate Governmental Program Analyst
  (LAN Workgroup Manager)		 1-6, 8
Associate Governmental Program Analyst		1-6

Customer and Taxpayer Services Division
CEA		All
Staff Services Manager		1-9
Business Taxes Compliance Specialist		1-6
Assistant Tax Services Specialist		1-6
Associate Governmental Program Analyst		1-6
Associate Information Systems Analyst		8
Staff Services Manager (Forms and Publications
 Section)		7, 9
Assistant Tax Services Specialist (Forms and
 Publications Section)		7, 8
Associate Governmental Program Analyst (Forms and
 Publications Section)		7, 8

Legislative Division
Assistant Chief Counsel		All
CEA		All
Staff Services Manager		1-6
Senior Specialist Property Appraiser		1-6
Business Taxes Specialist		1-6
Associate Governmental Program Analyst
  (System or LAN Administrator)		1-6, 8
Operations Research Specialist		1-4, 6, 8
Research Program Specialist		1-4, 8
Research Analyst		1-4, 8

Technology Services Division
CEA		All
Data Processing Manager IV		All
Business Taxes Administrator		1, 2, 7-9
Business Taxes Compliance Supervisor		1, 2, 7-9
Data Processing Manager		7-9
Staff Services Manager		7-9
Systems Software Specialist		8
Associate Systems Software Specialist		8
Senior Information Systems Analyst		8
Staff Information Systems Analyst		8
Associate Information Systems Analyst		8
Senior Programmer Analyst		8
Staff Programmer Analyst		8
Associate Programmer Analyst		8
Associate Governmental Program Analyst		8

Taxpayers' Rights and Equal Employment Opportunity Division
CEA		All
Business Taxes Specialist (TRA)		1-4
Associate Property Appraiser (TRA)		1-4
Staff Services Manager (EEOO)		7, 9
Associate Governmental Program Analyst (EEOO)		7, 9

Administration Department
CEA		All
Training  Officer (Training Office)		9
Associate Governmental Program Analyst 
 (Training  Office)		9

Administrative Support Division
CEA		All
Staff Services Manager		7-10
Associate Business Management Analyst		7-9
Associate Governmental Program Analyst		7-9
Telecommunications Systems Analyst		10
Office Services Manager (Supervisor, Cashier Unit)		7

Personnel Management Division
CEA		7-9
Staff Services Manager		7-9
Associate Governmental Program Analyst		7-9
Associate Personnel Analyst		7-9
Labor Relations Specialist		7-9

Financial Management Division
CEA		All
Staff Services Manager		7-9
Accounting Administrator		7-9
Associate Accounting Analyst		7-9
Associate Administrative Analyst		7-9
Associate Budget Analyst		7-9
Senior Accounting Officer		7-9
Associate Governmental Program Analyst		7-9
Staff Information Systems Analyst (Specialist)		8

Policy, Planning and Evaluation Division
Staff Services Manager III		1-4, 7-9
Staff Services Manager I or II		7-9
Associate Management Analyst		7-9
Associate Business Management Analyst		7-9
Associate Governmental Program Analyst		7-9
Staff Information Systems Analyst		8

Legal Department
CEA		All
Assistant Chief Counsel		All
Tax Counsel		1-6
Supervising Tax Auditor		1, 2
Administrative Assistant		7-9
Librarian		7, 8
Staff Information Systems Analyst 		8
Associate Information Systems Analyst		8
Business Taxes Specialist II or III		1, 2
Business Taxes Specialist I		1, 2 *
Business Taxes Compliance Supervisor (Offers in 
 Compromise)		1, 2
Business Taxes Compliance Specialist (Offers in 
 Compromise)		1, 2
Business Taxes Specialist (Offers in Compromise)		1, 2

Internal Security and Audit Division
CEA		All
Business Taxes Administrator		All
Business Taxes Specialist		All
Associate Tax Auditor		All
Associate Governmental Program Analyst		7-9
Systems Software Specialist		8
Staff Information Systems Analyst		8
Associate Information Systems Analyst		8
Assistant Information Systems Analyst		8

Investigations Division
CEA		All
Business Taxes Administrator		1, 2, 7-9
Business Taxes Specialist		1, 2
Business Taxes Compliance Specialist		1, 2
Supervising Tax Auditor		1, 2, 9
Associate Tax Auditor		1, 2
Staff Information Systems Analyst		8

Property and Special Taxes Department
CEA		All
Administrative Assistant		1, 2, 6-9
Staff Services Manager		7-9
Associate Governmental Program Analyst		3, 7-9
Staff Information Systems Analyst		8

Assessment Policy and Standards Division
CEA		3, 7-9
Principal Property Appraiser		3, 7-9
Senior Specialist Property Appraiser		3
Senior Specialist Property Auditor Appraiser		3
Supervising Property Appraiser		3, 7-9
Associate Property Appraiser		3
Associate Property Auditor Appraiser		3
Research Analyst II (GIS)		3

County Property Tax Division
CEA		3, 4, 7-9
Principal Property Appraiser		3, 7-9
Senior Petroleum and Mining Appraisal Engineer		3
Supervising Property Appraiser (Assessment Practices 
 Surveys Section)		3, 7-9
Senior Specialist Property Appraiser (Assessment 
 Practices Surveys Section)		3
Senior Specialist Property Auditor Appraiser (Assessment 
 Practices Surveys Section)		3
Associate Property Appraiser (Assessment Practices 
 Surveys Section)		3
Associate Property Auditor Appraiser (Assessment Practices 
 Surveys Section)		3
Supervising Property Appraiser (Timber Tax Section)		4, 7-9
Senior Specialist Property Auditor Appraiser (Timber
 Tax Section)		4
Associate Property Auditor Appraiser
 (Timber Tax Section)		4
Senior Forest Property Appraiser		4
Associate Forest Property Appraiser		4

Valuation Division
CEA		3, 7-9
Principal Property Appraiser		3, 7-9
Senior Specialist Property Appraiser		3
Senior Specialist Property Auditor Appraiser		3
Supervising Property Appraiser		3, 7-9
Associate Property Appraiser		3
Associate Property Auditor-Appraiser		3

Excise Taxes and Fees Division
CEA		1, 2, 7-9
Business Taxes Compliance Supervisor		1, 2, 6, 9
Business Taxes Compliance Specialist		1, 2, 6, 9
Supervising Tax Auditor		1, 2, 6, 9
Business Taxes Specialist II or III		1, 2, 6, 9
Business Taxes Specialist I		1, 2, 6 *
Associate Tax Auditor		1, 2, 6*

Fuel Taxes Division
CEA		1, 2, 7-9
Business Taxes Administrator		1, 2, 7-9
Staff Services Manager		1, 2, 9
Business Taxes Compliance Supervisor		1, 2, 9
Business Taxes Compliance Specialist		1, 2, 9
Supervising Tax Auditor		1, 2, 9
Business Taxes Specialist II or III		1, 2, 9
Business Taxes Specialist I		1, 2 *
Associate Tax Auditor		1, 2 *

Sales and Use Tax Department
CEA 3 or 4		All
CEA 2		1, 2, 7-9
Business Taxes Administrator		1, 2, 7-9
Administrative Assistant		1, 2, 7, 8
Business Taxes Compliance Supervisor
 (LAN Administrator)		1, 2, 8, 9
Business Taxes Compliance Supervisor		1, 2, 9
Business Taxes Compliance Specialist		1, 2, 9
Supervising Tax Auditor		1, 2, 7-9
Business Taxes Specialist II or III		1, 2, 7-9
Business Taxes Specialist (Special Projects)		1, 2, 7-9
Business Taxes Specialist (Systems Coordinator)		1, 2, 8, 9
Business Taxes Specialist (Training Group)		1, 2, 9
Business Taxes Specialist (Computer Audit Specialist)		1, 2, 8
Business Taxes Specialist (Regulation Coordinator)		1, 2
Business Taxes Specialist (Revenue Opportunity)		1, 2
Business Taxes Specialist (Technical Advisor)		1, 2
Business Taxes Specialist (Project Coordinator)		1, 2
Business Taxes Specialist I		1, 2 *
Associate Tax Auditor		1, 2 *
Staff Information Systems Analyst		1, 2, 8
Associate Information Systems Analyst 		1, 2, 8
Associate Governmental Program Analyst		1, 2

Consultant		All **

_______

* Pursuant to 2 California Code of Regulations, section 18733,  in lieu of filing Form 700, an employee in this disclosure category who was not assigned and did not participate in any property tax audits shall file Form 700-A.

** Consultants shall be included in the list of designated employees and shall disclose pursuant to the broadest disclosure category in the code subject to the following limitation:
The Executive Director may determine in writing that a particular consultant is hired to perform a range of duties that is limited in scope and thus is not required to fully comply with the disclosure requirements in this section. Such written determination shall include a description of the consultant's duties and, based upon that description, a statement of the extent of disclosure requirements. The Executive Director's determination is a public record and shall be retained for public inspection in the same manner and location as this conflict of interest code.

Appendix B

Disclosure Categories
Category 1 
Designated employees in this category must report investments, business positions in business entities, and sources of income, including loans, gifts and travel payments, from sources of the type licensed or regulated by or registered with the Board under the Bradley-Burns Uniform Local Sales and Use Tax Law, the Sales and Use Tax Law, and the Transactions and Use Tax Law.
Category 2
Designated employees in this category must report investments, business positions in business entities, and sources of income, including loans, gifts and travel payments, from sources of the type licensed or regulated by or registered with the Board under the Alcoholic Beverage Tax Law, California Cigarette and Tobacco Products Licensing Act of 2003, California Tire Fee Law, Childhood Lead Poisoning Prevention Fee Law, Cigarette and Tobacco Products Tax Law, Diesel Fuel Tax Law, Electronic Waste Recycling Act of 2003, Emergency Telephone Users Surcharge Law, Energy Resources Surcharge Law, Hazardous Substances Tax Law, Integrated Waste Management Fee Law, International Fuel Tax Agreement, Marine Invasive Species Fee Collection Law, Motor Vehicle Fuel Tax Law, Natural Gas Surcharge Law, Occupational Lead Poisoning Prevention Fee Law, Oil Spill Response, Prevention, and Administration Fees Law, Underground Storage Tank Maintenance Fee Law, Use Fuel Tax Law, or Water Rights Fees.
Category 3
Designated employees in this category must report investments, business positions in business entities, and sources of income, including loans, gifts and travel payments, from sources that own, or owned, property of the type assessed or valued or exempted by the Board and interests in real property located within the State of California.
Category 4
Designated employees in this category must report investments, business positions in business entities, and sources of income, including loans, gifts and travel payments, from sources of the type registered with or regulated by the Board under the Timber Yield Tax Law and interests in real property classified as timberland under the Timber Yield Tax Law.
Category 5
Designated employees in this category must report investments, business positions in business entities, and sources of income, including loans, gifts and travel payments, from sources who have filed an appeal within the preceding 12 months or have an appeal pending under the Personal Income Tax Law, Bank and Corporation Tax Law, or Senior Citizens Property Tax Assistance Law or have a pending claim under the Taxpayers' Bill of Rights for one of these tax programs.
Category 6
Designated employees in this category must report investments, business positions in business entities, and sources of income, including loans, gifts and travel payments, from sources authorized by the Insurance Commissioner to transact business in this state.
Category 7
Designated employees in this category must report investments, business positions in business entities, and sources of income, including loans, gifts and travel payments, from sources that provide goods, equipment, vehicles, services, or leased space of the type utilized by the Board.
Category 8
Designated employees in this category must report investments business positions in business entities, and sources of income, including loans, gifts and travel payments, from sources that provide computers, computer programming, or any other services or training or equipment related to such things as computers, software, automation, data processing, communication, information technology, and duplication services of the type utilized by the Board.
Category 9
Designated employees in this category must report investments, business positions in business entities, and sources of income, including loans, gifts and travel payments, from sources that provide services, materials, equipment, conference facilities, or consultation of the type utilized by the Board for personnel services or the training of employees.
Category 10
Designated employees in this category must report investments, business positions in business entities, and sources of income, including loans, gifts and travel payments, from sources that provide telecommunications equipment and services of the type utilized by the Board.
Division 2.3. State Board of Equalization--Contribution Disclosure
§7001. Contribution to Members of the State Board of Equalization.
History

(a) Terms used in Government Code Section 15626 are defined in Sections 7002 through 7011.
HISTORY

1. New division 2.2 and section filed 7-21-94; operative 8-22-94 (Register 94, No. 29).
2. Renumbering of former division 2.3 to division 2.4 and renumbering of former division 2.2 to division 2.3 filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§7002. Members of the Board of Equalization.
History

(a) The provisions of Government Code Section 15626 are applicable to the Members of the State Board of Equalization and the State Controller.
(b) For the purposes of Section 15626, if a deputy to the Controller sits at a meeting of the board and votes on behalf of the Controller, the deputy shall disclose contributions made to the Controller and shall disqualify himself or herself from voting pursuant to the requirements of the section.
HISTORY

1. New section filed 7-21-94; operative 8-22-94 (Register 94, No. 29).
§7003. Adjudicatory Proceedings Pending Before the Board Under Government Code Section 15626.
History

(a) For purposes of Government Code Section 15626, an “adjudicatory proceeding pending before the board” means any matter pertaining to an issued assessment of tax or fee or refund of tax or fee to a taxpayer or feepayer that has been scheduled and appears as an item on a meeting notice of the board, as required by Government Code Section 11125, as a contested matter for administrative hearing before the board.
(b) A non-appearance agenda item is not considered an adjudicatory proceeding unless the matter has previously appeared on the calendar as a contested matter, or has been removed from the non-appearance agenda for separate discussion and vote, or the agenda item is one about which the member has previously contacted the board staff or a party. A matter which has previously been submitted on the record without an appearance by the taxpayer or taxpayer's representative and without Board discussion of the matter is a non-appearance matter.
(1) The term “removed from the non-appearance agenda for separate discussion and vote” are those agenda items which have been removed from the non-appearance calendar and which have been the subject of a discussion or vote by the Board. It does not include items about which a Board Member raises a procedural question, or a question concerning whether the requirements of Government Code Section 15626 have been met.
(2) The term “contacted the board staff or a party” does not include procedural inquiries by a Board Member or a party, including, but not limited to, inquiries concerning:
(A) when a case will be scheduled for Board consideration or decision;
(B) the status of a particular case;
(C) whether the requirements of Government Code Section 15626 have been met.
(3) The term “contacted the board staff or a party” means and includes any substantive inquiries from a Board Member and/or his or her staff to the board staff. Substantive inquiries include inquiries which are not procedural inquiries and which request information or discussion of legal issues, staff positions, staff or taxpayer theories or other substantive issues concerning a matter on a non-appearance agenda.
(c) Assessments pursuant to Section 19 of Article XIII of the California Constitution are not considered adjudicatory proceedings under Government Code Section 15626.
(d) Rate setting functions fixed or set by the board, including, but not limited to, rates set pursuant to Revenue and Taxation Code Sections 12202.1, 30123, 38115, and 41031, and Health and Safety Code Sections 25205.3, 25205.4, 25205.5, 25205.7, 25205.9, 25174.2 and 25343 are not considered adjudicatory proceedings under Government Code Section 15626.
(e) Administrative hearings for consideration and adoption of rules and regulations are not considered adjudicatory proceedings under Government Code Section 15626.
(f) A petition for rehearing is not an adjudicatory item unless removed for separate discussion and vote or the agenda item is one about which the member has contacted board staff or a party.
HISTORY

1. New section filed 7-21-94; operative 8-22-94 (Register 94, No. 29).
§7004. Party Under Government Code Section 15626.
History

(a) For purposes of Government Code Section 15626, “party” means any person who is the subject of an adjudicatory proceeding before the board. It does not include a state agency as that term is described in Chapter 2 (commencing with Section 82000) of Title 9 of the Government Code.
(b) When a close corporation is a “party” to an adjudicatory proceeding pending before the board, the majority shareholder is subject to the disclosure requirements of Government Code Section 15626. For purposes of Section 15626, “close corporation” means a corporation in which any natural person, or any natural person who together with his or her spouse, owns or controls at least 50 percent of the voting stock of a corporation.
HISTORY

1. New section filed 7-21-94; operative 8-22-94 (Register 94, No. 29).
§7005. Agents Under Government Code Section 15626.
History

(a) For purposes of Government Code Section 15626, a person is the “agent” of a party to, or a participant in, an adjudicatory proceeding pending before the board only if he or she represents that person in connection with the proceeding. If an individual acting as an agent is also acting as an employee or member of a law, accounting, consulting or other firm, or a similar entity or corporation, both the entity or corporation and the individual are “agents.”
(b) To determine whether a contribution of $250 or more has been made by a person or his or her agent, contributions made by that person within the preceding 12 months shall be aggregated with those made by his or her agent within the preceding 12 months or the period of the agency relationship, whichever is shorter. Contributions from other employees or members of the agent's law, accounting, or consulting firm, or similar entity, or contributions from participants, shall not be aggregated with those of the party and his or her agent.
(c) A person who has not represented a party or a participant during the preceding 12 months shall not be considered an agent for purposes of determining whether Section 15626 applies. A person who has ceased to represent a party or a participant is no longer an agent for purposes of determining whether Section 15626 applies.
HISTORY

1. New section filed 7-21-94; operative 8-22-94 (Register 94, No. 29).
§7006. Participants Under Government Code Section 15626.
History

(a) A “participant” means any person who is not a party but who actually supports or opposes a particular decision in an adjudicatory proceeding pending before the board and who has a financial interest in the decision.
(b) For purposes of Government Code Section 15626, a person actually “supports or opposes a particular decision” when he or she:
(1) Communicates directly, either in person or in writing, with a board member or employees of the board for the purpose of influencing the decision in a proceeding; and/or
(2) Testifies or makes an oral statement before the board during an adjudicatory proceeding pending before the board for the purposes of influencing the decision of the board; and/or
(3) Communicates with the employees of the board, or when his or her agent lobbies in person, testifies in person or otherwise communicates with board members and/or the employees of the board, for the purpose of influencing the board member's decision in a proceeding and the board member knows or has reason to know that the communication has occurred.
(c) A person does not “actively support or oppose a particular decision” when he or she communicates to the public at large, other than those oral or written communications made in proceedings before the agency.
(d) “Financial interest” has the meaning described in Article I (commencing with Section 87100) of Chapter 7 of Title 9 of the Government Code.
(e) A Political Action Committee organized pursuant to 2 U.S.C. Section 441(a)-(b) and/or Government Code Section 82013 is not considered a participant under Government Code Section 15626.
(f) When a close corporation is a participant in an adjudicatory proceeding pending before the board, the majority shareholder is subject to the disclosure requirements of Government Code Section 15626.
HISTORY

1. New section filed 7-21-94; operative 8-22-94 (Register 94, No. 29).
§7007. Receipt of Contributions Under Government Code Section 15626.
History

For purposes of Government Code Section 15626,
(a) The term “contribution” has the same meaning prescribed in Government Code Section 82015 and the regulation adopted pursuant thereto. A contribution made pursuant to Section 301(b) of the Federal Election Campaign Act of 1971 (2 U.S.C.A. § 431(2)) to a candidate for federal office or to a committee formed for the purpose of electing a candidate for federal office is not considered a contribution within the meaning of Section 15626. A contribution is deemed to be received if it has been accepted or received within the meaning of Government Code Section 84211(g).
(b) A person “accepts” or “receives” a contribution only if the contribution is for that person's own candidacy or own controlled committee.
(c) A person “makes a contribution” to a board member or candidate only if the contribution is made for that board member's or candidate's own candidacy or controlled committee.
(d) A contribution to a board member from a political action committee organized under 2 U.S.C. § 441(a)-(b) and/or Government Code Section 82013, affiliated with a party, participant or agent to a party or participant is not a “contribution” for the purposes of Government Code Section 15626.
HISTORY

1. New section filed 7-21-94; operative 8-22-94 (Register 94, No. 29).
§7008. Prohibitions and Disqualification Under Government Code Section 15626.
History

(a) For purposes of Government Code Section 15626,
(1) A board member knows or has reason to know that a person has a financial interest in the decision in a pending adjudicatory proceeding if:
(A) The person is a named party; or
(B) The person is a participant and reveals facts in his or her written or oral support or opposition before the board which makes the person's financial interest apparent.
(2) A board member knows, or should have known, about an adjudicatory proceeding pending before the board if either:
(A) The member has received notice of the pending adjudicatory proceeding. Notice includes receipt of an agenda or other written document from the staff identifying the proceeding and the party by name; or
(B) The board member has actual knowledge of the proceeding.
(3) A board member knows, or has reason to know about a contribution if:
(A) The contribution has been disclosed by the party or participant or agent pursuant to Section 15626; or
(B) The board member has actual knowledge of the contribution.
(b) A board member will be considered to have participated under Government Code Section 15626 in a matter if he or she, acting within the authority of his or her office:
(1) Votes on a matter.
(2) Takes part in the discussion regarding the matter.
(3) Urges other board members to reach a particular result in the matter.
(4) Is present and determines not to act when a vote is called without disclosure of the reasons for disqualification.
(c) Nothing in this section shall prevent any member of the board from making, or participating in making, a governmental decision to the extent that the member's participation is legally required for the action or decision to be made. However, the fact that a member's vote is needed to break a tie does not make the member's participation legally required.
(d) In the event a board member's participation is legally required for the action or decision to be made, the board may bring back as many disqualified members as is necessary to establish a quorum. The preferred means of selecting which disqualified member should participate is by lot. Other means of random selection or other impartial and equitable means of selection may also be used.
HISTORY

1. New section filed 7-21-94; operative 8-22-94 (Register 94, No. 29).
§7009. Disclosure Under Government Code Section 15626.
History

(a) A board member who is required by Government Code Section 15626 to disclose the receipt of a contribution shall make the disclosure on the public record at the beginning of the adjudicatory hearing or decision, if a hearing is held.
(b) A written record of any disclosure of receipt of a contribution made by a board member pursuant to Government Code Section 15626 shall be made available to the public.
(c) All statements filed pursuant to Government Code Section 15626 by parties, participants, and agents shall be incorporated into the written record of the proceeding and shall be made available to the public.
(d) The board staff shall report on the record if a hearing is held, or into the written record if no hearing is held:
(1) Whether any party or participant is a close corporation, and if so, the name of its majority shareholder;
(2) Whether any agent is an employee or member of any law, accounting, consulting or other firm, or similar entity or corporation, and if so, its name and address and whether a contribution has been made by any such person, firm, corporation, or entity.
HISTORY

1. New section filed 7-21-94; operative 8-22-94 (Register 94, No. 29).
§7010. Return of Contribution Under Government Code Section 15626.
History

(a) If a member receives a contribution which would otherwise require disqualification and he or she returns the contribution within 30 days from the time he or she knows, or has reason to know, about the contribution and the adjudicatory proceeding pending before the board, his or her participation in the proceeding shall be deemed lawful.
(b) For purposes of Government Code Section 15626, a return of that portion of any contribution or contributions over $249 will be deemed a return of contribution which would otherwise require disqualification and the board member's participation in the proceeding shall be deemed lawful.
HISTORY

1. New section filed 7-21-94; operative 8-22-94 (Register 94, No. 29).
§7011. Notice of Contribution.
Note     •     History

(a) The Notice of Contribution to be completed by all parties, participants and agents, a close corporation and its majority shareholder, shall be on the forms described as Contribution Disclosure forms for parties, participants, or agents.
(b) The Contribution Disclosure form shall inquire of each party, participant, agent and close corporation and majority shareholder whether a contribution has been made to a member, and if so, in what aggregate amount and on what date or dates within the 12 months preceding an adjudicatory proceeding or decision.
(1) Every party, participant, agent and close corporation and majority shareholder shall complete the Contribution Disclosure form prior to any pending adjudicatory proceeding or decision.
(2) Completion of a Contribution Disclosure form is required whether or not the party, participant, agent and close corporation and majority shareholder appears at the pending adjudicatory proceeding or decision.
(3) All parties, participants and agents shall disclose any and all fictitious business names they have utilized.
(c) The disclosure form filed by any party, participant, or agent shall be part of the public record of the related adjudicatory proceeding.
(d) The opinions issued by the Office of the Chief Counsel of the Board of Equalization interpreting Government Code Section 15626 and these regulations thereunder shall be maintained by the Office of Board Proceedings and shall be available to the public.
NOTE

Authority cited: Section 15626, Government Code. Reference:  Section 15626, Government Code.
HISTORY

1. New section filed 7-21-94; operative 8-22-94 (Register 94, No. 29).
Division 2.4. State Board of Equalization -- Access to Records
Article 1. Public Access to Records Pertaining to Tax and Fee Programs
§8000. Purpose and Scope.
Note     •     History

(a) Access to public records maintained by the Board is governed by the California Public Records Act (Government Code Section 6250 and following). The term “public record,” as used in this article, is defined in subdivision (e) of Section 6252 of the Government Code. 
(b) The purpose of this article is to facilitate public access to Board records so as to provide a better understanding of the tax and fee programs administered by the Board. Therefore, the information in this article is not directly applicable to a request by a taxpayer or taxpayer's representative to obtain copies of records pertaining to the taxpayer's own account(s). Nonetheless, a request for a taxpayer's own records may be addressed to the Executive Director or Disclosure Officer as provided in Regulation 8004. 
NOTE

Authority cited: Sections 6253.4 and 15652, Government Code. References: Sections 6250, 6251, 6252 and 6253, Government Code. 
HISTORY

1. New division 2.3 (article 1, sections 8000-8016), article 1 (sections 8000-8016) and section filed 11-15-2000; operative 12-15-2000 (Register 2000, No. 46).
2. Renumbering of former division 2.3 to division 2.4 filed 1-7-2008; operative 2-6-2008 (Register 2008, No. 2).
§8002. Disclosure Policy.
Note     •     History

Public records that are not exempt from disclosure by state or federal law may be inspected and copied pursuant to the procedures set forth in this article. 
NOTE

Authority cited: Sections 6253.4 and 15652, Government Code. References: Sections 6250, 6253, 6254, 6254.20, 6254.25, 6254.9 and 6255, Government Code. 
HISTORY

1. New section filed 11-15-2000; operative 12-15-2000 (Register 2000, No. 46).
§8004. Procedures for Requesting Public Records.
Note     •     History

(a) Requests to inspect or obtain copies of public records shall provide a sufficiently specific description so as to allow the Board to identify the requested records. 
(b) The Board's mailing address is State Board of Equalization, P.O. Box 942879, Sacramento, CA 94279. In addition, use of the appropriate Mail Identification Code (“MIC”), as provided in this article, will ensure that a request for public records is promptly forwarded to the appropriate subdivision of the Board. 
(c) Except as otherwise provided in this article, requests to inspect or obtain copies of public records shall be made in writing and shall be addressed to either the Executive Director, MIC: 73 or the Disclosure Officer, MIC: 54. 
(d) Certain publications identified in this article may be requested by calling the Board's Customer Service number, 1-800-400-7115, by writing the Board's Supply Unit at: State Board of Equalization, Supply Unit, 3920 West Capitol Avenue, West Sacramento, CA 95691, or by faxing to 916-372-6078. 
(e) Many of the records described in Regulations 8010 through 8016 are also available on the Board's website at http://www.boe.ca.gov. Check the website for currently available records. 
NOTE

Authority cited: Sections 6253.4 and 15652, Government Code. References: Section 6253, Government Code. 
HISTORY

1. New section filed 11-15-2000; operative 12-15-2000 (Register 2000, No. 46).
§8006. Cost for Copies of Public Records.
Note     •     History

(a) Except as provided in (b) through (e) below, or as otherwise provided in this article, any person making a request for copies of public records shall reimburse the Board ten cents (.10¢) per page for each page copied. 
(b) Copying costs may be waived when the total copying cost for the records requested is less than ten dollars ($10) per quarter. 
(c) Current issues of the Board's Annual Report, Current Legal Digests, tax information pamphlets and publications, and newsletters are available free of charge. 
(d) The following publications are available for purchase at cost: the Assessors' Handbook, the Business Taxes Audit Manual, the Business Taxes Law Guide, the Compliance Policy and Procedures Manual, Letters to Assessors, and the Property Taxes Law Guide. 
(e) Charges for transcripts of testimony heard before the Board shall be made at the rates specified in Section 69950 of the Government Code unless a copy of the transcript is already available, in which case the cost shall be consistent with (a) and (b) above. 
NOTE

Authority cited: Sections 6253.4 and 15652, Government Code. References: Sections 6253, 15622 and 69950, Government Code. 
HISTORY

1. New section filed 11-15-2000; operative 12-15-2000 (Register 2000, No. 46).
§8008. Determination Regarding Disclosure of Public Records.
Note     •     History

(a) Upon a request for inspection or copies of records, the Board shall have up to 10 calendar days from the receipt of the request to determine whether the request is for disclosable public records in the possession of the Board. In “unusual circumstances,” as defined in Section 6253 of the Government Code, the Board may send a written notice to the requestor to extend the period of determination up to an additional 14 calendar days. 
(b) After making the determination set forth in (a) above, the Board shall promptly notify the requestor of the Board's determination to disclose the requested records or why some or all of the requested records cannot be disclosed. A notification of denial of any request for records shall set forth the name and title or position of the person responsible for the denial. 
(c) After a determination that the Board will disclose the requested records, the Board shall have a reasonable amount of time in which to review the records and, if necessary, to redact any confidential taxpayer information from the requested records. After this review, copies of disclosable records shall be promptly provided to the requestor. 
NOTE

Authority cited: Sections 6253.4 and 15652, Government Code. References: Sections 6250, 6253, 6254, 6254.20, 6254.25, 6254.9 and 6255, Government Code. 
HISTORY

1. New section filed 11-15-2000; operative 12-15-2000 (Register 2000, No. 46).
§8010. Business Taxes Records.
Note     •     History

The sales and use tax program and special taxes programs are collectively referred to as business taxes. The business taxes records include: 
(a) Annotations. Annotations are summaries of the conclusions reached in selected legal rulings of counsel. Business Taxes annotations are published in the Business Taxes Law Guide. 
(b) Annotation Back-Up Opinions. An annotation back-up opinion is a redacted copy of the legal ruling of counsel on which an annotation is based. Confidential taxpayer information will be redacted from a back-up opinion prior to disclosure. Requests for copies of business taxes annotation back-up opinions may be sent directly to the Legal Librarian, MIC 82. 
(c) Board Staff Memoranda or Letters. Memoranda or letters written by Board staff may be requested by author, date, subject, statute, or regulation. Confidential taxpayer information will be redacted prior to disclosure. Documents protected by the attorney-client privilege or attorney work product privilege will not be disclosed. 
(d) Business Taxes Law Guide. The Business Taxes Law Guide is a four-volume compilation of Business Taxes statutes, regulations, case law synopses, annotations, and memorandum opinions. The Business Taxes Law Guide may be requested as provided in subdivision (d) of Regulation 8004. 
(e) Business Taxes Current Legal Digests. Business Taxes Current Legal Digests are sent to interested parties to review drafts of additions, amendments, and deletions of annotations before the draft annotations are finalized and incorporated into the Business Taxes Law Guide. There is an interested parties mailing list for Business Taxes Current Legal Digests. 
(f) Business Taxes General Bulletins. Business Taxes General Bulletins were used to provide guidance to staff. Almost all Business Taxes General Bulletins are now obsolete. 
(g) Decision and Recommendation. A Decision and Recommendation represents an Appeals Attorney's or Appeals Auditor's recommendation regarding a petition for redetermination or a claim for refund after hearing an appeals conference. A Decision and Recommendation does not reflect the ultimate disposition of the appeal by the Board. A Decision and Recommendation has no precedential value. Copies of Decisions and Recommendations may be requested by subject, statute, or regulation. Confidential taxpayer information will be redacted prior to disclosure. 
(h) Manuals and Guidelines. 
(1) Audit Policy and Management Guidelines. The Audit Policy and Management Guidelines (the “APMG”) addresses special policy areas and procedures relating mainly to the sales and use tax audit program, as well as management of the audit program and the audit selection system. In order to safeguard the integrity of the Board's audit program, most of the content of the APMG will not be disclosed to the public. 
(2) Business Taxes Audit Manual. The Audit Manual provides guidance to auditors performing business taxes audits. The purpose of the manual is to ensure that audits are conducted and reports are prepared in a uniform manner consistent with approved tax audit practices. The Business Taxes Audit Manual may be requested as provided in subdivision (d) of Regulation 8004. 
(3) Compliance Policy and Management Guidelines. The Compliance Policy and Management Guidelines (“the CPMG”) addresses special policy areas and procedures relating mainly to the sales and use tax compliance program. In order to safeguard the integrity of the Board's compliance program, most of the content of the CPMG will not be disclosed to the public. 
(4) Compliance Policy and Procedures Manual. The Compliance Policy and Procedures Manual (“the CPPM”) contains Board policy guidelines, specific standards, and uniform procedures to guide staff with taxpayer registration, account maintenance, tax return processing, the application of security, account close-outs and clearances, and collection and cashiering functions. The manual includes established methods and procedures to provide for uniform, effective, and efficient operations. The CPPM may be requested as provided in subdivision (d) of Regulation 8004. 
(5) Other Business Taxes Manuals and Guidelines. Various units of the Board have informal manuals to assist employees in performing their duties. Many of these manuals and guidelines are listed below: 
(A) Alcoholic Beverage Tax Audit Manual. 
(B) Cigarette Tax Audit Manual. 
(C) Cigarette Tax Enforcement Manual. 
(D) Close-Out Procedures -- Alcoholic Beverage and Cigarette and Tobacco Product Tax Programs. 
(E) Consumer Use Tax Section Guidelines for Documents Required to Support a Claim for Exemption of Use Tax. 
(F) Emergency Telephone Users Surcharge Audit Manual. 
(G) Excise Taxes Division Refund Manual. 
(H) Excise Taxes Division Relief of Penalty Manual. 
(I) Fuel Taxes Audit Manual. 
(J) Fuel Taxes Procedure Bulletins. 
(K) Fuel Taxes Section Collection Desk Manual. 
(L) International Fuel Tax Agreement Audit Manual. 
(M) International Fuel Tax Agreement Procedures Manual. 
(N) Truck Inspection Program Procedures Manual. 
(O) Use Fuel Tax Clearance Process. 
These manuals and guidelines are not updated on a regular basis. Some manuals and guidelines contain confidential information that must be redacted before the document may be released to the public. 
(i) Memorandum Opinions. A formal Business Taxes opinion issued by the Board is called a Memorandum Opinion. The Board has issued a very limited number of Memorandum Opinions. Memorandum Opinions are published in the Business Taxes Law Guide. Individual copies of Memorandum Opinions may be requested by name or subject. 
(j) Newsletters. The Board issues the following newsletters: the Tax Information Bulletin (published quarterly), the Fuel Taxes Newsletter (published twice a year), and the Environmental Fees Newsletter (published twice a year). Newsletters may be requested as provided in subdivision (d) of Regulation 8004. 
(k) Operations Memoranda. Operations Memoranda (“Ops Memos”) are used to inform Board staff and the public of changes in laws and Board procedures. Ops Memos are public unless they contain confidential information, in which case, when it is possible to do so, a redacted copy will be provided. Ops Memos may be requested by subject, title, or Ops Memo number. In time, individual Ops Memos become obsolete. A list of current Ops Memos may be requested. 
(l) Policy Memoranda Issued to Districts. Policy memoranda are circulated to the Districts as needed to clarify departmental issues and/or policies relating to specific topics. Policy memoranda may be requested by subject or date. 
(m) Rulemaking Files. A rulemaking file contains a record of the steps taken by an agency to adopt a regulation. A copy of a rulemaking file may be requested directly from the Regulations Coordinator, Board Proceedings Division, MIC: 81. Request rulemaking files by regulation number and the date of the adoption, amendment, or repeal. 
(n) Settlements. Whenever a reduction of tax or fee in an administrative settlement in excess of five hundred dollars ($500) is approved, the Board creates a public record of the settlement. Public records of administrative settlements are available for inspection at the reception desk of the Board's Headquarters located at 450 N Street, Sacramento, California. Copies of up to fifty (50) pages may be obtained directly from the reception desk. Requests for more than 50 pages will be mailed to the requestor within one week. Requests for copies may also be addressed to the Executive Director, MIC: 73. 
(o) Tax Pamphlets and Publications. A list of tax pamphlets and publications is available. Tax pamphlets and publications may be requested as provided in subdivision (d) of Regulation 8004. 
(p) Training Courses - Sales and Use Tax. A list of Sales and Use Tax training courses may be requested. The materials in some courses may be restricted to use by Board employees. If a course contains restricted information, a redacted copy of course materials will be provided. 
NOTE

Authority cited: Sections 6253.4 and 15652, Government Code. References: Sections 6250, 6252, 6253, 6254, 6254.20, 6254.25, 6254.9 and 6255, Government Code. 
HISTORY

1. New section filed 11-15-2000; operative 12-15-2000 (Register 2000, No. 46).
§8012. Property Taxes Records.
Note     •     History

The Board's property taxes records include: 
(a) Annotations. Annotations are summaries of the conclusions reached in selected legal rulings of counsel. Property Taxes annotations are published in the Property Taxes Law Guide. 
(b) Annotation Back-Up Opinions. An annotation back-up opinion is a redacted copy of the legal ruling of counsel on which the annotation is based. Confidential taxpayer information will be redacted from the back-up opinion prior to disclosure. 
(c) Assessment Practices Surveys. 
(1) Periodic Surveys. Periodic surveys are conducted of the county assessor offices throughout the state. The findings are summarized in an Assessment Practices Survey report containing recommendations for improving assessment practices in the county. These reports may be requested by the name of the county. 
(2) Special Topic Surveys. Statewide surveys of the 58 county assessors are occasionally conducted on a specific assessment issue. The resulting Special Topic Survey summarizes the findings of the survey, reviews the applicable law, and presents the Board's views. These reports may be requested by topic. 
(d) Board Staff Memoranda or Letters. Memoranda or letters written by Board staff may be requested by author, date, subject, statute, or regulation. Confidential taxpayer information will be redacted prior to disclosure. Documents protected by the attorney-client privilege or attorney work product privilege will not be disclosed. 
(e) Findings and Decisions. Formal property taxes opinions by the Board pertaining to petitions for reassessment and to applications for review are called Findings and Decisions. Findings and Decisions are issued upon the taxpayer's request. Copies of these decisions may be requested by providing the taxpayer's name or appeals number and the year of the decision. Findings and Decisions are not indexed by subject matter. 
(f) Formal Opinions of the Board. The Board has issued a very limited number of formal property taxes opinions that may be requested by taxpayer name from the Legal Division, MIC 82.
(g) Letters to Assessors. Letters to Assessors provide ongoing advisory service for county assessors and other interested parties. The letters provide Board staff opinions of property tax assessment rules, laws and court decisions. The letters also include summaries of court rulings, legal opinions, highlights of enacted legislation, property tax rules, and technical bulletins for assessment problems. A yearly subscription to the Letters to Assessors is available by contacting the Policy, Planning, and Standards Division, MIC 64. An annually updated subject list of Letters to Assessors is also available and specific letters will be provided upon request. Some of the Letters to Assessors Only titled “CAO” (County Assessors Only) contain confidential taxpayer information and, therefore, are not disclosed to the public. 
(h) Manuals. 
(1) Assessment Appeals Manual. The Assessment Appeals Manual is provided as an informational resource to members of local boards of equalization throughout the state, and is intended to advance standardization of assessment appeals practices within California. 
(2) Assessors' Handbook. The Assessors' Handbook is a collection of manuals containing information on property tax appraisal and assessment practices. A list of these manuals is available. 
(3) County Property Tax Division Procedures Manuals. 
(A) Procedure Manual for Survey/Sampling Program. The Procedure Manual for Survey/Sampling Program sets forth the basic policies and procedures followed by County Property Tax Division appraisal staff when conducting county assessment practices surveys and sampling county assessment rolls. 
(B) Timber Tax Procedures Manual. The Timber Tax Procedures Manual includes the following subjects: Forest Property Appraisal, Timber Harvest Operation and Timber Tax Registration. Each subject in the manual may be requested separately. 
(4) Procedure Manual for Welfare Exemptions Unit. The Procedure Manual for Welfare Exemptions Unit provides a general description of the operations of the Welfare Exemptions Unit. 
(5) Unitary Valuation Methods Manual. The Unitary Valuation Methods Manual documents the valuation models used by the Board's staff in the preparation of value indicators and facilitates discussion of the relevancy of the various models or specific aspects of particular models. 
(6) Valuation Division Audit Manual. This manual provides guidance to auditors performing state assessed property audits. The purpose of the manual is to ensure that audits are conducted in a uniform manner. 
(7) Private Railroad Car Tax Procedures Manual. The purpose of the Private Railroad Car Tax Procedures Manual is to document the source of legal authority, processes, procedures, interrelationships of employees, and controls in the Private Railroad Car Tax Program. 
(i) Operations Memoranda. Operations Memoranda (“Ops Memos”) are used to inform Board staff and the public of changes in laws and Board procedures. Ops Memos are public unless they contain confidential information, in which case, when it is possible to do so, a redacted copy will be provided. Ops Memos may be requested by subject, title, or Ops Memo number. In time individual Ops Memos become obsolete. A list of current Ops Memos may be requested. 
(j) Property Taxes Current Legal Digest. The Property Taxes Current Legal Digest is sent to interested parties to review drafts of additions, amendments, and deletions of annotations before the draft annotations are finalized and incorporated into the Property Taxes Law Guide. There is an interested parties mailing list for the Property Taxes Current Legal Digests. 
(k) Property Taxes Law Guide. The Property Taxes Law Guide contains statutes, regulations, case law synopses, and annotations. The Property Taxes Law Guide may be requested as provided in subdivision (d) of Regulation 8004. 
(l) Rulemaking Files. A rulemaking file contains a record of the steps taken by an agency to adopt a regulation. A copy of any official rulemaking file may be requested directly from the Regulations Coordinator, Board Proceedings Division, MIC: 81. Request rulemaking files by regulation number and the date of the adoption, amendment, or repeal. 
(m) State Assessee Newsletter. The State Assessee Newsletter is published annually. The newsletter contains information on the state assessee valuation process and is provided to all state assessees in lieu of an annual reporting seminar. 
(n) State Assessed Board Roll. The Board roll of state assessed property, sometimes referred to as the “utility roll,” includes all property subject to local taxation required to be assessed by the Board. The State Assessed Board Roll is available in three formats (microfiche, magnetic tape, or cartridge tape) through the Budget Section, MIC: 25. Contact the Budget Section for the cost of obtaining this document. 
(o) Tax Pamphlets and Publications. A list of tax pamphlets and publications is available. Tax pamphlets and publications may be requested as provided in subdivision (d) of Regulation 8004. 
(p) Training Courses. A list of training courses for Property Tax Appraisers may be requested. These courses are designed to present the policies and procedures that have been approved and/or adopted by the Board of Equalization. The materials in some courses may be restricted to use by the Board. If course materials contain restricted information, a redacted copy of the materials will be provided. Test questions, scoring keys, and other examination data required to carry out the provisions of Sections 670, 671 and 673 of the Revenue and Taxation Code are exempt from public disclosure. 
(q) Welfare Exemption Claim Files. Material submitted to the Board in a welfare exemption claim is public and may be requested by taxpayer name or by subject. 
NOTE

Authority cited: Sections 6253.4 and 15652, Government Code. References: Sections 6250, 6252, 6253, 6254, 6254.20, 6254.25, 6254.9 and 6255, Government Code. 
HISTORY

1. New section filed 11-15-2000; operative 12-15-2000 (Register 2000, No. 46).
§8014. Franchise or Income Tax Appeals Records.
Note     •     History

The Board's franchise or income tax appeals records include: 
(a) Franchise or Income Tax Appeal Files. Material submitted to the Board in a franchise or income tax appeal is public and may be requested by taxpayer name. 
(b) Formal Opinions. A franchise or income tax formal opinion is public and may be requested by taxpayer name or subject. 
(c) Summary Decisions. Summary decisions issued in franchise or income tax appeals are public and may be requested by taxpayer name or subject. 
NOTE

Authority cited: Sections 6253.4 and 15652, Government Code. References: Sections 6250, 6252, 6253, 6254, 6254.25 and 6255, Government Code. 
HISTORY

1. New section filed 11-15-2000; operative 12-15-2000 (Register 2000, No. 46).
§8016. Other Public Records.
Note     •     History

(a) Board records that are not specific to a particular tax or fee program include: 
(1) Annual Report of the Board of Equalization. 
(2) Board Meeting Records. The following Board meeting records may be requested directly from the Board Proceedings Division, MIC: 81: 
(A) Board Meeting Agendas. 
(B) Minutes of Board Meetings and Board Committee Meetings. 
(C) Transcripts of Board Meetings.
(3) Issue Papers. The Board staff prepares issue papers addressing topics on which the Board will be making decisions. Issue papers may be requested by title or issue paper number. A subject index of issue papers is not maintained. 
(4) Legislative Analyses. The Board's Legislative Division tracks bills that may have an impact on the Board. A copy of a bill analysis may be requested by providing the bill number and year. 
(b) A request to inspect or obtain a copy of any public record that is not included in this article may be made in writing to either the Executive Director MIC: 73 or the Disclosure Officer MIC: 54. 
NOTE

Authority cited: Sections 6253.4 and 15652, Government Code. References: Sections 6250, 6252, 6253, 6254, 6254.20, 6254.25, 6254.9 and 6255, Government Code. 
HISTORY

1. New section filed 11-15-2000; operative 12-15-2000 (Register 2000, No. 46).
Division 2.5. State Controller*

*Inheritance Tax and Gift Tax regulations of the State Controller were originally filed on 10-5-45 as Subchapters 2 and 1, respectively, of Chapter 1, Title 18.

Regulations were renumbered and reorganized on 11-30-59 as Subchapters 1 and 2, respectively, of Chapter 2.5, Title 18 (Register 59, No. 20).

Chapter 2.5 was repealed on 9-22-78 and refiled to reflect significant changes in section numbers (Register 78, No. 38).
Chapter 1. Inheritance Tax

(Originally Printed 10-5-45 as Subchapter 2 of Chapter 1, Title 18)
NOTE

The regulations are numbered to correspond with the section of the California Inheritance Tax Law which is being implemented, interpreted, or made specific. The authority cited for all regulations in Subchapter 1 is Section 14740, Revenue and Taxation Code.)

Foreword*

Nature and Scope of Inheritance Tax
The inheritance tax is not a tax upon property, but is essentially a succession tax, or tax upon the right or privilege of receiving or succeeding to property. It reaches not only the right to succeed to property under a will or the laws of succession, but also any right in property received through the medium of a transfer made without a valuable and adequate consideration in money or money's worth during the lifetime of the transferor, either in contemplation of his death or with the intention that it take effect in possession or enjoyment at or after his death. In addition, it reaches the receipt of homestead property, a family allowance, property set apart by order of a probate court, a power of appointment, and proceeds of a life or accident insurance policy on the life of a decedent. It also extends to the right of a surviving joint tenant to the immediate ownership, possession, and enjoyment of joint tenancy property.
Unlike the federal estate tax, which is a tax on the right of a decedent to transmit property and is measured by the size of the decedent's net estate, the inheritance tax is measured by the share of a decedent's net estate passing to each particular beneficiary, the rates imposed varying according to the amount received or succeeded to by the beneficiary and his relationship to the decedent.

Additional Tax
In addition to the inheritance tax, the Inheritance Tax Law imposes an additional or so-called “pick-up” tax which is applicable whenever a credit for state inheritance tax is allowed by the federal government under the federal estate tax law and either no inheritance tax is payable to this State or the amount thereof is less than the full amount of the credit allowable under the federal law.

History of Inheritance Tax Legislation
The Legislature of the State of California has enacted seven major inheritance tax laws, which together constitute single and continuous legislation. The following is a summary history of the major provisions of these laws:
(1) 1893 Act (Chapter 168, Statutes of 1893; Effective March 23, 1893). 
This imposed a tax of $5 on each $100 of the market value of property transferred by a decedent to persons other than the decedent's direct relatives (a father, mother, husband, wife, lawful issue, any lineal descendant born in lawful wedlock, adopted child, brother, sister, the wife or widow of a son, and the husband of a daughter), and to organizations other than those exempt from taxation. Transfers taxable included (i) transfers by will or the laws of succession; (ii) transfers inter vivos made by deed, grant, sale, or gift either in contemplation of death or with the intention that they take effect in possession or enjoyment at or after death; and (iii) bequests or devises to executors and trustees in lieu of statutory commissions and allowances, to the extent of the excess over such commissions and allowances. Any estate valued at less than $500 was exempt.
The act was amended in 1895, 1897, 1899, and 1903 (twice).
The 1895 amendment (Chapter 28, Statutes of 1895; effective March 9, 1895) related to the appraisement of estates and the duties of certain officers in the collection of the tax.
The 1897 amendment (Chapter 83, Statutes of 1897; effective March 9, 1897) extended the transfer exemption to transfers to resident nieces and nephews, and to nonprofit charitable, educational, and public institutions. 
The 1899 amendment (Chapter 85, Statutes of 1899; effective March 14, 1899) abolished the exemption of transfers to brothers and sisters and to resident nephews and nieces.
The first 1903 amendment (Chapter 52, Statutes of 1903; effective February 27, 1903) authorized county treasurers to employ attorneys.
The second 1903 amendment (Chapter 228, Statutes of 1903; effective March 20, 1903) extended the transfer exemption to any transfer to a person who for 10 years prior to a decedent's death had stood in the mutually acknowledged relation of a child to the decedent, and to any previously unincluded transfer to a lineal ancestor. 
The act was expressly repealed in 1905 by Chapter 314 of the Statutes of 1905. 
(2) 1905 Act (Chapter 314, Statutes of 1905; Effective July 1, 1905). 
This imposed an inheritance tax on transfers to those in direct, as well as in collateral, relationship to the transferor or deceased. The tax imposed was in the nature of a “step” or “progressive” tax--a tax which takes into account both relationship and the amount transferred. 
Taxable transfers under this act included not only those subject to the 1893 act, but also the exercise of a power of appointment, or the failure or omission to exercise such a power, by the person in whom the power was vested. The property to which the power related was deemed a part of he estate of the donee of the power.
As under the 1893 act, transfers to tax-exempt organizations and to nonprofit charitable, educational, and public institutions were exempt from the tax imposed. The act also granted specific exemptions varying from $500 in the case of a transfer to a stranger to $10,000 in the case of a transfer to a widow or minor child.
If the market value of property given to any person did not exceed $25,000, the act taxed the difference between the amount given and the applicable specific exemption at a so-called “primary rate,” varying from 1 percent in the case of a husband, wife, lineal issue, lineal ancestor, or adopted or mutually acknowledged child, to 5 percent in the case of a stranger. If the market value of the property was more than $25,000, the act taxed the difference between the applicable specific exemption and the first $25,000 at the “primary rate,” and taxed the excess at rates dependent upon the amount of the excess and the relationship between the transferee and the transferor.
In other respects the 1905 act was substantially the same as the 1893 act.
The 1905 act was expressly repealed in 1911 by Chapter 395 of the Statutes of 1911.
(3) 1911 Act (Chapter 395, Statutes of 1911; Effective July 1, 1911).
This, in the main, was substantially the same as the 1905 law.
Material differences appeared in the amounts of some of the specific exemptions and in the rates of taxation.
Other differences appeared in provisions for the taxation of homesteads, both statutory and probate, and for the appointment by the Controller of inheritance tax appraisers.
The act was expressly repealed in 1913 by Chapter 595 of the Statutes of 1913.
(4) 1913 Act (Chapter 595, Statutes of 1913; Effective August 10, 1913). 
This re-enacted the substance of most of the provisions of the 1911 law.
An innovation was a provision for taxing the giving of a power of appointment as a transfer from the donor to the donee of the power, and taxing the transaction upon the donor's death as part of his estate. Under the former law the exercise or nonexercise of a power by the donee was deemed a transfer taxable in his estate.
The act differed materially from the 1911 act in the rates on transfers in excess of $100,000.
The act was amended twice at the 1915 Session of the Legislature: by Chapters 189 and 198 of the Statutes of 1915 (each effective August 8, 1915).
The first of these amendments changed the rate provisions, reduced the specific exemption for Class C transferees (uncle, aunt, descendant of uncle or aunt), and, for exemption and rate purposes, placed a grand uncle or grand aunt or descendant of either in the same category as a stranger in blood.
An innovation effected by the second amendment was a provision for taxing the creation of a joint tenancy as a transfer intended to take effect in possession or enjoyment at or after death.
The act was expressly repealed by Chapter 589 of the Statutes of 1917.
(5) 1917 Act (Chapter 589, Statutes of 1917; Effective July 27, 1917). 
For the most part, this was substantially the same as the 1913 law, as amended.
A major difference was contained in provisions exempting from the act the one-half of the community property passing to a wife under the law of succession upon the death of her husband, and one-half of any community property transferred inter vivos by a husband to his wife, or converted by him inter vivos into joint tenancy property between them.
The act provided for a return to the 1905 method of taxing powers of appointment: i.e., on the exercise or nonexercise of the power by the donee, and as though the property to which the power related were a part of his estate.
Instead of taxing the creation of a joint tenancy as a transfer intended to take effect in possession or enjoyment at or after death, as was the case under the 1913 law, as amended,the act taxed the right of a surviving joint tenant to the immediate ownership, possession, or enjoyment of so much of the tenancy property as belonged to the deceased joint tenant and never originally belonged to the survivor.
In connection with taxable transfers inter vivos, the act defined valuable and adequate consideration as consideration equal in money or money's worth to the full value of property transferred.
In a case of several transfers made by a decedent to one person, the act provided that the tax should be imposed upon the aggregate market value of the property transferred, in the same manner and to the same extent as if all the property had been included in one transfer.
The act specifically forbade any deduction for an inheritance or estate tax paid to the federal government.
The act provided that the charitable exemption should be confined to transfers to organizations organized or existing under the laws of California or to transfers of property limited for use in this State.
The tax rates and specific exemptions remained as they were under the 1913 act, as amended by Chapter 189 of the Statutes of 1915.
The act was expressly repealed by Chapter 821 of the Statutes of 1921.
(6) 1921 Act (Chapter 821, Statutes of 1921; Effective August 2, 1921). 
This, in its original form, was substantially the same as the 1917 law.
One feature of the act was a provision for deductions in determining the taxable market value of property transferred. These included debts, funeral expenses, and expenses of last illness; state, county, and municipal taxes which were a lien against the decedent's property at the date of his death; ordinary expenses of administration; amounts due or paid to the federal government for federal inheritance or estate taxes; and amounts due or paid any state (other than California) as inheritance, succession, or transfer taxes.
Another feature was a provision for an exemption in respect to all property transferred to a Class A transferee (husband, wife, lineal ancestor, lineal issue, adopted child, acknowledged child, or lineal issue of adopted or acknowledged child), if within five years prior to the death of the decedent the property had been transferred to the decedent by another decedent to whom the present decedent was a Class A transferee, and a tax paid on such transfer. This was the inception of the previously taxed property exemption.
A third feature was a provision to the effect that in the computation of the tax, any property falling within any of the several specified exemptions should first be deducted from the aggregate amount of property transferred, and that the remainder should be taxed at the rates it would have been taxed had no such exemptions been allowed.
The specific exemptions were the same as under the 1917 law. The rates of tax were also the same except as to taxable values in excess of $200,000.
The act was amended in 1923, 1925 (twice), 1927, 1929, 1933, and 1935.
The 1923 amendment (Chapter 337, Statutes of 1923; effective August 17, 1923) amplified the community property exemptions mentioned in connection with the 1917 act, in providing that upon the death of a wife neither the one-half of the community belonging to a husband under the probate law, nor the other one-half which might pass to him under such law in the event of his wife's failure to dispose of it by will to others, was subject to the act.
The first 1925 amendment (Chapter 238, Statutes of 1925; effective July 23, 1925) merely provided for the deposit of taxes collected in the General Fund.
The second 1925 amendment (Chapter 284, Statutes of 1925; effective July 23, 1925) provided that when a husband by testamentary disposition of the community property forced his surviving wife to elect whether to take under his will or by operation of law, any of such property, not exceeding one-half of the value of the total community, which she might elect to take under the will was not subject to the act. It also provided that for the purposes of the act, any personal property, wherever situated, acquired by spouses before or after the amendment while domiciled elsewhere, which would not have been the separate property of either if acquired in California, should be deemed to be community property.
Another innovation effected by the second 1925 amendment was a provision extending the tax to family allowances.
The 1927 amendment (Chapter 646, Statutes f 1927; effective July 29, 1927) provided for an exemption as to intangibles of a nonresident decedent who, at the time of his death, was a resident of a state or territory of the United States which imposed a succession or death tax in respect to the intangibles of its own resident decedents, but either: (1) Did not impose such a tax in respect to intangibles of residents of California; or (2) Granted a reciprocal exemption in respect to intangibles. The amendment also inserted provisions for an additional or estate tax in cases where a federal estate tax was imposed, to insure in all events that the tax payable to the State should at least equal the 80 percent federal estate tax credit.
The 1929 amendment (Chapter 844, Statutes of 1929; effective August 14, 1929) provided that a taxable inter vivos transfer to take effect in possession or enjoyment at or after death of the transferor should be valued as of the date of death of the transferor. It eliminated as a taxable transfer any failure or omission by a donee to exercise a power of appointment previously given him. It provided that the proceeds of life or accident policies payable to the insured or his estate should be subject to the act, but excluded from the act the proceeds of all other life or accident policies. It also changed some of the specific exemptions and rates of tax.
The 1929 amendment, in addition, provided for a reciprocal exemption in the matter of transfers to foreign charitable organizations; exempted the proceeds of federal war risk insurance payable to the estate of a World War veteran; extended the reciprocal intangibles exemption to transfers of intangibles by nonresidents who resided in foreign states or countries; authorized the State Controller to compromise contingent taxes; provided that property within the previously taxed property exemption should be valued as of the date of death of the first decedent; and made numerous changes respecting the administration and collection machinery of the act.
The 1933 amendment (Chapter 1048, Statutes of 1933; effective October 25, 1933) changed the specific exemption and rates of tax applicable to transfers to a wife.
The 1935 amendment (Chapter 177, Statutes of 1935; approved May 20, 1935) made some changes in the refund provisions of the act, but never became effective in view of the enactment of the Inheritance Tax Act of 1935 (Chapter 358, Statutes of 1935), which repealed the 1921 act.
(7) 1935 Act (Chapter 358, Statutes of 1935; Effective June 25, 1935). 
This act, as adopted, was substantially the same as the 1921 act, as amended.
In addition to listing the several taxable inter vivos transfers specified in the 1921 act, the act also set forth the pre-existing law that taxable inter vivos transfers include any transfer of property without a valuable and adequate consideration as to which the transferor reserved a life estate or life income or the transferee promised to make payments to or take care of the transferor, and include any transfer of property without a valuable and adequate consideration made by way of an advancement or effected by means of a revocable trust.
The act, in effect, exempted any transfer of intangible personal property by a nonresident residing in the United States.
In the matter of community property, the act provided that when the husband by testamentary disposition of such property forced his surviving wife to elect whether to take under his will or by operation of law, any property, whether community or separate, not exceeding one-half of the value of the total community, which she might elect to take under the will was not subject to the act. The act also limited the provision in the 1921 act relative to the classification as community of personal property acquired outside the State, to intangible personal property thus acquired. In addition, it provided that the whole of any community transferred inter vivos by a wife to her husband was not subject to the act.
The act reinstated in the law the provision of the 1913 act which taxed the giving of a power of appointment as a transfer from the donor to the donee of the power.
Inserted in the act was a provision for taxing all transfers (whether by will or otherwise) upon the market value of the property transferred as of the date of the transferor's death, and at the rates and exemptions then in effect. In the same connection, the act provided that in a case of several transfers by a decedent to one person, the tax is imposed upon the market value of the property included in each transfer as of the date of the decedent's death, and at the rates and exemptions then in effect.
Another feature of the act was a provision for taxing every legacy in accordance with the terms of the will by which it is left, regardless of any renunciation or waiver by the legatee, or any agreement by him for the distribution of the legacy otherwise than as provided in the will.
The act provided that in the case of proceeds of life or accident insurance payable to named beneficiaries other than the insured or his estate and issued after the effective date of the act, or issued prior to such date with a right reserved in the insured to change the beneficiary or to secure the cash surrender value, the excess over $50,000 was subject to the act.
The act eliminated as a deduction from market value any succession, inheritance, or estate tax due or paid another state.
The act changed all of the specific exemptions and a large number of the rates of tax.
The act was amended in 1937 (thrice), in 1939, in 1941 (twice), and in 1943.
The first 1937 amendment (Chapter 296, Statutes of 1937; effective August 27, 1937) dealt with tax security bonds, the collection of taxes, and the fees of county treasurers.
The second 1937 amendment (Chapter 333, Statutes of 1937, effective August 27, 1937) related to tax liens.
The third 1937 amendment (Chapter 421, Statutes of 1937, effective August 27, 1937) related to the collection of taxes by county treasurers.
The 1939 amendment (Chapter 694, Statutes of 1939; effective July 6, 1939) extended the charitable exemption to transfers to organizations incorporated under the laws of the United States, and provided for the filing of tax bonds.
The first 1941 amendment (Chapter 177, Statutes of 1941; effective April 23, 1941) exempted gifts of powers of appointment limited to be exercised or exercised in favor of charitable beneficiaries; provided that deductible funeral and last illness expenses include those of a deceased wife whether or not she be survived by a husband financially well able to pay such expenses; and deleted a provision taxing any increase accruing on the extinction of a charge or interest against or in transferred property.
The second 1941 amendment (Chapter 833, Statutes of 1941; effective June 25, 1941), among other things, limited the charitable exemption to corporations, etc., organized solely for and engaged exclusively in charitable or like work; extended such exemption to transfers to this State or to the United States; set up a formula for computing the previously taxed property exemption; deleted a provision regarding the appraisal of a contingent or defeasible estate untaxed before the happening of the contingency; provided that a life estate or annuity which terminates before the tax is fixed shall be valued at the present value as of the death of the decedent who gave the estate or annuity of the amount paid or payable to the tenant or annuitant; prescribed a one year statute of limitations for a refund or correction of order fixing tax where a debt is proved against an estate after the payment of a legacy, etc., or where a deduction for a debt was erroneously allowed; changed the method for deducting the fees of a county treasurer where a refund is allowed on an excess or erroneous tax payment; added a provision for furnishing lists of contents of safe deposit boxes; changed the provisions regarding compensation of inheritance tax appraisers in proceedings to determine inheritance tax; amplified the provisions pertaining to writs of execution; increased the maximum annual fees of the Treasurer of the County of Los Angeles.
The 1943 amendment (Chapter 19, Statutes of 1943; effective February 6, 1943) included in the federal war risk insurance exemption the proceeds of federal war risk insurance payable to the estate of a veteran of World War II, and restored the five year limitation provision to the definition of “previously taxed property.”
(8) Part 8, Division 2, Revenue and Taxation Code. 
The Act of 1935, as amended, was codified in 1943 (Chapter 658, Statutes of 1943) as Part 8 of Division 2 of the Revenue and Taxation Code, comprising Sections 13301 to 14901, inclusive, but the effective date of the codification was postponed until July 1, 1945. The code represents the law now in force.
(9) Major Legislation after 1943 Codification.
1945 Statutes (effective July 1, 1945):
Chapter 697 reduced the rate of interest in computing future, contingent and limited estates from 5 to 4 percent.
Chapter 711 allowed deduction of fees for attorney services in actions to establish death or to determine tax and for other tax services.
Chapter 1014 made numerous clarifications of prior law.
Chapter 1137 amended maximum commissions of county treasurers.
1947 Statutes (effective September 19, 1947):
Chapter 78, amended the law relating to maximum commissions of county treasurers.
Chapter 734 included widower of a daughter as a class B transferee; included certain personal property acquired elsewhere as community property; amended law relating to delinquency of additional tax, interest penalty on tax delinquency bonds, procedure for remission of interest, commissions of county treasurers and inspection of records and provided for distribution of copies of the Inheritance Tax Law.
Chapter 820 exempted tax on certain transfers from persons who died in the armed services.
1949 Statutes (effective October 1, 1949):
Chapter 300 enacted Uniform Act on Interstate Compromise of Death Taxes.
Chapter 301 adopted Uniform Act on Interstate Arbitration of Death Taxes.
Chapter 684 added procedure for release of real property from inheritance tax lien.
Chapter 1001 amended provisions for maximum commissions of county treasurers.
1950 Statutes (effective April 26, 1950):
Chapter 5 provided marital exemption of property equal to clear market value of one-half of decedent's separate property if transferred to the spouse.
1951 Statutes (effective September 22, 1951):
Chapter 197 allowed deduction for fees paid to executors, administrators and accountants in preparation of income tax returns or adjustment of estate and inheritance taxes.
Chapter 244 amended provisions relating to county treasurers' commissions.
Chapter 733 included within charitable exemption transfers to certain hospital corporations and membership associations.
Chapter 845 amended provisions relating to the withholding of securities, deposits, etc. and removed penalty of up to $20,000 for failure to comply.
Chapter 1448 limited taxable transfers in contemplation of death to those made within three years of death; amended provisions respecting additional tax delinquency, compromise of taxability of contingent transfers or of tax where decedent is claimed as a nonresident and penalty on delinquent tax bonds; changed interest rate on delinquent taxes to 6 percent and repealed provisions relating to remission of interest.
1953 Statutes (effective September 9, 1953):
Chapter 695 included as class A transferees persons adopted during minority by lineal issue or other class A children.
Chapter 974 amended provisions relating to certificates of release of tax lien and to inheritance tax appraisers' fees.
Chapter 1309 amended county treasurers' commissions.
Chapter 1313 provided that a reservation of a life interest is conclusively presumed where the transferor retains possession or enjoyment of the income or interest in the property transferred until his death; added reciprocal collection of inheritance taxes with other states; and amended provisions relating to assisting governmental officers in enforcement of the tax and payment of expenses of special employment.
1955 Statutes (effective September 7, 1955):
Chapter 506 provided for exemption of community property transferred to a wife other than by will or succession up to a value not exceeding one-half of total community, amending the previous provision which exempted only one-half of the property transferred.
Chapter 520 amended provision relating to delinquency of additional tax; and added a provision to restate the prior law that joint tenancy of spouses with its source in community property is to be treated as community property for inheritance tax purposes.
Chapter 1175 provided that any allowable deduction, not merely a debt, established or paid after the order fixing tax is made may be the basis for modification of the order.
Chapter 1382 amended provisions relating to county treasurers' commissions.
1956 Statutes (effective July 3, 1956):
Chapter 2 exempted public retirement pensions from tax.
Chapter 3 amended provisions regarding taxability of intangible personal property of a deceased nonresident of the United States.
1957 Statutes (effective September 11, 1957):
Chapter 287 amended requirement of notice of filing appraiser's report and provided that an endorsed copy of the order fixing tax be mailed to the Controller.
Chapter 403 added provision that the wife has the same interest in all community property whenever acquired that she has in community property since the effective date of Civil Code Section 161a; reworded charitable exemption provisions; amended provisions for countersignature of tax receipts by Controller and provided for optional use of whole dollar amounts in tax reports.
Chapter 490 amended taxability of property to which Sections 201.5 and 201.8 of the Probate Code are applicable.
Chapter 502 amended the deduction of federal estate taxes and revised provisions for previously taxed property to allow a credit rather than an exemption.
Chapter 541 authorized Controller to give a general consent to corporations for transfer of stock upon their obtaining an affidavit of residence.
Chapter 883 amended provision for maximum commissions of county treasurers.
Chapter 1959 provided alternate method for arbitration of domiciliary disputes.
1959 Statutes (Chapter 1128 effective June 24, 1959, others effective September 18, 1959):
Chapter 1128 increased the rates of tax on transferees in classes C and D and repealed the deduction for federal estate taxes.
Chapter 485 provided that inter vivos transfers made for consideration but for less than adequate or full consideration are taxable only as to the portion in excess of the consideration.
Chapter 1545 authorized the Controller to give a general consent to banks or savings and loan associations for delivery of deposits, etc.
Chapter 1628 amended definition of class B and class C transferees to include an adopted or acknowledged child as a “descendent” within the classes.
Chapter 1684 provided for payment of refunds by the State rather than by county treasurers.
Chapter 1917 provided for the appraisal of estate property located in a county outside of the county whose superior court has jurisdiction and for sharing of the appraisal fees.
1961 Statutes (effective September 15, 1961):
Chapter 636 added a provision that joint tenancy between a husband and wife having its source in quasi-community property be treated as furnished half by each spouse.
Chapter 2189 increased the tax rate for class B transferees, reduced the specific exemption of a wife from $24,000 to $5,000, and exempted community property passing to a spouse except where a widow is given a life estate or a power of appointment.
1963 Statutes (effective September 20, 1963):
Chapter 522 clarified taxability of intangible personal property of a deceased nonresident of the United States regarding corporate stock and extends the bank deposit exclusion of such nonresidents to savings and loan associations.
Chapter 1711 amended maximum commissions of county treasurers.
Chapter 1749 provided for a single simplified method for obtaining refunds.
Chapter 1840 provided for allowance of deduction for casualty losses.
1965 Statutes (effective September 17, 1965):
Chapter 1070 exempted a life estate given in community property to a widow, clarified that only decedent's half of community property is subject to tax to third parties, provides for the conversion of separate property to community property to be treated as half the separate property of each spouse, and revised provisions for transfers of powers of appointment to include the exercise or nonexercise of a general power to be treated as a taxable event in addition to taxing the creation of a power, various powers of appointment being specifically defined.
Chapter 1181 clarified reciprocity of taxation regarding intangible personal property of nonresidents.
Chapter 1409 exempted charitable use transfers in trust though the California trustee may not be organized solely for charitable purposes.
1967 Statutes:
Chapter 963 (effective July 29, 1967 at 7:00 p.m.) combined transferee class D with class C; increased tax rates on all classes; required tax collections be paid by county treasurers to State Treasurer within 15 days of receipt.
Chapter 1481 (effective November 8, 1967) revised the consent to transfer procedure and authorized Controller to issue general consents or dispense with requirements where tax is not in jeopardy. 
1968 Statutes (effective June 6, 1968):
Chapter 1968 revised class A transferee rules regarding children adopted by stepparents.
1969 Statutes (effective November 10, 1969):
Chapter 1200 combined into a single provisions the rules regarding classification of adopted children; and updated the mortality and actuarial tables to be used at 3 1/2 percent per annum in valuing future interests including life estates and annuities.
1970 Statutes (effective November 23, 1970):
Chapter 514 provided that a transfer of certain powers to trustees to make discretionary payments to beneficiaries is a transfer to the trust beneficiaries.
Chapter 1282 (operative July 1, 1971) enacted revisions of inheritance tax appraiser system, changed title to “inheritance tax referee”; provided for qualifying examinations, appointment rules, four-year terms, removal procedure and for political activity limitations.
Chapter 1440 provided for transition of positions of inheritance tax appraisers to referees.
Chapter 1453 provided a method of appraisal at taxpayer's option in determining fair market value of land which is subject to open-space restrictions, operative until December 31, 1974.
1971 Statutes (effective March 4, 1972):
Chapter 53 authorizes Controller to enter into tax payment agreements in undue hardship cases in order to permit earlier distribution of an estate.
Chapter 119 provides a procedure for determination of tax by the Controller where no court proceeding is pending.
Chapter 1205 provided for joint trustee accounts of spouses to be treated under specified conditions the same as joint tenancy accounts.
Chapter 1420 allowed the insurance exemption to apply to certain life insurance proceeds payable to a trust created under the will of the decedent.
1971 Statutes: Extra Sessions (effective December 8, 1971, 6:00 p.m.):
Chapter 1 changed tax delinquency to 9 months after death in lieu of 24 months after death and repealed the 5 percent discount for early payments.
1972 Statutes (Chapter 990 effective August 16, 1972; others effective March 7, 1973):
Chapter 579 provided that the age of adoption for tax exemption purposes to be reduced from 21 to 18.
Chapter 990 adopted new Civil Code disclaimer provisions for inheritance tax purposes.
Chapter 1303 revised maximum commissions of county treasurers.
1973 Statutes:
Chapter 19 (effective April 11, 1973) provided exemption benefits for certain transfers and insurance of Vietnam War decedents, as part of the P.O.W. Homecoming Act.
Chapter 637 (effective September 21, 1973) amended classification of persons adopted when over 18 years of age.
1974 Statutes (effective January 1, 1975; Chapter 1075 operative June 1, 1975):
Chapter 101 revised and updated life expectancy and actuarial tables to be used in valuing future, contingent or limited estates, utilizing 6 percent in lieu of former 3 1/2 percent rate.
Chapter 444 provided a revised procedure for modifying a erroneous order fixing tax.
Chapter 752 provided for appraisal and tax report by an inheritance tax referee under new Probate Code procedure for confirmation of community property passing to a spouse without administration.
Chapter 1075 revised method of computing commissions of county treasurers. 
1975 Statutes (effective January 1, 1976):
Chapter 661 increased interest rate for late payment of tax from 6 percent to 12 percent per annum.
Chapter 942 taxed deceased spouse's one-half interest in community property passing to the surviving spouse, eliminated the distinction as to community property converted from separate property, changed the separate property marital exemption to an exclusion and increased the specific exemption for a surviving spouse from $5,000 to $60,000.
1976 Statutes (effective January 1, 1977):
Chapter 150 deleted from the deduction provisions express reference to funeral and last illness expenses of a deceased wife.
Chapter 365 further defined and extended the scope of the State Personnel Board's administration of the inheritance tax referee's qualification examination.
Chapter 922 required the inheritance tax referee file the referee's report with the court upon completion of the appraisement and within 60 days after receipt of all information and documentation necessary to assess the tax or to issue a no tax certificate.
Chapter 1230 further defined the undue hardship requisite to entering into tax payment agreements in order to permit earlier distribution of an estate.
1977 Statutes (Chapter 1079 effective September 26, 1977; others effective January 1, 1978):
Chapter 694 further clarified provisions of Stats. 1970, Chapter 514, by expressly providing the discretionary power of a trustee to make payments for the benefit of trust beneficiaries other than the trustee is not a power of appointment even though the discretion of the trustee is absolute and includes the power to terminate the trust.
Chapter 1079 aggregated lifetime transfers with transfers subject to inheritance tax for the purpose of determining the inheritance tax rate, repealed gift tax credit provisions and renumbered the previously taxed property credit provisions, included as a taxable transfer the gift tax paid on lifetime transfers subject to inheritance tax, added a new orphan's exemption and added a new generation skipping transfer tax as Part 9.5 of Division 2 of the Revenue and Taxation Code.
1978 Statutes (Chapter 1388 effective September 30, 1978; others effective January 1, 1979):
Chapter 58 provided county treasurers of counties with a population of less than 25,000 may elect to remit inheritance tax moneys to the state treasurer on a monthly basis.
Chapter 604 provided for payment of interest on refunds at a rate indexed to the federal reserve rate on each January 1, not to exceed 7 percent per annum.
Chapter 1096 provided the transferee of a dwelling owned and occupied by the decedent at date of death may, under stated conditions, elect to pay the tax attributable to the dwelling in five annual installments, and that the tax shall accrue interest at the rate of 7 percent per annum during the five-year period.
Chapter 1144 provided a procedure whereby a transferee may dedicate to the state real property devoted to open space use in payment of the inheritance tax, and that the county treasurer shall accept the notification of acceptance as payment of tax.
Chapter 1181 included a timber-growing enterprise within the definition of qualified family property under the undue hardship installment payment provisions.
Chapter 1388 provided that only lifetime gifts made after December 31, 1976, shall be aggregated with transfers subject to inheritance tax for the purpose of determining the inheritance tax rate, and added gift tax credit provisions applicable to includable gifts made prior to January 1, 1977.
1979 Statutes (Chapter 1005 effective September 26, 1979; others effective January 1, 1980):
Chapter 731 eliminated requirement that receipt countersigned and sealed by the Controller be on file prior to a decree of distribution, provided that receipt from county treasurer certifying the payment of all tax plus interest shall constitute proof of payment, and required that inheritance tax referee file the referee's report with court within 60 days after receipt of all information and documentation necessary to assess the tax or to issue a no tax certificate.
Chapter 1005 declared Legislature's intent that the provisions of Chapter 1388 of the Statutes of 1978 (limiting unification to only gifts made after December 31, 1976) shall apply retroactively to all cases where the date of death is after the effective date of Chapter 1079 of the Statutes of 1977, i.e., 5:15 p.m., September 26, 1977.
Chapter 1075 provided for waiver of interest for late payment of tax upon a showing that tax was not paid prior to delinquency date solely because of the failure of a public official to perform his or her duties in a timely manner.
Chapter 1168 provided Class A and Class B beneficiaries who receive qualified family property may elect to make installment payments of the tax without the necessity of showing undue hardship, expanded definition of qualified family property to conform to similar provisions contained in the federal estate tax law and provided for an adjusted rate of interest where the tax is paid in installments pursuant to an agreement with the Controller.
1980 Statutes (effective January 1, 1981):
Chapter 55 further clarified the provisions of Chapter 1282 of Statutes of 1970 by expressly providing the authority of a person to act as an inheritance tax referee ceases immediately upon the expiration of that person's term of office.
Chapter 634 provided transfers to a spouse are excluded from the tax except where spouse receives a limited power of appointment in any part, or all, of the decedent's property; increased the specific exemption for all other classes of beneficiaries; provided special use valuation, under specified conditions, for certain real property; provided several different plans for payment of tax in installments subject to specified conditions; eliminated role of county treasurer in administration of tax; and eliminated requirement that tax be paid before a decree of distribution may be made.
1982 Statutes (Chapter 1535 effective June 8, 1982):
Proposition 6, an initiative statute which was adopted by the voters at the June 8, 1982, Direct Primary Election, repealed Part 8 (commencing with Section 13301), known as the Inheritance Tax Law, and Part 9 (commencing with Section 15101), known as the Gift Tax Law, of the Revenue and Taxation Code, the inheritance and gift tax provisions were replaced by an estate tax in an amount equal to the maximum allowable federal estate tax credit for state death taxes.

*Prepared by State Controller.
Article 1. Definitions
§13303. Property--In General.
Note     •     History

In general, property subject to the Inheritance Tax Law includes any real or personal property, and any right or interest therein or income therefrom, the receipt or succession to which may be taxed under the Inheritance Tax Law and under the Constitutions of this State and the United States.
Note: For the describing of property on form IT-22, Inheritance Tax Declaration, see Section 14501.1.
NOTE

Authority cited for Subchapter 1 (Sections 13303 through 14813, not consecutive): Section 14740, Revenue and Taxation Code. Reference: Sections 13303 and 14501, Revenue and Taxation Code.
HISTORY

1. Repealer of Subchapter 1 (Sections 13303(a) through 14813-14814, not consecutive) and new Subchapter 1 (Sections 13303 through 14813, not consecutive) filed 9-22-78 as procedural and organizational; designated effective 12-1-78 (Register 78, No. 38). For history of former Subchapter 1, see Registers 59, No. 20; 68, No. 27; 69, No. 47; 71, No. 11; 72, No. 18; 73, No. 15; 75, No. 17; 76, Nos. 5, 18, 43 and 51; 77, No. 35; and 78, Nos. 8 and 23.
2. Editorial correction (Register 78, No. 42).
§13303.1. Property of Resident Transferors.
Note

(a) Real Property. 
Real property in this State belonging to a resident transferor is subject to the Inheritance Tax Law. Real property outside the State belonging to a resident transferor is not subject to the law. If, however, a resident transferor owning real property situated outside the State has entered into an executory contract for its sale, the right of the transferor, his estate or heir to the proceeds of the sale will be treated as subject to the law should the state in which the property is situated not subject the property to its own inheritance or estate tax law, either on an application of the so-called “doctrine of equitable conversion” or for any other reason.
(b) Tangible Personal Property. 
Tangible personal property in this State belonging to a resident transferor is subject to the Inheritance Tax Law. Tangible personal property permanently outside the State belonging to a resident transferor is not subject to the law.
(c) Intangible Personal Property. 
Intangible personal property, wherever situated, belonging to a resident transferor is subject to the Inheritance Tax Law.
NOTE

Reference: Sections 13303-13305, Revenue and Taxation Code.
§13303.2. Property of Nonresident Transferors.
Note

(a) Real Property. 
Real property in this State belonging to a nonresident transferor is subject to the Inheritance Tax Law.
(b) Tangible Personal Property. 
Tangible personal property permanently in this State belonging to a nonresident transferor is subject to the Inheritance Tax Law.
(c) Intangible Personal Property Belonging to a Nonresident Residing in the United States. 
Intangible personal property belonging to a nonresident transferor residing in the United States is not subject to the Inheritance Tax Law.
(d) Intangible Personal Property Belonging to Nonresident Residing Outside United States. 
Stocks and bonds issued by a corporation organized under the laws of California or which has its principal place of business or does a major part of its business in California or of a federal corporation or national bank which has its principal place of business or does a major part of its business in California, whether the evidence thereof is kept within or without the State, and all other intangible personal property in California belonging to a nonresident transferor residing outside the United States except savings accounts in savings and loan associations operating under the authority of the Division of Savings and Loan or the Federal Home Loan Bank board and bank deposits, unless such deposits are used in connection with a business conducted or operated, in whole or in part, in California, are subject to the Inheritance Tax Law. However, Revenue and Taxation Code Section 13851 exempts such intangible personal property from the inheritance tax if the transferor at the time of his death was a resident of a foreign state or country which then imposed a legacy, succession, or death tax in respect to the intangibles of its own residents, but either:
(1) Did not impose such a tax in respect to intangible personal property of residents of this State; or
(2) Had a reciprocity provision in its law exempting from its tax the intangibles of nonresidents of other jurisdictions whose laws in turn, contain a similar exemption.
Note: As to the intangibles exemption of nonresident transferors residing in a foreign state or country, Sections 13851, 13851.1 and 13851.2.
NOTE

Reference: Section 13303, Revenue and Taxation Code.
§13303.3. Intangible Personal Property.
Note

The term “intangible personal property” includes stocks, bonds, notes (whether secured or unsecured), bank deposits, accounts receivable, patents, trade-marks, copyrights, good will, partnership interest, life insurance policies, and other choses in action.
NOTE

Reference: Section 13303, Revenue and Taxation Code.
§13303.4. Residence.
Note

For the purpose of the Inheritance Tax Law the term “residence” is synonymous with legal residence or domicile.
When a claim is made that the residence of a transferor was outside the State of California and a court proceeding to determine the inheritance tax is pending, an affidavit in support of the claim must be filed with the inheritance tax referee on form IT-2, entitled “Declaration Concerning Residence,” copies of which may be obtained from the referee or from the Inheritance Tax Division of the Controller's office in Los Angeles, Sacramento or San Francisco.
NOTE

Reference: Section 13303, Revenue and Taxation Code.
§13303.5. Residence of Married Women and Minors.
Note

Generally, a married woman has the same residence as her husband, even though she is separated from him. The residence of a minor, ordinarily, is that of the father, or of the mother if the father is deceased. Accordingly, if a man has his residence in California, his wife and minor children, generally, likewise have their residence here.
NOTE

Reference: Section 13303, Revenue and Taxation Code.
§13303.6. Resident.
Note

The term “resident” means a person whose residence is in the State of California.
NOTE

Reference: Section 13303, Revenue and Taxation Code.
§13303.7. Nonresident.
Note

The term “nonresident” means a person whose residence is outside the State of California.
NOTE

Reference: Section 13303, Revenue and Taxation Code.
§13303.8. Joint Tenancy.
Note

For the purpose of the Inheritance Tax Law the term “joint tenancy” includes any ownership of property by two or more persons whereby the property is held in the joint names of such persons, or is deposited in a bank or other depositary in their joint names subject to payment to either or any of them during their lives or to the survivor or survivors upon the death of any one. The distinguishing incident of this character of ownership is the right of the surviving owner to the sole and immediate ownership, possession, and enjoyment of the property by virtue of his survivorship.
NOTE

Reference: Section 13303, Revenue and Taxation Code.
§13303.9. Future Interest.
Note

The term “future interest” includes a remainder or other estate or interest in property, whether vested or contingent, the right to the use, possession, or enjoyment of which is limited to commence at, or is postponed to some future date or time.
NOTE

Reference: Section 13303, Revenue and Taxation Code.
§13303.10. Cemetery Property.
Note

Property in a cemetery passing to an individual by reason of the death of the owner, is exempt from the Inheritance Tax Law.
NOTE

Reference: Sections 8250, 8250.5 and 8604, Health and Safety Code; Section 13303, Revenue and Taxation Code.
§13303.11. Tax-Exempt Securities.
Note

Inasmuch as the inheritance tax is a tax upon the right or privilege of receiving or succeeding to property, and not upon the property itself, tax-exempt federal, state, or municipal bonds or other evidences of indebtedness are subject to the Inheritance Tax Law.
NOTE

Reference: Section 13303, Revenue and Taxation Code.
§13304. Transfer.
Note

For the purpose of the Inheritance Tax Law the term “transfer” includes the passing of any property, or any interest therein or income therefrom, from one person to another, for the present or future possession or enjoyment of the recipient or a third person, whether by will, by operation of law, a grant, a deed, a sale, a gift, a court order setting apart property or granting a family allowance, the homestead laws, the giving of a power of appointment, survivorship, an advancement, under a policy of life or accident insurance, or otherwise.
NOTE

Reference: Section 13304, Revenue and Taxation Code.
§13304.1. Complete Transfer.
Note

The term “complete transfer” includes any transfer under which the rights of the transferee are vested and the transferor does not reserve any power to revoke, terminate, alter, amend, revise, or change the interest of the transferee.
NOTE

Reference: Section 13304, Revenue and Taxation Code.
§13304.2. Incomplete Transfer.
Note

The term “incomplete transfer” includes any transfer under which the rights of the transferee are contingent or the transferor reserves the power to revoke, terminate, alter, amend, revise, or change the interest of the transferee.
NOTE

Reference: Section 13304, Revenue and Taxation Code.
§13306. Transferee Under a Trust.
Note

Where a trust is involved, the beneficiary, not the trustee, is the transferee.
NOTE

Reference: Section 13306, Revenue and Taxation Code.
§13309. Transferee Under Section 228 or 229 of Probate Code.
Note

Any relative of a decedent who, pursuant to Section 228 or 229 of the Probate Code, succeeds to any property of the decedent which previously had been the community property of the decedent and the predeceased spouse or the separate property of the latter, is a Class C transferee, unless his relationship to the decedent places him in a prior class.
NOTE

Reference: Section 13309, Revenue and Taxation Code.
Article 2. Imposition and Computation of Inheritance Tax
§13401. Tax Imposed--In General.
Note

The Inheritance Tax Law reaches every receipt or succession to real or personal property subject to the law, and any right or interest therein or income therefrom, whether in trust or otherwise, to the extent that the receipt or succession is effected by any transfer subject to the law.
NOTE

Reference: Section 13401, Revenue and Taxation Code.
§13401.1. Duty of Producing Evidence.
Note

Any person who claims that a particular transfer is not subject to the Inheritance Tax Law has the burden of producing evidence supporting such claim.
NOTE

Reference: Section 13401, Revenue and Taxation Code.
§13402. Computation of Tax--In General.
Note     •     History

(a) Decedents Dying Prior to 5:15 p.m., September 26, 1977. The inheritance tax is ordinarily measured by the clear market value (see Revenue and Taxation Code Section 13312) of the distributive share of a decedent's estate to which a particular transferee is entitled. Each individual share is in the nature of a separate estate, and the tax is computed separately thereon. Consequently, there will be as many separate computations of the tax in a particular estate as there are transferees of the decedent's property.
(b) Decedents Dying on or After 5:15 p.m., September 26, 1977. The date of gift value of net gifts (within the meaning of Revenue and Taxation Code Section 15118, see Section 15118) which are not otherwise subject to inheritance tax, made by the decedent during lifetime after December 31, 1976, to a particular transferee is added to the clear market value (see Revenue and Taxation Code Section 13312) of the distributive share of decedent's estate to which the particular transferee is entitled, and a tentative tax is computed upon a sum of these two amounts. The tentative tax is then reduced by the amount of tax computed, at the rates and exemptions in effect at date of death, upon the total date of gift value of all gifts made by decedent during his lifetime after December 31, 1976 to the particular transferee. The difference thus determined is the amount of inheritance tax due with respect to the transferee.
Since each individual transferee's tax is computed separately, there will be as many separate computations of the tax in a particular decedent's estate as there are transferees of the decedent's property.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 13402, Revenue and Taxation Code, and Stats. 1979, Ch. 1005.
HISTORY

1. Amendment of subsection (b) and new subsection (c) filed 3-8-79; effective thirtieth day thereafter (Register 79, No. 10).
2. Amendment filed 2-28-80; effective thirtieth day thereafter (Register 80, No. 9).
§13402.1. Method of Computation.
Note     •     History

(a) Decedents Dying Prior to 5:15 p.m., September 26, 1977--In General. The inheritance tax is ordinarily computed as follows:
(1) Determine the value of all property subject to the Inheritance Tax Law transferred to the particular transferee under the decedent's will or pursuant to the laws of succession. For the valuation of property, see Sections 13951 through 13956.
(2) Deduct from the value determined pursuant to subdivision (1) the total amount of all allowable deductions provided in Revenue and Taxation Code Sections 13981 through 13990, to which the transferee is entitled, to arrive at the clear market value. As to deductions, see Sections 13982 through 13988.6.
(3) Determine the value of all property subject to the Inheritance Tax Law included in any transfer to the transferee effected by any means other than the decedent's will or the laws of succession (as, for example, by a taxable transfer during the life of the decedent, or by the passage to the transferee of property held in joint tenancy, or by the payment to the transferee of proceeds of insurance on the life of the decedent), and make any proper deduction therefrom to arrive at the clear market value.
(4) Add the result determined pursuant to subdivision (3) to the result determined pursuant to subdivision (2).
(5) Deduct from the sum determined pursuant to subdivision (4) the exemptions provided in Revenue and Taxation Code Sections 13801 through 13803, and the marital exemption effective before January 1, 1976, in Revenue and Taxation Code Section 13805, to which the transferee is entitled. As to the specific exemptions, see Sections 13801 through 13801.3. As to the marital exemption or exclusion of separate property, see Section 13805.
(6) Compute the tax by applying to the result determined pursuant to subdivision (5) the same rate of taxation (see Revenue and Taxation Code Sections 13404 through 13406) which would have been applicable had the exemptions not been allowed. See also Section 13403. As to rates of taxation, see also Sections 13403.1 and 13403.2.
(b) Decedents Dying on or After 5:15 p.m., September 26, 1977--In General.
(1) Determine the value of all property subject to the Inheritance Tax Law transferred to the particular transferee under the decedent's will or pursuant to the laws of succession. For the valuation of property, see Sections 13951 through 13956.
(2) Deduct from the value determined pursuant to subdivision (1) the total amount of all allowable deductions provided in Revenue and Taxation Code Sections 13981 through 13990, to which the transferee is entitled, to arrive at the clear market value. As to deductions, see Sections 13982 through 13988.
(3) Determine the value of all property subject to the Inheritance Tax Law included in any transfer to the transferee effected by any means other than the decedent's will or the laws of succession (as, for example, by a taxable transfer during the life of the decedent, or by the passage to the transferee of property held in joint tenancy or by the payment to the transferee of proceeds of insurance on the life of the decedent), and make any proper deductions therefrom to arrive at the clear market value.
(4) Add the result determined pursuant to subdivision (3) to the results determined pursuant to subdivision (2).
(5) Add to the sum determined pursuant to subdivision (4) the date of gift value of net gifts which are not otherwise subject to inheritance tax made by the decedent during his lifetime after December 31, 1976, to the transferee.
(6) Deduct from the sum determined pursuant to subdivision (5) the specific exemption provided for in Revenue and Taxation Code Sections 13801 through 13803 to which the transferee is entitled.
(7) Compute the tentative tax by applying to the result determined pursuant to subdivision (6) the same rate of taxation (see Revenue and Taxation Code Sections 13404 through 13406) which would have applied had the specific exemption not been allowed.
(8) Determine the total date of gift value, less any applicable annual exclusion, of all gifts made during lifetime after December 31, 1976, from the decedent to the transferee and compute the tax payable under the Gift Tax Law on the amount thus determined, at the rates and exemption in effect at date of death, in the same manner as set forth in subdivisions (6) and (7), i.e., deduct from the total thus determined the specific exemption to which the transferee is entitled at date of death, and compute the tax by applying to the result thus determined the same rate of taxation which would have applied had the exemption not been allowed.
(9) Subtract the tax on prior net gifts determined pursuant to subdivision (8) from the tentative tax determined pursuant to subdivision (7). The difference is the amount of inheritance tax due with respect to each transferee, respectively.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 13402, Revenue and Taxation Code, and Stats. 1979, Ch. 1005.
HISTORY

1. Amendment of subsection (b), and new subsection (c) filed 3-8-79; effective thirtieth day thereafter (Register 79, No. 10).
2. Repealer of subsection (b) and amendment of subsection (c) filed 2-28-80; effective thirtieth day thereafter (Register 80, No. 9).
§13402.2. Date of Death After 5:15 p.m., September 26, 1977--Examples.
Note     •     History

The provisions of Subsection (b) of Section 13402.1 are illustrated by the following examples:
(a) Nonincludible Transfers. As used in this regulation, the term “nonincludible transfer” denotes a lifetime transfer subject to gift tax under which the rights of the transferee are vested and under which the transferor does not postpone the possession or enjoyment of the property transferred until the transferor's death, nor retain any interest in the property transferred, nor reserve any power to revoke, terminate, alter, amend, revise or change the interest of the transferee, nor make the transfer in contemplation of death within three years prior to death, nor make the transfer as an advancement or in lieu of or in avoidance of probate, nor create a joint tenancy, and under which the transferee does not promise to make payments to care for the transferor. Such a transfer is not subject to inheritance tax upon the subsequent death of the transferor. However, in the case of decedents with a date of death after 5:15 p.m., September 26, 1977, the date of gift value of nonincludible transfers made after December 31, 1976, less any applicable annual exclusion, is added to the clear market value of transfers subject to inheritance tax for the purpose of determining the rates of taxation that shall apply to those transfers subject to inheritance tax at the death of the transferor.
EXAMPLE (1). Gift of a nonincludible transfer made after December 31, 1976.
In 1977, P makes a gift to C, adult child, of $60,000 cash, for which a gift tax return is properly filed and gift tax paid.

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POINTS TO NOTE:
(A) The gift was made after December 31, 1976. Therefore, the net gift is aggregated with the death time transfer to compute the inheritance tax.
(B) Only the net gift (i.e., date of gift value of the gift less the allowable $3,000 annual exclusion) is aggregated.
(C) The second (tax on prior gifts) inheritance tax computation is a separate computation in which the specific exemption applicable at date of death is allowed, and the tax on the excess over the specific exemption commences at the beginning tax rates in effect at date of death.
EXAMPLE (2). Gift of nonincludible transfer made after December 31, 1976, change of exemption between date of gift and date of death.
In 1977, P makes a gift to C, minor child, of $60,000 cash. The gift tax return is properly filed and gift tax paid.

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The Tentative Tax Computation and the Tax on Prior Gifts Computation Are the Same As in Example (1).
POINTS TO NOTE:
(A) Although the $12,000 specific exemption was allowed in computing the gift tax paid, only a $5,000 specific exemption is used in computing the second (tax on prior gifts) inheritance tax computation where the transferee is an adult at the date of death. This is necessary because the “tax on prior gifts” reduction is similar to a credit applied against the “tentative tax.” If the larger exemption were used, the “credit” would be reduced correspondingly, resulting in an imposition of a tax at death on a portion ($7,000) of the specific exemption allowed at the date of gift. The exemption and rate of tax applied in both inheritance tax computations are those in effect and according to the beneficiary's status at the date of death, regardless of what may have been the rate of tax and exemption in effect at date of gift.
(B) The same principle applies in cases where there is a change of tax rates between date of gift and date of death, and in cases where there is a change of beneficiary's relationship between date of gift and date of death. The prior net gifts are added to the death transfers for the first (tentative tax) inheritance tax computation, and the tax rates in effect at date of death are applied to the sum of the value of those transfers, after allowance for the specific exemption in effect at date of death. Consequently, the applicable specific exemption and tax rates in effect at date of death must be used in computing the second (tax on prior gifts) inheritance tax computation, regardless of what tax rates or exemption may have applied at the date of gift. The tax on prior gifts reduction of the tentative tax may be the same as, more than, or less than the actual gift tax paid. Therefore, to insure the correct inheritance tax computation, it is necessary to make separate computation rather than merely apply a “credit” in the amount of the gift tax paid.
EXAMPLE (3). Gift of nonincludible transfer made after December 31, 1976, change of beneficiary's relationship between date of gift and date of death.
In 1977, X makes a gift to N, minor nephew, of $60,000 cash. The gift tax return is properly filed and gift tax paid.

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The Tentative Tax Computation and the Tax on Prior Gifts Computation Are the Same As in Example (1).
POINTS TO NOTE:
(A) At the date of death, N is an adult Class A beneficiary, and therefore the tentative tax is computed upon the aggregate of lifetime and death transfers at the Class A exemption and tax rates. Consequently, Class A exemption and rates must be used in computing the reduction due to the tax on prior gifts (second inheritance tax computation).
COMMENTS RE EXAMPLES (1), (2) and (3):
The first three illustrations demonstrate that the reduction due to the tax on prior gifts (second inheritance tax computation) may be the same as, more than, or less than the actual gift tax paid. Therefore, to insure a correct inheritance tax determination, it is necessary to make a separate computation rather than merely apply a “credit” in the amount of gift tax paid.
Since the tentative tax (first inheritance tax computation) is computed, on the aggregate of lifetime gifts made after December 31, 1976, and death transfers, at the exemption and tax rates in effect and applicable at date of death, the reduction for the tax on prior gifts (second inheritance tax computation) must also be computed at the exemption and tax rates in effect and applicable at date of death, regardless of what exemption or tax rates may have applied at the date of gift.
In the first three illustrations, the date of gift exemption status of the beneficiary and the tax rates applied at date of gift varies resulting in a different amount of gift tax paid in cash case. However, the date of death status of the beneficiary and the value of the property received are identical in all three illustrations, i.e., an adult Class A beneficiary having received net gifts from parent/adoptive parent during lifetime and after December 31, 1976, of $57,000 and receiving a net probate estate having a clear market value of $200,000. By proceeding in the manner outlined, a uniform result is obtained, and the inheritance tax due in each case is determined to be $16,280.
In the first three illustrations, there were no gifts made prior to January 1, 1977. Nonincludible lifetime gifts made prior to January 1, 1977, are not aggregated with transfers subject to inheritance tax. Consequently, the computation of the tax on prior gifts (second inheritance tax computation) requires special consideration in the case of decedents dying after 5:15 p.m., September 26, 1977, who during lifetime made gifts both before January 1, 1977, and after December 31, 1976. See Example (4) below.
EXAMPLE (4). Gift of nonincludible transfer made prior to January 1, 1977, plus gift of nonincludible transfer made after December 31, 1976.
In 1968, P makes a gift to C, adult child, of $33,000 cash, for which a gift tax return is properly filed and gift tax paid.

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POINTS TO NOTE:
(A) The 1968 gift is determined to be nonincludible for inheritance tax purposes. In the case of decedents with a date of death after 5:15 p.m., September 26, 1977, nonincludible transfers made prior to January 1, 1977 are not aggregated with the death transfers. Therefore, the pre-1977 nonincludible transfer is not included in the measure of the tentative tax and the tentative tax is not reduced by a tax computed upon the net gift value of the pre-1977 nonincludible transfer.
(B) By reason of the progressive tax rate structure of the gift tax, the pre-1977 nonincludible transfer results in the subsequent (post-1976) nonincludible transfer being taxed in the higher tax rate brackets. Therefore, to determine the amount of tax on prior gifts reduction of the tentative tax with respect to the subsequent (post-1976) transfer, it is necessary to take into account the effect of the pre-1977 transfer. In such a case, the tax on prior gifts reduction of the tentative tax is determined in the following manner:
1. Add to the sum of the net gift value of post-1976 transfers the sum of the net gift value of pre-1977 transfers.
2. Compute the tax on the total net gift value thus determined at the rate and exemptions in effect at date of death.
3. Compute the tax on the sum of the net gift value of all transfers made prior to January 1, 1977, at the rate and exemptions in effect at date of death and commencing with the primary rates.
4. The tax computed in step 2, is then reduced by the tax computed in step 3, and the result is the amount of tax on prior gifts reduction of the tentative tax.
(C) As demonstrated in the previous examples, the tax on prior gifts reduction of the tentative tax may be the same as, more than, or less than the actual gift tax paid. Where there is no change in the transferee's beneficiary status, and no change in the specific exemption, and no change in the tax rates between the date of gift and date of death, the tax on prior gifts reduction of the tentative tax will be the same as the gift tax paid with respect to the transfers made after December 31, 1976.
(b) Includible Transfer: General. As used in this regulation, the term “includible transfer” denotes a lifetime transfer subject to gift tax under which the rights of transferee are contingent or the transferor postpones the possession or enjoyment of the property transferred until the transferor's death, or retains an interest in the property transferred, or reserves the power to revoke, terminate, alter, amend, revise or change the interest of the transferee, or make the transfer in contemplation of death within three years prior to death, or makes the transfer as an advancement or in lieu of or in avoidance of probate, or creates a joint tenancy, or under which the transferee promises to make payments to or care for the transferor. Such a transfer is also subject to inheritance tax, at its date of death value, upon the death of the transferor. However, where the date of transferor's death is after 5:15 p.m., September 26, 1977, the method of computing the inheritance tax in the case of an includible transfer made by the decedent during lifetime will differ depending upon whether the date of gift was before January 1, 1977 or after December 31, 1976.
(1) Includible Transfers, Date of Gift After December 31, 1976. In each of the previous examples, the lifetime transfer is not subject to inheritance tax. In such a case, the date of gift value of net gifts made after December 31, 1976, is used in both the first (tentative tax) inheritance tax computation and the second (tax on prior net gifts) inheritance tax computation.
Where the lifetime transfer is also subject to inheritance tax (as, for example, in the case of a transfer with a life estate reserved or a transfer into joint tenancy), the date of death value of the property transferred must be used in the first (tentative tax) inheritance tax computation, but the date of gift value continues to be used in the second (tax on prior net gifts) inheritance tax computation.
The following examples illustrate the computation in cases where lifetime transfers which are subject to inheritance tax have been made and the date of death of the transferor is after 5:15 p.m., September 26, 1977.
EXAMPLE (5). Gift of an includible transfer made after December 31, 1976.
In 1977, P makes a gift to C, adult child, of a residence, reserving a life estate. At the date of gift, the market value of the residence is $80,000, and the value of the remainder interest transferred to C is $34,116. A gift tax return is properly filed and gift tax paid.

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POINTS TO NOTE:
(A) The transfer in which P reserved a life estate is subject to inheritance tax (Revenue and Taxation Code Section 13644). Consequently, the transfer is valued at date of death value in the first (tentative tax) inheritance tax computation.
(B) The date of gift value of the net gifts subject to gift tax must be used in the second (tax on prior gifts) inheritance tax computation even though the full date of death value is subject to inheritance tax.
(C) Since the lifetime gift is an includible transfer, subject to inheritance tax, the gift tax on the gift is also subject to inheritance tax (Revenue and Taxation Code Section 13648), and is included in the measure of the first (tentative tax) inheritance tax computation.
EXAMPLE (6). Gift of includible transfer made after December 31, 1976, plus gift of nonincludible transfer made after December 31, 1976.
In February, 1977, P makes a gift to C, adult child, of a residence, reserving a life estate. At the date of gift, the market value of the residence is $80,000, and the value of the remainder interest transferred to C is $34,116. A gift tax return is properly filed and gift tax paid.

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POINTS TO NOTE:
(A) In the first (tentative tax) inheritance tax computation, the includible transfer is valued at the date of death value and the nonincludible transfer is valued at date of gift value.
(B) In the second (tax on prior gifts) inheritance tax computation, both lifetime gifts (includible and nonincludible) are valued at date of gift value.
(C) The gift tax paid with respect to includible transfers is subject to inheritance tax, and is included in the measure of the tentative tax. The gift tax paid with respect to nonincludible transfers is not subject to inheritance tax, and is not included in the measure of the tentative tax.
EXAMPLE (7). Gift of includible transfer made after December 31, 1976, plus gift of nonincludible transfer made prior to January 1, 1977.
In 1976, P makes a gift to C, adult child, of $33,000 cash for which a gift tax return is properly filed and gift tax paid.

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POINTS TO NOTE:
(A) The cash gift made in 1976 is determined to be nonincludible for inheritance tax purposes and therefore that transfer is not aggregated with the death transfers, and is not included in the measure of the tentative tax.
(B) The gift made prior to January 1, 1977, results in the gift made after December 31, 1976, being taxed for gift tax purposes in the higher tax rate brackets. Therefore, the tax on prior gifts reduction of the tentative tax must be computed in the manner demonstrated in Example (4) under subsection (a) of this section.
The tax on prior gifts reduction of the tentative tax must be computed in this manner in every case where transfers subject to gift tax were made during lifetime of the decedent both before January 1, 1977 and after December 31, 1976, and the date of death is after 5:15 p.m., September 26, 1977.
(2) Includible Transfers, Date of Gift Prior to January 1, 1977. Pursuant to the provisions of Section 13402 of the Revenue and Taxation Code, as amended by Stats. 1978, Chapter 1388, nonincludible transfers made prior to January 1, 1977, are not aggregated with transfers subject to inheritance tax where the date of death is after 5:15 p.m., September 26, 1977 (see Stats. 1979, Ch. 1005). Therefore, in estates where the date of death is after that date, pre-1977 nonincludible transfers are not included in the measure of the tentative tax and the tentative tax is not reduced by a tax computed upon the net gift value of the pre-1977 nonincludible transfers.
Includible transfers, by definition, are subject to inheritance tax upon the death of the donor, and are included in the measure of the tentative tax at the date of death market value, regardless of the date of gift. However, where the date of death is after 5:15 p.m., September 26, 1977, a tax on prior gifts reduction of the tentative tax is not computed for the pre-1977 includible transfer. In such a case, a gift tax credit is allowed with respect to the pre-1977 includible transfers. See Section 14077 concerning gift tax credit.
EXAMPLE (8). Gift of includible transfer made prior to January 1, 1977.
In 1974, P transfers real property to himself and C, adult child, as joint tenants. The date of gift value of the real property is $60,000. A gift tax return is properly filed and gift tax paid.

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P dies in December, 1978, without having made any additional gifts. The date of death value of the joint tenancy real property is $75,000, and P's probate estate has a clear market value of $250,000, all of which goes to C. the inheritance tax is computed as follows:

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POINTS TO NOTE:
(A) Even though the includible transfer was made prior to January 1, 1977, it is nevertheless subject to inheritance tax, at its date of death value.
(B) Where the includible transfer is made prior to January 1, 1977, and the date of death is after 5:15 p.m., September 26, 1977, a tax on prior gifts computation is not made with respect to the includible transfer. In such a case, a gift tax credit is allowed for gift tax paid at the date of gift.
(C) In the case of pre-1977 includible gifts, the amount of gift tax paid which is allowed as a gift tax credit is added to other assets subject to inheritance tax, as a prepaid inheritance tax. Reference: Estate of Giolitti, 26 Cal. App. 3d 327 and Estate of Schmalenbach, 15 Cal. 3d 102.
EXAMPLE (9). Gift of includible transfer made prior to January 1, 1977 plus gift of nonincludible transfer made after December 31, 1976.
In 1974, P transfers real property to himself and C, adult child, as joint tenants. The date of gift value of the property transferred is $60,000. A gift tax return is properly filed and gift tax paid.

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POINTS TO NOTE:
(A) The transfer into joint tenancy is an includible transfer, and therefore the date of death value of the joint tenancy property is included in the measure of the tentative tax. However, the transfer into joint tenancy was made prior to January 1, 1977. Consequently, the tax on prior transfers reduction of the tentative tax does not include the amount of tax computed upon the net gift value of the 1974 transfer into joint tenancy. Where a gift tax has been paid on a pre-1977 includible transfer, a gift tax credit is allowed with respect to such transfer.
(B) The nonincludible transfer was made after December 31, 1976. Therefore, the nonincludible transfer is included in the measure of the tentative tax, and the tentative tax is reduced by a tax computed, at the exemption and rates of tax in effect at date of death, on the value of the post-1976 nonincludible net gift.
However, by reason of the pre-1977 transfer, the post-1976 nonincludible transfer was taxed at the higher rate brackets for gift tax purposes. Therefore, the tax on prior gifts reduction of the tentative tax is computed in the same manner as is demonstrated in Example (4) under subsection (a) of this section.
There was no change in the specific exemption or tax rates between the date of the 1977 nonincludible transfer and the date of death. Consequently, the tax on prior gifts reduction of the tentative tax, in the inheritance tax computation, is the same as the gift tax paid on the 1977 nonincludible transfer.
(C) The gift tax paid with respect to the pre-1977 includible transfer is included in the measure of the tentative tax as a prepaid inheritance tax.
(D) The gift made after December 31, 1976 was determined to be nonincludible for inheritance tax purposes. Therefore, the gift tax paid with respect to this transfer is not included in the measure of the tentative tax.
EXAMPLE (10). Gift of includible transfer made prior to January 1, 1977 plus gift of includible transfer made after December 31, 1976.
In 1974, P transfers real property to himself and C, adult child, as joint tenants. The date of gift value of the real property is $60,000. The gift tax return is properly filed and gift tax paid.

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POINTS TO NOTE:
(A) All includible transfers, whether made prior to January 1, 1977, or after December 31, 1976, are valued at date of death value for the tentative tax computation.
(B) A gift tax credit is allowed for includible transfers made prior to January 1, 1977, and the tax on prior gifts reduction of the tentative tax is computed only with respect to transfers made after December 31, 1976.
(C) Where transfers have been made prior to January 1, 1977, and a transfer is subsequently made after December 31, 1976, the tax on prior gifts reductions of the tentative tax is computed in the manner demonstrated in Example (4) under subsection (a) of this section. Where there is no change in the specific exemption and tax rates applicable to the donee/beneficiary between the date of the post-1976 transfers and the date of death, the tax on prior gifts reduction of the tentative tax is the same as the gift tax paid on the post-1976 transfers.
(D) In the case of post-1976 includible transfers, the amount of gift tax paid is added to other assets subject to inheritance tax for the tentative tax computation, and is not included in the tax on prior gifts computation. See Revenue and Taxation Code Section 13648.
(E) In the case of pre-1977 includible transfers, the amount of gift tax paid which is allowed as a gift tax credit is added to other assets subject to inheritance tax for the tentative tax computation, as a prepaid inheritance tax, and is not included in the tax on prior gifts computation. Reference: Estate of Giolitti, 26 Cal. App. 3d 327 and Estate of Schmalenbach, 15 Cal. 3d 102.
(3) Includible Transfers Made After December 31, 1976, Decrease in Value. 
EXAMPLE (11). Gift of an includible transfer, decrease in value between date of gift and date of death.
In 1977, P transfers to herself and C, adult child, as joint tenants, 1,000 shares of stock having a date of gift market value of $100 per share. The gift tax return is properly filed and gift tax paid.

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POINTS TO NOTE:
(A) The transfer into joint tenancy is an includible transfer subject to inheritance tax (see Revenue and Taxation Code Section 13671), and, therefore, it must be valued at the date of death value in the first (tentative tax) inheritance tax computation.
(B) The date of gift value of the includible transfer, less any applicable annual exclusion, continues to be used in the second (tax on prior gifts) inheritance tax computation even though the value of the property decreases between the date of gift and the date of death. However, the tax on prior gifts cannot be used to reduce the tentative tax below a zero tax.
(C) Although the value of the includible transfer decreases between the date of gift and date of death, the full amount of the gift tax paid, based upon the date of gift value of the includible transfer, is included as a taxable transfer (see Revenue and Taxation Code Section 13648).
EXAMPLE (12). Gift of includible transfer, decreased by invasion between date of gift and date of death.
In 1977, P transfers to T, trustee assets having a date of gift value of $100,000. Under the terms of the trust, income accumulates for the life of P. Upon P's death, the trust terminates, at which time accumulated income and corpus then remaining is to be paid to C, trustor's child, if living, otherwise to N, trustor's niece, or her issue, per stirpes, if N does not survive. During the term of the trust, the trustee is to pay so much income or principal as the trustee, in its discretion, deems necessary for the welfare, support, medical, hospitalization or other emergency needs of M, trustor's mother. The trust is expressly made irrevocable, and trustor retains no power to alter or amend the trust.
In the gift tax determination, the trust contingencies are compromised (see Revenue and Taxation Code Section 15951) upon the basis that C will receive the entire trust corpus. The gift tax paid is computed as follows:

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POINTS TO NOTE:
(A) In this illustration, the includible transfer is decreased between date of gift and date of death by reason of an invasion of trust corpus, thereby converting a portion of the original transfer to a nonincludible transfer. Therefore, only a portion of the original transfer is included in the first (tentative tax) inheritance tax computation as a transfer subject to inheritance tax. Consequently, in the second (tax on prior gifts) inheritance tax computation there must be an adjustment to prorate the tax on prior gift between the includible and nonincludible portion of the original transfer. The tax on the prior gift, measured by the date of gift value of the total original transfer and computed at the exemption and rates of tax applicable to the transferee at date of death, is first computed. That portion of the tax on prior gifts thus determined which bears the same ratio to the total tax thus computed as the date of gift value of the includible portion of the original transfer bears to the date of gift value of the total original transfer is used as the tax on prior gift reduction of the tentative tax computed with respect to the transferee of the includible transfer. (Compare with example (11) where all of the property transferred is included at date of death but the value of the property transferred is decreased between date of gift and date of death.)
(B) The illustration assumes no change in the value of trust assets from date of gift to date of death. If, at the date of invasion, the market value of the assets placed in trust is different from the market value at date of gift, the amount by which the date of gift value of the trust is reduced is an amount that bears the same ratio to the date of invasion value of the amount converted to a nonincludible transfer as the date of gift value of the trust bears to the date of invasion value of the trust immediately before the invasion. This value is determined by the following formula:

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The result is the amount by which the date of gift value of the trust is reduced to determine the date of gift value of the includible transfer to be used in the second (tax on prior gifts) inheritance tax computation.
In the event that there are successive invasions of trust corpus, the adjusted date of gift value, as determined by the immediately preceding invasion of trust corpus, shall be used to determine the amount by which the value of the includible transfer is reduced by reason of converting a portion thereof to a nonincludible transfer.
(C) Only the gift tax paid with respect to the portion of the transfer which is included in the inheritance tax computation is added to the measure of the first (tentative tax) inheritance tax computation. This is determined by multiplying the actual gift tax paid by the fraction in which the numerator is the date of gift value of the includible portion of the original transfer and the denominator is the date of gift value of the total original transfer.
(D) In such a case, if the transferee of the portion of the transfer that was converted to a nonincludible transfer (M in the illustration) survives the transferor and receives other assets the transfer of which is subject to inheritance tax, the nonincludible portion of the original transfer would be added to the transfers subject to inheritance tax, in the same manner as illustrated in examples (1) through (4), inclusive, to determine the amount of inheritance tax due with respect to that transferee.
As in the case of the includible transfer, the second (tax on prior gifts) inheritance tax computation with respect to the transferee of the nonincludible portion of the original transfer must be adjusted to reflect only that portion of the tax on prior gifts that is attributable to the nonincludible portion of the original transfer. The tax on the prior gift, measured by the date of gift value of the total original transfer and computed at the exemption and rates of tax applicable to the nonincludible transferee at date of death, is first computed. That portion of the tax on prior gifts thus determined which bears the same ratio to the total tax thus computed as the date of gift value of the nonincludible portion of the original transfer bears to the date of gift value of the total original transfer is used as the tax on prior gift reduction of the tentative tax computed with respect to the transferee of the nonincludible transfer.
(c) Interspousal Transfers. The manner of computing the inheritance tax in the case of a deceased married person who made gifts to his or her spouse during lifetime and whose date of death is after 5:15 p.m., September 26, 1977 is demonstrated by the following examples.
EXAMPLE (13). Husband and wife, nonincludible gift of separate property prior to 1977 plus nonincludible gift of separate property after 1976.
In 1975, H (husband) makes a gift to W (wife) of his separate property having a date of gift value of $103,000. The gift tax return is properly filed and gift tax paid.

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POINTS TO NOTE:
(A) The nonincludible transfer made prior to January 1, 1977, is not aggregated with transfers subject to inheritance tax.
(B) The date of gift value of the net gift made after December 31, 1976 is aggregated with transfers subject to inheritance tax and included in the measure of the tentative tax. The tentative tax is reduced by a tax computed, at the exemption and rates of tax in effect at date of death, on the date of gift value of the nonincludible net gift made after December 31, 1976. By reason of the progressive tax rate structure of the gift tax, the pre-1977 nonincludible transfer results in the subsequent, post-1976 transfer being taxed in the higher tax brackets. Therefore, the tax on prior gifts reduction of the tentative tax is computed in the manner demonstrated in Example (4) under subsection (a) of this section.
EXAMPLE (14). Husband and wife, nonincludible gift of separate property prior to 1977 plus includible gift of separate property made after 1976.
In 1975, H. makes a gift to W of separate property having a date of gift value of $103,000. A gift tax return is properly filed and gift tax paid. 
Gift Tax Computation:
The gift tax computation is the same as in Example (13). Gift tax = $4,600.
In 1977, H makes an additional Gift to W of separate property, reserving a life estate. The date of gift value of the separate property is $200,000 and the value of the remainder interest transferred to W is $131,612. A gift tax return is properly filed and gift tax paid.

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H dies in December, 1978, without making any additional gifts. The clear market value of H's probate estate passing to W is $125,000 community property (representing H's 1/2 interest in the community property) and $100,000 separate property. The property in which W received a remainder interest by gift made in 1977 has a date of death value of $250,000, and the 1975 gift is determined to be nonincludible for inheritance tax purposes. The inheritance tax is computed as follows:

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POINTS TO NOTE:
(A) The 1975 gift is determined to be nonincludible, and therefore is not aggregated with transfers subject to inheritance tax and is not included in the measure of the tentative tax.
(B) The gift made in 1977 is an includible transfer, and is therefore included in the measure of the tentative tax at the date of death value of the property transferred.
(C) The tax on prior gifts reduction of the tentative tax is computed with respect to only the post-1976 transfer, and is measured by the date of gift value of the net gift. By reason of the gifts made prior to January 1, 1977, the gift made after December 31, 1976, was placed in the higher gift tax brackets. Therefore, the tax on prior gifts reduction of the tentative tax is computed in the same manner as is demonstrated in Example (4) under subsection (a) of this section.
(D) The gift tax paid on the includible transfer is included in the measure of the tentative tax, and is not included in the computation of the tax on prior gifts reduction of the tentative tax.
(E) The includible transfer was a gift of separate property, and the gift tax paid on the includible transfer is also regarded to have been separate property. Therefore, a marital exclusion is also allowed on the gift tax paid. In the example, the maximum marital exclusion allowed in the tentative tax is computed as follows:

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EXAMPLE (15). Husband and wife, includible gift of separate property prior to 1977 plus nonincludible gift of separate property after 1976.
In 1975, H makes a gift to W of separate property reserving a life estate. At the date of gift the value of the property transferred is $200,000, and the value of the remainder interest transferred to W is $131,612. A gift tax return is properly filed and gift tax paid.

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POINTS TO NOTE:
(A) The gift made in 1975 was an includible transfer, and is subject to inheritance tax, at date of death value, even though made prior to January 1, 1977. Therefore, the date of death value of the property transferred in 1975 is included in the measure of the tentative tax.
(B) Since the includible transfer was made prior to January 1, 1977, the tax on prior gifts reduction of the tentative tax does not include the gift tax on the includible transfer. However, a gift tax credit is allowed for the gift tax paid on includible transfers made prior to January 1, 1977.
(C) The gift made after December 31, 1976 is determined to be nonincludible for inheritance tax purposes. Therefore, the date of gift value of the net gift is included in the measure of the tentative tax, and the tentative tax is reduced by a tax on prior gifts computed on the date of gift value of the net gift, at the exemptions and rates of tax in effect at date of death.
(D) By reason of the prior gift, the 1977 gift was placed in the higher tax bracket for gift tax purposes. Therefore, the tax on prior gifts reduction of the tentative tax is computed in the manner demonstrated in Example (4) under subsection (a) of this section.
(E) To the extent that the gift tax paid on the includible transfer is allowed as a gift tax credit, the gift tax paid is subject to inheritance tax, and is included in the measure of the tentative tax as a prepaid inheritance tax. Reference: Estate of Giolitti, 26 Cal. App. 3d 327 and Estate of Schmalenbach, 15 Cal. 3d 102. See Section 14077 concerning gift tax credit.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 13402, Revenue and Taxation Code, and Stats. 1979, Ch. 1005.
HISTORY

1. Amendment of section title filed 3-8-79; effective thirtieth day thereafter (Register 79, No. 10).
2. Repealer and new section filed 2-28-80; effective thirtieth day thereafter (Register 80, No. 9).
§13402.3. Examples: Date of Death After 8:25 p.m., September 30, 1978.
Note     •     History

NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 13402, Revenue and Taxation Code, and Stats. 1979, Ch. 1005.
HISTORY

1. New section filed 3-8-79; effective thirtieth day thereafter (Register 79, No. 10).
2. Repealer filed 2-28-80; effective thirtieth day thereafter (Register 80, No. 9).
§13403. Application of Exemptions or Exclusion.
Note     •     History

(a) Specific Exemptions. The specific exemptions provided in Revenue and Taxation Code Sections 13801 to 13803, inclusive, come out of the lower rate brackets and the excess over the exemptions is taxed in the rate bracket or brackets where it would have been taxed had the exemption not been allowed (see Revenue and Taxation Code Section 13403). Consequently, if a parent dying in 1974 left a taxable estate of $50,000 distributed to a minor child, the $12,000 specific exemption then provided under Revenue and Taxation Code Section 13801 is applied to the first rate bracket leaving $13,000 taxable at the first rate bracket (3 percent), and $25,000 taxable at the second rate bracket (4 percent). Likewise if a parent dying in 1981 leaves a taxable estate of $50,000 passing to a minor child the $40,000 specific exemption provided by Section 13801, amended and effective as to decedents dying on and after January 1, 1981, is applied to the first rate bracket as to $25,000 and to $15,000 in the second rate bracket leaving $10,000 taxable at the second rate bracket (4 percent).
(b) Separate Property Exemption or Exclusion Between Spouses.
(1) Decedents Dying on or After January 1, 1976 and Prior to January 1, 1981. The marital exclusion of separate property provided by Revenue and Taxation Code Section 13805, as amended and made effective as to decedents dying on or after January 1, 1976, and prior to January 1, 1981, is excluded from the clear market value of the estate before applying any of the tax bracket rates. Consequently, if a spouse dies in 1976 with a separate property estate of $150,000 passing to the surviving spouse, $75,000 (one-half of the separate property then provided under Revenue and Taxation Code Section 13805) is excluded. The balance of $75,000 is subject to the $60,000 specific exemption then provided under Revenue and Taxation Code Section 13801 to be taken out of the first three rate brackets leaving $15,000 taxable at the third rate bracket (6 percent).
(2) Decedents Dying Prior to January 1, 1976. The marital exemption under Revenue and Taxation Code Section 13805, applying with reference to separate property of a deceased spouse dying prior to January 1, 1976, comes out of the lower tax rate brackets. The excess over this and the specific exemption under Revenue and Taxation Code Section 13801 is taxed in the rate bracket or brackets where it would have been taxed had the exemption not been allowed. Consequently if a spouse dies in 1974 with a separate property estate having a clear market value of $150,000 passing to the surviving spouse, the $5,000 specific exemption (Revenue and Taxation Code Section 13801 prior to January 1, 1976) and the $75,000 marital exemption (Section 13805 prior to January 1, 1976) are applied to the first and second rate brackets as to the first $50,000 of the total exemptions allowable. The balance of the allowable exemptions ($30,000) is applied to the third rate bracket leaving $20,000 taxable in the third rate bracket and $50,000 taxable in the fourth rate bracket.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 13403, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§13403.1. Rates Applicable to Transfers by Will or Succession.
Note

Where property was transferred by will or pursuant to the laws of succession, the rates of taxation applicable are those in effect at the date of the decedent's death.
NOTE

Reference: Section 13403, Revenue and Taxation Code.
§13403.2. Rates Applicable to Transfers Inter Vivos.
Note

(a) On or After June 25, 1935. Where property was transferred during the life of the transferor on or after June 25, 1935 (the effective date of the Inheritance Tax Act of 1935), the rates of taxation applicable are those in effect at the date of the transferor's death.
(b) Prior to June 25, 1935. Where property was transferred during the life of the transferor prior to June 25, 1935, the rates of taxation applicable are:
(1) Those in effect at the date of the transfer, if the transfer was complete, see Section 13304.1; or
(2) Those in effect at the date of the transferor's death, if the transfer was incomplete, see Section 13304.2.
NOTE

Reference: Section 13403, Revenue and Taxation Code.
§13408. Several Transfers to Same Person.
Note

(a) Transfers On or After June 25, 1935. Where more than one transfer has been made on or after June 25, 1935 (the effective date of the Inheritance Tax Act of 1935), by a transferor to the same person, the tax is measured by the aggregate market value of the property so transferred as if all of the property had been transferred at the date of the transferor's death, the tax rates and exemptions applicable also being those in effect at such date. 
(b) Incomplete Transfer Between July 27, 1917, and June 25, 1935, Plus Transfer Upon Death on or After June 25, 1935. 
Where any person during his lifetime on or after July 27, 1917 (the effective date of the Inheritance Tax Act of 1917), but prior to June 25, 1935, made an incomplete transfer, (see Section 13304.2), of property to another, and upon his death occurring on or after June 25, 1935, transferred other property by will to such other person, the tax is computed in accordance with subsection (a) of this regulation.
(c) Complete Transfer Between July 27, 1917, and June 25, 1935, Plus Transfer Upon Death on or After June 25, 1935. 
Where any person during his lifetime on or after July 27, 1917, but prior to June 25, 1935, made a complete transfer, see Section 13304.1, of property to another, and upon his death occurring on or after June 25, 1935, transferred other property by will to such other person, the tax is computed as follows:
(1) Determine in accordance with Section 13801.2(c) the amount of the specific exemption allowable.
(2) Deduct from the value of the property transferred inter vivos the amount of the specific exemption determined pursuant to subdivision (1) of this subsection.
(3) Compute the tax upon the remainder determined pursuant to subdivision (2) at the rates in effect at the date of the transfer inter vivos.
(4) Compute the tax upon the value of the property transferred by will at the rates in effect at the date of the decedent's death. In making this computation, treat the value of the property transferred by will as the highest portion of the aggregate market value of the property transferred inter vivos and at death and tax it at the rates applicable in the appropriate tax rate brackets reached by reason of the aggregation.
NOTE

Reference: Section 13408, Revenue and Taxation Code.
§13408.1. Independent Transfer and Power of Appointment to Same Person.
Note     •     History

(a) Transfers on or After June 25, 1935. 
Should any person on or after June 25, 1935 (the effective date of the Inheritance Tax Act of 1935), receive both a power of appointment subject to the Inheritance Tax Law (see Revenue and Taxation Code Sections 13691 through 13698), over particular property and an outright bequest or devise of other property from the same transferor, the computation of the tax is governed by the following:
(1) General Power of Appointment. 
If the power is general in nature, or if it is limited in nature but the donee may use or otherwise receive benefit from the property subject to the power, the value of the property subject to the power is aggregated with the value of the property bequeathed or devised, and the tax is computed as though there had been a single transfer to the recipient, the rates applicable being those in effect at the date of the transferor's death.
(2) Limited Power of Appointment. 
If the power is limited in nature, and the donee cannot use or receive benefit from the property subject to the power, the value of the property subject to the power is not united with the value of the property included in the outright gift for the purpose of tax computation, as in the case of a general power. On the contrary, each item is treated individually for the purpose of tax computation. The specific exemption allowable is governed by Section 13801.3(a)(2); the dates applicable are those in effect at the transferor's death. The provisions of this paragraph may be illustrated by the following examples:
EXAMPLE (1). A at his death in 1970 by will gives B, his adult son, property valued at $50,000; and by the same instrument gives B a limited power of appointment over a remainder in other property, such remainder also being valued at $50,000. B cannot use or otherwise benefit from the property subject to the power. The tax is computed as follows: 

					Tax
	Value of outright gift	 $50,000
	  	5,000	exempt
		 20,000	at 3%	 $ 600
	 	25,000	at 4%	 1,000
					$1,600
	Value of property subject
  	 to power 	 $50,000
		 25,000	at 3%	 $ 750
		 25,00	at 4%	 1,000
					 1,750
					$3,350
EXAMPLE (2). The facts are the same as in the example immediately preceding, except that the value of the outright gift is $2,000. The tax is computed as follows: 

					Tax
	Value of outright gift.	 $2,000
	 	 2,000	exempt
	Value of property subject
   to power	 $50,000
	 	3,000	exempt
		 22,000	at 3% 	 $ 660
		 25,000	at 4% 	 1,000	$1,660

(b) Incomplete Inter Vivos Transfer Between July 27, 1917, and June 25, 1935, Plus Power of Appointment Subsequent to Latter Date.
Should any person receive property pursuant to an incomplete inter vivos transfer (see Section 13304.2) made on or after July 27, 1917 (the effective date of the Inheritance Tax Act of 1917), but prior to June 25, 1935, and on or after the latter date receive from the same transferor a power of appointment subject to the Inheritance Tax Law over other property, the computation of the tax is governed by subdivision (a) of this Section.
(c) Complete Inter Vivos Transfer Between July 27, 1917, and June 25, 1935, Plus Power of Appointment on or After Latter Date.
Should any person receive property pursuant to a complete inter vivos transfer (see Section 13304.1) made on or after July 27, 1917, but prior to June 25, 1935, and on or after the latter date receive from the same transferor a power of appointment subject to the Inheritance Tax Law over other property, the computation of the tax is governed by the following:
(1) General Power of Appointment. 
If the power is general in nature, or if it is limited in nature but the donee may use or otherwise benefit from the property subject to the power, the tax is computed in accordance with Section 13408(c).
(2) Limited Power of Appointment. 
If the power is limited in nature, and the donee cannot use or receive any benefit from the property subject to the power, the tax is computed separately on the value of each unit of property, as in the case where an outright gift and limited power are given to the same person on or after June 25, 1935. The tax rates governing the computation of the tax in respect to the inter vivos transfer are those in effect at the time of the transfer; the rates governing the computation in regard to the power, those in effect at the transferor's death. In making the computation, the specific exemption in effect at the date of the inter vivos transfer is allowable against the value of such transfer; no specific exemption is allowable against the value of the property subject to the power, except as provided in Section 13801.3(c)(2).
NOTE

Reference: Section 13408, Revenue and Taxation Code.
HISTORY

1. Editorial correction of subsections (a)(1) and (a)(2) (Register 78, No. 42).
§13409. Disclaimers.
Note

(a) Decedents Dying on or After August 16, 1972. 
If a transferee under a will, an heir of an intestate or a transferee of an inter vivos transfer subject to inheritance tax disclaims any interest in the estate of the decedent or the property transferred, in whole or in part, pursuant to the provisions of Chapter 11 (commencing with Section 190) of Division 1 of the Probate Code, the interest disclaimed is treated as if the beneficiary disclaiming had predeceased the person who created the interest and said interest is taxed as a transfer from the decedent to the person who takes by reason of the disclaimer, provided all of the following requirements are satisfied:
(1) The date of death of the decedent is on or after August 16, 1972 (effective date of Revenue and Taxation Code, Section 13409, as enacted by Stats. 1972, Ch. 990),
(2) The disclaimant has not in any manner accepted the interest sought to be disclaimed prior to filing the disclaimer, and
(3) The disclaimer is filed in the manner and form and within the time specified in Chapter 11 (commencing with Section 190) of Division 1 of the Probate Code.
(A) Time of Filing. 
To be effective, the disclaimer must be filed within a reasonable time after the disclaimant acquires knowledge of the interest. The presumption set forth in Section 190.3 of the Probate Code shall apply in determining whether a disclaimer has been filed within a reasonable time.
(B) Place of Filing. 
In the case of interests created by will or arising from intestate succession, the disclaimer shall be filed with the superior court in the county in which the estate of the decedent is being administered; if there is no administration, the disclaimer shall be filed with the superior court in the county in which administration would be proper.
In the case of an interest created by an inter vivos trust subject to the inheritance tax, the disclaimer shall be filed with the trustee then acting.
(b) Decedents Dying Prior to August 16, 1972. 
If a transferee under a will, an heir of an intestate or a transferee of an inter vivos transfer subject to inheritance tax disclaims any interest in the estate of the decedent or in the property transferred, in whole or in part, pursuant to the provisions of Chapter 11 (commencing with Section 190) of Division 1 of the Probate Code, and the date of death of the decedent is prior to August 16, 1972, the tax is nevertheless computed as though no disclaimer had been filed.
NOTE

Reference: Section 13409, Revenue and Taxation Code.
§13409.1. Other Agreements by Transferees or Heirs.
Note

If a transferee under a will, an heir of an intestate or a transferee of an inter vivos transfer subject to inheritance tax makes a voluntary assignment or transfer of the interest sought to be disclaimed without complying with the disclaimer provisions of Chapter 11, Division 1 of the Probate Code, or if such person enters into an agreement with other beneficiaries, heirs or transferees providing that the interest to which he would otherwise be entitled shall pass to a person or persons who would not otherwise succeed to such interest except under provisions of the agreement, the transfer, assignment or agreement by the transferee shall be disregarded in computing the inheritance tax due.
NOTE

Reference: Section 13409, Revenue and Taxation Code.
§13411. Contingent or Conditional Transfer.
Note

(a) If a taxable transfer is made subject to a contingency or condition upon the occurrence of which the interest of any transferee in the property involved may, in whole or in part, be created, defeated, extended, or abridged, the tax is computed at the highest rate possible upon the happening of the contingency or condition. For example, A by will transfers to B a life interest in property valued at $100,000, and to C, D, and E, or the survivor, a remainder interest in the property at B's death. C is not related to A. D and E are brothers of A. In such case the tax on the remainder will be compute on the supposition that the property will go to C, since a tax on a remainder to C would be computed at higher rates than on a remainder going to D or E (see Revenue and Taxation Code Sections 13404 through 13406 and 13307 through 13309). Any person who pays the tax so computed may secure a refund in the event that D or E survives B's death, in an amount equal to the difference between the tax paid and the tax which would have been payable had it been computed on the basis of a transfer to the actual survivor or survivors (see Revenue and Taxation Code Section 13956(b)).
(b) The payment of a tax due on a contingent or conditional transfer may be deferred on the filing of a bond (see Revenue and Taxation Code Sections 14171 through 14178), and may under proper circumstances be the subject of a compromise (see Revenue and Taxation Code Sections 14191 and 14192).
NOTE

Reference: Section 13411, Revenue and Taxation Code.
Article 2.1. Imposition and Computation of Additional Tax
§13441. Property Left in Two or More States.
Note

(a) Apportionment.
In a case where a decedent leaves property having a situs in this State, and leaves other property having a situs in another state, or other states, the portion of the maximum state death tax credit allowable against the federal estate tax on the total estate by the federal estate tax law which is attributable to the property having a situs in California shall be determined in the following manner:
(1) For the purpose of apportioning the maximum state death tax credit, the gross value of the property shall be that value finally determined for federal estate tax purposes.
(2) The maximum state death tax credit allowable shall be multiplied by the percentage which the gross value of property having a situs in California bears to the gross value of the entire estate subject to federal estate tax.
(3) The product determined pursuant to subdivision (2) shall be the portion of the maximum state death tax credit allowable which is attributable to property having a situs in California.
(b) Additional Tax Imposed.
If the inheritance tax imposed by this state is less than the portion of the maximum state death tax credit allowable which is attributable to property having a situs in California, as determined in subsection (a) of this regulation, an additional tax will be imposed in an amount equal to the difference between the portion of the maximum state death tax credit attributable to property having a situs in California and the normal inheritance tax imposed by this State.
(c) Copy of Federal Estate Tax Return.
In a case where a decedent leaves property in two or more states, and an additional tax is imposed by California, a copy of the Federal Estate Tax Return (form 706) must be submitted to the inheritance tax referee or the appropriate district office of the Inheritance and Gift Tax Division.
(d) Time of Payment.
As to time of payment and delinquent date for payment of additional tax, see Section 14103(c).
The provisions of this regulation are illustrated by the following example:
EXAMPLE: Decedent died a resident of California. At date of death, decedent was possessed of personal and real property in California and real property in State X. For California state inheritance tax purposes, the real and personal property in California is valued at $10,500,000, and the total of allowable deductions is in the amount of $1,250,000, resulting in a net taxable estate (clear market value) for state inheritance tax purposes in the amount of $9,250,000. Under the terms of decedent's will, the entire estate goes to four adult children in equal shares. The inheritance tax due with respect to the share going to each child is, therefore, $302,350; and the total normal inheritance tax is $1,209,400 ($302,350 x 4).
For federal estate tax purposes, the gross value of the total estate is $25,000,000; and the gross value of the personal and real property in California is $10,000,000. The total of deductions allowable for federal estate tax purposes is $1,500,000, resulting in a net taxable estate in the amount of $23,500,000. The maximum state death tax credit is $3,226,800.

The additional tax is $81,320, determined as follows:
Federal estate tax net taxable estate 	$23,500,000
Maximum state death tax credit to be apportioned	$3,226,800
Gross value of total estate (FET values)	$25,000,000
Gross value of California estate (FET values)	$10,000,000
Percentage of gross federal estate having a situs
 in California ($10,000,000/$25,000,000) 	40%
Portion of maximum state death tax credit
    attributable to property having a situs in
California (40% x $3,226,800) 	$1,290,720
California normal inheritance tax 	1,209,400
Additional tax due 	     $81,320

NOTE

Reference: Section 13441, Revenue and Taxation Code.
§13442. Property Left in Two or More States--No Normal Inheritance Tax.
Note

(a) Additional Tax Imposed.
In a case where a decedent leaves property having a situs in this State, and leaves other property having a situs in another state, or other states, and no normal inheritance tax is imposed by this State, an additional tax will be imposed in the amount of the maximum state death tax credit allowable against the federal estate tax which is attributable to property having a situs in California.
(b) Apportionment.
In such a case, the amount of the maximum state death tax credit allowable against the federal estate tax which is attributable to property having a situs in California shall be determined in the same manner as is set forth in subsection (a) of Section 13441.
(c) Copy of Federal Estate Tax Return.
In a case where a decedent leaves property in two or more states, and an additional tax is imposed by California, a copy of the Federal Estate Tax Return (form 706) must be submitted to the inheritance tax referee or the appropriate district office of the Inheritance and Gift Tax Division.
(d) Time of Payment.
As to time of payment and delinquent date for payment of additional tax, see Section 14103(c).
NOTE

Reference: Section 13442, Revenue and Taxation Code.
Article 3. Community Property
§13551. Transfer Inter Vivos to Third Person.
Note

The whole of any community property which is transferred by means of a taxable inter vivos transfer by the spouses to a third person is subject to the Inheritance Tax Law.
(a) Decedent Dying On or After September 11, 1957.
In the case of a decedent dying on or after September 11, 1957, each spouse is considered a transferor of one-half of the property.
(b) Decedents Dying Prior to September 11, 1957.
In the case of a decedent who died prior to September 11, 1957:
(1) If the property was acquired on or after July 29, 1927, each spouse is considered a transferor of one-half of the property.
(2) If the property was acquired prior to July 29, 1927, the husband is considered the transferor of the entire property.
(See also Section 13554.)
NOTE

Reference: Section 13551, Revenue and Taxation Code.
§13554. Conversion of Community Property into Joint Tenancy of Spouses and Third Person.
Note

(a) Tenant Dying on or After September 11, 1957.
If community property is converted by the spouses into the joint tenancy property of themselves and a third person, and the tenancy is thereafter maintained, upon the death of any one of the tenants on or after September 11, 1957, the effective date of Revenue and Taxation Code Section 13557, each spouse is deemed to have contributed one-half of the joint tenancy property out of his or her own separate property, and the property is or is not subject to the Inheritance Tax Law to the extent specified in Revenue and Taxation Code Section 13671. (See also Section 13671.1).
(b) Tenant Dying Prior to September 11, 1957.
(1) Property Acquired on or After July 29, 1927.
If community property acquired on or after July 29, 1927, is converted by the spouses into the joint tenancy property of themselves and a third person, and the tenancy is thereafter maintained, upon the death of any one of the tenants prior to September 11, 1957, each spouse is deemed to have contributed one-half of the joint tenancy property out of his or her own separate property, and the property is or is not subject to the Inheritance Tax Law to the extent specified in Revenue and Taxation Code Section 13671. (See also Section 13671.1).
(2) Property Acquired Prior to July 29, 1927.
If community property acquired prior to July 29, 1927, is converted by the spouses into joint tenancy property between themselves and a third person, and the tenancy is thereafter maintained, upon the death of one of the tenants prior to September 11, 1957, the husband is deemed to have contributed the entire joint tenancy property out of his own separate property, and the property is or is not subject to the Inheritance Tax Law to the extent specified in Revenue and Taxation Code Section 13671, except that upon the death of the husband the wife is entitled to a community exemption in the amount of one-half of the joint tenancy interest to which she is entitled where the husband died prior to September 7, 1955 (the effective date of an amendment to Revenue and Taxation Code Section 13554), and a community exemption in the amount of all the joint tenancy interest to which she is entitled up to one-half of the whole community property where the husband died on or after September 7, 1955, and prior to September 11, 1957. (See also Section 13671.1).
Note: As to conversion of community property into joint tenancy between husband and wife, see Section 13671.50.
As to joint tenancies generally, see Section 13671 and 13671.1. 
NOTE

Reference: Section 13554, Revenue and Taxation Code.
§13556. Presumption.
Note

The usual presumption that property acquired by a husband or wife after marriage is community property does not apply as against any claim by the State for the inheritance tax. The burden of proving any property to be community property is on the person who claims that it has such status. A claim that property is community property must be supported by form IT-3, entitled “Marital Property Declaration.” This declaration should be executed by the decedent's surviving spouse, or if it is for some reason impossible for the surviving spouse to execute the declaration, by any person having actual knowledge of the facts required, and submitted to the inheritance tax referee or, if no court proceeding to determine tax is pending, to the State Controller. Copies of form IT-3 may be obtained from the referee or from the Inheritance Tax Division of the Controller's office in Los Angeles, Sacramento, or San Francisco.
NOTE

Reference: Section 13556, Revenue and Taxation Code.
Article 4. Transfers by Will and Laws of Succession
§13601. Transfer by Will Pursuant to Agreement.
Note

A transfer by will made pursuant to an agreement between the transferee and the decedent is subject to the Inheritance Tax Law to the extent that such agreement is not supported by adequate consideration in money or money's worth received by the decedent.
NOTE

Reference: Section 13601, Revenue and Taxation Code.
§13601.1. Misappropriated, Destroyed, or Depreciated Property.
Note

A bequest or devise of property which, prior to distribution, has been misappropriated by the executor or administrator, or for any reason has been lost or destroyed or has depreciated in value, is nevertheless a transfer subject to the Inheritance Tax Law.
NOTE

Reference: Section 13601, Revenue and Taxation Code.
§13601.2. Agreement Extrinsic to Will Limiting Estate Given.
Note

Any valid written agreement extrinsic to a will which limits any absolute estate passing under the will may be considered together with the will in determining the true nature and scope of the estate. For example, if a wife upon her death devises her separate real property in fee to her husband pursuant to a previously executed written agreement that he, in turn, at his death will devise to her nephews such portion of the property as he did not consume during his life, in view of the agreement the husband will be deemed to take a life estate with power to use and consume the principal, and the nephews a remainder over in the unconsumed portion of the property.
NOTE

Reference: Section 13601, Revenue and Taxation Code.
§13601.3. Forgiveness of Debt.
Note

Any discharge or forgiveness in a will of any debt owed the testator constitutes a transfer subject to the Inheritance Tax Law.
NOTE

Reference: Section 13601, Revenue and Taxation Code.
§13601.4. Tax Free Bequest.
Note

A provision in a will bequeathing a sum free and clear of the inheritance tax constitutes a gift of such an amount as, after the payment of the tax thereon, would net the legatee the amount of the bequest. In effect, the legatee in such case is given the amount of the bequest plus an additional sum sufficient to pay the tax and the tax upon the tax ad infinitum. The provisions of this paragraph may be illustrated by the following examples:
EXAMPLE (1).
A, at his death in 1973, bequeathed $40,000 to B, his adult daughter, and provided that is shall be free and clear of the inheritance tax. B is deemed to receive a transfer of $41,250, computed as follows:

Bequest to daughter	 $40,000  

Trial tax $5,000 exempt 
	20,000 at 3% 	$ 600
	15,000 at 4% 	600
		$1,200

To determine the bequest of tax, divide the trial tax by the difference between 100 percent and highest tax rate, 4 percent in this case.

100% - 4% = 96% or 0.96

1,200 = $1,250 
 0.96
Proof:
Bequest	 $40,000	$5,000	exempt     
Bequest of tax	 1,250	20,000	at 3%	 $ 600
	______	16,250	at 4%	 650
	$41,250			______
				$1,250
The proof indicates $1,250 is correct since the final tax is equal to the amount added as a bequest of tax.
EXAMPLE (2).
X, at his death in 1973, bequeathed $49,000 to Y, his adult daughter, and provided that it shall be free and clear of the inheritance tax. Y is deemed to receive a transfer of $50,638 computed as follows:

Bequest to daughter	 $49,000 
Trial tax $5,000 exempt
     20,000 at 3% 	$ 600
     24,000 at 4% 	 960
	$1,560
The method demonstrated in Example (1) of this regulation would require the division of $1,560 by the difference between 100 percent and 4 percent or 96 percent. The result would be $1,625. If this amount were added as a bequest of tax, the total bequest would exceed $50,000 and part of the bequest would be taxed at 6 percent. Thus $1,625 would not prove out. It is obvious that some account must be taken of the fact that part of the amount to be added as bequest of tax will be taxed at 4 percent and part at 6 percent. This problem may be solved as follows:

Bequest	 $49,000   
Amount to be added in 4% bracket
 ($50,000 - $49,000)	 $1,000
Tax at 4% on $1,000	 $40   
Excess of trial tax over $1,000
 ($1,560 - $1,000)	  560   
	$600   
This sum will be taxed at 6 percent. To find the amount after tax on $600 is added, the $600 should be divided by the difference between 100 percent and 6 percent or 94 percent.

600
0.94	= 			  638

Total bequest of tax				 $1,638
Proof:
Bequest	 $49,000	$5,000	exempt     
Bequest of tax..	1,638	20,000	at 3% 	$  600
	 _____	25,000	at 4% 	1,000
	$50,638	638	at 6% 	     38

	$1,638
No bequest distributed under the residuary clause of a will may receive a bequest of tax if the bequests of tax are payable from the residue.
When part of a person's interest is subject to a bequest of tax and part is not subject thereto, the bequest of tax is computed on the part subject to the bequest of tax without considering the other interests.
NOTE

Reference: Section 13601, Revenue and Taxation Code.
§13601.5. Transfer by Laws of Succession.
Note

If a person dies intestate, the passage of any property from him under the applicable laws of succession of this or any other state constitutes a transfer subject to the Inheritance Tax Law to the extent that the property is subject thereto.
NOTE

Reference: Section 13601, Revenue and Taxation Code.
§13601.6. Agreement or Assignment by Legatee or Heir.
Note

An agreement, assignment, compromise of a will contest or other arrangement entered into by a legatee, heir or transferee after the death of a decedent, which does not qualify as a disclaimer of an interest in the decedent's property or estate, but which changes the distribution that would otherwise have been made under the will, by the laws of intestacy or by other transfer from the decedent is to be disregarded in determining the inheritance tax on the transfer as it would otherwise have been made.
Note: As to disclaimers, see Section 13409(a).
NOTE

Reference: Section 13601, Revenue and Taxation Code.
§13603. Bequest or Devise to Executor.
Note

If a decedent makes a bequest or devise of property to his executor named in his will in lieu of compensation for services fixed by law, the passage to the executor of that portion of the bequest or devise which is equal to his statutory compensation fixed by Section 901 of the Probate Code is exempt from the Inheritance Tax Law.
Note: As to the deduction of executor's fees in determining the clear market value of property, see Section 13988.
NOTE

Reference: Section 13603, Revenue and Taxation Code.
Article 4.1. Homestead and Family Allowance
§13621. Transfer Effected by Vesting of Statutory Homestead.
Note

In the case of a homestead of a husband and wife created in accordance with the Civil Code:
(a) Community Property.
If the homestead was selected from community property, upon the death of either spouse the vesting of the homestead in the survivor is subject to the law as a transfer of community property from the decedent to the survivor to the extent that the property is subject to the law. (See Revenue and Taxation Code Section 13554).
(b) Separate Property of Either Spouse.
(1) Such Spouse Joined in Selection.
If the homestead was selected from the separate property of either spouse, and such spouse joined in the selection, upon the death of such spouse the vesting of the homestead in the survivor is subject to the law as a transfer of the separate property of the decedent to the survivor. On the other hand, if the spouse whose separate property was selected should be the survivor, the vesting of the homestead in such spouse would not constitute a transfer subject to the law.
(2) Such Spouse Did Not Join in Selection.
If the homestead was selected from the separate property of either spouse, but such spouse did not join in the selection, upon the death of such spouse the vesting of the homestead in the surviving spouse or any third person is subject to the law as a transfer of the separate property of the decedent. If the property vests in a person other than the surviving spouse or a minor child of the decedent, the probate court may set the homestead apart for the use of the surviving spouse or minor child in accordance with the Probate Code. In such event, the setting apart of the property constitutes a transfer of separate property to the surviving spouse or minor child which is also subject to the law. In the determination of the tax, if any, on the interest vesting in the person other than the surviving spouse or minor child, allowance will be made for the interest passing to the surviving spouse or child as a consequence of the setting apart of the homestead. Should the spouse whose property was selected for the homestead survive his or her spouse, the vesting of the homestead in the former does not constitute a transfer subject to the law.
NOTE

Reference: Section 13621, Revenue and Taxation Code.
§13622. Transfers Effected by Probate Homestead.
Note

In the case of a homestead created by a probate court in accordance with the Probate Code:
(a) Community or Section 201.5 Property.
If the homestead is set apart from community property or property to which Section 201.5 of the Probate Code is applicable for the use of a surviving souse or minor child, the setting apart of the homestead is subject to the law as a transfer of community property or Section 201.5 property to such spouse or minor child to the extent that the property is subject to the law. (See Revenue and Taxation Code Sections 13551 and 13555).
(b) Separate Property.
If the homestead is set apart from the separate property of a deceased spouse for the use of his or her surviving spouse or minor child, the setting apart of the property is subject to the law as a transfer to the surviving spouse or minor child. If the property set apart was bequeathed or devised by the decedent to a person other than his or her surviving spouse or minor child, the bequest or devise is also a transfer subject to the law. In determining the tax, if any, on such transfer, allowance will be made for the interest passing to the surviving spouse or child as a consequence of the setting apart of the homestead.
NOTE

Reference: Section 13622, Revenue and Taxation Code.
Article 4.2. Inter Vivos Transfers
§13641. Consideration in Money or Money's Worth.
Note

For the purpose of the Inheritance Tax Law the term “consideration in money or money's worth” does not include any consideration not reducible to money or a money value, such as love and affection or a promise of marriage.
NOTE

Reference: Section 13641, Revenue and Taxation Code.
§13642. Contemplation of Death.
Note

(a) In General.
The term “contemplation of death” means that general expectancy of death, whether immediate or distant, which ordinarily actuates the mind of a person in the execution of his will. It is not restricted to an expectancy of imminent or speedy death.
A transfer motivated by the above-described general expectancy of death, without which it would not have been made, and made within three years prior to the death of the transferor, is one in contemplation of death notwithstanding that other motives were also present.
(b) Evidence.
Whether a transfer made inter vivos within three years prior to the death of the transferor has or has not been made in contemplation of death is a question to be determined after an examination of all the facts and circumstances of each case.
NOTE

Reference: Section 13642, Revenue and Taxation Code.
§13644. Transfer in Trust with Reservation of Income for Life.
Note

Any irrevocable inter vivos transfer in trust under which the trustee is to pay the income to the trustor during his life, and upon the trustor's death deliver the corpus to the beneficiary is a transfer with reservation of an income or interest for life and is subject to the Inheritance Tax Law.
Note: As to a revocable transfer in trust, see Section 13646.
NOTE

Reference: Section 13644, Revenue and Taxation Code.
§13644.1. Annuity Contract Plus Single Premium Life Policy.
Note

The purchase of an annuity contract entitling the purchaser to a specified annuity during the remainder of his life, together with a so-called “single premium life policy” issued without a physical examination of the purchaser and providing for the payment of a given sum to a named beneficiary on the purchaser's death, insofar as the policy is concerned constitutes a transfer intended to take effect in possession or enjoyment at or after death and is subject to the Inheritance Tax Law, if it appears that the policy would not have been issued without the contract. In such case, the insurance exemption provided in Revenue and Taxation Code Section 13724 is not allowable against the proceeds of the policy.
NOTE

Reference: Sections 13721 to 13724, inclusive, 13861 and 13861.5, Revenue and Taxation Code.
§13646. Transfer with Reservation of Power to Revoke or Control.
Note

An inter vivos transfer conforming to Revenue and Taxation Code Section 13641, whether in trust or otherwise, subject to a power reserved in the transferor to revoke, terminate, alter, amend, revise, or change the interest of the beneficiary, constitutes a transfer intended to take effect in possession or enjoyment at or after the death of the transferor, and is subject to the Inheritance Tax Law.
A transfer in trust of intangible personal property located outside this State by a nonresident trustor to a nonresident trustee for the benefit of a third person, with a power reserved in the trustor to revoke, terminate, alter, amend, revise, or change the interest of the beneficiary, is subject to the Inheritance Tax Law if the trustor subsequently dies a resident of California without having terminated, relinquished, or surrendered the power; or subsequently becomes a resident of California and then terminates, relinquishes, or surrenders the power in contemplation of death.
A power to revoke, terminate, alter, amend, revise, or change the interest of a beneficiary includes a power exercisable either by the transferor alone or by the transferor and any other person not having a substantial adverse interest in the property transferred.
NOTE

Reference: Section 13646, Revenue and Taxation Code.
§13646.1. Transfer with Reservation of Possibility of Reverter.
Note

If any property transferred by an inter vivos transfer not otherwise subject to the Inheritance Tax Law, conforming to Revenue and Taxation Code Section 13641, may revert or revest in the transferor upon the prior death of the transferee pursuant to an express provision in the instrument making the transfer and not by reason of the statute of succession, and the transferor predeceases the transferee, the transfer constitutes one intended to take effect in possession or enjoyment at or after the death of the transferor and is subject to the Inheritance Tax Law.
NOTE

Reference: Section 13646, Revenue and Taxation Code.
§13647. Advancement.
Note

An “advancement,” or gift made by an individual during his lifetime to his child or other heir with the intention on the part of the donor that such gift shall represent a part or the whole of that portion of his estate which the child or other heir would inherit upon his death, is subject to the Inheritance Tax Law.
NOTE

Reference: Section 13647, Revenue and Taxation Code.
§13648. Joint Life and Survivorship Annuity.
Note

(a) Purchased by Decedent.
If any person with his own funds purchases an annuity payable to himself and any other person for their joint lives and then to the survivor for his or her life, and the purchaser dies first, the right of the surviving annuitant to the balance of the annuity constitutes a transfer to the surviving annuitant subject to the Inheritance Tax Law.
(b) Purchased by Both Annuitants.
If each annuitant under a joint life and survivorship contract contributes his or her own property for the purchase of the contract, and either annuitant dies, the right of the surviving annuitant to such portion of the balance of the annuity as is proportionate to the decedent's contribution constitutes a transfer to the survivor subject to the Inheritance Tax Law.
Note: As to the valuation of joint life and survivorship annuities, see Section 13952.9.
NOTE

Reference: Section 13648, Revenue and Taxation Code.
§13648.1. Refund Annuity.
Note

The right of any beneficiary to the balance payable under a refund annuity contract upon the death of the annuitant constitutes a transfer subject to the Inheritance Tax Law.
Note: As to the valuation of refund annuities, see Section 13952.10.
NOTE

Reference: Section 13648, Revenue and Taxation Code.
§13648.2. U. S. Savings Bond Payable on Death of One Person to Another.
Note

United States savings bonds may be purchased as “payable on death” of one person to another. The provisions of the Inheritance Tax Law relating to inter vivos transfers are applicable to such bonds (see Revenue and Taxation Code Sections 13641 through 13648).
Note: As to the taxation of United States savings bonds purchased in two names, see Section 13671.2.
NOTE

Reference: Section 13648, Revenue and Taxation Code.
Article 4.3. Joint Tenancies
§13671. Contribution Claim by Surviving Joint Tenant.
Note

The basis for an allowance of contribution to a joint tenancy by a surviving joint tenant is the claim therefor by the survivor in completing the inquiry on form IT-22, Inheritance Tax Declaration.
Contribution claims are required to be traced back to their remote origin to prove that the original source of the funds contributed by the survivor was not the decedent. Thus, if a father gave money to his son and some years later the son used this money to create a joint tenancy with the father, the entire joint tenancy would be taxed at the father's death since the father was the contributor of the funds when they are traced back to their remote origin.
The contribution allowable to a surviving joint tenant must be reduced by its proper proportion of certain of he deductions applicable to the joint tenancy. Some of the allowable deductions under the Inheritance Tax Law apply as a proportionate reduction of the entire joint tenancy. Others apply only to the decedent's share of the joint tenancy.
(b) The deductions which apply over the whole joint tenancy and thus operate as a proportionate reduction of the survivor's gross contribution are:
(1) Attorneys' fees relating to the joint tenancy.
(2) Real property taxes on joint tenancy real property.
(3) Encumbrances on joint tenancy real property.
(4) Appraisal fee for joint tenancy property.
(5) Court costs relating to the joint tenancy.
(c) The deductions which apply to the decedent's share of the joint tenancy only and thus do not reduce the survivor's contribution are:
(1) Funeral expenses and last illness expenses, when they are deductible from the joint tenancy.
(2) Unsecured debts of the decedent, when they are deductible from the joint tenancy. These deductions are usually not deductible from a joint tenancy transfer but rather from a probate estate. However, if there is no probate estate and if they have been paid by the surviving joint tenant, they may be allowed and treated as stated.
NOTE

Reference: Section 13671, Revenue and Taxation Code.
§13671.1. Examples of Joint Tenancy Between Three or More Persons.
Note

Property held in joint tenancy by three or more persons is subject to or excluded from the Inheritance Tax Law to the extent specified in Revenue and Taxation Code Section 13671. This may be illustrated by the following examples, in each of which it is assumed that any property contributed by a surviving joint tenant never belonged individually to the decedent:
EXAMPLE (1).
A, B, and C are joint tenants in property valued at $100,000, all of which was contributed by A:
(A) If A dies first, the entire property will be subject to the law at A's death. If thereafter the tenancy continues in existence until the death of B or C, one-half of the property, or $50,000, will be subject to the law at the date of the death.
(B) If B or C, or both, should predecease A, none of the property will be subject to the law at B's or C's death.
(C) If B predeceases A and C, and A predeceases C, the tenancy continuing in existence until A's death, none of the property at B's death will be subject to the law, but all of it will be subject thereto at A's death.
EXAMPLE (2).
A, B, and C are joint tenants in property valued at $100,000, of which $50,000 was contributed by A, $25,000 by B, and $25,000 by C:
(A) If A dies first, at his death $50,000 will be subject to the law, and $50,000 will be excluded. If thereafter the tenancy continues in existence until the death of B or C, at the date of the death $50,000 will be subject to the law, and $50,000 will be excluded.
(B) If B or C dies first, at the date of the death $75,000 will be excluded from the law, and $25,000 will be subject thereto. If thereafter the tenancy continues in existence until the death of the survivor of B or C, at the date of such death $37,500 will be subject to the law, and $62,500 will be excluded.
(C) If B predeceases A and C, and A predeceases C, the tenancy continuing in existence until A's death, at B's death the property will be subject to or excluded from the law in accordance with paragraph (B) of this example. At A's death $62,500 will be subject to the law, and $37,500 will be excluded.
NOTE

Reference: Section 13671, Revenue and Taxation Code.
§13671.2. U.S. Savings Bond Purchased in Two Names.
Note

United States savings bonds may be purchased in two names, i.e., payable to one person or another. The provisions of the Inheritance Tax Law relating to joint tenancy property are applicable to such bonds. (See Sections 13671 and 13671.50).
Note: As to the taxation of United States savings bonds “payable on death” of one person to another, see Section 13648.2.
NOTE

Reference: Section 13671, Revenue and Taxation Code.
§13671.3. Joint Trustee Accounts of Husband and Wife.
Note

Where a husband and wife deposit funds in a bank or savings and loan account as joint trustees, revocable by either and payable to either or the survivor, the account shall be treated in the same manner as a joint tenancy account upon the death of the first to die of said joint trustees. For example, assume that funds of A and B, husband and wife, are deposited in a bank or savings and loan account titled “A and B as joint trustees for C.” The account is revocable by either A or B, can be drawn on by either and upon the death of either the account s payable to the surviving joint trustee. Upon death of A, the account becomes the property of B with continued right to revoke or withdraw. C has only a contingent interest in the account in the event B does not revoke or withdraw during lifetime. Hence, as between A and B the account is recognized for inheritance tax purposes to have the same effect as a joint tenancy account. If the account is still in existence at the death of B, the payment of the funds to C will be treated as a transfer from B to C.
NOTE

Reference: Section 13671, Revenue and Taxation Code.
§13671.50. Conversion of Community Property into Joint Tenancy Between Husband and Wife.
Note

If community property is converted by the spouses into their joint tenancy property, and the tenancy is thereafter maintained, upon the death of either spouse the property is treated as community property for inheritance tax purposes.
Note: As to conversion of community property into joint tenancy of spouses and third person, see Section 13554.
NOTE

Reference: Section 13671.5, Revenue and Taxation Code.
Article 4.4. Powers of Appointment
§13692. Powers of Appointment--In General.
Note

A transfer subject to inheritance tax includes the value of property in respect of which the decedent by taxable inter vivos gift or by transfer at death created, possessed, exercised or released certain powers of appointment. A power may be generally defined as a power or authority given (by a donor, creator of the power) to a person (donee of the power) to designate the person or persons (appointees under the exercise of the power) who shall own, possess or enjoy the property or interest therein. If the donee of the power does not exercise the power the persons who otherwise receive the property or interest therein are generally termed the “takers in default” of the exercise of the power. In general, the creation or gift of the power is a taxable transfer from the donor to the donee of the power and the exercise or nonexercise of a general power is a taxable transfer from the donee to the appointees or takers in default. With certain exceptions (see Revenue and Taxation Code Section 13695 and Section 13693 of this Article) the exercise or nonexercise of limited powers by a donee is not taxable. 
Note: Rules of general application are contained in Section 13692.1.
As to rules applicable to general powers of appointment possessed by a deceased donee whose death occurred on or after September 17, 1965, see Sections 13696 and 13697.
For rules applicable to the creation of powers of appointment see Section 13694.
Special provisions regarding limited powers of appointment are dealt with in Section 13693.
For treatment of limited powers of appointment exempted as being for charitable purposes see Revenue and Taxation Code Sections 13699 through 13701.
As to computation of the tax where a person receives both an independent transfer and a power of appointment, see Sections 13408.1 and 13801.3.
NOTE

Reference: Section 13692, Revenue and Taxation Code.
§13692.1. Powers of Appointment--Nature and Scope.
Note

(a) In General.
The term “power of appointment” includes all powers which are in substance and effect powers of appointment regardless of the nomenclature used in creating the power. For example, if a trust instrument provides that the beneficiary may appropriate or consume the principal of the trust, the power to consume or appropriate is a power of appointment. Similarly, a power given to a decedent to affect the beneficial enjoyment of trust property or its income by altering, amending or revoking the trust instrument or terminating the trust is a power of appointment; except that a power granted to a trustee to make discretionary payments of principal or income to or for the benefit of a trust beneficiary (or beneficiaries) other than the trustee, including the power to terminate the trust, in whole or in part, is not taxed as a power of appointment. (See Section 13694(b)). A power in a donee to remove or discharge a trustee and appoint himself may be a power of appointment. For example, if under the term of a trust, the trustee or his successor has the power to appoint the principal or income of the trust for the benefit of individuals including himself, and the decedent has the unrestricted power to remove or discharge the trustee and appoint any other persons including himself, the decedent is considered as having a power of appointment. However, the decedent is not considered to have a power of appointment if he only had the power to appoint a successor trustee, including himself, under limited conditions which did not exist at the time of his death without an accompanying unrestricted power of removal. A power to amend only the administrative provisions of a trust which cannot affect the beneficial enjoyment of the trust property or income is not a power of appointment. The mere power of management, investment, custody of assets, or the power to allocate receipts or disbursements between income and principal, exercisable in a fiduciary capacity, whereby the holder has no power to enlarge or shift any of the beneficial interests therein is not a power of appointment. Further, the right in a beneficiary of a trust to assent to a periodic accounting, thereby relieving the trustee from further accountability, is not a power of appointment if the right of assent does not consist of any power or right to enlarge or shift the beneficial interest of any beneficiary therein. Deposits of a husband and wife made in their names to a joint trustee account with power to revoke are treated as in joint tenancy upon the death of the first spouse to die and not as a transfer of a power of appointment to the surviving spouse, per Revenue and Taxation Code Section 13671.
(b) Relation to Other Sections.
For purposes of these regulations the term “power of appointment” does not include powers reserved by the decedent to himself within the concept of Revenue and Taxation Code Sections 13643, 13644 and 13646. No provisions of Revenue and Taxation Code Sections 13691 through 13701 or of these regulations is to be construed as in any way limiting the application of any other section of the Inheritance Tax Law or of these regulations. The power of the owner of a property interest already possessed by him to dispose of his interest and nothing more, is not a power of appointment, but the transfer of such interest is subject to tax insofar as other provisions of Article 3 of Chapter 4 of the Inheritance Tax Law may be applicable.
(c) Powers over a Portion of Property.
If a power of appointment exists as to part of an entire group of assets or only over a limited interest in property, Revenue and Taxation Code Sections 13691 through 13701 apply only to such part or interest. For example, if a trust created by D provided for payment of income to A for life then to B for life, with power in A to appoint the remainder by will and in default of appointment for payment of the remainder to X, and if A dies before B the sections apply only to the value of the remainder excluding B's life estate. If A dies after B the sections apply to the entire property. If the power is restricted to only one-half the remainder, the sections apply only to one-half the value of the interests described above.
(d) Definition of “Exercise” of Power of Appointment.
Whether a power of appointment is in fact exercised depends upon the general law applicable to the particular situation. The manner in which powers of appointment may be exercised is provided in Chapters 4-8 (commencing with Section 1384.1), Title 7, Part 4, Division 2 of the Civil Code. A valid exercise designates the appointed person or persons to whom the transfer is made from the donee of the power, and upon such a transfer the taxability or nontaxability is determined. In the case of a failure to exercise the power the transfer upon which the tax is determined is from the donee of the power to the person or persons who take in default of the exercise thereof.
NOTE

Reference: Section 13692, Revenue and Taxation Code.
§13692.2. Definition of “General Power of Appointment.”
Note

(a) The term “general power of appointment” as defined in Revenue and Taxation Code Section 13692 means any power of appointment exercisable in favor of the donee, his estate, his creditors or the creditors of his estate, except
(1) a power limited to an ascertainable standard as described in Section 13692.3 and Revenue and Taxation Code Section 13692(a),
(2) a power exercisable by the donee only in conjunction with the creator of the power (see Section 13692.4 and Revenue and Taxation Code Section 13692(b)), and
(3) a power exercisable by the donee only in conjunction with a person having a substantial interest in the property subject to the power, which is adverse to the exercise thereof in favor of the donee (see Section 13692.5 and Revenue and Taxation Code Section 13692(c)).
(b) A power of appointment exercisable to meet taxes, debts, charges which are enforceable against the donee's estate, for the discharging of legal obligations of the donee or for his pecuniary benefit, is considered a general power of appointment. However, a power of appointment not otherwise considered to be a general power of appointment is not treated as a general power merely because an appointee may, in fact, be a creditor of the donee or his estate. A power of appointment is not a “general” power if by its terms it is either:
(1) exercisable only in favor of one or more designated persons or classes other than the donee or his creditors or the donee's estate or the creditors of his estate, or
(2) expressly not exercisable in favor of the donee or his creditors or the donee's estate or creditors thereof.
NOTE

Reference: Section 13692, Revenue and Taxation Code.
§13692.3. Powers Limited by an Ascertainable Standard.
Note

A power to consume, invade or appropriate income or corpus, or both, for the benefit of the donee, which is limited by an ascertainable standard relating to the health, education, support or maintenance of the donee is by reason of Revenue and Taxation Code Subsection 13692(a) not a general power of appointment. A power is limited by such a standard if the extent of the donee's duty to exercise and not to exercise the power is reasonably measurable in terms of his needs for health, education or support (or any combination of them). As used in this subparagraph, the words “support” and “maintenance” are synonymous and their meaning is not limited to the bare necessities of life. A power to use property for the “comfort, welfare or happiness,” or for “comfort and well-being,” “benefit,” “welfare and well-being,” “care, comfort and enjoyment,” of the donee of the power are not limited by the requisite standard. Examples of powers which are limited by the requisite standard are powers exercisable for the donee's “support,” “support in reasonable comfort,” “maintenance in health and reasonable comfort,” “support in his accustomed manner of living,” “education, including college and professional education,” “health” and “medical, dental, hospital and nursing expenses and expenses of invalidism.” In determining whether a power is limited by an ascertainable standard, it is immaterial whether the beneficiary is required to exhaust his other income before the power can be exercised.
NOTE

Reference: Section 13692, Revenue and Taxation Code.
§13692.4. Powers Joint with Creator of Power.
Note

Excepted from the definition of a general power of appointment is a power not exercisable by the donee of the power except in conjunction with the creator of the power. Transfer of property made subject to such a power is treated as a transfer by the creator of the power, taxability being determinable under Revenue and Taxation Code Sections 13641-13648.
NOTE

Reference: Section 13692, Revenue and Taxation Code.
§13692.5. Powers Joint with Person Having an Adverse Interest.
Note

A general power of appointment does not include a power which is not exercisable by the donee except in conjunction with or with the consent or joinder of a person having a substantial interest in the property subject to the power which is adverse to the exercise of the power in favor of the donee, his estate, his creditors or the creditors of his estate.
An interest adverse to the exercise of a power is considered as substantial if its value in relation to the total value of the property subject to the power is not insignificant. For this purpose, the interest is to be valued in accordance with the actuarial principles set forth in Revenue and Taxation Code Section 13953, or if it is not susceptible to valuation under said provision, in accordance with the general principles set forth in Revenue and Taxation Code Section 13951.
A taker in default of appointment under a power has an interest which is adverse to an exercise of the power. A coholder of the power has no adverse interest merely because of his joint possession of the power nor merely because he is a permissible appointee under the power. However, a coholder is considered as having an adverse interest where he may possess the power after the decedent's death and may exercise it at that time in favor of himself, his estate, his creditors or the creditors of his estate. Thus, for example, if X, Y and Z held a power jointly to appoint among a group of persons which includes themselves and if on the death of X the power will pass to Y and Z jointly, then Y and Z are considered to have interests adverse to the exercise of the power in favor of X. Similarly, if on Y's death the power will pass to Z, Z is considered to have an interest adverse to the exercise of the power in favor of Y.
The application of these principles respecting a joint holder with an adverse interest may be further illustrated in the following examples in each of which it is assumed that the value of the interest in question is substantial.
EXAMPLE (1).
The donee and R were trustees of a trust which provided for income to be paid to the donee for life, then to M for life and the remainder to go to R. The trustees had power to distribute corpus to the donee. Since R's interest was substantially adverse to an exercise of the power in favor of the donee the latter did not have a general power of appointment. If M and the donee were the trustees, M's interest would likewise have been adverse.
EXAMPLE (2).
The donee and L were trustees of a trust which provided that income be paid to L for life, then to M for life and the remainder to be paid to the donee. The trustees had power to distribute corpus to the donee during the life of L. Since L's interest was adverse to an exercise of the power in favor of the donee, the latter did not have a general power of appointment. If the donee and M were the trustees, M's interest would likewise have been adverse.
EXAMPLE (3).
The donee and L were trustees of a trust under which the income was to be paid to L for life. The trustees could designate whether corpus was to be distributed after L's death to the donee or to M. L's interest was not adverse to an exercise of the power in favor of the donee as his life interest in the income would not be affected and the donee therefore had a general power of appointment.
EXAMPLE (4).
C (creator) leaves property to T (trustee) in trust to pay the income to D (donee) for life with power in D to invade or appoint the corpus to himself at any time with the consent of R (remainderman). If there is no invasion or appointment, the property passes to R at D's death. Here R (remainderman) has an obvious adverse interest to the exercise of the power in favor of D (donee) because if the power is so exercised, R (remainderman) loses his remainder interest. Since the power is within the exception, it is not a general power and therefore not subject to tax in D's estate.
EXAMPLE (5).
C (creator) leaves property to T (trustee) in trust to pay income to D (donee) for life with power to D (donee) and X acting jointly to distribute corpus to D (donee). X has no other interest in the property, but the trust provides that upon D's death X shall have the power to appoint the property to anyone including himself. D (donee) does not have a taxable general power because X's interest is obviously adverse. By outliving D (donee) X can by virtue of his succession to the power obtain the property for himself.
NOTE

Reference: Section 13692, Revenue and Taxation Code.
§13692.6. Joint Powers Allocated to Fractional Portions of Property.
Note

A power which is exercisable only in conjunction with another person, and which after application of the rules set forth in Sections 13692.4 and 13692.5, above, constitutes a general power of appointment will be treated as though the holders of the power who are permissible appointees of the property were joint owners of property subject to the power. The donee under this rule will be treated as possessed of a general power of appointment over an aliquot share of the property to be determined with reference to the number of joint holders, including the donee, who (or whose estates or creditors) are permissible appointees. Thus, for example, if X, Y and Z hold an unlimited power jointly to appoint among a group of persons, including themselves, but on the death of X the power does not pass to Y and Z jointly, then Y and Z are not considered to have interests adverse to the exercise of the power in favor of X. In this case X is considered to possess a general power of appointment as to one-third of the property subject to the power.
NOTE

Reference: Section 13692, Revenue and Taxation Code.
§13693. Limited Powers of Appointment.
Note

(a) Definition of “Limited Power of Appointment.”
A limited power of appointment is defined in Revenue and Taxation Code Section 13693 as a power which does not qualify under Revenue and Taxation Code Section 13692 as a general power of appointment, i.e., a power under which a donee may not appoint to himself, his estate, his creditors or the creditors of his estate. For example, a limited power of appointment would include a power to appoint only to or among specified persons or designated classes of persons, not including the donee holder of the power, nor his estate, his creditors or creditors of his estate. A power of appointment may be general as to part of the appointive property and limited as to the rest. Thus, where the donor of the power transfers property to a donee for life and at the donee's death to be distributed, one-half to X, Y or Z as the donee by will directs, and one-half to any person as the donee may so direct, the donee has a limited power of appointment as to one-half and a general power as to the other half. 
(b) Gifts of Limited Powers.
Under Revenue and Taxation Code Section 13694, a gift of a power of appointment is taxable to the donee of the power, no distinction being made between general or limited powers for this purpose (See Section 13694).
(c) Exercise of Limited Power of Appointment.
Except as hereafter indicated, the exercise or nonexercise of a limited power of appointment by a donee of the power is not taxable for inheritance tax purposes. An exception is made where the donor created the power in conjunction with a disposition of property effected before 5:00 p.m. of June 25, 1935 and died prior thereto. In such case the exercise thereafter by the donee of said power is taxed as a transfer from the donee to the person or persons appointed pursuant to the exercise. For this purpose only the exercise is taxable under Revenue and Taxation Code Section 13695. If such a limited power is not exercised it is not treated as a taxable transfer from the donee. The gift or creation of a limited power is taxable at the death of the donor as indicated under paragraph (b) above.
NOTE

Reference: Section 13693, Revenue and Taxation Code.
§13694. Gift of Power of Appointment.
Note

The gift of a power of appointment is commonly referred to as the creation of a power of appointment in that the donor of the power creates a means of transferring a property interest by giving the donee the power to designate the distribution thereof. Such a creation and gift made in conjunction with a disposition of property otherwise taxable is treated as a taxable transfer from the donor to the donee without reference to the appointees who may be designated to take through an exercise of the power by the donee and without reference to those who would take in absence of an exercise. Thus the transfer is treated in the same manner as an outright gift of property to the donee. This is true regardless of whether the transfer involves either a general power of appointment or a limited power of appointment. Taxability is subject to the following exceptions in Revenue and Taxation Code Section 13694.
(a) Community Property Exclusion to Spouse--Transfer Coupled with Power of Appointment Made by Decedents Dying Prior to January 1, 1976.
With reference to decedents dying prior to January 1, 1976, where a power of appointment is given by a donor to the donor's spouse over any portion of the donor's half interest in community property the value of any interest given other than the power of appointment itself up to but not exceeding the value of a life estate to the spouse is excluded from taxation. Thus, the taxability of a transfer of a power of appointment in community property from one spouse to the other is reduced by the value of other interests but not to exceed the value of a life estate where other interests in the same property are given to the spouse which do not amount to a power of appointment. For example, if a surviving spouse receives a life estate in the decedent's half of their community property together with a power to appoint the remainder, the value of the life estate would be excluded from tax and the value of the remainder would be taxable. On the other hand, if the surviving spouse receives no specified life estate but is given a power to revoke during life with a testamentary power to appoint the remainder, none of the community property so covered would be excluded from tax because both the power to revoke and the testamentary power to appoint each come within the definition of a power of appointment and the power to revoke is not an interest other than a power of appointment. If, in this latter case the surviving spouse is also given a life estate in conjunction with the power to revoke, the value of the life estate is excluded from tax.
A life estate may be implied from the nature of the transfer. Thus, if a power of appointment in community property is given to a spouse by way of a power to consume during lifetime it is considered to include an implied life estate for this purpose and an exclusion is allowed for the value of a life estate to the spouse.
To qualify for this exclusion the interest given which is other than the power of appointment itself need not be in the nature of a life estate. Revenue and Taxation Code Section 13694 merely requires that it be any interest other than the power itself. For example, such additional interest may be in the form of an annuity of specified amounts or for periodic payments for a time certain or payment at a specified future time. In such cases the exclusion is limited to the value of a life estate or the value of the additional interest whichever is less.
For purposes of computing the life estate exclusion under this exception in Revenue and Taxation Code Section 13694, the valuation principles of Revenue and Taxation Code Sections 13953 and 13954 will apply.
These provisions and illustrations do not apply to joint trustee bank or savings and loan accounts between spouses which are treated as joint tenancy accounts under Revenue and Taxation Code Section 13671.
(b) Discretionary Power of Trustee to Make Certain Payments of Income or Principal.
For the purpose of treating the creation of a power of appointment as a transfer from the donor to the donee of the power certain discretionary powers granted to a trustee are not considered to be powers of appointment. These consist of powers limited to making discretionary payments of principal or income for the benefit of a trust beneficiary or beneficiaries other than the trustee. Trusts containing such powers are often termed “sprinkling” or “spraying” trusts and this exception to the treatment of these powers as powers of appointment is limited to those situations in which the trust instrument specifically provides that the trustee or trustees shall have discretionary power to make payments for the benefit of a trust beneficiary other than the trustee. Included are those sprinkling trust situations in which there is a limited and continuing discretion to determine from time to time during the existence of the trust to make unequal payments to one or more of the trust beneficiaries and the power to effect a payment of trust corpus by terminating the trust, in whole or in part.
Where this exception as to discretionary payments is met the tax is determined upon a transfer from the donor to the ultimate beneficiaries and is treated as a transfer subject to the contingent future identification of those beneficiaries within the provisions of Revenue and Taxation Code Section 13411. See also Revenue and Taxation Code Section 14191 whereby the contingencies can be settled upon a compromise at the time the tax is fixed.
Where the power to make discretionary payments of income or principal may be exercised in favor of the trustee, the trustee will be considered as having a general power of appointment; and where the trustee has the power to appoint the beneficiary (or beneficiaries) of the trust from among a designated class of beneficiaries, which does not include the trustee, his estate, his creditors, or creditors of his estate, the trustee will be considered as having a limited power of appointment.
NOTE

Reference: Section 13694, Revenue and Taxation Code.
§13696. General Power of Appointment Held at Death by Deceased Donee.
Note

(a) In General.
Pursuant to Revenue and Taxation Code Section 13696 (effective as to decedents who died on or after September 17, 1965) if a donee has a general power of appointment over property at the time of his death the exercise or nonexercise thereof is treated as a transfer subject to inheritance tax. If there is an exercise the transfer is taxed to the person or persons to whom the property is appointed. If the power is not exercised the transfer is taxed to those to whom the property passes by virtue of the nonexercise, i.e., the takers in default. An exercise or release of the power before death is taxable to the extent indicated in Revenue and Taxation Code Section 13697 (see Section 13697). The exercise of the limited power of appointment is subject to tax at the death of a decedent only if the donor who created the power died prior to 5:00 p.m. of June 25, 1935, and the power was exercised thereafter (see Revenue and Taxation Code Section 13695). Similarly the exercise of a general power under such circumstances was subject to tax as to donees who died prior to September 17, 1965. All general powers held by a decedent who died on or after September 17, 1965 are subject to tax as indicated above. (See Section 13692.1 through 13692.6 for definitions of various terms used herein).
(b) Existence of Power at Death.
Under Revenue and Taxation Code Section 13696 a power of appointment is considered to exist on the date of a deceased donee's death even though the exercise of the power is subject to the precedent giving of notice, or even though the exercise of he power takes effect only on the expiration of a stated period after its exercise, whether or not on or before the decedent's death notice has been given or the power has been exercised. However, a power which by its terms is exercisable only upon the occurrence during the decedent's lifetime of an event or a contingency which did not in fact take place or occur during such time is not a power in existence on the date of the decedent's death. For example, if a decedent was given a general power of appointment exercisable only after he reached a certain age, only if he survived another person, or only if he died without descendants, the power would not be in existence on the date of the decedent's death if the condition precedent to its exercise had not occurred.
(c) Exercise or Nonexercise of Power of Appointment.
For purposes of Revenue and Taxation Code Section 13696 the exercise or nonexercise of a power of appointment held at death by a donee determines the person or persons against whom the inheritance tax is assessed. In the case of an exercise the tax is upon a transfer from the donee to the person or persons who are appointed to take the property. If the power is not exercised the tax determination is based on a transfer to the person or persons who take in default of the exercise of the power. The general law requirements regarding the exercise of a power of appointment must be met. These are contained in Chapter 4 (commencing with Section 1384.1) of Part 4, Division 2 of the Civil Code. For the effect of a failure to make an effective appointment see Chapter 5 (commencing with Section 1389.1) of Part 4, Division 2 of the Civil Code.
The term “exercise” means an act on the part of the donee of a power of appointment of designating the person or persons who are to receive the property subject to the power. A power of appointment is considered as exercised for purposes of Revenue and Taxation Code Section 13696 even though the exercise is in favor of the taker in default of appointment. A power of appointment is also considered as exercised even though the disposition cannot take effect until the occurrence of an event after the exercise takes place, if the exercise is irrevocable and, as of the time of the exercise, the condition was not impossible of occurrence. For example, if property is left in trust to A for life, with a power in B to appoint the remainder by will, and B dies before A, exercising his power by appointing the remainder to C if C survives A, B is considered to have exercised his power if C is living at B's death. On the other hand, a testamentary power of appointment is not considered as exercised if it is exercised subject to the occurrence during the decedent's life of an express or implied condition which did not in fact occur. Thus, if in the preceding example, C dies before B, B's power of appointment would not be considered to have been exercised. Similarly, if a trust provides for income to A for life, remainder as A appoints by will, and A appoints a life estate in the property to B and does not otherwise exercise his power, but B dies before A, A's power is not considered to have been exercised.
For purposes of Revenue and Taxation Code Section 13696 the mere right to exercise a general power of appointment existing in the donee of the power at his death is sufficient to establish a taxable transfer from the donee to the appointees of an exercise of the power or to the takers in default of an exercise. In the case of a default of exercise there need be no showing of an actual intention on the part of the donee to decline, refuse or otherwise specify that the power is not being exercised. Being an inheritance tax, the incidence of tax is upon the transfer of property interests to the ultimate beneficiaries occasioned by the donee's exercise or nonexercise of the power.
NOTE

Reference: Section 13696, Revenue and Taxation Code.
§13697. Inter Vivos Exercise, Release, Lapse and Disclaimer of Powers.
Note

(a) In General.
Under Revenue and Taxation Code Section 13697 property subject to a general power of appointment is a transfer subject to inheritance tax even though the deceased donee of the power does not have the power at the date of his death, if during his life he exercised or released the power under circumstances such that if it was a transfer of property owned by the decedent such transfer would be subject to tax under Revenue and Taxation Code Sections 13641 through 13648. A lapse of a general power of appointment is considered to be a release of the power to the extent set forth in subparagraph (b) herein. An unequivocal disclaimer or renunciation of a general power of appointment is not considered to be a release for this purpose.
(b) Lapse of Power of Appointment.
The failure to exercise a power of appointment within a specified time, so that the power lapses, constitutes a release of the power. However, Revenue and Taxation Code Section 13697 provides that such a lapse during any calendar year of decedent's life is treated as a release only to the extent that the property which could have been appointed by exercise of such lapsed power exceeds the greater of (i) $5,000 or (ii) 5 percent of the aggregate value, at the time of the lapse, of the assets out of which, or the proceeds of which, the exercise of the lapsed power could have been satisfied.
This regulation may be illustrated by the following examples:
EXAMPLE (1).
A transferred property worth $200,000 in trust providing for payment of income to D for life with remainder to D's issue. D had a noncumulative right to withdraw $10,000 a year from the principal of the trust fund (which neither increased nor decreased in value prior to D's death). The failure of D to exercise his right of withdrawal will not result in an inter vivos transfer subject to inheritance tax with respect to the power to withdraw $10,000 which lapses each year before the year of D's death inasmuch as it does not exceed 5 percent of the principal of the trust at the time of the lapse. At D's death there will be subjected to tax by virtue of his possession of the power at death the $10,000 which he was entitled to withdraw for the year of his death less any amount which he may have taken during that year.
EXAMPLE (2).
If in the preceding example D had possessed the right to withdraw $15,000 of the principal annually, the failure to exercise such power in any calendar year will be considered a release of the power to the extent of the excess of the amount subject to withdrawal over 5 percent of the trust fund (in this example, $5,000, assuming the trust fund is worth $200,000 at the time of the lapse). Since each lapse is treated as though D had exercised dominion over the trust property by making a transfer of principal reserving the income therefrom for his life, the value of the trust property is taxable at D's death as a transfer with a reserved life estate but only to the extent of the excess of the amount subject to withdrawal over $5,000 or 5% of the trust fund whichever is greater.
(c) Lapse of Power, Portion Taxable.
Where the lapse of a power of appointment is includible as a transfer at decedent's death the amount taxed is determined as that portion of the date of death value of the trust corpus which the taxable portion at the date of the lapse bears to the corpus at that time. For example, if the life beneficiary of a trust had a right exercisable only during one calendar year to withdraw $50,000 from the corpus of a trust, which he did not exercise, and if at the end of the year the corpus was worth $800,000, the taxable portion over which the power lapsed is $10,000 (the excess of $50,000 over 5 percent of the corpus), or 1/80 of the total value. On the decedent's death, if the total value of the corpus(excluding income accumulated after the lapse of the power) was $1,200,000, 1/80 or $15,000 would be includible as a taxable transfer. However, if the total value was then $600,000, only $7,500 (1/80 of $600,000) would be includible.
(d) Lapse of Power for More Than One Year.
If the failure to exercise a power, such as a right of withdrawal, occurs in more than a single year, the proportion of the property over which the power lapsed which is treated as a taxable disposition will be determined separately for each such year. The aggregate of the taxable proportion for all such years, valued in accordance with the above principles, will be includible as a taxable transfer by reason of the lapse. The includible amount, however, shall not exceed the aggregate value of the assets out of which, or the proceeds of which, the exercise of the power could have been satisfied, valued as of the date of the decedent's death.
(e) Disclaimer or Renunciation of Power of Appointment.
A disclaimer or renunciation of a general power of appointment is not deemed to be a release of the power. The disclaimer or renunciation must be unequivocal. A disclaimer is a complete and unqualified refusal to accept the rights to which one is entitled. There can be no disclaimer or renunciation of a power after its acceptance. In the absence of facts to the contrary, the failure to renounce or disclaim within a reasonable time after learning of its existence will be presumed to constitute an acceptance of the power. The disclaimer of a power on or after August 16, 1972 must comply in manner and form to the provisions of Chapter 11 (commencing with Section 190) of Division 1 of the Probate Code.
NOTE

Reference: Section 13697, Revenue and Taxation Code.
Article 4.5. Insurance
§13722. Insurance Payable to Estate.
Note

All proceeds of a life or accident insurance policy which are payable on the death of the insured to his estate, executor, or administrator, or which in fact are receivable by or for the benefit of the insured's estate are subject to the Inheritance Tax Law, except proceeds of any federal war risk insurance of any veteran of World War I or World War II (see Revenue and Taxation Code Section 13861) and except for proceeds of any National Service Life Insurance or Servicemen's Group Life Insurance Policy of any veteran of the Vietnam Conflict exempt under the provisions of Revenue and Taxation Code Section 13861.5.
All proceeds of any policy similar to the type mentioned in the preceding paragraph which are payable to a testamentary trustee or to a trustee who is under a legal obligation to use the funds to meet taxes, charges, debts, or expenses legally enforceable against the insured's estate are subject to the Inheritance Tax Law. So also are proceeds of similar insurance taken out by an insured in favor of a named person or corporation as collateral security for a loan or other accommodation, the proceeds in such case being considered as receivable for the benefit of the insured's estate.
Note: As to the valuation of insurance, see Section 13951.9.
As to taxation of annuity contracts, see Sections 13644.1, 13648 and 13648.1.
As to withholding and notice requirements prior to delivery of insurance proceeds by insurance companies and issuance of consents to delivery such proceeds, see Sections 14345 and 14345.1.
NOTE

Reference: Section 13722, Revenue and Taxation Code.
§13723. Insurance Payable to Named Beneficiaries.
Note

The first $50,000 of proceeds of any life or accident insurance policy, as to which the insured until his death retained the legal incidents of ownership (as, for example, the right to change the beneficiary, the right to surrender, cancel, or assign the policy, the right to pledge the policy for a loan, or the right to obtain from the insurer a loan against the surrender value of the policy), which are payable on the death of the insured to a beneficiary other than the insured's estate, executor, or administrator, and which are not receivable by or for the benefit of the insured's estate, are exempt from the Inheritance Tax Law, any excess over $50,000 being subject thereto. Whether the insured has more than one such policy or names more than one beneficiary therein, only $50,000 of the aggregate proceeds are exempt. If more than one beneficiary is named in one or several policies, the total amount of the exempt proceeds is prorated among the several beneficiaries in proportion to the amount of insurance payable to each. For example, if a decedent leaves life insurance to A in the amount of $10,000, to B in the amount of $40,000, and to C in the amount of $50,000, the beneficiaries should be entitled to the following exemptions: A, $5,000; B, $20,000; C, $25,000.
All proceeds of any policy similar to the type mentioned in the preceding paragraph, as to which the insured at his death had none of the legal incidents of ownership, are exempt from the law, unless the insured during his lifetime had assigned or transferred the policy in conformity with Revenue and Taxation Code Section 13641 in contemplation of death, in which case only $50,000 of the proceeds are exempt.
Note: As to valuation of insurance, see Section 13951.9.
As to taxation of annuity contracts, see Sections 13644.1, 13648 and 13648.1.
As to withholding and notice requirements prior to delivery of insurance proceeds by insurance companies and issuance of consents to deliver such proceeds, see Sections 14345 and 14345.1.
NOTE

Reference: Section 13723, Revenue and Taxation Code.
§13724. Insurance Paid from Community Funds, Date of Death Prior to January 1, 1981.
Note     •     History

If all the premiums on a policy of insurance issued on the life of a deceased spouse and payable to the surviving spouse have been paid from their community funds, and the decedent retained the legal incidents of ownership in the policy until death, one-half of the proceeds of the policy is excluded as community property belonging to the surviving spouse (see Revenue and Taxation Code Section 13551 as amended and effective January 1, 1976), and in addition, $50,000 of the decedent's one-half are excluded under the insurance exclusion (see Section 13723). This regulation may be illustrated by the following example: 
EXAMPLE. A at his death in 1976 left a $200,000 insurance policy on his life payable to his wife, B, the premiums on which were paid from community funds, and as to which the legal incidents of ownership were retained by A until his death. B will be entitled to exclusions totalling $150,000, of which $100,000 is within the community exclusion and $50,000 within the insurance exclusion.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 13724, Revenue and Taxation Code.
HISTORY

1. Amendment of section title filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§13724.1. Insurance Paid Partly from Community and Partly from Separate Funds, Date of Death Prior to January 1, 1981.
Note     •     History

If the premiums on a policy of insurance issued on the life of a deceased spouse and payable to the surviving spouse have been paid partly from community funds and partly from separate funds, and the decedent had retained the legal incidents of ownership in the policy until death, one-half of the proportion of the insurance proceeds which is community is excluded as community belonging to the surviving spouse (see Revenue and Taxation Code Section 13551). In addition, $50,000 of the remaining proceeds are excluded by reason of the insurance exclusion (see Section 13723). Also, the separate property in the insurance is taken into consideration in determining the amount of the marital exemption under Code Section 13805 as it applies to decedents dying prior to January 1, 1976, and to the marital exclusion under the amendment to Section 13805, effective as to decedents dying on and after January 1, 1976 (see Section 13805). However, in calculating the one-half of the clear market value of decedent's separate property (factor (1)) for the purpose of determining the maximum marital exemption or exclusion to which the surviving spouse is entitled, the separate property in the insurance proceeds must be reduced by the proportionate share of the $50,000 insurance exclusion which applies to such separate portion of the insurance proceeds.
This regulation may be illustrated by the following example: 
EXAMPLE. A at his death in 1976 left a $200,000 insurance policy on his life payable to his wife, B, the premiums on which were paid three-fourths from community funds and one-fourth from A's separate funds, and as to which the legal incidents of ownership were retained by A until his death. In addition A left separate property having a value of $100,000 all of which he left to B. B would be entitled to exclusions totalling $193,750, of which $75,000 is within the community exclusion, $50,000 within the insurance exclusion, and $68,750 within the marital exemption or exclusion. The marital exemption or exclusion is computed as follows:
(1) One-half the net value of decedent's separate property: 
1/4 x $200,000 = $50,000, separate property insurance 
1/4 x $50,000  = $12,500, proportion of insurance exclusion 

applicable to separate property insurance

	$ 50,000
	 12,500
	$ 37,500
	 100,000	Other separate property
	$137,500
	$137,500	= $68,750
 	    2     
(2) Amount of property received by wife which is not exempt:

	$200,000	Insurance proceeds
	 100,000	Other separate property
	$300,000	Total received by wife
     	75,000	Less community exclusion
	$225,000
	50,000	Less insurance exclusion
	$175,000
Factor (1) is lower, so $68,750 is the marital exemption or exclusion.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 13724, Revenue and Taxation Code.
HISTORY

1. Amendment of section title filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§13724.2. Insurance Paid from Separate Funds, Date of Death Prior to January 1, 1981.
Note     •     History

If all the premiums on a policy of insurance issued upon the life of a husband or wife and payable to the surviving spouse have been paid from the insured's separate funds, and the insured had retained the legal incidents of ownership in the policy until death, $50,000 of the proceeds of the policy are excluded by reason of the insurance exclusion (see Section 13723) and the proceeds, being separate property of the decedent, are also included in computing the surviving spouse's marital exemption under Revenue and Taxation Code Section 13805 as it applies to decedents dying prior to January 1, 1976, and to the marital exclusion under the amendment to Revenue and Taxation Code Section 13805, effective as to decedents dying on or after January 1, 1976 (see Section 13805). However, in calculating the one-half of the clear market value of the decedent's separate property (factor (1)) for the purpose of determining the maximum marital exemption or exclusion to which the spouse is entitled, the amount of the insurance proceeds must be reduced by the $50,000 insurance exclusion.
This regulation may be illustrated by the following example: 
EXAMPLE. A at his death in 1976 left a $200,000 insurance policy on his life payable to his wife, B, the premiums on which were paid from A's separate funds, and as to which the legal incidents of ownership were retained by A until his death. In addition A left other separate property having a value of $100,000 all of which he left to B. B would be entitled to the $50,000 insurance exclusion and a marital exemption or exclusion in the sum of $125,000. The marital exemption or exclusion is computed as follows:

(1) One-half the net value of decedent's separate property: 
	$200,000	Insurance proceeds 
	    50,000	Less insurance exclusion 
	$150,000
	  100,000	Other separate property 
	$250,000
	$250,000	= $125,000 
	2     

(2) Amount of property received by wife which is not exempt: 
	$200,000	Insurance proceeds 
 	 100,000	Other separate property 
	$300,000	Total received by wife 
	    50,000	Less insurance exclusion 
	$250,000
Factor (1) is lower, so $125,000 is the marital exemption or exclusion.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 13724, Revenue and Taxation Code.
HISTORY

1. Amendment of section title 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§13724.3. Insurance Payable to Spouse, Date of Death on or After January 1, 1981.
Note     •     History

Proceeds of insurance payable to the spouse of a decedent dying on or after January 1, 1981 are within the spousal exclusion provided by Revenue and Taxation Code Section 13805 as amended and effective January 1, 1981. Where a decedent with a date of death on or after January 1, 1981 leaves insurance payable to the spouse and other named beneficiaries, the full amount of the insurance exclusion is prorated among the several beneficiaries other than the spouse in proportion to the amount of insurance payable to each. For example, if a decedent leaves life insurance to his wife (W) in the amount of $100,000, to his son (S) in the amount of $50,000, and to his daughter (D) in the amount of $50,000, the $100,000 proceeds payable to W is within the spousal exclusion provided by Revenue and Taxation Code Section 13805 and the insurance exclusion is applied to the proceeds payable to D and S. In such a case, D and S would each be entitled to a $25,000 insurance exclusion.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Sections 13724 and 13805, Revenue and Taxation Code.
HISTORY

1. Repealer and new section filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§13724.4. Proceeds of Life Insurance on Prior Decedent Payable to Present Decedent.
Note     •     History

(a) Present Decedent Selected Mode of Settlement. If the proceeds of a policy of insurance issued upon the life of a prior decedent is being paid in installments or otherwise to a present decedent and the mode of settlement was selected by the present decedent, the balance due on the policy is subject to the Inheritance Tax Law and the insurance exemption is not applicable.
(b) Prior Decedent Selected Mode of Settlement If the proceeds of a policy of insurance issued upon the life of a prior decedent are being paid in installments or otherwise to a present decedent and the mode of settlement was selected by the prior decedent, the balance due on the policy is not subject to the Inheritance Tax Law. 
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 13724, Revenue and Taxation Code.
HISTORY

1. New section filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
Article 5. Specific Exemptions
§13801. Specific Exemption--In General.
Note

A transferee is entitled to one specific or personal exemption in respect to all property received by him from the transferor, whether during life or at the death of the latter, pursuant to any transfer subject to the Inheritance Tax Law. This exemption varies in amount in accordance with the transferee's degree of relationship to the transferor, see Revenue and Taxation Code Sections 13307 through 13310, and Sections 13801 through 13804.
Note: As to the deduction of the specific exemption from the lower tax rate brackets, see Section 13402.3.
NOTE

Reference: Section 13801, Revenue and Taxation Code.
§13801.1. Specific Exemption Applicable.
Note

(a) Transfer by Will or Laws of Succession.
In the case of a transfer by will or pursuant to the laws of succession, the specific exemption in effect at the date of the transferor's death is the exemption applicable.
(b) Transfer Inter Vivos.
(1) On or After June 25, 1935. 
In the case of a transfer during the life of the transferor made on or after June 25, 1935 (the effective date of the Inheritance Tax Act of 1935), the exemption in effect at the date of the transferor's death is the exemption applicable.
(2) Prior to June 25, 1935. 
In the case of a transfer during the life of the transferor made prior to June 25, 1935:
(A) The exemption in effect at the date of the transfer is the exemption applicable, if the transfer was complete (see Section 13304.1); or
(B) The exemption in effect at the date of the transferor's death is the exemption applicable, if the transfer was incomplete (see Section 13304.2).
NOTE

Reference: Section 13801, Revenue and Taxation Code.
§13801.2. Several Transfers to Same Person.
Note

When more than one transfer has been made after July 27, 1917 (the effective date of the Inheritance Tax Act of 1917), by a transferor to the same person, the latter is deemed to have received by a single transfer the entire property involved and is entitled to but one specific exemption. The amount of the exemption is governed by the following:
(a) Transfers on or After June 25, 1935. 
If each transfer was made on or after June 25, 1935 (the effective date of the Inheritance Tax Act of 1935), the exemption allowable is the exemption in effect at the date of the transferor's death.
(b) Incomplete Transfer Between July 27, 1917, and June 25, 1935, Plus Transfer upon Death on or After June 25, 1935.
If an incomplete transfer (see Section 13304.2), was made during the life of the transferor on or after July 27, 1917, but prior to June 25, 1935, and a second transfer was made upon the transferor's death on or after June 25, 1935, the exemption allowable is the exemption in effect at the date of the transferor's death.
(c) Complete Transfer Between July 27, 1917, and June 25, 1935, Plus Transfer upon Death on or After June 25, 1935.
If a complete transfer (see Section 13304.1), was made during the life of the transferor on or after July 27, 1917, but prior to June 25, 1935, and a second transfer was made upon the transferor's death on or after June 25, 1935, and at a time when the specific exemption in force was different from that in force when the first transfer was made, the exemption allowable is as follows:
(1) If the amount of the property involved in the first transfer was equal to or greater than the exemption in force at the time of the transfer, and in excess of the exemption in force at the date of the second transfer, an exemption equal to the amount of the exemption applicable at the date of the first transfer is allowable. 
(2) If the amount of the property involved in the first transfer was less than the exemption in force at the time of the transfer, but in excess of the exemption in force at the date of the second transfer, an exemption equal to the amount of the property involved in the first transfer is allowable.
(3) If the amount of the property involved in the first transfer was less than the exemption in force at the time of the transfer, and less than the exemption in force at the date of the second transfer, a total exemption equal to the amount of the exemption applicable at the date of the second transfer is allowable.
Note: As to the computation of tax where there are several transfers to the same person, see Section 13408.
NOTE

Reference: Section 13801, Revenue and Taxation Code.
§13801.3. Independent Gift and Power of Appointment to Same Person.
Note

(a) Transfers on or After June 25, 1935. Should any person on or after June 25, 1935 (the effective date of the Inheritance Tax Act of 1935), receive both a power of appointment subject to the Inheritance Tax Law (see Revenue and Taxation Code Section 13694) over particular property and an outright bequest or devise of other property from the same transferor, the specific exemption allowable is governed by the following:
(1) General Power of Appointment. If the power is general in nature, or if it is limited in nature but the donee may use or otherwise receive benefit from the property subject to the power, the value of the property subject to the power is aggregated with the value of the property bequeathed or devised, and one exemption is allowed on the whole. This exemption is the one in effect at the date of the transferor's death.
(2) Limited Power of Appointment. If the power is limited in nature, and the donee cannot use or otherwise receive benefit from the property subject to the power, an exemption is allowed on the bequest or devise, but none is allowed on the property subject to the power, unless the exemption allowed on the bequest or devise exceeds the amount of the latter, in which case the surplus will be allowed against the property subject to the power. The exemption applicable is the one in effect at the date of the transferor's death.
(b) Incomplete Inter Vivos Transfer Between July 27, 1917, and June 25, 1935, Plus Power of Appointment on or After June 25, 1935. Should any person receive property pursuant to an incomplete inter vivos transfer (see Section 13304.2), made on or after July 27, 1917 (the effective date of the Inheritance Tax Act of 1917) but prior to June 25, 1935, and on or after the latter date receive from the same transferor a power of appointment subject to the Inheritance Tax Law over other property, the exemption applicable is governed by subsection (a) of this regulation.
(c) Complete Inter Vivos Transfer Between July 27, 1917, and June 25, 1935, Plus Power of Appointment on or After June 25, 1935. Should any person receive property pursuant to a complete inter vivos transfer (see Section 13304.1), made on or after July 27, 1917, but prior to June 25, 1935, and on or after the latter date receive from the same transferor a power of appointment subject to the Inheritance Tax Law over other property, the specific exemption in force at the time of the second transfer being different from that in force at the time of the first:
(1) General Power of Appointment. If the power is general in nature, or if it is limited in nature but the donee may use or otherwise receive benefit from the property subject to the power, the value of the property subject to the power is aggregated with the value of the property transferred inter vivos, and one exemption is allowed on the whole in accordance with Regulations 13801-13804(c)(3).
(2) Limited Power of Appointment. If the power is limited in nature, and the donee cannot use or otherwise receive benefit from the property subject to the power, an exemption is allowed on the property transferred inter vivos, but none of the property subject to the power, unless the exemption allowed on the property transferred inter vivos exceeds the amount of the latter, in which case the surplus will be allowed against the property subject to the power. The exemption applicable is the one in effect at the date of the transfer inter vivos.
Note: As to the computation of tax where the same person is given a power of appointment together with an outright gift of other property, see Section 13408.1.
NOTE

Reference: Section 13801, Revenue and Taxation Code.
§13805. California Marital Exemption or Exclusion.
Note     •     History

(a) In General. All of the property transferred to the spouse of a decedent who died on or after January 1, 1981 is excluded from the inheritance tax, except where the spouse receives a limited power of appointment over any portion or all of the decedent's property. The spouse of a decedent who died on or after January 1, 1976 and before January 1, 1981, is entitled to a marital exclusion and the spouse of a decedent who died on or after April 26, 1950 and before January 1, 1976, is entitled to a marital exemption, either of which applies with respect to property received by the spouse from the decedent pursuant to any transfer subject to the Inheritance Tax Law equal in amount to one-half of the clear market value of the decedent's separate property. However, as to decedents who died on or after January 1, 1976 and before January 1, 1981, the exclusion will not apply with reference to separate property which has been converted from community or quasi-community property (see Revenue and Taxation Code Section 13805(b) as amended and effective January 1, 1976).
(b) Marital Exclusion as to Decedents Who Died on or after January 1, 1981. All of the property transferred to the spouse of a decedent who died on or after January 1, 1981 is excluded from inheritance tax, except that if a limited power of appointment over any portion or all of the decedent's property is given to the spouse of the decedent, the value of such property is subject to the tax. Where a limited power of appointment is given by a decedent to the decedent's spouse, the value of any interest given other than the limited power of appointment itself is excluded from the tax. For example, if a surviving spouse receives a life estate plus a general power of appointment over the remainder in one-half of the decedent's estate and a life estate plus a limited power of appointment over the remainder in the other one-half, the value of the life estate and general power of appointment in one-half of the estate and the value of the life estate in the other one-half are excluded and the value of the remainder in the one-half of the estate subject to the limited power of appointment is subject to the tax.
(c) Determination of Amount of Marital Exclusion or Exemption as to Decedents Who Died Before January 1, 1981. The exemption or exclusion requires the calculation of the following two factors the lower of which is the dollar amount allowable:
(1) One-half of the clear market value of the decedent's separate property, and
(2) The amount of property received by the surviving spouse which is not excluded (not excluded as community or quasi-community property, the insurance exclusion, etc.)
There is no limitation on the form of transfer to the surviving spouse in order to include the transfer in the calculation of factor (2). Thus life estates are counted in determining the amount of property taken by the surviving spouse.
As to computation of the marital exemption or exclusion involving proceeds of insurance on the life of a deceased spouse payable to the surviving spouse, see Sections 13724.1 and 13724.2.
(d) Allowance of Exclusion as to Decedents Who Died on or After January 1, 1976 and Before January 1, 1981. With reference to transfers by decedents who died on or after January 1, 1976 and before January 1, 1981, the amount determined under (c) above is excluded from the sum of net transfers subject to the Inheritance Tax Law and passing to the surviving spouse before application of the specific spousal exemption or tax rate brackets, thus reducing the amounts otherwise taxable in the higher tax rate brackets. The provisions of subdivision (c) may be illustrated by the following example: 
EXAMPLE. A married person died in 1976 leaving an estate which consisted entirely of separate property having a clear market value of $150,000 to the surviving spouse. One-half of the separate property ($75,000) is excluded from the tax. The balance of $75,000 is taxable subject to the $60,000 specific exemption (Revenue and Taxation Code Section 13801). The $60,000 specific exemption is applied to the first and second rate brackets as to $50,000 and to $10,000 in the third rate bracket leaving $15,000 taxable at the third bracket rate:
$150,000--Separate property passing to spouse
    75,000--Marital exclusion (Revenue and Taxation Code Section       13805, effective January 1, 1976)
    60,000--Specific exemption (Revenue and Taxation Code Section       13801, effective January 1, 1976)

    15,000--Taxable at 6 percent (third rate bracket) 	= $900

	Total Tax $900
(e) Deduction of Marital Exemption as to Decedents Who Died Prior to January 1, 1976. The marital exemption of surviving spouses of decedents who died prior to January 1, 1976, and on or after April 26, 1950 is deductible from lower tax rate brackets pursuant to Revenue and Taxation Code Section 13403 as then applicable which requires the property in excess of the exemption to be taxed in the rate brackets in which it would have been taxed had there been no exemption. These provisions may be illustrated by the following example: 
EXAMPLE. A married person died in 1974 leaving an estate which consisted entirely of separate property having a clear market value of $150,000 to the surviving spouse. The marital exemption of one-half the separate property ($75,000) and the $5,000 specific exemption (Revenue and Taxation Code Section 13801 prior to January 1, 1976) are applied to the first and second rate brackets as to the first $50,000 of the total exemptions allowable. The balance of the allowable exemptions ($30,000) is applied to the third rate bracket leaving $20,000 taxable in the third rate bracket and $50,000 taxable in the fourth rate bracket:
$150,000--Separate property passing to spouse
    75,000--Marital exemption (Revenue and Taxation Code Section       13805 prior to January 1, 1976)
      5,000--Specific exemption (Revenue and Taxation Code Section       13801 prior to January 1, 1976)

    20,000--Taxable at 6% (third rate bracket) = 	$1,200

    50,000--Taxable at 8% (fourth rate bracket) = 	4,000

	Total Tax $5,200
(f) Exclusion Inapplicable to Separate Property Converted from Community or Quasi-Community Property.
(1) For the purpose of Revenue and Taxation Code Section 13805(b) applicable to decedents who died on or after January 1, 1976 and before January 1, 1981, “conversion” includes any transaction or agreement between spouses which transforms property from community property or quasi-community property (including property subject to Probate Code Section 201.5) into a separate property status other than by gift from one spouse to another. The following are examples of “converted” property:
(A) A partition or equal division of community property or quasi-community property (whether by undivided shares or by division in the agreement so that each spouse receives definite assets of total equal value);
(B) A transfer of property from community property or quasi-community property into another form of co-ownership, wherein the surviving spouse can claim by contribution (other than under Revenue and Taxation Code Section 13672); or otherwise that the property is other than community property or quasi-community property;
(C) An agreement (either before or after marriage) that future earnings or acquisitions which would otherwise be community property or quasi-community property shall be shared by the spouses as their separate property;
(D) A change in form of ownership that results in the rents, issues and profits therefrom being held as separate property, which, but for the change would have been community or quasi-community property;
(E) Property which is “converted” within the meaning of Revenue and Taxation Code Section 13805(b) includes not only the property so converted, but also property acquired by the decedent in exchange (by one transaction or a series of transactions) for such separate property acquired by conversion, and includes property which was converted before or after January 1, 1976.
(2) If the value of the separate property acquired by the decedent as a result of a conversion (as provided in paragraph (1) above) did not exceed the value of the separate property thus acquired by the surviving spouse, the entire value of such separate property thus acquired by the decedent and its proceeds including rents, issues and profits shall be considered, for the purpose of Revenue and Taxation Code Section 13805(b), to be converted property not qualifying for marital exclusion under Revenue and Taxation Code Section 13805(b). If there is an unequal division so that one spouse receives more than one-half of the property which was transferred from community or quasi-community property into separate property, property held by each spouse is treated as converted property to the extent that the values (as of the date of the transfer) are equal. 
EXAMPLE (1). At the date of conversion, spouses divided $300,000 of community property (or quasi-community property) equally, $150,000 each. At the date of death, the deceased spouse's interest is valued at $180,000. The $180,000 is converted property and does not qualify for the marital exclusion. 
EXAMPLE (2). At the date of conversion, spouses divided $400,000 of community property (or quasi-community property) giving the deceased spouse $300,000 and the surviving spouse $100,000, the values were the same at the date of death. Therefore, the converted property is $100,000 and $200,000 qualifies for the marital exclusion which will be a maximum of $100,000.
(3) The exclusion provided under Revenue and Taxation Code Section 13805(a) is not available to a conversion of quasi-community property, including property subject to Probate Code Section 201.5, irrespective of whether the deceased spouse or the surviving spouse was the acquirer within the meaning of Probate Code Section 201.5. Therefore, if either spouse makes a transfer of quasi-community property (as defined in Revenue and Taxation Code Section 15300) so as to effect a conversion as provided in paragraphs (1) and (2) above, the one-half held by the decedent as his or her share of such property shall be treated as converted property.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 13805, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
Article 5.1. Charitable Exemption
§13841. Transfers to State of California.
Note

Transfers to the State of California include transfers to any department, board, commission, or other agency of the State.
NOTE

Reference: Section 13841, Revenue and Taxation Code.
§13841.1. Transfers to United States.
Note

Transfers to the United States include transfers to any department, board, commission, or other agency of the United States. 
NOTE

Reference: Section 13841, Revenue and Taxation Code.
§13841.2. Transfers to Public Corporations.
Note

Transfers to public corporations include transfers to any county, city and county, city, or district of this State; to any housing authority created pursuant to the “Housing Authorities Law” of California; to the University of the State of California; and to the State Bar of California.
NOTE

Reference: Section 13841, Revenue and Taxation Code.
§13842. Charitable Organization.
Note

An organization will ordinarily be considered to be charitable in character if it is one organized and existing for the principal purpose of promoting the welfare of mankind at large, or of a community, or of some class forming a part of it indefinite as to numbers and individuals, and operates without pecuniary profit or gain to its incorporators, shareholders, or members. Among other organizations that commonly fall in this category are the American National Red Cross; the Boy Scouts of America; and religious, social, educational, recreational, and cemetery nonprofit corporations organized pursuant to Division 2 of Title 1 of the Corporations Code.
NOTE

Reference: Section 13842, Revenue and Taxation Code.
§13842.1. Charitable Transfer Generally.
Note

In general, a charitable transfer includes any transfer for the benefit of an indefinite number of unnamed persons and designed to do any of the following:
(a) Bring them under the influence of religion or education.
(b) Relieve them from disease or suffering.
(c) Assist them to establish themselves in life.
(d) Erect or maintain public buildings or works.
(e) Otherwise lessen the burdens or make better the conditions of the general public or some class of the general public.
NOTE

Reference: Section 13842, Revenue and Taxation Code.
§13842.2. Religious Charitable Transfer.
Note

A transfer to or for a conceded and established religious organization for any of its purposes will generally be considered as charitable in nature. Such a transfer may be in the form of a gift for the beautification or maintenance of the organization's place of worship, for the maintenance of a cemetery operated by it, for the purchase of equipment, or for use in missionary purposes.
NOTE

Reference: Section 13842, Revenue and Taxation Code.
§13842.3. Transfer for Care of Cemetery Plot.
Note

A transfer to an individual in trust for use in caring for the transferor's burial plot is not a charitable transfer. On the other hand, a transfer or contribution to a private cemetery organization in California for deposit in the latter's perpetual or special care fund, and for use in caring for the transferor's burial plot located within the organization's cemetery, or for use in caring for the transferor's and any other person's burial plot located within the cemetery, is a charitable transfer.
NOTE

Reference: Section 13842, Revenue and Taxation Code.
§13842.4. Educational Charitable Transfer.
Note

A transfer to or for an institution established for the purpose of advancing the learning or education of an indefinite and undetermined group of people, and not operated for private gain, is ordinarily charitable in nature. The charitable character of the transfer is not vitiated by the fact that the institution may charge tuition, if its income from such source is used for its support and is not diverted to private purposes.
Transfers for the founding of public institutions of learning, for providing scholarships for worthy young men and women, for the establishment of university chairs, and for the maintenance of public libraries are all charitable in nature.
NOTE

Reference: Section 13842, Revenue and Taxation Code.
§13842.5. Transfers for Indigent and Dependent People.
Note

Commonly within the category of charitable transfers are transfers for the use of widows and orphans, transfers for placing and maintaining free beds in hospitals for deserving sick people in indigent circumstances, transfers to orphan asylums, and transfers to public institutions for the blind.
NOTE

Reference: Section 13842, Revenue and Taxation Code.
§13842.6. Transfers for Benefit of Animals.
Note

Charitable transfers are not limited to those for the benefit of mankind, but may also take form as transfers for the benefit of animals, as, for example, to prevent cruelty to them.
NOTE

Reference: Section 13842, Revenue and Taxation Code.
§13842.7. Transfer for Promotion of Political Purposes.
Note

A transfer for the promotion of political purposes may be charitable in nature if the ends sought are not opposed to good morals and can be attained by peaceable means, and not by war, riot, or revolution. However, the charitable exemption is not applicable if the transfer is made to an organization a substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation.
NOTE

Reference: Section 13842, Revenue and Taxation Code.
§13842.8. Proof Required.
Note

Any person who claims a charitable exemption must submit such documents or evidence to the State Controller or the inheritance tax referee as may be requested by either of them.
NOTE

Reference: Section 13842, Revenue and Taxation Code.
Article 5.2. Intangibles Exemption
§13851. Nature, Scope and Amount.
Note

A transfer of intangible personal property subject to the Inheritance Tax Law by a nonresident transferor (see Section 13303.2(d)), is exempt from the Inheritance Tax Law in the amount of the property transferred if the transferor at the time of his death was a resident of a foreign state or country which then imposed a legacy, succession, or death tax in respect to the intangibles of its own residents, but either:
(a) Did not impose such a tax in respect to intangible personal property of residents of this State; or
(b) Had a reciprocity provision in its law exempting from its tax the intangibles of nonresidents of other jurisdictions whose laws, in turn, contain a similar exemption.
It will be noted that intangible personal property belonging to a nonresident transferor residing in the United States is not subject to the Inheritance Tax Law.
NOTE

Reference:Section 13851, Revenue and Taxation Code.
§13851.1. Proof Required.
Note

If a court proceeding to determine the inheritance tax is pending, any person who claims an intangibles exemption must file a declaration with the inheritance tax referee on form IT-2, entitled “Declaration Concerning Residence.” If no court proceeding to determine the tax is pending, the claim must be supported by an affidavit on form IT-23, entitled “Residence Affidavit and Request for Consent to Transfer,” and an affidavit on form IT-23A, entitled “Rider to Be Attached to Residence Affidavit and Request for Consent to Transfer, Form IT-23, . . . ,” if decedent was a nonresident of the United States, filed with the Inheritance Tax Division of the Controller's office in Los Angeles, Sacramento, or San Francisco. Copies of the forms may be obtained from the Inheritance Tax Division.
NOTE

Reference: Section 13851, Revenue and Taxation Code.
§13851.2. Foreign State or Country.

For the purpose of the Inheritance Tax Law the term “foreign state or country” means any jurisdiction other than one embraced within the United States.
Article 5.3. Pension Exemption
§13880. Pension Exclusion.
Note

Public retirement system pensions, retirement allowances, optional benefits and other rights and the right of any person, whether the decedent or not, are exempt from the tax imposed by the Inheritance Tax Law. “Public retirement system” includes United States federal and other states of the United States, but does not include persons not directly employed by such government. “Pensions, retirement allowances and optional benefits” shall include amounts contributed by the employee to public retirement systems, plus the increase and earnings of such contributions.
NOTE

Reference 13880, Revenue and Taxation Code.
Article 6. Valuation
§13951. Market Value.
Note

The value of each item of property included in any transfer subject to the Inheritance Tax Law is ordinarily the market value of the property on the date of the transferor's death. “Market value,” as a general rule, is the price that a willing buyer would pay to a willing seller of property, neither being under any compulsion to buy or sell.
If there is more than one unit of property included in a transfer, the market value of the whole will be determined by ascertaining the market value on the date of the transferor's death of each individual unit. In the case of a gift of stocks or bonds, each stock or bond will be treated as an individual unit.
All relevant facts and elements of value as of the date of the transferor's death will be considered in the determination of value. Depreciation or appreciation in value subsequent to the date of death are not relevant factors and will not be considered.
NOTE

Reference: Section 13951, Revenue and Taxation Code.
§13951.1. Real Property--In General.
Note

The market value of real property for inheritance tax purposes will depend upon all the facts and circumstances in each case. In making the valuation all relevant and competent evidence will be given consideration.
NOTE

Reference: Section 13951, Revenue and Taxation Code.
§13951.2. Local Assessed Value.
Note

Unless it represents the actual market value of the property, the assessed value of real property for ad valorem taxation will not be accepted as the value thereof for inheritance tax purposes.
NOTE

Reference: Section 13951, Revenue and Taxation Code.
§13951.3. Securities--In General.
Note

The value of stocks or bonds is, generally, the market value per share or bond on the date of the transferor's death.
NOTE

Reference: Section 13951, Revenue and Taxation Code.
§13951.4. Listed Securities and Unlisted Securities Traded on Open Market.
Note

(a) Selling Prices.
In the case of stocks or bonds which have a market, on a stock exchange, in an over-the-counter market, or otherwise, the mean between the highest and lowest quoted selling prices on the date of the transferor's death will be deemed the market value per share or bond.
If there were no sales on the date of the transferor's death, but there were sales on dates within a reasonable period both before and after the date of death, the market value is determined:
(1) By taking the means between the highest and lowest quoted selling prices on the nearest date before and the nearest date after the date of death;
(2) By then prorating the difference between such mean prices to the date of death, considering only the respective numbers of trading days between the selling dates and the date of death in such proration; and
(3) By finally adding or subtracting, as the case may be, the prorated portion of the difference to or from the mean price on the nearest date before the date of death. For example, assume that the date of death is Friday, June 15, that sales of the stock nearest such date occurred two trading days before (Wednesday, June 13) and three trading days after (Wednesday, June 20), and that on these days the mean sale prices per share were $10 and $15, respectively. Dividing the difference between the mean sale prices ($5) by the number of trading days before and after the date of death (2 + 3) gives $1 per trading day. The portion of the difference attributable to the period from the nearest date before the date of death to the date of death (2 x $1) is $2. This amount added to the mean price on the nearest date before the date of death ($10) equals $12. Accordingly, $12 will be taken as representing the market value of a share of the stock on the date of death. If, instead, on June 13 and June 20 the mean sale prices per share were $15 and $10, respectively, $13 will be taken as representing the market value of a share of the stock on the date of death. As another example, assume that the transferor died on Sunday, October 7, and that Saturday and Sunday were not trading days. If sales of stock occurred one trading day before (Friday, October 5) at a mean sale price per share of $20 and one trading day after (Monday, October 8) at a mean sale price per share of $23, then the market value per share of stock as of the date of death is $21.50.
(b) Bid and Asked Prices.
If the provisions of subsection (a) of this regulation are inapplicable because actual sales are not available during a reasonable period beginning before and ending after the date of death, the market value may be determined by taking the mean between the bona fide bid and asked prices on the date of death, or if none: 
(1) By taking the means between the bona fide bid and asked prices on the nearest date before and the nearest date after the date of death, if both such nearest dates are within a reasonable period of the date of death;
(2) By then prorating the difference between such mean prices to the date of death, considering only the respective numbers of trading days between such nearest dates and the date of death in such proration; and
(3) By finally adding or subtracting, as the case may be, the prorated portion of the difference to or from the mean price on the nearest date before the date of death.
(c) Incomplete Selling Prices or Bid and Asked Prices.
If the provisions of subdivisions (a) and (b) of this regulation are inapplicable because no actual sale prices or bona fide bid and asked prices are available on a date within a reasonable period before the date of death, but such prices are available on a date within a reasonable period after the date of death, or vice versa, then the mean between the highest and lowest of such sale prices or between such bid and asked prices may be taken as the market value.
(d) Securities Listed on More Than One Exchange.
If a stock or bond is listed on more than one exchange, the records of the exchange where the stock or bond is principally dealt in should be employed in ascertaining market value.
NOTE

Reference: Section 13951, Revenue and Taxation Code.
§13951.5. Additional Factors in Valuation of Listed and Traded Securities.
Note

In any case in which it is established that the value per share or bond on the basis of selling or bid and asked prices does not reflect the market value of a security, other relevant facts and elements of value will also be considered in determining its market value. A case of this kind would include one in which the sale of a listed stock on the date of the transferor's death was made at a price arrived at on the basis of erroneous, false, and misleading information concerning the affairs and financial condition of the issuing corporation.
The so-called “blockage rule” is not recognized in determining the value of securities for inheritance tax purposes.
NOTE

Reference: Section 13951, Revenue and Taxation Code.
§13951.6. Untraded and Closely Owned Securities.

(a) The value of corporate or other bonds not traded on an open market is usually arrived at by giving consideration to the security behind the bonds, the interest yield, the date of maturity, and other relevant factors.
The value of shares of closely held stock is usually arrived at by first ascertaining the net worth (the excess of the assets, including good will, if any, over liabilities) of the corporation as a going business, and then assigning to each share its proportion of such worth.
In determining net worth the tangible assets of the business in question should be valued at their market value to a going concern, and not at their cost to the particular business nor at their book value.
(b) Among other factors that will be considered in the valuation of closely held stock are the following:
(1) The period of time that the issuing corporation has been in existence and its position in the trade.
(2) The nature of the corporation.
(3) The operating history of the corporation and, particularly, its earnings over a reasonable period of time.
(4) The balance sheet of the corporation.
(5) The standard of earnings maintained by concerns engaged in similar lines of endeavor.
(6) The strength and danger of competition, both existing and potential.
(7) The management and personnel.
(8) The effect of possible governmental regulation.
(9) The present and future requirements of the corporation in the matter of new land, buildings, or equipment.
(10) Current business policy.
(11) Dividend payment history.
(12) The prices paid on private sales of the shares to persons who were in a position to know their value.
(13) The prospects for future earnings.
§13951.7. Good Will--General Method of Valuing.
Note

Unless the facts and circumstances of a particular case require the use of a different method, the valuation of good will is arrived at as follows:
(a) Determine the total amount of assets used in the business, other than good will, patents, trademarks, copyrights, and the like. 
(b) Determine the liabilities of the business and deduct the amount thereof from the sum determined pursuant to subdivision (a).
(c) Determine what percentage of the difference determined pursuant to subdivision (b) represents a fair return thereon (in the absence of evidence to the contrary, 15 percent thereof will ordinarily be considered a proper percentage of return), and then multiply the amount of such difference by the percentage determined. The product will represent the amount of a fair return.
(d) Determine the average net profit of the business for a reasonable period immediately prior to the date of the transferor's death. Five years will ordinarily represent a “reasonable period.”
(e) Deduct the amount of the fair return determined pursuant to subdivision (c) from the average net profit.
(f) Determine the “number of years purchase period.” By this is meant the number of years after a sale of the business for which a buyer, as part of the purchase price, would pay the seller the average net profit of the business. Unless the nature and character of the business in any particular case require a different figure, the number of years purchase period will be considered to be five years.
(g) Multiply the difference between the amount of fair return and the average net profit, as determined pursuant to subdivision (5), by the number of years purchase period. The product will constitute the amount of good will.
NOTE

Reference: Section 13951, Revenue and Taxation Code.
§13951.8. Other Factors Considered in Valuing Good Will.
Note

Among other factors to be considered in the valuation of the good will of a business are those listed in subdivisions (1) to (13) of Section 13951.6.
NOTE

Reference: Section 13951, Revenue and Taxation Code.
§13951.9. Insurance.
Note

The value of life, accident, or war risk insurance is the full amount of the proceeds thereof subject to the Inheritance Tax Law (see Sections 13722 through 13724.1 and Revenue and Taxation Code Sections 13721 through 13724 and 13861).
NOTE

Reference: Section 13951, Revenue and Taxation Code.
§13951.10. Notes and Accounts Receivable.
Note

The value of a note or account receivable, whether secured or unsecured, is presumed to be its face value plus accrued interest, if any, to the date of the transferor's death. A lower value may be established by the submission of satisfactory proof.
NOTE

Reference: Section 13951.8, Revenue and Taxation Code.
§13951.11. Interest in Business.
Note

In determining the value of any business or interest therein, a fair appraisal as of the date of the transferor's death should be made of all assets of the business, both tangible and intangible, including goodwill, and the business or interest therein should be given a net value equal to the amount which a willing purchaser, whether an individual or a corporation, would pay therefor in view of the new value of the assets of the business and its demonstrated earning capacity.
All factors relative to the valuation of other property, if applicable, will be considered in determining the valuation of a proprietary or partnership interest in a business. All evidence bearing upon such valuation should be submitted to the State Controller or the inheritance tax referee, including copies of reports in any case in which examinations of the business have been made by accountants, engineers, or other technical experts as of or near the date of the transferor's death.
NOTE

Reference: Section 13951, Revenue and Taxation Code.
§13951.12. Patent, Trademark, or Copyright.
Note

The value of a patent, trademark, or copyright is usually the present worth of the estimated future earnings thereof.
NOTE

Reference: Section 13951, Revenue and Taxation Code.
§13951.13. Growing Crop.
Note

Among other factors to be considered in the valuation of a growing crop are the following:
(a) The probable market value of the crop when harvested.
(b) The probable cost of producing and marketing the crop.
(c) The price, if any, paid at or about the date of the transferor's death for futures in the same kind of crop.
NOTE

Reference: Section 13951, Revenue and Taxation Code.
§13952. Limited Estates, Future Estates, Contingent Estates, Annuities (Other Than Annuity Contracts)--In General.
Note

The value of a future, contingent, or limited estate, income, or interest in property is generally the present value or worth of such estate, income, or interest at the date of the transferor's death. In this connection, the Inheritance Tax Law specifically provides that such present value or worth is to be determined in accordance with the standards of mortality and values set forth in the United States Life Tables: 1959-1961, published by the United States Department of Health, Education and Welfare, Public Health Service, and the rate of interest used in computing the present value of the estate, income or interest is 6 percent per annum compounded annually. In determining the present value or worth as of the date of the transferor's death of a future, contingent, or limited estate, income or interest, other than an annuity in a fixed amount, the yearly income, or the annual value of the use or income, of the estate, income or interest, is considered equivalent to 6 percent of the appraised value of the property upon which the estate, income or interest is based.
A single life annuity table at 6 percent showing the present value or worth of an annuity, a life estate and a remainder interest of $1 due at the end of each year during the life of a male person of a specified age and of $1 due at the death of a male person of a specified age, respectively, is set forth in Section 13953 as Table A(1). Table A(2) shows the present value or worth at 6 percent of an annuity, life estate and a remainder interest of $1 due at the end of each year during the life of a female person of a specified age and the present value or worth of $1 due at the death of a female person of a specified age, respectively. The present value or worth at 6 percent of an annuity for a term certain, and income interest for a term certain, and a remainder interest postponed for a term certain is set forth in Section13953 as Table B.
In the case of a transfer of the character above set forth made by a transferor dying on or after November 10, 1969, but prior to January 1, 1975, the present value or worth thereof is to be determined by the United States Life Tables and Actuarial Tables 1939-1941, Table 38, published by the Bureau of the Census of the United States Department of Commerce, and the rate of interest used in computing the present value of the estate, income or interest is 3 1/2 percent per annum compounded annually. In such a case the yearly income or annual value of the use or income of an estate or interest is 3 1/2 percent of the appraised value of the property upon which the estate or interest is based.
A single life annuity table at 3 1/2 percent showing the present value or worth of an annuity, a life estate and a remainder interest of $1 due at the end of each year during the life of a person of a specified age and of $1 due at the death of a person of a specified age, respectively, is set forth in Section 13953.1 as Table C. The present value or worth at 3 1/2 percent of an annuity for a term certain, and income interest for a term certain, and a remainder interest postponed for a term certain is set forth in Section 13953.1 as Table D.
In the case of a transfer of the character above set forth made by a transferor dying on or after July 1, 1945, but prior to November 10, 1969, the present value or worth thereof is to be determined by the Actuaries Combined Experience Tables of Mortality, save that the rate of interest used shall be 4 percent per annum; and, the yearly income or annual value of the use or income of an estate or interest is 4 percent of the appraised value of the property upon which the estate or interest is based.
In a case of a transfer of the character above set forth made by a transferor dying prior to July 1, 1945, the value thereof is to be determined by the Actuaries Combined Experience Tables of Mortality, save that the rate of interest used shall be 5 percent per annum; and, the yearly income or annual value of the use or income of an estate or interest is 5 percent of the appraised value of the property upon which the estate or interest is based.
It is assumed in the illustrative computations which follow that the transfer was made on or after January 1, 1975, and the 6 percent tables are therefore used.
CAUTION: Tables A(1), A(2) and B, contained in Section 13953 are to be used to value interest in property for decedents dying on or after January 1, 1975. Tables C and D, contained in Section 13953.1, are to be used to value interest in property for decedents dying on or after November 10, 1969, but prior to January 1, 1975. Care should be taken to refer to the correct table in each case.
NOTE

Reference: Section 13952, Revenue and Taxation Code.
§13952.1. Estates, Income and Annuities for Life of One Person.
Note

(a) The present value of a life estate in property, the income from which is to be paid annually in an unfixed amount to a single life tenant is computed as follows:
(1) Determine the age and sex of the life tenant as of his or her birthday nearest the date of the transferor's death.
(2) Consult Table A(1) or Table A(2), whichever is appropriate, in Section 13953, and ascertain therefrom the life estate factor (the present value of a life estate of $1 per year) for the life of a person of the same age as the life tenant.
CAUTION: Table A(1) is the appropriate table if the life tenant is a male person. Table A(2) is the appropriate table if the life tenant is a female person. The user of the tables should exercise care to refer to the appropriate table in each case.
(3) Multiply the appraised value of the property by the life estate factor obtained pursuant to step (2). The product will be the present value of the life estate at the time of the transferor's death.
The provisions of subdivision (a) may be illustrated by the following examples:
EXAMPLE (1).
A bequeaths the annual income from $100,000 to B for life, with remainder over to C. B, a male, at the time of A's death is 40 years of age. Table A(1) indicates that the life estate factor is .78923. The present value of B's life estate as of the date of the transferor's death is $78,923 ($100,000 x .78923).
EXAMPLE (2).
A bequeaths the annual income from $100,000 to D for life, with remainder over to E. D, a female, at the time of A's death is 40 years of age. Table A(2) indicates that the life factor is .84281. The present value of D's life estate as of the date of the transferor's death is $84,281 ($100,000 x .84281).
(b) The formula set forth under subdivision (a) is also used in determining the present value of a fixed annual annuity for life, or of a life estate in property the income from which is to be paid annually at the end of each year in a fixed amount to the life tenant, except that in each of such cases the annuity factor in column 2 of Table A(1) or Table A(2), whichever is appropriate, is substituted for the life estate factor in step (2) of the formula and the amount of the annuity or specified income is substituted for the appraised value of the property in step (3) of the formula. The provisions of this subdivision may be illustrated by the following examples:
EXAMPLE (1).
A bequeaths to B, a male, who is 50 years of age at A's death, an annuity of $1,000 per annum for the balance of B's life. As is shown by Table A(1), Section 13953, the present value of an annuity of $1 per year for life to a male person of age 50 is 11.3329. Multiplying this factor by $1,000 results in a product of $11,333, which is the present value of B's annuity.
EXAMPLE (2).
A bequeaths to C, a female, who is 50 years of age at A's death, an annuity of $1,000 per annum for the balance of C's life. As is shown by Table A(2), Section 13953, the present value of an annuity of $1 per year for life to a female person of age 50 is 12.5793. Multiplying this factor by $1,000 results in a product of $12,579, which is the present value of C's annuity.
(c) In determining the present value of a fixed annuity payable at the end of regular intervals of less than one year, the aggregate amount to be paid within a year is first multiplied by the life annuity factor in column 2 of Table A(1) or Table A(2), whichever is appropriate, opposite the number of years in column 1 nearest the age of the person whose life measures the duration of the annuity so as to arrive at the product representing the present value of the annuity payable at the end of each year during the life of that person as of the date of the transferor's death. The product so obtained is then multiplied by whichever of the following adjustment factors is applicable:
(1) 1.0148, if the annuity is payable semiannually.
(2) 1.0222, if the annuity is payable quarterly.
(3) 1.0272, if the annuity is payable monthly.
The provisions of subdivision (c) may be illustrated by the following example:
EXAMPLE.
A bequeaths to B, a male, who is 50 years of age at A's death, an annuity of $1,000 per annum, payable semiannually for the balance of B's life. By reference to Table A(1), the life annuity factor in column 2 opposite 50 years is found to be 11.3329. The aggregate annual amount, $1,000, is multiplied by the life annuity factor, 11.3329, and the product is multiplied by the semiannual adjustment factor of 1.0148. The present value of B's life annuity, payable semiannually, as of the date of the decedent's death is $11,501 ($1,000 x 11.3329 x 1.0148).
Note: If the annuitant is a female person, consult Table A(2), rather than Table A(1).
(d) Fixed annuities payable at the beginning of each period must be distinguished from annuities payable at the end of the annuity period. Thus, if the first payment of an annuity for the life of a person is due at the beginning of the annual, semiannual, quarterly or monthly period, rather than at the end of the period, the present value of the life annuity is the sum of the first payment plus the present value of the life annuity, the first payment of which is not due until the end of the period, as determined in subdivisions (b) and (c) above. The provisions of this subdivision may be illustrated by the following examples:
EXAMPLE (1).
A bequeaths to B, a male, who is 50 years of age at A's death, an annuity of $1,000 per annum for the balance of B's life with the proviso that B be entitled to the first payment of the annuity on the date of A's death. The present value of the annuity payable at the end of each annual payment period for life is $11,333, as determined in Example (1) under subdivision (b) above. The present value of B's life annuity, the first payment of which is due at the beginning of each period is $12,333 ($11,333 + $1,000).
EXAMPLE (2).
A bequeaths to B, a male, who is 50 years of age at A's death, an annuity of $1,000 per annum, payable semiannually for the balance of B's life with the proviso that B be entitled to the first payment of the annuity on the date of A's death. The semiannual amount of the annuity is $500 (1/2 x $1,000). The present value of the annuity payable at the end of each semiannual payment period for life is $11,501, as determined in the example under subdivision (c) above. The present value of B's life annuity, the first payment of which is due at the beginning of each period is $12,001 ($11,501 + $500).
NOTE

Reference: Section 13952, Revenue and Taxation Code.
§13952.2. Estates, Income and Annuities for Joint Lives of Several Persons.
Note

(a) Joint Lives of Two Persons.
If income, an annuity, or an estate is transferred to two persons for their use or enjoyment during their joint lives, the present values of the respective interests of the transferees are computed as follows:
(1) Determine in accordance with Section 13952.1 what the present value of the older transferee's life interest would be if he were the only transferee.
(2) Divide by two the value ascertained pursuant to step (1). The quotient will be the present value of the older transferee's interest in the joint estate.
(3) Determine in accordance with Section 13952.1 what the present value of the younger transferee's life interest would be if he were the only transferee.
(4) Subtract the present value of the elder transferee's single life interest, as determined pursuant to step (1), from the present value of the younger transferee's single life interest, as determined pursuant to step (3).
(5) Add the remainder determined pursuant to step (4) to one-half of the present value of the elder transferee's single life interest determined pursuant to step (1). The sum is the present value of the younger transferee's interest in the joint estate.
The provisions of subdivision (a) may be illustrated by the following example:
EXAMPLE.
A bequeaths to B and C the annual income from a sum of $10,000 for their joint lives, the survivor to enjoy the entire income until his death, with a remainder over to D. At the time of A's death, B, a male, is 40 years of age and C, a female, is 25 years of age. Table A(1) of Section 13953 indicates the life estate factor for a male aged 40 is .78923. The product of this factor multiplied by $10,000 is $7,892, the present value of B's single life estate. One-half of $7,892, or $3,946, is the present value of B's interest in the joint life estate. Table A(2) indicates the life estate factor for the life of a female aged 25 is .92375. The product of this factor multiplied by $10,000 is $9,238, the present value of C's single life estate. The difference between B's and C's single life estate, $1,345, is added to one-half of the present value of B's single life estate ($3,946), resulting in the sum of $5,291, the present value of C's interest in the joint and successive life estate. The value of D's remainder is $762 ($10,000 less the sum of B's and C's joint and successive life interest).
The above computation may be simplified by combining the last two steps, i.e., (4) and (5) of subdivision (a) into one computation in the following manner. After determining the value of B's interest in a joint life estate and the present value of C's single life estate as set forth above (pursuant to steps (1), (2) and (3)), subtract the value of B's interest in the joint life estate ($3,946) from the value of C's single life estate ($9,238). The difference represents C's interest in the joint and successive life estate ($9,238 - $3,946 = $5,292).
(b) Joint Lives of Three Persons.
If income or an estate is transferred to three persons for their use or enjoyment until the death of the last to die of the three persons with a remainder over to a fourth person, the present values of the respective interests of the transferees are computed as follows:
(1) Determine in accordance with Section 13952.1 what the present value of the oldest transferee's life interest would be if he were the only transferee.
(2) Divide by 3 the present value ascertained pursuant to step (1). The quotient will be the present value of the oldest life tenant's interest in the joint life estate as of the date of the transferor's death.
(3) Determine in accordance with Section 13952.1 what the present value of the second oldest transferee's life interest would be if he were the only transferee.
(4) Subtract the present value of the oldest life tenant's single life estate, as determined pursuant to step (1), from the present value of the second oldest life tenant's single life estate, as determined pursuant to step (3) and divide by 2 the difference so obtained. Add the quotient to the present value of the oldest life tenant's interest in the joint life estate, as determined pursuant to step (2). The sum will represent the present value of the second oldest life tenant's interest in the joint and survivorship life estate as of the date of the transferor's death.
(5) Determine in accordance with Section 13952.1 what the present value of the youngest transferee's life interest would be if he were the only transferee.
(6) Subtract the present value of the second oldest life tenant's single life estate, as determined pursuant to step (3), from the present value of the youngest life tenant's single life estate, as determined pursuant to step (5), and add the difference so obtained to the present value of the second oldest life tenant's interest in the joint and successive life estate, as determined pursuant to step (4). The sum will represent the present value of the youngest life tenant's interest in the joint and successive life estate as of the date of the transferor's death.
(7) The present value of the remainder interest in the property is determined simply by subtracting the present value of the youngest life tenant's normal life estate, as determined pursuant to step (5), from the appraised value of the property.
The provisions of this subdivision (b) may be illustrated by the following example:
EXAMPLE.
A bequeaths to B, a male; C, a male; and D, a female, the annual income from a sum of $100,000 for their joint lives, the survivor to enjoy the entire income until his death, with a remainder over to E. At the time of A's death the ages of B, C and D are, respectively, 70, 60 and 50. The present value of B's single life interest is $41,294 (.41294 x $100,000). One-third of this sum, or $13,765, is the present value of B's interest in the joint estate. The present value of C's single life interest is $55,052 (.55052 x $100,000). The difference between this sum and $41,294 (the value of B's single life estate) is $13,758. One-half of $13,758, or $6,879, is added to $13,765, resulting in a sum of $20,644, the present value of C's interest in the joint estate. The present value of D's single life interest is $75,476 (.75476 x $100,000). The difference between this sum and $55,052 (the value of C's single life estate) is $20,424. This latter sum is added to $20,644 (the value of C's interest in the joint estate) resulting in a sum of $41,068, the present value of D's interest in the joint estate. The computation may be proven by adding the respective interest of the several joint and successive life tenants. The sum should equal the value of a single life estate for the youngest life tenant ($13,765 + $20,644 + $41,068 = $75,477). The sum varies by $1 due to rounding to the nearest dollar. The value of E's remainder interest is $24,523 ($100,000 less the sum of B's, C's and D's joint and successive life interests).
NOTE

Reference: Section 13952, Revenue and Taxation Code.
§13952.3. Life Estate, Successive Life Estate and Remainder.
Note

If income or an estate is transferred to one person for his use or enjoyment during his life and upon death of that life tenant to another person for the latter's use or enjoyment for life, and upon death of the latter life tenant the remainder is transferred to a third person, the present values of the respective interests of the three persons as of the date of the transferor's death are computed as follows:
(a) Determine in accordance with Section 13952.1 the present value of the primary life tenant's life estate.
(b) Determine in accordance with Section 13952.1 the present value of the secondary life tenant's normal life estate as though he or she were the only life tenant.
(c) The present value of the secondary life tenant's successive life estate in the property as of the date of the transferor's death is determined by subtracting the present value of the primary life tenant's life estate, as computed pursuant to step (a), from the secondary life tenant's single life estate, as computed to step (b). 
(d) The present value or worth of the remainder interest in the property is determined simply by subtracting the present value of the secondary life tenant's single life estate, as obtained pursuant to step (b), from the appraised value of the property.
The provisions of this regulation may be illustrated by the following example:
EXAMPLE.
Decedent bequeaths the annual income from $300,000 in trust to A, a female, for life. Upon the death of A the annual income is payable to B, a male, for life, and upon B's death the remainder payable to C. At the date of death, the ages of A and B, respectively, are 66 and 42. Table A(2) of Section 13953 indicates the life estate factor in column 3 for a female age 66 is .54211. The present value of A's life estate, as of the date of decedent's death, is $162,633 ($300,000 x .54211). Table A(1) indicates the life estate factor for a male age 42 is .76967. The present value of B's single life estate as of the date of the decedent's death is $230,901 ($300,000 x .76967). The present value of B's successive life estate as of the date of the decedent's death is $68,268 ($230,901 - $162,633). The present value of C's remainder interest in the property as of the date of decedent's death is $69,099 ($300,000 - $230,901).
NOTE

Reference: Section 13952, Revenue and Taxation Code.
§13952.4. Estates, Income and Annuities for Period of Years.
Note

(a) The present value of an estate in property, the income from which is to be paid annually in the unfixed amount for a term of years is computed as follows:
(1) Consult Table B of Section 13953, and ascertain therefrom the income factor for a term of years in column 3 opposite the figure in column 1 representing the number of years for which the income is to continue.
(2) Multiply the appraised value of the property by the income factor obtained pursuant to step (1), which will give the present value of the estate for the term of years as of the date of the transferor's death.
(3) Present worth of the remainder interest in the property is determined simply by subtracting the present value of the estate for the term of years, as determined pursuant to step (2), from the appraised value of the property.
The provisions of this subdivision may be illustrated by the following example:
EXAMPLE.
Decedent bequeaths to A the possession, use and enjoyment of real property for seven years. At the end of the seventh year, the property is to be transferred to B. At decedent's date of death, A is 60 years of age and the real property is appraised at $50,000. By reference to Table B, the income factor for a term of years in column 3 opposite seven in column 1, representing the number of years for which the income is to continue, is found to be .334943. The present value of A's estate for the seven years is $16,747 ($50,000 x .334943). The present worth of B's remainder interest in the property as of the date of the decedent's death is $33,253 ($50,000 - $16,747).
(b) The formula set forth under subdivision (a) is also used for determining the present value of a fixed annual annuity payable for a term certain, except that in such case the annuity for a term certain factor in column 2 of Table B is substituted for the income factor in step (1) of the formula and the annuity is substituted for the appraised value of the property in step (2) of the formula. The provisions of this subdivision may be illustrated by the following example:
EXAMPLE.
Decedent bequeaths to A an annuity of $1,000 a year for seven years. Table B of Section 13953 indicates the annuity factor in column 2 opposite seven years is 5.5824. The present value of the annuity certain as of the date of the decedent's death is $5,582 ($1,000 x 5.5824).
(c) In determining the present value of a fixed annuity for a term certain, payable at regular intervals of less than one year, the aggregate amount to be paid within a year is first multiplied by the appropriate annuity factor for a term certain, in column 2 of Table B opposite the number of years in column 1 representing the term for which the annuity is to be paid, to arrive at the product representing the present value of the annuity payable at the end of each year for the term certain. The product so obtained is then multiplied by whichever of the following adjustment factors is applicable:
(1) 1.0148, if the annuity is payable semiannually.
(2) 1.0222, if the annuity is payable quarterly.
(3) 1.0272, if the annuity is payable monthly.
The provisions of subdivision (c) may be illustrated by the following example:
EXAMPLE.
Decedent bequeaths to A an annuity of $1,000 per annum, payable monthly, for a term of seven years. By reference to Table B, the annuity factor in column 2 opposite seven years in column 1 is found to be 5.5824. The aggregate annual amount, $1,000, is multiplied by the term certain annuity factor, 5.5824, and the product is multiplied by the monthly adjustment factor of 1.0272. The present value of A's annuity, payable monthly for a period of seven years, as of the date of the decedent's death is $5,734 ($1,000 x 5.5824 x 1.0272).
(d) If the first payment of a fixed annuity for a term certain is due at the beginning of the annual, semiannual, quarterly or monthly payment period, the present value of the annuity is determined by multiplying together the aggregate amount to be paid within any year, the appropriate annuity factor for term certain shown in Table B and whichever of the following factors is applicable:
(1) 1.0600, if the annuity is payable annually.
(2) 1.0448, if the annuity is payable semiannually.
(3) 1.0372, if the annuity is payable quarterly.
(4) 1.0322, if the annuity is payable monthly.
The provisions of subdivision (d) may be illustrated by the following example:
EXAMPLE.
Decedent bequeaths to A an annuity of $1,000 per annum, payable monthly, for a term of seven years with the proviso that A be entitled to the first payment thereof on the date of death. By reference to Table B, the annuity factor in column 2 opposite seven years in column 1 is found to be 5.5824. The aggregate annual amount, $1,000, is multiplied by the term certain annuity factor, 5.5824, and the product is multiplied by the monthly adjustment factor of 1.0322. The present value of A's annuity, as of the decedent's date of death is $5,762 ($1,000 x 5.5824 x 1.0322).
Thus, fixed annuities for a term certain, payable at the beginning of the annuity period, must be distinguished from both life annuities (see Section 13952.1) and fixed annuities payable at the end of the annuity term.
NOTE

Reference: Section 13952, Revenue and Taxation Code.
§13952.5. Deferred Bequest.
Note

(a) Bequest Payable at Death of Person Other Than Transferee.
If a bequest is payable to a transferee at the death of another person, the present value of the bequest as of the date of the transferor's death is computed as follows:
(1) Determine the age of the person at whose death the bequest is payable as of his birthday nearest the date of the transferor's death.
(2) Consult Table A(1) or Table A(2), whichever is appropriate, in Section 13953, and ascertain therefrom the remainder factor of $1 due at the death of a person of the same age as a person at whose death the bequest is payable.
(3) Multiply the amount of the bequest by the remainder factor determined pursuant to step (2). The product will represent the present worth of the bequest as of the date of the transferor's death.
The provisions of subdivision (a) may be illustrated by the following example:
EXAMPLE: Decedent bequeaths to A, to be paid at the death of X, a female, property having a value of $60,000 at the decedent's date of death. At the decedent's date of death, X is 70 years of age. By consulting Table A(2), the remainder factor in column 4 opposite 70, the number representing X's age, is .52460. This remainder factor multiplied by the appraised value of the property ($60,000) results in a product of $31,476, the present worth of the bequest to A as of the date of the decedent's death.
(b) Bequest Payable at Specified Time in Future.
The present value of a particular sum of money payable at a future date certain is computed as follows:
(1) Consult Table B in Section 13953, and ascertain therefrom the remainder postponed for a term certain factor of $1 payable at the end of the time specified.
(2) Multiply the factor obtained pursuant to step (1) by the amount of the sum payable. The product will be the present worth, as of the date of the transferor's death, of the sum payable at the end of the specified time. The provisions of subdivision (b) may be illustrated by the following example:
EXAMPLE.
Decedent bequeaths to A $10,000 to be paid at the end of five years from the date of his death. By consulting Table B, the factor for remainder postponed for a term certain in column 4 opposite 5 in column 1, representing the number of years at the end of which the bequest is to be paid, is found to be .747258. The factor multiplied by $10,000 results in a product of $7,473, the present value of the bequest as of the date of the decedent's death.
NOTE

Reference: Section 13952, Revenue and Taxation Code.
§13952.6. Present Value of Annuity Exceeding Value of Annuity Fund.
Note

Where the present value of an annuity actually exceeds the amount of the property or fund out of which the annuity is to be paid the present value of the annuity is the amount of the property or fund. This regulation may be illustrated by the following example:
EXAMPLE.
A bequeaths to B, a female, a life annuity of $5,000 per year, payable out of a fund totaling $35,000. B is 65 years of age at A's death. Computed in accordance with 13952-13954(b), the present value of an annuity of $5,000 per year for the life of a female of the age of 65 is $46,503 ($5,000 x 9.3005 = $46,503). Since this exceeds the annuity fund of $35,000, the latter figure will represent the present value of B's annuity.
NOTE

Reference: Section 13952, Revenue and Taxation Code.
§13952.7. Remainder.
Note

The present worth of a remainder is obtained by computing the present worth of the precedent estate or estates and subtracting the amount thereof from the total value of the property involved. The difference will represent the present worth of the remainder.
The present worth of a remainder interest after a life estate may also be obtained by multiplying the appraised value of the subject property by the remainder factor in Table A(1) or Table A(2), whichever is appropriate, of Section 13953 opposite the age of the person possessing the precedent estate. This regulation may be illustrated by the following examples:
EXAMPLE.
A bequeaths the annual income from $100,000 to B for life with remainder over to C. B, a male, at the time of A's death is 40 years of age. By an application of the method set forth in Section 13952.1 for determining the present value of a life estate, B's life interest is found to be $78,923. This latter sum subtracted from $100,000 results in a difference of $21,077, the present value of C's remainder.
EXAMPLE.
Using the same facts as set forth in example immediately above, the remainder factor for a male 40 years of age (the age of the lifetenant) is .21077. The present value of C's remainder interest is $21,077 ($100,000 x .21077).
NOTE

Reference: Section 13952, Revenue and Taxation Code.
§13952.8. Annuity Contract.
Note

The value of an annuity contract issued by a company regularly engaged in the selling of contracts of that character is, ordinarily, the cost of the contract.
It is to be noted that an annuity contract is not a life insurance policy. Consequently, the exemption mentioned in Section 13723 is not allowable on any payment made under any such contract.
NOTE

Reference: Section 13952, Revenue and Taxation Code.
§13952.9. Joint Life and Survivorship Annuity Contract.
Note

(a) Survivor Made No Contribution.
If the survivor made no contribution towards the purchase of the contract, the value of a joint and survivorship contract issued by a company regularly engaged in the selling of contracts of that character is, upon the death of the purchaser annuitant, the present value at the purchaser's death of the annuity payable to the survivor for the balance of his life.
(b) Survivor Made Contribution.
If the survivor made some contribution towards the purchase of the contract, the value of a joint and survivorship contract issued by a company regularly engaged in the selling of contracts of that character is, upon the death of any one of the annuitants, that portion of the present value, at the death of the deceased annuitant, of the annuity payable to the survivor for the balance of his life which bears the same ratio to the total present value as the contribution made by the deceased annuitant bears to the total contributions of both annuitants.
Note: As to the taxation of joint life and survivorship annuities, see Section 13648. 
NOTE

Reference: Section 13952, Revenue and Taxation Code.
§13952.10. Refund Annuity Contract.
Note

The value of a refund annuity contract at the date of the annuitant's death is:
(a) The full amount payable to the beneficiary, if such amount is payable in a lump sum.
(b) The present value at the annuitant's death of the amount payable to the beneficiary, if such amount is payable periodically or in the form of an annuity.
Note: As to the taxation of refund annuities, see Section 13648.1. 
NOTE

Reference: Section 13952, Revenue and Taxation Code.
§13953. Tables.
Note

(a) Tables A(1) and A(2) showing the present value of an annuity, a life estate and a remainder of $1 per year during the life of a person of a specified age, based on United States Life Tables: 1959-1961, published by the United States Department of Health, Education and Welfare, Public Health Service, with interest at 6 percent per annum compounded annually.
CAUTION: The tables immediately following are effective as to estates of decedents dying on or after January 1, 1975. For decedents dying prior to January 1, 1975, but on or after November 10, 1969, refer to Tables C and D, contained in Section 13953.1. For decedents dying prior to November 10, 1969, use Actuaries Combined Experience Tables of Mortality with interest at 4 percent, showing present value of annuity of $1 per year during life of person of specified age, if date of death was on or after July 1, 1945. For decedents dying prior to July 1, 1945, use Actuaries Combined Experience Tables of Mortality with interest at 5 percent, showing present value of annuity of $1 per year during life of person of specified age.

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(b) Table B showing the present value of an annuity for a term certain, income for a term certain and of a remainder interest postponed for a term certain, based on United States Life Tables: 1959-1961, published by the United State Department of Health, Education and Welfare, Public Health Service, with interest at 6 percent per annum.
(Effective as to decedents dying on or after January 1, 1975.)

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(c) Adjustment Factors for Annuities Payable at Regular Intervals of Less Than One Year.
If a life annuity or an annuity certain is payable at the end of semiannual, quarterly, monthly or weekly periods, the following adjustment factors should be used:

Semiannual	 1.0148

Quarterly	 1.0222

Monthly	 1.0272

Weekly	 1.0291
If an annuity for a term certain is payable at the beginning of the annual or other payment period, the following adjustment factor should be used:

Annual	 1.0600

Semiannual	 1.0448

Quarterly	 1.0372

Monthly	 1.0322

Weekly	 1.0303
However, a provision that the income from property is to be paid in semiannual, quarterly, bimonthly, monthly or weekly installments does not affect the value to be assigned to the life interest.
NOTE

Reference: Section 13953, Revenue and Taxation Code.
§13953.1. Decedents with Date of Death on or After November 10, 1969 and Before January 1, 1975.
Note

(a) The tables set forth in this regulation are used to determine the value of a future, contingent or limited estate, income or interest in property in the case of a decedent with a date of death on or after November 10, 1969 and before January 1, 1975.
The value of a future, contingent or limited estate, income or interest in property is generally the present value or worth of such estate, income or interest at the date of death. In this connection, during the period commencing November 10, 1969 and ending December 31, 1974, inclusive, the Inheritance Tax Law specifically provided that such value or worth is to be determined in accordance with the standards of mortality and values set forth in the United States Life Tables and Actuarial Tables 1939-1941, Table 38, published by the Bureau of the Census of the United States Department of Commerce, and the rate of interest used in computing the present value of the estate, income or interest is 3 1/2 percent per annum compounded annually. The law further provided that in determining the present value or worth as of the date of the transferor's death of a future, contingent or limited estate, income or interest, other than an annuity in a fixed amount, the yearly income, or the annual value of the use or income, of the estate, income or interest, was considered equivalent to 3 1/2 percent of the appraised value of the property upon which the estate, income or interest was based.
A single life annuity table of 3 1/2 percent showing the present value or worth of an annuity, a life estate and a remainder interest of $1 due at the end of each year during the life of a person of a specified age and of $1 due at the death of a person of a specified age respectively, is set forth below as Table C. The present value or worth at 3 1/2 percent of an annuity for a term certain, and income interest for a term certain, and a remainder interest postponed for a term certain is set forth below as Table D.
The tables below are to be applied in the same manner as illustrated in Sections 13952.1 through Section 13952.7, above, substituting the factors shown in Table C for the factors from Tables A(1) and A(2), and the factors shown in Table D for the factors from Table B in the illustrations. Note that in the case of decedents with a date of death prior to January 1, 1975, there is no distinction between male and female in valuing an interest measured by the life of a person, or in valuing the remainder interest following a preceding estate measured by the life of one or more persons. Table C applies to male and female alike. Note also that in cases of annuities payable at regular intervals of less than one year, the adjustment factors differ from those which apply in cases of decedents with dates of death on or after January 1, 1975.
United States Life Tables and Actuarial Tables 1939-1941, Table 38, published by the Bureau of the Census of the United States Department of Commerce with interest at 3 1/2 percent per annum compounded annually, showing the present value of an annuity, a life estate and remainder interest of $1 per year during the life of a person of a specified age.
(Effective as to estates of decedents dying on or after November 10, 1969, and before January 1, 1975.)

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(b) United States Life Tables and Actuarial Tables 1939-1941, Table 38, published by the Bureau of the Census of the United States Department of Commerce with interest at 3 1/2 percent per annum showing present value of an annuity for a term certain, income for a term certain and of a remainder interest postponed for a term certain.
(Effective as to estates of decedents dying on or after November 10, 1969, and before January 1, 1975.)

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(c) Adjustment Factors for Annuities Payable at Regular Intervals of Less Than One Year. If a life annuity or an annuity certain is payable at the end of semiannual, quarterly, bimonthly, monthly or weekly periods, the following adjustment factors should be used:

Semiannual	 1.0087

Quarterly	 1.0130

Bimonthly	 1.0145

Monthly	 1.0159

Weekly	 1.0171
If an annuity for a term certain is payable at the beginning of the annual or other payment period, the following adjustment factors should be used:

Annual	 1.0350

Semiannual	 1.0262

Quarterly	 1.0218

Bimonthly	 1.0203

Monthly	 1.0189

Weekly	 1.0177
However, a provision that the income from property is to be paid in semiannual, quarterly, bimonthly, monthly or weekly installments does not affect the value to be assigned to the life interest.
NOTE

Reference: Section 13953, Revenue and Taxation Code.
§13956. Contingent Encumbrances and Contingencies.
Note

(a) In the valuation of any property in which a transferee is given a present right of enjoyment or possession, no allowance will be made on account of any contingent incumbrance on the property, nor on account of any contingency upon the happening of which the transferee's interest might, in whole or in part, be abridged, defeated, or diminished. If, however, the incumbrance or contingency should become effective after the transferee has become possessed, or has entered upon the enjoyment, of the property, and an inheritance tax has been paid, a refund of tax may be secured by the person who paid the tax.
(b) Under proper circumstances, any tax due in respect to the transfer of any property covered by this regulation may be the subject of a compromise, see Revenue and Taxation Code Sections 14191 and 14192.
NOTE

Reference: Section 13956, Revenue and Taxation Code.
§13957. Open-Space Land.
Note

In determining fair market value of open-space land qualified under Revenue and Taxation Code Section 421 (Land Conservation Act), recognition shall be given to the existence of an enforceable restriction under Revenue and Taxation Code Section 422 as one of the factors to be taken into account.
Chapter 1453, Statutes of 1970, provides a temporary statutory exception to fair market value in the case of such land, applicable where the decedent died on or after September 19, 1970 and prior to January 1, 1975, at the option of the personal representative of the estate or transferee of the land provided there are less than five sales of land qualifying as comparable. In that event any such land which is subject to inheritance tax shall be valued by the inheritance tax appraiser for inheritance tax purposes by the identical methods required by Revenue and Taxation Code Sections 423 and 423.5 when County Assessors are valuing open-space land for property tax purposes.
NOTE

Reference: Section 13957, Revenue and Taxation Code.
Article 6.1. Deductions
§13982. Apportionment of Deductions--In General.
Note

If a decedent leaves property to two or more persons, the deductions specified in the Inheritance Tax Law will ordinarily be prorated against the market value of the property to which each such person is entitled, according to the ratio between such value and the market value of all property in the decedent's estate. However, if for any reason the property left to a particular transferee is not chargeable with the payment of the items for which deductions are permissible, no portion of the deductions may be allowed against such property.
NOTE

Reference: Section 13982, Revenue and Taxation Code.
§13982.1. Nonresident Decedent.
Note

Where a nonresident decedent leaves assets in California, the transfer of which is taxable under the Inheritance Tax Law, no deduction is allowed for debts, expenses of administration, or funeral expenses incurred at the place of residence, if the decedent has no creditors in California and his assets at his place of residence are sufficient for the payment of such debts and expenses. If, however, the assets at the decedent's place of residence are insufficient for the payment of the debts and expenses there incurred, such portion of such debts and expenses as is necessarily paid from the California assets is allowable.
NOTE

Reference: Section 13982, Revenue and Taxation Code.
§13983. Unsecured Obligation.
Note

If paid by the decedent's estate or the transferee of the property, the unpaid amount of any bona fide, allowable, and legally enforceable unsecured debt of a decedent existing at the time of his death, together with any interest thereon which had accrued at the time of death, may be deducted from the market value of property transferred by the decedent.
Any tax which is not deductible under Revenue and Taxation Code Section 13987, relating to state, county, and municipal taxes which are a lien against property included in any transfer subject to the Inheritance Tax Law, but which was a personal obligation of the decedent at the date of his death and is paid by the decedent's estate may be deducted as a debt of the decedent under Revenue and Taxation Code Section 13983.
NOTE

Reference: Section 13983, Revenue and Taxation Code.
§13983.1. Secured Obligation.
Note

(a) In General.
If paid by the decedent's estate or the transferee of the property, the unpaid amount of any bona fide, allowable, and legally enforceable debt of a decedent existing at the time of his death, together with any accrued interest thereon at the time of death, which is secured by a mortgage or other lien on any property included in any transfer subject to the Inheritance Tax Law made by the decedent, may be deducted from the market value of the property. A like deduction is permissible for any such obligation not paid by the decedent's estate or the transferee, where the property affected by the mortgage or other lien is distributed to the transferee subject to the mortgage or other lien. A debt of the decedent which is secured by a mortgage or other lien on property situated outside the State of California or on any other property which is not subject to the Inheritance Tax Law is not deductible. Also, a secured obligation which is paid out of mortgage insurance is not deductible.
(b) Decedent Not Personally Liable.
If the decedent was not personally liable at the time of his death for a debt secured by a mortgage or other lien on property transferred by him, no deduction will be allowed for any payment of the debt by the estate or the transferee. However, if the particular property is distributed to the transferee subject to the mortgage or other lien, the unpaid amount of the debt at the date of the decedent's death, together with interest accrued thereon at that time, may be deducted from the market value of the property.
NOTE

Reference: Section 13983, Revenue and Taxation Code.
§13983.2. Joint and Several Obligation.
Note

Ordinarily, only one-half of the amount of the unpaid portion of a joint and several obligation of the decedent and another person is allowable as a deduction in the decedent's estate, where the decedent and such other person received equal benefits from the consideration received for the obligation.
If in fact the decedent was the principal obligor of a joint and several obligation entered into between himself and another, the latter being a mere surety on the obligation, the entire amount of the unpaid portion of the obligation is allowable as a deduction. On the other hand, if the decedent was the surety and the other person the principal obligor, no part of the obligation is ordinarily allowable.
NOTE

Reference: Section 13983, Revenue and Taxation Code.
§13983.3. Contingent Obligation.
Note

A contingent obligation of a decedent is not allowable as a deduction until the contingency occurs.
NOTE

Reference: Section 13983, Revenue and Taxation Code.
§13983.4. Outlawed Obligation.
Note

An obligation of a decedent on which the statute of limitations had run on or prior to the date of the death of the decedent is not allowable as a deduction.
NOTE

Reference: Section 13983, Revenue and Taxation Code.
§13986. Expenses of Funeral and Last Illness.
Note

(a) In General. Except as otherwise indicated in this regulation, funeral and last illness expenses of a decedent are allowable as deductions from the market value of property transferred by the decedent, if:
(1) The expenses were obligations of the decedent or his estate; and
(2) They were paid by the estate or the transferee of the property after the decedent's death.
(b) Last Illness Expenses Paid Prior to Death. If last illness expenses were paid prior to decedent's death out of a survivor's property and there is a probate estate, such expenses are deductible from the probate estate if a claim therefor is filed, allowed, and approved in the estate; otherwise they are not deductible.
If last illness expenses were paid prior to decedent's death out of a transferee's property, and there is no probate estate, they are deductible from transfers to that person.
(c) Funeral Expenses. Funeral expenses include any reasonable expense incurred in keeping with decedent's standard of living for any of the following:
(1) Burial.
(2) A burial plot, either for the decedent alone or for the decedent and members of his family.
(3) A tombstone, monument or other memorial.
(4) Perpetual care of the burial plot.
Funeral expenses paid out of insurance proceeds or from social security benefits which proceeds or benefits are not payable to or included in the estate are not deductible, see Section 13981.
Note: As to the deduction of funeral and last illness expenses of a deceased wife, see Revenue and Taxation Code Section 13986.
NOTE

Reference: Section 13986, Revenue and Taxation Code.
§13987. State and Local Taxes and Assessments--In General.
Note

Except as otherwise indicated in this regulation and Section 13987.1, any tax or assessment levied by the State of California, or by any county, city and county, city, or district thereof, is allowable as a deduction from the market value of the property, if it was a lien at the date of decedent's death against property included in any transfer subject to the Inheritance Tax Law made by the decedent.
Interest on such a tax which accrued prior to the date of death is also deductible, but interest which accrues on or after the date of death is not deductible.
A tax on property situated outside the State of California or on any other property which is not subject to the Inheritance Tax Law is not deductible.
Note: As to the deduction of a tax which is not a lien at the date of decedent's death against property included in any transfer subject to the Inheritance Tax Law, see Section 13983.
NOTE

Reference: Section 13987, Revenue and Taxation Code.
§13987.1. California Inheritance Tax.
Note

The amount of the California inheritance tax paid or payable by any transferee of property is not allowable as a deduction. However, if the decedent was a recipient of property left by a predeceased person, and had failed to pay any California inheritance tax on the transfer prior to his death, the amount of the tax which was a lien on the property at the date of his death, together with any interest then accrued thereon, may be allowed as a deduction.
NOTE

Reference: Section 13987, Revenue and Taxation Code.
§13987.2. Gift Taxes.
Note     •     History

(a) In General. In those cases where a decedent made a lifetime gift before January 1, 1977 which is also subject to inheritance tax, a gift tax credit is allowable against the inheritance tax on the lifetime gift (see Revenue and Taxation Code Sections 14071-14077). The gift tax credit is allowable regardless of whether the gift tax is paid before or after the death of the donor. Gift tax paid after the donor's death for which no gift tax credit is allowed against the inheritance tax is treated as a debt of the decedent and allowed as a deduction for inheritance tax purposes.
(b) California Gift Tax. If a California gift tax is paid after the donor's death for which a gift tax credit is allowed, the amount of gift tax paid is not allowable as an inheritance tax deduction to the extent that the gift tax credit is allowed (see Section 14071). The full amount of the gift tax paid after death is allowed as an inheritance tax deduction if the lifetime transfer for which the gift tax is due is not also subject to inheritance tax and the gift tax is paid from assets of the decedent's estate. In any case, penalty and interest which had accrued as of the date of death is allowed as a deduction if it is paid after death from assets of the decedent's estate.
(c) Federal Gift Tax. If a federal gift tax is paid after the donor's death for which a gift tax credit is allowed against the federal estate tax, the amount of gift tax paid is not allowable as an inheritance tax deduction to the extent the gift tax credit is allowed. The full amount of the federal gift tax paid after the death of the donor is allowed as an inheritance tax deduction if the gift for which the gift tax is due is not also subject to federal estate tax and the gift tax is paid from assets of the decedent's estate. In any case, penalty and interest which had accrued as of the date of death is allowed as a deduction if it is paid after death from assets of the decedent's estate.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 13987. Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (a) filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§13988. Compensation of Executor Provided by Will.
Note

If a decedent by will has provided for the compensation of the executor of his will, and the executor does not waive or renounce his claim thereto by a written instrument filed in court, no deduction for the statutory commission under Section 901 of the Probate Court is allowable as an expense of administration. It is to be noted, however, that in such case only that portion of the compensation left by will which exceeds the statutory commission is subject to taxation under the Inheritance Tax Law (see Section 13603 and Revenue and Taxation Code Section 13603).
NOTE

Reference: Section 13988, Revenue and Taxation Code.
§13988.1. Executor or Administrator Who Acts as His Own Attorney.
Note

Deduction of executor's commissions and attorney's fees actually paid or to be paid from funds of the estate up to the amount allowed by statute on the principal of the decedent's estate shall be allowed in cases where the executor or administrator acts as his own attorney or employs a law firm of which he is a member, subject to the provisions of Revenue and Taxation Code Section 13981, limiting deductions to items which actually reduce the amount of the inheritance or transfer.
NOTE

Reference: Section 13988, Revenue and Taxation Code.
§13988.2. Statutory Commissions and Fees on Community Property.
Note

In regard to community property the ordinary commissions and fees allowed the executor or administrator and the attorney for the executor or administrator under Sections 901 and 910 of the Probate Code are computed on the amount subject to administration.
NOTE

Reference: Section 13988, Revenue and Taxation Code.
§13988.3. Nondeductible Statutory Commissions and Fees.
Note

The amounts deductible for ordinary commissions allowed the executor or administrator under Section 901 of the Probate Code and for ordinary fees allowed the attorney for the executor or administrator under Section 910 of that Code are the commissions in effect pursuant to Section 901 at the date of the decedent's death. Accordingly, if decedent died prior to September 7, 1955, the increased commissions allowed by the amendment to Section 901 effective on that date are not deductible.
Statutory commissions and fees allowed an executor or administrator and the attorney for the executor or administrator based on income of the estate during administration are not deductible.
NOTE

Reference: Section 13988, Revenue and Taxation Code.
§13988.4. Losses on Sale of Property.
Note

A deduction is allowable for losses suffered when the net proceeds realized from the sale of decedent's property is less than the appraised value of the property provided the sale was directed by the decedent's will, the sale was necessary in order to raise funds to pay taxes, debts, or costs of administration, or the property was taken in a condemnation proceeding.
The amount of the deduction is the difference between the appraised value of the property and the net amount realized on the sale. In determining the net amount realized, the expenses of sale, such as escrow charges, real estate agent's commissions, attorney's fees, and costs of proceedings, are deducted from the sale price.
If the net amount realized is greater than the appraised value, no deduction of any kind relating to the sale is allowable. In such a situation the costs of sale are not deductible.
NOTE

Reference: Section 13988, Revenue and Taxation Code.
§13988.5. Miscellaneous Deductible Expenses of Administration.
Note

Included among ordinary expenses of administration and thus allowable as deductions against the market value of property transferred by decedent are the following:
(a) The cost of the executor's or administrator's bond for every year it remains in force. The maximum for this item is $10 for a bond in the amount of $2,000 or less, and one-half of 1 percent of the amount of any bond in excess of $2,000.
(b) The usual and necessary probate court costs.
(c) The fee and actual and necessary expenses of the inheritance tax referee under Section 609 of the Probate Code.
NOTE

Reference: Section 13988, Revenue and Taxation Code.
§13988.6. Nondeductible Expenses of Administration.
Note

Except to the extent permitted by Revenue and Taxation Code Section 13988.1, extraordinary expenses of administration are not allowable as deductions. Included among such nondeductible expenses are the following:
(a) Expenses, including attorney's fees and costs of proceedings, incurred in connection with contests or litigated claims against the estate or in connection with will contests.
(b) Expenses, excluding attorney's, executor's, administrator's, and accountant's fees, for prosecuting objections to the report of the inheritance tax referee.
(c) Expenses of sale of property, such as escrow charges, real estate agent's commissions, attorney's fees, and costs of proceedings. However, such expenses are subtracted from the sales price to determine the net proceeds of sale when the sale is directed by the decedent's will, the sale is necessary to raise funds to pay taxes, debts, or costs of administration, or the property is taken in a condemnation proceeding (see Section 13988.4).
(d) Referee's fees on reappraisals for sale purposes.
(e) Expenses during administration for costs of maintenance, fire insurance costs, gardener or caretaker's salary, or repairs and additions to the property.
(f) Expenses relative to carrying on decedent's business pursuant to court order.
(g) Travel expenses of the executor or administrator or his attorney, except travel expenses of executor (one-way only) in coming to California to qualify.
(h) Extraordinary attorney's fees for services in connection with litigation or conferences in resisting a federal income tax deficiency claim.
(i) Extraordinary attorney's fees except to the extent such fees are deductible under Revenue and Taxation Code Section 13988.1 for tax work or joint tenancy.
(j) Extraordinary executor's or administrator's fees except to the extent such fees are deductible under Revenue and Taxation Code Section 13988.1 for tax work.
NOTE

Reference: Section 13988, Revenue and Taxation Code.
Article 7. Previously Taxed Property Credit
§14051. Previously Taxed Property Credit--In General.
Note

A credit for inheritance tax paid in the estate of a prior decedent is allowed where the present decedent was a Class A transferee (see Revenue and Taxation Code Section 13307) in respect to the prior decedent, and the present transferee is a Class A transferee in respect to the present decedent, if the date of death of the second decedent is not more than five years after the date of death of the first decedent.
The previously taxed property credit is a credit against and deducted from the Class A transferee's tax. The amount of the credit is limited to the proportion of the maximum credit available which the clear market value of the property transferred to a Class A transferee in the present estate bears to the total clear market value of the present decedent's taxable estate. The amount of tax paid by the present decedent in the prior estate is the maximum amount of credit.
If an additional tax under Revenue and Taxation Code Section 13441 or 13442 is due in either the first or second estate, the previously taxed property credit is not allowable.
NOTE

Reference: Section 14051, Revenue and Taxation Code.
§14051.1. Computation.
Note

(a) No tracing of the property is required to establish the allowance of the previously taxed property credit. The only factor which needs to be ascertained is the amount of tax paid by the present decedent in the prior estate. This is the maximum amount of the credit.
If the entire present estate does not pass to a single Class A transferee, it is necessary to give to each Class A transferee his proper proportion of the maximum credit. This is the same proportion of the maximum credit as the clear market value of the property transferred to the particular Class A transferee bears to the total clear market value of the present decedent's taxable estate.
In determining the clear market value of the property transferred to a transferee or of the entire estate, the following are deducted:
(1) Community exclusion.
(2) Quasi-community exclusion.
(3) Marital exclusion in the case of a decedent with a date of death on or after January 1, 1976.
(4) Contribution to joint tenancy.
(5) Insurance exclusion.
(6) Intangible exclusion.
(7) Deductions allowed under the Inheritance Tax Law.
(8) Nontaxable property, such as cemetery property and public retirement benefits.
(b) The following are not deducted in determining the clear market value for the purpose of apportioning the credit:
(1) Specific exemption.
(2) Marital exemption in the case of a decedent with a date of death prior to January 1, 1976.
(3) Charitable exemption.
(4) War risk exemption.
(5) Armed services exemption.
This regulation may be illustrated by the following example:

Example. A died on January 6, 1974. The inheritance tax was computed as follows:
	Inventory (all separate property)			 $110,000
	Deductions			      5,000
	Clear market value			 $105,000
Adult Son 
	Bequest	 $15,000
	One-third residue	 30,000	$5,000 exempt
		             	Tax on balance		 $1,400
		$45,000
Widow
	Two-thirds residue.	 $60,000	$5,000 exempt
		52,500	Marital exemption
			Tax on balance		     150
					$1,550
 The adult son died November 4, 1975. He left probate property appraised at $65,000. There were $5,000 of deductions. His estate was divided equally between his adult son and his son's wife.
The calculation of the inheritance tax due is as follows:
	Inventory			 $65,000
	Deductions			    5,000
	Clear market value			 $60,000
Adult Son
	One-half residue	 $30,000	$5,000 exempt
			Tax on balance		 $800
			P.T.P. credit		    700
					$100
Daughter-in-law
	One-half residue	 $30,000	$2,000 exempt
		           	Tax on balance		 $1,880
		$60,000			$1,980
The calculation of the previously taxed property credit is as follows:
Class A transferee: Adult son in each estate

Tax paid by present decedent in prior estate	 $1,400
Clear market value of transfers to Class A

transferees from present decedent	 30,000

Clear market value of present decedent's estate	 60,000
30,000/60,000 x $1,400 = $700 P.T.P. Credit
NOTE

Reference: Section 14071, Revenue and Taxation Code.
Article 7.1. Gift Tax
§14071. Gift Tax Credit.
Note     •     History

(a) In General. 
A credit for any gift tax paid under the California Gift Tax Law on a gift is allowed against and in reduction of the amount of any inheritance tax imposed by the Inheritance Tax Law on the same transfer at the death of the donor. This credit is known as the gift tax credit. The law prescribes the method of calculation of the credit. Stated generally it provides for the ascertainment of the gift tax relating to the transfer which is to be taxed both for gift and inheritance tax purposes, and also the ascertainment of the inheritance tax relating to the transfer which is to be so taxed. The gift tax credit is the lower of these two factors. The two factors are referred to herein as (1) the gift tax on the gift, and (2) the inheritance tax on the gift. The term “gift” used herein refers to a transfer which is being taxed both for gift tax and inheritance tax purposes. It is also known as the includible gift.
(b) Gift Tax on the Gift. 
In determining factor (1), the gift tax on the gift, the value of the includible gift is taken at its market value for gift tax purposes. The inheritance tax value does not enter into the calculation of this factor. If only one gift was ever made, the gift tax paid is the value of factor (1). If more than one gift was made, it is necessary to apportion the gift tax of a particular year between the gift which is being taxed for inheritance tax purposes, and the gifts of that year which are not subject to inheritance tax. If there were gifts in several years, each year is considered by itself in determining the proportion of gift tax in a particular year relating to a gift made which is also subject to inheritance tax, i.e., it is not proper to add gifts of all years together determine the proportion of total gift tax relating to one or more transfers being taxed twice, (see Example (3) of this regulation). It should be noted further that interest and penalties on the gift tax are not considered in computing the gift tax credit.
(c) Inheritance Tax on the Gift.
In determining factor (2), the inheritance tax on the gift, the value of the includible gift is taken at the lower of its gift tax value or its inheritance tax value. Using such value, the includible gift is reduced by the same proportion of the annual exemption allowed to the donee in the year the includible gift was made as the value of the includible gift bears to the total value at the date of gift of all gifts by the donor to the donee in that year. The resulting figure is known as the net includible gift. Also, if the includible gift was subject to any deductions for inheritance tax purposes which were not considered in arriving at its market value for gift tax purposes, e.g., inheritance tax referee's appraisal fee for appraising the includible gift at its date of death value, the net includible gift is reduced by the same proportion of such deductions as the value of the net includible gift bears to the value of all property subject to inheritance tax transferred to the donee from the donor less all appropriate inheritance tax deductions except the deductions in question. The resulting figure is known as the net reduced includible gift, (see Example (4) of this regulation). Factor (2), the inheritance tax on the gift, is the amount which bears the same proportion to the total inheritance tax on transfers to the donee from the donor as the net reduced includible gift bears to the clear market value of the property subject to inheritance tax.
If the includible gift was a remainder interest in property after a life estate, the inheritance tax value of the transfer is divided into its component parts based on the ratio of remainder value to total value at the time of the gift (see Example (2) of this regulation).
(d) California Gift Tax Paid Prior to Donor's Death.
If any gift tax had been paid under the California Gift Tax Law on an includible gift before the donor died, the payment of such tax constitutes a prepayment of inheritance tax to the extent a credit for such payment is allowed against and in reduction of the amount of any inheritance tax imposed by the Inheritance Tax Law on the same transfer at the death of the donor. This prepaid inheritance tax is treated, for inheritance tax purposes, as a taxable transfer to the donee to whom the credit is allowed.
(e) California Gift Tax Paid After Donor's Death.
The gift tax credit is allowable even though the gift tax is paid after the donor's death. The amount of the gift tax paid after death is deductible as a debt of the decedent in determining the clear market value for the inheritance tax only to the extent that a credit is not allowed against the inheritance tax due from the donee on the includible gift. Any penalty and interest paid after death which were accrued as of the date of death of the donor are deductible as debts of the decedent for inheritance tax purposes. In addition, any California gift tax paid after death for which no credit is allowed is treated as a debt of the decedent and allowed as an inheritance tax deduction.
(f) Federal Gift Tax Paid Prior to Donor's Death.
If a federal gift tax was paid prior to the donor's death on a transfer of property which subsequently becomes subject to both the federal estate and state inheritance taxes, the payment of the federal gift tax constitutes, for inheritance tax purposes, a prepayment of the federal estate tax to the extent a credit for such payment is allowed against the federal estate tax. If there is a probate estate, such prepaid federal estate tax is taxed as an asset of the estate according to the terms of the donor's will or the laws of succession. In a nonprobate proceeding the prepaid federal estate tax is taxable as a transfer to the transferee or transferees who will ultimately receive the benefit of the credit.
(g) Federal Gift Tax Paid After Donor's Death.
A federal gift tax due and owing at the death of a donor, but paid after death, is not deductible, for inheritance tax purposes, as a debt of the decedent to the extent a credit for such payment is allowable against the federal estate tax, when the gift tax arises from an inter vivos transfer which is also includible as a transfer subject to the federal estate tax. Any penalty and interest paid on the federal gift tax after death which were accrued as of the date of death are allowable as an inheritance tax deduction. In addition, any federal gift tax paid after death for which no federal gift tax credit is allowed against the federal estate tax is allowable as an inheritance tax deduction.
(h) EXAMPLES.
This regulation is illustrated by the following examples:
EXAMPLE (1).
A in 1973 gave B, his adult son, two gifts. Gift No. 1 was valued at $20,000 and Gift No. 2 was valued at $25,000. Both gifts were present interests. No further gifts were made. The gift tax calculation was as follows:

	Gift No. 1	 $20,000
	Gift No. 2	 25,000
		             
	Total market value of gifts	 $45,000
	Less: Annual exemption	 3,000
		             
	Net taxable gifts	$42,000	$5,000 specific exemption
 			Gift tax due 	 $1,280
A died in 1976. He left property to B under his will which after appropriate deductions had a clear market value of $30,000. The transfer in 1973 of Gift No. 2 was also determined to be subject to inheritance tax. The transfer of Gift No. 1 was determined not to be subject to inheritance tax. Gift No. 2 was appraised as of the date of death at $22,000, and was not liable for any deductions. The gift tax due on the two gifts was paid prior to the donor's death. The inheritance tax is calculated as follows:

	B, adult son
	Bequest	 $30,000
	Transfer (Gift No.2)	 22,000
			$5,000 Specific exemption
			Tax on balance	$1,761
	Prepaid inheritance tax.	       686	Less: Gift tax credit	686
		-------		------
		$52,686		$1,076

The gift tax credit is calculated as follows:
(a) Factor (1), Gift Tax on Gift:

	$25,000	¸ $45,000 x $1,280 = $711
	$25,000	Includible gift
	45,000	Total gifts
	1,280	Gift tax
	711	Gift tax attributable to includible gift

(b) Factor (2), Inheritance Tax on Gift:
	$22,000	¸ $45,000 x $3,000 = $1,467
	$22,000	Includible gift, lower value, at date of gift or death
	45,000	Total gifts, value at date of gift
	3,000	Annual exemption
	1,467	Proportionate annual exemption
	$22,000	Includible gift
 Less    1,467		Proportionate annual exemption
	      $20,533	Net includible gift
Since the gift was not subject to deductions for inheritance tax purpose which were not considered in arriving at the market value of the property for gift tax purpose, the net includible gift of $20,533 is also the net reduced includible gift.
Algebraic formulas are used to calculate the amount of the inheritance tax on the includible gift and the amount of the prepaid inheritance tax, since both of them are not known. Following is a table of symbols used in such formulas:
A--Tax adjustment factor (see Inheritance Rate and Exemption Table in (9) of this regulation).
C--Gift tax credit, which is limited to lower of F or S.
F--First limitation, gift tax on includible gift.
N--Net includible gift.
n--Net reduced includible gift.
P--Prepaid inheritance tax.
R--Rate of tax applied to total interest (see Inheritance Rate and Exemption Table in (9) of this regulation).
S--Second limitation, inheritance tax on includible gift.
V--Total value of property taxable to donee, but excluding pre-
paid inheritance tax. 
The formula is:
S = n x [R - A/(V + P)]
Since this formula has two unknowns, namely, “S” and “P,” it may be rewritten to simplify the computation by substituting “F” for “P” so that it will have only one unknown, as follows:
S = n x [R - A/ (V + F)]

Thus, the known values of this formula are:
A	=	$1,400
F	=	$711
n	=	$20,533
R	=	0.06
V	=	$52,000 ($30,000+$22,000)
S	=	$20,533 x [0.06-$1,400/($52,000+$711)]
S	=	$20,533 x 0.0334401
S	=	$686
Since S, the inheritance tax on the includible gift, is less than F, the gift tax on the includible gift, the gift tax credit is $686. Thus, the prepaid inheritance tax will also be $686.

>Proof:

C = $20,533 x [0.06-$1,400/($52,000+$686)]

C =  $686
EXAMPLE (2).
X in 1973 gave Y, his adult son, a cash gift of $20,000. He also gave him a parcel of property valued at $30,000 reserving to himself a life estate. X was 69 years old at the date of gift. No prior gifts had been made. The gift tax was paid before the last day prescribed by law.

The gift tax calculation is as follows:
 Cash gift 	 $20,000
Less: Annual exemption	 3,000
	            
	$17,000
Remainder interest in
property	 21,434
	            
Net taxable gifts	 $38,434	$5,000 Specific exemption
		Gift tax due	 $1,137
X died in 1976. He left property having a clear market value of $15,000 to Y from his probate estate. The property transferred in 1973 in which X retained a life estate was also subject to inheritance tax. The cash gift of $20,000 in 1973 was found not to be subject to inheritance tax. The property in which X retained a life estate was valued as of the date of death at $28,000. It was not chargeable with any deductions. The inheritance tax is calculated as follows:

Y adult son
Bequest	 $15,000	$5,000 Specific exemption
Transfer	 28,000	Tax on balance 	 $1,343
Prepaid inheritance tax	 572	Gift tax credit 	 -572
	            		          
	$43,572		$771

The gift tax credit is calculated as follows:

(a) Factor (1), Gift Tax on Gift:
	($21,434/$41,434) x $1,137 = $588
	$21,434 Includible gift
	$41,434 ($20,000 + $21,434) Total gifts
	$1,137 Gift tax
	$588 Gift tax attributable to includible gift

(b) Factor (2), Inheritance Tax on Gift:
	($21,434/$30,000) x $28,000 = $20,005
	$21,434 Gift Tax value of remainder interest
	$30,000 Gift tax value of entire parcel
	$28,000 Inheritance tax value of entire parcel
	$20,005 Proportionate part of inheritance tax value attributable to 	the remainder ($20,005/$41,434) x $3,000 = $1,448
	$20,005 Includible gift, lower value, at date of gift or death
	$41,434 Total gifts, value at date of gift
	$3,000 Annual exemption
	$1,448 Proportionate annual exemption
		$20,005	Includible gift, lower value, at date of gift or death
	Less:	1,448	Proportionate annual exemption
		-----
	  	  $18,557	Net includible gift
Since the includible gift was not subject to deductions for inheritance tax purposes which were not considered in arriving at the market value of the property for gift tax purposes, the net includible gift of $18,557 is also the net reduced includible gift.
S = n x [R - A/(V + F]

The known values of this formula are as follows:
n	=	$18,557 
R	=	0.04 
A	=	$400 
V	=	$43,000 ($15,000 + $28,000)
F	=	$588
S	=	$18,557 x [0.04 - $400/($43,000 + $588)]
S	=	$572
Since S, the inheritance tax on the gift, is less than F, the gift tax on the gift, the gift tax credit is $572. Accordingly, the prepaid inheritance tax will be also $572.
EXAMPLE (3).
P made gifts to S, his adult son, in 1972, 1973, 1974 and 1975. All of the gifts were present interests. The gifts were as follows:

1972	--Cash		$10,000
1973	--Parcel A	$7,000
	--Parcel B	8,000
		_____	15,000
1974	--Parcel C		$12,000
1975	--Parcel D	$5,000
	--Parcel E	3,000
		           	8,000

The gift tax calculations in the various years were as follows:

   1972
Cash	 $10,000
Annual exemption	 -3,000
	           
	$7,000	$5,000 Specific 
		 exemption
		1972 Gift Tax	 $60

  1973
Parcel A	 $7,000
Parcel B	 8,000
	           
Total gifts 	 $15,000
Annual exemptions	 -3,000
	            
Net taxable gifts 
 for 1973	 $12,000
Prior net taxable gifts	7,000 
	            
Total net taxable gifts	$19,000	$5,000 Specific
		 exemptions
		Total gift tax	 $420
		Less: Tax on prior 
		 gift	 60
			        
		1973 gift tax	 $360

  1974
Parcel C	 $12,000
Annual exemption	 -3,000
	            
Net taxable gifts
 for 1974	 $9,000
Prior net gifts	 19,000
	            
Total net taxable gifts	 $28,000	$5,000 specific 
		 exemption
		Total gift tax	 $720
		Less: Tax on prior
		 gifts	 420
			        
		1974 gift tax	 $300

  1975
Parcel D	 $5,000
Parcel E	 3,000
	            
Total gifts	 $8,000
Annual exemptions	 -3,000
	            
Net taxable gifts
 for 1975	 $5,000
Prior net gifts	 28,000
	            
Total net taxable gifts	 $33,000	$5,000 specific 
		 exemption
		Total gift tax	 $920
		Less: Tax on prior
		 gifts	 720
			        
		1975 gift tax	 $200

P died in 1976. He left property having a clear market value of $6,000 to S from his probate estate. The gift taxes were all paid prior to death. In addition the following inter vivos transfers were found to be subject to inheritance tax:
Parcel B--appraised as of date of death at $7,500
Parcel C--appraised as of date of death at $13,000
Parcel D--appraised as of date of death at $4,000
The other gifts were found not to be subject to inheritance tax. The inter vivos transfers were not liable for any deductions. The inheritance tax is computed as follows:

S, adult son
Bequest	 $6,000
Taxable transfers:
 Parcel B	 7,500
 Parcel C	 13,000
 Parcel D	 4,000
 Prepaid inheritance tax	 474	$5,000 Specific exemption
	            	Tax on balance	 $839
	$30,974	Gift tax credit	 -474
			        
			$365
The gift tax credit is calculated as follows:
(a) Factor (1) Gift Tax on Gifts:

	1973	$8,000	(includible gift) ¸ $15,000 (total gifts) x $360	= $192
	1974	$12,000	(includible gift ¸ $12,000 (total gift) x $300	=  300
	1975	$5,000	(includible gift) ¸ $8,000 (total gift) x $200	=  125
				        
	Gift tax attributable to includible gifts	$617
(b) Factor (2), Inheritance Tax on Gifts:
The first step is to find the net reduced includible gifts, i.e., what part of the total transfers taxable at death represents amounts also taxed for gift tax purposes after considering the lower of gift tax and inheritance tax value and considering the effect of the various annual exemptions. 

1973	$7,500	/$15,000 x $3,000 = $1,500
	$7,500	Includible gift, lower value, at date of gift or death 
	$15,000	Total gifts, value at date of gift
	$3,000	Annual exemption
	$1,500	Proportionate annual exemption
	$7,500	Includible gift
Less:	1,500	Proportionate annual exemption 
	------
	$6,000	Net includible gift
The net includible gift of $6,000 is also the net reduced includible gift, since the gift was not subject to deductions for inheritance tax purposes which were not considered in arriving at the market value of the property for gift tax purposes.

1974	$9,000	Net reduced includible gift
1975	$4,000	/$8,000 x $3,000 = $1,500
	$4,000	Includible gift, lower value, at date of gift or death
	$8,000	Total gifts, value at date of gift
	$3,000	Annual exemption
	$1,500	Proportionate annual exemption
	$4,000	Includible gift
Less:	1,500	Proportionate annual exemption
	------
	$2,500	Net includible gift
The net includible gift of $2,500 is also the net reduced includible gift, since the gift was not subject to deductions for inheritance tax purposes which were not considered in arriving at the market value of the property for gift tax purposes.

	$6,000	Net reduced includible gift for 1973
	$9,000	Net reduced includible gift for 1974
	$2,500	Net reduced includible gift for 1975
	------
	$17,500	Total net reduced includible gifts
S = n x [R - A/(V + F)]
The known values of this formula are as follows:

	n	= $17,500
	R	= 0.04
	A	= $400
	V	= $30,500
	F	= $617
First Trial

	S	= $17,500 x [0.04 - $400/($30,500 - $617)]
	S	= $475
Second Trial

	S	= $17,500 x [0.04 - $400/($30,500 - $475)]
	S	= $474
The $474 inheritance tax attributable to the net reduced includible gifts is less than the $617 gift tax attributable to the same gifts and consequently will be the gift tax credit. The prepaid inheritance tax will be also $474.
EXAMPLE (4).
In examples (1), (2), and (3) or this regulation the gift was not subject to deductions for inheritance tax purposes which were not considered in arriving at the market value of the property for gift tax purposes. Consequently, the net includible gift and the net reduced includible gift were the same. This example illustrates the computation necessary if the gift is subject to a deduction for inheritance tax purposes which was not deductible in arriving at the market value of the property for gift tax purposes.
During the year 1974, R, in contemplation of death gave T, his adult son, real property valued at $250,000. The gift was a present interest, and it was subject to both federal and state gift taxes. R made no other gifts to T. The gift tax calculation was as follows:

Real Property	 $250,000
Annual exemption	 -3,000
	--------
Net taxable gift	 $247,000	$5,000 Specific exemption
		Gift tax due	 $17,300

R died in 1975. In his will he left all of his property to T which after all appropriate inheritance tax deductions amounted to $150,000. The 1974 gift to T was also subject to both federal estate and state inheritance taxes. As of the date of death the value of the 1974 gift had shrunk to $200,000. The only inheritance tax deduction for which the 1974 gift was liable was the referee's fee for the date of death appraisement of the includible gift. The federal gift tax credit was $33,700. The inheritance tax is computed as follows:

T, adult son
Bequest	                  	$150,000	$5,000 Specific exemption
Transfer	 $2,000,000		Tax on balance	$34,683
Less: Appraisal
 fee	            200		Gift tax credit	17,091
	----------			-------
		199,800		$17,592
Prepaid federal
 estate tax	                 	33,700
Prepaid inherit--
 ance tax	                  	17,091
		--------
		$400,591

The gift tax credit is calculated as follows:
(a) Factor (1), Gift Tax on Gift

There was only one gift so the gift tax paid is the value of factor (1), i.e., $17,300.

(b) Factor (2), Inheritance Tax on Gift:
	$200,000/	$250,000 x $3,000 = $2,400
	$200,000	includible gift, lower value, at date of gift or death
	$250,000	Total gift, value at date of gift
	$3,000	Annual exemption
	$2,400	Proportionate annual exemption

Includible gift	           	$200,000
 Less:	Proportionate annual exemption	 $2,400
	Appraisal fee	     200
		------
	 Total reduction	           	2,600
			--------
Net reduced includible gift	           	$197,400

	S = n x [R - A/(V + F)]
The known values of the above formula are as follows:

	n	= $197,400
	R	= 0.14
	A	= $21,400
	V	= $383,500 ($150,000 + $199,800 + $33,700)
	F	= $617
First Trial

	S	= $197,400 x [0.14 - $21,400/($383,500 + $17,300)]
	S	= $17,096
Second Trial:

	Since “S” is less than “F,” substitute “S” for “F” in the above formula.
	S	= $197,400 x [0.14 - $21,400/($383,500 + $17,096)]
	S	= $17,091
Since the $17,091 inheritance tax attributable to the net reduced includible gift is less than the $17,300 gift tax attributable to same gift and consequently will be the gift tax credit. The prepaid inheritance tax will be also $17,091.
(i) Inheritance Tax Rate and Exemption Table.

COMPUTATION OF INHERITANCE TAX USING RATES AND EXEMPTIONS EFFECTIVE FOR DECEDENTS WHO DIED ON OR AFTER JANUARY 1, 1976 AND BEFORE JANUARY 1, 1981

View Graphic
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 14071, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (i) filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
Article 8. Payment of Tax
§14103. Delinquent Date.
Note

(a) Date of Death on or After 6:00 p.m., December 8, 1971. Every tax imposed by the Inheritance Tax Law in respect to any transfer by a decedent whose death occurred on or after 6:00 p.m., December 8, 1971, is delinquent at the expiration of nine months from the date on which such tax became due and payable, i.e., the date of death (see Revenue and Taxation Code Section 14102).
(b) Date of Death Prior to 6:00 p.m., December 8, 1971. In the case of a decedent whose death occurred prior to 6:00 p.m., December 8, 1971, every tax, except additional tax under Revenue and Taxation Code Section 13441 or 13442, imposed by the Inheritance Tax Law in respect to any transfer by a decedent whose death occurred on or after June 25, 1935, is delinquent at the expiration of two years from the date on which such tax became due and payable, i.e., the date of death (see Revenue and Taxation Code Section 14102). Every tax imposed in respect to any decedent whose death occurred prior to June 25, 1935 is delinquent at the expiration of 18 months from the date of death.
(c) Additional Tax Imposed by Section 13441 or 13442.
(1) Every additional tax imposed by Revenue and Taxation Code Section 13441 or 13442 in respect to any decedent whose death occurred on or after 6:00 p.m., December 8, 1971, is delinquent at the expiration of nine months from the date on which such tax became due and payable, i.e., the date of death (see Revenue and Taxation Code Section 14102).
(2) Every additional tax imposed in respect to any decedent whose death occurred during the period beginning September 7, 1955 and ending 6:00 p.m., December 8, 1971, is delinquent at the expiration of two years from the date of death, or six months from the date on which the tax imposed by the Federal Estate Tax Law became final, whichever period terminates later.
(3) Every additional tax imposed in respect to any decedent whose death occurred during the period beginning September 19, 1947 and ending September 6, 1955, is delinquent at the expiration of two years from the date of death or, if the federal estate tax is not finally determined until after said two-year period, the delinquency date is the thirtieth day after the date of the final determination of the federal estate tax.
(4) Every additional tax imposed in respect to any decedent whose death occurred during the period beginning June 25, 1935 and ending September 18, 1947, is delinquent at the expiration of two years from the date of death.
(5) Every additional tax imposed in respect to any decedent whose death occurred prior to June 25, 1935 is delinquent at the expiration of 18 months from the date of death.
NOTE

Reference: Section 14103, Revenue and Taxation Code.
§14104. Place, Manner, and Medium of Payment.
Note     •     History

Every tax imposed by the Inheritance Tax Law must be paid by the person liable for the tax (see Revenue and Taxation Code Section 14101) to the Controller by remittance payable to the State Treasurer.
Payment of the tax may be made in legal tender of the United States, or by a negotiable check, draft, or money order payable to the order of the State Treasurer. The acceptance by the Controller of a check, draft, or money order constitutes a payment of the tax for which it was given as of the date of acceptance when, but not before, such paper is actually paid.
The mere earmarking of real property to be held or sold for the payment of taxes does not constitute a payment of such taxes.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 14104, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§14104.1. Payment Prior to Order Fixing Tax.
Note     •     History

The Controller may accept any payment of tax in any case where the tax has not been fixed by order of the superior court. Any such payment which is accepted will be deemed to have been made as a payment on account and subject to the provisions of the subsequent order fixing tax.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 14104, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
Article 8.1. Tax Receipt
§14143. Consent to Preliminary Distribution.
Note

The State Controller, or the inheritance or any assistant inheritance tax attorney of the Inheritance Tax Department of the State Controller's office, is authorized to give his consent in writing to a preliminary distribution of property in the estate of any decedent prior to the payment of any inheritance tax due on the transfer thereof. In requesting such consent, a copy of the petition for distribution should be submitted to the person whose consent is requested.
NOTE

Additional reference: Section 1001, Probate Code.
NOTE

Reference: Section 14143, Revenue and Taxation Code.
§14143.50. Agreement for Payment of Tax.
Note

The Controller is authorized to enter into an agreement for payment of the inheritance tax upon his finding that payment as a prerequisite to distribution of the estate would result in undue hardship (see Revenue and Taxation Code Sections 14105 and 14143.5).
(a) Undue Hardship. “Undue hardship” as used in this connection means more than an inconvenience to the estate. It must appear that:
(1) the transferee (or transferees) of the estate is unable to secure a loan against the property transferred at a rate of interest specified in Revenue and Taxation Code Section 14211 or less, and
(2) that a substantial financial loss, for example, due to the sale of the property at a sacrifice price, will result from payment of inheritance tax as a prerequisite to distribution, and
(3) that, except in the case of qualified family property (see Revenue and Taxation Code Section 14143.5), the estate will suffer a substantial financial loss if distribution is not made.
If a market exists, a sale of property at the current market price is not ordinarily considered as resulting in an undue hardship. The necessity for selling an interest in a qualified family property (see Revenue and Taxation Code Section 14143.5), which is included in the estate, to unrelated persons will be considered to be an undue hardship even though the interest could be sold at a price equal to its current fair market value.
(b) Adequate Security. The Controller must find that payment of the tax plus interest due thereon is adequately secured before entering into any agreement respecting its payment.
(c) Terms of Agreement. The terms of any such agreement shall provide that the executor, administrator or trustee in addition to the transferee or beneficiary shall remain personally liable for the tax plus interest due thereon until paid. The agreement shall provide for payment in no more than 10 annual installments. The first installment, together with any interest due, shall be paid on or before a date specified in the agreement. Each subsequent installment shall be in an amount not less than 10 percent of the tax imposed plus the interest computed on the unpaid balance, and it shall be paid on or before the anniversary date of the first installment payment. If the qualified family property is transferred to any person who would not qualify for the extension of time to pay inheritance tax without first obtaining a release pursuant to Revenue and Taxation Code Section 14308, the unpaid balance of tax due plus accrued interest shall become payable immediately upon such transfer.
NOTE

Reference: Section 14143.5, Revenue and Taxation Code.
Article 8.2. Deferment of Payment
§14171. Contingencies.
Note

See Section 13411 for other provisions dealing with the taxation of contingencies.
NOTE

Reference: Section 14171, Revenue and Taxation Code.
Article 8.3. Tax Compromises
§14191. Contingencies.
Note

See Section 13411 for other provisions dealing with the taxation of contingencies.
NOTE

Reference: Section 14191, Revenue and Taxation Code.
§14211. Interest on Delinquent Tax.
Note     •     History

(a) Generally. Any tax imposed by the Inheritance Tax Law which becomes delinquent (see Section 14103) will bear interest from the delinquent date to the date the tax plus accrued interest is paid in full. Except as provided in Revenue and Taxation Code Section 14212 (see Section 14212), there is no relief from accrued interest for a late payment of the inheritance tax.
(b) Interest Rate on Delinquent Tax Paid in Installments. Any tax imposed by the Inheritance Tax Law which becomes delinquent and is being paid in installments shall bear interest as follows:
(1) In any case where the tax is paid in installments under the provisions of Revenue and Taxation Code Section 14105 or Section 14143.5, the delinquent tax shall bear interest at the adjusted rate of interest specified in Section 14211.1.
(2) In any case where the tax attributable to a dwelling is paid in installments under the provisions of Revenue and Taxation Code Section 14213, the delinquent tax shall bear interest at the rate specified in Section 14213.
(c) Interest Rate on or after January 1, 1976. In all other cases, any tax imposed by the Inheritance Tax Law which has become delinquent prior to and remains unpaid or becomes delinquent on or after January 1, 1976, will bear interest at the rate of 12 percent per annum.
(d) Interest Rate on or after September 22, 1951. Any tax imposed by the Inheritance Tax Law which became delinquent (see Section 14103) on or after September 22, 1951, will bear interest from the delinquent date to the date of payment at the rate of 6 percent per annum. If the tax remains unpaid on January 1, 1976, the interest rate becomes 12 percent per annum from said date to date of payment.
(e) Interest Rate Prior to September 22, 1951. Any tax imposed by the Inheritance Tax Law which became delinquent (see Section 14103) prior to September 22, 1951 (the effective date of the amendment of Revenue and Taxation Code Section 14211 and of the repeal of Revenue and Taxation Code Section 14212), will ordinarily bear interest at the rate of 10 percent per annum from the date of death of the transferor. However, if in the judgment of the court having jurisdiction to determine the tax (see Sections 14651, 14653 and 14653.1) the tax cannot or could not be paid on or before the delinquent date because of pending claims or necessary litigation involving the transferor's estate, or for any other unavoidable cause of delay, it may enter an order reducing the penalty. In such event, the tax will bear interest at 7 percent per annum from the delinquent date (see Section 14103) to the date of payment or to September 22, 1951, whichever is earlier, and in the latter case, at 6 percent per annum from September 22, 1951, to the date of payment (12 percent per annum on unpaid amounts on and after January 1, 1976); provided, that if the cause of delay is removed prior to the payment of the tax and prior to September 22, 1951, the tax will bear interest at 10 percent per annum from the date of such removal to the date of payment or to September 22, 1951, whichever is earlier, and in the latter case, at 6 percent per annum from September 22, 1951, to the date of payment (12 percent on unpaid amounts on and after January 1, 1976). “Necessary litigation” does not include any litigation to defeat the payment of any tax imposed by the Inheritance Tax Law. If no order reducing penalty is obtained, the tax will bear interest at 10 percent per annum from the date of death to the date of payment or to September 22, 1951, whichever is earlier, and in the latter case, at 6 percent per annum from September 22, 1951, to the date of payment (12 percent per annum on unpaid amounts on and after January 1, 1976).
(f) Additional Tax, Different Delinquent Date. An inheritance tax and an additional tax under Revenue and Taxation Code Section 13441 or 13442 imposed by the Inheritance Tax Law in respect to transfers by a decedent may have different delinquent dates (see Section 14103) and, accordingly, may bear interest from different dates. As to both the inheritance tax and the additional tax under Revenue and Taxation Code Section 13441 or 13442 the delinquent date is the same in respect to transfers of decedents whose deaths occur on or after 6:00 p.m., December 8, 1971 (see Section 14103), and interest thereon at 6 percent per annum from nine months after date is applicable to December 31, 1975, and at 12 percent per annum on unpaid amounts thereafter.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 14211, Revenue and Taxation Code, and Stats. 1979, Ch. 1168.
HISTORY

1. Repealer and new section filed 2-28-80; effective thirtieth day thereafter (Register 80, No. 9).
§14211.1. Adjusted Rate of Interest on Delinquent Tax--Undue Hardship and Qualified Family Property.
Note     •     History

In the case of any tax which becomes delinquent and is being paid in installments pursuant to the provisions of Revenue and Taxation Code Section 14105 or Section 14143.5, the delinquent amount shall bear interest at the adjusted rate of interest or at 12 percent per annum, whichever is lower. The adjusted rate of interest shall be determined in the following manner:
(a) Commencing September 29, 1979, the effective date of Stats. 1979, Ch. 1168, the initial adjusted rate of interest shall be 11 percent per annum.
(b) Thereafter, the Controller shall establish an adjusted rate of interest not later than October 15 of any year if the adjusted prime rate charged by banks (that being 90 percent of the average predominate rate quoted by commercial banks to large businesses, as determined by the Board of Governors of the Federal Reserve System) during September of that year, rounded to the nearest full percent, is at least a full percentage point more or less than the adjusted rate of interest which is then in effect. Any such adjusted rate of interest shall be equal to the adjusted prime rate charged by banks, rounded to the nearest full percent, and shall become effective on February 1 of the immediately succeeding year. Any adjustment provided for under this subsection may not be made prior to the expiration of 23 months following the date of any preceding adjustment under this subsection which changes the rate of interest.
(c) Any annual installment which is not paid on the date prescribed for payment shall thereafter bear interest at the rate of 12 percent per annum.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 14211, Revenue and Taxation Code, and Stats. 1979, Ch. 1168.
HISTORY

1. New section filed 2-28-80; effective thirtieth day thereafter (Register 80, No. 9).
§14212. Waiver of Interest.
Note     •     History

Upon a showing that any tax imposed by the Inheritance Tax Law was not paid prior to the delinquent date solely because of the failure of a public official to perform his or her duties in a timely manner, the interest accrued during the period commencing with the delinquency date and ending 3 days after notice of the amount of tax due is given to the executor, administrator, trustee or other person liable for payment of the tax shall be waived.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 14212, Revenue and Taxation Code, and Stats. 1979, Ch. 1075.
HISTORY

1. New section filed 2-28-80; effective thirtieth day thereafter (Register 80, No. 9).
§14213. Interest on Tax Attributable to Dwelling.
Note     •     History

In the case of any tax attributable to a dwelling which becomes delinquent and is being paid in installments pursuant to the provisions of Revenue and Taxation Code Section 14213, the delinquent amount shall bear interest at the rate of 7 percent per annum subject to the following conditions: 
(a) In any year in which the annual installment is not paid on or before the date prescribed,the interest for that year shall accrue at the rate of 12 percent per annum.
(b) The rate of interest shall be increased to 12 percent per annum from and after 60 days following the occurrence of any of the following:
(1) The dwelling is sold; or
(2) The transferee no longer maintains the dwelling as the transferee's principal place of residence.
(c) On and after the date which is 5 years after the date upon which the tax attributable to a dwelling becomes delinquent, any unpaid balance of tax shall thereafter bear interest at the rate of 12 percent per annum.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 14213, Revenue and Taxation Code, and Stats. 1978, Ch. 1096.
HISTORY

1. New section filed 2-28-80; effective thirtieth day thereafter (Register 80, No. 9).
Article 9. Collection of Tax Lien
§14301. Recordation of Abstract of Order Fixing Tax.
Note

A certified abstract of any order fixing tax may be recorded with the recorder of any county pursuant to Section 674, Code of Civil Procedure. Upon such recordation the tax becomes a lien upon all the real property in the county owned by the person liable for the tax, to the extent specified in Section 674 of said code.
NOTE

Additional reference: Section 14537.
NOTE

Reference: Section 14301, Revenue and Taxation Code.
Article 9.1. Withholding of Tax by Third Persons
§14341. Consents--Stock Transfers.
Note     •     History

(a) Unless it first secures the written consent of the State Controller, or of a person authorized in writing by the State Controller to issue the consent, no California corporation or foreign corporation whose principal place of business is in California can transfer on its books or issue a new certificate for any share of its capital stock which:
(1) Belongs to or stands in the name of a resident or nonresident decedent; or
(2) Belongs to or stands in the joint names of a resident or nonresident decedent and any other person; or
(3) Is held in trust for a resident or nonresident decedent.
(b) Pursuant to authority granted by Revenue and Taxation Code Section 14348 the Controller has issued blanket consents dispensing with the consent to transfer requirement under conditions set forth in the blanket consent thereby permitting the corporation or transfer agent to transfer shares without securing a release from the Controller in each case.
Consent is unnecessary where the stock of a foreign corporation whose principal place of business is outside his State is forwarded to a California transfer agent for transfer.
If a consent to transfer stock from the name of any decedent to the executor of his will or the administrator of his estate has been obtained, a second consent is unnecessary for any subsequent transfer of the stock from the name of the executor or administrator to the name of any other person pursuant to an order of sale. A second consent to transfer is necessary for a subsequent transfer of the stock from the name of the executor or administrator to the name of any other person pursuant to a decree of distribution.
Note: As to issuance of consents, see Section 14345.1.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 14341, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§14344. Access to Safe Deposit Box.
Note     •     History

NOTE

Authority cited: Section 14740, Revenue and Taxation Code.
HISTORY

1. Repealer filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§14344.1. Depositary's Record of Entry to Safe Deposit Box.
Note     •     History

NOTE

Authority cited: Section 14740, Revenue and Taxation Code.
HISTORY

1. Repealer filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§14344.2. Information from Safe Deposit Company.
Note     •     History

NOTE

Authority cited: Section 14740, Revenue and Taxation Code.
HISTORY

1. Repealer filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§14345. Delivery of Property--Insurance Companies.
Note     •     History

(a) Insurance on Life of Decedent. Except as provided in subdivisions (1), (2) and (3) below, unless the Controller issues a written consent, delivery of payment by reason of the death of an insured to the beneficiary or beneficiaries under a policy of life or accident insurance may not be made by the insuring company without retaining a sufficient amount to pay any inheritance tax and interest which may thereafter be assessed and without first giving notice to the Controller of the time and place of payment at least ten days prior thereto. (See Revenue and Taxation Code Section 14345.)
These provisions are modified by the following exceptions whereby, pursuant to the authority granted by Revenue and Taxation Code Section 14348, the State Controller has dispensed with the written consent or withholding and prior notice requirements of Revenue and Taxation Code Section 14345 in the following cases except as otherwise specified:
(1) When proceeds are payable to a named beneficiary if the aggregate paid by the company is not in excess of $5,000. 
(2) Subject to the notice under subdivision (9), and in situations other than those indicated in subdivisions (3), (4), (5) and (6), when payable to a named beneficiary if the aggregate paid by the company to the beneficiary is over $5,000 but not in excess of $25,000, and if the company can affirm that to its knowledge the total amount of insurance written by all companies on the life of the decedent does not exceed $50,000.
(3) When payable to the surviving spouse of the decedent with a date of death on or after January 1, 1981 in any amount, provided that notice under subdivision (9) be given of payment in excess of $100,000.
(4) Subject to the notice under subdivision (9) when payable to the surviving spouse of a decedent with a date of death prior to January 1, 1981, if the aggregate paid by the company does not exceed $25,000 plus 50 percent of any proceeds in excess of $25,000. 
(5) Subject to the notice under subdivision (9) when payable to a child of the decedent if the aggregate paid by the company does not exceed $25,000 plus 50 percent of any proceeds in excess of $25,000. 
(6) Subject to the notice under subdivision (9) of amounts over $2,000, when payable to the estate of a decedent or the executor or administrator of decedent's estate in any amount, if the company has obtained a certified copy of letters testamentary or letters of administration issued in a probate proceeding by a California court to a California resident executor or administrator.
(7) When payable in any amount and the company has obtained a certified copy of the decedent's death certificate which contains entries showing the death to have occurred outside the State of California and that the last usual residence of the decedent was in a state of the United States other than California and the length of stay therein was not less than two years.
(8) When payable in any amount and the company has either not obtained a death certificate, or having obtained one, it shows that the decedent died outside the State of California but is indeterminate as to his last usual residence or length of stay therein, and the company has obtained an affidavit of residence stating that the decedent died outside the State of California, that he or she was a legal resident of a state of the United States other than California and that he or she was not present in California for a period longer than six months during the last two years of his life.
(9) Payments authorized in the situations described in subdivisions (a)(2), (3), (4), (5) and (6), are subject to the condition that notice of such payment is sent to the District Office of the Division of Tax Administration-Inheritance Tax serving the county of which the decedent was a resident, within 35 days after the date of such payment. (See Section 14732 for counties comprising each district.) The notice must indicate the number of the insurance policy, name of the insuring company, nature and type of the policy, name of the insured decedent and residence at time of death, name and residence of beneficiary and beneficiary's relationship to the decedent, the face value of the policy, the amount payable, the amount paid to the beneficiary and the amount retained for future payment, if any.
(10) When the policy is not owned by the insured decedent at death, payment may be made to a named beneficiary if the aggregate is not in excess of $5,000, or pursuant to the circumstances described in subdivisions (a)(3), (4) and (5) and subject to notice under subdivision (a)(9). Payment of all other amounts are subject to the provisions of Revenue and Taxation Code Section 14345. The request for consent to transfer will be processed in the District Office of the Division of Tax Administration-Inheritance Tax serving the county of decedent's residence. See Section 14732 for counties comprising each district. To facilitate processing the request should include the policy number, name and last residence of the insured decedent, name of the beneficiary, relationship of the beneficiary to the decedent, the amount payable, name of the policy owner, relationship of the owner to the insured, effective date of the current ownership, whether the owner was the original applicant, how ownership was acquired, the extent to which consideration may have been given by the owner to the insured, whether the insured retained any incidents of ownership or policy rights, and the extent to which the insured may have paid the premiums on the policy.
(b) Annuity Contract. In the case of an insurance company which had issued an annuity contract, under which any amount is due as a result of the death of a decedent, or under which payments continue after the death of a decedent, the company shall comply with the notice and withholding requirements specified in Revenue and Taxation Code Section 14345 unless the consent specified in that section is first secured; provided, payment may be made to the following persons up to the amount indicated if contemporaneously with such payment notice thereof is given to the State Controller:
(1) If the transferee entitled thereto is the spouse of the decedent, payments may be made without limit.
(2) If the transferee entitled thereto is the lineal ancestor or lineal issue of the decedent, i.e., parent, grandparent, child, grandchild, etc., payments may be made in a total amount not in excess of $15,000.
(3) If the transferee entitled thereto is the brother, sister or descendant of a brother or sister of the decedent, payments may be made in a total amount not in excess of $7,500.
(4) If the transferee entitled thereto is not in any of the foregoing classes, payments may be made in a total amount not in excess of $2,000.
For purposes of this regulation, the word transferee is defined to include, but is not limited to, surviving joint annuitant.
(c) Application for Consent to Transfer. An application for the State Controller's “Consent to Transfer” proceeds of policies should state the number of the policy, the amount payable, the last known address of decedent and the place of his death, the name and address of the beneficiary and his relationship to the decedent, and the total amount of insurance payable by reason of the death of the decedent carried with the applicant and with other companies so far as is known.
The application should be sent to the District Office of the Division of Tax Administration-Inheritance Tax nearest the place of decedent's residence. For the District Offices, see Section 14732.
Note: As to the taxation of insurance proceeds, see Sections 13722, 13723, 13724, 13724.1, 13724.2 and Revenue and Taxation Code Sections 13721 through 13724.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 14345, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§14345.1. Issuance of Consent.
Note     •     History

To secure any consent mentioned in Revenue and Taxation Code Sections 14341, and 14345, a written request therefor must ordinarily be submitted to any of the following:
(a) The State Controller.
(b) The inheritance or any assistant inheritance tax attorney of the Division of Tax Administration-Inheritance Tax of the State Controller's office.
(c) The inheritance tax referee who has been assigned to the estate in which the request is being made.
The persons enumerated in subdivisions (b) and (c) above have written authorization from the State Controller to issue consents. The State Controller has also authorized legal assistants of the Division of Tax Administration-Inheritance Tax to issue consents to transfer.
No consent to deliver property will be issued unless evidence is submitted that the payment of the tax on the transfer thereof is otherwise amply secured.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 14345, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
Article 10. Refunds
§14371. Refund of Erroneous Payment in Excess of Order Fixing Tax.
Note

Any person making an erroneous payment of tax in excess of the amount specified in an order fixing tax as finally amended or modified, and as adjusted for the discount or interest provisions of the law, is entitled to a refund of the amount erroneously paid.
NOTE

Reference: Section 14371, Revenue and Taxation Code.
§14371.1. Refund of Erroneous Payment in Excess of Controllers' Determination.
Note

Where there is no order fixing tax amounts erroneously paid will be subject to refund to the person making payment on presentation of proof satisfactory to the Controller that he is entitled to a refund.
NOTE

Reference: Section 14371, Revenue and Taxation Code.
§14371.2. Erroneous Payment.
Note

An erroneous payment is that portion of the amount paid which is in excess of the amount specified in an order fixing tax or where there is no order fixing tax, in excess of the amount specified in a Controller's determination of tax.
NOTE

Reference: Section 14371, Revenue and Taxation Code.
§14372. Time Limitation for Refund Applications.
Note

Application for refund of an erroneous payment may be made to the Controller, or to the superior court having jurisdiction within one year after entry of the order fixing tax or of the decree of final distribution of the estate, whichever is later.
NOTE

Reference: Section 14372, Revenue and Taxation Code.
§14372.1. Application for Refund.
Note

An application for refund of an erroneous payment where the tax has been fixed in a Controller's determination shall be made to the Controller within one year after the determination becomes final, within two years of the decedent's death or within one year after the erroneous payment, whichever is later.
NOTE

Reference: Section 14372, Revenue and Taxation Code.
Article 11. Estates in Probate
§14501. Submission of Documents.
Note     •     History

To assist the inheritance tax referee appointed in any proceeding to determine tax (see Revenue and Taxation Code Sections 14501 through 14577, and Probate Code Sections 1170 through 1175) in arriving at his determination as to whether any tax imposed by the Inheritance Tax Law is due on any transfer of property by a decedent, the following documents must be submitted to the referee:
(a) The original and two copies of any inventory prepared pursuant to Section 600 of the Probate Code.
(b) Two copies of the decedent's will, if any, including any codicils thereto.
(c) The original and one copy of Form IT-22, entitled “Inheritance Tax Declaration.” This should be executed by the executor of the decedent's will, the administrator of the decedent's estate, or any other person having actual knowledge of the facts required. Copies of the declaration form may be obtained from the referee or from the Division of Tax Administration-Inheritance Tax of the Controller's office in Los Angeles, Sacramento, or San Francisco. (See also Section 14501.1).
(d) The original and one copy of form IT-3, entitled “Marital Property Declaration,” where the distribution of the estate is determined by the character of the property as either community, quasi-community or separate property, or where the decedent was survived by a spouse and under the terms of the decedent's will admitted to probate the surviving spouse is forced to make an election or during the decedent's lifetime the decedent and the surviving spouse entered into an agreement concerning the character of their property. In all other cases, the form IT-3 is not normally required; however, the Controller's office may require the form IT-3 be completed and submitted in any case where the information contained thereon is necessary to determine the proper amount of inheritance tax due. The declaration should be executed by the decedent's surviving spouse. If this is for some reason impossible, it may be executed by any person having actual knowledge of the facts required. In the latter event, the person making the declaration should add a paragraph explaining the reason for not submitting the spouse's declaration and setting forth the declarant's connection with the decedent and his or her means of knowledge of answers to the questions.
(e) The original and one copy of Form IT-2, entitled “Declaration Concerning Residence,” if it is claimed that the decedent was a nonresident of California at the time of his death.
If no court proceeding is pending or contemplated, and it is desired to secure the Controller's consent to transfer intangible property belonging to the estate of a decedent who was domiciled outside the State of California, the request for the Controller's consent should be made on form IT-23, entitled “Residence Affidavit and Request for Consent to Transfer,” and form IT-23A, entitled “Rider to be Attached to Residence Affidavit and Request for Consent to Transfer, Form IT-23, in Cases Where Decedent was a Nonresident not a Citizen of the United States,” in cases where the decedent was a nonresident of the United States, filed with the Division of Tax Administration-Inheritance Tax in Los Angeles, Sacramento or San Francisco. Copies of the forms may be obtained from the Division of Tax Administration-Inheritance Tax. (See also Sections 13303.4, 13851.1 and 14345.1).
(f) Two copies of any petition filed pursuant to Sections 1170 through 1175 of the Probate Code to establish the fact of the decedent's death.
(g) An affidavit executed by any joint tenant of the decedent's who survived the latter's death, if it is claimed that such tenant made any contribution to the acquisition of the joint tenancy property. (See Sections 13554 and 13671 through 13671.5, and Revenue and Taxation Code Sections 13671 and 13671.5). There is no prescribed form for this affidavit. It may be incorporated in the space provided in the Inheritance Tax Declaration, Form IT-22, or by a rider or exhibit attached thereto. A full statement should be made explaining the transactions whereby the joint tenancy titles involved were created, giving in regard to each item the date of acquisition, the net amount invested by the decedent and by the survivor, and the economic origin of the survivor's contribution. Stating that the survivor's investment was made with his own or separate property is not sufficient since this would be true if the decedent had some time in the past given to the survivor the money or property which was later reinvested in the joint tenancy property. If such were the case, the survivor's contribution would be subject to inheritance tax.
(h) Two copies of any trust or other instrument by which the decedent made any transfer during his lifetime (see Revenue and Taxation Code Sections 13641 through 13648), together with two copies of a list of the property, as of the date of the decedent's death, included in such transfer.
(i) In the case of a transfer by the decedent of listed inactive stock, of unlisted stock not actively traded in, or of stock of a closed corporation, balance sheets of the issuing corporation as of a date as near to the date of death as is practicable, and profit and loss statements of the corporation for each of the five years immediately preceding the date of death. Copies of balance sheets and statements already prepared by the company's accountant should be submitted. The number of shares outstanding and the nature of the business in which the company is engaged must be shown.
(j) If a transfer consisted of a parcel of real property, the most recent real property tax bill, or other satisfactory evidence of ad valorem tax value, covering such parcel.
(k) If any property transferred was subject to a bona fide lien or other encumbrance which reduced the market value of the property at the date of death, a copy of the lien or encumbrance instrument, or a statement of the terms thereof.
(l) Such other documents and copies of the foregoing as may be of assistance to the referee in determining whether any tax is due.
If a referee has been appointed to determine tax in a probate proceeding, the aforementioned documents should be submitted to the referee by the executor of the decedent's will or the administrator of the decedent's estate.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 14501, Revenue and Taxation Code.
HISTORY

1. Amendment of subsections (c), (d) and (e) filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27.)
§14501.1. Inheritance Tax Declaration--Description of Property.
Note

In general, in listing property upon Form IT-22, entitled “Inheritance Tax Declaration,” (see Section 14501(c)) the description thereof should be such that the property may be readily identified.
(a) Real Property. In describing real property or any interest therein, set forth:
(1) A description of the property sufficient to identify it.
(2) The name of the county in which the property is located.
(3) If located in a city, the place where located by street and number.
(4) If improved, a short statement of the character of the improvements.
(5) The name of the person in whose name the title stands.
(b) Bonds. A description of bonds should include a statement of the following:
(1) Number of bonds.
(2) Principal amount.
(3) Name of obligor.
(4) Date of maturity.
(5) Rate of interest and the date or dates on which interest is payable.
(6) Series number, where there is more than one issue.
(7) Exchange upon which listed or the principal place of business of the obligor, if unlisted.
(c) Stocks. A description of stocks should include a statement of the following:
(1) Number of shares.
(2) Particular class or series.
(3) Whether common or preferred, and, if preferred, what issue thereof.
(4) Whether par or no-par.
(5) Certificate number.
(6) Name of corporation issuing, and, if stock is not listed on an exchange, state in which corporation was incorporated, and location of its principal place of business. If stock is listed, state the name of the principal exchange upon which it is sold.
(d) Notes. A description of notes should include the following:
(1) Name of the maker.
(2) Date on which made.
(3) Date of maturity.
(4) Amount of principal.
(5) Amount of unpaid principal.
(6) Rate of interest, whether simple or compound, date to which interest has been paid, and amount of unpaid interest.
(7) If secured, the nature of the security.
(e) Life Insurance. A description of a life insurance policy should include the following:
(1) Nature and type of the policy.
(2) Name of the insurer issuing the policy.
(3) Name of beneficiary and his relationship to decedent.
(4) Number of policy.
(5) Face value of policy and amount payable.
(f) Judgment. A description of a judgment should contain the following:
(1) Title of the cause and name of the court in which the judgment was rendered.
(2) Date on which rendered.
(3) Name and address of the judgment debtor and of the judgment creditor.
(4) Amount unpaid.
The filing of a certified abstract of judgment conforming to the provisions of Section 674 of the Code of Civil Procedure will meet all requirements concerning the description of a judgment.
(g) Trust. In describing any property transferred by the decedent in trust, give the name and address of the trustee, and the name, age, and address of each of the beneficiaries.
Property which is completely described in the inventory filed with the probate court need not be described in Declaration IT-22; but in such case a reference should be made in the declaration to the description in the inventory.
NOTE

Reference: Section 14501, Revenue and Taxation Code.
§14501.2. Statute of Limitations.
Note

There is no statute of limitations respecting the time within which the proceeding mentioned in Revenue and Taxation Code Sections 14501 through 14515 may be commenced.
NOTE

Reference: Section 14501, Revenue and Taxation Code.
§14502. Hearing Before Referee.
Note     •     History

In reaching a determination as to whether any tax imposed by the Inheritance Tax Law is due in the estate of a decedent, the inheritance tax referee may conduct a hearing at which he or she may exercise all the powers of a referee of the superior court, and examine any person under oath who the referee believes possesses knowledge of necessary facts. The referee may issue a subpoena requiring any such person to appear and testify at the hearing and to produce any book, paper, or record in his custody or control that may be relevant to the inquiry. Any person served with such a subpoena who refuses to appear and testify, or produce the required book, paper, or record, is guilty of a contempt of the superior court.
The referee will hold a hearing in those cases in which he or she deems it necessary or at the request of the taxpayer or his or her representative or at the request of the Division of Tax Administration-Inheritance Tax of the State Controller's office. The Division will generally request a hearing in any case in which a substantial inheritance tax question is involved.
The documents specified in Section 14501.1 must be submitted to the referee prior to the time of the holding of any hearing by him or her.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 14502, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§14506. Proposed Report.
Note

Prior to filing any report with the superior court in any proceeding to determine tax (see Revenue and Taxation Code Sections 14501 through 14577 and Probate Code Sections 1170 through 1175) the inheritance tax referee must send the State Controller a copy of the proposed form thereof.
NOTE

Reference: Section 14506, Revenue and Taxation Code.
§14515. Distribution to State of Escheated Property.
Note

A distribution to the State of any property of a person dying on or after June 25, 1935 (the effective date of the Inheritance Tax Act of 1935), to which the State is entitled by reason of escheat, does not constitute a transfer subject to the Inheritance Tax Law. However, if after such distribution the property is delivered pursuant to law to any heir of the decedent entitled thereto, a transfer is deemed to have been made to the heir as of the date of death of the decedent.
A distribution to the State of any property of a person dying prior to June 25, 1935, to which the State is entitled by reason of escheat, constitutes a transfer subject to the Inheritance Tax Law. In such case the tax is computed as though the transfer is made to a stranger. If the property is subsequently delivered pursuant to law to any heir of the decedent whose relationship to the decedent is nearer than that of a stranger, a refund will be made as in the case of a tax paid upon a transfer subject to a contingency or condition, (see Revenue and Taxation Code Section 13411).
NOTE

Reference: Section 14515, Revenue and Taxation Code.
Article 11.1. Proceeding Initiated by Controller
§14533. Hearing Before Referee.
Note

In conducting any hearing in a proceeding to determine tax instituted by the State Controller, the referee has substantially all the powers specified in Section 14502.
NOTE

Reference: Section 14533, Revenue and Taxation Code.
§14533.1. Statute of Limitations.
Note

There is no statute of limitations respecting the time within which the proceeding mentioned in Revenue and Taxation Code Sections 14531 through 14537 may be commenced.
NOTE

Reference: Section 14533, Revenue and Taxation Code.
Article 11.2. Proceeding Initiated by Interested Party
§14551. Statute of Limitations.
Note

There is no statute of limitations respecting the time within which the proceedings mentioned in Revenue and Taxation Code Sections 14551 through 14555 may be commenced.
NOTE

Reference: Section 14551, Revenue and Taxation Code.
Article 11.3. Tax Determination by the Controller
§14560. In General.
Note

The Controller may make a determination of the taxability, tax liability, and amount of tax on transfers subject to tax in any case where no court proceeding is pending or likely to be filed, or should in the opinion of the Controller be filed, in which such a determination may be made. Court proceedings in which a tax may be determined include a probate of decedent's estate (Revenue and Taxation Code Sections 14501-14515), petition by Controller (Revenue and Taxation Code Sections 14531-14537), petition by interested party (Revenue and Taxation Code Sections 14551-14555), actions to quiet title (Revenue and Taxation Code Sections 14571-14577) and petition to establish fact of death (Probate Code Section 1174).
NOTE

Reference: Section 14560, Revenue and Taxation Code.
§14561. Referral to Referee.
Note

In those cases where, under Revenue and Taxation Code Section 14560, the Controller may issue a tax determination in absence of a court proceeding, the matter may be referred to an inheritance tax referee to ascertain and submit a report on:
(a) The clear market value of the property included in each transfer subject to tax.
(b) The amount of tax due and payable on each transfer.
(c) Such other facts as will assist the Controller in the determination of the tax.
The documents to be submitted to the referee, or the Controller in absence of a referral to a referee, are the same as those specified in Sections 14501 and 14501.1.
Referral to an inheritance tax referee will be made only in those cases in which appraisals of the assets will have a bearing on the tax.
NOTE

Reference: Section 14561, Revenue and Taxation Code.
§14562. Notice of Determination.
Note

Upon determining the inheritance tax due on any transfer, the Controller will notify the person filing form IT-22 or the persons liable for the tax. The notice will be by mail to the address stated in the form IT-22 or by personal service. The Controller may also send copies of the notice to such other persons as may be appropriate.
NOTE

Reference: Section 14562, Revenue and Taxation Code.
§14563. Finality of Determination.
Note

The Controller's determination of tax becomes final 60 days after the date on which notice thereof is mailed as specified in Section 14562 and Revenue and Taxation Code Section 14562 unless within such time a proceeding in which the tax may be fixed by court order is instituted. Written notice of such a proceeding must be given to the Controller. If such a proceeding is timely instituted, the Controller's determination is superseded and determination of the tax will proceed as if no Controller's determination had been made.
NOTE

Reference: Section 14563, Revenue and Taxation Code.
§14563.1. Effect of Determination.
Note

Upon becoming final a Controller's determination shall thereafter have the same force and effect as an order fixing tax made by a court in a proceeding in which such an order may be made. Pursuant to Revenue and Taxation Code Section 14672 such order has the force and effect of a judgment in a civil action.
The determination is conclusive only as to such property as may have been included in transfers disclosed to the Controller before the determination was made.
NOTE

Reference: Section 14563, Revenue and Taxation Code.
Article 12. Court Jurisdiction
§14651. Court Jurisdiction--Resident Decedent.
Note

In the case of a decedent who died a resident of California, the superior court of the county in which he last resided as a rule has jurisdiction to hear and determine all questions relative to any tax imposed by the Inheritance Tax Law on any transfer by him.
NOTE

Reference: Section 14651, Revenue and Taxation Code; Section 301, Probate Code.
§14653. Court Jurisdiction--Nonresident Decedent.
Note

In the case of a decedent who died a nonresident of California, the superior court of the county in which any of the decedent's real property is situated, or, if he owned no real property in this State, then the superior court of any county in which any of his personal property is situated, as a rule has jurisdiction to hear and determine all questions relative to any tax imposed by the Inheritance Tax Law on any transfer by the decedent. If the decedent leaves real or personal property in more than one county in this State, the superior court of any such county which first acquires jurisdiction will retain the same to the exclusion of the superior court of any other such county.
NOTE

Reference: Section 14653, Revenue and Taxation Code; Section 301, Probate Code.
§14653.1. Paramount Jurisdiction of Probate Court.
Note

Notwithstanding Sections 14651 and 14653, any superior court which has acquired jurisdiction in probate of the estate of any decedent has exclusive jurisdiction to hear and determine all questions relative to any tax imposed by the Inheritance Tax Law on any transfer by the decedent.
NOTE

Reference: Section 14653, Revenue and Taxation Code.
Article 13. Administration
§14732. Division of Tax Administration-Inheritance Tax--In General.
Note     •     History

The State Controller supervises the administration of the Inheritance Tax Law through the medium of the Division of Tax Administration-Inheritance Tax of his office.
To facilitate the work of the division, the State Controller has divided the State into three districts with an office of the division in each, as follows:
(a) Northern District: Headquarters--Room 402, 1227 O Street, Sacramento 95802 (P.O. Box 247).
Includes the Counties of Alpine, Amador, Butte, Calaveras, Colusa, El Dorado, Fresno, Glenn, Kings, Lake, Lassen, Madera, Mariposa, Merced, Modoc, Napa, Nevada, Placer, Plumas, Sacramento, San Joaquin, Shasta, Sierra, Siskiyou, Solano, Stanislaus, Sutter, Tehama, Trinity, Tulare, Tuolumne, Yolo, Yuba.
(b) Central District: Headquarters--Humboldt Bank Building, 785 Market Street, San Francisco 94103.
Includes the Counties of Alameda, Contra Costa, Del Norte, Humboldt, Marin, Mendocino, Monterey, San Benito, San Francisco, San Luis Obispo, San Mateo, Santa Clara, Santa Cruz, Sonoma.
(c) Southern District: Headquarters--Room 6125, 107 South Broadway, Los Angeles 90012.
Includes the Counties of Imperial, Inyo, Kern, Los Angeles, Mono, Orange, Riverside, San Bernardino, San Diego, Santa Barbara, Ventura.
Any correspondence with the division relative to any matter arising within a particular county should be sent to the headquarters of the district within which the county is located.
NOTE

Authority cited: Section 14740, Revenue and Taxation Code. Reference Section 14502, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
Article 13.1. Inheritance Tax Referees
§14772. Ethics.
Note

The conduct and professional activities of Inheritance Tax Referees should reflect credit to the profession and adhere to the common rules of integrity applying to all officers of the Court. Their official activities must be conducted in such an impartial manner that all persons understand that no Referee can be influenced by other than proper methods. Referees must avoid situations where prejudice, bias or opportunity for improper personal gain could influence their decisions. They must equally avoid circumstances suggesting that favoritism or improper personal gain must be a motivating force in the performance of their statutory responsibilities.
Consistent with such objectives, an Inheritance Tax Referee shall not:
(a) Advertise the position of Inheritance Tax Referee in conjunction with any other profession, business or occupation; or use in any way the title of Inheritance Tax Referee in connection with any public or private matter which is unrelated to the referee's duties, functions or responsibilities.
(b) Directly or indirectly acquire or negotiate to acquire, either as principal or agent, an interest in property appraised by said Referee in his or her official capacity as Inheritance Tax Referee, until there has either been a bona fide sale or transfer of such property to a third person, a lapse of three years from date of the appraisal, or judicial approval after the court has been given full knowledge of all facts concerning the Referee's official involvement with the property.
(c) Engage in any employment, activity or enterprise, or have any interest, financial or otherwise, direct or indirect, which is inconsistent, incompatible, in conflict with, or inimical to his duties, functions or responsibilities as a Referee.
(d) Receive or accept, directly or indirectly, any gift (including money, service, gratuity, favor, entertainment, hospitality, loan or any other thing of value) under circumstances from which it reasonably could be inferred that the gift was intended to influence the performance of official duties or was intended as a reward for any official action.
(e) Engage in any political activity which is contrary to the provisions of Revenue and Taxation Code Section 14778.
(f) Engage at any time in conduct or behavior which causes discredit to the Office of Inheritance Tax Referee, including, but not limited to, dishonesty, intemperance or conviction of a felony or conviction of a misdemeanor involving moral turpitude.
NOTE

Reference: Section 14772, Revenue and Taxation Code.
§14772.1. Performance.
Note

An Inheritance Tax Referee shall:
(a) Promptly perform all duties required by law in a competent and efficient manner.
(b) Use accepted appraisal practices and procedures in determining the fair market value of assets to be appraised.
(c) Employ necessary staff personnel to guarantee that all work is properly performed without unreasonable delay and be responsible for conformance to these standards by his or her staff.
(d) Not disclose an appraisal, finding or determination to a third party without permission of the Office of State Controller where appropriate or the attorney for the estate, and personal representative or surviving transferee, in cases of nonprobate property, unless required to do so by law.
(e) Obtain an advisory appraisal by a Referee of another county when:
(1) An interest in real property is located in such other county;
(2) Appraising an interest in a business entity (partnership, corporation, trust, etc.) owning an interest in real property in such other county when the Referee concludes that such property should be appraised in order to value the decedent's interest in the business entity. (The request for an advisory opinion should indicate the property's inclusion in a separate entity.)
If contiguous real property subject to (1) or (2) is located in two or more such counties, the advisory appraisal on the entire parcel shall be obtained from one Referee in any such county.
(3) An advisory opinion is not required if either:
(A) A parcel of real property is situated partly in the county of decedent's domicile and partly in an adjoining county;
(B) Consent to appraise the real property without an advisory appraisal is first obtained from all Inheritance Tax Referees of the county in which the real property is located;
(C) It appears from all available evidence that the value of the interest in the real property does not exceed $5,000; or
(D) The appraisal is a “reappraisal for purposes of sale” and the Inheritance Tax Referee is satisfied from all available information that the sale price is consistent with the prior appraisal and the sale is a bona fide sale.
NOTE

Reference: Section 14772, Revenue and Taxation Code.
§14772.2. Training.
Note

(a) An Inheritance Tax Referee shall complete a minimum of twenty hours per year of acceptable continuing educational study as defined by the Office of the State Controller.
(b) An Inheritance Tax Referee shall be responsible for providing adequate training to his or her staff to insure that official duties will be performed in a competent and efficient manner.
NOTE

Reference: Section 14772, Revenue and Taxation Code.
Article 13.2. County Treasurers
§14791. In General.
Note     •     History

NOTE

Authority cited: Section 14740, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 13.2 (Section 14791) filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
Article 13.3. Inspection of Records
§14813. Information Confidential.
Note

(a) All information and records relative to any tax imposed by the Inheritance Tax Law acquired by the State Controller or by the inheritance or any assistant inheritance tax attorney is confidential in nature and, except as may be necessary for the enforcement of the law, cannot be divulged to any person other than a person liable for the tax or his duly authorized agent, or any local, state, or federal tax official.
(b) If the Controller has received the information to be divulged from the United States Internal Revenue Service, the person to whom it is divulged shall be advised of its source and that the confidentiality afforded thereto must be the same as if it were received directly from the Internal Revenue Service. Such information may be divulged only (1) to representatives of the Internal Revenue Service; (2) to the State Board of Equalization and the Franchise Tax Board; and (3) in judicial proceedings for enforcement of the California Inheritance and Gift Tax Laws.
NOTE

Reference: Section 14813, Revenue and Taxation Code.
Chapter 2. Gift Tax
NOTE: The regulations are numbered to correspond with the section of the California Gift Tax Law which is being implemented, interpreted, or made specific. The authority cited for all regulations in Subchapter 2 is Section 16506, Revenue and Taxation Code.)

Foreword *

* Prepared by State Controller.

Nature and Scope of Gift Tax
The gift tax is not a tax upon property, but is rather a tax upon the privilege of transferring property by gift. Generally speaking, it reaches every transfer of property made after 10 p.m. of June 21, 1939 (the effective date of the “Gift Tax Act of 1939”), by an individual, whether in trust or otherwise, whether it is direct or indirect, and whether the property is real or personal, tangible or intangible, to the extent that the transfer is made without an adequate and full consideration in money or money's worth. It does not extend to any transfer of property which this State for constitutional reasons is prohibited from taxing. Also, it ordinarily taxes only gifts of property, other than future interests therein, in excess of $4,000 annual exemption to each donee, and gifts of future interests in property regardless of value.
The tax is not limited in its imposition to transfers of property without a valuable consideration, which at common law are treated as gifts, but extends to sales and exchanges made with donative intent for less than an adequate and full consideration in money or money's worth.
History of Gift Tax Legislation
The California gift tax was imposed by the “Gift Tax Act of 1939” (Chapter 652 of the Statutes of 1939, effective 10 p.m., June 21, 1939).
The law was amended in 1940 by Chapter 41 of the Statutes of the First Extra Session of 1940, effective March 6, 1940; and again in 1941 by Chapter 1035 of the Statutes of 1941, effective July 16, 1941.
Among other things, the 1940 amendment subjected to the law one-half of all community property transferred by way of gift to a husband; provided that any donative transfer of community property by spouses to a third person is a gift of one-half of such property by the husband and one-half by the wife; provided that if the separate property of one spouse is transferred by agreement into community property, one-half of such property represents a gift from the transferring spouse; excluded alien nonresidents of the United States from the scope of several of the specified exemptions; extended the annual $4,000 exemption to transfers made in trust; and deleted a provision requiring that the consent of the State Controller be obtained prior to the making of transfers of corporate stock.
The 1941 amendment, in part, provided that a wife has the same interest in community property acquired before July 29, 1927 (the effective date of Section 161a of the Civil Code), that she has in community property acquired since that date; limited the scope of the charitable exemption; extended the annual exemption to alien nonresidents of the United States; changed the method of computing the gift tax credit; provided that the payment of the gift tax by a donee, or any agreement by him to pay such tax, is not consideration for the transfer to him; changed the last date for filing returns from March 1 to April 15 of the year following the calendar year in which a gift is made; authorized the State Controller to provide by rule for the filing of returns in a case where a donor has died or for some other reason cannot personally file a return; provided for the valuation of a transfer both for gift and inheritance purposes, if the transfer is subject both to gift and inheritance taxes, where the donor dies before filing a return; provided that the penalty for failure to file a return attaches also where the return is required by regulations of the Controller; provided that where a gift return is filed after the last date for filing, a penalty for delinquent tax payment attaches as of June 15 next following; provided that the civil penalty of $1,000 attaches also where there is willful failure to make a return or pay tax in accordance with the Controller's regulations; and authorized valuation of insurance policies and annuity contracts at market value as of the date of gift.
In 1943 the Gift Tax Act of 1939 as amended was codified and became Part 9 of Division 2 of the Revenue and Taxation Code, comprising Sections 15101 to 16652, inclusive, (Chapter 658, Statutes of 1943). The effective date of the codification was postponed to July 1, 1945.
The law was amended in 1944 (Chapter 46, Fourth Extra Session, Statutes of 1944; effective June 20, 1944) to provide relief to members of the armed services of the United States serving outside the continental United States with respect to the time of filing returns and paying the tax.
The law was amended twice in 1945, twice in 1947, and three times in 1951.

Major Legislation Affecting Codified Law
1945 Statutes (operative July 1, 1945):
Chapter 380 amended provisions for computation of tax on false or fraudulent returns or on failure to file a return or report transfers; also provided for payment of interest on certain tax refunds.
Chapter 697 reduced the rate of interest in computing future, contingent and limited estates from 5 to 4 percent.
1947 Statutes (effective September 19, 1947):
Chapter 658 amended provisions respecting appropriation of Gift Tax Fund.
Chapter 735 required adoptions be of persons under age 21 to qualify as class A donees; included widower of a daughter as a class B donee; amended provisions relating to penalties and refunds; provided for distribution of copies of the law; repealed provisions regarding fraud or failure to report transfers; repealed definition of community property as including intangibles acquired by spouses while domiciled outside of California; and repealed provisions relating to certain contingent transfers.
1951 Statutes (effective September 22, 1951):
Chapter 80 provided that the specific exemption be applied against net gift to a donee.
Chapter 453 provided limits as to lien which attaches to property of a donee.
Chapter 734 included within the charitable exemption property transferred to certain nonprofit hospitals and membership associations.
1953 Statutes (effective September 9, 1953):
Chapter 695 included as class A donees persons adopted during minority by any lineal issue or certain others in same classification.
Chapter 895 reduced return filing penalty from 10 percent to 5 percent.
Chapter 1313 (effective to all gifts, whenever made) substituted filing return under declaration of penalty of perjury in lieu of filing under oath; and provided for reciprocal collection of gift taxes with other states.
1955 Statutes (effective September 7, 1955):
Chapter 383 excluded certain gifts to minors from classification as future interest gifts.
1957 Statutes (effective September 11, 1957):
Chapter 403 permitted the use of whole dollar amounts on returns; amended charitable exemption and provisions for time of determination of tax; added tax computation provisions regarding a false or fraudulent return or failure to file a return; provided for issuance of warrants for collection of tax; and amended provisions for tax delinquency notice to governmental officers and agencies respecting withholding.
Chapter 1581 added provision for gift tax consequences of creation of real property joint tenancy between husband and wife.
1959 Statutes:
Chapter 1128 (effective June 24, 1959) increased rates of tax on class C and class D donees.
Chapter 1628 (effective September 18, 1959) amended definition of class B and class C donees to include certain adopted or acknowledged children thereof.
1961 Statutes (effective September 15, 1961):
Chapter 636 added provisions with reference to taxing transfers of quasi-community property.
Chapter 2189 provided a tax rate increase as to class B donees; reduced specific exemption of a wife from $24,000 to $5,000; provided equal treatment of spouses where separate property of either is transferred into community property.
1963 Statutes (effective September 20, 1963):
Chapter 499 deleted requirement that payment of gift tax be made under protest as a condition to filing an action for recovery.
Chapter 506 provided for redetermination of tax for later years when affected by a determination for a prior year.
Chapter 523 disallowed annual exemption for certain transfers of separate property into community property.
1965 Statutes (effective September 17, 1965):
Chapter 1070 provided for gift tax on the exercise or release of general powers of appointment; repealed provisions treating certain conversions of separate property into community property as taxable gifts at death of a spouse; exempted transfers of community property between spouses; and provided that conversions of separate property to community property be considered as half the separate of each spouse.
Chapter 1409 exempted charitable use transfers in trust although California trustee is not organized solely for charitable purposes.
1967 Statutes (effective July 29, 1967, at 7:00 p.m.):
Chapter 963 combined transferee classes C and D into one class C and increased the rates for all classes; reduced the gift tax annual exemption from $4,000 to $3,000.
1968 Statutes (Chapter 263 effective June 6, 1968; others effective November 13, 1968):
Chapter 263 revised class A transferee requirements regarding children adopted by stepparents.
Chapter 709 substantially revised the gift tax determination procedure and delinquency.
Chapter 1092 provided that certain transfers of a decedent not previously reported be deemed incomplete and taxed at death.
1969 Statutes (effective November 10, 1969):
Chapter 1200 combined into a single provision the rules regarding classification of adopted children; updated mortality and actuarial tables to be calculated at 3 1/2 percent per annum for valuing future interests such as life estates and annuities; amended procedure regarding court action by a taxpayer.
1970 Statutes (operative July 1, 1971):
Chapter 1282 changed title of “inheritance tax appraiser” to “inheritance tax referee” throughout the gift tax law to conform to inheritance tax law revisions of appraiser system.
1971 Statutes (effective January 1, 1972):
Chapter 1741 established new procedures for filing returns and paying gift taxes on a quarterly basis.
1972 Statutes:
Chapter 579 (effective March 7, 1972) reduced the age of adoption for exemption purposes from 21 to 18.
Chapter 990 (effective August 16, 1972) provided that a disclaimer of an interest in property shall not be considered a gift.
1973 Statutes (effective September 21, 1973):
Chapter 637 amended exemption classification provisions for persons adopted when over 18 years of age.
1974 Statutes (effective January 1, 1975):
Chapter 101 updated mortality tables to be used at a 6 percent rate in valuing future interests such as life estates, annuities and remainders.
Chapter 443 amended provisions relating to suits for modification or refund of gift taxes.
1975 Statutes (effective January 1, 1976):
Chapter 661 increased the interest rate for late payment of the tax from 6 percent to 12 percent per annum.
Chapter 942 taxed donor's one-half interest in community property transferred to a spouse, provided a marital exclusion in an amount equal to one-half the value of donor's separate property transferred to a spouse and increased the specific exemption for gifts to a spouse from $5,000 to $60,000.
1976 Statutes (effective January 1, 1977):
Chapter 579 provided gifts to certain political organizations are exempt from tax.
Chapter 635 changed the age of donee whereby a gift of a future interest may nevertheless qualify for the annual exclusion from 18 to 21. 
1977 Statutes (effective January 1, 1978, operative July 1, 1978):
Chapter 481 repealed and reenacted the gift tax law provisions to conform with new uniform state tax lien law.
1978 Statutes (effective January 1, 1979):
Chapter 604 provided for payment of interest on refunds where overpayment of tax was made because of an error or mistake on the part of the taxpayer at a rate indexed to the federal reserve rate on each January 1, not to exceed 7 percent per annum.
1979 Statutes (effective January 1, 1980):
Chapter 322 made certain technical amendments to the Uniform State Tax Lien Law, adopted by Stats. 1977, Chapter 481.
1980 Statutes (effective January 1, 1981):
Chapter 600 consolidated the Uniform State Tax Lien Law, contained in various codes and several different parts of the Revenue and Taxation Code, including Part 9, into a single chapter of the Government Code; and deleted from the Gift Tax Law express language of the uniform law and, in place thereof, referred to the relevant chapter of the Government Code.
Chapter 634 provided transfers to a spouse are excluded from the tax except where the spouse receives a limited power of appointment in any part, or all, of the donor's property; and increased the specific exemption for all other classes of beneficiaries.
Article 1. Definitions
§15103. Property--In General.
Note     •     History

The Gift Tax Law reaches any real or personal property, and any right or interest therein or income therefrom, the transfer of which this State is not prohibited from taxing by either the California or Federal Constitution. In general, the property must either be situated in California or be within the State's taxing jurisdiction.
NOTE

Authority cited: for Subchapter 2 (Sections 15103 through 16563, not consecutive): Section 16506, Revenue and Taxation Code. Reference: Section 15103, Revenue and Taxation Code.
HISTORY

1. Repealer of Subchapter 2 (Sections 15103(a) through 16563-16564, not consecutive) and new Subchapter 2 (Sections 15103-16563, not consecutive) filed 9-22-78 as procedural and organizational; designated effective 12-1-78. For history of former Subchapter 2, see Registers 59, No. 20; 66, No. 8; 73, No. 15; 75, No. 17; 76, No. 5 and 76, No. 51.
§15103.1. Property of Resident Donors.
Note

(a) Real Property.
Real property in this State belonging to a resident donor is subject to the Gift Tax Law. Real property outside the State belonging to a resident donor is not subject to the law.
(b) Tangible Personal Property.
Tangible personal property in this State belonging to a resident donor is subject to the Gift Tax Law. Tangible personal property permanently outside the State belonging to a resident donor is not subject to the law.
(c) Intangible Personal Property.
Intangible personal property, wherever situated, belonging to a resident donor is subject to the Gift Tax Law.
NOTE

Reference: Section 15103, Revenue and Taxation Code.
§15103.2. Property of Nonresident Donors.
Note

(a) Real Property.
Real property in this State belonging to a nonresident donor is subject to the Gift Tax Law.
(b) Tangible Personal Property.
Tangible personal property permanently in this State belonging to a nonresident donor is subject to the Gift Tax Law.
(c) Intangible Personal Property.
Ordinarily, intangible personal property belonging to a nonresident donor is not subject to the Gift Tax Law unless it has acquired a so-called “business situs” (i. e., been actively used in connection with some business) in this State.
Any intangible personal property of a nonresident donor otherwise subject to the Gift Tax Law is not subject thereto if transferred by a donor who at the date of the transfer was a resident of a state or territory of the United States or of a foreign state or country which then imposed a gift tax in respect to the intangibles of its own residents, but either:
(1) Did not impose such a tax in respect to intangible personal property of residents of this State; or
(2) Had a reciprocity provision in its law exempting from its tax the intangibles of nonresidents of other jurisdictions whose laws, in turn, contain a similar exemption.
Note: As to the intangibles exemption of nonresident donors, see Section 15451 and 15451.1, and Revenue and Taxation Code Section 15451.
NOTE

Reference: Section 15103, Revenue and Taxation Code.
§15103.3. Intangible Personal Property.
Note

The term “intangible personal property” includes stocks, bonds, notes (whether secured or unsecured), bank deposits, accounts receivable, patents, trademarks, copyrights, goodwill, partnership interests, life insurance policies, and other choses in action.
NOTE

Reference: Section 15103, Revenue and Taxation Code.
§15103.4. Residence.
Note

For the purpose of the Gift Tax Law the term “residence” is synonymous with legal residence or domicile.
Any donor who claims that his residence is outside the State of California must, in support of such claim, file with the State Controller an affidavit to that effect on Form GT-11.
NOTE

Reference: Section 15103, Revenue and Taxation Code.
§15103.5. Residence of Married Women and Minors.
Note

Generally, a married woman has the same residence as her husband, even though she is separated from him. The residence of a minor, ordinarily, is that of the father, or of the mother if the father is deceased. Accordingly, if a man has his residence in California, his wife and minor children, generally, likewise have their residence here.
NOTE

Reference: Section 15103, Revenue and Taxation Code.
§15103.6. Resident.
Note

The term “resident” means a person whose residence is in the State of California.
NOTE

Reference: Section 15103, Revenue and Taxation Code.
§15103.7. Nonresident.
Note

The term “nonresident” means a person whose residence is outside the State of California.
NOTE

Reference: Section 15103, Revenue and Taxation Code.
§15103.8. Joint Tenancy.
Note

For the purpose of the Gift Tax Law the term “joint tenancy” includes any ownership of property by two or more persons, the respective interests of whom are equal, both as to title and possession, and were acquired at the same time and by the same title. The distinguishing incident of this character of ownership is the right of the surviving owner to the sole ownership of the property by virtue of his survivorship.
Note: As to transfers of joint tenancy property, see Sections 15104.2, 15104.3, 15104.4, and Revenue and Taxation Code Section 15104.5.
NOTE

Reference: Section 15103, Revenue and Taxation Code.
§15103.9. Future Interest.
Note

The term “future interest” includes a remainder of other estate or interest in property, whether vested or contingent, the right to the use, possession, or enjoyment of which is limited to commence at, or is postponed to, some future date or time.
Note: As to the exclusion of future interests from the annual exemption, see Revenue and Taxation Code Section 15402.
NOTE

Reference: Section 15103, Revenue and Taxation Code.
§15103.10. Tax-Exempt Securities.
Note

Inasmuch as the gift tax is a tax upon the privilege of transferring property by gift, and not upon the subject of the gift, tax-exempt federal, state, or municipal bonds or other evidences of indebtedness are subject to the Gift Tax Law.
NOTE

Reference: Section 15103, Revenue and Taxation Code.
§15104. Transfers--In General.
Note

The Gift Tax Law ordinarily reaches every transfer of property made after 10 p.m. of June 21, 1939, by an individual resident or nonresident without an adequate and full consideration in money or money's worth, to the extent that the transfer is within this State's taxing jurisdiction. A transfer may be made in trust or otherwise, may be direct or indirect, and may relate to property which is real or personal, tangible or intangible.
NOTE

Reference: Section 15104, Revenue and Taxation Code.
§15104.1. Cessation of Donor's Dominion or Control.
Note

One of the principal elements in a transfer subject to the Gift Tax Law is the complete divestment of the donor's control over the property transferred. If the donor so parts with his dominion and control over the property as to leave him no power to cause the beneficial title to be revested in himself, the transfer is complete. But a transfer, though passing both legal and beneficial title, is still in essence merely formal so long as there remains in the donor a power to cause the revesting of the beneficial title in himself, and the gift remains incomplete during the existence of the power. The relinquishment or termination of the power is regarded as the event which completes the transfer. The receipt of income from the transferred property by the donee during the interim between the formal making of the transfer and the relinquishment or termination of the power operates to free such income from the donor's power to receive it himself, and constitutes a gift of such income in the year of its receipt.
A possibility of reverter does not in and of itself constitute a retention of dominion and control. When a transfer is made involving such a possibility, the tax is computed as though the transfer were made subject to a condition or contingency (see Section 15210).
NOTE

Reference: Sections 15104 and 15105, Revenue and Taxation Code.
§15104.2. Transfer of Community Property into Joint Tenancy, or Vice Versa.
Note     •     History

A transfer or conversion of community property into a joint tenancy between the spouses does not constitute a gift. The same is true as to a transfer or conversion of joint tenancy property owned by a husband and wife into their community where both spouses made equal contributions to the joint tenancy.
Where there are unequal contributions made to real property held by a husband and wife in joint tenancy, created on or after September 11, 1957 and before January 1, 1981, see Sections 15104.50 and 15104.51.
NOTE

Authority cited: Section 16506, Revenue and Taxation Code. Reference: Section 15104, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§15104.3. Transfer of Separate Property into Joint Tenancy.
Note     •     History

Unless otherwise indicated it is assumed in this regulation that the transfers were not made for an adequate and full consideration in money or money's worth.
(a) Joint Bank Account. If A with his own separate funds creates a joint bank or similar account for himself and B, there is a gift from A to B when the latter lawfully and rightfully withdraws sums from the account for his own purposes, to the extent of any and all amounts so withdrawn.
If A and B with their own separate and individual funds create a joint bank or similar account between them, any lawful and rightful withdrawal from the account by A or B in excess of his contribution will constitute a gift from the other at the time of such withdrawal.
(b) Joint U. S. Savings Bond. If A with his own separate funds purchases a United States savings bond in his name and the name of B, i.e., payable to A or B, there is a gift from A to B when the latter lawfully and rightfully surrenders the bond for cash for his own purposes.
If A and B with their own separate and individual funds purchase a United States savings bond in both names, i.e., payable to A or B, upon the lawful and rightful surrender of the bond for cash any amount received by A or B in excess of his contribution will constitute a gift from the other at the time of such cashing of the bond.
(c) Joint Tenancy Other Than Joint Bank Account or Joint U. S Savings Bond.
(1) Personal Property. If A with his own separate property creates a joint tenancy in personal property, other than a joint bank or similar account or a joint United States savings bond, in favor of himself and B there is a gift from A to B of one-half of the property at the time that the tenancy is created.
If A and B with their own separate and individual property create a joint tenancy in personal property, other than a joint bank or similar account or a joint United States savings bond, in favor of themselves, each makes a gift to the other of that portion of his contribution which exceeds his one-half equal interest in the tenancy.
(2) Real Property.
(A) If A with his own separate property creates a joint tenancy in real property in favor of himself and B, an individual who is not the spouse of A, there is a gift from A to B of one-half of the property at the time that the tenancy is created.
If A and B, two individuals who are not husband and wife, with their own separate property create a joint tenancy in real property in favor of themselves, each makes a gift to the other of that portion of his contribution which exceeds his one-half equal interest in the tenancy.
(B) If A with his own separate property created, prior to September 11, 1957, a joint tenancy in real property in favor of himself and his spouse, B, or if A and B, husband and wife, with their own separate property created, prior to September 11, 1957, a joint tenancy in real property in favor of themselves, the rules applicable regarding the making of a gift are the same as in subdivision (c)(2)(A) of this regulation.
(3) Joint Tenancy Real Property Between Husband and Wife Created on or After September 11, 1957 and Before January 1, 1981. For the rules applicable regarding the making of a gift by reason of the creation, on or after September 11, 1957, and before January 1, 1981, of a joint tenancy between husband and wife in real property, see Revenue and Taxation Code Section 15104.5, then in effect but subsequently repealed, effective January 1, 1981.
Note: As to the definition of “joint tenancy,” see Section 15103.8.
As to the transfer of community property into joint tenancy, see Section 15104.2.
NOTE

Authority cited: Section 16506, Revenue and Taxation Code. Reference: Section 15104, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (c) filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§15104.4. Transfer of Joint Tenancy Property to Third Person.
Note

It is assumed in this regulation that the transfers were not made for an adequate and full consideration in money or money's worth.
(a) Joint Bank Account. A transfer of a joint bank or similar account by the joint tenants to a third person constitutes a gift from each tenant to the extent of, or in proportion to, his contribution to the account.
If a joint bank or similar account is created with community property each spouse contributes one-half of such property.
(b) Joint U. S. Savings Bond. A transfer of a joint United States savings bond by the joint tenants to a third person constitutes a gift from each tenant to the extent of, or in proportion to, his contribution for the bond.
If a joint United States savings bond is purchased with community property each spouse contributes one-half of such property.
(c) Joint Tenancy Other Than Bank Account, U. S. Savings Bond, or Real Property Owned by Husband and Wife. A transfer of joint tenancy property, other than a joint bank or similar account, a joint United States savings bond, or real property owned by a husband and wife in a joint tenancy created on or after September 11, 1957, to a third person constitutes a gift of one-half of such property by each joint tenant.
Note: For a transfer to a third person of real property owned by a husband and wife in a joint tenancy created on or after September 11, 1957, see Section 15104.50.
NOTE

Reference: Section 15104, Revenue and Taxation Code.
§15104.5. Release of Debt.
Note

If A owes B a sum of money, and B without an adequate and full consideration in money or money's worth releases A from the obligation to repay it, the release constitutes a gift to A.
NOTE

Reference: Section 15104, Revenue and Taxation Code.
§15104.6. Permitting Statute of Limitations to Run on Obligation.
Note

If A lends money to B, and then with donative intent permits the statute of limitations to run against his right to recover in an action at law upon the obligation, a gift to B occurs when the statute of limitations has run.
NOTE

Reference: Section 15104, Revenue and Taxation Code.
§15104.7. Transfer of Corporate Property.
Note

A transfer of property by a corporation to A not made for an adequate and full consideration in money or money's worth is a gift to the latter from the stockholders or members of the corporation in proportion to their respective interests, except where A himself is a stockholder or member of the corporation and the transfer is a distribution to him as such from earnings or as a result of a liquidation.
NOTE

Reference: Section 15104, Revenue and Taxation Code.
§15104.8. Transfers in Trust.
Note

It is assumed in this regulation that the transfers were not made for an adequate and full consideration in money or money's worth.
(a) An irrevocable transfer of property from A to B in trust for the beneficial use of C will ordinarily constitute a gift from A to C. Subsequent transfers or additions to the trust corpus by A will likewise ordinarily constitute gifts from A to C.
(b) A transfer of property from A to B in trust for the beneficial use of A does not constitute a gift. However, the payment of the income from the property to a person other than A constitutes a gift.
(c) A transfer of property from A to B in trust for the beneficial use of A during his life, upon the termination of which the property is to go to C, constitutes a gift of a remainder to C.
(d) A transfer of property from A to B in trust for the beneficial use of C does not constitute a gift if A reserves the power either to designate a new beneficiary other than himself, or to modify or alter the disposition in any way not beneficial to himself, even though he may in all other respects have surrendered his dominion and control over the property. A gift will occur, however, if A should relinquish the power during his lifetime.
(e) A transfer of property from A to B in trust for the beneficial use of C without reservation, except to the extent that if C should predecease A the property will revert to the latter, constitutes a gift from A to C. The tax in such case is computed as though the transfer were made subject to a contingency or condition (see Section 15210).
Note: As to a transfer of property in trust where power to revest in the donor title to the property is vested in the donor, either alone or in conjunction with others, see Revenue and Taxation Code Section 15105.
NOTE

Reference: Section 15104, Revenue and Taxation Code.
§15104.9. Life Insurance.
Note

It is assumed in this regulation that the transfers were not made for an adequate and full consideration in money or money's worth.
(a) If A assigns an insurance policy on his life to B without retaining any of the legal incidents of ownership (as, for example, the right to surrender or cancel the policy, the right to obtain a loan against the policy, the right to its surrender value, or a right to change the beneficiary or assignee, if by the exercise of the latter right the proceeds of the policy might be made payable to A, his estate, his administrator, or his executor), such assignment constitutes a gift from A to B.
(b) If A designates a beneficiary to whom the proceeds of a policy on his life are to be paid, without retaining any of the legal incidents of ownership in the policy, the designation constitutes a gift from A to the person designated.
(c) If A makes an irrevocable gift of a policy, whether by a method noted in subdivisions (a) and (b) or otherwise, and thereafter pays the premiums thereon, each premium payment is a gift in the amount thereof.
(d) If A is the owner of a policy insuring the life of B in which C is the named beneficiary, the payment of insurance proceeds to C, upon B's death, constitutes a gift from A to C.
Note: For valuation of gifts of life insurance, see Sections 15558, 15558.1, and 15558.2.
NOTE

Reference: Section 15104, Revenue and Taxation Code.
§15104.10. Purchase of Annuity.
Note

A transfer of property from A to B pursuant to an agreement under which B is to pay an annuity to C may constitute a gift from A to C. 
NOTE

Reference: Section 15104, Revenue and Taxation Code.
§15104.11. Transfer for Rendition of Service to Third Person.
Note

A transfer from A to B in consideration for a service to be rendered by B to C may constitute a gift from A to C, or both to B and C, depending on whether the service to be rendered is or is not adequate and full consideration in money or money's worth for that which is received by B.
NOTE

Reference: Section 15104, Revenue and Taxation Code.
§15104.12. Transfers by or to Children.
Note

(a) The Gift Tax Law extends to any transfer by a minor child of property which he is legally competent to transfer.
(b) Since the earnings of an unemancipated minor child usually belong to his parents, the payment of the same to the parents by the child or his employer will not ordinarily constitute a gift. On the other hand, the payment of an emancipated minor child's earnings to his parents for whose support he is not legally liable will ordinarily constitute a gift.
(c) If the earnings of an unemancipated minor child are given, transferred, or released to, or are placed in a trust fund for the benefit of, such child by or with the consent of the parents, the amount so given, transferred, released, or placed in trust constitutes a gift to the child from the parents. However, if a portion of the earnings of an unemancipated minor child are given, transferred, or released to, or are placed in trust for the benefit of, such child by or with the consent of the parents, with the purpose of discharging the parents' legal obligation to support the child, and such portion of the child's earnings is reasonably necessary for the child's maintenance, the transaction does not constitute a gift.
(d) A transfer of property or payment of funds by an adult child or an emancipated minor child to or for his parents for whose support he is legally liable will not constitute a gift if the property or funds are reasonably necessary for the maintenance of the parents. However, the transfer or payment will constitute a gift to the extent that the property or funds are not reasonably necessary for the maintenance of the parents.
NOTE

Reference: Section 15104, Revenue and Taxation Code.
§15104.13. Transfers by or for Mental Incompetents.
Note

A transfer or payment without an adequate and full consideration in money or money's worth pursuant to an order, decree, or judgment of a court of law of property or funds owned by a mentally incompetent person will be treated as a gift from the incompetent, unless the transfer or payment is made for the maintenance of a person for whose support the incompetent is legally responsible. If the transfer or payment is not made to a person for whose support the incompetent is legally responsible, or is made to such a person in an amount more than sufficient for his maintenance, the transfer or payment, or the excess thereof over an amount reasonably necessary for maintenance, constitutes a gift from the incompetent.
NOTE

Reference: Section 15104, Revenue and Taxation Code.
§15104.50. Transfer Between Spouses of Real Property Owned by Husband and Wife in Joint Tenancy Created on or After September 11, 1957 and Before January 1, 1981.
Note     •     History

If a joint tenancy between husband and wife is created on or after September 11, 1957 and before January 1, 1981, either by one spouse alone or by both spouses, and, pursuant to Revenue and Taxation Code Section 15104.5, then in effect, the donor does not elect to have the creation of the joint tenancy treated as a transfer by gift, and thereafter the joint tenancy is changed to some other form of ownership prior to January 1, 1981, the donor spouse shall be deemed to have made a transfer by gift to the extent that the proportion of total consideration furnished by such spouse multiplied by the value of the property at the date of terminating the joint tenancy exceeds the value of the interest retained by such spouse.
If the joint tenancy is created with community property each spouse contributes one-half of the community property and the transfer or conversion of the community property into the joint tenancy between the spouses is not deemed a transfer by gift (see Section 15104.2).
If the joint tenancy between husband and wife, created on or after September 11, 1957, is changed to some other form of ownership after January 1, 1981, the change in the form of ownership comes within the marital exclusion pursuant to the provisions of Revenue and Taxation Code Section 15310, as amended and effective January 1, 1981, and no gift tax is due.
This regulation may be illustrated by the following examples: 
EXAMPLE (1). In 1960, husband transfers his separate real property, having a value of $25,000, to himself and wife, as joint tenants. Husband does not elect to have the transfer treated as a gift. In 1975, husband and wife enter a community property agreement, changing the joint tenancy to community property. Husband has made a gift to wife of one-half the value of the property at the date of the community property agreement.
EXAMPLE (2). In 1960, husband transfers his separate real property, having a value of $10,000, to himself and wife, as joint tenants. Husband does not elect to have the transfer treated as a gift. Thereafter, the real property is improved with community property funds in the amount of $20,000. The property is subsequently sold for $60,000, and husband and wife hold the proceeds of sale as community property.
Husband has furnished two-thirds consideration for the joint tenancy property ($10,000 separate and $10,000 community), and he has retained a one-half interest in the proceeds from the sale of the property. Husband has made a gift to wife of $10,000 [$40,000 (2/3 x 60,000) - 30,000 (1/2 x 60,000) = $10,000]. 
EXAMPLE (3). In 1960, husband transfers his separate real property, having a value of $20,000, to himself and wife, as joint tenants. Husband does not elect to have the transfer treated as a gift. Thereafter, the real property is improved with community property funds in the amount of $15,000. The property is sold in 1981 for $85,000, and husband and wife hold the proceeds of the sale as community property. The transfer from the husband to the wife comes within the marital exclusion pursuant to Revenue and Taxation Code Section 15310, as amended and effective for gifts made after January 1, 1981, and no gift tax is due.
NOTE

Authority cited: Section 16506, Revenue and Taxation Code. Reference: Section 15104.5, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§15104.51. Transfer to Third Person of Real Property Owned by Husband and Wife in Joint Tenancy Created on or After September 11, 1957.
Note     •     History

Unless otherwise indicated it is assumed in this regulation that the transfers were not made for an adequate and full consideration in money or money's worth.
If a joint tenancy between husband and wife in real property is created on or after September 11, 1957 and before January 1, 1981, either by one spouse alone or by both spouses, and, pursuant to Revenue and Taxation Code Section 15104.5, then in effect, the donor does not elect to have the creation of the joint tenancy treated as a transfer by gift, and thereafter the real property is transferred prior to January 1, 1981 by the spouses to a third person, each spouse is deemed to have made a gift to the third person to the extent of, or in proportion to, his/her contribution to the joint tenancy.
If a joint tenancy between husband and wife in real property is created on or after September 11, 1957, and before January 1, 1981, either by one spouse alone or by both spouses, and, pursuant to Revenue and Taxation Code Section 15104.5, then in effect, the donor does not elect to have the creation of the joint tenancy treated as a transfer by gift, and thereafter the real property is transferred after January 1, 1981 by the spouses to a third person, each spouse is deemed to have made a gift of an undivided one-half interest in the property to the third person.
This regulation may be illustrated by the following examples:
EXAMPLE (1). A in November, 1957, with his own separate property created a joint tenancy in real property, having a market value of $30,000, in favor of himself and his spouse, B. A did not report the creation of the joint tenancy as a transfer by gift in his gift tax return for the year 1957. In July, 1958, A and B transferred the real property to a third person, C. The market value of the property at that time was $31,000. There was a gift in 1958 of $31,000 from A to C.
EXAMPLE (2). A and B, husband and wife, in November, 1957, with their own separate and individual funds purchased a parcel of real property in joint tenancy for $30,000. A contributed $25,000 and B contributed $5,000 to the purchase price. A did not report the creation of the joint tenancy as a transfer by gift in his gift tax return for the year 1957. In July, 1958, A and B transferred the real property to a third person, C. The market value of the property at that time was $31,500. A made a gift of $26,250 and B a gift of $5,250 to C in 1958.
EXAMPLE (3). A and B, husband and wife, in November, 1957, with community funds purchased a parcel of real property in joint tenancy for $30,000. In July, 1958, A and B transferred the real property to a third person, C. The market value of the property at that time was $31,500. A and B each made a gift of $15,750 to C in 1958.
EXAMPLE (4). In 1965, A transfers his separate real property, having a value of $25,000, to himself and his spouse, B, as joint tenants. A did not report the creation of the joint tenancy as a transfer by gift in his gift tax return for the year 1965. In June, 1981, A and B transferred the real property to a third person, C. The market value of the property at that time was $100,000. A and B each made a gift of $50,000 to C in 1981.
NOTE

Authority cited: Section 16506, Revenue and Taxation Code. Reference: Section 15104, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§15106. Transfer for Inadequate Consideration.
Note

A transfer of property for a valuable yet inadequate consideration in terms of money or money's worth constitutes a gift of the difference between the value of the property transferred and the value of the consideration received. Thus, for example, A transfers property valued at $10,000 to B in return for property valued at $5,000. The difference between the values of the property, or $5,000, represents a gift from A to B. There would be no gift in such case, however, if the transaction represented a bona fide sale or exchange made in the ordinary course of business and was free from donative intent.
Any consideration for a transfer not reducible to a money value, such as love and affection or a promise of marriage, will be disregarded, and the entire value of the property transferred will be treated as the amount of the gift.
NOTE

Reference: Section 15106, Revenue and Taxation Code.
§15109. Donee.
Note

For the purpose of the Gift Tax Law the term “donee” means any individual or other person who receives, or is the beneficiary of, any property, or any property right or interest, transferred by donor. Where a trust is involved, the beneficiary, not the trustee, is the donee.
NOTE

Reference: Section 15109, Revenue and Taxation Code.
§15118. “Net Gifts” Defined.
Note

The term “net gifts,” in respect to gifts made by a donor to a particular donee during any calendar year, means the aggregate amount or market value of all gifts made by the donor to the donee during a calendar year after 10 p.m. of June 21, 1939, less the sum of the following:
(a) The annual exemption, if any.
(b) The amount of any gifts falling within the charitable exemption, if any.
(c) The amount of any gifts falling within the intangible exemption, if any.
Although the amount of the specific exemption is a deductible item in determining the sum of net taxable gifts (see Revenue and Taxation Code Section 15204), it is to be observed that it is not deductible in ascertaining the amount of “net gifts.”
NOTE

Reference: Section 15118, Revenue and Taxation Code.
Article 2. Imposition and Computation of Tax
§15204. Computation of Tax--In General.
Note

The gift tax is computed on the basis of the aggregate net gifts made to a particular donee, not on the basis of the aggregate net gifts made to all donees. Thus in each case there will be as many separate computations of tax as there are donees.
For the method of computation of gift tax, see Revenue and Taxation Code Section 15204.
In view of the method of computation of the gift tax as set forth in Revenue and Taxation Code Section 15204, the tax for any calendar year is in effect computed only on net taxable gifts (i.e., the excess of all gifts over exemptions allowed) for that year, upon the application of rates determined by the aggregate of all net gifts, which include the specific exemption (see Section 15118), made to the donee both during such year and all prior calendar years since 10 p.m. of June 21, 1939. The same result is reached by computing the tax on all net taxable gifts for prior years. This is the method used on form GT-1, Donor's Gift Tax Return, and explained in the Instructions for Filing Your California Gift Tax Return. It may be noted that in computing the tax on the return and pursuant to the instructions the specific exemption is not deducted separately but is automatically allowed in the tax table set forth in the instructions.
It may also be noted that if no gifts were made to a donee during any preceding calendar year, the tax for the year during which gifts are first made to the donee is computed by applying the specific exemption against the first $25,000 tax rate bracket (see Revenue and Taxation Code Sections 15205 through 15208), of net gifts made to the donee, by taxing the remainder of net gifts in the first bracket at the first tax rate, by taxing the next $25,000 of net gifts at the second tax rate, by taxing the amount of net gifts in the third tax rate bracket at the third tax rate, and so on. See also Section 15426.1 and note application of specific exemptions where the exemption is in an amount in excess of $25,000.
NOTE

Reference: Section 15204, Revenue and Taxation Code.
§15210. Contingent or Conditional Gift.
Note

If a taxable transfer is made subject to a contingency or condition upon the occurrence of which the interest of any donee in the property transferred may, in whole or in part, be created, defeated, extended, or abridged, the tax is computed at the highest rate possible upon the happening of the contingency or condition. For example, A gives B a life interest in property valued at $100,000, and C, D, and E, or the survivor, a remainder interest in the property at B's death. C is not related to A. D and E are brothers of A. In such case the tax on the remainder will be computed on the supposition that the property will go to C, since a tax on a remainder to C would be computed at higher rates than on a remainder going to D or E (see Revenue and Taxation Code Sections 15110 through 15113 and 15205 through 15208). Any person who pays the tax so computed may secure a refund in the event that D or E survive B's death, in an amount equal to the difference between the tax paid and the tax which would have been payable had it been computed on the basis of a transfer to the actual survivor or survivors (see Revenue and Taxation Code Section 16224).
The payment of a tax due on a contingent or conditional gift may be deferred on the filing of a bond (see Revenue and Taxation Code Sections 15931 through 15937), and may under proper circumstances be the subject of a compromise (see Revenue and Taxation Code Sections 15951 and 15952).
NOTE

Reference: Section 15210, Revenue and Taxation Code.
§15211. Computation Where Several Gifts Part of One Transaction.
Note

Where a donor makes gifts of property to each of several persons as part of one transaction under which each donee is to transfer the property received by him to an ultimate donee, the Controller may elect to disregard the severalty of the gifts and compute the tax payable on the aggregate amount transferred as though each gift had been made directly to the ultimate donee. An example of a situation of this kind is where A makes gifts of $4,000 each to B, C, D, and E pursuant to an agreement that they, in turn, will transfer the property given them to G. See also Section 15651 as to returns of gifts to several persons as part of one transaction.
NOTE

Reference: Section 15211, Revenue and Taxation Code.
Article 3. Community, Quasi--Community, and Separate Property
§15301. Transfer of Community Property to One Spouse.
Note     •     History

If community property is transferred by gift from one spouse to the other, the transferor's one-half interest in the community property is subject to the Gift Tax Law, except that if the transfer occurred on or after September 17, 1965 and prior to January 1, 1976, or at any time after January 1, 1981, none of the property so transferred is subject to the law.
NOTE

Authority cited: Section 16506, Revenue and Taxation Code. Reference: Section 1530, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§15301.50. Transfer of Quasi-Community Property to One Spouse.
Note     •     History

If quasi-community property is transferred by gift from one spouse to the other, one-half of the property transferred is subject to the Gift Tax Law except that if the transfer occurs on or after January 1, 1981 none of the property so transferred is subject to law. For the definition of “quasi-community property,” see Revenue and Taxation Code Section 15300.
NOTE

Authority cited: Section 16506, Revenue and Taxation Code. Reference: Section 15301, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§15302. Transfer of Community Property to Third Person.
Note

If community property is transferred by gift to a person other than one of the spouses, the whole of such property is subject to the Gift Tax Law, each spouse being considered a donor of one-half.
NOTE

Reference: Section 15302, Revenue and Taxation Code.
§15302.50. Transfer of Quasi-Community Property to Third Person.
Note

If quasi-community property is transferred to a third person, all of the property is subject to the Gift Tax Law and the spouse who owned the property is the donor, except that at the election of both spouses, each shall be the donor as to one-half.
NOTE

Reference: Section 15302.5, Revenue and Taxation Code.
§15303.50. Transfer of Quasi-Community Property into Community Property or Other Equal Ownership.
Note

If quasi-community property of either spouse is transferred into ownership of both spouses as community property, joint tenancy or equal interests as tenants in common such a transfer is not subject to the Gift Tax Law. If such transfer is made by the wife on or after September 15, 1961 and prior to January 1, 1976 and the wife died thereafter within these dates, one-half may be subject to the Gift Tax Law under the provisions of Revenue and Taxation Code Section 15303.5 then in effect.
NOTE

Reference: Section 15303.5, Revenue and Taxation Code.
§15306. Presumption.
Note     •     History

The usual presumption that property acquired by a husband or wife after marriage is community property does not apply as against any claim by the State for the gift tax. The burden of proving any property to be community property is on the person who claims that it has such status. A claim that property is community property must be supported by form GT-3, entitled “Marital Property Declaration.” This declaration should be executed by one of the spouses, or if it is for some reason impossible for one of the spouses to execute the declaration, by any person having actual knowledge of the facts required, and submitted to the State Controller. Copies of form GT-3 may be obtained from the Division Tax Administration Gift Tax of the Controller's office in Los Angeles, Sacramento or San Francisco.
NOTE

Authority cited: Section 16506, Revenue and Taxation Code. Reference: Section 15306, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
§15310. Transfer of Separate Property Between Spouses.
Note     •     History

(a) Transfers on or after January 1, 1981. If either spouse transfers separate property by gift to the other spouse on or after January 1, 1981, the transfer is not subject to the Gift Tax Law.
(b) Transfers on or after January 1, 1976 and before January 1, 1981. If either spouse transfers separate property by gift to the other spouse on or after January 1, 1976, and before January 1, 1981, one-half of the property so transferred is not subject to the Gift Tax Law. This exclusion, however, does not apply to any separate property or proceeds thereof which had been converted from community or quasi-community property (see Revenue and Taxation Code Section 15310(b) then in effect). In the latter case the entire separate property transferred by the donor spouse is subject to the Gift Tax Law. For this purpose, see Section 13805.
(c) Transfers prior to January 1, 1976. If either spouse transfers separate property to the other spouse by gift made prior to January 1, 1976, all of the property so transferred is subject to the Gift Tax Law.
NOTE

Authority cited: Section 16506, Revenue and Taxation Code. Reference: Section 15310, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).
Article 4. Annual Exemptions
§15401. Application.
Note

The annual exemption is applicable where the aggregate gifts to a donee are $3,000 or less. Where the annual gifts to a donee exceed $3,000 the exemption operates as to the first $3,000 of the gifts. Thus, for example, if A makes gifts of money to B in the calendar year 1974 totaling $2,500 in amount, the entire $2,500 is within the exemption. On the other hand, if the gifts total $3,500 in amount, $3,000 would be within the exemption and the excess would be subject to the tax imposed, unless also within one of the other exemptions specified in the law (i.e., the specific exemption, the intangible exemption, or the charitable exemption).
In view of this exemption a donor may, during a calendar year, make as many gifts not exceeding $3,000 in amount or value to as many different persons as he may desire without incurring a tax thereon. For example, A may give $3,000 in cash to each of ten persons during any calendar year. Since the gift to each individual donee would not exceed $3,000, no tax would be due.
The $3,000 annual exemption referred to above applies to gifts made on or after July 29, 1967. The annual exemption for gifts made prior thereto is $4,000 and the same principles otherwise apply.
NOTE

Reference: Section 15401, Revenue and Taxation Code.
§15401.1. When to Be Taken.
Note

The annual exemption must be taken or used in the year for which it is allowed. The exemption permitted for the year 1974, for instance, must be taken or used in respect to gifts made during the calendar year 1974. It cannot be taken or used as to gifts made during the calendar year 1975.
NOTE

Reference: Section 15401, Revenue and Taxation Code.
§15402. Exclusions from Exemption.
Note

In addition to the exclusions from the annual exemption provided in Revenue and Taxation Code Section 15402, the following gifts are not within this exemption:
(a) A gift made on or after March 6, 1940, and prior to July 16, 1941, by a donor who is an alien nonresident of the United States.
(b) A gift made in trust after 10 p.m. of June 21, 1939, and prior to March 6, 1940.
Note: As to the definition of the term “future interest,” see Section 15103.9.
NOTE

Reference: Section 15402, Revenue and Taxation Code.
Article 4.1. Specific Exemption
§15421. Specific Exemption--In General.
Note

In addition to the other exemptions mentioned in this group, a donor is entitled to a specific exemption in respect to all gifts made by him to any one donee during the course of his (the donor's) lifetime. This exemption varies in amount in accordance with the donee's degree of relationship to the donor (see Revenue and Taxation Code Sections 15110 through 15113, and 15421 through 15424).
A donor who is an alien nonresident of the United States is not entitled to the specific exemption in respect to any gifts made by him on or after March 6, 1940.
It is to be noted that the specific exemption is the same in amount as the specific exemption in the Inheritance Tax Law.
NOTE

Reference: Section 15421, Revenue and Taxation Code.
§15425. Alien Nonresident of United States.
Note

The term “alien nonresident of the United States” means any person whose residence is outside the United States and who is not a citizen of the United States.
NOTE

Reference: Section 15425, Revenue and Taxation Code.
§15426. Application--In General.
Note

Only one specific exemption is allowed in respect to a particular donee regardless of the number of calendar years during which the donor may make gifts to such donee.
The exemption must be applied to the amount of net gifts (see Section 15118), as they are made. If, however, the exemption, or the unused portion thereof, exceeds the amount of net gifts made in a particular calendar year, the excess may be applied to the net gifts made in subsequent years, until the maximum amount of the exemption has been used. Thus, for example, if A makes net gifts totaling $2,500 to B, his brother, during the calendar year 1958, the entire specific exemption of $2,000 which is allowable in such case must be taken for the gifts on the return filed for 1958. On the other hand, if the net gifts to B had totaled $1,500, only $1,500 of the exemption would have to be taken for the year 1958, and A could apply the balance of the exemption, or $500, to the amount of net gifts made by him to B in later calendar years.
It is to be noted that no part of the specific exemption is considered to be used in any calendar year until after the application of the annual exemption for that year and the charitable and intangibles exemptions, if any.
NOTE

Reference: Section 15426, Revenue and Taxation Code.
§15426.1. Application Against Lowest Tax Rate Bracket.
Note

The specific exemption must be applied against the lowest tax rate bracket or brackets of net gifts made to a particular donee (see Revenue and Taxation Code Sections 15205 to 15207, inclusive), and consumes the first portion of such bracket or brackets up to the amount allowed. Thus, where the specific exemption is under $25,000 it is applied against the first tax rate bracket and the remainder of net gifts in that bracket is taxable at the first and lowest tax rate for that particular donee class(see Revenue and Taxation Code Sections 15110 to 15113 and 15205 to 15207, inclusive). Where the specific exemption is over $25,000, as in the case of the $60,000 exemption of a donee spouse (see Revenue and Taxation Code Section 15421, as amended by Chapter 942, Statutes 1975, in effect as to gifts made on or after January 1, 1976), the first $25,000 thereof is applied to the first and lowest tax rate bracket, the next $25,000 is applied to the second and next lower bracket and the remaining $10,000 of the exemption is applied to the third tax rate bracket, any excess of gifts being taxed in the rate of the third tax bracket until that bracket is consumed up to $100,000, and so on into the higher tax brackets. (See also Section 15204.)
NOTE

Reference: Section 15426, Revenue and Taxation Code.
§15427. Change in Specific Exemption of Donee.
Note

When the sum of all net gifts made to a donee equals or exceeds the amount of the specific exemption allowable on a gift made in any calendar year, no further exemption is allowable (see Revenue and Taxation Code Section 15427). The application of this provision may be illustrated in the following situations:
(a) Minor Child Becomes an Adult.
A minor child's specific exemption of $12,000 ceases upon reaching 18 years of age when the $5,000 specific exemption of an adult child then becomes applicable. Thus, a donor who has used $5,000 or more of the specific exemption with respect to gifts to a minor child is not entitled to any additional specific exemption to the same donee after the child reaches majority at 18 years of age. For example, if A makes a gift of $10,000 to B, his minor child, in 1973, the net gift after excluding the $3,000 annual exemption is $7,000 which is within the $12,000 specific exemption of a minor child donee. In 1974 B reaches majority and thereafter A makes a further gift to B of $20,000. No additional specific exemption is applicable since A has used more than a $5,000 specific exemption with respect to B while B was a minor. The later gift would, however, be subject to an annual exemption of $3,000.
(b) Specific Exemption of a Spouse on and after January 1, 1976.
By legislative act the specific exemption of a spouse donee on and after January 1, 1976 is $60,000, the previous exemption being $5,000 (see Revenue and Taxation Code Section 15421 before and after the 1975 amendment). To the extent that the prior net gifts have not exceeded the $60,000 an additional specific exemption is allowable until that amount is reached in respect to net gifts made after January 1, 1976 to the same donee. If, however, the prior net gifts equal or exceed the $60,000 amount, no further specific exemption is allowable.
NOTE

Reference: Section 15427, Revenue and Taxation Code.
Article 4.2. Charitable Exemption
§15441. Gifts to State of California.
Note

Gifts to the State of California include gifts to any department, board, commission, or other agency of the State.
NOTE

Reference: Section 15441, Revenue and Taxation Code.
§15441.1. Gifts to United States.
Note

Gifts to the United States include gifts to any department, board, commission, or other agency of the United States.
NOTE

Reference: Section 15441, Revenue and Taxation Code.
§15441.2. Gifts to Public Corporations.
Note

Gifts to public corporations include gifts to any county, city and county, city, or district of this State; to any housing authority created pursuant to the “Housing Authorities Law” of California; to the University of the State of California; and to the State Bar of California.
NOTE

Reference: Section 15441, Revenue and Taxation Code.
§15442. Charitable Organization.
Note

An organization will ordinarily be considered to be charitable in character if it is one organized and existing for the principal purpose of promoting the welfare of mankind at large, or of a community, or of some class forming a part of it indefinite as to numbers and individuals, and operates without pecuniary profit or gain to its incorporators, shareholders, or members. Among other organizations that commonly fall in this category are the American National Red Cross; the Boy Scouts of America; and religious, social, educational, recreational, and cemetery nonprofit corporations organized pursuant to Division 2 of Title 1 of the Corporations Code.
NOTE

Reference: Section 15442, Revenue and Taxation Code.
§15442.1. Charitable Gift Generally.
Note

In general, a charitable gift includes any gift for the benefit of an indefinite number of unnamed persons and designed to do any of the following:
(a) Bring them under the influence of religion or education.
(b) Relieve them from disease or suffering.
(c) Assist them to establish themselves in life.
(d) Erect or maintain public buildings or works.
(e) Otherwise lessen the burdens or make better the conditions of the general public or some class of the general public.
NOTE

Reference: Section 15442, Revenue and Taxation Code.
§15442.2. Religious Charitable Gift.
Note

A gift to or for a conceded and established religious organization for any of its purposes will generally be considered as charitable in nature. Such a gift may be in the form of a gift for the beautification or maintenance of the organization's place of worship, for the maintenance of a cemetery operated by it, for the purchase of equipment, or for use in missionary purposes.
NOTE

Reference: Section 15442, Revenue and Taxation Code.
§15442.3. Gift for Care of Cemetery Plot.
Note

A gift to an individual in trust for use in caring for the donor's burial plot is not a charitable gift. On the other hand, a gift or contribution to a private cemetery organization in California for deposit in the latter's perpetual or special care fund, and for use in caring for the donor's burial plot located within the organization's cemetery, or for use in caring for the donor's and any other person's burial plot located within the cemetery, is a charitable gift.
NOTE

Reference: Section 15442, Revenue and Taxation Code.
§15442.4. Educational Charitable Gift.
Note

A gift to or for an institution established for the purpose of advancing the learning or education of an indefinite and undetermined group of people, and not operated for private gain, is ordinarily charitable in nature. The charitable character of the gift is not vitiated by the fact that the institution may charge tuition, if its income from such source is used for its support and is not diverted to private purposes.
Gifts for the founding of public institutions of learning, for providing scholarships for worthy young men and women, for the establishment of university chairs, and for the maintenance of public libraries are all charitable in nature.
NOTE

Reference: Section 15442, Revenue and Taxation Code.
§15442.5. Gifts for Indigent and Dependent People.
Note

Commonly within the category of charitable gifts are gifts for the use of widows and orphans, gifts for placing and maintaining free beds in hospitals for deserving sick people in indigent circumstances, gifts to orphan asylums, and gifts to public institutions for the blind.
NOTE

Reference: Section 15442, Revenue and Taxation Code.
§15442.6. Gifts for Benefit of Animals.
Note

Charitable gifts are not limited to those for the benefit of mankind, but may also take form as gifts for the benefit of animals, as, for example, to prevent cruelty to them.
NOTE

Reference: Section 15442, Revenue and Taxation Code.
§15442.7. Gift for Promotion of Political Purposes.
Note

A gift for the promotion of political purposes may be charitable in nature if the ends sought are not opposed to good morals and can be attained by peaceable means, and not by war, riot, or revolution. However, the charitable exemption is not applicable if the gift is made to an organization a substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation.
NOTE

Reference: Section 15442, Revenue and Taxation Code.
§15442.8. Proof Required.
Note

In order to prove his right to a charitable exemption, a donor must submit such documents or evidence as may be requested by the State Controller.
Note: As to the meaning of “foreign state or country,” see Section 15451.1.(b).
NOTE

Reference: Section 15442, Revenue and Taxation Code.
Article 4.3. Intangible Exemption
§15451. Proof Required.
Note

In order to prove his right to an intangibles exemption, a donor must submit an affidavit of nonresidence on Form GT-11, together with such other documents or evidence as may be requested by the State Controller.
NOTE

Reference: Section 15451, Revenue and Taxation Code.
§15451.1. Foreign State or Country.
Note

For the purpose of the Gift Tax Law the term “foreign state or country” means any jurisdiction other than one embraced within the United States.
NOTE

Reference: Section 15451, Revenue and Taxation Code.
Article 5. Valuation
§15551. Market Value.
Note

The value of any property for the purpose of taxation under the Gift Tax Law is ordinarily the market value of the property at the date of the gift. “Market value,” as a general rule, is the price that a willing buyer would pay to a willing seller of property, neither being under any compulsion to buy or sell.
If there is more than one unit of property included in a gift, the market value of the whole will generally be determined by ascertaining the market value on the date of the gift of each individual unit. In the case of a gift of stocks or bonds, each stock or bond will be treated as an individual unit.
All relevant facts and elements of value as of the time of a gift will be considered in determining its value.
NOTE

Reference: Section 15551, Revenue and Taxation Code.
§15551.1. Encumbrances and Liens.
Note

If any property is transferred subject to a bona fide encumbrance or lien, such as a trust deed, mortgage, or pledge, the market value of the property is its gross market value at the date of the gift, less the amount of the encumbrance or lien at that time.
NOTE

Reference: Section 15551, Revenue and Taxation Code.
§15551.2. Community Property Transferred to Spouse.
Note

The value of a gift of community property to one or the other of the spouses is ordinarily one-half of the total market value of the property at the date of the gift (see Section 15301).
Note: As to returning gifts of community property, see Sections 15656.3 and 15656.6.
NOTE

Reference: Section 15551, Revenue and Taxation Code.
§15551.3. Separate Property Transferred into Community.
Note

The value of a gift to a spouse effected by the transfer or conversion of his or her spouse's separate property into their community is ordinarily one-half of the total market value of the separate property at the date of the gift.
Note: As to marital exclusion, see Section 15310. As to returning transfers or conversions of separate property into community property, see Section 15656.4.
NOTE

Reference: Section 15551, Revenue and Taxation Code.
§15551.4. Real Property--In General.
Note

The valuation of real property for gift tax purposes will depend upon all the facts and circumstances in each case. In making the valuation all relevant and competent evidence will be given consideration.
NOTE

Reference: Section 15551, Revenue and Taxation Code.
§15551.5. Local Assessed Value.
Note

Unless it represents the actual market value of the property, the assessed value of real property for ad valorem taxation will not be accepted as the value thereof for gift tax purposes.
NOTE

Reference: Section 15551, Revenue and Taxation Code.
§15551.6. Securities--In General.
Note

The value of a gift of stocks or bonds is, generally, the market value per share or bond at the date of the gift.
NOTE

Reference: Section 15551, Revenue and Taxation Code.
§15551.7. Listed Securities and Unlisted Securities Traded on Open Market.
Note

(a) Selling Prices.
In the case of a gift of stocks or bonds which have a market, on a stock exchange, in an over-the-counter market, or otherwise, the mean between the highest and lowest quoted selling prices on the date of the gift will be deemed the market value per share or bond.
If there were no sales on the date of the gift, but there were sales on dates within a reasonable period both before and after the date of gift, the market value is determined:
(1) By taking the means between the highest and lowest quoted selling prices on the nearest date before and the nearest date after the date of gift;
(2) By then prorating the difference between such mean prices to the date of gift, considering only the respective numbers of trading days between the selling dates and the date of gift in such proration; and
(3) By finally adding or subtracting, as the case may be, the prorated portion of the difference to or from the mean price on the nearest date before the date of gift. For example, assume that a gift of stock is made on Friday, June 15, that sales of the stock nearest such date occurred two trading days before (Wednesday, June 13) and three trading days after (Wednesday, June 20), and that on these days the mean sale prices per share were $10 and $15, respectively. Dividing the difference between the mean sale prices ($5) by the number of trading days before and after the date of gift (2 + 3) gives $1 per trading day. The portion of the difference attributable to the period from the nearest date before the date of gift to the date of gift (2 x $1) is $2. This amount added to the mean price on the nearest date before the date of gift ($10) equals $12. Accordingly, $12 will be taken as representing the market value of a share of the stock on the date of gift. If, instead, on June 13 and June 20 the mean sale prices per share were $15 and $10, respectively, $13 will be taken as representing the market value of a share of the stock on the date of gift. As another example, assume that the gift was made on Sunday, October 7, and that Saturday and Sunday were not trading days. If sales of stock occurred one trading day before (Friday, October 5) at a mean sale price per share of $20 and one trading day after (Monday, October 8) at a mean sale price per share of $23, then the market value per share of stock as of the date of gift is $21.50.
(b) Bid and Asked Prices.
If the provisions of subdivision (a) of this regulation are inapplicable because actual sales are not available during a reasonable period beginning before and ending after the date of gift, the market value may be determined by taking the mean between the bona fide bid and asked prices on the date of gift, or if none:
(1) By taking the means between the bona fide bid and asked prices on the nearest date before and the nearest date after the date of gift, if both such nearest dates are within a reasonable period of the date of gift;
(2) By then prorating the difference between such mean prices to the date of gift, considering only the respective numbers of trading days between such nearest dates and the date of gift in such proration; and
(3) By finally adding or subtracting, as the case may be, the prorated portion of the difference to or from the mean price on the nearest date before the date of gift.
(c) Incomplete Selling Prices or Bid and Asked Prices.
If the provisions of subdivisions (a) and (b) of this regulation are inapplicable because no actual sale prices or bona fide bid and asked prices are available on a date within a reasonable period before the date of gift, but such prices are available on a date within a reasonable period after the date of gift, or vice versa, then the mean between the highest and lowest of such sale prices or between such bid and asked prices may be taken as the market value.
(d) Securities Listed on More Than One Exchange.
If a stock or bond is listed on more than one exchange, the records of the exchange where the stock or bond is principally dealt in should be employed in ascertaining market value.
NOTE

Reference: Section 15551, Revenue and Taxation Code.
§15551.8. Additional Factors in Valuation of Listed and Traded Securities.
Note

In any case in which it is established that the value per share or bond on the basis of selling or bid and asked prices does not reflect the market value of a security, other relevant facts and elements of value will also be considered in determining its market value. A case of this kind would include one in which the sale of a listed stock on the date of a gift was made at a price arrived at on the basis of erroneous, false, and misleading information concerning the affairs and financial condition of the issuing corporation.
The so-called “blockage rule” is not recognized in determining the value of securities for gift tax purposes. 
NOTE

Reference: Section 15551, Revenue and Taxation Code.
§15551.9. Untraded and Closely Owned Securities.
Note

(a) The value of corporate or other bonds not traded on an open market is usually arrived at by giving consideration to the security behind the bonds, the interest yield, the date of maturity, and other relevant factors.
The value of shares of closely held stock is usually arrived at by first ascertaining the net worth (the excess of the assets, including good will, if any, over liabilities) of the corporation as a going business, and then assigning to each share its proportion of such worth.
In determining net worth the tangible assets of the business in question should be valued at their market value at the date of gift to a going concern, and not at their cost to the particular business nor at their book value.
(b) Among other factors that will be considered in the valuation of closely held stock are the following:
(1) The period of time that the issuing corporation has been in existence and its position in the trade.
(2) The nature of the corporation.
(3) The operating history of the corporation and, particularly, its earnings over a reasonable period of time.
(4) The balance sheet of the corporation.
(5) The standard of earnings maintained by concerns engaged in similar lines of endeavor.
(6) The strength and danger of competition, both existing and potential.
(7) The management and personnel.
(8) The effect of possible governmental regulation.
(9) The present and future requirements of the corporation in the matter of new land, buildings, or equipment.
(10) Current business policy.
(11) Dividend payment history.
(12) The prices paid on private sales of the shares to persons who were in a position to know their value.
(13) The prospects for future earnings.
NOTE

Reference: Section 15551, Revenue and Taxation Code.
§15551.10. Interest and Dividends.
Note

If the donee does not receive the interest or dividends as part of the gift, interest accrued on bonds or dividends declared on stocks prior to the date of a gift of the bonds or stocks will not be treated as augmenting the taxable value of the bonds or stocks.
NOTE

Reference: Section 15551, Revenue and Taxation Code.
§15551.11. Good Will--General Method of Valuing.
Note     •     History

Unless the facts and circumstances of a particular case require the use of a different method, the valuation of good will is arrived at as follows:
(a) Determine the total amount of assets used in the business, other than good will, patents, trademarks, copyrights, and the like. 
(b) Determine the liabilities of the business and deduct the amount thereof from the sum determined pursuant to subdivision (a).
(c) Determine what percentage of the difference determined pursuant to subdivision (b) represents a fair return thereon (in the absence of evidence to the contrary, 15 percent thereof will ordinarily be considered a proper percentage of return), and then multiply the amount of such difference by the percentage determined. The product will represent the amount of a fair return.
(d) Determine the average net profit of the business for a reasonable period immediately prior to the date of the gift. Five years will ordinarily represent a “reasonable period.”
(e) Deduct the amount of the fair return determined pursuant to subdivision (c) from the average net profit.
(f) Determine the “number of years purchase period.” By this is meant the number of years after a sale of the business for which a buyer, as part of the purchase price, would pay the seller the average net profit of the business. Unless the nature and character of the business in any particular case require a different figure, the number of years purchase period will be considered to be five years.
(g) Multiply the difference between the amount of fair return and the average net profit, as determined pursuant to subdivision (e), by the number of years purchase period. The product will constitute the amount of good will.
NOTE

Reference: Section 15551, Revenue and Taxation Code.
HISTORY

1. Editorial correction of subsection (c) (Register 78, No. 42).
§15551.12. Other Factors Considered in Valuing Good Will.
Note

Among other factors to be considered in the valuation of the good will of a business are those listed in subdivisions (b)(1) to (13) of Section 15551.9.
NOTE

Reference: Section 15551, Revenue and Taxation Code.
§15551.13. Notes and Accounts Receivable.
Note

The value of a note or account receivable, whether secured or unsecured, is presumed to be its face value plus accrued interest, if any, to the date of gift. A lower value may be established by the submission of satisfactory proof that the note or account is worth less because of default in interest, uncollectibility in part by reason of the insolvency of the maker or other parties liable, or for other cause.
NOTE

Reference: Section 15551, Revenue and Taxation Code.
§15551.14. Interest in Business.
Note

In determining the value of any business, or interest therein, transferred without an adequate and full consideration in money or money's worth, a fair appraisal as of the date of the gift should be made of all the assets of the business, tangible and intangible, including good will, and the business or interest therein should be given a net value equal to the amount which a willing purchaser, whether an individual or a corporation, would pay therefor in view of the net value of the assets of the business and its demonstrated earning capacity.
All factors relative to the valuation of other property, if applicable, will be considered in determining the valuation of a proprietary or partnership interest in a business. All evidence bearing upon such valuation should be submitted with the return, including copies of reports in any case in which examinations of the business have been made by accountants, engineers or other technical experts as of or near the date of the gift.
NOTE

Reference: Section 15551, Revenue and Taxation Code.
§15551.15. Patent, Trademark, or Copyright.
Note

The value of a patent, trademark, or copyright is usually the present worth of the estimated future earnings thereof.
NOTE

Reference: Section 15551, Revenue and Taxation Code.
§15551.16. Growing Crop.
Note

Among other factors to be considered in the valuation of a growing crop are the following:
(a) The probable market value of the crop when harvested.
(b) The probable cost of producing and marketing the crop.
(c) The price, if any, paid at or about the date of the gift for futures in the same kind of crop.
NOTE

Reference: Section 15551, Revenue and Taxation Code.
§15552. Limited Estates, Future Estates, Contingent Estates, Annuities (Other Than Annuity Contracts)--In General.
Note

The value of a future, contingent or limited estate, income or interest in property is generally the present value or worth of such estate, income or interest at the date of the gift. In this connection, the Gift Tax Law specifically provides that such present value or worth is to be determined in accordance with the standards of mortality and values set forth in the United States Life Tables: 1959-1961, published by the United States Department of Health, Education and Welfare, Public Health Service, and the rate of interest used in computing the present value of the estate, income or interest is 6 percent per annum compounded annually. In determining the present value or worth as of the date of the gift of a future, contingent, or limited estate, income or interest, other than an annuity in a fixed amount, the yearly income, or the annual value of the use or income, of the estate, income or interest, is considered equivalent to 6 percent of the appraised value of the property upon which the estate, income or interest is based.
A single life annuity table at 6 percent showing the present value or worth of an annuity, a life estate and a remainder interest of $1 due at the end of each year during the life of a male person of a specified age and of $1 due at the death of a male person of a specified age, respectively, is set forth in Section 15552.8 as Table A(1). Table A(2) shows the present value or worth at 6 percent of an annuity, life estate and a remainder interest of $1 due at the end of each year during the life of a female person of a specified age and the present value or worth of $1 due at the death of a female person of a specified age, respectively. The present value or worth at 6 percent of an annuity for a term certain, an income interest for a term certain, and a remainder interest postponed for a term certain is set forth in Section 15552.8 as Table B.
In the case of a gift of the character above set forth made on or after November 10, 1969, but prior to January 1, 1975, the present value or worth thereof is to be determined by the United States Life Tables and Actuarial Tables 1939-1941, Table 38, published by the Bureau of the Census of the United States Department of Commerce, and the rate of interest used in computing the present value of the estate, income or interest is 3 1/2 percent per annum compounded annually. In such a case the yearly income or annual value of the use or income of an estate or interest is 3 1/2 percent of the appraised value of the property upon which the estate or interest is based.
A single life annuity table at 3 1/2 percent showing the present value or worth of an annuity, a life estate and a remainder interest of $1 due at the end of each year during the life of a person of a specified age and of $1 due at the death of a person of a specified age, respectively, is set forth in Section 15552.9 as Table C. The present value or worth at 3 1/2 percent of an annuity for a term certain, and income interest for a term certain, and a remainder interest postponed for a term certain is set forth in Section 15552.9 as Table D.
In the case of a gift of the character above set forth made on or after July 1, 1945, but prior to November 10, 1969, the present value or worth thereof is to be determined by the Actuaries Combined Experience Tables of Mortality, save that the rate of interest used shall be 4 percent per annum; and, the yearly income or annual value of the use or income of an estate or interest is 4 percent of the appraised value of the property upon which the estate or interest is based.
In a case of a gift of the character above set forth made prior to July 1, 1945, the value thereof is to be determined by the Actuaries Combined Experience Tables of Mortality, save that the rate of interest used shall be 5 percent per annum; and, the yearly income or annual value of the use or income of an estate or interest is 5 percent of the appraised value of the property upon which the estate or interest is based.
It is assumed in the illustrative computations which follow that the gift was made on or after January 1, 1975, and the 6 percent tables are therefore used.
CAUTION: Tables A(1), A(2) and B, contained in Section 15552.8 are to be used to value interest in property for gifts made on or after January 1, 1975. Tables C and D contained in Section 15552.9 are to be used to value interest in property for gifts made on or after November 10, 1969, but prior to January 1, 1975. Care should be taken to refer to the correct table in each case.
NOTE

Reference: Section 15552, Revenue and Taxation Code
§15552.1. Estates, Income and Annuities for Life of One Person.
Note

(a) The present value of a life estate in property, the income from which is to be paid annually in an unfixed amount to a single life tenant is computed as follows:
(1) Determine the age and sex of the life tenant as of his or her birthday nearest the date of the gift.
(2) Consult Table A(1) or Table A(2), whichever is appropriate, in Section 15552.8, and ascertain therefrom the life estate factor (the present value of a life estate of $1 per year) for the life of a person of the same age as the life tenant.
CAUTION: Table A(1) is the appropriate table if the life tenant is a male person. Table A(2) is the appropriate table if the life tenant is a female person. The user of the tables should exercise care to refer to the appropriate table in each case.
(3) Multiply the appraised value of the property by the life estate factor obtained pursuant to step (B). The product will be the present value of the life estate at the time of the gift.
The provisions of subdivision (a) may be illustrated by the following example:
EXAMPLE (1).
A gives the annual income from $100,000 to B for life, with remainder over to C. B, a male, at the time of the gift is 40 years of age. Table A(1) indicates that the life estate factor is .78923. The present value of B's life estate as of the date of the gift is $78,923 ($100,000 x .78923).
EXAMPLE (2).
A gives the annual income from $100,000 to D for life, with remainder over to E. D, a female, at the time of the gift is 40 years of age. Table A(2) indicates that the life factor is .84281. The present value of D's life estate as of the date of the gift is $84,281 ($100,000 x .84281).
(b) The formula set forth under subdivision (a) is also used in determining the present value of a fixed annual annuity for life, or of a life estate in property the income from which is to be paid annually at the end of each year in a fixed amount to the life tenant, except that in each of such cases the annuity factor in column 2 of Table A(1) or Table A(2), whichever is appropriate, is substituted for the life estate factor in step (2) of the formula and the amount of the annuity or specified income is substituted for the appraised value of the property in step (3) of the formula. The provisions of this subdivision may be illustrated by the following examples:
EXAMPLE (1).
A gives to B, a male, who is 50 years of age, an annuity of $1,000 per annum for the balance of B's life. As is shown by Table A(1), Section 15552.8, the present value of an annuity of $1 per year for life to a male person of age 50 is 11.3329. Multiplying this factor by $1,000 results in a product of $11,333, which is the present value of B's annuity.
EXAMPLE (2).
A gives to C, a female, who is 50 years of age, an annuity of $1,000 per annum for the balance of C's life. As is shown by Table A(2), Section 15552.8, the present value of an annuity of $1 per year for life to a female person of age 50 is 12.5793. Multiplying this factor by $1,000 results in a product of $12,579, which is the present value of C's annuity.
(c) In determining the present value of a fixed annuity payable at the end of regular intervals of less than one year, the aggregate amount to be paid within a year is first multiplied by the life annuity factor in column 2 of Table A(1) or Table A(2), whichever is appropriate, opposite the number of years in column 1 nearest the age of the person whose life measures the duration of the annuity so as to arrive at the product representing the present value of the annuity payable at the end of each year during the life of that person as of the date of the gift. The product so obtained is then multiplied by whichever of the following adjustment factors is applicable.
(1) 1.0148, if the annuity is payable semiannually.
(2) 1.0222, if the annuity is payable quarterly.
(3) 1.0272, if the annuity is payable monthly.
The provisions of subdivision (c) may be illustrated by the following example:
EXAMPLE.
A gives to B, a male, who is 50 years of age, an annuity of $1,000 per annum, payable semiannually for the balance of B's life. By reference to Table A(1), the life annuity factor in column 2 opposite 50 years is found to be 11.3329. The aggregate annual amount, $1,000, is multiplied by the life annuity factor, 11.3329, and the product is multiplied by the semiannual adjustment factor of 1.0148. The present value of B's life annuity, payable semiannually, as of the date of the gift is $11,501 ($1,000 x 11.3329 x 1.0148).
Note: If the annuitant is a female person, consult Table A(2), rather than Table A(1).
(d) Fixed annuities payable at the beginning of each period must be distinguished from annuities payable at the end of the annuity period. Thus, if the first payment of an annuity for the life of a person is due at the beginning of the annual, semiannual, quarterly or monthly period, rather than at the end of the period, the present value of the life annuity is the sum of the first payment plus the present value of the life annuity, the first payment of which is not due until the end of the period, as determined in subdivisions (b) and (c) above. The provisions of this subdivision may be illustrated by the following examples:
EXAMPLE (1).
A gives to B, a male, who is 50 years of age, an annuity of $1,000 per annum for the balance of B's life with the proviso that B be entitled to the first payment of the annuity on the date of the gift. The present value of the annuity payable at the end of each annual payment period for life is $11,333, as determined in Example (1) under subdivision (b) above. The present value of B's life annuity, the first payment of which is due at the beginning of each period is $12,333 ($11,333 + $1,000).
EXAMPLE (2).
A gives to B, a male, who is 50 years of age, an annuity of $1,000 per annum, payable semiannually for the balance of B's life with the proviso that B be entitled to the first payment of the annuity on the date of the gift. The semiannual amount of the annuity is $500 (1/2 x $1,000). The present value of the annuity payable at the end of each semiannual payment period for life is $11,501, as determined in the example under subdivision (c) above. The present value of B's life annuity, the first payment of which is due at the beginning of each period is $12,001 ($11,501 + $500).
NOTE

Reference: Section 15552, Revenue and Taxation Code.
§15552.2. Estates, Income and Annuities for Joint Lives of Several Persons.
Note

(a) Joint Lives of Two Persons.
If income, an annuity, or an estate is given to two persons for their use or enjoyment during their joint lives, the present values of the respective interests of the transferees are computed as follows:
(1) Determine in accordance with Section 15552.1 what the present value of the older donee's life interest would be if he were the only donee.
(2) Divide by two the value ascertained pursuant to step (1). The quotient will be the present value of the older donee's interest in the joint estate.
(3) Determine in accordance with Section 15552.1 what the present value of the younger donee's life interest would be if he were the only donee.
(4) Subtract the present value of the elder donee's single life interest, as determined pursuant to step (1), from the present value of the younger donee's single life interest, as determined pursuant to step (3).
(5) Add the remainder determined pursuant to step (4) to one-half of the present value of the elder donee's single life interest determined pursuant to step (1). The sum is the present value of the younger donee's interest in the joint estate.
The provisions of subdivision (a) may be illustrated by the following example:
EXAMPLE.
A gives to B and C the annual income from a sum of $10,000 for their joint lives, the survivor to enjoy the entire income until his death, with a remainder over to D. At the time of the gift, B, a male, is 40 years of age and C, a female, is 25 years of age. Table A(1) of Section 15552.8 indicates the life estate factor for a male aged 40 is .78923. The product of this factor multiplied by $10,000 is $7,892, the present value of B's single life estate. One-half of $7,892, or $3,946, is the present value of B's interest in the joint life estate. Table A(2) indicates the life estate factor for the life of a female aged 25 is .92375. The product of this factor multiplied by $10,000 is $9,238, the present value of C's single life estate. The difference between B's and C's single life estate, $1,345, is added to one-half of the present value of B's single life estate ($3,946), resulting in the sum of $5,291, the present value of C's interest in the joint and successive life estate. The value of D's remainder is $762 ($10,000 less the sum of B's and C's joint and successive life interest).
The above computation may be simplified by combining the last two steps, i.e., (4) and (5) of subdivision (a) into one computation in the following manner. After determining the value of B's interest in a joint life estate and the present value of C's single life estate as set forth above (pursuant to steps (1), (2) and (3)), subtract the value of B's interest in the joint life estate ($3,946) from the value of C's single life estate ($9,238). The difference represents C's interest in the joint and successive life estate ($9,238 - $3,946 = $5,292).
(b) Joint Lives of Three Persons.
If income or an estate is given to three persons for their use or enjoyment until the death of the last to die of the three persons with a remainder over to a fourth person, the present value of the respective interests of the donees are computed as follows:
(1) Determine in accordance with Section 15552.1 what the present value of the oldest donee's life interest would be if he were the only donee.
(2) Divide by 3 the present value ascertained pursuant to step (1). The quotient will be the present value of the oldest life tenant's interest in the joint life estate as of the date of the gift.
(3) Determine in accordance with Section 15552.1 what the present value of the second oldest donee's life interest would be if he were the only donee.
(4) Subtract the present value of the oldest life tenant's single life estate, as determined pursuant to step (1), from the present value of the second oldest life tenant's single life estate, as determined pursuant to step (3), and divide by 2 the difference so obtained. Add the quotient to the present value of the oldest life tenant's interest in the joint life estate, as determined pursuant to step (2). The sum will represent the present value of the second oldest life tenant's interest in the joint and survivorship life estate as of the date of the gift.
(5) Determine in accordance with Section 15552.1 what the present value of the youngest donee's life interest would be if he were the only donee.
(6) Subtract the present value of the second oldest life tenant's single life estate, as determined pursuant to step (3), from the present value of the youngest life tenant's single life estate, as determined pursuant to step (5), and add the difference so obtained to the present value of the second oldest life tenant's interest in the joint and successive life estate, as determined pursuant to step (4). The sum will represent the present value of the youngest life tenant's interest in the joint and successive life estate as of the date of the gift.
(7) The present value of the remainder interest in the property is determined simply by subtracting the present value of the youngest life tenant's single life estate, as determined pursuant to step (5), from the appraised value of the property.
The provisions of this subdivision (b) may be illustrated by the following example:
EXAMPLE.
A gives to B, a male; C, a male; and D, a female, the annual income from a sum of $100,000 for their joint lives, the survivor to enjoy the entire income until his death, with a remainder over to E. At the time of the gift the ages of B, C, and D are, respectively, 70, 60 and 50. The present value of B's single life interest is $41,294 (.41294 x $100,000). One-third of this sum, or $13,765, is the present value of B's interest in the joint estate. The present value of C's single life interest is $55,052 (.55052 x $100,000). The difference between this sum and $41,294 (the value of B's single life estate) is $13,758. One-half of $13,758, or $6,879, is added to $13,765, resulting in a sum of $20,644, the present value of C's interest in the joint estate. The present value of D's single life interest is $75,476 (.75476 x $100,000). The difference between this sum and $55,052 (the value of C's single life estate) is $20,424. This latter sum is added to $20,644 (the value of C's interest in the joint estate, with a penny adjustment) resulting in a sum of $41,068, the present value of D's interest in the joint estate. The computation may be proven by adding the respective interest of the several joint and successive life tenants. The sum should equal the value of a single life estate for the youngest life tenant ($13,765 + $20,644 + $41,068 = $75,477). The sum varies by $1 due to rounding to the nearest dollar. The value of E's remainder interest is $24,523 ($100,000 less the sum of B's, C's and D's joint and successive life interests).
NOTE

Reference: Section 15552, Revenue and Taxation Code.
§15552.3. Life Estate, Successive Life Estate and Remainder.
Note

If income or an estate is given to one person for his use or enjoyment during his life and upon death of that life tenant to another person for the latter's use or enjoyment for life, and upon death of the latter life tenant the remainder is given to a third person, the present values of the respective interests of the three persons as of the date of the gift are computed as follows:
(a) Determine in accordance with Section 15552.1 the present value of the primary life tenant's life estate.
(b) Determine in accordance with Section 15552.1 the present value of the secondary life tenant's single life estate as though he or she were the only life tenant.
(c) The present value of the secondary life tenant's successive life estate in the property as of the date of the gift is determined by subtracting the present value of the primary life tenant's life estate, as computed pursuant to step (a), from the secondary life tenant's single life estate, as computed pursuant to step (b).
(d) The present value or worth of the remainder interest in the property is determined simply by subtracting the present value of the secondary life tenant's single life estate, as obtained pursuant to step (b), from the appraised value of the property.
The provisions of this regulation may be illustrated by the following example:
EXAMPLE.
Donor gives the annual income from $300,000 in trust to A, a female, for life. Upon the death of A the annual income is payable to B, a male, for life, and upon B's death the remainder payable to C. At the date of gift, the ages of A and B, respectively, are 66 and 42. Table A(2) of Section 15552.8 indicates the life estate factor in column 3 for a female age 66 is .54211. The present value of A's life estate, as of the date of the gift, is $162,633 ($300,000 x .54211). Table A(1) indicates the life estate factor for a male age 42 is .76967. The present value of B's single life estate as of the date of the gift is $230,901 ($300,000 x .76967). The present value of B's successive life estate as of the date of the gift is $68,268 ($230,901 - $162,633). The present value of C's remainder interest in the property as of the date of gift is $69,099 ($300,000 - $230,901).
NOTE

Reference: Section 15552, Revenue and Taxation Code.
§15552.4. Estates, Income and Annuities for Period of Years.
Note

(a) The present value of an estate in property, the income from which is to be paid annually in an unfixed amount for a term of years is computed as follows:
(1) Consult Table B of Section 15552.8, and ascertain therefrom the income factor for a term of years in column 3 opposite the figure in column 1 representing the number of years for which the income is to continue.
(2) Multiply the appraised value of the property by the income factor obtained pursuant to step (1), which will give the present value of the estate for the term of years as of the date of the gift.
(3) Present worth of the remainder interest in the property is determined simply by subtracting the present value of the estate for the term of years, as determined pursuant to step (2), from the appraised value of the property.
The provisions of this subdivision may be illustrated by the following example:
EXAMPLE.
Donor gives to A the possession, use and enjoyment of real property for seven years. At the end of the seventh year, the property is to be transferred to B. At the date of gift, A is 60 years of age and the real property is appraised at $50,000. By reference to Table B, the income factor for a term of years in column 3 opposite seven in column 1, representing the number of years for which the income is to continue, is found to be .334943. The present value of A's estate for the seven years is $16,747 ($50,000 x .334943). The present worth of B's remainder interest in the property as of the date of gift is $33,253 ($50,000 - $16,747).
(b) The formula set forth under subdivision (a) is also used for determining the present value of a fixed annual annuity payable for a term certain, except that in such case the annuity for a term certain factor in column 2 of Table B is substituted for the income factor in step (1) of the formula and the annuity is substituted for the appraised value of the property in step (2) of the formula. The provisions of this subdivision may be illustrated by the following example:
EXAMPLE.
Donor gives to A an annuity of $1,000 a year for seven years. Table B of Section 15552.8 indicates the annuity factor in column 2 opposite seven years is 5.5824. The present value of the annuity certain as of the date of the gift is $5,582 ($1,000 x 5.5824).
(c) In determining the present value of a fixed annuity for a term certain, payable at regular intervals of less than one year, the aggregate amount to be paid within a year is first multiplied by the appropriate annuity factor for a term certain, in column 2 of Table B opposite the number of years in column 1 representing the term for which the annuity is to be paid, to arrive at the product representing the present value of the annuity payable at the end of each year for the term certain. The product so obtained is then multiplied by whichever of the following adjustment factors is applicable:
(1) 1.0148, if the annuity is payable semiannually.
(2) 1.0222, if the annuity is payable quarterly.
(3) 1.0272, if the annuity is payable monthly.
The provisions of subdivision (c) may be illustrated by the following example:
EXAMPLE.
Donor gives to A an annuity of $1,000 per annum, payable monthly, for a term of seven years. By reference to Table B, the annuity factor in column 2 opposite seven years in column 1 is found to be 5.5824. The aggregate annual amount, $1,000, is multiplied by the term certain annuity factor, 5.5824, and the product is multiplied by the monthly adjustment factor of 1.0272. The present value of A's annuity, payable monthly for a period of seven years, as of the date of the gift is $5,734 ($1,000 x 5.5824 x 1.0272).
(d) If the first payment of a fixed annuity for a term certain is due at the beginning of the annual, semiannual, quarterly or monthly payment period, the present value of the annuity is determined by multiplying together the aggregate amount to be paid within any year, the appropriate annuity factor for term certain shown in Table B and whichever of the following factors is applicable:
(1) 1.0600, if the annuity is payable annually.
(2) 1.0448, if the annuity is payable semiannually.
(3) 1.0372, if the annuity is payable quarterly.
(4) 1.0322, if the annuity is payable monthly.
The provisions of subdivision (d) may be illustrated by the following example:
EXAMPLE.
Donor gives to A an annuity of $1,000 per annum, payable monthly, for a term of seven years with the proviso that A be entitled to the first payment thereof on the date of the gift. By reference to Table B, the annuity factor in column 2 opposite seven years in column 1 is found to be 5.5824. The aggregate annual amount, $1,000, is multiplied y the term certain annuity factor, 5.5824, and the product is multiplied by the monthly adjustment factor of 1.0322. The present value of A's annuity, as of the date of the gift is $5,762 ($1,000 x 5.5824 x 1.0322).
Thus, fixed annuities for a term certain, payable at the beginning of the annuity period, must be distinguished from both life annuities (see Section 15552.1) and fixed annuities payable at the end of the annuity term.
NOTE

Reference: Section 15552, Revenue and Taxation Code.
§15552.5. Deferred Gift.
Note

(a) Gift Payable at Death of Person Other Than Donee.
If a gift is payable to a donee at the death of another person, the present value of the gift is computed as follows:
(1) Determine the age of the person at whose death the gift is payable as of his birthday nearest the date of the gift.
(2) Consult Table A(1) or Table A(2), whichever is appropriate, in Section 15552.8, and ascertain therefrom the remainder factor of $1 due at the death of a person of the same age as a person at whose death the gift is payable.
(3) Multiply the amount of the gift by the remainder factor determined pursuant to step (2). The product will represent the present worth of the gift.
The provisions of subdivision (a) may be illustrated by the following example:
EXAMPLE.
Donor gives to A, to be paid at the death of X, a female, property having a value of $60,000 at the date of gift. At the date of gift, X is 70 years of age. By consulting Table A(2), the remainder factor in column 4 opposite 70, the number representing X's age, is .52460. This remainder factor multiplied by the appraised value of the property ($60,000) results in a product of $31,476, the present worth of the gift to A.
(b) Gift Payable at Specified Time in Future.
The present value of a particular sum of money payable at a future date certain is computed as follows:
(1) Consult Table B in Section 15552.8, and ascertain therefrom the remainder postponed for a term certain factor of $1 payable at the end of the time specified.
(2) Multiply the factor obtained pursuant to step (1) by the amount of the sum payable. The product will be the present worth, as of the date of the gift, of the sum payable at the end of the specified time. The provisions of subdivision (b) may be illustrated by the following example:
EXAMPLE.
Donor gives to A $10,000 to be paid at the end of five years from the date of gift. By consulting Table B, the factor for remainder postponed for a term certain in column 4 opposite 5 in column 1, representing the number of years at the end of which the gift is to be paid, is found to be .747258. The factor multiplied by $10,000 results in a product of $7,473, the present value of the gift deferred for a period of five years.
NOTE

Reference: Section 15552, Revenue and Taxation Code.
§15552.6. Present Value of Annuity Exceeding Value of Annuity Fund.
Note

Where the present value of an annuity actually exceeds the amount of the property or fund out of which the annuity is to be paid the present value of the annuity is the amount of the property or fund. This regulation may be illustrated by the following example:
EXAMPLE.
A gives to B, a female, a life annuity of $5,000 per year, payable out of a fund totaling $35,000. B is 65 years of age at the date of gift. Computed in accordance with Section 15552.1, the present value of an annuity of $5,000 per year for the life of a female of the age of 65 is $46,503 ($5,000 x 9.3005 = $46,503). Since this exceeds the annuity fund of $35,000, the latter figure will represent the present value of B's annuity.
NOTE

Reference: Section 15552, Revenue and Taxation Code.
§15552.7. Remainder.
Note

The present worth of a remainder is obtained by computing the present worth of the precedent estate or estates and subtracting the amount thereof from the total value of the property involved. The difference will represent the present worth of the remainder.
The present worth of a remainder interest after a life estate may also be obtained by multiplying the appraised value of the subject property by the remainder factor in Table A(1) or Table A(2), whichever is appropriate, of Section 15552.8 opposite the age of the person possessing a precedent estate. This regulation may be illustrated by the following examples:
EXAMPLE.
A gives the annual income from $100,000 to B for life with remainder over to C. B, a male, at the time of gift, is 40 years of age. By an application of the method set forth in Section 15552.1(a) for determining the present value of a life estate, B's life interest is found to be $78,923. This latter sum subtracted from $100,000 results in a difference of $21,077, the present value of C's remainder.
EXAMPLE.
Using the same facts as set forth in example immediately above, the remainder factor for a male 40 years of age (the age of the life tenant) is .21077. The present value of C's remainder interest is $21,077 ($100,000 x .21077).
NOTE

Reference: Section 15552, Revenue and Taxation Code.
§15552.8. Tables.
Note

Tables A(1) and A(2) showing the present value of an annuity, a life estate and a remainder of $1 per year during the life of a person of a specified age, based on United States Life Tables: 1959-1961, published by the United States Department of Health, Education and Welfare, Public Health Service, with interest at 6 percent per annum compounded annually.
CAUTION: The tables immediately following are effective as to gifts made on or after January 1, 1975. For gifts made prior to January 1, 1975, but on or after November 10, 1969, refer to Tables C and D, contained in Section 15552.9. For gifts made prior to November 10, 1969, use Actuaries Combined Experience Tables of Mortality with interest at 4 percent, showing present value of annuity of $1 per year during life of person of specified age, if date of gift was on or after July 1, 1945. For gifts made prior to July 1, 1945, use Actuaries Combined Experience Table of Mortality with interest at 5 percent, showing present value of annuity of $1 per year during life of person of specified age.

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(b) Table B showing the present value of an annuity for a term certain, income for a term certain and of a remainder interest postponed for a term certain, based on United States Life Tables: 1959-1961, published by the United States Department of Health, Education and Welfare, Public Health Service, with interest at 6 percent per annum.
(Effective as to gifts made on or after January 1, 1975.)

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(c) Adjustment Factors for Annuities Payable at Regular Intervals of Less Than One Year. If a life annuity or an annuity certain is payable at the end of semiannual, quarterly, monthly or weekly periods, the following adjustment factors should be used:

	Semiannual	 1.0148
	Quarterly	 1.0222
	Monthly	 1.0272
	Weekly	 1.0291
If an annuity for a term certain is payable at the beginning of the annual or other payment period, the following adjustment factor should be used:

	Annual	 1.0600
	Semiannual	 1.0448
	Quarterly	 1.0372
	Monthly	 1.0322
	Weekly	 1.0303
However, a provision that the income from property is to be paid in semiannual, quarterly, bimonthly, monthly or weekly installments does not affect the value to be assigned to the life interest.
NOTE

Reference: Section 15552, Revenue and Taxation Code.
§15552.9. Gifts Made on or After November 10, 1969 and Before January 1, 1975.
Note

The tables set forth in this regulation are used to determine the value of a future, contingent or limited estate, income or interest in property in the case of a gift made on or after November 10, 1969 and before January 1, 1975.
The value of a future, contingent or limited estate, income or interest in property is generally the present value or worth of such estate, income or interest at the date of gift. In this connection, during the period commencing November 10, 1969 and ending December 31, 1974, inclusive, the Gift Tax Law specifically provided that such value or worth is to be determined in accordance with the standards of mortality and values set forth in the United States Life Tables and Actuarial Tables 1939-1941, Table 38, published by the Bureau of the Census of the United States Department of Commerce, and the rate of interest used in computing the present value of the estate, income or interest is 3 1/2 percent per annum compounded annually. The law further provided that in determining the present value or worth as of the date of the gift of a future, contingent or limited estate, income or interest, other than an annuity in a fixed amount, the yearly income, or the annual value of the use or income, of the estate, income or interest, was considered equivalent to 3 1/2 percent of the appraised value of the property upon which the estate, income or interest was based.
A single life annuity table of 3 1/2 percent showing the present value or worth of an annuity, a life estate and a remainder interest of $1 due at the end of each year during the life of a person of a specified age and of $1 due at the death of a person of a specified age respectively, is set forth below as Table C. The present value or worth of 3 1/2 percent of an annuity for a term certain, and income interest for a term certain, and a remainder interest postponed for a term certain is set forth below as Table D.
The tables below are to be applied in the same manner as illustrated in Section 15552.1 through Section 15552.7, above, substituting the factors shown in Table C for the factors from Tables A(1) and A(2), and the factors shown in Table D for the factors from Table B in the illustrations. Note that in the case of gifts made prior to January 1, 1975, there is no distinction between male and female in valuing an interest measured by the life of a person, or in valuing the remainder interest following a preceding estate measured by the life of one or more persons. Table C applies to male and female alike. Note also that in cases of annuities payable at regular intervals of less than one year, the adjustment factors differ from those which apply in cases of gifts made on or after January 1, 1975.
(a) United States Life Tables and Actuarial Tables 1939-1941, Table 38, published by the Bureau of the Census of the United States Department of Commerce with interest at 3 1/2 percent per annum compounded annually, showing the present value of an annuity, a life estate and remainder interest of $1 per year during the life of a person of a specified age.
(Effective as to gifts made on or after November 10, 1969, and before January 1, 1975.)

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(b) United States Life Tables and Actuarial Tables 1939-1941, Table 38, published by the Bureau of the Census of the United States Department of Commerce with interest at 3 1/2 percent per annum showing present value of an annuity for a term certain, income for a term certain and of a remainder interest postponed for a term certain.
(Effective as to gifts made on or after November 10, 1969, and before January 1, 1975.)

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(c) Adjustment Factors for Annuities Payable at Regular Intervals of Less Than One Year. If a life annuity or an annuity certain is payable at the end of semiannual, quarterly, bimonthly, monthly or weekly periods, the following adjustment factors should be used:

	Semiannual	 1.0087
	Quarterly	 1.0130
	Bimonthly	 1.0145
	Monthly	 1.0159
	Weekly	 1.0171
If an annuity for a term certain is payable at the beginning of the annual or other payment period, the following adjustment factors should be used:

	Annual	 1.0350
	Semiannual	 1.0262
	Quarterly	 1.0218
	Bimonthly	 1.0203
	Monthly	 1.0189
	Weekly	 1.0177
However, a provision that the income from property is to be paid in semiannual, quarterly, bimonthly, monthly or weekly installments does not affect the value to be assigned to the life interest.
NOTE

Reference: Section 15552, Revenue and Taxation Code.
§15556. Contingent Encumbrances and Contingencies.
Note

In the valuation of any property in which a donee is given a present right of enjoyment or possession, no allowance will be made on account of any contingent encumbrance on the property, nor on account of any contingency upon the happening of which the donee's interest might, in whole or in part, be abridged or diminished. If, however, the encumbrance or contingency should become effective after the donee has become possessed, or has entered upon the enjoyment of, the property, and a gift tax has been paid, a refund of tax will be made if an application is filed within six months after the taking effect of the encumbrance or contingency, (see Revenue and Taxation Code Section 16223). The amount of the refund will be the difference between the tax paid on the value of the property without allowance for the encumbrance or contingency, and that which would have been paid on a valuation of the donee's actual interest in the property after the taking effect of the encumbrance or contingency.
NOTE

Reference: Section 15556, Revenue and Taxation Code.
§15558. Purchase of Single Payment Contract for Another.
Note

If an individual purchases from a life insurance or other authorized company as a gift for the benefit of another a single payment life insurance contract or contract for the payment of an annuity, the value of the gift is the cost of the contract, i.e., the amount of the single payment.
NOTE

Reference: Section 15558, Revenue and Taxation Code.
§15558.1. Assignment of Annuity Contract.
Note

If an individual who has purchased an annuity contract from a life insurance or other authorized company, by the terms of which the company is to pay him periodically a sum of money for the balance of his life, makes a gratuitous and irrevocable assignment of the contract, the value of the gift is the amount which the company would charge for an annuity contract, providing for the payment of the annuity specified in the contract assigned, for the life of a person of the age of the donor at the date of the gift. This amount will be approximately equal to the total amount which the donor has paid to the company under the contract, plus any interest earned thereon, less the amount of any payments previously made by the company to the donor.
NOTE

Reference: Section 15558, Revenue and Taxation Code.
§15558.2. Assignment, or Designation of Beneficiary, of Life Insurance Contract.
Note

If an individual makes an irrevocable and gratuitous assignment, or designation of a beneficiary, of a fully or partially paid-up life insurance policy issued on his life, the value of the gift is the cost of replacing or reproducing the policy at the date of the gift.
NOTE

Reference: Section 15558, Revenue and Taxation Code.
Article 6. Donor's Return
§15651. Persons Required to File.
Note

(a) Resident Donors.
A gift tax return must be filed on form GT-1 by any individual resident of California who makes a gift to any one donee of property, other than a future interest therein, exceeding in value the amount of the annual exemption ($3,000); or, regardless of value, makes a gift of a future interest in property to any one donee not entitled to the annual exemption.
(b) Nonresident Donors.
A gift tax return must be filed on form GT-1 by any nonresident of California who makes a gift of tangible personal property located in California or real property situate in California, and any resident of a country other than the United States who makes a gift of any property, tangible or intangible, located in California, under the conditions specified in paragraph (a).
(c) Several Gifts as One Transaction.
A return must be filed in any case when gifts of property of less than $3,000 in value, but in the aggregate exceeding such sum, are made to each of several persons as part of a transaction under which each donee is to transfer the property received by him to an ultimate donee. (See Revenue and Taxation Code Sections 15421 through 15451). A case of this kind is one where A makes gifts of $3,000 each to B, C, D and E pursuant to an agreement that they, in turn, will transfer the property given them to G.
(d) Irrevocable Trust.
A return must be filed in any case where transfers of property, regardless of value, otherwise subject to California gift tax is made to the trustee of an irrevocable trust.
(e) Exempt Transfers.
A return is required to be filed by a donor in accordance with this regulation even though a tax may not be payable by him because of the specific, charitable or intangible exemption provided in Revenue and Taxation Code Sections 15421 through 15451.
NOTE

Reference: Section 15651, Revenue and Taxation Code.
§15651.1. No Joint Filing.
Note

When two or more donors own property in common and make a gift of the common property to the same donee or donees, each donor is required to file a return reporting the gift of his proportionate interest in the common property. Joint filing is not permitted even though the donors are husband and wife making a gift of community property.
NOTE

Reference: Section 15651, Revenue and Taxation Code.
§15651.2. Time and Place of Filing Return.
Note

The donor's gift tax return must be filed with the Inheritance and Gift Tax Division of the State Controller's office at Sacramento on or before the 15th day of the second month following the close of the calendar quarter in which the gift was made. That is, May 15 for gifts made January 1 to March 31, August 15 for gifts made April 1 to June 30, November 15 for gifts made July 1 to September 30, and February 15 for gifts made October 1 to December 31.
The return cannot be filed prior to the close of the calendar quarter in which the gift was made unless the return is for a deceased donor, except where special permission is granted by the State Controller.
When the date for the filing of the return falls on a legal holiday, the filing date will be the day next following which is not a legal holiday.
A duly executed return placed in an envelope which is properly addressed to the Inheritance and Gift Tax Division of the State Controller's office at Sacramento, with postage paid, and deposited in the United States mail, will be considered as having been filed on or before the filing date if the envelope is postmarked prior to midnight of the due date for filing the return even though the return is not actually received until a subsequent date.
Whenever in his opinion good cause (such as illness or absence from State, place of business, or place where records are kept) exists therefor, the State Controller may extend for a period not to exceed six months, the time for filing the return. No extension will be granted until there is filed with the Controller either before or after the date for the filing of the return a verified application setting forth the reason or reasons necessitating the extension.
NOTE

Reference: Section 15651, Revenue and Taxation Code.
§15653. Death or Incompetency of Donor.
Note

If a donor dies before filing his return, and an executor of his will or an administrator of his estate has been appointed, the executor or the administrator must file the return if he has actual knowledge of the gift. If a donor becomes legally incompetent before filing his return, and a guardian of his estate or person has been appointed, the guardian must file the return if he has actual knowledge of the gift.
NOTE

Reference: Section 15653, Revenue and Taxation Code.
§15653.1. Return by Agent.
Note

A return made by a donor's agent is not sufficient unless the donor is unable to make the return himself within the required time by reason of illness or absence from the State. Mere convenience is not sufficient reason for authorizing an agent to make the return. If by reason of illness or absence from the State a return is made by an agent, such return must be ratified within a reasonable time by the donor. The ratification must be in the form of an affidavit, or declaration executed under penalty of perjury, filed with the State Controller, and must specifically state that the return made by the agent has been carefully examined and that the affiant ratifies the return as his own.
NOTE

Reference: Section 15653, Revenue and Taxation Code.
§15654. Failure to Make Return, False or Fraudulent Return.
Note

If no return, an incomplete return, or a false or fraudulent return is made, the State Controller will make a return for the donor on the basis of such information as he may possess or obtain.
Penalties will be imposed for any failure to make a return, for an incomplete return and for a false or fraudulent return. These are specified in Revenue and Taxation Code Sections 15681 through 15685. (See also Section 15681).
NOTE

Reference: Section 15654, Revenue and Taxation Code.
§15656. Form of Return.
Note

The donor's gift tax return must be made on Form GT-1, copies of which may be obtained from the Inheritance Tax Division of the State Controller's office in Los Angeles, Sacramento, or San Francisco. The return need not be made in duplicate.
Form GT-1 consists of four schedules, A, B, C and D. A separate Schedule D for each additional donee must be filed with the form GT-1.
The donor must list on the return all gifts as to which a return is required to be filed (see Section 15651) made by him during the calendar quarter for which the return is filed.
The return must set forth the market value of all gifts not made in money, including gifts resulting from sales and exchanges of property made for less than an adequate and full consideration in money or money's worth, (see Section 15106). In the latter case the market value of the property sold or exchanged and that of the consideration received by the donor must be stated.
Any exemption claimed except the specific exemption must be fully set forth in the return. In this connection attention is directed to Schedule A in which exempt charitable gifts (see Section 15441 and Revenue and Taxation Code Sections 15441 and 15442) should be entered as should also any gift which the taxpayer contends is of a type not subject to the Gift Tax Law other than gifts which are exempt by reason of their amount being less than the annual or specific exemptions.
All documents and vouchers used in preparing the return should be retained by the donor so as to be available by the State Controller whenever required. Copies of all documents required by the instructions printed on Form GT-1 and the Instructions for Filing Your California Quarterly Gift Tax Return, and of any documents which the donor may desire to submit, should be filed with the return.
The tax, if any, for the calendar quarter for which the return is filed may be computed and entered in the space provided on the first page of the return.
In preparing any return the instructions printed on Form GT-1 and the Instructions for Filing Your California Quarterly Gift Tax Return should be carefully read and followed.
NOTE

Reference: Section 15656, Revenue and Taxation Code.
§15656.1. Description of Property Listed on Return.
Note

In general, in listing upon the return the property comprising gifts made during a calendar quarter, the description thereof should be such that the property may be readily identified.
(a) Real Property.
If the gift consists of real property or any interest therein, set forth:
(1) A description of the property sufficient to identify it.
(2) The name of the county in which the property is located.
(3) If located in a city, the place where located by street and number.
(4) If improved, a short statement of the character of the improvements.
(b) Bonds.
A description of bonds should include a statement of the following:
(1) Number of bonds.
(2) Principal amount.
(3) Name of obligor.
(4) Date of maturity.
(5) Rate of interest and the date or dates on which interest is payable.
(6) Series number, where there is more than one issue.
(7) Exchange upon which listed or the principal place of business of the obligor, if unlisted.
(8) Market value of bond plus accrued interest, if any, at date of gift.
(9) Reference as to source of market value.
(c) Stocks.
A description of stocks should include a statement of the following:
(1) Number of shares transferred.
(2) Particular class or series.
(3) Whether common or preferred, and, if preferred, what issue thereof.
(4) Whether par or no par.
(5) Certificate number.
(6) Name of corporation issuing, and, if stock is not listed on an exchange, the state in which the corporation was incorporated, and location of its principal place of business. If stock is listed, state the name of the principal exchange upon which it is sold.
(d) Notes.
A description of notes should include the following:
(1) Name of the maker.
(2) Date on which made.
(3) Date of maturity.
(4) Amount of principal.
(5) Amount of unpaid principal.
(6) Rate of interest, whether simple or compound, date to which interest has been paid, and amount of unpaid interest.
(7) If secured, the nature of the security.
(e) Life Insurance or Annuity Contract.
A description of a life insurance policy or an annuity contract should include the following:
(1) Nature and type of the policy or contract.
(2) Name of the insurer or the company issuing the policy or contract.
(3) Name of beneficiary.
(4) Number of policy or contract.
(5) Face value of policy or contract.
(6) Amount of premiums or other payment.
If an annuity is payable for a term of years, the duration of the term and the date on which it began should be given, and if payable for the life of any person, the date of birth of such person should be stated.
For every policy of life insurance listed on the return, the donor must procure from the insurer a statement on Form GT-4, Life Insurance Statement, and file it with the return (see Section 15656.6(c)).
(f) Judgment.
A description of a judgment should contain the following:
(1) Title of the cause and name of the court in which the judgment was rendered.
(2) Date on which rendered.
(3) Name and address of the judgment debtor and of the judgment creditor.
(4) Amount unpaid.
The filing of a certified abstract of judgment conforming to the provisions of Section 674 of the Code of Civil Procedure will meet all requirements concerning the description of a judgment.
(g) Trust.
In describing a gift in trust, give the name and address of the trustee, and the name, age, and address of each of the beneficiaries.
NOTE

Reference: Section 15656, Revenue and Taxation Code.
§15656.2. Encumbrances and Deductions from Market Value.
Note

If a lien (mortgage, trust deed, pledge, etc.) or other encumbrance exists on any property an interest in which is transferred, only the proper proportion of the encumbrance may be deducted from the value of the interest in determining the net market value of the property transferred. A description of a lien or other encumbrance on property transferred should include the following:
(a) Nature of lien or encumbrance.
(b) Amount payable at date of gift.
(c) Name of mortgagee, beneficiary, pledgee, or other person in whose favor the lien or encumbrance exists.
There may also be deducted from the market value of the property any consideration in money's worth, but evidence of such consideration must be submitted.
NOTE

Reference: Section 15656, Revenue and Taxation Code.
§15656.3. Transfers of Community Property or Quasi-Community Property.
Note

(a) Community Property Transferred to Third Person.
In returning a gift of community property to a third person, the total market value of the property at the date of gift should be stated. (See also Section 15656.6).
(b) Quasi-Community Property Transferred to Spouse or Third Person.
In returning a gift of quasi-community property to one of the spouses or to a third person, the total market value of the property at the date of the gift should be stated.
NOTE

Reference: Section 15656, Revenue and Taxation Code.
§15656.4. Separate Property Transferred into Community.
Note

In returning a gift to a spouse effected by the transfer or conversion of his or her spouse's separate property into their community, the total market value of the separate property at the date of the gift should be stated. (See also Section 15551.6).
NOTE

Reference: Section 15656, Revenue and Taxation Code.
§15656.5. Donor's Records.
Note

Every donor should keep such books and records as may be necessary to establish the total amount of his gifts and other information required to be shown in his gift tax return. (See also Section 15656).
NOTE

Reference: Section 15656, Revenue and Taxation Code.
§15656.6. Supplemental Documents.
Note

(a) Inactive Stock.
In the case of a gift of listed inactive stock, of unlisted stock not actively traded in, or of stock of a close corporation, balance sheets of the issuing corporation as of a date as near to the date of the gift as is practicable, and detailed profit and loss statements of the corporation for each of the five years immediately preceding the date of the gift, must be filed with the return. Copies of balance sheets and statements already prepared by the company's accountant should be submitted. The number of shares outstanding and the nature of the business in which the company is engaged must be shown.
(b) Declaration of Trust.
If a gift was made by means of a declaration of trust, a copy of the trust instrument must be submitted with the return.
(c) Life Insurance.
For every policy of life insurance listed on the return the donor must procure a statement from the insurer on Form GT-4, Life Insurance Statement, in accordance with the instructions printed thereon, and file it with the Controller. If specifically requested by the Controller, the insurance company must file this statement directly with the Controller.
(d) Real Property.
Proof of value of real property is required in all cases. The Controller will generally consider the following documents adequate proof of value:
(1) An appraisal made as of the date of gift by an acting inheritance tax referee of the county in which the property is situate.
(2) If an appraisal has been made as of a date reasonably close to the date of gift by an inheritance tax referee in a probate or other proceeding, a statement to that effect describing the proceeding with sufficient clarity to enable the Controller to locate the records pertaining thereto.
(3) If the property was subject to a bona fide sale at a date reasonably close to the date of gift, a statement giving the date of sale, sales price, names of seller and buyer, their relationship to each other, and any other evidence available showing that the sale was a bona fide “arm's-length” transaction.
If proof of value is not given by any of the above methods, the Controller will require filing of supplemental property description forms, including the form GT-20, Substantiation of Value of Real Property.
The local assessed value of real property should not be returned as the value of the property unless evidence is submitted that such value in fact represents the actual market value of the property as of the date of the gift.
(e) Community Property.
In the case of a gift of community property, form GT-3, Marital Property Declaration, must be filled out and submitted with the return. Unless this is done, the property will be treated as the separate property of one of the spouses for gift tax purposes. (See also Section 15306).
(f) Charitable or Intangibles Exemption.
In order to prove his right to a charitable (see Sections 15441 through 15441.8 and Revenue and Taxation Code Sections 15441 and 15442) or intangibles (see Section 15451 and 15451.1, and Revenue and Taxation Code Section 15451) exemption, a donor must submit such documents or evidence as may be required by the Controller. In any case, there must be submitted in support of the intangibles exemption an affidavit of nonresidence.
NOTE

Reference: Section 15656, Revenue and Taxation Code.
Article 6.1. Donee's or Trustee's Return
§15671. Donee's Return.
Note

Normally, the donee is not required to file a gift tax return, provided a return is properly filed by the donor. However, the donee is secondarily liable for payment of gift tax due. (See Revenue and Taxation Code Section 15901). Therefore, if for any reason the donor does not file a timely return reporting all transfers subject to the gift tax, the donee should file a return reporting such gifts to him.
In addition, the Controller may, in any case, require that gift tax returns be filed by the donee.
Insofar as they are pertinent, the regulations applicable to a donor's return apply also to a donee's return.
NOTE

Reference: Section 15671, Revenue and Taxation Code.
§15672. Trustee's Return.
Note

A trustee to whom is irrevocably transferred in any calendar quarter property by gift for which, as set forth in Section 15651, the donor is required to file a return, must, if he has actual knowledge of the fact that the transaction constitutes a gift, either execute and file a return as to the property on Form GT-2 or join with the donor in the execution and filing of the donor's gift tax return in respect to the property.
A trustee of a revocable trust need not report the creation of the trust. However, if after the creation of such a trust the donor makes any gift of the corpus, or the income is paid over to any person other than the donor, or the donor relinquishes or terminates his power of revocation, the trustee must file a return as to the same with the State Controller. (See Revenue and Taxation Code Section 15105).
Insofar as they are pertinent, the provisions of Section 15671 applicable to a donee's return apply also to a return filed by a trustee on Form GT-2.
NOTE

Reference: Section 15672, Revenue and Taxation Code.
Article 6.2. Donors and Donees in Armed Forces
§15675. Soldiers' and Sailors' Relief.
Note

A donor or donee who was or is a member of the armed forces of the United States, or of any auxiliary branch thereof, or of the merchant marine, who is serving or has served as such member beyond the continental United States, may apply to the Controller for an extension of time within which to file a return, or for the payment of the tax, or for compliance with any other provisions of the Gift Tax Law, and to be relieved from any penalty or the payment of interest as otherwise provided by law. Such application must be supported by the affidavit of the donor or donee, which shall state the date such service outside the Continental United States began, and the date of return thereto, and the date of discharge or release from active service.
No extension of time shall be granted beyond 180 days after such release or discharge, and unless application therefor is filed with the Controller within 180 days after the donor or donee's release or discharge from active service.
NOTE

Reference: Section 15675, Revenue and Taxation Code.
Article 6.3. Penalties
§15681. Additions to Tax for Donor's Failure to File or Complete Return.
Note

If a donor's return is not filed on or before the date on which it is required to be filed (see Section 15651.2 and Revenue and Taxation Code Sections 15651 and 15652), or if a donor's return does not show every taxable transfer made during the reporting period for which it is filed, a penalty is added to any tax due on the transfers not returned in an amount equal to 5 percent of such tax. An additional penalty of 25 percent of the amount of such tax is added thereto if the failure to file the return or include any transfer therein was the result of a fraudulent intent to evade the tax.
The penalties specified in this regulation are not only added to the amount of tax due, but become a part of such tax for the purpose of determining interest on delinquent tax payments. Any deficiency determination issued (see Section 15801) will contain a statement of the amount of penalties, if any, specified in this regulation for which the taxpayer is liable.
If an extension of time for filing a return is granted (see Section 15651.2 and Revenue and Taxation Code Section 15652) the penalties specified in this regulation will not be imposed unless the taxpayer fails to file a return on or before the expiration of the period of extension, or, having filed a return before such date, fails to report every taxable transfer.
Even though an extension of time for filing a return is granted, the tax becomes delinquent and subject to interest at 7 percent per annum from the original due date until paid. The granting of an extension of time operates to relieve the taxpayer from penalty for late filing of the return but not from the payment of interest. (See Revenue and Taxation Code Section 15962).
NOTE

Reference: Section 15681, Revenue and Taxation Code.
Article 7. Determination of Tax
§15801. Deficiency Determination, Generally.
Note

In the event the tax paid is less than the tax due, as disclosed upon the Controller's examination of all information available to him, the Controller shall issue a determination for the deficiency.
NOTE

Reference: Section 15801, Revenue and Taxation Code.
§15801.1. Time for Determination, General.
Note

In a case not involving a false or fraudulent return or failure to file a return, and where the return is filed within the time specified by law, the Controller may issue the deficiency determination at any time after the tax is due (i.e., the 15th day of the second month following the close of the calendar quarter in which the gift is made), but no later than four (4) years after the last day prescribed by law for filing the return; provided, however, the Controller and the donor or other person liable for the tax may agree in writing that the deficiency determination may be made after the four-year period, in which case the determination shall be issued within the period agreed upon.
Where the Controller and the donor or other person liable for the tax agree in writing that the determination is to be made at some time after the expiration of the four-year period, the parties may from time to time agree to extend the time within which the determination may be issued.
NOTE

Reference: Section 15801, Revenue and Taxation Code.
§15802. Time for Determination, False or Fraudulent Return or Unreported Gifts.
Note

There is no statutory period limiting the time within which the Controller may issue a deficiency determination where a false or fraudulent return is filed or where gifts are made for which no return is filed. In such a case, the Controller may issue a deficiency determination at any time.
If a gift tax return is timely filed, but the return fails to disclose all gifts made by the donor during the calendar quarter for which the return is filed, the Controller may issue a deficiency determination for the unreported gifts at any time, regardless of the reason for failure to include the same in the return filed.
NOTE

Reference: Section 15802, Revenue and Taxation Code.
§15803. Erroneous Determination, Time for Change.
Note

In any case in which a deficiency has been determined in an erroneous amount, the Controller may, within three years after the erroneous determination was made, set aside the determination or issue an amended determination in the correct amount.
Even though an amended determination is issued, or subsequent amended determinations are issued, any unpaid tax becomes delinquent after the last date prescribed by law for filing the return reporting the gift for which the determination is issued. (See Section 15905 and Revenue and Taxation Code Section 15905). See Section 15681 regarding penalties for failure to file or for late filing.
NOTE

Reference: Section 15803, Revenue and Taxation Code.
§15804. Notice of Determination.
Note

The Controller shall give notice of any deficiency determined, together with any penalty incurred, by personal service or mailing a copy of the Notice of Gift Tax Deficiency, form GT-30, to the person filing the return at the address stated in the return.
If no return is filed, the Controller will mail the Notice of Gift Tax Deficiency to the person or persons liable for the tax.
If advisable under the circumstances, the Controller may also send copies of the Notice of Gift Tax Deficiency to persons other than those liable for payment of the tax.
NOTE

Reference: Section 15804, Revenue and Taxation Code.
§15807. Amendment of Determinations, Prior Year Gifts.
Note

When the Controller makes an original, amended or supplemental determination of a deficiency for a calendar quarter which is prior to calendar quarters for which the tax has previously become final, he may concurrently therewith, notwithstanding other provisions of the Gift Tax Law, determine the true amount of tax which would have been determined had all the determinations been made in the sequence in which the gifts were made. This regulation may be illustrated by the following example:
EXAMPLE.
A makes a gift of $20,000 to B, his adult daughter in October, 1967, but fails to file a return. In 1968, A makes another gift to B in the amount of $30,000 for which he files a timely return. A notice of determination of the tax due in the amount of $680 for the 1968 gift is issued in 1969, under the law then in effect, and the tax is paid.

$ 3,000 annual exemption
  5,000 specific exemption
 20,000 @ 3%	$600
  2,000 @ 4%	       80
-------	----
$30,000	$680
-------	----

The failure to report the 1967 gift is discovered in 1973, after the determination issued in 1969 has become final. See Revenue and Taxation Code Section 15803. By reason of the 1967 gift, there is a deficiency for the 1968 gift, as well as the deficiency for the unreported 1967 gift. Pursuant to the provisions of Revenue and Taxation Code Section 15807, a determination for the deficiency for the 1968 gift may nevertheless be issued, in addition to the determination of deficiency for the 1967 gift.
The tax due for the several gifts is computed as follows:
(1) 1967 gift:

	(a) Net taxable gift ($20,000--$3,000)	$17,000
	(b) Specific exemption 5,000	5,000
	(c) Tax on balance ($12,000 @ 3%)	360
	(d) Penalty (Section 15681)	18
	(e) Total tax plus penalty, 1967 gift	378
(2) 1968 gift:

	(a) Total net tax gifts
	  (1967: $20,000--$3,000 plus
	  1968: $30,000--$3,000)	$44,000
	(b) Specific exemption	5,000
	(c) Tax on total ($20,000 @ 3% plus
	  $19,000 @ 4%)	1,360
	(d) Tax on prior year gifts (1967 deficiency)	360
	(e) Tax on 1968 gift	1,000
	(f) Tax previously paid	68
	(g) Deficiency, 1968 gift	320
In the case of the 1967 gift tax deficiency, the tax plus penalty is subject to interest at the rate of 7 percent per annum from June 15, 1968 until paid. Interest at 7 percent per annum accrues on the 1968 tax deficiency beginning 90 days after the date of the amended determination.
NOTE

Reference: Section 15807, Revenue and Taxation Code.
Article 8. Payment of Tax
§15901. Personal Liability.
Note

Both the donor and the donee of a gift are personally liable for any gift tax due. The donor is primarily liable; however, the Controller may proceed directly against the donee for payment if, for any reason, the tax is not paid by the donor.
NOTE

Reference: Section 15901, Revenue and Taxation Code.
§15901.1. Deceased Donor or Donee.
Note

If a donor or donee dies before he pays the gift tax, his estate shall pay the tax.
NOTE

Reference: Section 15901, Revenue and Taxation Code.
§15905. Delinquent Date.
Note

If the tax is not paid on or before the last day prescribed by law for filing the quarterly gift tax return, i.e., on or before the 15th day of the second month following the close of the calendar quarter in which the gift was made, the tax becomes delinquent and thereafter accrues interest until the tax and interest are paid in full.
The Controller may, for good cause shown, extend for period not to exceed 6 months, the time for filing the gift tax return. (See Revenue and Taxation Code Section 15652.) However, the granting of an extension of time for filing the return does not extend the time for making payment. (See Section 15681). Even though an extension of time for filing the return is granted, the tax is delinquent if not paid on or before the original due date for filing the return. (See Revenue and Taxation Code Section 15962).
If the Controller determines a deficiency, upon his examination of a return filed at any time, the unpaid balance of gift tax due is delinquent from and after the last date prescribed by law for filing the quarterly return. (See Section 15961).
NOTE

Reference: Section 15905, Revenue and Taxation Code.
§15906. Place, Manner and Medium of Payment.
Note

The gift tax must be paid at the office of the State Controller, Inheritance and Gift Tax Division, in Sacramento, California. Payment may be made in cash or by check, draft or money order, made payable to the order of the State Treasurer of California.
The acceptance by the Controller of a check, draft or money order constitutes a payment of the tax for which it was given as of the date of acceptance when, but not before, such paper is actually paid. if the paper for any reason is not actually paid, the Controller will proceed to collect the tax, and the taxpayer will remain liable therefor, together with all penalties and interest thereon, as though the paper had not been tendered.
A remittance in payment of the tax which is sent to the Controller through the United States mail in a properly addressed envelope, with postage paid, will be treated by the Controller as if it had been received by him on the date shown by the post office cancellation mark stamped on the envelope.
NOTE

Reference: Section 15906, Revenue and Taxation Code.
Article 8.3. Interest and Penalties
§15961. Interest.
Note

(a) General.
If the tax is not paid on or before the original due date of the return (see Revenue and Taxation Code Section 15651), it becomes subject to interest at 7 percent per annum through December 31, 1975 and at the rate of 12 percent per annum thereafter until paid.
(b) Return Filed on Time.
If the return is filed within the time specified by law, no interest is chargeable if payment is made with the return; interest is chargeable, however, as to any deficiency found to be due. If the tax is not paid on or before the original due date for filing the return, it begins to accrue interest as indicated in (a) above from such date until payment.
(c) Return Not Filed in Time.
If the return is filed after the 15th day of the second month following the close of the calendar quarter in which the gift was made, any tax and penalty due becomes delinquent and subject to interest as indicated in (a) above from said date until paid. Interest accrues from the original due date of the return even though the Controller grants an extension of time beyond that date for filing the return. (See Section 15681).
(d) Failure to File Return, etc.
In the case of a false or fraudulent return or in the case of a failure to file a return, any unpaid tax and penalty becomes delinquent on the 15th day of the second month following the close of the calendar quarter in which the gift was made, and thereafter bears interest as indicated in (a) above until paid.
(e) Penalty Subject to Interest.
In any case of a delinquency, the interest is computed upon the amount of delinquent tax plus any penalties accrued. (See Revenue and Taxation Code Section 15684. For penalties generally, see Section 15681 and Revenue and Taxation Code Sections 15681 through 15685).
NOTE

Reference: Section 15961, Revenue and Taxation Code.
Article 8.5. Collection of Tax Lien
§16066. Release or Subordination of Lien.
Note

To obtain a release or subordination of any lien imposed by the Gift Tax Law, the taxpayer must file an application for the same with the State Controller. The application should explain fully the circumstances that require the release or subordination, and should fully describe the particular items for which the release or subordination is desired. If the application is made prior to the filing of the gift tax return, an affidavit may be required showing the value of the property for which the release or subordination is requested, the basis for such valuation, the total amount of gifts made during the calendar year and prior calendar years, and, in case the property is to be sold or otherwise transferred, the name and address of the purchaser or transferee and the consideration, if any, paid or to be paid by him.
As a condition to the granting of a release or subordination the Controller may require the taxpayer to furnish a bond or other security satisfactory to the Controller for the payment of the tax, interest, and penalties due. If a bond is required it shall run in favor of the State of California in an amount not less than the amount of the tax, interest, and penalties, shall be conditioned for the payment of such amount, and shall be executed by such sureties as the Controller may approve.
NOTE

Reference: Section 16066, Revenue and Taxation Code.
§16067. Certificate of Release or Subordination.
Note

A certificate by the Controller releasing property from any gift tax lien, or subordinating such lien to any other lien, is conclusive evidence of the release or subordination, but is no evidence whatsoever of payment or satisfaction of the tax for which the lien was imposed.
NOTE

Reference: Section 16067, Revenue and Taxation Code.
§16068. Termination of Lien When Bond Given Re Contingent Interests.
Note

If a bond is filed with the Controller for the purpose of deferring the payment of tax in a case where the interest of a donee depends upon a contingency or condition, (see Revenue and Taxation Code Sections 15931 through 15937), any lien upon the property ceases when the bond is approved by the Controller.
NOTE

Reference: Section 16068, Revenue and Taxation Code.
Article 8.6. Withholding by Third Persons
§16101. Notice to Organization Doing Business Through Branches.
Note

In the case of an organization doing business through branches or agencies which has in its possession or control any credit or other personal property belonging to a delinquent taxpayer, or which owes any debt to the latter, the notice from the Controller specified in Revenue and Taxation Code Section 16101, requiring withholding of the credit, other personal property, or debt, will, whenever practicable, be sent to the branch or agency which has actual possession or control of the credit or other property, or through which the debt was incurred.
NOTE

Reference: Section 16101, Revenue and Taxation Code.
Article 9. Refunds
§16221. Refund of Erroneous Tax Payment.
Note

If the Controller finds that there has been an overpayment of tax, penalty or interest, the overpayment shall be credited on any amount then due from, or which is a lien on any property owned by, the person entitled to the refund, and the balance shall be refunded to the person entitled thereto. (See Revenue and Taxation Code Section 16281).
No credit or refund shall be allowed or made after four years from the last day prescribed for filing the return or one year from the date of overpayment, whichever period is later, unless before the expiration of such period a claim therefor is filed by the Taxpayer, or unless before the expiration of such period the Controller allows a credit or makes a refund. (See Revenue and Taxation Code Section 16221.5).
NOTE

Reference: Section 16221, Revenue and Taxation Code.
§16222. Refund of Tax Judicially Declared in Excess of Amount Due.
Note

If any portion of any tax which has been paid is later declared by a judgment of a court of law to be in excess of the amount legally due, the person who paid the tax, his heir, the executor of his will, or the administrator of his estate, but not his assign, is entitled to a refund of the excess amount upon filing an application therefor with the Controller within one year after the judgment becomes final.
NOTE

Reference: Section 16222, Revenue and Taxation Code.
§16223. Refund of Tax Paid on Property Valued Without Allowance for Contingency.
Note

If a tax has been paid on a gift of property subject to a contingent encumbrance or contingency but valued without allowance therefor, (see Section 15556), and upon the taking effect of the encumbrance or the happening of the contingency the interest of the donee in the property becomes abridged or diminished, the person who paid the tax, or his heir, the executor of his will, or the administrator of his estate, but not his assign, is entitled to a refund in an amount equal to the difference between the tax paid and the tax which would have been paid on a valuation of the donee's interest in the property after the taking effect of the encumbrance or the happening of the contingency An application for the refund must be filed with the Controller within six months after the taking effect of the encumbrance or the happening of the contingency.
NOTE

Reference: Section 16223, Revenue and Taxation Code.
§16223.1. Application for Refund--In General.
Note

An application for a refund or refund credit must set forth in detail and under oath each ground upon which the refund or credit is claimed, together with facts sufficient to apprise the Controller of the exact basis thereof.
NOTE

Reference: Section 16224, Revenue and Taxation Code.
Article 9.1. Suit for Refund
§16251. Suits to Recover Taxes Paid.
Note

Any taxpayer who is dissatisfied with any tax deficiency determined by the Controller (see Revenue and Taxation Code Sections 15801, 15802 and 15803), may, if he has paid the tax, sue to recover the tax by filing an action against the State in the superior court having jurisdiction (see Revenue and Taxation Code Sections 16401 and 16402). The action must be filed within four years from the last date prescribed for filing the return, or within one year from the date the tax was paid or within 90 days after a claim of refund is denied by the Controller (see Revenue and Taxation Code Section 16221.5), whichever is later.
NOTE

Reference: Section 16251, Revenue and Taxation Code.
Article 11. Administration
§16563. Information Confidential.
Note

(a) All gift tax returns and other information and records acquired in connection therewith by the State Controller or any of his employees are confidential in nature and, except as may be necessary for the enforcement of the Gift Tax Law, cannot be divulged to any person other than the donor or his duly authorized agent, or any local, state, or federal tax official.
(b) If the Controller has received the information to be divulged from the United States Internal Revenue Service, the person to whom it is divulged shall be advised of its source and that the confidentiality afforded thereto must be the same as if it were received directly from the Internal Revenue Service. Such information may be divulged only (1) to representatives of the Internal Revenue Service; (2) to the State Board of Equalization and the Franchise Tax Board; and (3) in judicial proceedings for enforcement of the California Inheritance and Gift Tax Laws.
NOTE

Reference: Section 16563, Revenue and Taxation Code.
Division 3. Franchise Tax Board
Chapter 1. General Administration

(Originally Printed 1-21-50)
Article 1. General Provisions
§17000. Franchise Tax Board.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Article 1 (formerly §§ 14501 to 14512, inclusive), filed 1-5-50 and designated to be effective upon filing (Register 19, No. 1).
2. Renumbered as §§  17000 to 17004 (Register 27, No. 4).
3. Repealer filed 3-22-82; effective thirtieth day thereafter (Register 82, No. 13).
§17000.1. Executive Officer.
Note     •     History

NOTE

Authority cited: Sections 19253, 19535 and 26422, Revenue and Taxation Code.
HISTORY

1. Renumbering from Section 17001 to Section 17000.1 filed 2-21-79 as procedural and organizational; effective upon filing (Register 79, No. 7).
2. Order of Repeal filed 6-4-85 by OAL pursuant to Government Code Section 11349.7; effective thirtieth day thereafter (Register 85, No. 26).
§17000.2. Emergency Meetings and Conditions; Notice Requested.
Note     •     History

NOTE

Authority cited: Sections 19253 and 26422, Revenue and Taxation Code. Reference: Section 11125, Gov. Code, and Sections 17048, 17069 and 25564, Revenue and Taxation Code.
HISTORY

1. New section filed 12-31-73 as an emergency; effective upon filing (Register 73, No. 52.)
2. Certificate of Compliance filed 2-27-74 (Register 74, No. 9).
3. Renumbering from Section 17002.6 to Section 17000.2 filed 2-21-79 as procedural and organizational; effective upon filing (Register 79, No. 7).
4. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
Article 2. Delegation of Authority
§17000.10. Authority of Executive Officer.
Note     •     History

Subject to the general supervision and direction of the Franchise Tax Board, all of the powers granted to and duties imposed on the Franchise Tax Board by any provision of law, rule or regulation may be exercised and performed by the executive officer except the powers and duties specified in Section 17000.11.
NOTE

Authority cited: Sections 19253, 20642, and 26422, Revenue and Taxation Code. Reference: Sections 15701 and 15702, Government Code. 
HISTORY

1. Renumbering from Section 17002 to Section 17000.10 and amendment filed 2-21-79 as procedural and organizational; effective upon filing (Register 79, No. 7).
§17000.11. Authority Reserved by the Board.
Note     •     History

The following powers and duties of the Franchise Tax Board are specifically reserved to the board and are not delegated to the executive officer:
(a) Except as otherwise delegated by resolution of the board, to adopt rules and regulations and to prescribe the extent, if any, to which any rule or regulation shall be applied without retroactive effect;
(b) To appoint and remove an executive officer in accordance with the provisions of Section 15701 of the Government Code;
(c) Any power or duty which by any provision of law shall be exercised or performed only by the board.
NOTE

Authority cited: Sections 19253, 20642 and 26422, Revenue and Taxation Code. Reference: Section 15702, Government Code.
HISTORY

1. Renumbering from Section 17003 to Section 17000.11 filed 2-21-79 as procedural and organizational; effective upon filing (Register 79, No. 7).
2. Amendment of subsection (d) filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
3. Amendment filed 11-21-84; effective thirtieth day thereafter (Register 84, No. 47).
§17000.12. Delegation by Executive Officer.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering from Section 17004 to Section 17000.12 filed 2-21-79 as procedural and organizational; effective upon filing (Register 79, No. 7).
2. Repealer filed 3-22-82; effective thirtieth day thereafter (Register 82, No. 13).
§17000.13. Delegation to Employment Development Department and Unemployment Insurance Appeals Board.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code; Reference: Sections 18806 and 18814, Revenue and Taxation Code and Section 15702.1, Government Code.
HISTORY

1. Amendment of subsection (a) filed 7-31-78 as an emergency; effective upon filing (Register 78, No. 31). For prior history, see Register 74, No. 35.
2. Certificate of Compliance filed 11-22-78 (Register 78, No. 47). 
3. Renumbering from Section 17002.5 to Section 17000.13 filed 2-21-79 as procedural and organizational; effective upon filing (Register 79, No. 7).
4. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
Article 3. Procedures of the Board
§17000.30. Conflict of Interest Code for the Franchise Tax Board.
Note     •     History

The Political Reform Act, Government Code sections 81000, et seq., requires state and local government agencies to adopt and promulgate Conflict of Interest Codes. The Fair Political Practices Commission has adopted a regulation, California Code of Regulations, title 2, section 18730, which contains the terms of a standard Conflict of Interest Code, which can be incorporated by reference, in an agency's Code.  Therefore, the terms of California Code of Regulations, title 2, section 18730 and any amendments to it duly adopted by the Political Practices Commission are hereby incorporated by reference in this agency's Code. This regulation, and the attached Appendix designating employees and establishing disclosure categories, shall constitute the Conflict of Interest Code of the Franchise Tax Board.
Designated employees shall file statements of economic interests with this agency. Upon receipt of the statement of the Executive Officer, the agency shall make and retain a copy and forward the original of that statement to the Fair Political Practices Commission. Statements for all other designated employees will be retained by the agency and made available for public inspection.
NOTE

Authority cited: Section 87300, Government Code. Reference: Sections 87300-87302 and 87306, Government Code.
HISTORY

1. New section filed 10-22-76; designated effective 1-1-77 (Register 76, No. 43). Approved by Fair Political Practices Commission 9-21-76. For history of previous section, see Register 71, No. 2.
2. Renumbering from section 17005 to section 17000.30 and amendment filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
3. Repealer and new section (including appendix) filed 2-26-81; effective thirtieth day thereafter. Approved by Fair Political Practices Commission 12-1-80 (Register 81, No. 9).
4. Amendment of Appendix filed 5-17-83; effective thirtieth day thereafter. Approved by Fair Political Practices Commission 4-18-83 (Register 83, No. 21).
5. Amendment of Appendix filed 3-7-88; operative 4-6-88. Submitted to OAL for printing only. Approved by Fair Political Practices Commission 1-29-88 (Register 88, No. 12).
6. Amendment of section and Appendix filed 5-17-91. Approved by Fair Political Practices Commission 3-19-91 (Register 91, No. 19).
7. Amendment of Appendix filed 1-30-92; operative 3-2-92. Submitted to OAL for printing only. Approved by Fair Political Practices Commission 12-17-91 (Register 92, No. 12).
8. Amendment of section and Appendix filed 10-21-93. Submitted to OAL for printing only. Approved by Fair Political Practices Commission 9-13-93 (Register 93, No. 43).
9. Amendment of section and Appendix filed 10-18-95; operative 11-17-95. Submitted to OAL for printing only. Approved by Fair Political Practices Commission 8-31-95 (Register 95, No. 42).
10. Amendment of Appendix filed 1-8-98; operative 2-7-98. Approved by Fair Political Practices Commission 11-4-97 (Register 98, No. 2).
11. Amendment of Appendix filed 5-18-99; operative 6-17-99. Approved by Fair Political Practices Commission 3-31-99 (Register 99, No. 21).
12. Amendment of Note and Appendix filed 12-24-2001; operative 1-23-2002. Approved by Fair Political Practices Commission 10-30-2001 (Register 2001, No. 52).
13. Amendment of section and Appendix filed 9-4-2003; operative 10-4-2003. Approved by Fair Political Practices Commission 7-7-2003 (Register 2003, No. 36).

Appendix

		Assigned
		Disclosure
	Designated Positions 	Category
	General Management 
	Executive Officer 	 1, 2, 3
	Career Executive Assignment (C.E.A.) Levels 1-4 	 1, 2, 3

	Consultants	1, 2, 3*

	Management Assistance
	Tax Service Specialist 	 1, 2, 3
	Assistant Tax Service Specialist 	 1, 2, 3
	Staff Services Manager I and III 	 1, 2, 3
	Staff Services Manager II (Mgr.)	1, 2, 3
	Staff Services Manager II (Sup)	1, 2, 3
	Operations Research Specialist II 	 1, 2, 3
	Associate Business Management Analyst	1, 2, 3
	Research Program Specialist I and II	1, 2, 3
	Research Program Specialist II (Econ)	1, 2, 3
	Associate Tax Research Specialist	1, 2, 3
	Tax Research Specialist I, II and III	1, 2, 3
	Associate Management Auditor	1, 2, 3
	Supervising Management Auditor	1, 2, 3
	Staff Management Auditor 	1, 2, 3
	Staff Services Management Auditor 	1, 2, 3
	Research Manager I and II (Econ)	2, 3
	Research Manager I, II and III (General)	2, 3
	Associate Governmental Program Analyst	2, 3
	Associate Management Analyst	2, 3
	Education and Outreach Specialist	2, 3
	Education and Outreach Supervisor	2, 3
	Associate Operations Specialist	2, 3
	Staff Operations Specialist	2, 3
	Senior Operations Specialist	2, 3
	Labor Relations Analyst	6
	Labor Relations Manager I	6
	Labor Relations Specialist	6
	Associate Personnel Analyst	6
	Training Officer I	6
	Audio-Visual Specialist	5
	Audio-Visual Assistant	5
	Printing Trades Supervisor II (General)	5

---------

 * The Executive Officer, or his or her designee, may determine in writing that a particular consultant, although a “designated position,” is hired to perform a range of duties that are limited in scope and thus is not required to fully comply with the disclosure requirements described in this section. Such written determination shall include a description of the consultant's duties and, based upon that description a statement of the extent of disclosure requirements. The Executive Officer's or his or her designee's determination is a public record and shall be retained for public inspection in the same manner and location as this conflict of interest code.

Administrators 
Administrator IV, FTB 	 1, 2, 3
Administrator III, FTB 	 1, 2, 3
Administrator II, FTB 	 1, 2, 3
Administrator I, FTB 	 1, 2, 3

Legal 

Chief Counsel II, C.E.A 	 1, 2, 3
Counsel, Multistate Tax Affairs 	 1, 2, 3

Assistance Chief Counsel 	 1, 2, 3
 Tax Counsel III, FTB (Sup), 
 Tax Counsel III, FTB (Spec), and
 CEA II, Tax Counsel, FTB and Graduate Legal Assistants
  assigned to the General Counsel Section 	 1, 2, 3
Program Specialist III, FTB	1, 2, 3

Program Specialist II, FTB	1, 2, 3
Tax Counsel III, FTB (Sup) 	 2, 3
Tax Counsel III, FTB (Spec) 	 2, 3
Tax Counsel IV, FTB	2, 3
Tax Counsel, FTB 	 2, 3
Senior Legal Analyst 	 2, 3
Graduate Legal Assistant 	 2, 3

Audit 
Program Specialist III, FTB 	 2, 3
Program Specialist II, FTB 	 2, 3
Program Specialist I, FTB 	 2, 3
Associate Tax Auditor, FTB 	 7
Tax Auditor, FTB 	 7

Special Agents 
Investigation Specialist II, Technical, FTB	2, 3
Investigation Specialist II, FTB 	 2, 3
Investigation Specialist I, FTB 	 2, 3

Collections 
Principal Compliance Representative, FTB	2, 3
Supervising Compliance Representative, FTB	2, 3

Data Processing Equipment Acquisition
Computer Operations Supervisor II 	 4
Computer Operations Specialist II 	 4
Data Processing Manager IV 	 4
Data Processing Manager III 	 4
Data Processing Manager II 	 4
Data Processing Manager I 	 4
Information System Tech Supervisor II	4
Senior Information Systems Analyst (Spec)	4
Senior Information Systems Analyst (Sup)	4
Staff Information Systems Analyst (Sup)	4
Staff Information Systems Analyst (Spec)	4
Associate Information Systems Analyst (Spec)	4
Information System Tech Specialist II	4
Senior Programmer Analyst (Specialist)	4
Staff Programmer Analyst (Specialist)	4
Associate Programmer Analyst (Spec) 	 4
Systems Software Specialist II (Tech. & Sup.) 	 4
Systems Software Specialist III (Tech. & Sup.)	4
Systems Software Specialist I 	 4
Associate Systems Software Specialist 	 4
Key Data Supervisor IV 	 4
Key Data Supervisor III 	 4
Key Data Supervisor II 	 4
Telecommunications Systems Analyst II 	 4, 5
Telecommunications Systems Analyst I	4, 5
Telecommunications Systems Manager II	 4, 5

General Procurement Activity 
Business Services Officer III 	 5

Designated Positions 	Category

Business Services Officer II 	 5
Business Services Officer I 	 5

Business Services Officer I and II (Specialist)	5
Business Services Officer I (Supervisor)	5
Business Services Assistant 	 5

Associate Business Management Analyst (Contract Admin.)	1, 2, 3, 5
Associate Space Planner	5
Staff Services Manager I (Contract Mgr.)	1, 2, 3, 5
Staff Services Analyst (Contract Admin.)	5
Associate Budget Analyst 	 5
Materials & Stores Supervisor	4, 5
Materials & Stores Specialist	4, 5
A designated employee may, from time to time, be temporarily assigned to a training and development assignment outside his or her particular classification. Such an employee shall, nevertheless, retain his or her designated status. However, employees classified as Associate Tax Auditor, FTB and Tax Auditor, FTB and serving in the following positions on a training assignment for one year or more shall be considered nondesignated for the duration of his or her assignment:
Assignment to the Print Coordination Unit 
Assignment as the department's Affirmative Action Officer 
Disclosure Categories 
Category 1 
Designated employees assigned to this category must report: 
Interests in real property subject to the laws administered by this department. 
Category 2 
Designated employees assigned to this category must report: 

	Investments and business positions in business entities and sources of income, including gifts, loans and travel payments, subject to the laws administered by this department. 
Category 3 
Designated employees assigned to this category must report: 
Investments and business positions in or income, including gifts, loans and travel payments, from any business entity, subject to the laws administered by this department, in which the designated employee is a director, officer, partner, trustee, employee or holds any position of management. 
Category 4 
Designated employees assigned to this category must report: 
Investments and business positions in business entities and income, including gifts, loans and travel payments, from sources which are engaged in the sale of data processing equipment and/or services in the State of California or which sold data processing equipment to the department. 
Category 5 
Designated employees assigned to this category must report: 
Investments and business positions in business entities and income, including gifts, loans and travel payments, from sources which, within the previous two years did, or in the future foreseeably might, contract with the Franchise Tax Board or with the State of California to provide services, equipment, leased space, materials, or supplies to the Franchise Tax Board, except those business entities or sources of income identified in Category 4 above. 
Category 6 
Designated employees assigned to this category must report: 
Investments and business positions in business entities and income, including gifts, loans and travel payments, from sources which within the previous two years did, or in the foreseeable future might, contract with the Franchise Tax Board to provide personnel services, including consultant training and personnel services, and commercial leased space for the purpose of conducting personnel or training seminars. 
Category 7 
Employees assigned to this disclosure category shall satisfy their reporting requirement as follows: 
If the employee has not participated in an assignment during the course of the reporting period in which he or she has a financial interest, then the employee shall sign a statement to that effect under penalty of perjury. Such statement shall be filed and processed as though it were the disclosure statement required by section 4(A) of the Standard Code. An employee who participated in an assignment in which he or she had a financial interest shall disclose that interest as described in Categories 2 and 3, but such statement shall be delivered to the filing officer who will file the statement as a public record.
As an aid to designated employees, the department shall provide a list of vendors with whom it has transacted business during the 12-month period preceding the disclosure statement filing date, and a list of the laws administered by the department.
§17000.31. Employee Rules and Rules for Accessing Records and Administrative Remedies.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Title 1.8 of Part 4 of Division 3, Civil Code.
HISTORY

1. New section and Appendix I filed 7-31-78 as an emergency; effective upon filing (Register 78, No. 31).
2. Certificate of Compliance filed 11-21-78 (Register 78, No. 47).
3. Renumbering from Section 17006 to Section 17000.31 filed 2-21-79 as procedural and organizational; effective upon filing (Register 79, No. 7).
4. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
Chapter 1.5. Bank and Corporation Franchise Tax
NOTE: Subchapter 1.5 originally printed 4-3-48. Repealer filed 2-18-52 as an emergency; designated to be effective on the thirtieth day thereafter and declared not applicable to any period prior to 7-1-51 (Register 27, No. 4).
Chapter 2. Personal Income Tax
Note: Repealer of Subchapter 2 (relating to taxable years prior to 12-31-54) was filed January 20, 1964; effective thirtieth day thereafter (Register 64, No. 4). For prior history of various sections thereof, see Register 27, No. 4; Register 53, No. 12; and Register 56, No. 11.
Chapter 2.5. Personal Income Tax  (Taxable Years Beginning After 12-31-54)

(Originally Filed 1-7-58)

PREFACE
The “Personal Income Tax Law” (formerly the Personal Income Tax Act) was enacted and became effective on June 13, 1935. With certain specific exceptions (Sections 17121-17136) the original statute imposed a tax upon the entire net income of residents and upon the net income of nonresidents derived from sources within the State. Notwithstanding the numerous amendments up to 1943, the statute remained basically unchanged. During the so-called war period (1943-1948, inclusive) temporary tax relief was granted in the form of reduced rates and increased exemptions in 1943; the personal exemptions were again increased in 1945 and the 1943 temporary rates and exemptions were made permanent. In 1949 the temporary rates ceased and the permanent rates became effective.
In 1943 the Legislature (Stats. 1943, p. 2354) incorporated the Personal Income Tax Act into the Revenue and Taxation Code as Part 10 of Division 2 thereof. Section 2 of said laws repealed the incorporated act and Section 3 provided that the codification was not effective until July 1, 1945.
Section 1 of the Laws of 1945, Chapter 645, repealed Section 3 of the 1943 law and provided that the 1943 law was to become effective on the effective date of the 1945 law. The latter became effective on June 5, 1945, and, thus, the Personal Income Tax Law became effective on June 5, 1945, as Part 10 of Division 2 of the Revenue and Taxation Code.
The original provisions, notwithstanding repeal, have been continued as part of the Revenue and Taxation Code, the same as if the old provisions had been in code form since 1935.
In 1955 the Legislature (Chapters 939 and 1590) completely revised the taxing provisions of the Personal Income Tax Law so that the language of the sections adopted and their sequence would conform to the Internal Revenue Code of 1954. However, in enacting such law many provision of the Internal Revenue Code were omitted. Also as a part of such revision the law in effect prior to January 1, 1955, was designated the “Personal Income Tax Law of 1954.” Accordingly, when referring to the law which was in effect prior to January 1, 1955, in order to distinguish between existing law and former law, after the section number add, “Personal Income Tax Law of 1954.”
The following regulations are applicable to taxable years commencing after December 31, 1954, except as otherwise specifically stated in the text of the regulations. The regulation numbers are the same as the sections of the Personal Income Tax Law which are being implemented, interpreted or made specific.
The regulations issued by this department and other State agencies are now being published by the Division of Administrative Procedure in the California Administrative Code and Register; the regulations contained in Subchapter 2.5 of Chapter 3 of Title 18 of the California Administrative Code and are distributed by the State of California, Documents Section, P.O. Box 1612, Sacramento, California, 9507.
The regulations issued by the department relating to the “Personal Income Tax Law of 1954,” are contained in Subchapter 2* of Chapter 3 of Title 18 of the California Administrative Code.

* Former Subchapter 2 entitled “Corporation Income Tax” originally printed April 3, 1948 (Title 18). Repealer filed February 18, 1952, as an emergency designated to be effective on the thirtieth day thereafter and declared not applicable to any period prior to July 1, 1951 (Register 27, No. 4).
Subchapter 1. General Provisions and Definitions
§17002.5. Delegation to Employment Development Department and Unemployment Insurance Appeals Board.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code; Reference: Sections 18806 and 18814, Revenue and Taxation Code and Section 15702.1, Government Code.
HISTORY

1. Amendment of subsection (a) filed 7-31-78 as an emergency; effective upon filing (Register 78, No. 31). For prior history, see Register 74, No. 35.
2. Certificate of Compliance filed 11-22-78 (Register 78, No. 47). 
3. Renumbering from Section 17002.5 to Section 17000.13 filed 2-21-79 as procedural and organizational; effective upon filing (Register 79, No. 7).
§17002.6. Emergency Meetings and Conditions, Notice Requested.
Note     •     History

NOTE

Authority cited: Sections 19253 and 26422, Revenue and Taxation Code. Reference: Section 11125, Gov. Code and Sections 17048, 17069 and 25564, Revenue and Taxation Code.
HISTORY

1. New section filed 12-31-73 as an emergency; effective upon filing (Register 73 No. 52).
2. Certificate of Compliance filed 2-27-74 (Register 74, No. 9).
3. Renumbering from Section 17002.6 to Section 17000.2 filed 2-21-79 as procedural and organizational; effective upon filing (Register 79, No. 7).
§17004. Trusts.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23). (See history note following Reg. 17006.)
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17006. Fiduciary.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New Subchapter 2.5 beginning with Group 2, filed 1-7-58 (except as specifically otherwise indicated): effective 30th day thereafter (Register 58, No. 1).
2. Group 1 (Regs. 17006 through 17022) filed 5-3-61; effective 30th day thereafter (Register 61, No. 9).
3. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17007. Classification of Organizations for Tax Purposes.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17008. Partnerships in General.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Amendment filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17009. Corporations.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17014. Who Are Residents and Nonresidents.
Note     •     History

The term “resident,” as defined in the law, includes (1) every individual who is in the State for other than a temporary or transitory purpose, and (2) every individual who is domiciled in the State who is outside the State for a temporary or transitory purpose. All other individuals are nonresidents.
Under this definition, an individual may be a resident although not domiciled in this State, and, conversely, may be domiciled in this State without being a resident. The purpose of this definition is to include in the category of individuals who are taxable upon their entire net income, regardless of whether derived from sources within or without the State, all individuals who are physically present in this State enjoying the benefit and protection of its laws and government, except individuals who are here temporarily, and to exclude from this category all individuals who, although domiciled in this State, are outside this State for other than temporary or transitory purposes, and, hence, do not obtain the benefits accorded by the laws and Government of this State.
If an individual acquires the status of a resident by virtue of being physically present in the State for other than temporary or transitory purposes, he remains a resident even though temporarily absent from the State. If, however, he leaves the State for other than temporary or transitory purposes, he thereupon ceases to be a resident.
If an individual is domiciled in this State, he remains a resident unless he is outside of this State for other than temporary or transitory purposes.
(b) Meaning of Temporary or Transitory Purpose. Whether or not the purpose for which an individual is in this State will be considered temporary or transitory in character will depend to a large extent upon the facts and circumstances of each particular case. It can be stated generally, however, that if an individual is simply passing through this State on his way to another state or country, or is here for a brief rest or vacation, or to complete a particular transaction, or perform a particular contract, or fulfill a particular engagement, which will require his presence in this State for but a short period, he is in this State for temporary or transitory purposes, and will not be a resident by virtue of his presence here.
If, however, an individual is in this State to improve his health and his illness is of such a character as to require a relatively long or indefinite period to recuperate, or he is here for business purposes which will require a long or indefinite period to accomplish, or is employed in a position that may last permanently or indefinitely, or has retired from business and moved to California with no definite intention of leaving shortly thereafter, he is in the State for other than temporary or transitory purposes, and, accordingly, is a resident taxable upon his entire net income even though he may retain his domicile in some other state or country.
Example (1): X is domiciled in Quebec, where he had lived for 50 years and had accumulated a large fortune. However, X's doctor ordered him to California where he now spends his entire time, except for yearly summer trips of about three or four months duration to Quebec. X maintains an abode in California and still maintains, and occupies on his visits there, his old abode in Quebec. Notwithstanding his domicile in Quebec, because his yearly sojourn in California is not temporary or transitory he is a resident of California, and is taxable on his entire net income.
Example (2): Until the fall of 1955, Y admitted domicile in California. At that time, however, to avoid the California income tax, Y declared himself to be domiciled in Nevada, where he had a summer home. Y moved his bank accounts to banks in that state, and each year thereafter spent about three or four months in that state. He continued to spend six or seven months of each year at his estate in California, which he continued to maintain, and continued his social, club and business connections in California. The months not spent in Nevada or California he spent traveling in other states or countries. Y is a resident of California and is taxable on his entire income, for his sojourns in this State are not for temporary or transitory purposes.
Note: If, in the foregoing two examples, the facts are reversed so that California is the State of domicile and the other states or countries are those in which the person is present for the indicated periods and purposes, X and Y are not residents of California within the meaning of the law because they are absent from the State for other than temporary or transitory purposes.
Example (3): B and C, husband and wife, domiciled in Minnesota where they maintained their family home, come to California each November and stay here until the middle of March. Originally they rented an apartment or house for the duration of their stay here but three years ago they purchased a house here. The house is either rented or put in the charge of a caretaker from March to November. B has retired from active control of his Minnesota business but still keeps office space and nominal authority in it. He belongs to clubs in Minnesota, but to none in California. He has no business interests in California. C has little social life in California, more in Minnesota, and has no relatives in California. Neither B nor C is a resident of California. The connection of each to the state of domicile in each year is closer than it is to California. Their presence here is for a temporary or transitory purpose.
Note: If, in the foregoing example, the facts are reversed so that California is the state of domicile and the persons are visitors in another state or country, the persons are residents of California.
The underlying theory of Sections 17014-17016 is that the state with which a person has the closest connection during the taxable year is the state of his residence.
An individual whose presence in California does not exceed an aggregate of six months within the taxable year and who is domiciled without the state and maintains a permanent abode at the place of his domicile, will be considered as being in this state for temporary or transitory purposes providing he does not engage in any activity or conduct within this State other than that of a seasonal visitor, tourist or guest.
An individual may be a seasonal visitor, tourist or guest even though he owns or maintains an abode in California or has a bank account here for the purpose of paying personal expenses or joins local social clubs.
(c) Meaning of Domicile. Domicile has been defined as the place where an individual has his true, fixed, permanent home and principal establishment, and to which place he has, whenever he is absent, the intention of returning. It is the place in which a man has voluntarily fixed the habitation of himself and family, not for a mere special or limited purpose, but with the present intention of making a permanent home, until some unexpected event shall occur to induce him to adopt some other permanent home. Another definition of “domicile” consistent with the above is the place where an individual has fixed his habitation and has a permanent residence without any present intention of permanently removing therefrom.
An individual can at any one time have but one domicile. If an individual has acquired a domicile at one place, he retains that domicile until he acquires another elsewhere. Thus, if an individual, who has acquired a domicile in Illinois, for example, comes to California for a rest or vacation or on business or for some other purpose, but intends to either return to Illinois or to go elsewhere as soon as his stay in California is completed, he retains his domicile in Illinois and does not acquire a domicile in California, even though he maintains a home here, has his family with him, and remains here a considerable period of time. Likewise, an individual, who is domiciled in California and who leaves the State retains his California domicile as long as he has the definite intention of returning here regardless of the length of time or the reasons why he is absent from the State. 
On the other hand, an individual, domiciled in Illinois, who comes to California with the intention of remaining here indefinitely, and who has no fixed intention of returning to Illinois, loses his Illinois domicile and acquires a California domicile the moment he enters the State. Similarly, an individual domiciled in California, who leaves the State, loses his California domicile the moment he abandons any intention of returning to California and locates elsewhere with the intention of remaining there indefinitely.
(d) Proof of Nonresidence.
(1) The type and amount of proof that will be required in all cases to rebut or overcome a presumption of residence and to establish that an individual is a nonresident cannot be specified by a general regulation, but will depend largely on the circumstances of each particular case.
Ordinarily, however, affidavits or testimony of an individual and of his friends, employer, or business associates that the individual was in California for a rest or vacation to complete a particular business transaction, or to work for a limited period of time will be sufficient to overcome any presumption of residence here. In the case of individuals who claim to be nonresidents by virtue of being outside the State for other than temporary or transitory purposes, affidavits of friends and business associates as to the reasons for being outside the State should be submitted.
Affidavits that an individual votes in or files income tax returns as a resident of some other state or country, although relevant in determining one's domicile, are otherwise of little value in determining one's residence. No weight shall be given to the fact that charitable contributions are made to charities either within or without the State.
(2) If an individual is presumed to be a resident during any taxable year or if any question as to his resident status exists, he should file a return, in order to avoid the possibility of the imposition of penalties, for that year even though he believes he was a nonresident and even though he received no income from sources within this State. If he received income from sources within this State, that income should be reported. If no income was received from sources within this State, that fact should be stated on the return.
The return should be accompanied by a signed statement setting forth in detail the reasons why the individual believes he was a nonresident. The return should also be accompanied by any evidence such as certificates, affidavits, etc., that the individual is able to obtain showing that he was not a resident.
If the Franchise Tax Board is satisfied from the statement and evidence submitted that the individual was a nonresident, the tax will be computed only upon the income, if any, from sources within this State. If the Franchise Tax Board is not satisfied that the individual was a nonresident, it will either request additional information or require the individual to file a return as a resident.
In any event, the individual will have the opportunity before his status as a resident or nonresident is finally determined to submit additional evidence either in writing or at an oral hearing before the Franchise Tax Board or its representatives.
(e) Time When Status as Resident or Nonresident Will Be Determined. Inasmuch as the status of an individual as a resident or a nonresident during any taxable year will generally depend upon his activities or conduct during the entire year, it will not be possible, ordinarily, to determine his status until after the close of the year.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Sections 17014 and 17015, Revenue and Taxation Code.
HISTORY

1. Repealer of former section 17014-17016(d), renumbering of former section 17014-17016(e) to section 17016 and renumbering of former sections 17014-17016(a) through 17014-17016(c), 17014-17016(f) and 17014-17016(g) to section 17014 filed 8-24-83; effective thirtieth day thereafter (Register 83, No. 35). For prior history, see Register 67, No. 36.
2. Change without regulatory effect of subsection (c) filed 9-19-88 (Register 88, No. 40).
3. Editorial correction of printing error in subsection (c) (Register 93, No. 38).
§17014-17016(a). Who Are Residents and Nonresidents.
History

HISTORY

1. Renumbering of Section 17014-17016(a) to Section 17014 filed 8-24-83; effective thirtieth day thereafter (Register 83, No. 35).
§17014-17016(b). Meaning of Temporary or Transitory Purpose.
History

HISTORY

1. Renumbering of Section 17014-17016(b) to Section 17014 filed 8-24-83; effective thirtieth day thereafter (Register 83, No. 35). For prior history, see Register 67, No. 36.
§17014-17016(c). Meaning of Domicile.
History

HISTORY

1. Renumbering of Section 17014-17016(c) to Section 17014 filed 8-24-83; effective thirtieth day thereafter (Register 83, No. 35).
§17014-17016(d). Residence of Married Women and Minors.
History

HISTORY

1. Repealer filed 8-24-83; effective thirtieth day thereafter (Register 83, No. 35).
§17014-17016(e). Presumption of Residence.
History

HISTORY

1. Renumbering of Section 17014-17016(e) to Section 17016 filed 8-24-83; effective thirtieth day thereafter (Register 83, No. 35).
§17014-17016(f). Proof of Nonresidence.
History

HISTORY

1. Renumbering of Section 17014-17016(f) to Section 17014 filed 8-24-83; effective thirtieth day thereafter (Register 83, No. 35).
§17014-17016(g). Time When Status As Resident or Nonresident Will Be Determined.
History

HISTORY

1. Renumbering of Section 17014-17016(g) to Section 17014 filed 8-24-83; effective thirtieth day thereafter (Register 83, No. 35).
§17014-17016(h). Status of Military Personnel.
History

HISTORY

1. Repealer filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
§17016. Presumption of Residence.
Note     •     History

If an individual spends in the aggregate more than nine months of any taxable year in this State it will be presumed that he is a resident of this State. The presumption is not conclusive but may be overcome by satisfactory evidence that he is in the State for temporary or transitory purposes only. It does not follow, however, that a person is not a resident simply because he does not spend nine months of a particular taxable year in this State. On the contrary, a person may be a resident even though not in the State during any portion of the year.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 17016, Revenue and Taxation Code.
HISTORY

1. Renumbering of former Section 17014-17016(e) to Section 17016 filed 8-24-83; effective thirtieth day thereafter (Register 83, No. 35).
§17022. Military or Naval Forces and Armed Forces of the United States.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Amendment filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17024.5. Elections.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 17024.5, Revenue and Taxation Code.
HISTORY

1. New section filed 3-19-84 as an emergency; effective upon filing (Register 84, No. 15). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 7-17-84.
2. Repealed by operation of Government Code Section 11346.1(g) (Register 84, No. 32).
3. New section filed 9-10-84; effective upon filing pursuant to Government Code Section 11346.2(d) (Register 84, No. 37).
4. Change without regulatory effect repealing Section 17024.5 filed 9-19-88 (Register 88, No. 40).
Subchapter 2. Imposition of Tax
§17041. Computation of Tax.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer and new section filed 7-17-75; effective thirtieth day thereafter (Register 75, No. 29).
2. Amendment filed 9-29-78 as an emergency; effective upon filing (Register 78, No. 40).
3. Certificate of Compliance filed 12-21-78 (Register 78, No. 51). 
4. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17042-17043. Definition of Head of Household.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Amendment filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer and new section filed 7-17-75; effective thirtieth day thereafter (Register 75, No. 29).
3. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17045. Tax in Case of Joint Return of Husband and Wife.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer and new section filed 7-17-75; effective thirtieth day thereafter (Register 75, No. 29).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17046. Surviving Spouse.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-17-75; effective thirtieth day thereafter (Register 75, No. 29).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
§17048. Tax Tables.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 17048, Revenue and Taxation Code. 
HISTORY

1. Repealer and new section filed 12-22-76; effective thirtieth day thereafter (Register 76, No. 52). For prior history, see Register 76, No. 9. 
2. Repealer and new section filed 10-3-78 as an emergency; effective upon filing (Register 78, No. 40). 
3. Certificate of Compliance filed 12-21-78 (Register 78, No. 51). 
4. Repealer and new section filed 10-12-79 as an emergency; effective upon filing (Register 79, No. 41). A Certificate of Compliance must be filed within 120 days or emergency language will be repealed on 2-9-80. 
5. Certificate of Compliance filed 1-18-80 (Register 80, No. 3). 
6. Repealer and new section filed 10-10-80 as an emergency; effective upon filing (Register 80, No. 41). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 2-8-81. 
7. Certificate of Compliance filed 1-16-81 (Register 81, No. 3). 
8. Repealer and new section filed 10-6-81 as an emergency; effective upon filing (Register 81, No. 41). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 2-3-82. 
9. Certificate of Compliance transmitted to OAL 1-15-82 and filed 2-11-82 (Register 82, No. 7). 
10. Repealer and new section filed 10-29-82 as an emergency; effective upon filing (Register 82, No. 44). A Certificate of Compliance must be transmitted to OAL or emergency language will be repealed on 4-27-83. 
11. Certificate of Compliance as to 10-29-82 order transmitted to OAL 2-9-83 and filed 3-10-83 (Register 83, No. 11). 
12. Repealer and new section filed 9-30-83 as an emergency; effective upon filing (Register 83, No. 41). A Certificate of Compliance must be transmitted to OAL or emergency language will be repealed 1-28-84. 
13. Certificate of Compliance transmitted to OAL 1-26-84 and filed 2-29-84 (Register 84, No. 9). 
14. Change without regulatory effect repealing Section 17048 pursuant to Section 100, Title 1, California Code of Regulations filed 12-8-89 (Register 90, No. 3). 
§17049. Elections.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17050. Husband and Wife Filing Separate Returns.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17051. Short Taxable Year Caused by Death.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17053(a). Allowance of Credit for Retirement Income.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-17-75; effective thirtieth day thereafter (Register 75, No. 29).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17053(b). Eligibility for Retirement Income Credit.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-17-75; effective thirtieth day thereafter (Register 75, No. 29).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17053(c). Retirement Income.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-17-75; effective thirtieth day thereafter (Register 75, No. 29).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17053(d). Limitation on Amount of Retirement Income.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-17-75; effective thirtieth day thereafter (Register 75, No. 29).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17053(e). Illustration of Application of Section 17053.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-17-75; effective thirtieth day thereafter (Register 75, No. 29).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
Article 1. Joint Strike Fighter Wage Credit
§17053.36-0. Table of Contents.
Note     •     History

Table of Contents--Regulation Sections 17053.36-1 through 17053.36-9 
Section 17053.36-1. The Joint Strike Fighter (JSF) Wage Credit. 
(a) In General 
(b) Joint Strike Fighter Property Credit 
(c) Cross References 
(d) General References 
Section 17053.36-2. Definitions. 
(a) Joint Strike Fighter 
(b) Initial Contract or Initial Subcontract 
(c) Joint Strike Fighter Program 
(d) Manufactured 
(e) Product For Ultimate Use in a Joint Strike Fighter 
Section 17053.36-3. Qualified Taxpayer. 
(a) Regulation 17053.37-3 Shall Apply 
Section 17053.36-4. Qualified Wages. 
(a) In General 
(b) Amount of Qualified Wages 
Section 17053.36-5. Qualified Employee. 
(a) In General 
(b) Limitation 
(1) Computation 
(c) Services Directly Related 
Section 17053.36-6. JSF Contract Bidding. 
(a) In General 
(b) Bid 
(c) JSF Wage Credit Reflected Within Bid 
(d) JSF Wage Credit Allowable 
(e) Pass-Through Entities 
(f) Copies Provided to Franchise Tax Board 
Section 17053.36-7. JSF Wage Credit Carryforwards. 
(a) In General 
(b) Carryforwards for Pass-Through Entities 
(c) Carryforwards Permitted After Sunset 
Section 17053.36-8. Recordkeeping Requirements. 
(a) In General 
(b) Books and Records 
Section 17053.36-9. Miscellaneous Provisions. 
(a) Effective Dates of the JSF Wage Credit 
(b) Enterprise Zone Hiring Credit 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.36, Revenue and Taxation Code. 
HISTORY

1. New article 1 (sections 17053.36-0--17053.37-11) and section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.36-1. The Joint Strike Fighter (JSF) Wage Credit.
Note     •     History

The Joint Strike Fighter (JSF) Wage Credit -- (See Regulation 17053.36-0 for Table of Contents.) 
(a) In General. The Joint Strike Fighter (JSF) Wage Credit is allowed to any qualified taxpayer for each taxable year beginning on or after January 1, 2001, and before January 1, 2006, in the following amounts: 
(1) Fifty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2001, and before January 1, 2002. 
(2) Forty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2002, and before January 1, 2003. 
(3) Thirty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2003, and before January 1, 2004. 
(4) Twenty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2004, and before January 1, 2005. 
(5) Ten percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2005, and before January 1, 2006. 
The credit allowed by Revenue and Taxation Code section 17053.36 and this regulation shall not exceed ten thousand dollars ($10,000) per year, per qualified employee, subject to reduction as provided in Revenue and Taxation Code section 17053.36, subsection (c), and this Regulation 17053.36-5 for employees that are qualified employees for only part of a taxable year. 
(b) Joint Strike Fighter Property Credit. The Joint Strike Fighter Property Credit contained in Revenue and Taxation Code section 17053.37 provides a credit for qualified property and capitalized direct labor costs to construct, modify or install qualified property used to manufacture products for ultimate use in a Joint Strike Fighter. In contrast, the Joint Strike Fighter Wage Credit allowed by Revenue and Taxation Code section 17053.36 and this regulation provides a credit for certain capitalized direct labor costs to develop and manufacture inventory property designed to be physically installed in or attached to a Joint Strike Fighter. 
(c) Cross References. Regulation 17053.36-2 contains definitions applicable to Regulations 17053.36-1 through 17053.36-9, inclusive, Regulation 17053.36-3 contains rules relating to qualified taxpayers, Regulation 17053.36-4 contains rules relating to qualified wages, Regulation 17053.36-5 contains rules relating to qualified employees, Regulation 17053.36-6 contains rules relating to contract bidding, Regulation 17053.36-7 contains rules relating to carryforwards, Regulation 17053.36-8 contains general recordkeeping requirements, and Regulation 17053.36-9 contains other miscellaneous provisions. For rules relating to the JSF Wage Credit allowed to taxpayers under the Personal Income Tax Law, see Revenue and Taxation Code section 17053.36 and the regulations thereunder. 
(d) General References. For purposes of Regulations 17053.36-1 through 17053.36-9, inclusive, the following general references shall apply: 
(1) All citations to the Revenue and Taxation Code are to the California Revenue and Taxation Code. 
(2) All citations to the Internal Revenue Code are to the Internal Revenue Code of 1986, as amended. 
(3) The credits provided for in Revenue and Taxation Code sections 17053.36 and 23636 shall be collectively referred to as the “Joint Strike Fighter Wage Credit” or the “JSF Wage Credit.” 
(4) Unless otherwise provided, any reference to wages in the examples in this regulation shall mean wages that are direct labor costs, as used in Internal Revenue Code section 263A and defined in the regulations thereunder, and shall assume that the wages are qualified wages paid to qualified employees to manufacture property in this state for ultimate use in a Joint Strike Fighter. In addition, unless otherwise provided, all examples in this regulation shall assume that the qualified taxpayer's bid to manufacture property for ultimate use in a Joint Strike Fighter reflected a reduction in the amount of the Joint Strike Fighter Wage Credit allowable as provided in Revenue and Taxation Code section 17053.36, subsection (e), and Regulation 17053.36-6. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.36, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.36-2. Definitions.
Note     •     History

Definitions -- (See Regulation 17053.36-0 for Table of Contents.) 
For purposes of Regulations 17053.36-1 through 17053.36-9, inclusive, the following definitions shall apply: 
(a) Joint Strike Fighter. The term “Joint Strike Fighter” shall mean the next-generation air combat strike aircraft developed and produced under the Joint Strike Fighter program of the United States government. 
(b) Initial Contract or Initial Subcontract. The term “initial contract” shall mean the contract awarded by the United States government to a prime contractor for any phase, including the Engineering and Manufacturing Development Phase, of the Joint Strike Fighter Program to produce the Joint Strike Fighter. The term “initial subcontract” shall mean a contract between a prime contractor and any other contractor, or between two contractors where one of those contractors is under contract with the prime contractor or where the prime contractor or a contractor under contract with the prime contractor has consented to the contract in writing, to produce a product that is designed to be physically attached to or installed in a Joint Strike Fighter under the initial contract. 
(c) Joint Strike Fighter Program. The term “Joint Strike Fighter Program” shall mean the multiservice, multinational project conducted by the United States government to develop and produce the next generation of air combat strike aircraft. 
(d) Manufactured. The term “manufactured” shall mean the process of developing, converting or conditioning stock in trade or other property properly includible in the inventory of the taxpayer for ultimate use in a Joint Strike Fighter by changing the form, composition, quality, or character of the property, and includes any improvements to property that result in a greater service life or greater functionality than that of the original property. The term “manufactured” shall include the design, engineering and testing activities necessary to develop the property. Property shall be treated as having a greater service life if such property can be used for a longer period than such property could have been used prior to the conversion or conditioning of such property. Property shall be treated as having greater functionality if it has been improved in such a manner that it can be used to perform new or different functions. 
(e) Product for Ultimate Use in a Joint Strike Fighter. The term “product for ultimate use in a Joint Strike Fighter” shall mean a product that is properly treated as inventory in the hands of the taxpayer and is designed to be physically installed in or attached to a Joint Strike Fighter. The term “product for ultimate use in a Joint Strike Fighter” shall not include any product that is not designed to form a part of the Joint Strike Fighter. For this purpose, the term “product” shall include any studies, drawings, pilot model or prototype used in connection with the development of the product. For this purpose, the term “inventory” includes any property which is required to be included in the qualified taxpayer's inventory costs under Internal Revenue Code section 263A or that is described in Internal Revenue Code section 1221(1). 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.36, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.36-3. Qualified Taxpayer.
Note     •     History

Qualified Taxpayer -- (See Regulation 17053.36-0 for Table of Contents.) 
(a) Regulation 17053.37-3 Shall Apply. For purposes of Regulations 17053.36-1 through 17053.36-9, inclusive, the provisions of Regulation 17053.37-3, as in effect on the date these regulations become effective, shall apply and are incorporated herein by reference. The term “qualified taxpayer” in this regulation shall have the same meaning as the term qualified taxpayer in Regulation 17053.37-3. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.36, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.36-4. Qualified Wages.
Note     •     History

Qualified Wages -- (See Regulation 17053.36-0 for Table of Contents.) 
(a) In General. For purposes of Regulations 17053.36-1 through 17053.36-9, inclusive, the term “qualified wages” shall mean that portion of wages paid or incurred by the qualified taxpayer to qualified employees that are direct labor costs, as used in Internal Revenue Code section 263A and defined in the regulations thereunder, included in inventory costs for property manufactured in this state by the qualified taxpayer for ultimate use in a Joint Strike Fighter. For this purpose, the term employee encompasses both full-time and part-time employees but shall not include contract employees or independent contractors referenced in Treasury Regulation section 263A-1. Qualified wages shall include wages for engineering, design, and testing activities to the extent those wages are treated as direct labor costs capitalized to and included in inventory costs for property manufactured in this state by the qualified taxpayer for ultimate use in a Joint Strike Fighter under the same method of allocation for California income or franchise tax purposes that the taxpayer used for federal income tax purposes under the uniform capitalization allocation rules specified in Treasury Regulation section 1.263A-1 (as in effect on the date Regulation 23636-4 is effective). 
(1) Direct labor costs shall include all elements of compensation, such as basic compensation, overtime pay, vacation pay, holiday pay, sick leave pay (other than payments pursuant to a wage continuation plan under Internal Revenue Code section 105(d) as it existed prior to its repeal in 1983), shift differential, payroll taxes, and payments to a supplemental unemployment benefit plan, but shall not include any indirect labor costs. 
(2) Indirect labor costs shall include that portion of qualified wages that are not direct labor costs. Indirect labor costs include, but are not limited to, training costs, officers' compensation, pension and other related costs, and employee benefit expenses (including payments pursuant to a wage continuation plan under Internal Revenue Code section 105(d) as it existed prior to its repeal in 1983). 
(3) In determining whether direct costs of labor are properly included in inventory costs for property manufactured in this state by the qualified taxpayer for ultimate use in a Joint Strike Fighter, the qualified taxpayer shall be required to use the same method of allocation for California income or franchise tax purposes that the taxpayer used for federal income tax purposes under the uniform capitalization allocation rules specified in Treasury Regulation section 1.263A-1 (as in effect on the date Regulation 17053.36-4 is effective). 
EXAMPLE 1: A, a qualified taxpayer, manufactures aircraft navigational instruments in its plant in Lancaster. A's manufacturing facility employees 20 people that assemble the instrument components. Assume that all of A's employees' activities are allocable to property manufactured in this state by the qualified taxpayer for ultimate use in a Joint Strike Fighter. A pays its employees $20 per hour, plus the following amounts as an employer: Social Security $1.54; Unemployment Insurance $.18; Workers' Compensation Insurance $.60; Health and Life Insurance $2.08; and Retirement Benefits $1.68 for total compensation of $26.08 per hour. Pursuant to Treasury Regulation section 263A-1, the Workers' Compensation Insurance, Health and Life Insurance and Retirement Benefits amounts are classified as indirect labor costs and are not qualified wages. Accordingly, $21.72 of the total wages of $26.08 paid by A constitutes direct labor costs and qualified wages for purposes of Revenue and Taxation Code section 17053.36 and this regulation. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except A purchases pressurized sealing equipment for the navigational instruments and installs the equipment in B's manufacturing facility located in Burbank. A then enters into a contract with B to pressure seal all of A's navigational equipment following assembly by A. A pays B a specified hourly rate for sealing the equipment. B is properly classified as an independent contractor. Under these facts, even though the payments are made to operate equipment owned by A, the payments to B are not qualified wages as B is not an employee of A and the payments are not qualified wages eligible for the credit. However, if B is a qualified taxpayer and B meets all of the other requirements of Revenue and Taxation Code section 17053.36 and this regulation, B would be able to claim the JSF Wage Credit for wages paid to its own employees, if any, in connection with the instrument sealing activity. 
(b) Amount of Qualified Wages. The amount of qualified wages allowed as a credit under Revenue and Taxation Code section 17053.36 and this regulation shall be as follows: 
(1) Fifty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2001, and before January 1, 2002. 
(2) Forty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2002, and before January 1, 2003. 
(3) Thirty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2003, and before January 1, 2004. 
(4) Twenty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2004, and before January 1, 2005. 
(5) Ten percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2005, and before January 1, 2006. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.36, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.36-5. Qualified Employee.
Note     •     History

Qualified Employee -- (See Regulation 17053.36-0 for Table of Contents.) 
(a) In General. The Joint Strike Fighter Wage Credit is allowed to any qualified taxpayer for certain qualified wages paid to qualified employees. For purposes of Regulations 17053.36-1 through 17053.36-9, inclusive, the term “employee” means any employee, as described in Sections 13004, 13004.1 and 13004.5 of the Unemployment Insurance Code, whose services for the qualified taxpayer are performed in this state and are at least 90 percent directly related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter. In order to properly compute the limitation contained in subsection (b) of this regulation, the determination of whether an employee is a qualified employee must be made on a monthly basis. 
(b) Limitation. The credit allowed by Revenue and Taxation Code section 17053.36 and this regulation shall not exceed ten thousand dollars ($10,000) per year, per qualified employee. For employees that are qualified employees for part of a taxable year, the credit shall not exceed ten thousand dollars ($10,000) multiplied by a fraction, the numerator of which is the number of months of the taxable year that the employee is a qualified employee and the denominator of which is 12. 
(1) Computation. There are two requirements for a qualified employee: (1) services must be performed in California and (2) 90% of those services must be directly related to the qualified taxpayer's initial contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter. Moreover, the dollar limitation contained in Revenue and Taxation Code section 17053.36, subsection (c), and this regulation is based upon the number of months during the taxable year that the employee is a qualified taxpayer. Accordingly, the determination of a qualified employee must be made on a monthly basis during the taxable year. For purposes of this regulation, a qualified taxpayer must first determine the amount of wages paid for the employee's services performed while physically located within and without California. Then, with respect to the California wages, at least 90 percent of the services performed for which California wages are paid each month must be directly related to the qualified taxpayer's initial contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter. If at least 90 percent of the California services are directly related, then the employee is a qualified employee for that month. If less than 90 percent of the California services are directly related or if all of the employee's services are performed outside of California, then the employee is not a qualified employee for that month. 
EXAMPLE 1: A, a qualified taxpayer, manufactures avionics systems in San Diego and Houston, Texas. B, one of A's employees, works from January 1, 2002, in Houston before being transferred to San Diego on July 1, 2002, to manufacture avionics systems for the Joint Strike Fighter. B works in San Diego exclusively on the avionics systems through the remainder of the 2002 taxable year. Under these facts, B is not a qualified employee for the months of January through June, inclusive, since all of B's services were performed outside of California during those months. Only wages paid for B's services performed in California are potentially eligible for the JSF Wage Credit. Assume B works a total of 160 hours per month. Under these facts, B's 160 hours of service related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter is divided by 160 total hours of California service each month. As a result, 100% of B's California services are related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter and B is a qualified employee for six months of the 2002 taxable year. To compute the $10,000 maximum dollar credit limitation, $10,000 would be multiplied by 6/12 (the numerator being the number of months B is a qualified employee and the denominator being 12) and A would be allowed a maximum JSF Wage Credit of $5,000 for B's California services for the 2002 taxable year. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that B is transferred to San Diego on December 8, 2002, and begins working on the avionics systems. Under these facts, B's California wages would be separated from the Texas wages. Assume B works a total of 160 hours per month and B worked 144 of these hours in California for the month of December 2002. B's 144 total hours of California service (a portion of B's total December hours) related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter is divided by 144 (total hours of California services). As a result, 100% of B's California services are related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter and B is a qualified employee for one month of the year. To compute the $10,000 maximum dollar credit limitation, $10,000 would be multiplied by 1/12 (the numerator being the number of months B is a qualified employee and the denominator being 12) and A would be allowed a maximum JSF Wage Credit of $833 for B's California services. 
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except B instead is promoted to a management position on December 1, 2002, in A's general administrative division in California. Services in general administrative functions are not services directly related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter. Assume B works a total of 160 hours per month. Under these facts, B's 160 hours of service related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter are divided by 160 total hours of California service for each month from July through November. As a result, 100% of B's California services for the months of July through November are related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter and B is a qualified employee for five months of the year. B's December hours of service related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter (0 hours) is divided by 160 total hours of California service. As a result, none of B's December California service is directly related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter and B is a qualified employee for only five months of the 2002 taxable year (but not for December). To compute the $10,000 wage credit limitation, $10,000 would be multiplied by 5/12 (the numerator being the number of months B is a qualified employee and the denominator being 12) and A would be allowed a maximum JSF Wage Credit of $4,167 for B's California services for the months of June through November. 
(c) Services Directly Related. For purposes of computing the 90% directly related service requirement under this regulation, services are directly related if the wages for those services are properly characterized as direct labor costs, as that term is used in Internal Revenue Code section 263A and defined in the regulations thereunder, as provided in Regulation 17053.36-4, and are included in inventory costs for property manufactured in this state by the qualified taxpayer for ultimate use in a Joint Strike Fighter. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.36, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.36-6. JSF Contract Bidding.
Note     •     History

JSF Contract Bidding -- (See Regulation 17053.36-0 for Table of Contents.) 
(a) In General. The JSF Wage Credit shall not be allowed unless the credit is reflected within the bid that forms the basis for the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in a Joint Strike Fighter. 
(b) Bid. For purposes of this regulation, the term “bid” shall mean a written bid or offer to perform a contract to produce a product that is designed to be physically attached to or installed in a Joint Strike Fighter in response to a request for bids to construct all or a portion of the Joint Strike Fighter. The bid shall be submitted in a competitive process where the contract will be awarded to the lowest possible bidder or as otherwise indicated in the conditions under which the bids will be received and the contract awarded. Where the scope of work, request for proposal or relationship of the contracting parties is such that only a single party will be submitting a proposal or contract to construct all or a portion of the Joint Strike Fighter, the term “bid” shall include the proposal submitted or contract ultimately executed. 
(c) JSF Wage Credit Reflected Within the Bid. For purposes of this regulation, the term “reflected within the bid” shall mean: 
(1) the bid that forms the basis of the contact or subcontract is reduced by the amount of the JSF Wage Credit allowable, and 
(2) the face of the bid, or an attachment to the bid, contains a calculation showing the original bid price, the amount of the JSF Wage Credit allowable and the resulting reduced bid amount. 
The JSF Wage Credit allowable shall be a lump sum number reflected on the contract or subcontract and the aggregate credit allowable over the term of the contract or subcontract is not required to be calculated on the basis of the year in which the credit amount is expected to be claimed. 
EXAMPLE 1: X, a qualified taxpayer, submits a bid to the prime contractor in the amount of $70 to manufacture retractable landing gear for the Joint Strike Fighter. The bid price without the JSF Wage Credit would have been $100. The bid form contains an attachment that states the JSF Wage Credit allowable for the subcontract is $30 ($100 contract price less JSF Wage Credit in the amount of $30 for a reduced contract price of $70). X is the successful bidder on the retractable landing gear and thereafter is awarded the contract to produce the part for the Joint Strike Fighter. X and the prime contractor execute a contract in the amount of $70. Under these facts, the $30 JSF Wage Credit amount is reflected within the bid that forms the basis for X's subcontract to manufacture property for ultimate use in a Joint Strike Fighter and X may claim the $30 JSF Wage Credit if all of the other requirements of Revenue and Taxation Code section 17053.36 and this regulation are met. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that the bid form reflects a price of $100. In this circumstance, X is not eligible to claim the credit because X has not reduced the amount of the bid by the amount of the JSF Wage Credit allowable. 
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that the bid form reflects a price of $70, but the bid form does not contain an attachment showing the amount of the JSF Wage Credit allowable. In this circumstance, X is not eligible to claim the credit because even though the bid amount has been reduced by the amount of the credit allowable, the amount of the credit allowable is not included on the face of the bid or in an attachment to the bid. 
EXAMPLE 4: Assume the same facts as in EXAMPLE 1, except that the scope of the project changes after the bid is submitted and X and the prime contractor execute a contract in the amount of $125, reflecting an increase of $55 dollars in the original bid amount. In this circumstance, the cost for the expanded scope of the contract was added to the original bid amount. As a result, X would only be allowed to claim a $30 JSF Wage Credit since this amount was reflected within the original bid. 
EXAMPLE 5: X, a qualified taxpayer, is the prime contractor awarded the initial contract from the United States government for the Engineering and Manufacturing Development Phase of the Joint Strike Fighter Program. X does not include any reduction for the JSF Wage Credit in its bid for the Engineering and Manufacturing Development Phase accepted by the United States government. Under these facts, X is not able to claim the JSF Wage Credit since the credit amount was not reflected within the bid that formed the basis for the initial contract for the Engineering and Manufacturing Development Phase. 
EXAMPLE 6: Assume the same facts as in EXAMPLE 5, except that Y responds to a request from X and submits a bid to subcontract a portion of the scope of the work covered in the Engineering and Manufacturing Development Phase of the Joint Strike Fighter Program. The bid form includes an attachment that shows the JSF Wage Credit allowable for the subcontract is $20 ($100 contract price less JSF Wage Credit in the amount of $20 for a reduced contract price of $80). Y is the successful bidder on that portion of the scope of the work and thereafter is awarded the contract to produce the part for the Joint Strike Fighter. X and Y execute a contract in the amount of $80. Under these facts, the $20 JSF Wage Credit amount is reflected within the bid that forms the basis for Y's subcontract to manufacture property for ultimate use in a Joint Strike Fighter. Even though X, the prime contractor, did not reduce its bid for the prime contract and is not eligible to claim the JSF Wage Credit, Y's bid met the bidding requirements for claiming the credit and Y may claim the $20 JSF Wage Credit if all of the other requirements of Revenue and Taxation Code section 17053.36 and this Regulation are met. 
(3) With respect to a contract to construct all or a portion of the Joint Strike Fighter that is executed on a “cost plus” basis, the term “reflected within the bid” shall mean that (1) California income or franchise taxes are treated as an item of cost to be reimbursed under the terms of the contract, (2) the cost plus contract, or an attachment to the contract, contains a calculation showing the amount of the JSF Wage Credit allowable, and (3) the California income or franchise taxes reimbursed under the contract reflect the reduction for the amount of the JSF Wage Credit allowable. 
(d) JSF Wage Credit Allowable. For purposes of this regulation, the term “credit allowable” shall mean at the time the bid for the initial contract or subcontract is submitted, the amount of the credit the qualified taxpayer expects to claim as a result of qualified wages paid in connection with the contract or subcontract. The amount of the JSF Wage Credit allowed to any qualified taxpayer shall be computed pursuant to Revenue and Taxation Code section 17053.36 and these regulations, but shall not exceed the lesser of the credit amount reflected within the bid of the qualified taxpayer or the credit allowed for actual amounts paid or incurred by the qualified taxpayer. 
EXAMPLE: Y, a qualified taxpayer, submits a bid to the prime contractor to manufacture the cockpit canopy for the Joint Strike Fighter. The bid form contains an attachment that shows the JSF Wage Credit allowable of $30 ($100 contract price less JSF Wage Credit in the amount of $30 for a reduced contract price of $70). X is the successful bidder on the cockpit canopy and thereafter is awarded the contract to produce the part for the Joint Strike Fighter. X and the prime contractor execute a contract in the amount of $70. Thereafter, Y's wage costs to produce the cockpit canopy increase by 20% and Y determines that its increase in wages paid would result in a JSF Wage Credit in the amount of $36. In this circumstance, even though Y's wage costs have increased, Y is only able to claim a JSF Wage credit in the amount of $30 since that is the amount of the JSF Wage Credit allowable that was reflected within Y's bid. 
(e) Pass-Through Entities. For purposes of this regulation: 
(1) The amount of the JSF Wage Credit allowable reflected on a bid submitted by a partnership or an S corporation shall be the amount of the JSF Wage Credit expected to be passed through the partnership to the partners or the S corporation to the shareholders in accordance with the applicable provisions of Part 10 (commencing with section 17001) and Part 11 (commencing with section 23001) of the Revenue and Taxation Code. 
EXAMPLE: Z, a qualified taxpayer, submits a bid to the prime contractor to manufacture a portion of the hydraulic system for the Joint Strike Fighter. Z calculates the total allowable JSF Wage Credit to be $150. Z has a valid S corporation election in effect for California tax purposes. Under Revenue and Taxation Code section 23803, subsection (a)(1)(A), Z's JSF Wage Credit is limited to $50 (one-third of the amount of the credit otherwise allowable). However, the amount of the JSF Wage Credit that is expected to be passed through to Z's shareholders is $150 and Z must reflect the $150 credit amount on the bid submitted to the prime contractor as provided in this regulation. 
(f) Copies Provided to Franchise Tax Board. The qualified taxpayer shall provide, upon request of the Franchise Tax Board, a copy of any bid that forms the basis for a contract or subcontract to manufacture a product for ultimate use in a Joint Strike Fighter. 
NOTE

Authority cited: Section 19053, Revenue and Taxation Code Reference: Section 17053.36, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.36-7. JSF Wage Credit Carryforwards.
Note     •     History

JSF Wage Credit Carryforwards -- (See Regulation 17053.36-0 for Table of Contents.) 
(a) In General. In any case where the JSF Wage Credit exceeds the “tax,” the excess may be carried forward to reduce the “tax” for the eight taxable years succeeding the taxable year for which the JSF Wage Credit is allowed, if necessary, until the credit is exhausted. 
(b) Carryforwards for Pass-Through Entities. In the case of any JSF Wage Credit allowed to a pass-through entity, the determination of the applicable carryover period for any JSF Wage Credit required to be carried forward shall be made at the pass-through entity level. 
(c) Carryforwards Permitted After Sunset. For taxable years commencing on or after January 1, 2006, any unused JSF Wage Credit may be carried forward, as provided above, until the unused JSF Wage Credit is exhausted. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.36, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.36-8. Recordkeeping Requirements.
Note     •     History

Recordkeeping Requirements -- (See Regulation 17053.36-0 for Table of Contents.) 
(a) In General. For purposes of Regulations 17053.36-1 through 17053.36-9, inclusive, a qualified taxpayer shall be required to maintain books and records that are adequate to substantiate its entitlement to any claimed JSF Wage Credit. These books and records should be retained for as long as the statute of limitations on assessment for the taxable year for which the JSF Wage Credit was allowed remains open, and, in the case of any JSF Wage Credit that is being carried forward, for the additional number of years that the actual carryforward of such JSF Wage Credit occurs. 
(b) Books and Records. The books and records maintained by the qualified taxpayer should be sufficient to clearly establish all necessary facts that affect the allowance and amount of the JSF Wage Credit. For this purpose, “adequate” recordkeeping depends upon the sufficiency of the information contained in the documentation. In many cases, the books and records normally maintained for California income or franchise tax purposes and wage reporting purposes will be adequate substantiation for the JSF Wage Credit. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.36, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.36-9. Miscellaneous Provisions.
Note     •     History

Miscellaneous Provisions -- (See Regulation 17053.36-0 for Table of Contents.) 
(a) Effective Dates of the JSF Wage Credit. The JSF Wage Credit shall cease to be effective on December 1, 2006; however, any unused credit may be carried forward, as provided in Revenue and Taxation Code section 17053.36, subsection (g), and this regulation. 
(b) Enterprise Zone Hiring Credit. Under Revenue and Taxation Code sections 17053.36 and 17053.75, a qualified taxpayer that also operates in an Enterprise Zone may claim both the JSF Wage Credit and the Enterprise Zone hiring credit for wages paid to an employee to the extent that all of the requirements of each of those sections are satisfied. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.36, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.37-0. Table of Contents.
Note     •     History

(Table of Contents -- Regulation Sections 17053.37-1 through 17053.37-11) 

Section 17053.37-1. The Joint Strike Fighter (JSF) Property Credit. 
(a) In General 
(b) Cross References 
(c) General References 
Section 17053.37-2. Definitions. 
(a) Capitalized Labor 
(b) Fabricating 
(c) Joint Strike Fighter 
(d) Initial Contract or Initial Subcontract 
(e) Joint Strike Fighter Program 
(f) Manufacturing 
(g) Packaging 
(h) Placed in Service 
(i) Product For Ultimate Use in a Joint Strike Fighter 
(j) Primarily 
(k) Process 
(l) Processing 
(m) Qualified Activities 
Section 17053.37-3. Qualified Taxpayer. 
(a) In General 
(b) Pass-Through Entities 
Section 17053.37-4. Qualified Costs. 
(a) In General 
(b) California Sales and Use Tax Payment Requirement 
(c) Capitalization Requirement 
(d) Capitalized Labor Costs 
(1) Capitalized Labor Costs Under Third-Party Contracts 
(e) Qualified Costs Paid or Incurred Pursuant to Binding Contracts 
(1) Allocation of Costs Actually Paid Prior to January 1, 2001 
(2) Binding Contract Bid Amount Reduced by Credit 
(3) Binding Contracts 
(4) Successor or Replacement Contracts 
(5) Option Contracts 
(6) Conditional Contracts 
Section 17053.37-5. Qualified Property. 
(a) In General 
(b) General Requirements for Qualified Property 
(1) Tangible Personal Property 
(2) Section 1245(a)(3)(A) Property 
(3) Used to Manufacture a Product for Ultimate Use in a Joint Strike Fighter 
(4) Primarily Used in Qualified Activities 
(c) Specifically Excluded Property 
(1) Furniture 
(2) Facilities Used for Warehousing Purposes 
(3) Inventory 
(4) Equipment Used to Store Finished Products 
(5) Tangible Personal Property Used in Administration, General Management, or Marketing 
(d) Movement of Used Property Into This State 
Section 17053.37-6. Leasing. 
(a) In General 
(1) Lessor Not Entitled to JSF Property Credit 
(2) Binding Contract Rules Applicable to Leases 
(3) Special Rules Applicable to All Leasing Transactions 
(A) Placed in Service 
(B) Bid Amount Reduced By Credit 
(b) Operating Leases 
(1) In General 
(2) Applicable Requirements 
(A) Lessee Must Be a Qualified Taxpayer 
(B) Use of Property in Qualified Activities 
(C) Sales or Use Tax Payment Requirement 
(D) Qualified Costs 
(E) Chargeable to Capital Account 
(3) Amount of JSF Property Credit Lessee May Claim 
(A) Qualified Cost to Lessor 
(B) Exception For Capitalized Labor 
(4) Special Rules for Operating Leases 
(A) Limitation on Qualified Costs 
(B) Reduction in Qualified Cost to Lessor 
(C) Qualified Cost to Successor Lessor 
(D) Acquisition by Lessee of Leased Property 
(5) Sale-Leaseback Transactions 
(A) General Rule 
(B) Acquisition Sale and Leaseback 
(6) Lessor Reporting Requirement 
(c) Finance Leases 
(1) In General 
(2) Applicable Requirements 
(A) Lessee Must Be a Qualified Taxpayer 
(B) Use of Property in Qualified Activities 
(C) Sales or Use Tax Payment Requirement 
(D) Qualified Costs 
(E) Chargeable to Capital Account 
(3) Amount of JSF Property Credit Lessee May Claim 
Section 17053.37-7. JSF Contract Bidding. 
(a) In General 
(b) Bid 
(c) JSF Property Credit Reflected Within Bid 
(d) JSF Property Credit Allowable 
(e) Pass-Through Entities 
(f) Copies Provided to Franchise Tax Board 
Section 17053.37-8. Recapture Rules. 
(a) In General 
(b) Disposition 
(c) Disposition of Qualified Property During the Taxable Year Placed in Service 
(d) Disposition of Qualified Property During a Taxable Year Subsequent to the Taxable Year Placed In Service 
(e) Adjustment of Carryforwards When Disposition Occurs 
(f) Recapture of JSF Property Credit Allowed to Pass-Through Entities 
(1) Partnerships and Partners 
(2) S Corporations and Shareholders 
(A) Corporate Level Recapture 
(B) Pass-through of JSF Property Credit Recapture Amount to Shareholders 
Section 17053.37-9. JSF Property Credit Carryforwards. 
(a) In General 
(b) Carryforwards for Pass-Through Entities 
(c) Carryforwards Permitted After Sunset 

Section 17053.37-10. Recordkeeping Requirements. 
(a) In General 
(b) Books and Records 
(c) Affidavit Regarding Sales and Use Tax 
(d) Written Statement by Lessor to Lessee Section 

Section 17053.37-11. Miscellaneous Provisions. 
(a) Effective Dates of the JSF Property Credit 
(b) Manufacturers' Investment Credit (MIC) 
(c) Enterprise Zone Sales or Use Tax Credit 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.37, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.37-1. The Joint Strike Fighter (JSF) Property Credit.
Note     •     History

The Joint Strike Fighter (JSF) Property Credit -- (See Regulation 17053.37-0 for Table of Contents.) 
(a) In General. The Joint Strike Fighter (JSF) Property Credit is allowed to any qualified taxpayer in an amount equal to ten percent (10%) of any qualified costs paid or incurred on or after January 1, 2001, and before January 1, 2006, for qualified property that is placed in service in this state and used by a qualified taxpayer in qualified activities to manufacture a product for ultimate use in a Joint Strike Fighter. A qualified taxpayer who leases qualified property for use in qualified activities of the qualified taxpayer may also claim the JSF Property Credit. Qualified property may be either new or used and must be placed in service in this state and used by a qualified taxpayer in qualified activities for more than one year to avoid recapture of the JSF Property Credit. The basis of any qualified property for which the JSF Property Credit is claimed is not required to be reduced by the amount of any JSF Property Credit claimed. 
(b) Cross References. Regulation 17053.37-2 contains definitions applicable to Regulations 17053.37-1 through 17053.37-11, inclusive, Regulation 17053.37-3 contains rules relating to qualified taxpayers, Regulation 17053.37-4 contains rules relating to qualified costs, Regulation 17053.37-5 contains rules relating to qualified property, Regulation 17053.37-6 contains rules applicable to leases of qualified property by qualified taxpayers, Regulation 17053.37-7 contains rules relating to contract bidding, Regulation 17053.37-8 contains recapture rules, Regulation 17053.37-9 contains rules relating to carryforwards, Regulation 17053.37-10 contains general recordkeeping requirements, and Regulation 17053.37-11 contains other miscellaneous provisions. For rules relating to the JSF Property Credit allowed to taxpayers under the Personal Income Tax Law, see Revenue and Taxation Code section 17053.37 and the regulations thereunder. 
(c) General References. For purposes of Regulations 17053.37-1 through 17053.37-11, inclusive, the following general references shall apply: 
(1) All citations to the Revenue and Taxation Code are to the California Revenue and Taxation Code. 
(2) All citations to the Internal Revenue Code are to the Internal Revenue Code of 1986, as amended. 
(3) The credits provided for in Revenue and Taxation Code sections 17053.37 and 23637 shall be collectively referred to as the “Joint Strike Fighter Property Credit” or the “JSF Property Credit.” 
(4) Any reference to sales or use tax shall mean California sales or use tax imposed under Part 1 (commencing with section 6001) of Division 2 of the Revenue and Taxation Code. Any discussion of California sales and use tax law in Regulations 17053.37-1 through 17053.37-11, inclusive, is based upon such law as in effect on the date these regulations become effective, and is generally intended to restate the requirements set forth in Revenue and Taxation Code section 17053.37 and to be illustrative of, but have no effect on, the California sales and use tax law and the regulations thereunder. All examples which contain references to an amount of California sales or use tax shall be at an assumed hypothetical sales or use tax rate of eight percent (8%). 
(5) Unless otherwise provided, any reference to capitalized labor costs in the examples in this regulation shall mean labor costs that are direct costs, as that term is used in Internal Revenue Code section 263A and defined in the regulations thereunder, that can be identified or associated with and are properly allocable to construction or modification of qualified property. 
(6) Unless otherwise provided, any reference to qualified property in the examples in this regulation shall assume that the qualified property is being used primarily to manufacture a product for ultimate use in a Joint Strike Fighter. In addition, unless otherwise provided, all examples in this regulation shall assume that the qualified taxpayer's bid to manufacture property for ultimate use in a Joint Strike Fighter reflected a reduction in the amount of the Joint Strike Fighter credit allowable as provided in Revenue and Taxation Code section 17053.37(i)(2) and Regulation 17053.37-7. 
NOTE

Authority cited: Section 17053.37(c)(3), Revenue and Taxation Code. Reference: Section 17053.37, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.37-2. Definitions.
Note     •     History

Definitions -- (See Regulation 17053.37-0 for Table of Contents.) 
For purposes of Regulations 17053.37-1 through 17053.37-11, inclusive, the following definitions shall apply: 
(a) Capitalized Labor. The term “capitalized labor” shall mean all costs of labor that are direct costs, as that term is used in Internal Revenue Code section 263A and defined in the regulations thereunder, that can be identified or associated with and are properly allocable to the construction, modification, or installation of specific items of qualified property. For this purpose, labor encompasses full-time and part-time employees, as well as contract employees and independent contractors. 
(1) Direct labor costs shall include all elements of compensation, such as basic compensation, overtime pay, vacation pay, holiday pay, sick leave pay (other than payments pursuant to a wage continuation plan under Internal Revenue Code section 105(d) as it existed prior to its repeal in 1983), shift differential, payroll taxes, and payments to a supplemental unemployment benefit plan, but shall not include any indirect labor costs. 
(2) Indirect labor costs are costs that cannot be identified or associated with the construction, modification, or installation of specific items of qualified property. Indirect labor costs include, but are not limited to, training costs, officers' compensation, pension and other related costs, and employee benefit expenses (including payments pursuant to a wage continuation plan under Internal Revenue Code section 105(d) as it existed prior to its repeal in 1983). 
(3) In determining whether direct costs of labor are properly allocable to the construction, modification, or installation of a specific item of qualified property, the qualified taxpayer shall be required to use the same method of allocation for California income and franchise tax purposes that the taxpayer used for federal income tax purposes under the uniform capitalization allocation rules specified in Treasury Regulation section 1.263A-1 (as in effect on the date Regulation 17053.37-2 is effective). 
(b) Fabricating. The term “fabricating” shall mean the process of making, building, creating, producing, or assembling components or property to work or be useable in a new or different manner. 
(c) Joint Strike Fighter. The term “Joint Strike Fighter” shall mean the next-generation air combat strike aircraft developed and produced under the Joint Strike Fighter program of the United States government. 
(d) Initial Contract or Initial Subcontract. The term “initial contract” shall mean the contract awarded by the United States government to a prime contractor for any phase, including the Engineering and Manufacturing Development Phase, of the Joint Strike Fighter Program to produce the Joint Strike Fighter Aircraft. The term “initial subcontract” shall mean a contract between a prime contractor and any other contractor, or between two contractors where one of those contractors is under contract with the prime contractor or where the prime contractor or a contractor under contract with the prime contractor has consented to the contract in writing, to produce a product that is physically attached to or installed in a Joint Strike Fighter Aircraft under the initial contract. 
(e) Joint Strike Fighter Program. The term “Joint Strike Fighter program” shall mean the multiservice, multinational project conducted by the United States government to develop and produce the next generation of air combat strike aircraft. 
(f) Manufacturing. The term “manufacturing” shall mean the process of converting or conditioning property by changing the form, composition, quality, or character of the property for ultimate use in a Joint Strike Fighter, and includes any improvements to tangible personal property that result in a greater service life or greater functionality than that of the original property. Tangible personal property shall be treated as having a greater service life if such property can be used for a longer period than such property could have been used prior to the conversion or conditioning of such property. Tangible personal property shall be treated as having greater functionality if it has been improved in such a manner that it can be used to perform new or different functions. 
(g) Packaging. The term “packaging” shall mean to wrap, seal, box, or put together as a unit, but shall include only that portion of any wrapping, sealing, boxing, or putting together as a unit that is necessary to prepare the goods for delivery to and placement in the qualified taxpayer's finished goods inventory, or to prepare the goods so that they are suitable for delivery to and placement in finished goods inventory. Additional wrapping, sealing, boxing, or putting together as a unit, such as any wrapping, sealing, boxing, or putting together as a unit that is necessary to consolidate the finished goods prior to shipping or to protect them during transportation, shall not be treated as packaging. 
(h) Placed in Service. The term “placed in service” shall mean the earliest taxable year in which either of the following occurs: 
(1) under the depreciation method used by the qualified taxpayer for California tax purposes, the period for depreciation with respect to the qualified property commences; or 
(2) the qualified property is placed in a condition or state of readiness and availability for a specifically assigned function. If qualified property meets the conditions of subsection (h)(2) of this regulation in any taxable year, it shall be considered placed in service in such year, notwithstanding that the period for depreciation with respect to the qualified property begins in a succeeding taxable year. For example, if under the qualified taxpayer's California depreciation practice such qualified property is accounted for in a multiple asset account and depreciation is computed under an averaging convention, or depreciation is computed under the completed contract method, the unit of production method, or the retirement method, then the qualified property is treated as in a condition or state of readiness and availability for a specifically assigned function. Specific examples where qualified property shall be considered in a condition or state of readiness and available for a specifically assigned function include (A) parts that are acquired and set aside during the taxable year for use as replacements for a particular item or items of qualified property in order to avoid operational time loss, (B) operational items of qualified property that are acquired for a specifically assigned function during the taxable year where it is not practicable to use such item of qualified property for its specifically assigned function in the qualified taxpayer's business until the following taxable year, and (C) qualified property acquired for a specifically assigned function that is operational but is still undergoing testing to eliminate any defects. Materials and parts acquired to be used in the construction of an item of qualified property shall not be considered in a condition or state of readiness and availability for a specifically assigned function. 
(i) Product for Ultimate Use in a Joint Strike Fighter. The term “product for ultimate use in a Joint Strike Fighter” shall mean a product that is designed to be physically installed in or attached to a Joint Strike Fighter aircraft. The term “product for ultimate use in a Joint Strike Fighter” shall not include any product that is not designed to form a physical part of the Joint Strike Fighter aircraft. For this purpose, the term “product” shall include any pilot model or prototypes used in connection with the development of the product. 
(j) Primarily. The term “primarily” shall mean that property is used 50 percent or more of the time in qualified activities. For purposes of the preceding sentence, the term “time” shall mean the total number of hours that the property is actually in use during the 12-month period immediately following the date the property is placed in service in this state. For example, if an item of property is used by a qualified taxpayer for a total of 100 hours for all uses during the 12-month period immediately following the date the property is placed in service in this state, then “primarily” used in qualified activities means at least 50 hours of the property's use is in qualified activities. 
(k) Process. The term “process” shall mean the period beginning at the point at which any raw materials are received by the qualified taxpayer and introduced into the manufacturing, processing, or fabricating activity of the qualified taxpayer and ending at the point at which the manufacturing, processing, or fabricating activity of the qualified taxpayer has altered tangible personal property to its completed form, including packaging, if required. Raw materials will be considered to have been introduced into the process when the raw materials are stored on the same premises where the qualified taxpayer's manufacturing, processing, or fabricating activity is conducted. Raw materials that are stored on premises other than where the qualified taxpayer's manufacturing, processing, or fabricating activity is conducted, shall not be considered to have been introduced into the manufacturing, processing, or fabricating process. 
(l) Processing. The term “processing” shall mean the process of physically applying the materials and labor necessary to modify or change the characteristics of property. 
(m) Qualified Activities. The term “qualified activities” shall mean activities engaged in by a qualified taxpayer that involve manufacturing, processing or fabricating a product for ultimate use in a Joint Strike Fighter. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.37, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.37-3. Qualified Taxpayer.
Note     •     History

Qualified Taxpayer -- (See Regulation 17053.37-0 for Table of Contents.) 
(a) In General. For purposes of Regulations 17053.37-1 through 17053.37-11, inclusive, a qualified taxpayer is any taxpayer under an initial contract or initial subcontract to manufacture property for ultimate use in a Joint Strike Fighter. The term “initial contract” shall mean the contract executed by the United States government and a prime contractor for any phase, including the Engineering and Manufacturing Development Phase, of the Joint Strike Fighter Program to produce the Joint Strike Fighter Aircraft. The term “initial subcontract” shall mean a contract between a prime contractor and any other contractor, or between two contractors where one of those contractors is under contract with the prime contractor or where the prime contractor or a contractor under contract with the prime contractor has consented to the contract in writing, to produce a product that is physically attached to or installed in a Joint Strike Fighter Aircraft under the initial contract. 
EXAMPLE 1: X is awarded the contract for the Engineering and Manufacturing Development Phase of the Joint Strike Fighter Program and executes a contract with the United States government for completion of that phase. Under these facts, X is a qualified taxpayer because X is a prime contractor awarded the initial contract from the United States government for a phase of the Joint Strike Fighter Program. 
EXAMPLE 2: Assume the same facts as EXAMPLE 1, except that X and Y are both awarded a portion of the contract for the Engineering and Manufacturing Development Phase of the Joint Strike Fighter Program and both execute contracts with the United States government for completion of their respective portions of that phase. Under these facts, both X and Y are qualified taxpayers because they are prime contractors awarded initial contracts from the United States government for a phase of the Joint Strike Fighter Program. 
EXAMPLE 3: Assume the same facts as EXAMPLE 1, except that Z submits a bid to X, the prime contractor, and is awarded a subcontract to manufacture a product for ultimate use in a Joint Strike Fighter under the scope of the initial contract. Under these facts, Z is a qualified taxpayer because Z is a subcontractor under an initial subcontract for a phase of the Joint Strike Fighter Program. 
EXAMPLE 4: Assume the same facts as EXAMPLE 3, except that A submits a bid to Z and is awarded a contract with Z to perform a portion of Z's work under the scope of Z's contract with X. Under these facts, A is also a qualified taxpayer because Z is under contract with one of the prime contractors and A is therefore a subcontractor under an initial subcontract for a phase of the Joint Strike Fighter Program. 
EXAMPLE 5: Assume the same facts as EXAMPLE 4, except that A contracts with B to complete a portion of the work under A's contract with Z. Neither X nor Z consent in writing to the contract between A and B. B thereafter completes all of the work in its contract with A. Even though B has assisted in manufacturing a product for ultimate use in a Joint Strike Fighter, B is not a qualified taxpayer because neither X nor Z consented in writing to the contract and B is thus not a subcontractor under an initial subcontract for a phase of the Joint Strike Fighter Program. 
(b) Pass-Through Entities. For purposes of Regulations 17053.37-1 through 17053.37-11, inclusive, in the case of any partnership or S corporation, the determination of whether a taxpayer is a qualified taxpayer shall be made at the entity level. Any credit allowed under Revenue and Taxation Code section 17053.37 and this regulation shall be passed through to the partners or shareholders in accordance with applicable provisions of Part 10 (commencing with Revenue and Taxation Code section 17001) or Part 11 (commencing with Revenue and Taxation Code section 23001). 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.37, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.37-4. Qualified Costs.
Note     •     History

Qualified Costs -- (See Regulation 17053.37-0 for Table of Contents.) 
(a) In General. For purposes of Regulations 17053.37-1 through 17053.37-11, inclusive, the term “qualified costs” includes any costs paid or incurred by a qualified taxpayer for the construction, reconstruction, or acquisition of qualified property on or after January 1, 2001, and before January 1, 2006, provided that California sales or use tax has been paid, directly or indirectly, on such costs (except for costs paid or incurred for capitalized labor), and such costs are properly chargeable to the qualified taxpayer's capital account. However, the term “qualified costs” does not include the amount of any California sales or use tax paid, directly or indirectly, by the qualified taxpayer. 
(b) California Sales and Use Tax Payment Requirement. In order for costs to be treated as qualified costs, California sales or use tax must be paid, directly or indirectly as a separately stated contract amount or as determined from the books and records of the qualified taxpayer, with respect to the qualified property. For purposes of Regulations 17053.37-1 through 17053.37-11, inclusive, the requirement that California sales or use tax be paid prior to claiming the JSF Property Credit shall be deemed satisfied as of the date the California sales or use tax is due and payable under Part 1 (commencing with section 6001) of Division 2 of the Revenue and Taxation Code. In the case of any costs paid or incurred by the qualified taxpayer upon which California sales or use tax has not been paid (except in the case of amounts properly treated as capitalized direct labor for the construction, modification, or installation of qualified property), such amounts shall not be treated as qualified costs. In the case of any leasing transaction, Regulation 17053.37-6 contains special rules applicable to the California sales and use tax payment requirement. 
EXAMPLE 1: D, a qualified taxpayer, purchases three hydraulic turbines from B, a California manufacturer of hydraulic turbines, for $500 to be used in D's manufacturing facility in Escondido. Under the terms of the purchase contract, B agrees to install the turbines at D's manufacturing facility by affixing them to the facility's concrete floor for an additional $100. Assume $36 of the $100 installation charge constitutes direct labor costs paid by B to its employees under Internal Revenue Code section 263A. B charges and collects from D $40 in California sales tax under the contract ($500 X 8%), with the $100 in installation charges being separately stated in the purchase contract and for purposes of this example are assumed to be exempt from California sales and use tax. Under these facts, D has $536 in qualified costs ($500 in costs upon which California sales tax was paid and $36 in capitalized direct labor costs, but excluding the $40 in sales tax). 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of D purchasing the turbines from B, D enters into a “fixed-price, turn-key” contract with C, the terms of which require D to pay C a total of $640 upon delivery and installation of the turbines in D's manufacturing facility. C, instead of delivering a resale certificate to B, pays $40 ($500 X 8%) in California sales tax to B on its purchase of the turbines. Under C's contract with D, the $40 California sales tax paid by C is a separately stated item. Under these facts, since the sales tax was separately stated in D's contract with C and paid by C on behalf of D, D is treated as having satisfied the California sales tax payment requirement. However, since $40 of the total contract price represents the sales tax paid indirectly by D, the amount of D's qualified costs is $536 ($500 for the turbines plus $36 in capitalized direct labor costs, but excluding the $40 in sales tax). 
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that D's contract with C does not separately state the amount of California sales tax paid by C. However, D's books and records substantiate that C paid California sales tax on behalf of D and that the total contract price of $640 is broken down between $500 for the turbines, $40 in California sales tax, and $100 in installation charges. Under these facts, the result is the same as in EXAMPLE 2 since the amount of California sales tax treated as being paid indirectly by D can be determined from D's books and records. 
(c) Capitalization Requirement. In order for costs to be treated as qualified costs, they must be amounts properly chargeable to the capital account of the qualified taxpayer. Amounts shall be treated as properly chargeable to capital account if under the qualified taxpayer's method of tax accounting they are properly includible in the qualified taxpayer's basis for computing depreciation on the qualified property under Revenue and Taxation Code section 17250. However, any amounts not required to be included in the qualified taxpayer's basis for depreciation purposes shall not be treated as qualified costs. For example, Internal Revenue Code section 179 provides that amounts for which an election is made under that section to currently deduct such amounts are “not chargeable to capital account.” Thus, any amounts for which a qualified taxpayer makes an election to currently expense for California income or franchise tax purposes under either Internal Revenue Code sections 179 or 179A, or amounts for which a qualified taxpayer makes an election for California purposes to currently expense under Internal Revenue Code section 179-type provisions such as Revenue and Taxation Code sections 17267.6 (Targeted Tax Area businesses), 17267.2 (Enterprise Zone businesses), or 17268 (Local Agency Military Base Recovery Area businesses), are treated as amounts that are not properly chargeable to capital account. In addition, any costs paid or incurred for property with a useful life of less than one year which may properly be expensed under Internal Revenue Code section 162 would be treated as amounts not properly chargeable to capital account. Although costs that are not properly chargeable to capital account are not treated as qualified costs, the portion of the cost of any item of qualified property that is properly chargeable to capital account (such as, for example, the amount in excess of what may be currently deducted under Internal Revenue Code section 179) may be a qualified cost under Revenue and Taxation Code section 17053.37. 
EXAMPLE 1: F, a qualified taxpayer, purchases 50 stainless steel racks for $900 from G for use in F's production line in Palmdale. F pays $72 ($900 X 8%) in California sales tax on the purchase. F makes an election for California franchise tax purposes to currently expense the entire cost of the stainless steel racks under Revenue and Taxation Code section 17255 (Internal Revenue Code section 179). Under these facts, the $900 paid by F for the stainless steel racks would not be treated as a qualified cost since the $900 is not properly chargeable to F's capital account under Revenue and Taxation Code section 17255 (Internal Revenue Code section 179). 
EXAMPLE 2: H, a qualified taxpayer doing business in the Fresno Enterprise Zone, purchases a drill press for $25 from I, and pays $2 (8% of $25) in California sales tax on the purchase. H makes an election under Revenue and Taxation Code section 24356.7 to expense 40% of the cost of the drill press. Under these facts, $10 of the $25 paid by H would not be treated as a qualified cost since the $10 is not properly chargeable to H's capital account. 
(d) Capitalized Labor Costs. For costs paid or incurred by the qualified taxpayer for capitalized labor, the requirement that California sales or use tax be paid in order for the costs to be treated as qualified costs shall not apply. The qualified taxpayer shall have the burden of establishing the amount of any cost paid or incurred for capitalized labor that is a direct labor cost, as that term is used in Internal Revenue Code section 263A and defined in the regulations thereunder, that can be identified or associated with and are properly allocable to the construction, modification, or installation of any item of qualified property. This burden may, for example, ordinarily be satisfied by either an invoice, supported by the books and records of the qualified taxpayer, that separately states the amount of capitalized direct labor for qualified property acquired by purchase or, in the case of self-constructed qualified property, from books and records of the qualified taxpayer that establish the amount of capitalized direct labor for the construction of the item of qualified property. 
EXAMPLE 1: G, a qualified taxpayer, purchases a machine that is qualified property from X for $500. The price of the machine includes $50 in separately stated shipping charges. X collects California sales tax of $34 (8% of $450) from G, with the shipping charges assumed to be exempt from California sales and use tax. Upon receipt of the machine, G incurs an additional $50 in capitalized direct labor costs to have G's employees install the machine in G's manufacturing facility in Riverside, and $25 in training costs to train G's personnel to properly operate the machine. Under these facts, only the cost of the machine upon which California sales tax was paid ($450), plus the capitalized direct labor installation costs ($50), would be treated as qualified costs. The $50 paid for shipping charges is not a qualified cost since no California sales tax was paid on such amounts, nor are the shipping charges treated as capitalized direct labor costs. The $25 incurred by G in training costs is not a qualified cost since training costs are indirect labor costs under Revenue and Taxation Code section 17053.37-2, subsection (a)(2). 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that the $50 in freight charges are not separately stated and X collects $40 (8% of $500) in California sales tax from G. Under these facts, the cost of the machine, including the freight charges, upon which California sales tax was paid ($500), plus the capitalized direct labor installation costs ($50), would be treated as qualified costs. 
EXAMPLE 3: J, a qualified taxpayer, purchases an extended warranty contract on qualified property. J's extended warranty contract provides that all unscheduled maintenance and repairs will be performed at no cost by the seller or its agent. Assume that the costs of the extended warranty contract are exempt from California sales and use tax. Under these facts, the extended warranty contract is not treated as a capitalized direct labor cost since it is not for the construction, modification, or installation of qualified property. As a result, the costs paid for the extended warranty contract are not qualified costs. 
EXAMPLE 4: K, a qualified taxpayer, purchases a machine that is qualified property and then uses its own employees to install and modify the machine, including necessary adjustments, alignments and “debugging,” so that the machine will properly run K's assembly line. Under these facts, assuming that K properly capitalizes for California tax purposes its direct labor costs for installing and modifying the machine, the labor costs are treated as capitalized direct labor costs and are thus qualified costs. 
EXAMPLE 5: L, a qualified taxpayer, purchases a comprehensive insurance policy on an item of qualified property. L may not include the premiums for the insurance policy as qualified costs because the insurance policy covers risk of loss, and is not a capitalized direct labor cost that is associated with the construction, modification or installation of qualified property. 
(1) Capitalized Labor Costs Under Third-Party Contracts. Only capitalized direct labor costs, as that term is used in Internal Revenue Code section 263A and defined in the regulations thereunder, that can be identified or associated with and are properly allocable to the construction, modification, or installation of specific items of qualified property, constitute qualified costs for purposes of the JSF Property Credit. For capitalized labor costs paid or incurred by a qualified taxpayer to a third-party contractor for the construction, modification or installation of qualified property, a qualified taxpayer is only allowed to include as qualified costs those direct labor costs that the qualified taxpayer could include if the qualified taxpayer had itself constructed the qualified property using its own employees. To determine whether the labor costs can be included as capitalized direct labor costs for the JSF Property Credit, the qualified taxpayer is required to look through its contract with the third party and put itself in the shoes of the third party for purposes of computing qualified costs. 
EXAMPLE 1: H, a qualified taxpayer, contracts with I for $100 to have a machine that is qualified property modified to increase its per-unit output. Assume that the labor costs associated with the modification are exempt from California sales and use tax. Assume also that $45 of the $100 contract constitutes direct labor costs paid by I to its employees under Internal Revenue Code section 263A and the regulations thereunder. Although H does not pay California sales or use tax on the modification work, H may include in its qualified costs a portion of the costs of modifying the machine since $45 of the $100 is properly treated as a capitalized direct labor cost for the modification of qualified property. H must “look-through” the contract with I so that only those costs that constitute capitalized direct labor costs with respect to payments made by I to its employees shall constitute direct labor costs with respect to H. 
(e) Qualified Costs Paid or Incurred Pursuant to Binding Contracts. For any qualified property constructed, reconstructed, or acquired by the qualified taxpayer (or any person related to the qualified taxpayer within the meaning of Internal Revenue Code sections 267 or 707) pursuant to a binding contract in existence on or prior to January 1, 2001, costs paid pursuant to that contract shall be subject to allocation under the rules in this subsection. 
(1) Allocation of Costs Actually Paid Prior to January 1, 2001. In any case where a qualified taxpayer has actually paid amounts (including, without limitation, contractual deposits and option payments) prior to January 1, 2001, under a binding contract, any such amounts shall not be treated as qualified costs. However, if under any binding contract a qualified taxpayer has paid amounts both before and after January 1, 2001, then the amounts actually paid after December 31, 2000, to the extent properly allocable to the construction, reconstruction, or acquisition of qualified property, shall be treated as qualified costs. In the case of any contract that was binding on January 1, 2001, under the terms of which a qualified taxpayer will acquire both qualified property and non-qualified property, and the qualified taxpayer has actually paid amounts both before and after January 1, 2001, then the amounts paid prior to January 1, 2001, and the amounts paid after December 31, 2000, must be allocated between the qualified property and the non-qualified property in proportion to the actual amounts paid prior to January 1, 2001, and the total contract price. 
(2) Binding Contract Bid Amount Reduced by Credit. In no event shall the allocation provided in this subsection be allowed unless the bid that was the basis of the binding contract in existence on or prior to January 1, 2001, was reduced by the amount of the JSF Property Credit allowable as required by Revenue and Taxation Code section 17053.37(i)(2) and Regulation 17053.37-7. 
EXAMPLE 1: On October 1, 2000, M, a qualified taxpayer, executes a contract to purchase five machines and ten computers that are qualified property for a total of $100 (plus applicable California sales tax). M will use the qualified property to complete a subcontract where the bid amount was reduced by the amount of the JSF Property Credit allowable. Under the terms of the contract, M is required to make a non-refundable $20 deposit upon execution of the contract and pay the remaining $80 upon delivery of the machines and computers. On May 1, 2001, the machines and computers are delivered and M pays the remaining $80 due under the contract. Under these facts, the $20 actually paid by M in 2000 will not be treated as a qualified cost, but the remaining $80 paid in 2001 will be treated as a qualified cost. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that the computers are not qualified property because M intends to use them for general administrative purposes. The computers represent $20 of the total $100 contract price. Under these facts, since M is purchasing both qualified property and non-qualified property under a binding contract, the $20 paid prior to January 1, 2001, and the $80 paid after December 31, 2000, must be allocated between the machines and the computers. Since the cost of the machines represent 80% of the total contract price ($80/$100), and $20 was actually paid prior to January 1, 2001, $16 (80% of $20) of the total $80 paid for the machines is treated as having been paid prior to January 1, 2001, and is thus not treated as a qualified cost. However, the remaining $64 ($80-$16) paid for the machines is treated as a qualified cost. 
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that the qualified taxpayer did not reduce the amount of the bid that formed the basis of the subcontract by the amount of the JSF Property Credit allowable. Under these facts, M is not entitled to any credit since the bid amount was not reduced by the amount of the JSF Property Credit allowable. 
(3) Binding Contracts. For purposes of Regulations 17053.37-1 through 17053.37-11, inclusive, a contract shall be treated as binding where the contract is enforceable under state law against the qualified taxpayer (or any related party within the meaning of Internal Revenue Code sections 267 or 707) and the amount of potential damages (whether by an express liquidated damages provision or otherwise) for which the qualified taxpayer may be liable upon cancellation or breach of the contract would equal or exceed five percent (5%) of the total contract price. However, a contract to acquire a component part of a larger item of property shall only be treated as a binding contract to acquire such component part and shall not be treated as a binding contract to acquire the larger item of property under the general rule for binding contracts. For example, a written binding contract to acquire a motor to power a drill press would be a binding contract only for the motor, not for the entire drill press. 
EXAMPLE 1: X, a qualified taxpayer, enters into a written contract with Y on August 15, 2000, under which X agrees to purchase 10 machines for $150 for delivery on December 1, 2001. Under the terms of the contract, X is required to make a non-refundable deposit of $10 upon execution of the contract. Under these facts, since X's potential damages upon cancellation or breach of the contract equal or exceed 5% of the total contract price ($10/$150, or 6.7%), X's contract with Y is treated as a binding contract in existence on or prior to January 1, 2001. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that Y is required to refund half of X's $10 deposit in the event X cancels the contract. Assume further that X's potential damages to Y upon breach of the contract are limited by a liquidated damages provision to the $5 of X's deposit that Y is not required to refund to X. Under these facts, X's contract is not treated as a binding contract in existence on or prior to January 1, 2001, since X's potential damages under the contract are less than 5% of the total contract price ($5/$150, or 3.3%). 
(4) Successor or Replacement Contracts. Any contract entered into on or after January 1, 2001, that is a successor or replacement contract to a contract that was binding prior to January 1, 2001, shall be treated as a binding contract in existence prior to January 1, 2001, and shall be subject to the same rules described in this section applicable to binding contracts generally. However, if a successor or replacement contract is entered into on or after January 1, 2001, and the subject of the successor or replacement contract relates both to amounts to be paid or incurred for the construction, reconstruction, or acquisition of qualified property described in the original binding contract and to amounts to be paid or incurred for the construction, reconstruction, or acquisition of qualified property not described in the original binding contract, then the portion of those amounts described in the successor or replacement contract that were not described in the original binding contract shall not be treated as costs paid or incurred pursuant to a binding contract in existence prior to January 1, 2001. 
EXAMPLE 1: On December 15, 2000, P, a qualified taxpayer, enters into a binding contract with Q to purchase three drill presses that are qualified property for a total contract price of $50. Under the terms of the contract, P makes a non-refundable $10 deposit to Q on December 20, 2000. On February 15, 2001, P and Q mutually agree to rescind the original contract and simultaneously execute a new contract under which P requests minor modifications to the specifications for the drill presses. Under the new contract, the total contract price is increased to $55 to compensate Q for Q's additional costs of modifying the specifications for the drill presses. Under these facts, the February 15, 2001, contract is treated as a replacement contract to the December 15, 2000, contract, and the $10 deposit made by P on December 20, 2000, is not treated as a qualified cost. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that upon rescission of the original contract Q refunds P's $10 deposit. Under the terms of the new contract P is legally obligated to make a non-refundable deposit of $15 to Q within 30 days of the execution of the contract. Under these facts, the new contract is still treated as a replacement contract. Despite Q's refund to P, $10 of the total $15 deposit made by P under the new contract is properly treated as having been actually paid prior to January 1, 2001, and will not be treated as a qualified cost. 
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that under the new contract P agrees to purchase five drill presses instead of the three drill presses under the original contract. The total contract price for the new contract is increased to $85. Under these facts, the new contract is still treated as a replacement contract with respect to the three drill presses which were the subject of the original contract, and the $10 actually paid by P prior to January 1, 2001, is not treated as a qualified cost. 
EXAMPLE 4: On November 1, 2000, R, a qualified taxpayer, enters into a binding contract with S to purchase two machines for $10 each and five computers for $2 each, for a total contract price of $30. Assume that the machines are qualified property, but since R will use the computers in its general administrative office, the computers are not qualified property. Under the terms of the contract, R makes a non-refundable $10 deposit to S on November 5, 2000. On March 1, 2001, R and S mutually agree to rescind the original contract and simultaneously execute a new contract under which R agrees to purchase three machines and five computers for $40. Under these facts, the March 1, 2001, contract is treated as a replacement contract to the November 1, 2000, contract to the extent of the two machines and the five computers, but is not treated as a replacement contract as to the third machine added by the March 1, 2001, contract. The $10 deposit actually paid prior to January 1, 2001, is not treated as a qualified cost. However, none of this $10 deposit amount is required to be allocated to the third machine for purposes of allocating the total contract price between the qualified property and the non-qualified property because the March 1, 2001, contract is not treated as a binding contract under this section as to the third machine, so that the entire $10 cost of the third machine is a qualified cost. 
(5) Option Contracts. For purposes of Regulations 17053.37-1 through 17053.37-11, inclusive, in any case where a qualified taxpayer (or any related party within the meaning of Internal Revenue Code sections 267 or 707) had an option to acquire qualified property on or prior to January 1, 2001, the option shall generally be treated as a binding contract. However, if the option holder would be required to forfeit an amount that is less than ten percent (10%) of the fixed option price upon cancellation or non-exercise of the option, then the option shall not be treated as a binding contract. 
EXAMPLE 1: On May 1, 2000, F, a qualified taxpayer, pays $150 to G for the right to purchase G's aluminum die-casting equipment for a total contract price of $900 (including the amount paid for the option) at any time prior to May 1, 2002. Under the terms of the option, the $150 is not refundable in the event F does not exercise its option. On January 15, 2002, F exercises its option to purchase G's casting equipment and delivers the remaining $750 due to G under the terms of the option. Since the option holder would have been required to forfeit more than 10% of the fixed option price upon cancellation or non-exercise of the option ($150/900, or 17%), the option is treated as a binding contract and the $150 paid by F prior to January 1, 2001, is not treated as a qualified cost. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that F pays only $80 for the option and is not obligated to forfeit any additional monies to G in the event F chooses not to exercise the option. Under these facts, the option is not treated as a binding contract since the maximum amount that F would be required to forfeit under the option contract is less than 10% of the fixed option price ($80/900, or 9%). 
(6) Conditional Contracts. A contract shall be treated as binding notwithstanding the fact that the contract is subject to a condition. 
EXAMPLE: On December 1, 2000, T, a qualified taxpayer, enters into a contract to purchase seven machines that are qualified property. The contract provides for a twenty percent (20%) down payment on December 1, 2000, with the balance to be paid on January 30, 2001. However, T's obligations under the contract are expressly conditioned upon the completion of T's new manufacturing facility in Palmdale. Despite this condition, the contract is treated as a binding contract in existence on or prior to January 1, 2001. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.37, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.37-5. Qualified Property.
Note     •     History

Qualified Property -- (See Regulation 17053.37-0 for Table of Contents.) 
(a) In General. For purposes of Regulations 17053.37-1 through 17053.37-11, inclusive, the term “qualified property” includes tangible personal property, whether new or used, that is defined in Internal Revenue Code section 1245(a)(3)(A) and is used by a qualified taxpayer primarily in qualified activities to manufacture a product for ultimate use in a Joint Strike Fighter. The term “qualified property” does not include certain types of property described in subsection (c) of this regulation. The basis of any qualified property for which the JSF Property Credit is claimed is not required to be reduced by the amount of any JSF Property Credit claimed. 
(b) General Requirements for Qualified Property. In order for property to be treated as qualified property, the property must satisfy each of the requirements of this subsection of this regulation. 
(1) Tangible Personal Property. For purposes of this section, property must be tangible personal property. The term “tangible personal property” means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). Tangible personal property includes all property (other than structural components) which is contained in or attached to a building. Thus, for example, production machinery, printing presses, and testing equipment which is contained in or attached to a building are tangible personal property. Furthermore, all property which is in the nature of machinery (other than structural components of a building or other inherently permanent structures) shall be considered tangible personal property even though located outside a building. The determination of whether property will be treated as an inherently permanent structure shall be made under Internal Revenue Code section 1245(a), so that generally property will be treated as an inherently permanent structure (and thus not tangible personal property) if the property is either intended to be or is in fact affixed permanently, and is either incapable of being moved or, if movable, would suffer a significant degree of damage upon its removal. Local law, including state, county, city, or regional, shall not be controlling for purposes of determining whether property is or is not “tangible” or “personal,” so that the fact that under local law property is held to be personal property or tangible property shall not affect the determination of whether such property is tangible personal property for purposes of the JSF Property Credit. 
EXAMPLE 1: B, a qualified taxpayer, manufactures aircraft engines in a manufacturing plant located in Tustin. B decides to upgrade its assembly line by installing a heavy-duty overhead crane which will be permanently affixed to the building structure. Prior to installing the crane B constructs steel columns that extend from the crane's girder to the roof of the building. Under these facts, while the steel columns may be treated as “other tangible property” under Internal Revenue Code section 1245(a)(3)(B), the steel columns are not tangible personal property and thus are not qualified property. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except instead consider the heavy-duty overhead crane. The crane moves back and forth along the assembly line on craneway tracks that are permanently bolted to the building's ceiling beams and is hard-wired to the building's electrical system. Despite its permanent affixation to the building, the crane is an item of tangible personal property. 
(2) Section 1245(a)(3)(A) Property. Only personal property described in Internal Revenue Code section 1245(a)(3)(A) is treated as qualified property for purposes of the JSF Property Credit. Other tangible property that is described in Internal Revenue Code sections 1245(a)(3)(B) through (F) is not “personal” property and is thus not qualified property under Revenue and Taxation Code section 17053.37. 
EXAMPLE 1: F, a qualified taxpayer, manufactures airplane fuselages. F constructs a building which is open at both ends through which a length of track travels to move the fuselages during several steps in the manufacturing process. Since the building is not tangible personal property defined in Internal Revenue Code section 1245(a)(3)(A), it would not be treated as qualified property. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, but in addition, F constructs and installs machinery in the building to facilitate the assembly of the fuselages. Although the machinery is permanently installed in the building, it is not a structural component of the building and can be removed without dismantling the building. As a result, the machinery is tangible personal property that is defined in Internal Revenue Code section 1245(a)(3)(A). 
(3) Used to Manufacture a Product for Ultimate Use in a Joint Strike Fighter. Property must be used in qualified activities to manufacture a product for ultimate use in a Joint Strike Fighter. This requirement will be satisfied if the qualified taxpayer is using the qualified property primarily to manufacture a product that is properly treated as inventory of the qualified taxpayer and that is physically installed in or attached to a Joint Strike Fighter aircraft. For this purpose, the term “inventory” includes any property that is required to be included in the qualified taxpayer's inventory under Internal Revenue Code section 263A or that is described in Internal Revenue Code section 1221(1). 
EXAMPLE 1: B, a qualified taxpayer, manufactures aircraft radar antennas that are attached to a Joint Strike Fighter. B constructs a compressor for use in B's assembly line. B uses the compressor exclusively to manufacture the antennas. Since B uses the compressor to manufacture a product that is physically attached to a Joint Strike Fighter aircraft, the compressor is primarily used in a qualified activity. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except B manufactures ground based radar equipment to be used in connection with the Joint Strike Fighter program. Under these facts, even though the radar equipment is being manufactured in connection with the Joint Strike Fighter program, the compressor is not used in qualified activities since the compressor is used to manufacture a product that is not physically attached to a Joint Strike Fighter aircraft. 
(4) Primarily Used in Qualified Activities. Property must be primarily used in qualified activities. 
EXAMPLE 1: B, a qualified taxpayer, manufactures avionics systems in San Diego. B constructs a compressor for use in B's assembly line. The compressor is used for 500 hours in the assembly line, which is part of B's qualified activities, and for 250 hours in B's warehouse, which is part of B's non-qualified activity. Since B used the compressor in B's qualified activities for more than 50 percent of the time the compressor was actually in use during the 12-month period following the date the compressor was placed in service in California by B (500 hours/750 hours, or 66.7%), the compressor is primarily used in a qualified activity. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except B instead uses the compressor for 500 hours in the non-qualified activity and 250 hours in the qualified activity. Under these facts, the compressor is not primarily used in a qualified activity since the compressor was used less than 50 percent of the time during the 12-month period following the date the compressor was placed in service in California by B in a qualified activity (250 hours/750 hours, or 33.3%). 
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except B uses the compressor for a total of 100 days during the 12-month period following the date the compressor was placed in service in California by B. During each of those 100 days, B uses the compressor for four hours in the qualified activity and six hours in the non-qualified activity. Although B is using the compressor in the qualified activity during each of the 100 days that it is actually in operation, the compressor is not primarily used in a qualified activity because the total number of hours the compressor is used in a qualified activity is less than 50 percent of the total hours of operation of the compressor during the 12-month period following the date the compressor was placed in service in California by B. 
EXAMPLE 4: C, a qualified taxpayer, manufactures aircraft communications equipment in San Jose. C purchases ten personal computers to be used in the company offices. The computers are to be used in part for administration and management, a non-qualified activity, but are also used for the tracking of assembly line operations by directly monitoring the performance, safety, and production of the assembly line, a qualified activity. As long as the computers are used at least 50 percent of the time in the qualified activity during the 12-month period following the date the compressor was placed in service in California by C, then C shall be treated as primarily using the computers in a qualified activity. 
EXAMPLE 5: R, a qualified taxpayer, manufactures aircraft instrument lights from raw materials such as glass, tungsten, aluminum, copper and paper. R initially receives the raw materials at its warehouse in North Hollywood, and then, when needed, transports them using its own trucks to R's manufacturing plant in Burbank. Upon delivery to the manufacturing plant, the raw materials are placed in a receiving area where they are then moved via forklift to their respective areas in the plant for introduction into the process of manufacturing the light bulbs. Under these facts, R's qualified property does not include the trucks used to transport the raw materials from the warehouse to the manufacturing plant since the raw materials have not been introduced into R's manufacturing “process” until the raw materials have been delivered to the manufacturing plant. However, the forklift would be qualified property (assuming it was not used more than 50 percent of the time to unload the raw material from the trucks to the receiving area) since once the raw materials are received at the same premises where R's manufacturing activity is being conducted, the movement of the raw materials via forklift is treated as part of R's manufacturing process. 
EXAMPLE 6: T, a qualified taxpayer, manufactures copper wire in Santa Ana. As part of T's manufacturing process, T purchases a machine to process the copper wire by coating it with white or black insulation prior to wrapping the wire in white plastic insulation. T's machine applies the materials and labor necessary to modify or change the characteristics of the copper wire. T's machine is used in “processing” the wire and thus would be qualified property. 
EXAMPLE 7: Assume the same facts as in EXAMPLE 7, except that T also uses the machine to coat its mailing labels for shipment of the wire. Assume that the processing of the copper wire is complete upon its being wrapped in the plastic insulation, and that the number of hours the machine is used during the 12-month period following the date the machine was placed in service in California by T for the “processing” of the wire is less than 50 percent of the machine's total use during such period. Under these facts, the machine is no longer primarily used for “processing,” a qualified activity, but is instead primarily used to coat the mailing labels, a non-qualified activity, so that the machine is not qualified property. 
EXAMPLE 8: C, a qualified taxpayer, manufactures hydraulic lines in Milpitas. The employees of C fabricate and assemble shelving to be used to store the manufactured lines following completion of C's manufacturing process. Assume that the costs of fabricating the shelving, including the direct labor costs, are properly capitalized by C. Although C has “fabricated” the shelving, the shelving is not qualified property since it is not used in C's manufacturing process, which is a qualified activity, but is rather used for storage, which is a non-qualified activity. 
EXAMPLE 9: C, a qualified taxpayer, manufactures ground based radar equipment and radar equipment that is physically installed in or attached to a Joint Strike Fighter aircraft. C purchases a compressor to use on its assembly line. The compressor is used for a total of 500 hours on the assembly line, 300 hours to manufacture the radar equipment that is physically installed in or attached to a Joint Strike Fighter aircraft and 200 hours to manufacture the ground based equipment. Since B used the compressor in B's qualified activities for more than 50 percent of the time the compressor was actually in use during the 12-month period following the date the compressor was placed in service in California by B (300 hours/500 hours, or 60%), the compressor is primarily used in a qualified activity. 
EXAMPLE 10: Assume the same facts as in EXAMPLE 10, except the compressor is used 200 hours to manufacture the radar equipment that is physically installed in or attached to a Joint Strike Fighter aircraft and 300 hours to manufacture the ground based equipment. Since B used the compressor in B's qualified activities for less than 50 percent of the time the compressor was actually in use during the 12-month period following the date the compressor was placed in service in California by B (200 hours/500 hours, or 40%), the compressor is not primarily used in a qualified activity. 
(c) Specifically Excluded Property. Notwithstanding subsections (b) or (d) of this regulation, qualified property does not include any of the following: 
(1) Furniture. Any item of furniture, regardless of how used or where located. 
(2) Facilities Used for Warehousing Purposes. Any property used for warehousing purposes after completion of the manufacturing process. Thus, for example, a manufacturer of engine components that stores its finished products in a separate warehouse building prior to shipment, and thereafter uses forklifts and other heavy equipment to move the inventory within the warehouse building, shall not treat the forklifts and other heavy equipment as qualified property. 
(3) Inventory. Any property that is properly treated as inventory of the qualified taxpayer. For this purpose, the term “inventory” includes any property which is required to be included in the qualified taxpayer's inventory under Internal Revenue Code section 263A or that is described in Internal Revenue Code section 1221(1). 
(4) Equipment Used to Store Finished Products. Any equipment used to store finished products that have completed the manufacturing process. Thus, for example, if a qualified taxpayer primarily uses a forklift in the finished goods portion of its manufacturing plant to transport finished products to its loading dock for shipping to customers, the forklift would not be qualified property. On the other hand, if the forklift was primarily used to transport raw materials to the assembly line and was occasionally used to transport finished products to the loading dock for shipment to customers, the forklift would be treated as qualified property. 
(5) Tangible Personal Property Used in Administration. General Management, or Marketing. Any tangible personal property that is used in administration, general management, or marketing. For this purpose, an item of property that is used both in a qualified activity and for administration, general management, or marketing, shall be treated as qualified property only if the item is primarily used in a qualified activity. However, property primarily used to clean and maintain the factory floor and fire safety equipment primarily used on the factory floor are not considered tangible personal property used in administration, general management, or marketing. 
(d) Movement of Used Property Into This State. In any case where property is moved from another state or country into this state by a qualified taxpayer or by a lessor who intends to lease such property to a qualified taxpayer, the property may generally be treated as qualified property for purposes of the JSF Property Credit if it satisfies the other requirements of this regulation. Thus, for example, if an item of property is acquired and placed in service in Nevada in 2000, and thereafter the item of property is moved into this state for use in a qualified activity (as defined in Regulation 17053.37-5(b)), the property may generally be treated as qualified property. However, in the case of any such moved property, a qualified taxpayer or lessor must still satisfy the requirements of Regulation 17053.37-4 (relating to qualified costs and payment of California sales or use tax) in order to claim the JSF Property Credit. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.37, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.37-6. Leasing.
Note     •     History

Leasing -- (See Regulation 17053.37-0 for Table of Contents.) 
(a) In General. For purposes of Regulations 17053.37-1 through 17053.37-11, inclusive, in the case of any leasing transaction in which qualified property is leased by a qualified taxpayer, the rules of this regulation shall apply. Generally, the lessor must pay California sales tax on the lessor's acquisition of the qualified property in order for the lessee to claim the credit for that item of qualified property. Conversely, the lessee cannot claim the JSF Property Credit for an item of property where the lessor acquired the qualified property without paying California sales or use tax and the lessor instead collects use tax payments from the lessee measured by the lessee's rental payments to the lessor. The determination of whether the rules in subsection (b) or subsection (c) of this regulation apply shall be made by reference to the sales and use tax treatment of the lease, rather than the income tax treatment of the lease. Thus, for example, a lease of qualified property that would be treated as a finance lease under income tax principles may still be treated as an operating lease under this regulation. In addition, under California sales and use tax law, a transaction denominated as a lease will instead generally be treated as a sale under a security agreement if the lease contains a nominal option price. For this purpose, California sales and use tax law generally treats the option price as nominal if it does not exceed the lesser of $100 or 1 percent of the total contract price. 
EXAMPLE 1: X, a leasing company, agrees to lease qualified property to Y, a qualified taxpayer, for use in Y's manufacturing facility in Garden Grove. Under the terms of the lease, X will lease the property to Y for $100 per year for a term of 10 years. Upon the expiration of the 10-year lease term, Y has an option to acquire the property for $1. Under these facts, the “lease” would be properly treated as a sale under a security agreement from its inception and not as a lease under Revenue and Taxation Code section 6006.3 and California State Board of Equalization Regulation 1660(a)(2)(A), Title 18, California Code of Regulations, so that the rules of subsection (c) of this regulation would apply. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that Y's option price is $125, or 12.5% of the total contract price. Under these facts, notwithstanding that the “lease” may be treated as a finance lease (and thus as a “purchase”) for California franchise and income tax purposes, under California sales and use tax law the “lease” would generally be treated as a lease and the rules of subsection (b) of this regulation would apply. 
(1) Lessor Not Entitled to JSF Property Credit. A lessor of qualified property is never entitled to claim the JSF Property Credit with respect to any item of qualified property it leases to another party, regardless of whether the lessor is otherwise a qualified taxpayer. 
(2) Binding Contract Rules Applicable to Leases. In the case of any qualified property leased pursuant to any agreement or contract that is treated as a binding contract under the rules of subsection (e) of Regulation 17053.37-4, the allocation rules of subsection (e) of Regulation 17053.37-4 shall apply in determining the amount of the qualified cost to the lessor upon which the lessee is entitled to claim the JSF Property Credit. For this purpose, if a lessor acquires qualified property under the terms of a contract that is treated as a binding contract with respect to the lessee (or a party related to the lessee within the meaning of Internal Revenue Code sections 267 or 318), then any payments or reimbursements made by the lessor, directly or indirectly in the form of a reduction in the amount of lease rental payments to be paid by the lessee under the lease, upon or as a result of the lessor's assumption of the lessee's obligations under the binding contract, shall be treated in the same manner as if the lessor had not assumed the lessee's obligations under the contract. Finally, in any case where a lessor has acquired property prior to January 1, 2001, and thereafter leases such property, the qualified cost to the lessor upon which the lessee would be entitled to claim the JSF Property Credit would generally be zero (assuming the lessor has not paid otherwise qualified costs after January 1, 2001, to improve or otherwise modify the leased property, in which case the lessor would have qualified costs to the limited extent of such post-2000 amounts that were paid). 
EXAMPLE 1: D, a qualified taxpayer, is engaged in the business of manufacturing aircraft landing gear in Palmdale. On September 20, 2000, D enters into a contract with X to acquire 3 machines that are qualified property for a total contract price of $900. Under the terms of the contract, D makes a non-refundable deposit to X of $150 upon execution of the contract, with an additional $150 due on July 1, 2001, and the final payment of $600 payable upon delivery of the machines on February 15, 2002. Assume that this contract is treated as a binding contract under subsection (e) of Regulation 17053.37-4. On January 15, 2002, D decides that it would prefer to instead lease the machines, so D enters into a contract with L, an equipment leasing company, under which L will (i) assume D's obligations under D's contract with X, (ii) lease the qualified property to D for a term of 10 years, and (iii) refund to D the $300 in payments that D has previously made to X. Assume that L will pay California sales tax on its purchase of the qualified property from X. Under these facts, L will be treated as having $750 in qualified costs for which D will be entitled to claim the JSF Property Credit, which is the total amount treated as paid by L after January 1, 2001 ($600 paid directly by L to X under X's contract with D, plus $150 paid by L to D as reimbursement for D's payment on July 1, 2001, but excluding the $150 paid by D to X prior to January 1, 2001). 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of L agreeing to refund the $300 in payments that D has previously made to X, L instead reduces the amount of the rental payments to be due from D under the lease. Under these facts, the result is the same as in EXAMPLE 1. 
(3) Special Rules Applicable to All Leasing Transactions 
(A) Placed in Service. In the case of any leasing transaction, the requirement that qualified property must be placed in service in California in order for a qualified taxpayer to claim the JSF Property Credit shall be treated as having been satisfied at the time when all the terms and conditions of the lease contract have been completed so that the lessee has an unconditional obligation to pay all rents due under the contract to the lessor of the qualified property. However, notwithstanding the preceding sentence, the requirement of subsection (b)(4) of Regulation 17053.37-5 that property be primarily used in qualified activities to manufacture a product for ultimate use in a Joint Strike Fighter must still be satisfied in order for a lessee to claim the JSF Property Credit. 
(B) Bid Amount Reduced by Credit. In no event shall any leasing transaction qualify for the JSF Property Credit unless the bid reduction requirements contained in Revenue and Taxation Code section 17053.37, subsection (i)(2), and Regulation 17053.37-7 have been satisfied with respect to the bid which contains the Joint Strike Fighter Property Credit allowable for the qualified property that is the subject of the lease. 
EXAMPLE: On July 1, 2001, A, a qualified taxpayer, enters into a contract to lease a drill press from B, an equipment leasing company, for use in A's manufacturing facility in Roseville. Under the terms of the lease contract, A's rental obligations commence at the beginning of the month following the date that A provides B with a written statement that the drill press has been received from C, the original manufacturer of the drill press, and that the drill press has been installed and is in good working order (e.g., A provides a Certificate of Acceptance to B). On January 15, 2002, A executes and delivers the required written statement to B. Under these facts, A is treated as having satisfied the “placed in service” requirement as of February 1, 2002, and, assuming all other requirements of Revenue and Taxation Code section 17053.37 have been satisfied, A is entitled to claim the JSF Property Credit. 
(b) Operating Leases. In the case of any lease that is not treated as a sale under Part 1 (commencing with section 6001) of Division 2 of the Revenue and Taxation Code (relating to the payment and collection of California sales and use tax), the rules set forth in this subsection of this regulation shall apply. Any lease subject to the rules of this subsection of this regulation shall be referred to in this regulation as an “operating lease.” 
(1) In General. Under Revenue and Taxation Code section 6006, subsection (g)(5), a lease of tangible personal property is generally treated as a sale for California sales and use tax purposes, unless the tangible personal property is leased in substantially the same form as acquired by the lessor or leased in substantially the same form as acquired by the transferor and the lessor or transferor has paid sales tax reimbursement or has paid use tax measured by the purchase price of the property. 
EXAMPLE: L, a taxpayer engaged in the equipment leasing business, purchases 20 machine tools for $10 from P, a retailer of machine tools. L intends to immediately lease the machine tools, without modification, to X, a qualified taxpayer engaged in the business of manufacturing aircraft cockpit canopies in Visalia, for a term of 10 years. L pays California sales tax on its purchase of the machine tools, and then leases the machine tools to X. Assume that X does not have an option to purchase the machine tools upon the expiration of the lease term. Since L has paid California sales tax on its purchase of the machine tools and then leased the property in substantially the same form as acquired, L's lease to X is not treated as a sale under Revenue and Taxation Code section 6006, subsection (g)(5), and the rules of this subsection of this regulation apply. 
(2) Applicable Requirements. In the case of an operating lease, the following requirements must be satisfied in order for the lessee to claim the JSF Property Credit. 
(A) Lessee Must Be a Qualified Taxpayer. The requirement under Regulation 17053.37-3 that the user of the qualified property must be a qualified taxpayer shall be applied to the lessee and not to the lessor. 
(B) Use of Property in Qualified Activities. The requirement under subsection (b)(4) of Regulation 17053.37-5 that property be used in qualified activities in order to be treated as qualified property shall be applied to the lessee and not the lessor with respect to the property that is the subject of an operating lease. 
(C) Sales or Use Tax Payment Requirement. Except as provided in subsections (b)(3)(B) or (b)(5)(B) of this regulation (relating to capitalized labor), the lessor must pay California sales tax reimbursement or California use tax on the lessor's construction, reconstruction or acquisition of the qualified property. In any case where the lessor's acquisition of the qualified property is pursuant to a transaction treated as either an occasional sale under Revenue and Taxation Code section 6006.5 or as a sale of mobile transportation equipment (as defined in Revenue and Taxation Code section 6023), the requirement of this subsection of this regulation shall be satisfied only if the lessor makes a timely election under either Revenue and Taxation Code sections 6094.1 or 6244(d) and pays California sales tax reimbursement or California use tax with respect to the lessor's acquisition of the qualified property. 
(D) Qualified Costs. The requirement that costs, in order to be treated as qualified costs, must be paid or incurred for the “construction, reconstruction, or acquisition” of qualified property shall not apply to the lessee's lease rental payments. Thus, for example, although a lessee may, under the lessee's method of California tax accounting, currently deduct its lease rental payments, the lessee will still be entitled to claim the JSF Property Credit if the other requirements of this subsection of this regulation are satisfied. However, the rules of Regulation 17053.37-4, including the rules relating to the allocation of costs paid or incurred pursuant to binding contracts, shall apply in determining the amount of qualified costs of the lessor upon which the lessee may determine its JSF Property Credit. 
(E) Chargeable to Capital Account. The requirement that costs, in order to be treated as qualified costs, must be properly chargeable to the capital account of the qualified taxpayer shall not apply to the lessee's lease rental payments. Thus, for example, although a lessee may, under the lessee's method of California tax accounting, currently deduct lease rental payments, the lessee will still be entitled to claim the JSF Property Credit if the other requirements of this subsection are satisfied. 
(3) Amount of JSF Property Credit Lessee May Claim. In general, a lessee under an operating lease is entitled to claim the JSF Property Credit at the same time and in the same amount as if such lessee had instead constructed, reconstructed, or acquired the qualified property other than by lease. 
(A) Qualified Cost to Lessor. Except as provided in subsection (b)(3)(B) of this regulation, the qualified cost to the lessor upon which the lessee is entitled to claim the JSF Property Credit is generally equal to the purchase price amount on which California sales tax reimbursement or use tax has been paid by the lessor. Thus, for example, if a lessor pays $100 for an item of qualified property, plus $8 in California sales tax reimbursement on such item, the qualified cost to the lessor would be $100. 
(B) Exception For Capitalized Labor. The qualified cost to the lessor under subsection (b)(3)(A) of this regulation shall also include any capitalized labor that is a direct cost, as that term is used in Internal Revenue Code section 263A and defined in the regulations thereunder, that can be identified or associated with and are properly allocable to the construction or modification of the qualified property. Thus, for example, assume a lessor pays $100 for an item of qualified property, with $20 of a $50 total labor cost properly treated as capitalized direct labor costs that are exempt from California sales or use tax. While the lessor would pay only $4 (8% of $50) in California sales tax reimbursement on the lessor's purchase of the qualified property, the qualified cost to the lessor under this subsection of this regulation would be equal to $70 ($50 + $20). 
(4) Special Rules for Operating Leases. The following special rules apply to any lease that is treated as an operating lease under this regulation. 
(A) Limitation on Qualified Costs. In determining a lessor's qualified cost under the rules of this subsection of this regulation, the allocation rule specified in Regulation 17053.37-4 shall apply to any costs actually paid by the lessor (or treated as paid by the lessor under the rules in this regulation) pursuant to a contract that was binding on January 1, 2001. Thus, for example, if a lessor has a binding contract to acquire qualified property for $100 as of January 1, 2001, and has paid a non-refundable deposit of $20 prior to January 1, 2001, and thereafter pays the remaining $80 purchase price, the lessor's qualified cost upon which a lessee may claim the JSF Property Credit could not exceed $80 ($100 purchase price less $20 actually paid prior to January 1, 2001, pursuant to a binding contract). 
(B) Reduction in Qualified Cost to Lessor. In the case of any re-lease of qualified property by a lessor to another qualified taxpayer, the qualified cost to the lessor under subsection (b)(3)(A) of this regulation as to the subsequent lessee shall first be reduced by the amount of qualified cost taken into account by any predecessor lessee. However, the preceding sentence shall not apply to the extent that the predecessor lessee was required to recapture any JSF Property Credit allowed to the predecessor lessee under the recapture rules in Regulation 17053.37-8. 
EXAMPLE 1: L, a taxpayer engaged in the equipment leasing business, acquires two cranes from R, a manufacturer of cranes in Oxnard, for $100. L intends to immediately lease the cranes to M, a qualified taxpayer, for use by M in its manufacturing facility located in Ventura. Assume the lease is properly treated as an operating lease under this regulation and that L pays sales tax to R of $8 (8% of $100) at the time of L's purchase. Under these facts, M will be entitled to claim a $10 JSF Property Credit (10% of $100) since L's qualified cost is $100. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that at the end of the lease term L re-leases the cranes to P, a qualified taxpayer, which manufactures synthetic resins and composite materials at a facility in Moorpark. Under subsections (b)(3)(A) and (b)(4)(B) of this regulation, L's qualified cost upon which P may claim the JSF Property Credit is zero ($0) since L's qualified cost is $0 ($100 original qualified cost to L, less $100 qualified cost taken into account by a predecessor lessee, M, when claiming the JSF Property Credit). 
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that M, the initial lessee, cancels the lease with L after 10 months, with L repossessing the cranes. Under these facts, M would be required to recapture (pursuant to Regulation 17053.37-8) the entire $10 JSF Property Credit previously claimed by M, and L's qualified cost upon L's re-lease of the cranes to P would be $100 ($100 original qualified cost to L, less $100 qualified cost taken into account by a predecessor lessee, M, plus $100 of qualified cost recaptured upon M's cancellation of the lease with L). 
(C) Qualified Cost to Successor Lessor. In any case where a successor lessor acquires qualified property from a lessor that is subject to a lease (including any qualified property that is not currently being leased but which the successor lessor intends to re-lease) in a transaction that is not treated as a sale for California sales and use tax purposes, the qualified cost to the successor lessor for purposes of the JSF Property Credit shall be reduced by the amount of qualified cost of the predecessor lessor that was taken into account by any lessee in computing a credit under the JSF Property Credit. However, the preceding sentence does not apply in any case where the transaction in which the successor lessor acquires the qualified property from the predecessor lessor is treated as a sale for California sales and use tax purposes. 
EXAMPLE 1: G is engaged in the equipment leasing business. G acquires three drill presses from Q, a manufacturer of drill presses, for $300. G immediately leases the printing presses to D, a qualified taxpayer, for use by D in D's machine tool facility in Santa Barbara. Assume the lease is properly treated as an operating lease under this regulation, and that G pays sales tax to Q of $24 ($300 X 8%) at the time of purchase. Under these facts, D would be entitled to claim a JSF Property Credit of $30 (10% of $300, G's qualified cost of the drill presses). Three years later G sells the drill presses to H, who is also engaged in the business of equipment leasing, for $250. Assume that G terminates its lease with D prior to the sale of the drill presses to H, and that H delivers a resale certificate to G so that H's purchase is exempt from California sales and use tax. Assume further that D agrees to re-lease the drill presses from H following H's acquisition of the drill presses from G. D terminates its lease two years after H's purchase of the drill presses, and H then re-leases the drill presses to E in a transaction treated as an operating lease under this regulation, for use by E in its tool and die facility in Bakersfield. Under these facts, H's qualified cost upon which E may claim the JSF Property Credit is $0 ($250 paid by H to G, less $300 qualified cost taken into account by a predecessor lessee, D). 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that G does not terminate its lease with D prior to G's sale of the drill presses to H. Under California sales and use tax law, the sale by G to H would be subject to California sales tax and H would not be entitled to deliver a resale certificate to G. As a result, assume H pays California sales tax reimbursement to G on the $250 purchase price. Since H has paid California sales tax reimbursement to G, H's qualified cost upon which E may claim the JSF Property Credit is $250. 
(D) Acquisition by Lessee of Leased Property. In any case where a lessee (or any party related to the lessee within the meaning of Internal Revenue Code sections 267 or 318) of qualified property acquires the leased property from the lessor within one year of the date the qualified property is first used by the lessee, then the purchase of the qualified property by the lessee shall be treated as a disposition of the property by the lessee and any JSF Property Credit claimed by the lessee must be recaptured by the lessee under the rules of Regulation 17053.37-8. However, if the lessee (or related party) pays California sales or use tax on the acquisition of the qualified property, then the rules of Regulation 17053.37-4 shall apply to the acquisition and the lessee-purchaser may be entitled to claim the JSF Property Credit with respect to its costs of acquisition. 
EXAMPLE 1: J, a qualified taxpayer, leases five lathes which are qualified property from Z, which is engaged in the equipment leasing business, for use in J's manufacturing facility in Folsom. Assume J's lease is treated as an operating lease under this regulation, and that J has claimed the JSF Property Credit. Nine months after J first uses the lathes, J exercises an option under the lease to acquire the lathes from Z for their fair market value. Under the rules of this regulation, and Regulation 17053.37-8, J would be required to recapture any JSF Property Credit claimed by J. However, if J paid California sales or use tax on the purchase of the lathes, then J may have qualified costs on J's purchase from Z under the rules of Regulation 17053.37-4. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that K, a wholly owned subsidiary of J, instead purchases the lathes from Z. Under the rules of this regulation, since K is related to J under both Internal Revenue Code sections 267 and 318, K's acquisition of the lathes will be treated as a disposition by J of the qualified property and J will be required to recapture the JSF Property Credit. If K continues to lease the lathes to J, then the rules of subsection (b)(4)(C) of this regulation shall apply in determining whether K will have qualified cost in the lathes upon which J may claim a JSF Property Credit upon K's acquisition of the lathes. On the other hand, if K cancels the lease with J (assuming K may legally do so) and uses the lathes in a qualified activity conducted by K, then, assuming K has paid California sales or use tax on its acquisition, K may have qualified costs under the rules of Regulation 17053.37-4 assuming K continues to use the lathes in a qualified activity instead of re-leasing the lathes. 
(5) Sale-Leaseback Transactions. In the case of any sale-leaseback transaction, the following rules shall apply: 
(A) General Rule. Except as provided in subsection (b)(5)(B) of this regulation, in the case of any sale-leaseback transaction in which a lessor does not pay California sales or use tax upon acquisition of an item of qualified property, the qualified cost to the lessor upon which the lessee would be entitled to claim the JSF Property Credit shall be zero. 
EXAMPLE: On January 15, 2001, F, a qualified taxpayer engaged in the business of manufacturing aircraft navigational instruments, purchases three glass grinders that are qualified property from Y, the manufacturer of the glass grinders. Y collects California sales tax on the purchase by F. On January 30, 2001, F places the three grinders in service in its manufacturing facility in Crescent City. On May 15, 2001, G, which is engaged in the equipment leasing business, purchases the three grinders from F and immediately leases them back to F. Under the rules of this regulation, and Regulation 17053.37-8, F would be required to recapture any JSF Property Credit claimed by F. In addition, since this transaction would not be treated as an “acquisition sale and leaseback” under Revenue and Taxation Code section 6010.65, G must pay California sales or use tax on G's purchase of the grinders in order for F to claim any JSF Property Credit under the rules of this regulation. If G delivers a resale certificate upon its acquisition of the grinders, so that G does not pay California sales or use tax upon G's acquisition of the grinders, then no JSF Property Credit could be claimed by F upon F's lease of the grinders from G. 
(B) Acquisition Sale and Leaseback. In the case of any transaction that is properly treated as an “acquisition sale and leaseback” under Revenue and Taxation Code section 6010.65, the requirement of subsection (b)(2)(C) of this regulation (relating to payment of California sales or use tax) shall be deemed satisfied by the lessor. If a transaction is treated as an “acquisition sale and leaseback” under this subsection of this regulation, then the qualified cost to the lessor under subsection (b)(3)(A) of this regulation shall be equal to the amount upon which the lessee paid California sales or use tax, plus any capitalized labor costs determined under subsection (b)(3)(B) of this regulation. However, the rules of this subsection of this regulation shall only apply if, and to the extent that, the costs originally incurred by the lessee to acquire, construct, or reconstruct the qualified property were treated as qualified costs under Regulation 17053.37-4. 
EXAMPLE 1: On December 1, 2001, P, a calendar year qualified taxpayer engaged in the business of manufacturing composite material, purchases and immediately places in service two mixing tanks that are qualified property from Z, the manufacturer of the mixing tanks. Z collects sales tax on the purchase by P. On January 15, 2002, R, which is engaged in the equipment leasing business, purchases the two mixing tanks from P and immediately leases them back to P. Since R's acquisition and leaseback occurs within 90 days of P's first functional use of the mixing tanks, and assuming the other requirements of Revenue and Taxation Code section 6010.65 are satisfied, P's sale to R and R's leaseback to P are treated as an “acquisition sale and leaseback” under Revenue and Taxation Code section 6010.65 and the rules of subsection (b)(5)(B) of this regulation would apply. Under the rules of this regulation, and Regulation 17053.37-8, P would be required to recapture any JSF Property Credit claimed on P's 2001 California return. However, R would be “deemed” to have paid California sales or use tax upon R's acquisition of the mixing tanks from P, and P would be entitled to claim an JSF Property Credit on its 2002 California return in an amount equal to R's qualified cost, as determined under subsections (b)(3)(A) and (b)(3)(B) of this regulation. For this purpose, R's qualified cost could not exceed P's qualified cost determined under Regulation 17053.37-4. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that P purchases and places the mixing tanks in service on December 1, 2000, and R purchases the mixing tanks from P and immediately leases them back to P on January 15, 2001. Under these facts, even though the transaction would be treated as an “acquisition sale and leaseback” under Revenue and Taxation Code section 6010.65, since P's qualified cost under Regulation 17053.37-4 would be equal to zero, R's qualified cost under this regulation would similarly be equal to zero, and thus no JSF Property Credit would be allowed to R. 
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that P purchased the mixing tanks under a contract that was treated as a binding contract under the rules in Regulation 17053.37-4. Assume further that 25 percent of P's total cost for the mixing tanks was actually paid prior to January 1, 2001, so that P's qualified cost for the mixing tanks was equal to 75 percent of the total cost of the tanks. Under these facts, since P's qualified cost under Regulation 17053.37-4 would be equal to 75 percent of P's total cost for the mixing tanks, R's qualified cost under this regulation could not exceed the amount of P's qualified cost, irrespective of the total amount paid by R to P to purchase the mixing tanks. 
(6) Lessor Reporting Requirement. In the case of any lease treated as an operating lease under this regulation, the lessor shall provide the lessee with a statement within 45 days after the close of the lessee's taxable year for which the JSF Property Credit is allowable to the lessee. This statement shall contain the amount of the lessor's qualified cost (as calculated under this regulation) upon which the lessee is eligible to compute the JSF Property Credit and the amount of such qualified cost upon which the lessor has paid California sales or use tax. For purposes of providing this statement only, if a lessor is legally obligated to remit California sales or use tax with respect to its acquisition of qualified property, but has not yet remitted such amounts solely due to timing differences between the lessor's California sales and use tax return filing period and the lessee's taxable year, then the lessor may treat the amounts upon which the California sales or use tax liability arises as “qualified costs to the lessor.” The statement required by this subsection of this regulation should not be filed with the lessee's tax return for the taxable year, but shall instead be made available to the Franchise Tax Board upon request. 
(c) Finance Leases. In the case of any leasing transaction that is treated as a sale under Part 1 (commencing with section 6001) of Division 2 of the Revenue and Taxation Code (relating to the payment and collection of California sales and use tax), the rules set forth in this subsection of this regulation shall apply. Any lease subject to the rules of this subsection of this regulation shall be referred to in this regulation as a “finance lease.” 
(1) In General. Under Revenue and Taxation Code section 6006, subsection (g)(5), a lease of tangible personal property is generally treated as a sale for California sales and use tax purposes, unless the tangible personal property is leased in substantially the same form as acquired by the lessor or leased in substantially the same form as acquired by the transferor and the lessor or transferor has paid sales tax reimbursement or has paid use tax measured by the purchase price of the property. If the lease is not treated as a sale under Revenue and Taxation Code section 6006, subsection (g)(5), then the rules of subsection (b) of this regulation apply. 
(2) Applicable Requirements. In the case of a finance lease, the following requirements must be satisfied in order for the lessee to claim the JSF Property Credit. 
(A) Lessee Must Be a Qualified Taxpayer. The requirement under Regulation 17053.37-3 that the user of the qualified property must be a qualified taxpayer shall be applied to the lessee and not to the lessor. 
(B) Use of Property in Qualified Activities. The requirement under subsection (b)(4) of Regulation 17053.37-5 that property be used in qualified activities in order to be treated as qualified property shall be applied to the lessee and not the lessor with respect to the property that is the subject of a finance lease. 
(C) Sales or Use Tax Payment Requirement. Except as provided in subsection (d) of Regulation 17053.37-4 (relating to capitalized labor), either the lessor or the qualified taxpayer must pay California sales tax reimbursement or California use tax on the lessee's purchase of the qualified property in order for the JSF Property Credit to be allowed to the lessee. In the case of an “occasional sale” under Revenue and Taxation Code section 6006.5, the lessee may satisfy the requirement of this subsection of this regulation by remitting the California sales or use tax on the lessee's purchase of the qualified property (assuming that under California sales and use tax law the lessor does not have a legal obligation to remit such amounts). 
(D) Qualified Costs. The requirement that costs, in order to be treated as qualified costs, must be paid or incurred for the “construction, reconstruction, or acquisition” of qualified property shall be applied by substituting the term “purchase” for the term “construction, reconstruction, or acquisition.” Since under general income tax principles a finance lease is treated as a purchase, the lessee's “lease rental payments” are treated as payments of the purchase price of the qualified property and would thus satisfy the “purchase” requirement. However, the lessee under such a lease would be obligated to pay California sales or use tax at the time the lease became effective, so that the lessee would be allowed the entire JSF Property Credit on such lease in the year the lease became effective. On the other hand, if a lease is not properly treated as a finance lease under general income tax principles, then the “purchase” requirement would not be satisfied. 
(E) Chargeable to Capital Account. The requirement that costs, in order to be treated as qualified costs, must be properly chargeable to the capital account of the qualified taxpayer shall apply to the lessee's lease rental payments. 
(3) Amount of JSF Property Credit Lessee May Claim. In general, a lessee under a finance lease is entitled to claim the JSF Property Credit at the same time and in the same amount as if such lessee had instead constructed, reconstructed, or acquired the qualified property other than by lease. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.37, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.37-7. JSF Contract Bidding.
Note     •     History

JSF Contract Bidding -- (See Regulation 17053.37-0 for Table of Contents.) 
(a) In General. The JSF Property Credit shall not be allowed unless the credit is reflected within the bid that forms the basis for the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in a Joint Strike Fighter. 
(b) Bid. For purposes of this regulation, the term “bid” shall mean a written bid or offer to perform a contract to produce a product that is designed to be physically attached to or installed in a Joint Strike Fighter in response to a request for bids to construct all or a portion of the Joint Strike Fighter Aircraft. The bid shall be submitted in a competitive process where the contract will be awarded to the lowest possible bidder or as otherwise indicated in the conditions under which the bids will be received and the contract awarded. Where the scope of work, request for proposal or relationship of the contracting parties is such that only a single party will be submitting a proposal or contract to construct all or a portion of the Joint Strike Fighter, the term “bid” shall include the proposal submitted or contract ultimately executed. 
(c) JSF Property Credit Reflected Within the Bid. For purposes of this regulation, the term “reflected within the bid” shall mean: 
(1) the bid that forms the basis of the contact or subcontract is reduced by the amount of the JSF Property Credit allowable, and 
(2) the amount of the JSF Property Credit allowable is included on the face of the bid or an attachment to the bid that forms the basis of the contract or subcontract. 
The JSF Property Credit allowable shall be a lump sum number reflected on the contract or subcontract and the aggregate credit allowable over the term of the contract or subcontract is not required to be calculated on the basis of the year in which the credit amount is expected to be claimed. 
EXAMPLE 1: X, a qualified taxpayer, submits a bid to the prime contractor in the amount of $90 to manufacture retractable landing gear for the Joint Strike Fighter. The bid price without the JSF Property Credit would have been $100. The bid form includes an attachment that states the JSF Property Credit allowable for the subcontract is $10 ($100 contract price less JSF Property Credit in the amount of $10, for a reduced contract price of $90). X is the successful bidder on the retractable landing gear and thereafter is awarded the contract to produce the part for the Joint Strike Fighter. X and the prime contractor execute a contract in the amount of $90. Under these facts, the $10 JSF Property Credit amount is reflected within the bid that forms the basis for X's subcontract to manufacture property for ultimate use in a Joint Strike Fighter and X may claim the $10 JSF Property Credit if all of the other requirements of Revenue and Taxation Code section 17053.37 and this regulation are met. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that the bid form reflects a price of $100. In this circumstance, X is not eligible to claim the credit because X has not reduced the amount of the bid by the amount of the JSF Property Credit allowable. 
EXAMPLE 3: Assume the same facts as in Example 1, except that the bid form reflects a price of $90, but the bid form does not contain an attachment showing the amount of the JSF Property Credit allowable. In this circumstance, X is not eligible to claim the credit because even though the bid amount has been reduced by the amount of the credit allowable, the amount of the credit allowable is not included on the face of the bid or in an attachment to the bid. 
EXAMPLE 4: Assume the same facts as in EXAMPLE 1, except that the scope of the project changes after the bid is submitted and X and the prime contractor execute a contract in the amount of $120, reflecting an increase of $30 dollars in the original bid amount. In this circumstance, the cost for the expanded scope of the contract was added to the original bid amount. As a result, X would only be allowed to claim a $10 JSF Property Credit since that amount was reflected within the original bid. 
EXAMPLE 5: X, a qualified taxpayer, is the prime contractor awarded the initial contract from the United States government for the Engineering and Manufacturing Development Phase of the Joint Strike Fighter Program. X does not include any amount for the Joint Strike Fighter credit in its bid for the Engineering and Manufacturing Development Phase accepted by the United States government. Under these facts, X is not able to claim the JSF Property Credit since the credit amount was not reflected within the bid that formed the basis for the initial contract for the Engineering and Manufacturing Development Phase. 
EXAMPLE 6: Assume the same facts as in Example 5, and Y responds to a request from X and submits a bid to subcontract a portion of the scope of the work covered in the Engineering and Manufacturing Development Phase of the Joint Strike Fighter Program. The bid form includes an attachment that shows the JSF Property Credit allowable for the subcontract is $10 ($100 contract price less JSF Property Credit in the amount of $10 for a reduced contract price of $90). Y is the successful bidder on that portion of the scope of the work and thereafter is awarded the contract to produce the part for the Joint Strike Fighter. X and Y execute a contract in the amount of $90. Under these facts, the $10 JSF Property Credit amount is reflected within the bid that forms the basis for Y's subcontract to manufacture property for ultimate use in a Joint Strike Fighter. Even though X, the prime contractor, did not reduce its bid for the prime contract and is not eligible to claim the JSF Property Credit, Y's bid met the bidding requirements for claiming the credit and Y may claim the $10 JSF Property Credit if all of the other requirements of Section 17053.37 of the Revenue and Taxation code and this regulation are met. 
(3) With respect to a contract to construct all or a portion of the Joint Strike Fighter that is executed on a “cost plus” basis, the term “reflected within the bid” shall mean that (1) California income or franchise taxes are treated as an item of cost to be reimbursed under the terms of the contract, (2) the cost plus contract, or an attachment to the contract, contains a calculation showing the amount of the JSF Property Credit allowable, and (3) the California income or franchise taxes reimbursed under the contract reflect the reduction for the amount of the JSF Property Credit allowable. 
(d) JSF Property Credit Allowable. For purposes of this regulation, the term “credit allowable” shall mean at the time the bid for the initial contract or subcontract is submitted, the amount of the credit the qualified taxpayer expects to claim as a result of qualified activities in connection with the contract or subcontract. The amount of the JSF Property Credit allowed to any qualified taxpayer under Revenue and Taxation Code section 17053.37 and these regulations shall not exceed the lesser of the credit amount reflected within the bid of the qualified taxpayer or the credit allowed for actual amounts paid or incurred by the qualified taxpayer. 
EXAMPLE: Y, a qualified taxpayer, submits a bid to the prime contractor to manufacture the cockpit canopy for the Joint Strike Fighter. The bid form includes an attachment that shows the JSF Property Credit allowable for the subcontract is $10 ($100 contract price less JSF Property Credit in the amount of $10 for a reduced contract price of $90). X is the successful bidder on the cockpit canopy and thereafter is awarded the contract to produce this part for the Joint Strike Fighter. X and the prime contractor execute a contract in the amount of $90. Thereafter, Y's costs to produce the cockpit canopy increase by 10% and Y determines that its actual qualified costs would result in a JSF Property Credit in the amount of $11. In this circumstance, even though Y's qualified costs have increased, Y is only able to claim a JSF Property Credit in the amount of $10 since that is the amount of the credit allowable that was reflected within Y's bid. 
(e) Pass-Through Entities. For purposes of this regulation: 
(1) The amount of the JSF Property Credit allowable reflected on a bid submitted by a partnership or an S corporation shall be the amount of the JSF Property Credit expected to be passed through the partnership to the partners or through the S corporation to the shareholders in accordance with the applicable provisions of Part 10 (commencing with section 17001) of the Revenue and Taxation Code. 
EXAMPLE: Z, a qualified taxpayer, submits a bid to the prime contractor to manufacture a portion of the hydraulic system for the Joint Strike Fighter. Z calculates the total allowable JSF Property Credit to be $75. Z has a valid S corporation election in effect for California tax purposes. Under Revenue and Taxation Code section 23803, subsection (a)(1)(A), Z's JSF Property Credit is limited to one-third of the amount of the credit otherwise allowable ($25). However, the amount of the JSF Property Credit that is expected to be passed through to Z's shareholders is $75 and Z must reflect the $75 reduced credit amount on the bid submitted to the prime contractor as provided in this regulation. 
(f) Copies Provided to Franchise Tax Board. The qualified taxpayer shall provide, upon request of the Franchise Tax Board, a copy of any bid that forms the basis for a contract or subcontract to manufacture property for ultimate use in a Joint Strike Fighter. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.37, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.37-8. Recapture Rules.
Note     •     History

Recapture Rules -- (See Regulation 17053.37-0 for Table of Contents.) 
(a) In General. The JSF Property Credit shall not be allowed or shall be recaptured under the rules of this regulation in any case where a disposition occurs within one year or less of the date the qualified property is first placed in service in this state. 
(b) Disposition. For purposes of this regulation, the term “disposition” shall include any of the following events: 
(1) Removal of the qualified property from this state; 
(2) Disposition of the qualified property to any party that is not a related party (as defined in Internal Revenue Code sections 267, 318 or 707), whether by sale, gift, a transfer upon the foreclosure of a security interest, or otherwise; 
(3) Use of the qualified property by the qualified taxpayer primarily in any non-qualified activity; or 
(4) Acquisition by a lessee (or any party related to the lessee under Internal Revenue Code sections 267 or 318) of qualified property that is being leased by such lessee. 
However, the term “disposition” shall not include any of the following events: 
(A) a mere transfer of legal title to a creditor upon creation of a security interest; 
(B) a transfer by a qualified taxpayer of legal title to qualified property to a lessor where the lessor is not treated as the tax owner of such property and the lease is properly characterized as a financing transaction under California income tax principles; 
(C) any election by a C corporation to become an S corporation; or 
(D) any destruction of qualified property which qualifies as an involuntary conversion under Internal Revenue Code section 1033. 
(c) Disposition of Qualified Property During the Taxable Year Placed in Service. In any case where there is a disposition of qualified property during the same taxable year in which such qualified property is first placed in service in this state, no JSF Property Credit shall be allowed to the qualified taxpayer for that property for the taxable year in which the qualified property is placed in service. 
EXAMPLE: H, a qualified taxpayer, files its California tax returns using a fiscal year ending on September 30th. On March 1, 2001, H pays $700 (plus California sales tax) for 10 personal computers and immediately places the computers in service in H's manufacturing facility in Burbank. On September 1, 2001, H acquires 10 new computers (which are immediately placed in service in H's manufacturing facility) for $800 (plus California sales tax) to replace the 10 computers already in service, and H instead uses the old computers to perform general administrative functions such as payroll and marketing. Under these facts, when H files its California tax return for its taxable year ending September 30, 2001, H is not entitled to claim the JSF Property Credit for the 10 personal computers acquired on March 1, 2001, because the computers are treated as having been disposed of during the same taxable year as they were placed in service as a result of H's use of these computers in an activity that is not a qualified activity. However, the 10 new computers acquired on September 1, 2001, may qualify for the JSF Property Credit for H's taxable year ending September 30, 2001. 
(d) Disposition of Qualified Property During a Taxable Year Subsequent to the Taxable Year Placed in Service. In any case where there is a disposition of qualified property within one year of the date that such qualified property is first placed in service in this state, but such disposition occurs in a different taxable year than the year in which the qualified property is placed in service in this state, then any JSF Property Credit that was allowed with respect to the qualified property shall be recaptured by adding the recaptured JSF Property Credit to the tax of the qualified taxpayer for the taxable year during which the disposition occurs (except as provided in subsection (e) of this regulation). 
EXAMPLE: F, a qualified taxpayer, files its California tax returns using a fiscal year ending on September 30th. On August 15, 2001, F acquires 20 new computers for $600 (plus California sales tax) and immediately places the computers in service in H's manufacturing facility in Glendora. On May 15, 2002, F removes the 20 computers from F's manufacturing facility in Glendora and transports them for use in F's New Mexico manufacturing facility. Assuming F had been allowed a JSF Property Credit on its taxable year ending September 30, 2001, California tax return for the computers acquired on August 15, 2001, F must recapture the entire JSF Property Credit allowed by adding such amount to F's tax for its taxable year ending September 30, 2002. 
(e) Adjustment of Carryforwards when Disposition Occurs. In any case where a qualified taxpayer is required to recapture any previously allowed JSF Property Credit under the rules of this regulation, then, prior to the addition of any recaptured amounts to the tax under subsection (d) of this regulation, any outstanding JSF Property Credit carryforwards shall first be reduced to the extent necessary to fully absorb the recapture amount. Any recapture amount remaining after application of the preceding sentence shall be added to the tax under the rules of subsection (d) of this regulation. 
EXAMPLE 1: On May 1, 2002, within one year of placing qualified property in service in this state, K disposes of qualified property for which a $150 JSF Property Credit was previously allowed. Under the rules of this regulation, K is required to recapture the entire $150 JSF Property Credit. Assume K had $400 in JSF Property Credit carryforwards that were available for use in 2002. Under these facts, K would reduce its available JSF Property Credit carryforwards to $250 ($400 minus $150). Since no additional recapture amount remains, K is not required to increase its tax for 2002 to reflect the $150 recapture amount. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of $400 in available JSF Property Credit carryforwards, K had only $100 in available JSF Property Credit carryforwards. Under these facts, K would first reduce its available JSF Property Credit carryforwards to zero, and would then increase its tax for 2002 by $50 ($150 recapture amount less $100 used to reduce available JSF Property Credit carryforwards). 
(f) Recapture of JSF Property Credit Allowed to Pass-Through Entities. 
(1) Partnerships and Partners. If a partnership places qualified property in service in this state, claims the JSF Property Credit to the extent of the qualified costs paid or incurred, and thereafter removes the qualified property from this state, disposes of the qualified property to an unrelated party, or primarily uses the property for a purpose not qualifying for the JSF Property Credit, then the JSF Property Credit shall be recaptured under Revenue and Taxation Code section 17053.37, subsection (g), and this regulation. The amount of JSF Property Credit subject to recapture shall be allocated among the partners in the same ratio that the JSF Property Credit was allocable to each partner for the qualified property subject to the recapture, and shall be added to the “tax” of the partner for the taxable year in which the qualified property is disposed of, removed from this state, or put to a non-qualifying use. 
EXAMPLE 1: Assume that C and D are equal partners of M, a partnership that is a qualified taxpayer. During M's taxable year beginning in 2001, M is allowed a total JSF Property Credit of $100. C and D each are able to utilize their entire 50% share of the 2001 JSF Property Credit to offset their respective 2001 tax liabilities, so that there is no JSF Property Credit carryover amount for either C or D. Assume further that in 2002, within one year of the date the qualified property was placed in service, M moves the qualified property to another state, thereby triggering a recapture of the JSF Property Credit. C and D are required to recapture their distributive share of the JSF Property Credit already applied to their respective 2001 tax liabilities on their respective 2002 California tax returns by adding the recaptured JSF Property Credit amounts to their respective “tax” for 2002. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that C uses all of C's share of the JSF Property Credit to reduce C's 2001 tax liability, but D carries over all of D's JSF Property Credit to 2002. On C's 2002 California tax return, C will be required to recapture C's share of the JSF Property Credit that was used to reduce C's “tax” for 2001 and D will be required to reduce its JSF Property Credit carryover to zero. D will not be required to increase D's “tax” for 2002 by the amount of D's share of the JSF Property Credit because D was unable to apply the amount to reduce D's tax liability for 2001. 
(2) S Corporations and Shareholders. 
(A) Corporate Level Recapture. If an S corporation places qualified property in service in this state, claims the JSF Property Credit to the extent of the qualified costs paid or incurred, and thereafter removes the qualified property from this state, disposes of the qualified property to an unrelated party, or primarily uses the qualified property for a purpose not qualifying for the JSF, then the JSF Property Credit shall be recaptured under Revenue and Taxation Code section 17053.37, subsection (g), and this regulation. The amount of any JSF Property Credit recaptured by the S corporation shall be added to the “tax” of the S corporation imposed under Chapter 4.5 of Part 11 of the Revenue and Taxation Code, except that the JSF Property Credit recapture amount added to the “tax” of the S corporation shall be appropriately reduced by the amount by which the S corporation was required to reduce such JSF Property Credit under Part 11 of the Revenue and Taxation Code. 
(B) Pass-through of JSF Property Credit Recapture Amount to Shareholders. In any case where a “disposition” of qualified property by an S corporation occurs, the amount of JSF Property Credit subject to recapture shall be allocated among the shareholders of the S corporation in the same ratio that the JSF Property Credit was allocable to each shareholder for the qualified property subject to the recapture, and shall be added to the “tax” of the shareholder for the taxable year in which the qualified property is disposed of, removed from this state, or put to a non-qualifying use. 
EXAMPLE: Assume that Q, an S corporation with three equal shareholders (E, F, and G), is allowed a JSF Property Credit in 2001 that Q is fully able to utilize to reduce Q's 1.5% S corporation tax liability. Assume further that E, F, and G each claims a one-third (1/3) share of the JSF Property Credit allowed to Q, and that each shareholder is able to utilize their entire distributive share of this JSF Property Credit on their respective 2001 California tax returns. In 2002, within one year of the date the qualified property was placed in service in California, Q sells the property to an unrelated party. Under these facts, Q, E, F, and G must each recapture the JSF Property Credit allowed and claimed by each on their respective 2001 California tax returns by adding such recapture amount to their 2002 respective California “tax” or “net tax,” as the case may be. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.37, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.37-9. JSF Property Credit Carryforwards.
Note     •     History

JSF Property Credit Carryforwards -- (See Regulation 17053.37-0 for Table of Contents.) 
(a) In General. In any case where the JSF Property Credit exceeds the “tax,” the excess may be carried forward to reduce the “tax” for the eight taxable years succeeding the taxable year for which the JSF Property Credit is allowed, if necessary, until the credit is exhausted. 
(b) Carryforwards for Pass-Through Entities. In the case of any JSF Property Credit allowed to a pass-through entity, the determination of the applicable carryover period for any JSF Property Credit required to be carried forward shall be made at the pass-through entity level. 
(c) Carryforwards Permitted After Sunset. For taxable years commencing on or after January 1, 2006, any unused JSF Property Credit may be carried forward, as provided above, until the unused JSF Property Credit is exhausted. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.37, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.37-10. Recordkeeping Requirements.
Note     •     History

Recordkeeping Requirements -- (See Regulation 17053.37-0 for Table of Contents.) 
(a) In General. For purposes of Regulations 17053.37-1 through 17053.37-11, inclusive, a qualified taxpayer shall be required to maintain books and records that are adequate to substantiate its entitlement to any claimed JSF Property Credit. These books and records should be retained for as long as the statute of limitations on assessment for the taxable year for which the JSF Property Credit was allowed remains open, and, in the case of any JSF Property Credit that is being carried forward, for the additional number of years that the actual carryforward of such JSF Property Credit occurs. 
(b) Books and Records. The books and records maintained by the qualified taxpayer should be sufficient to clearly establish all necessary facts which affect the allowance and amount of the JSF Property Credit. For this purpose, “adequate” recordkeeping depends upon the sufficiency of the information contained in the documentation. In many cases, the books and records normally maintained for California income or franchise tax purposes will be adequate substantiation for the JSF Property Credit. 
EXAMPLE 1: X, a qualified taxpayer, claims a JSF Property Credit for the purchase of 100 computers to be used in X's manufacturing facility in West Los Angeles. Assume the computers were purchased from a mail order retailer located in South Dakota. If X has only retained the original invoice and a cash disbursements journal, neither of which reflect that California sales or use tax was paid by X, then the invoice would not be sufficient to establish that California sales or use tax was paid on the computers. However, if X has retained a copy of a timely filed California use tax return that clearly demonstrates that California use tax was paid by X with respect to the computers, then X would be treated as having paid or incurred qualified costs. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that X intends to use 20 of the computers for general administrative functions such as payroll and marketing. In addition to the records necessary to establish that California sales or use tax was paid, X should also retain a copy of the purchase contract containing a detailed list of the computers by model number so that X can establish which of the computers are being used in qualified activities and which are not being used in qualified activities. 
(c) Affidavit Regarding Sales and Use Tax. For purposes of this regulation only, in the case of any lump sum or turn key contract, the requirement that California sales or use tax be paid may be established by reference to bids, contracts or affidavits from the contractor. For purposes of determining whether California sales or use tax has been paid, directly or indirectly by the contractor, when it is not a separately stated contract amount, a qualified taxpayer shall be entitled to rely on a written representation to that effect from the contractor, and California sales or use tax shall be deemed to have been paid in the absence of affirmative knowledge on the part of the qualified taxpayer that California sales or use tax was not paid. 
(d) Written Statement by Lessor to Lessee. In the case of any leasing transaction described in subsection (b) of Regulation 17053.37-6 (relating to operating leases), the lessor shall provide a statement to the lessee specifying the amount of the lessor's original cost of the qualified property upon which the lessee may claim the JSF Property Credit and the amount of that cost upon which California sales or use tax was paid. This statement must be provided to the lessee within 45 days after the close of the lessee's taxable year for which the JSF Property Credit is allowable to the lessee. For purposes of providing this statement only, if a lessor is legally obligated to remit California sales or use tax with respect to its acquisition of qualified property, but has not yet remitted such amounts solely due to timing differences between the lessor's California sales and use tax return filing period and the lessee's taxable year, then the lessor may treat the amounts upon which the California sales or use tax liability arises as “qualified costs to the lessor.” This written statement should not be filed with any return of either the lessor or lessee, but shall instead be retained by the lessee and made available to the Franchise Tax Board upon request. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.37, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.37-11. Miscellaneous Provisions.
Note     •     History

Miscellaneous Provisions -- (See Regulation 17053.37-0 for Table of Contents.) 
(a) Effective Dates of the JSF Property Credit. The JSF Property Credit shall cease to be effective on December 1, 2006; however, any unused credit may be carried forward, as provided in Revenue and Taxation Code section 17053.37, subsection (g), and Regulation 17053.37-9. 
(b) Manufacturers' Investment Credit (MIC). Under Revenue and Taxation Code section 17053.37, in any case where a credit would be allowed for qualified property under both that provision and the Manufacturers' Investment Credit (MIC) provided in Revenue and Taxation Code section 17053.49, a qualified taxpayer may claim either the MIC credit or the JSF Property Credit. Thus, a qualified taxpayer may not claim both the JSF Property Credit and the MIC for the costs of the same qualified property. 
(c) Enterprise Zone Sales or Use Tax Credit. Under Revenue and Taxation Code sections 17053.37 and 17053.70, a qualified taxpayer that also operates in an Enterprise Zone may claim both the JSF Property Credit and the Enterprise Zone sales or use tax credit on the same item of qualified property to the extent that all of the requirements of each of those sections are satisfied. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.37, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§17053.49-0. Table of Contents.
Note     •     History

Regulation Sections 17053.49-1 Through 17053.49-11

§ 17053.49-1. The Manufacturers' Investment Credit (MIC)
(a) In General
(b) MIC for Qualified Costs Paid or Incurred in 1994 Must Be Claimed on Qualified Taxpayer's Return for First Taxable Year Beginning on or After January 1, 1995
(c) Cross References
(d) General References

§ 17053.49-2. Definitions
(a) Biopharmaceutical Activities
(b) Capitalized Labor
(c) Fabricating
(d) Gross Receipts
(e) Manufacturing
(f) Net Assets
(g) Other Biotechnology Activities
(h) Packaging
(i) Placed in Service
(j) Pollution Control
(k) Primarily
(l) Process
(m) Processing
(n) Qualified Activity
(o) Recycling
(p) Refining
(q) Research and Development
(r) SIC Codes
(s) SIC Manual
(t) Small Business
(u) Total MIC

§ 17053.49-3. Qualified Taxpayer
(a) In General
(b) Business Activities Treated as an Establishment
(1) Establishment
A. Activities Conducted at Different Physical Locations
B. Activities Conducted at a Single Physical Location
(2) Auxiliary Establishments
A. Auxiliary Activities Conducted at a Different Physical Location than the Supported Establishment
B. Auxiliary Activities Conducted at the Same Physical Location as the Supported Establishment
(3) Operating Establishments
(4) Determining Whether Employment is Significant
(5) Activities Properly Assigned a SIC Code in an Non-Qualified Activity

§ 17053.49-4. Qualified Costs
(a) In General
(b) California Sales and Use Payment Requirement
(c) Capitalization Requirement
(d) Capitalized Labor Costs
(e) Qualified Costs Paid or Incurred Pursuant to Binding Contracts
(1) Allocation of Costs Actually Paid Prior to January 1, 1994
(2) Binding Contracts
(3) Successor or Replacement Contracts
(4) Option Contracts
(5) Conditional Contracts

§ 17053.49-5. Qualified Property
(a) In General
(b) General Requirements for Qualified Property
(1) Tangible Personal Property
(2) Section 1245(a) Property
(3) Used in an Activity Described in Division D of the SIC Manual
(4) Primarily Used in a Qualified Activity
(c) Special Purpose Buildings and Foundations
(1) Defined
(2) Exclusive Use for a Qualified Purpose
(3) Property Which is not a Special Purpose Building and Foundation
(4) Research Facilities
(d) Specifically Excluded Property
(1) Furniture
(2) Facilities Used for Warehousing Purposes
(3) Inventory
(4) Equipment Used in the Extraction Process
(5) Equipment Used to Store Finished Products
(6) Tangible Personal Property Used in Administration, General Management, or Marketing
(7) Property for Which the California Low-Emission Vehicle Credit is Claimed
(e) Movement of Used Property Into This State
(f) Property Used to Refine Reformulated or Oxygenated Gasoline

§ 17053.49-6. Leasing
(a) In General
(1) Lessor Not Entitled to MIC
2) Binding Contract Rules Applicable to Leases
(3) Special Rule Applicable to All Leasing Transactions -- “Placed in Service”
(b) Operating Leases
(1) In General
(2) Applicable Requirements
A. Lessee Must Be a Qualified Taxpayer
B. Use of Property in a Qualified Activity
C. Sales or Use Tax Payment Requirement
D. Qualified Costs
E. Chargeable to Capital Account
(3) Amount of MIC Lessee May Claim
A. Qualified Cost to Lessor
B. Exception For Capitalized Labor
(4) Special Rules for Operating Leases
A. Transitional Election
B. Limitation on Qualified Costs
C. Reduction in Qualified Cost to Lessor
D. Qualified Cost to Successor Lessor
E. Acquisition by Lessee of Leased Property
(5) Sale-Leaseback Transactions
A. General Rule
B. Acquisition Sale and Leaseback
(6) Lessor Reporting Requirement
(c) Finance Leases
(1) In General
(2) Applicable Requirements
A. Lessee Must Be a Qualified Taxpayer
B. Use of Property in a Qualified Activity
C. Sales or Use Tax Payment Requirement
D. Qualified Costs
E. Chargeable to Capital Account
(3) Amount of MIC Lessee May Claim

§ 17053.49-7. Reserved

§ 17053.49-8. Recapture Rules
(a) In General
(b) Disposition
(c) Disposition of Qualified Property During the Taxable Year Placed in Service
(d) Disposition of Qualified Property During a Taxable Year Subsequent to the Taxable Year Placed In Service
(e) Adjust of Carryforwards when Disposition Occurs
(f) Recapture of MIC Allowed to Pass-Through Entities
(1) Partnerships and Partners
(2) S Corporations and Shareholders
A. Corporate Level Recapture
B. Pass-through of MIC Recapture to Shareholders
(g) Recapture of MIC Allowed in 1994 or 1995 But Deferred Until Qualified Taxpayer's First Taxable Year Beginning on or after January 1, 1995

§ 17053.49-9 MIC. Carryforwards
(a) In General
(b) Small Business Determination Made as of the Last Day of the Taxable Year for Which the MIC is Allowed
(c) Special Rule for MIC Allowed in 1994 or 1995 But Deferred Until Qualified Taxpayer's First Taxable Year Beginning on or after January 1, 1995
(d) Small Business
(e) Carryforwards for Pass-Through Entities
(f) Carryforwards Permitted After Sunset

§ 17053.49-10. Recordkeeping Requirements
(a) In General
(b) Books and Records
(c) Affidavit Regarding Sales and Use Tax
(d) Written Statement by Lessor to Lessee

§ 17053.49-11. Miscellaneous Provisions
(a) Operative Dates of the MIC
(b) Los Angeles Revitalization Zone (LARZ) Credits
(c) Election to Claim Sales and Use Tax Refund in lieu of MIC under Revenue and Taxation Code Section 6902.2
(d) Sales and Use Tax Exemption under Revenue and Taxation Code Section 6377
(e) Special Rule Applicable for Fiscal Year Taxpayers
NOTE

Authority Cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.49, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).
2. Change without regulatory effect amending table of contents for section 17053.49-2 filed 8-14-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 33).
§17053.49-1. The Manufacturers' Investment Credit.
Note     •     History

(See Regulation Section 17053.49-0 for Table of Contents.)
(a) In General. The Manufacturers' Investment Credit (MIC) is allowed to any qualified taxpayer in an amount equal to six percent (6%) of any qualified costs paid or incurred on or after January 1, 1994, for qualified property that is placed in service in this state. A qualified taxpayer who leases qualified property for use in a qualified activity of the qualified taxpayer may also claim the MIC. Qualified property may be either new or used and must be placed in service in this state and used by a qualified taxpayer in a qualified activity for more than one year to avoid recapture of the MIC. The basis of any qualified property for which the MIC is claimed is not required to be reduced by the amount of any MIC claimed.
(b) MIC for Qualified Costs Paid or Incurred in 1994 Must Be Claimed on Qualified Taxpayer's Return for First Taxable Year Beginning on or After January 1, 1995. In the case of any qualified costs paid or incurred on or after January 1, 1994, and prior to the first taxable year of the qualified taxpayer beginning on or after January 1, 1995, the MIC shall be treated as having been allowed as of the date the qualified property is placed in service in this state but shall not be claimed by the qualified taxpayer until the qualified taxpayer files its California tax return for its first taxable year beginning on or after January 1, 1995. No MIC shall be claimed on any return filed for any taxable year commencing prior to the qualified taxpayer's first taxable year beginning on or after January 1, 1995. Fiscal year taxpayers who paid or incurred qualified costs on or after January 1, 1994, and during the qualified taxpayer's taxable year beginning in 1993, shall treat any such taxable year 1993 qualified costs as 1994 qualified costs to be claimed on the qualified taxpayer's 1995 taxable year return.
(c) Cross References. Regulation 17053.49-2 contains definitions applicable to Regulations 17053.49-1 through 17053.49-11, inclusive. Regulation 17053.49-3 contains rules relating to qualified taxpayers, Regulation 17053.49-4 contains rules relating to qualified costs, Regulation 17053.49-5 contains rules relating to qualified property, Regulation 17053.49-6 contains rules applicable to leases of qualified property by qualified taxpayers, Regulation 17053.49-7 is reserved, Regulation 17053.49-8 contains recapture rules, Regulation 17053.49-9 contains rules relating to carryforwards, Regulation 17053.49-10 contains general recordkeeping requirements, and Regulation 17053.49-11 contains other miscellaneous provisions. For rules relating to the MIC allowed to taxpayers under the Bank and Corporation Tax Law, see Revenue and Taxation Code Section 23649 and the regulations thereunder.
(d) General References. For purposes of Regulations 17053.49-1 through 17053.49-11, inclusive, the following general references shall apply:
(1) All citations to the Revenue and Taxation Code are to the California Revenue and Taxation Code.
(2) All citations to the Internal Revenue Code are to the Internal Revenue Code of 1986.
(3) The credits provided for in Revenue and Taxation Code Sections 17053.49 and 23649 shall be collectively referred to as the “Manufacturers' Investment Credit” or the “MIC.”
(4) Any reference to a taxpayer's taxable year shall mean the taxable year as defined in Revenue and Taxation Code Section 17010.
(5) Any reference to sales or use tax shall mean California sales or use tax imposed under Part 1 (commencing with Section 6001) of Division 2 of the Revenue and Taxation Code. Any discussion of California sales and use tax law in Regulations 17053.49-1 through 17053.49-11, inclusive, is based upon such law as in effect on the date these regulations became effective, and is generally intended to restate the requirements set forth in Revenue and Taxation Code Section 17053.49 and to be illustrative of, but have no effect on, the California sales and use tax law and the regulations thereunder. All examples which contain references to an amount of California sales or use tax shall be at an assumed hypothetical sales or use tax rate of eight percent (8%).
(6) Any reference to “Division D of the SIC Manual” shall mean that portion of the SIC Manual which includes Codes 2011 through 3999, inclusive.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.49, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).
2. Change without regulatory effect amending subsection (d)(6) filed 8-14-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 33).
§17053.49-2. Definitions.
Note     •     History

(See Regulation Section 17053.49-0 for Table of Contents.)
For purposes of Regulations 17053.49-1 through 17053.49-11, inclusive, the following definitions shall apply:
(a) Biopharmaceutical Activities. The term “biopharmaceutical activities” shall mean those activities, including research, development, production, or provision of biotechnology, which use organisms or materials derived from organisms, and their cellular, subcellular or molecular components, in order to provide pharmaceutical products or processes for human or animal therapeutics, diagnostics, medical, pharmaceutical, nutritional, or other health-related purposes. Biopharmaceutical activities use recombinant DNA technology and living organisms to make commercial products, as opposed to pharmaceutical activities which make use of chemical compounds to produce commercial products.
(b) Capitalized Labor. The term “capitalized labor” shall mean all direct costs of labor that can be identified or associated with and are properly allocable to the construction, modification, or installation of specific items of qualified property. For this purpose, labor encompasses full-time and part-time employees, as well as contract employees and independent contractors.
(1) Direct labor costs shall include all elements of compensation, such as basic compensation, overtime pay, vacation pay, holiday pay, sick leave pay (other than payments pursuant to a wage continuation plan under Internal Revenue Code Section 105(d) as it existed prior to its repeal in 1983), shift differential, payroll taxes, and payments to a supplemental unemployment benefit plan, but shall not include any indirect labor costs.
(2) Indirect labor costs are costs that cannot be identified or associated with the construction, modification, or installation of specific items of qualified property. Indirect labor costs include, but are not limited to, training costs, officers' compensation, pension and other related costs, and employee benefit expenses (including payments pursuant to a wage continuation plan under Internal Revenue Code Section 105(d) as it existed prior to its repeal in 1983).
(3) In determining whether direct costs of labor are properly allocable to the construction, modification, or installation of a specific item of qualified property, the qualified taxpayer shall be required to use the same method of allocation that is required to be used by the qualified taxpayer for California income tax purposes under the uniform capitalization allocation rules specified in Treasury Regulation Section 1.263A-1 (as in effect on the date Regulation 17053.49-2 is effective).
(c) Fabricating. The term “fabricating” shall mean the process of making, building, creating, producing, or assembling components or property to work or be useable in a new or different manner.
(d) Gross Receipts. The term “gross receipts” shall mean gross income, as defined in Revenue and Taxation Code Section 24271, plus cost of goods sold.
(e) Manufacturing. The term “manufacturing” shall mean the process of converting or conditioning property by changing the form, composition, quality, or character of the property for ultimate sale at retail or for use in the manufacturing of a product to be ultimately sold at retail, and includes any improvements to tangible personal property that result in a greater service life or greater functionality than that of the original property. Tangible personal property shall be treated as having a greater service life if such property can be used for a longer period than such property could have been used prior to the conversion or conditioning of such property. Tangible personal property shall be treated as having greater functionality if it has been improved in such a manner that it can be used to perform new or different functions.
(f) Net Assets. The term “net assets” shall mean total assets less total liabilities, as determined for California income tax purposes.
(g) Other Biotechnology Activities. The term “other biotechnology activities” shall mean activities consisting of the application of recombinant DNA technology to produce commercial products, as well as activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(h) Packaging. The term “packaging” shall mean to wrap, seal, box, or put together as a unit, but shall include only that portion of any wrapping, sealing, boxing, or putting together as a unit that is necessary to prepare the goods for delivery to and placement in the qualified taxpayer's finished goods inventory, or to prepare the goods so that they are suitable for delivery to and placement in finished goods inventory. Additional wrapping, sealing, boxing, or putting together as a unit, such as any wrapping, sealing, boxing, or putting together as a unit that is necessary to consolidate the finished goods prior to shipping or to protect them during transportation, shall not be treated as packaging.
(i) Placed in Service. The term “placed in service” shall mean the earliest taxable year in which either of the following occurs:
(1) under the depreciation method used by the qualified taxpayer for California tax purposes, the period for depreciation with respect to the qualified property commences; or
(2) the qualified property is placed in a condition or state of readiness and availability for a specifically assigned function.
If qualified property meets the conditions of subsection (i)(2) of this regulation in any taxable year, it shall be considered placed in service in such year, notwithstanding that the period for depreciation with respect to the qualified property begins in a succeeding taxable year. For example, if under the qualified taxpayer's California depreciation practice such qualified property is accounted for in a multiple asset account and depreciation is computed under an averaging convention, or depreciation is computed under the completed contract method, the unit of production method, or the retirement method, then the qualified property is treated as in a condition or state of readiness and availability for a specifically assigned function. Specific examples where qualified property shall be considered in a condition or state of readiness and available for a specifically assigned function include (A) parts that are acquired and set aside during the taxable year for use as replacements for a particular item or items of qualified property in order to avoid operational time loss, (B) operational items of qualified property that are acquired for a specifically assigned function during the taxable year where it is not practicable to use such item of qualified property for its specifically assigned function in the qualified taxpayer's business until the following taxable year, and (c) qualified property acquired for a specifically assigned function that is operational but is still undergoing testing to eliminate any defects. Materials and parts acquired to be used in the construction of an item of qualified property shall not be considered in a condition or state of readiness and availability for a specifically assigned function.
(j) Pollution Control. The term “pollution control” shall mean any activity that results in the abatement, reduction, or control of water, land, or atmospheric pollution or contamination by removing, altering, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat, but only to the extent that such activity meets or exceeds standards established by this state or by any local or regional governmental agency within this state.
(k) Primarily. The term “primarily” shall mean that property is used 50 percent or more of the time in any qualified activity. For purposes of the preceding sentence, the term “time” shall mean the total number of hours that the property is actually in use during the 12-month period immediately following the date the property is placed in service in this state. For example, if an item of property is used by a qualified taxpayer for a total of 100 hours for all uses during the 12-month period immediately following the date the property is placed in service in this state, then “primarily” used in a qualified activity means at least 50 hours of the property's use is in a qualified activity.
(l) Process. The term “process” shall mean the period beginning at the point at which any raw materials are received by the qualified taxpayer and introduced into the manufacturing, processing, refining, fabricating, or recycling activity of the qualified taxpayer and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling activity of the qualified taxpayer has altered tangible personal property to its completed form, including packaging, if required. Raw materials will be considered to have been introduced into the process when the raw materials are stored on the same premises where the qualified taxpayer's manufacturing, processing, refining, fabricating, or recycling activity is conducted. Raw materials that are stored on premises other than where the qualified taxpayer's manufacturing, processing, refining, fabricating, or recycling activity is conducted, shall not be considered to have been introduced into the manufacturing, processing, refining, fabricating, or recycling process.
(m) Processing. The term “processing” shall mean the process of physically applying the materials and labor necessary to modify or change the characteristics of property.
(n) Qualified Activity. The term “qualified activity” shall mean an activity engaged in by a qualified taxpayer that involves manufacturing, processing, refining, fabricating, recycling, research and development, or pollution control, and shall also include the maintenance, repairing, measuring, or testing of any qualified property.
(o) Recycling. The term “recycling” shall mean the process of modifying, changing, or altering the physical properties of manufacturing, processing, refining, fabricating, secondary or postconsumer waste which results in the reduction, avoidance or elimination of the generation of waste, but shall not include transportation, baling, shredding, grinding, compressing, or any other activity that does not otherwise change the physical properties of any such waste. Recycling includes, but is not limited to, each of the following:
(1) Any “input change,” which shall mean any change in the raw materials or feedstocks used in any process for the purpose of reducing, avoiding, or eliminating the generation of hazardous waste.
(2) Any “operational improvement,” which shall mean improved site management for the purpose of reducing, avoiding, or eliminating the generation of hazardous waste.
(3) Any “production process change,” which shall mean any change in the process, method or technique which is used to produce a product or a desired result, including the return of materials or their components for reuse within any existing process or operation, for the purpose of reducing, avoiding, or eliminating the generation of hazardous waste.
(4) Any “product reformulation,” which shall mean changes in design, composition, or specifications of an end product, including product substitution, for the purpose of reducing, avoiding, or eliminating the generation of hazardous waste.
(p) Refining. The term “refining” shall mean the process of converting a natural resource to an intermediate or finished product, but shall not include any transportation, storage, conveyance or piping of the natural resources prior to commencement of the refining process, or any other activities which are not part of the process of converting the natural resource into the intermediate or finished product.
(q) Research and Development. The term “research and development” shall mean those activities that are described in Internal Revenue Code Section 174 or in any regulations thereunder. Research and development shall include activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product. For this purpose, uncertainty exists if the information available to the qualified taxpayer does not establish the capability or method for developing or improving the product or the appropriate design of the product.
(r) SIC Codes. The term “SIC” Codes” shall mean those codes listed in the SIC Manual.
(s) SIC Manual. The term “SIC Manual” shall mean the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition.
(t) Small Business. The term “small business” shall mean a qualified taxpayer or partnership that, as of the last day of the taxable year for which the MIC is allowed, satisfies any of the following requirements: (1) has gross receipts of less than fifty million dollars ($50,000,000), (2) has net assets of less than fifty million dollars ($50,000,000), (3) has a total MIC of less than one millions dollars ($1,000,000) or (4) for income years beginning on or after January 1, 1997, is engaged in biopharmaceutical activities or other biotechnology activities that are described in Codes 2833 to 2836, inclusive, of the SIC Manual, published by the United States Office of Management and Budget, 1987 edition, and as further amended, and has not received regulatory approval for any product from the United States Food and Drug Administration. The determination of whether a qualified taxpayer or partnership is a “small business” shall be made on a separate entity basis, and, in the case of any qualified taxpayer or partnership engaged in multiple lines of business or that has multiple establishments, shall be made by aggregating all of the qualified taxpayer's or partnership's business activities.
(u) Total MIC. The term “total MIC” shall mean the aggregate amount of MIC allowed to a qualified taxpayer for a taxable year (including any amounts allowed in the current taxable year but required to be carried forward), but shall not include any MIC carryforward amounts from prior years.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.49, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).
2. Change without regulatory effect repealing subsection (b), relettering subsections, adding new subsection (g), and amending subsections (l) and (t) filed 8-14-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 33).
§17053.49-3. Qualified Taxpayer.
Note     •     History

(See Regulation Section 17053.49-0 for Table of Contents.)
(a) In General. For purposes of Regulations 17053.49-1 through 17053.49-11, inclusive, a qualified taxpayer is any taxpayer or partnership that is engaged in an activity that is described in Division D of the SIC Manual. The determination of whether a taxpayer is engaged in an activity that is described in Division D of the SIC Manual shall be made under the rules and methods described in the SIC Manual, 1987 edition, herein incorporated by reference, and the rules in this regulation on the basis of all of the facts and circumstances. Thus, for example, a taxpayer is a qualified taxpayer where such taxpayer is engaged in multiple business activities, one or more of which constitutes an activity that is described in Division D of the SIC Manual. For purposes of the MIC, a SIC Code assignment to a given taxpayer's activity made by any federal, state (other than the Franchise Tax Board), regional, or local government agency shall not be controlling.
(b) Business Activities Treated as an Establishment. The determination of whether a taxpayer is engaged in an activity that is described in Division D of the SIC Manual shall be made by reference to the classification of business activity rules contained in the SIC Manual. If a taxpayer is engaged in one or more lines of business that is treated as an establishment under the SIC Manual, and that establishment is properly classified in Division D of the SIC Manual, then the taxpayer is a qualified taxpayer. In contrast, if a taxpayer is only engaged in business activities that are properly classified in any division or divisions of the SIC Manual other than Division D of the SIC Manual, then the taxpayer shall not be treated as a qualified taxpayer.
(1) Establishment. For purposes of this section, the term “establishment” shall mean an economic unit (as distinguished from subunits such as departments), generally at a single physical location, where business is conducted or where services or manufacturing or other industrial operations are performed. For example, a factory, mill, store, hotel, movie theater, mine, farm, ranch, bank, railroad depot, airline terminal, sales office, warehouse, or central administrative office would each be treated as an establishment. There are two types of establishments under the SIC Manual, auxiliary establishments and operating establishments.
A. Activities Conducted at Different Physical Locations. Business activities conducted at different physical locations shall generally be treated as separate establishments. Thus, for example, if a taxpayer manufactures clay tiles in Los Angeles and operates a retail tile store in Tarzana, each of these activities would be generally treated as a separate establishment.
B. Activities Conducted at A Single Physical Location. Where distinct and separate business activities are performed at a single physical location (such as construction activities operated out of the same physical location as a lumber yard), each activity shall be treated as a separate establishment where all of the following are satisfied:
1. No single industry description in the SIC Manual includes such combined activities;
2. Separate reports are prepared on the number of employees, their wages and salaries, sales or receipts, property and equipment, and other types of financial data, such as financial statements, job costing, and profit center accounting; and
3. Employment in each such economic activity is significant (as defined in subsection (b)(4)).
Where all of the requirements in subsection (b) (1)B. of this regulation are not satisfied, then all of the activities conducted at that location shall be assigned a single SIC Code based upon the principal activity being conducted at that location. For example, where there are five distinct and separate business activities being conducted at a single physical location and none of those activities meet all of the requirements of subsection (b)(1)B. of this regulation, that location would properly be assigned a single SIC Code representing the principal business activity.
(2) Auxiliary Establishments. Auxiliary establishments are establishments that are principally engaged in performing management or support services for other establishments of the same taxpayer. Auxiliary establishments shall generally be assigned the same SIC Code as the principal activity of the operating establishment that they serve. However, establishments principally engaged in producing goods or providing services for other establishments of the same taxpayer, when such goods or services are covered by industries in Divisions A through D, inclusive, of the SIC Manual, shall be classified as operating establishments in such divisions of the SIC Manual on the basis of their principal activity. Examples of auxiliary establishments include, but are not limited to, the provision of management and other general administrative functions, such as accounting, data processing, legal services, research and development, testing, and warehousing.
A. Auxiliary Activities Conducted at a Different Physical Location than the Supported Establishment. Auxiliary activities conducted at a different physical location from the supported establishment or establishments shall be treated as a separate establishment, and shall be classified as either an auxiliary establishment or an operating establishment under the rules of this regulation. Thus, for example, if a taxpayer manufactures plastic foam products in San Jose and has a finished goods warehouse in Fremont from which it fills orders and ships the finished goods to its customers, each of these activities will be treated as a separate establishment.
EXAMPLE 1: C manufactures computers, an activity properly classified under SIC Code 3571, at its manufacturing plant in San Diego. C also conducts research and development activities at C's facility in Rancho Cordova for the purpose of enhancing the performance of existing C products and to develop new products to be manufactured by C. Assume that C's Rancho Cordova research facility is properly treated as a separate establishment under the rules in this regulation and principally performs research and development activities in support of C's manufacturing facility in San Diego. Under these facts, C's research facility in Rancho Cordova would be properly classified as an “auxiliary establishment” under the rules in this regulation. Moreover, since C's research facility is properly classified as an auxiliary establishment, it would be assigned the same SIC Code (SIC Code 3571) as C's manufacturing establishment in San Diego.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that C's manufacturing plant is located in Austin, Texas. Under these facts, the result is the same as in EXAMPLE 1 because the physical location of the auxiliary establishment is irrelevant to the determination of whether the activity being classified will be treated as an auxiliary establishment.
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that C's research facility principally performs commercial research and development performed on a contract basis for parties other than C. Under these facts, while C's research facility would still be treated as an “establishment” under the rules in this regulation, it would not be treated as an “auxiliary establishment” since C's research facility in Rancho Cordova does not “primarily” support C's manufacturing activity. Instead, C's research facility would be treated as a separate operating establishment, and would be assigned a separate SIC Code based on its primary activity (SIC Code 8731, Commercial Research and Development).
B. Auxiliary Activities Conducted at the Same Physical Location as the Supported Establishment. Where auxiliary activities are performed at the same physical location where the supported establishment or establishments are located, the auxiliary activities shall be treated as a separate establishment, and shall be classified as either an auxiliary establishment or an operating establishment under the rules of this regulation, when each of the following is satisfied:
1. Separate reports are prepared on the number of employees, their wages and salaries, sales or receipts, property and equipment, and other types of financial data, such as financial statements, job costing, and profit center accounting;
2. The auxiliary unit serves other establishments of the same taxpayer; and
3. Employment is significant (as defined in subsection (b) (4)) for both the auxiliary and operating activity.
(3) Operating Establishments. Any establishment that is not treated as an auxiliary establishment shall be treated as an operating establishment and shall be assigned a SIC Code on the basis of its principal activity, which shall be determined by reference to its principal product or group of products produced or distributed, or services rendered. In the case of activities classified under Division D of the SIC Manual, the principal activity of the establishment shall be determined by reference to the value of production of each product being produced. For purposes of this section, the product or service contributing to the largest proportion of the cost of goods manufactured, excluding overhead, shall be treated as the principal activity of the establishment. However, in cases where multiple manufacturing and non-manufacturing activities are conducted at an establishment and the taxpayer can demonstrate that value of production does not adequately represent the relative economic importance of each of the varied activities being conducted at the establishment, the taxpayer may instead use employment or payroll information in the same manner to determine the principal activity of the establishment.
EXAMPLE 1: D is solely engaged in the following activities, both of which are conducted at the same physical location -- the manufacturing of wood kitchen cabinets and the retail sale of packaged dairy products. D employes 1 individual to manufacture the wood cabinets and 10 individuals to run the retail store. Assume the retail sale of packaged dairy products is the principal activity being conducted at this location. D does not maintain separate books and records for each of the activities, but instead maintains a single set of books and records. Since D does not maintain separate books and records for the manufacturing operation under subsection (b)(1)(B)2., and since the employment in this activity is less than 25% of the total employment and thus not significant under subsection (b)(1)(B)3., the manufacturing activity does not constitute a separate establishment from the retail operation. Moreover, under the rules in this section, D's principal activity at the establishment would be classified under SIC Code 5451 (Dairy Products Stores). Therefore, D is not engaged in an activity described in Division D of the SIC Manual and is thus not a qualified taxpayer.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that D employs 4 individuals in its wood cabinet manufacturing activity, but still does not maintain separate books and records for the wood cabinet manufacturing activity. Because the number of individuals employed in both the manufacturing operation and the retail operation is more than 25 percent of the total number of individuals D employs, employment in each of the activities would be considered significant. However, because D does not maintain separate books and records for each activity, D is treated as having only one establishment. Since the retail operation (SIC Code 5451 - Dairy Products Stores) is the principal activity of D's single establishment, D is not engaged in an activity described in Division D of the SIC Manual, and is thus not a qualified taxpayer.
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that D maintains separate books and records for the manufacturing activity. Since D is maintaining separate books and records, and the number of individuals employed in both the manufacturing operation and the retail operation is more than 25 percent of the total number of individuals D employs and thus treated as significant, both the manufacturing operation and the retail operation constitute separate establishments. As a result, D is engaged in an activity described in Division D of the SIC Manual, the manufacturing of wood kitchen cabinets (SIC Code 2434), and is a qualified taxpayer.
(4) Determining Whether Employment is Significant. For purposes of this section, the determination of whether employment is significant shall be based upon all of the facts and circumstances. However, employment in an economic activity shall be deemed “significant” whenever more than 25 percent of the taxpayer's total number of employees at a single physical location, or more than 25 percent of the taxpayer's total dollar value of payroll at a single physical location, is attributable to the business activity being tested for separate establishment status.
(5) Activities Properly Assigned a SIC Code in a Non-Qualified Activity. In the case of certain manufacturing-type activities that are conducted at establishments principally engaged in activities that are properly classified under divisions other than Division D of the SIC Manual, such activities shall not be treated as an activity described in Division D of the SIC Manual. Examples of these types of activities include, but are not limited to, the following:
A. processing on farms if the raw materials are grown on the farm and the manufacturing activities are on a small scale without the extensive use of paid labor;
B. threshing;
C. cotton ginning;
D. the dressing and beneficiating of ores;
E. the breaking, washing, and grading of coal;
F. the crushing and breaking of stone;
G. the crushing, grinding, or other preparation of sand, gravel, and nonmetallic chemical and fertilizer minerals other than barite;
H. fabricating operations performed at the site of construction by contractors;
I. cutting and selling purchased carcasses;
J. preparing feed at grain elevators and farm supply stores;
K. stemming leaf tobacco at wholesale establishments;
L. production of wiping rags;
M. the breaking of bulk and redistribution in smaller lots, including packaging, repackaging, or bottling products, such as liquors or chemicals;
N. establishments principally engaged in selling, to the general public, products produced on the same premises from which they are sold, such as bakeries, candy stores, ice cream parlors, and custom tailors;
O. tire retreading and rebuilding;
P. sign painting and lettering shops;
Q. computer software production; and
R. the production of motion picture films (including video tapes).
EXAMPLE 1: B is engaged in the retail sale of bakery products and the manufacturing of fresh bread products primarily for direct sale by B on B's premises to retail customers. Both activities are conducted at a single physical location in Auburn. While B's manufacturing activity appears to be “described in” SIC Code 2051 (Bread and Other Bakery Products), if B's principal activity is the retail sale of these bakery products, then B will not be treated as engaged in an activity described in Division D of the SIC Manual since B is properly treated as being principally engaged in the retail sale of bakery products under SIC Code 5461 (Retail Bakeries). As a result, assuming that the baking operation is not properly treated as a separate establishment under the rules of this section, the baking operation would be properly classified as being part of the retail bakery operation.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of selling most of its bakery products through its retail store, B sells 80 percent of its bakery products to the wholesale bakery trade. Assuming that B's manufacturing operation would otherwise be properly treated as a separate establishment from its retail store, then B would be treated as engaged in an activity that is properly classified under SIC Code 2051 (Bread and Other Bakery Products).
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.49, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).
§17053.49-4. Qualified Costs.
Note     •     History

(See Regulation Section 17053.49-0 for Table of Contents.)
(a) In General. For purposes of Regulations 17053.49-1 through 17053.49-11, inclusive, the term “qualified costs” includes any costs paid or incurred by a qualified taxpayer for the construction, reconstruction, or acquisition of qualified property on or after January 1, 1994, provided that California sales or use tax has been paid, directly or indirectly, on such costs (except for costs paid or incurred for capitalized labor), and such costs are properly chargeable to the qualified taxpayer's capital account. However, the term “qualified costs” does not include the amount of any California sales or use tax paid, directly or indirectly, by the qualified taxpayer.
(b) California Sales and Use Tax Payment Requirement. In order for costs to be treated as qualified costs, California sales or use tax must be paid, directly or indirectly as a separately stated contract amount or as determined from the books and records of the qualified taxpayer, with respect to the qualified property. For purposes of Regulations 17053.49-1 through 17053.49-11, inclusive, the requirement that California sales or use tax be paid prior to claiming the MIC shall be deemed satisfied as of the date the California sales or use tax is due and payable under Part 1 (commencing with Section 6001) of Division 2 of the Revenue and Taxation Code. In the case of any costs paid or incurred by the qualified taxpayer upon which California Sales or use tax has not been paid, except in the case of amounts properly treated as capitalized labor directly allocable to the construction, modification, or installation of qualified property, such amounts shall not be treated as qualified costs. In the case of any leasing transaction, Regulation 17053.49-6 contains special rules applicable to the California sales and use tax payment requirement.
EXAMPLE 1: D, a qualified taxpayer, purchases three hydraulic turbines from B, a California manufacturer of hydraulic turbines, for $500 to be used in D's manufacturing facility in Escondido. Under the terms of the purchase contract, which is dated February 15, 1994, B agrees to install the turbines at D's manufacturing facility by affixing them to the facility's concrete floor for an additional $100. B charges and collects from D $40 in California sales tax under the contract ($500 x 8%), with the $100 in installation charges being separately stated in the purchase contract and for purposes of this example are assumed to be exempt from California sales and use tax. Under these facts, D has $600 in qualified costs ($500 in costs upon which California sales tax was paid and $100 in capitalized labor, but excluding the $40 in sales tax).
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of D purchasing the turbines from B, D enters into a “fixed-price, turn-key” contract with C, the terms of which require D to pay C a total of $640 upon delivery and installation of the turbines in D's manufacturing facility. C, instead of delivering a resale certificate to B, pays $40 ($500 x 8%) in California sales tax to B on its purchase of the turbines. Under C's contract with D, the $40 California sales tax paid by C is a separately stated item. Under these facts, since the sales tax was separately stated in D's contract with C and paid by C on behalf of D, D is treated as having satisfied the California sales tax payment requirement. However, since $40 of the total contract price represents the sales tax paid indirectly by D, the amount of D's qualified costs is $600 ($500 for the turbines plus $100 in capitalized labor, but excluding the $40 in sales tax).
EXAMPLE  3: Assume the same facts as in EXAMPLE 2, except that D's contract with C does not separately state the amount of California sales tax paid by C. However, D's books and records substantiate that C paid California sales tax on behalf of D and that the total contract price of $640 is broken down between $500 for the turbines, $40 in California sales tax, and $100 in installation charges. Under these facts, the result is the same as in EXAMPLE 2 since the amount of California sales tax treated as being paid indirectly by D can be determined from D's books and records.
(c) Capitalization Requirement. In order for costs to be treated as qualified costs, they must be amounts properly chargeable to the capital account of the qualified taxpayer. Amounts shall be treated as properly chargeable to capital account if under the qualified taxpayer's method of tax accounting they are properly includible in the qualified taxpayer's basis for computing depreciation on the qualified property under Revenue and Taxation Code Section 17250. However, any amounts not required to be included in the qualified taxpayer's basis for depreciation purposes shall not be treated as qualified costs. For example, Internal Revenue Code Section 179 provides that amounts for which an election is made under that section to currently deduct such amounts are “not chargeable to capital account.” Thus, any amounts for which a qualified taxpayer makes an election to currently expense for California income tax purposes under either Internal Revenue Code Sections 179 or 179A, or amounts for which a qualified taxpayer makes an election for California purposes to currently expense under Internal Revenue Code Section 179-type provisions such as Revenue and Taxation Code Sections 17252.5 (Enterprise Zone businesses), 24356.3 (Program Area businesses), 17266 (Los Angeles Revitalization Zone businesses), or 17268 (Local Agency Military Base Recovery Area businesses), are treated as amounts that are not properly chargeable to capital account. In addition, any costs paid or incurred for property with a useful life of less than one year which may properly be expensed under Internal Revenue Code Section 162 would be treated as amounts not properly chargeable to capital account. Although costs that are not properly chargeable to capital account are not treated as qualified costs, the portion of the cost of any item of qualified property that is properly chargeable to capital account (such as, for example, the amount in excess of what may be currently deducted under Section 179 of the Internal Revenue Code) may be a qualified cost under Revenue and Taxation Code Section 17053.49.
EXAMPLE 1: F, a qualified taxpayer, purchases 50 stainless steel racks for $900 from G for use in F's cheese production line in Santa Cruz. F pays $72 (900 x 8%) in California sales tax on the purchase. F makes an election for California income tax purposes to currently expense the entire cost of the stainless steel racks under Revenue and Taxation Code Section 17265 (Internal Revenue Code Section 179). Under these facts, the $900 paid by F for the stainless steel racks would not be treated as a qualified cost since the $900 is not properly chargeable to F's capital account under Revenue and Taxation Code Section 17265 (Internal Revenue Code Section 179).
EXAMPLE 2: H, a qualified taxpayer doing business in the Los Angeles Revitalization Zone, purchases a commercial baking oven for $25 from I, and pays $2 (8% of $25) in California sales tax on the purchase. H makes an election under Revenue and Taxation Code Section 17266 to expense the entire cost of the oven. Under these facts, the $25 paid by H would not be treated as a qualified cost since the $25 is not properly chargeable to H's capital account.
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that H is instead doing business in the Fresno enterprise zone. Under the provisions of Revenue and Taxation Code Section 17252.5, H elects to expense $10 of the cost of the oven. Under these facts, H may treat only $15 of the total $25 paid for the oven as a qualified cost since the $10 being expensed under Revenue and Taxation Code Section 17252.5 is not properly chargeable to H's capital account.
(d) Capitalized Labor Costs. For costs paid or incurred by the qualified taxpayer for capitalized labor, the requirement that California sales or use tax be paid in order for the costs to be treated as qualified costs shall not apply. The qualified taxpayer shall have the burden of establishing the amount of any cost paid or incurred for capitalized labor that is directly allocable to the construction, modification or installation of any item of qualified property. This burden may, for example, ordinarily be satisfied by either an invoice, supported by the books and records of the qualified taxpayer, that separately states the amount of directly allocable capitalized labor on qualified property acquired by purchase or, in the case of self-constructed qualified property, from books and records of the qualified taxpayer that establish the amount of capitalized labor that is directly allocable to the construction of the item of qualified property.
EXAMPLE 1: G, a qualified taxpayer, purchases a machine that is qualified property from X for $500. The price of the machine includes $50 in separately stated shipping charges. X collects California sales tax of $34 (8% of $450), from G, with the shipping charges assumed to be exempt from California sales and use tax. Upon receipt of the machine, G incurs an additional $50 in directly allocable capitalized labor costs to have G's employees install the machine in G's manufacturing facility in Riverside, and $25 in training costs to train G's personnel to properly operate the machine. Under these facts, only the cost of the machine upon which California sales tax was paid ($450), plus the directly allocable installation costs ($50), would be treated as qualified costs. The $50 paid for shipping charges is not a qualified cost since no California sales tax was paid on such amounts, nor are the shipping charges treated as directly allocable capitalized labor. The $25 incurred by G in training costs is not a qualified cost since training costs are indirect labor costs under subsection (c)(2) of Regulation 17053.49-2.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that the $50 in freight charges are not separately stated and X collects $40 (8% of $500) in California sales tax from G. Under these facts, the cost of the machine, including the freight charges, upon which California sales tax was paid ($500), plus the directly allocable installation costs ($50), would be treated as qualified costs.
EXAMPLE 3: H, a qualified taxpayer, contracts with I for $100 to have a machine that is qualified property modified to increase its per-unit output. Assume that the labor costs associated with the modification are exempt from California sales and use tax. Although H does not pay California sales or use tax on the modification work, H may include in its qualified costs the costs of modifying the machine since the $100 is properly treated as a capitalized labor cost that is directly allocable to the modification of qualified property.
EXAMPLE 4: J, a qualified taxpayer, purchases an extended warranty contract on qualified property. J's extended warranty contract provides that all unscheduled maintenance and repairs will be performed at no cost by the seller or its agent. Assume that the costs of the extended warranty contract are exempt from California sales and use tax. Under these facts, the extended warranty contract is not treated as a directly allocable capitalized labor cost since it is not for the construction, modification, or installation of qualified property. As a result, the costs paid for the extended warranty contract are not qualified costs.
EXAMPLE 5: K, a qualified taxpayer, purchases a machine that is qualified property and then uses its own employees to install and modify the machine, including necessary adjustments, alignments and “debugging,” so that the machine will properly run K's assembly line. Under these facts, assuming that K properly capitalizes for California tax purposes its direct labor costs for installing and modifying the machine, then the direct costs are treated as directly allocable capitalized labor costs and are thus qualified costs.
EXAMPLE 6: L, a qualified taxpayer, purchases a comprehensive insurance policy on an item of qualified property. L may not include the premiums for the insurance policy as qualified costs because the insurance policy covers risk of loss, and is not a directly allocable capitalized labor cost that is associated with the construction, modification or installation of qualified property.
(e) Qualified Costs Paid or Incurred Pursuant to Binding Contracts. For any qualified property constructed, reconstructed, or acquired by the qualified taxpayer (or any person related to the qualified taxpayer within the meaning of Internal Revenue Code Sections 267 or 707) pursuant to a binding contract in existence on or prior to January 1, 1994, costs paid pursuant to that contract shall be subject to allocation under the rules in this subsection.
(1) Allocation of Costs Actually Paid Prior to January 1, 1994. In any case where a qualified taxpayer has actually paid amounts (including, without limitation, contractual deposits and option payments) prior to January 1, 1994, under a binding contract, any such amounts shall not be treated as qualified costs. However, if under any binding contract a qualified taxpayer has paid amounts both before and after January 1, 1994, then the amounts actually paid after December 31, 1993, to the extent properly allocable to the construction, reconstruction, or acquisition of qualified property, shall be treated as qualified costs. In the case of any contract that was binding on January 1, 1994,  under the terms of which a qualified taxpayer will acquired both qualified property and non-qualified property, and the qualified taxpayer has actually paid amounts both before and after January 1, 1994, then the amounts paid prior to January 1, 1994 and the amounts paid after December 31, 1993, must be allocated between the qualified property and the non-qualified property in proportion to the actual amounts paid prior to January 1, 1994, and the total contract price.
EXAMPLE 1: On October 1, 1993, M, a qualified taxpayer, executes a contract to purchase five machines and ten computers that are qualified property for a total of $100 (plus applicable California sales tax). Under the terms of the contract, M is required to make a non-refundable $20 deposit upon execution of the contract and pay the remaining $80 upon delivery of the machines and computers. On May 1, 1994, the machines and computers are delivered and M pays the remaining $80 due under the contract. Under these facts, the $20 actually paid by M in 1993 will not be treated as a qualified cost, but the remaining $80 paid in 1994 will be treated as a qualified cost.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that the computers are not qualified property because M intends to use them for general administrative purposes. The computers represent $20 of the total $100 contract price. Under these facts, since M is purchasing both qualified property and non-qualified property under a binding contract, the $20 paid prior to January 1, 1994, and the $80 paid after December 31, 1993, must be allocated between the machines and the computers. Since the cost of the machines represent 80% of the total contract price ($80/$100), and $20 was actually paid prior to January 1, 1994, $16 (80% of $20) of the total $80 paid for the machines is treated as having been paid prior to January 1, 1994, and is thus not treated as a qualified cost. However, the remaining $64 ($80 - $16) paid for the machines is treated as a qualified cost.
(2) Binding Contracts. For purposes of Regulations 17053.49-1 through 17053.49-11, inclusive, a contract shall be treated as binding where the contract is enforceable under state law against the qualified taxpayer (or any related party within the meaning of Internal Revenue Code Sections 267 or 707) and the amount of potential damages (whether by an express liquidated damages provision or otherwise) for which the qualified taxpayer may be liable upon cancellation or breach of the contract would equal or exceed five percent (5%) of the total contract price. However, a contract to acquire a component part of a larger item of property shall only be treated as a binding contract to acquire such component part and shall not be treated as a binding contract to acquire the larger item of property under the general rule for binding contracts. For example, a written binding contract to acquire an engine to power a printing press would be a binding contract only for the engine, not for the entire printing press.
EXAMPLE 1: X, a qualified taxpayer, enters into a written contract with Y on August 15, 1993, under which X agrees to purchase 10 machines for $150 for delivery on December 1, 1994. Under the terms of the contract, X is required to make a non-refundable deposit of $10 upon execution of the contract. Under these facts, since X's potential damages upon cancellation or breach of the contract equal or exceed 5% of the total contract price ($10/$150, or 6.7%), X's contract with Y is treated as a binding contract in existence on or prior to January 1, 1994.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that Y is required to refund half of X's $10 deposit in the event X cancels the contract. Assume further that X's potential damages to Y upon breach of the contract are limited by a liquidated damages provision to the $5 of X's deposit that Y is not required to refund to X. Under these facts, X's contract is not treated as a binding contract in existence on or prior to January 1, 1994, since X's potential damages under the contract are less than 5% of the total contract price ($5/$150, or 3.3%).
(3) Successor or Replacement Contracts. Any contract entered into on or after January 1, 1994, that is a successor or replacement contract to a contract that was binding prior to January 1, 1994, shall be treated as a binding contract in existence prior to January 1, 1994, and shall be subject to the same rules described in this section applicable to binding contracts generally. However, if a successor or replacement contract is entered into on or after January 1, 1994, and the subject of the successor or replacement contract relates both to amounts to be paid or incurred for the construction, reconstruction, or acquisition of qualified property described in the original binding contract and to amounts to be paid or incurred for the construction, reconstruction, or acquisition of qualified property not described in the original binding contract, then the portion of those amounts described in the successor or replacement contract that were not described in the original binding contract shall not be treated as costs paid or incurred pursuant to a binding contract in existence prior to January 1, 1994.
EXAMPLE 1: On December 15, 1993, P, a qualified taxpayer, enters into a binding contract with Q to purchase three drill presses that are qualified property for a total contract price of $50. Under the terms of the contract, P makes a non-refundable $10 deposit to Q on December 20, 1993. On February 15, 1994, P and Q mutually agree to rescind the original contract and simultaneously execute a new contract under which P requests minor modifications to the specifications for the drill presses. Under the new contract, the total contract price is increased to $55 to compensate Q for Q's additional costs of modifying the specifications for the drill presses. Under these facts, the February 15, 1994, contract is treated as a replacement contract to the December 15, 1993, contract, and the $10 deposit made by P on December 20, 1993, is not treated as a qualified cost.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that upon rescission of the original contract Q refunds P's $10 deposit. Under the terms of the new contract P is legally obligated to make a non-refundable deposit of $15 to Q within 30 days of the execution of the contract. Under these facts, the new contract is still treated as a replacement contract. Despite Q's refund to P, $10 of the total $15 deposit made by P under the new contract is properly treated as having been actually paid prior to January 1, 1994, and will not be treated as a qualified cost.
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that under the new contract P agrees to purchase five drill presses instead of the three drill presses under the original contract. The total contract price for the new contract is increased to $85. Under these facts, the new contract is still treated as a replacement contract with respect to the three drill presses which were the subject of the original contract, and the $10 actually paid by P prior to January 1, 1994, is not treated as a qualified cost.
EXAMPLE 4: On November 1, 1993, R, a qualified taxpayer, enters into a binding contract with S to purchase two machines for $10 each and five computers for $2 each, for a total contract price of $30. Assume that the machines are qualified property, but since R will use the computers in its general administrative office, the computers are not qualified property. Under the terms of the contract, R makes a non-refundable $10 deposit to S on November 5, 1993. On March 1, 1994, R and S mutually agree to rescind the original contract and simultaneously execute a new contract under which R agrees to purchase three machines and five computers for $40. Under these facts, the March 1, 1994, contract is treated as a replacement contract to the November 1, 1993, contract to the extent of the two machines and the five computers, but is not treated as a replacement contract as to the third machine added by the March 1, 1994, contract. The $10 deposit actually paid prior to January 1, 1994, is not treated as a qualified cost. However, none of this $10 deposit amount is required to be allocated to the third machine for purposes of allocating the total contract price between the qualified property and the non-qualified property because the March 1, 1994, contract is not treated as a binding contract under this section as to the third machine, so that the entire $10 cost of the third machine is a qualified cost.
(4) Option Contracts. For purposes of Regulations 17053.49-1 through 17053.49-11, inclusive, in any case where a qualified taxpayer (or any related party within the meaning of Internal Revenue Code Sections 267 or 707) had an option to acquire qualified property on or prior to January 1, 1994, the option shall generally be treated as a binding contract. However, if the option holder would be required to forfeit an amount that is less than ten percent (10%) of the fixed option price upon cancellation or non-exercise of the option, then the option shall not be treated as a binding contract.
EXAMPLE 1: On May 1, 1993, F, a qualified taxpayer, pays $150 to G for the right to purchase G's manufacturing facility in Stockton for a total contract price of $900 (less the amount paid for the option) at any time prior to May 1, 1995. Under the terms of the option, the $150 is not refundable in the event F does not exercise its option. On January 15, 1995, F exercises its option to purchase G's manufacturing facility and delivers the remaining $750 due to G under the terms of the option. Since the option holder would have been required to forfeit more than ten percent (10%) of the fixed option price upon cancellation or non-exercise of the option, the option is treated as a binding contract and the $150 paid by F prior to January 1, 1994, is not treated as a qualified cost.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that F pays only $80 for the option and is not obligated to forfeit any additional monies to G in the event F chooses not to exercise the option. Under these facts, the option is not treated as a binding contract since the maximum amount that F would be required to forfeit under the option contract is less than ten percent (10%) of the fixed option price.
(5) Conditional Contracts. A contract shall be treated as binding notwithstanding the fact that the contract is subject to a condition.
EXAMPLE: On December 1, 1993, T, a qualified taxpayer, enters into a contract to purchase seven machines that are qualified property. The contract provides for a twenty percent (20%) down payment on December 1, 1993, with the balance to be paid on January 30, 1994. However, T's obligations under the contract are expressly conditioned upon the completion of T's new manufacturing facility in Compton. Despite this condition, the contract is treated as a binding contract in existence on or prior to January 1, 1994.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.49, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).
§17053.49-5. Qualified Property.
Note     •     History

(See Regulation Section 17053.49-0 for Table Contents.)
(a) In General. For purposes of Regulations 17053.49-1 through 17053.49-11, inclusive, the term “qualified property” includes tangible personal property, whether new or used, that is defined in Internal Revenue Code Section 1245 (a) (3) (A) and is used by a qualified taxpayer in both an activity that is described in Division D of the SIC Manual and primarily in a qualified activity. The term “qualified property” also includes certain “off-the-shelf” computer software that is used by a qualified taxpayer primarily in a qualified activity, any special purpose building or foundation, or portion thereof, that is primarily used by any qualified taxpayer in a qualified activity that is described in SIC Codes 3571-3579, inclusive (computer and office equipment), SIC Codes 3671-3679, inclusive (electronic components and accessories), an activity related to biotechnology described in SIC Code 8731 (commercial physical and biological research), a biopharmaceutical activity described in SIC Codes 2833-2836, inclusive (drugs), those activities related to space vehicles and parts described in SIC Codes 3761-3769, inclusive, those activities related to space satellites and communications  satellites and equipment described in SIC Codes 3663 and 3812 (but only with respect to “qualified property” that is placed in service on or after January 1, 1996), or those activities related to semiconductor equipment manufacturing described in SIC Code 3559 (but only with respect to “qualified property” that is placed in service on or after January 1, 1997), or property described in subsection (f) of this regulation. The term “qualified property” does not include certain types of property described in subsection (d) of this regulation. The basis of any qualified property for which the MIC is claimed is not required to be reduced by the amount of any MIC claimed.
(b) General Requirements for Qualified Property.  Except as provided in subsections (c) or (f) of this regulation, in order for property to be treated as qualified property, the property must satisfy each of the requirements of this subsection of this regulation.
(1) Tangible Personal Property. Except for any “off-the-shelf” computer software upon which California sales or use tax has been paid and except for property described in subsection (f) of this regulation, property must be tangible personal property. For purposes of this section, the term “tangible personal property” means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). Tangible personal property includes all property (other than structural components) which is contained in or attached to a building. Thus, for example, production machinery, printing presses, and testing equipment which is contained in or attached to a building is tangible personal property. Furthermore, all property which is in the nature of machinery (other than structural components of a building or other inherently permanent structures) shall be considered tangible personal property even though located outside a building. The determination of whether property will be treated as an inherently permanent structure shall be made under Internal Revenue Code Section 1245(a), so that generally property will be treated as an inherently permanent structure (and thus not tangible personal property) if the property is either intended to be or is in fact affixed permanently, and is either incapable of being moved or, if movable, would suffer a significant degree of damage upon its removal. Local law, including state, county, city, or regional, shall not be controlling for purposes of determining whether property is or is not “tangible” or “personal,” so that the fact that under local law property is held to be personal property or tangible property shall not affect the determination of whether such property is tangible personal property for purposes of the MIC. 
EXAMPLE 1: B, a qualified taxpayer, manufactures heavy tractors in a manufacturing plant located in Tustin. B decides to upgrade its assembly line by installing a heavy duty overhead crane which will be permanently affixed to the building structure. Prior to installing the crane B constructs steel columns that extend from the crane's girder to the roof of the building. Under these facts, while the steel columns may be treated as “other tangible property” under Internal Revenue Code Section 1245 (a) (3) (B), the steel columns are not tangible personal property and thus not qualified property.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except instead consider the heavy duty overhead crane. The crane moves back and forth along the assembly line on craneway tracks that are permanently bolted to the building's ceiling beams and is hard-wired to the building's electrical system. Despite its permanent affixation to the building, the crane is an item of tangible personal property.
(2) Section 1245 (a) Property. Property must be defined in Internal Revenue Code Section 1245(a). However, since property must also be tangible personal property under subsection (b)(1) of this regulation, then, except for any “off-the-shelf” computer software upon which California sales or use tax has been paid and except for property described in subsection (f) of this regulation, only personal property described in Internal Revenue Code Section 1245(a) (3) (A) will be treated as qualified property for purposes of the MIC. Except as provided in the previous sentence, other tangible property that is described in Internal Revenue Code Sections 1245(a) (3) (B) through (F) is not “personal” property and is thus qualified property under Revenue and Taxation Code Section 17053.49.
EXAMPLE 1: F, a qualified taxpayer, manufactures railroad cars. F constructs a building which is open at both ends through which a length of track travels to move the cars during several steps in the manufacturing process. Since the building is not tangible personal property defined in Internal Revenue Code Section 1245(a) (3) (A), it would not be treated as qualified property.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, but in addition, F constructs and installs machinery in the building to facilitate the assembly of the railroad cars. Although the machinery is permanently installed in the building, it is not a structural component of the building and can be removed without dismantling the building. As a result, the machinery is tangible personal property that is defined in Internal Revenue Code Section 1245 (a) (3) (A). 
(3) Used in an Activity Described in Division D of the SIC Manual. Property must be used in an activity that is described in Division D of the SIC Manual. Generally, this requirement will be satisfied if the taxpayer is using the property in the same activity that made the taxpayer a qualified taxpayer under Regulation 17053.49-3. Thus, for example, if a taxpayer that is engaged in manufacturing electromedical equipment (SIC Code 3845) is treated as a qualified taxpayer under Regulation 17053.49-3), and the qualified taxpayer purchases tangible personal property that is defined in Internal Revenue Code Section 1245(a)(3)(A) for use in its electromedical equipment manufacturing activity, the requirement that the property be used in an activity described in Division D of the SIC Manual would be satisfied. In addition, in the case of a qualified taxpayer that is engaged in two or more activities that are properly classified under Division D of the SIC Manual, the use of property in any of such Division D activities will satisfy this requirement that property be used in an activity described in Division D of the SIC Manual.
(4) Primarily Used in a Qualified Activity. Property must be primarily used in a qualified activity.
EXAMPLE 1: B, a qualified taxpayer, manufactures trucks and automobiles in San Diego. B constructs a compressor for use in B's assembly line. The compressor is used for 500 hours in the assembly line, which is part of B's qualified activity, and for 250 hours in B's warehouse, which is part of B's non-qualified activity. Since B used the compressor in B's qualified activity for more than 50 percent of the time the compressor was actually in use during the 12-month period following the date the compressor was placed in service in California by B (500 hours/750 hours, or 66.7%), the compressor is primarily used in a qualified activity.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except B instead uses the compressor for 500 hours in the non-qualified activity and 250 hours in the qualified activity. Under these facts, the compressor is not primarily used in a qualified activity since the compressor was used less than 50 percent of the time during the 12-month period following the date the compressor was placed in service in California by B in a qualified activity (250 hours/750 hours, or 33.3%).
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except B uses the compressor for a total of 100 days during the 12-month period following the date the compressor was placed in service in California by B. During each of those 100 days, B uses the compressor for four hours in the qualified activity and six hours in the non-qualified activity. Although B is using the compressor in the qualified activity during each of the 100 days that it is actually in operation, the compressor is not primarily used in a qualified activity because the total number of hours the compressor is used in a qualified activity is less than 50 percent of the total hours of operation of the compressor during the 12-month period following the date the compressor was placed in service in California by B.
EXAMPLE 4:  C, a qualified taxpayer, manufactures telephone equipment in San Jose. C purchases ten personal computers to be used in the company offices. The computers are to be used in part for administration and management, a non-qualified activity, but are also used for the tracking of assembly line operations by directly monitoring the performance, safety, and production of the assembly line, a qualified activity. As long as the computers are used at least 50 percent of the time in the qualified activity during the 12-month period following the date the compressor was placed in service in California by C, then C shall be treated as primarily using the computers in a qualified activity.
EXAMPLE 5: R, a qualified taxpayer, manufactures light bulbs from raw materials such as glass, tungsten, aluminum, copper and paper. R initially receives the raw materials at its warehouse in North Hollywood, and then, when needed, transports them using its own trucks to R's manufacturing plant in Burbank. Upon delivery to the manufacturing plant, the raw materials are placed in a receiving area where they are then moved via forklift to their respective areas in the plant for introduction into the process of manufacturing the light bulbs. Under these facts, R's qualified property does not include the trucks used to transport the raw materials from the warehouse to the manufacturing plant since the raw materials have not been introduced into R's manufacturing “process” until the raw materials have been delivered to the manufacturing plant. However, the forklift would be qualified property since once the raw materials are received at the same premises where R's manufacturing activity is being conducted, the movement of the raw materials via forklift is treated as part of R's manufacturing process.
EXAMPLE 6: Q, a qualified taxpayer, is an integrated oil producer that refines petroleum products. Q owns the wells from which the oil is extracted and, after extracting the oil from the ground, Q then pumps the oil, via pipeline, to its refinery located several miles from the well sites. The pipeline transverses other property for which Q has easements but does not own. Once the oil reaches the refinery, it is immediately introduced into Q's refining process. Q may not include as qualified property the oil wells or the pipelines because these are not used as part of the refining process.
EXAMPLE 7: T, a qualified taxpayer, manufactures copper “romex” wire in Santa Ana. As part of T's manufacturing process, T purchases a machine to process the copper wire by coating it with white or black insulation prior to wrapping the wire in white plastic insulation. T's machine applies the materials and labor necessary to modify or change the characteristics of the copper wire. T's machine is used in “processing” the “romex” wire and thus would be qualified property.
EXAMPLE 8: Assume the same facts as in EXAMPLE 7, except that T also uses the machine to coat its mailing labels for shipment of the wire. Assume that the processing of the copper “romex” wire is complete upon its being wrapped in the white plastic insulation, and that the number of hours the machine is used during the 12-month period following the date the machine was placed in service in California by T for the “processing” of the wire is less than 50 percent of the machine's total use during the period. Under these facts, the machine is no longer primarily used for “processing,” a qualified activity, but is instead primarily used to coat the mailing labels, a non-qualified activity, so that the machine is not qualified property.
EXAMPLE 9: C, a qualified taxpayer, manufactures cameras in Milpitas. The employees of C fabricate and assemble shelving to be used to store the manufactured cameras following completion of C's manufacturing process. Assume that the costs of fabricating the shelving, including the labor costs, are properly capitalized by C. Although C has “fabricated” the shelving, the shelving is not qualified property since it is not used in C's manufacturing process, which is a qualified activity, but is rather used for storage, which is a non-qualified activity.
EXAMPLE 10: J, a qualified taxpayer, manufactures aquariums in Whittier. As part of J's manufacturing process, J uses specialized equipment which recycles used styrofoam packing material by converting it into plastic parts that J then uses in manufacturing the aquariums. The specialized recycling equipment is primarily used in recycling, a qualified activity, so that it is treated as qualified property.
EXAMPLE 11: Assume the same facts as in EXAMPLE 10, except that J does not use postconsumer waste, but instead converts its own manufacturing waste (generated by the construction of plastic aquarium parts) into finished aquarium parts. J may include as qualified property the equipment used to convert the waste resulting from J's manufacturing process into the aquarium parts.
EXAMPLE 12: V, a qualified taxpayer, manufactures explosives in Barstow. V's research team attempts through research and experimentation to create a new process for making explosives that can be more easily detected by standard metal detectors. Due to the high danger associated with testing and manufacturing the explosives, V constructs an explosion containment chamber to both conduct the research and to insert fuses into the explosives being manufactured by V. Assume that during the 12-month period following the date the explosion containment chamber was placed in service in California by V that it was used 60% of the time to conduct research, and 40% of the time to insert the fuses into the manufactured explosives. Assuming the explosion containment chamber is tangible personal property defined in Internal Revenue Code Section 1245(a) (3) (A), and assuming V's research is described in Internal Revenue Code Section 174 or the regulations thereunder, V may treat the explosion containment chamber as qualified property.
EXAMPLE 13: W, a qualified taxpayer, manufactures engines for propeller airplanes in Long Beach. W constructs two engine test stands. The first engine test stand is used to evaluate design enhancements to the engines manufactured by W. Assuming this first engine test stand is tangible personal property that is defined in Internal Revenue Code Section 1245 (a) (3) (A), and assuming W's research activity is described in Internal Revenue Code Section 174 or the regulations thereunder, W may treat the first engine test stand as qualified property because it is used in research and development. The second test stand is used to evaluate and test assembled engines prior to their shipment to customers. Assuming this second test stand is tangible personal property that is defined in Internal Revenue Code Section 1245 (a) (3) (A), W may treat the second engine test stand as qualified property because it is used as part of W's manufacturing process.
EXAMPLE 14: X, a qualified taxpayer, manufactures garden and lawn fertilizer products in Arcata. One of the by--products of X's manufacturing process is a large volume of highly alkaline water. This water is considered waste water by the local water quality control agency that has jurisdiction over the discharge of waste water. To comply with the local waste water discharge standards, which are assumed for purposes of this example to exceed any applicable federal standards, X purchases equipment to reduce the alkalinity of the waste water so that it can be first reused in X's manufacturing process and then treated for discharge into local evaporative ponds. Since the waste water treatment equipment treats the waste water to meet or exceed the local agency's standards, X may include as qualified property the equipment purchased for treating the waste water since it is used in pollution control, a qualified activity.
EXAMPLE 15: E, a qualified taxpayer, manufactures metal barrels and drums in Richmond. E purchases an electric welder which is qualified property and a portable diagnostic computer for regular and/or non-regular testing of the welder. E may include as qualified property the diagnostic computer since it is used primarily to maintain, repair, measure, or test the welder.
EXAMPLE  16: F, a qualified taxpayer, manufactures aluminum die-casting equipment in Bakersfield. F purchases a laser micrometer measuring device to periodically check the alignment of extruders which are assumed to be qualified property. F may include as qualified property the laser micrometer measuring device since it is used primarily to measure the extruding equipment.
EXAMPLE 17: G, a qualified taxpayer, manufactures motor vehicle parts in Van Nuys. G purchases a specialized wrench set to be used primarily for repair of G's specialized extruding press that is used by G in its manufacturing process. Since G uses the wrench set primarily on qualified property, G may include the wrench set as qualified property.
EXAMPLE 18: H, a qualified taxpayer, manufactures elevators in Hayward. H purchases a standard electronic multi-tester. During the 12-month period following the date the electronic multi-tester was placed in service in California by H, the multi-tester is used 30 percent of the time to test electrical equipment which is qualified property, and the remainder of the time H used the multi-tester to test the electrical system of its fleet of vehicles which are used by senior management personnel. Under these facts, assuming that the vehicles are not qualified property, H may not include as qualified property the multi-tester since it is not primarily used for the testing of qualified property.
(c) Special Purpose Buildings and Foundations. In the case of any qualified taxpayer that is engaged in a manufacturing activity described in SIC Codes 3571-3579, inclusive (computer and office equipment), SIC Codes 3671-3679, inclusive (electronic components and accessories), an activity related to biotechnology described in SIC Code 8731 (commercial physical and biological research), a biopharmaceutical activity described in SIC Codes 2833-2836, inclusive (drugs), those activities related to space vehicles and parts decried in SIC Codes 3761-3769, inclusive, those activities related to space satellites and communications  satellites and equipment described in SIC Codes 3663 and 3812 (but only with respect to “qualified property” that is placed in service on or after January 1, 1996), or those activities related to semiconductor equipment manufacturing described in SIC Code 3559 (but only with respect to “qualified property” that is placed in service on or after January 1, 1997), qualified property also includes special purpose buildings and foundations, or any portion thereof, that are used in any of the above-described SIC Code activities and which satisfy the other requirements of this subsection of this regulation.
(1) Defined. For purposes of this regulation, the term “special purpose building and foundation” shall mean an entire building, or any portion of any building, and the foundation immediately underlying such building, or any portion of such foundation, that is specifically designed and constructed or reconstructed for the installation, operation, and use of specific machinery and equipment with a special purpose, which machinery and equipment, after installation, will become affixed to or a fixture of the real property, and the construction or reconstruction of which is specifically designed and used exclusively for the qualified purpose. A building shall be treated as specifically designed and constructed or modified for a qualified purpose if it is not economic to design and construct the building for the intended purpose and thereafter use the building for a different purpose.
(2) Exclusive Use for a Qualified Purpose. A special purpose building will be treated as being used exclusively for a qualified purpose only if its use does not include a use for which it was not specifically designed and constructed or modified. Incidental use for a non-qualified purpose is permissible. Incidental use means a use which is both related and subordinate to the qualified purpose. For purposes of this regulation, it will be conclusively presumed that a use is not subordinate if more than one-third of the total usable volume of the building is devoted to a use which is not a qualified purpose. In the event an entire building does not qualify as a special purpose building, a qualified taxpayer may establish that a portion of a building, and the foundation immediately underlying such portion, qualifies for treatment as a special purpose building and foundation if such portion satisfies all of the definitional provisions of Revenue and Taxation Code Section 17053.49 and this subsection of this regulation. To the extent that a building is not a special purpose building as defined in this regulation, but a portion of the building qualifies for treatment as a special purpose building, then all equipment which exclusively supports the qualified purpose occurring within that portion and which would qualify as Internal Revenue Code Section 1245 (a) (3) (A) property if it were not a fixture or affixed to the building shall be treated as a cost of the portion of the building which qualifies for treatment as a special purpose building.
(3) Property Which is not a Special Purpose Building and Foundation. Buildings and foundations which do not meet the definition of a special purpose building and foundation include, but are not limited to:
A. buildings designed and constructed or reconstructed principally to function as a general purpose manufacturing, industrial, or commercial building;
B. research facilities that are used primarily prior to and after, or prior to or after, the manufacturing process; or
C. storage facilities that are used primarily prior to and after, or prior to or after, completion of the manufacturing process.
(4) Research Facilities. A research facility shall not be considered to be primarily used prior to and after, or prior to or after, completion of the manufacturing process if its purpose and use relate exclusively to the development and regulatory approval of the manufacturing process for specific biopharmaceutical products. A research facility which is used primarily in connection with the discovery of an organism from which a biopharmaceutical product or process is developed does not meet the requirements of Revenue and Taxation Code Section 17053.49 and the preceding sentence and is not to be considered used in the manufacturing process.
EXAMPLE 1: K, a qualified taxpayer, manufactures medicinal antiseptics (SIC Code 2834) in Fairfield. K constructs a 5,000 square foot “clean room” for the purpose of manufacturing sterile antiseptics, a product that requires, under applicable federal Food and Drug Administration criteria, absolute sterility and controlled humidity in the manufacturing environment. The “clean room” is not economic to design for any other purpose other than manufacturing medicinal antiseptics. While the clean room and its foundation appear to satisfy the definition of a special purpose building and foundation, K may not include as qualified property the clean room and its foundation because K, while in a line of business described in SIC Codes 2830-2836, inclusive, is not a biopharmaceutical establishment. If, however, the antiseptic is a biopharmaceutical product, then the special purpose building and foundation may be qualified property.
EXAMPLE 2: L, a qualified taxpayer, owns a 40,000 square-foot warehouse facility in Santa Clara. L modifies part of the facility to manufacture computer microprocessors, which is an activity described in SIC Code 3674. A portion of this microprocessor manufacturing is to be done in a “clean room” since the microprocessors must be manufactured with specialized equipment which is sensitive to air, humidity and pollutants in order to ensure the economic value of the microprocessors. Although the entire 40,000 square foot building is not a special purpose building, the portion of the building which is used as the “clean room” and the cost of its ancillary support equipment is treated as a special purpose building under this regulation because the equipment used therein has a special purpose which can only be achieved in the “clean room.”
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except the “clean room” is used merely for long-term storage of the finished product where a controlled environment will greatly extend the shelf life of the product. The “clean room” is not being used in the manufacturing process since it only serves a  storage function and thus the “clean room” is not treated as a special purpose building.
EXAMPLE 4: M, a qualified taxpayer, manufactures typewriters (SIC Code 3579) in Chatsworth. M specially designs and constructs a building for the purpose of housing and supporting a high-powered, high-speed hydraulic press for the production of precision carriages. It is not economic to design the building for any other purpose. The building requires heavily reinforced foundational pilings with strategically located floor pylons for anchoring the press. In addition, the walls and ceiling of the building have many integral permanent features to accept the size, shape, plumbing, and electrical needs of the press. Even though the building may be viewed as “specifically designed and constructed for a qualified purpose,” it would not be treated as a special purpose building because the equipment has no “special purpose” and the building is merely a general purpose manufacturing building.
EXAMPLE 5: N is solely engaged in performing commercial research and development for biotech companies (SIC Code 8731) in Palo Alto. N constructs a special purpose building for the purpose of conducting its commercial research and development activities. Although the building may otherwise be a special purpose building, N may not claim the MIC because N is not a qualified taxpayer under Regulation 17053.49-3.
EXAMPLE 6: P, a qualified taxpayer, is engaged in two lines of business: manufacturing computer terminals (SIC Code 3575) and performing commercial research and development for biotech companies (SIC Code 8731). P constructs a special purpose building for the exclusive purpose of conducting research in connection with its commercial research and development activity for biotech companies. The special purpose building and foundation would be qualified property even though P is only conducting research in the building. However, if P instead uses the research building in connection with its manufacturing activity, the building is no longer qualified property since the use of the building is now a part of a research facility used prior to and after, or prior to or after, the manufacturing process, and thus used for a non-qualified purpose under this regulation.
EXAMPLE 7: Assume the same facts as in EXAMPLE 6, except that P is also engaged in manufacturing a new type of blank computer software disks (SIC Code 3695) that require an environment that only the highest level of “clean rooms” can provide, and that P constructs such a “clean room” for the sole purpose of manufacturing the disks. Although P is a qualified taxpayer that may claim the MIC with respect to certain special purpose buildings and foundations, and notwithstanding the fact that the “clean room” otherwise meets the definition of a “special purpose building and foundation,” P's “clean room” that is used to manufacture the blank disks does not qualify as a special purpose building and foundation for purposes of the MIC because the activity being conducted in the “clean room” is properly classified under SIC Code 3695, which is not one of those SIC Code activities that entitles a qualified taxpayer to the MIC for their special purpose buildings and foundations.
(d) Specifically Excluded Property. Notwithstanding subsection (b), (c), (e) or (f) of this regulation, qualified property does not include any of the following:
(1) Furniture. Any item of furniture, regardless of how used or where located.
(2) Facilities Used for Warehousing Purposes. Any property used for warehousing purposes after completion of the manufacturing process. Thus, for example, a manufacturer of engine components that stores its finished products in a separate warehouse building prior to shipment and thereafter uses forklifts and other heavy equipment to move the inventory within the warehouse building shall not treat the forklifts and other heavy equipment as qualified property.
(3) Inventory. Any property that is properly treated as inventory of the qualified taxpayer. For this purpose, the term “inventory” includes any property which is required to be included in the qualified taxpayer's inventory under Internal Revenue Code Section 263A or that is described in Internal Revenue Code Section 1221(1).
(4) Equipment Used in the Extraction Process. Any equipment used in the extraction process. Thus, for example, drill bits, rigging, and pumps used in wells and mines to extract oil, water or minerals shall not be treated as qualified property since this is equipment used in the extraction process.
(5) Equipment Used to Store Finished Products. Any equipment used to store finish products that have completed the manufacturing process. Thus, for example, if a qualified taxpayer primarily uses a forklift in the finished goods portion of its manufacturing plant to transport finished products to its loading dock for shipping to customers, the forklift would not be qualified property. On the other hand, if the forklift was primarily used to transport raw materials to the assembly line and was occasionally used to transport finished products to the loading dock for shipment to customers, the forklift would be treated as qualified property.
(6) Tangible Personal Property Used in Administration, General Management, or Marketing. Any tangible personal property that is used in administration, general management, or marketing. For this purpose, an item of property that is used both in a qualified activity and for administration, general management, or marketing, shall be treated as qualified property only if the item is primarily used in a qualified activity. However, property primarily used in to clean and maintain the factory floor and fire safety equipment primarily used on the factory floor are not considered tangible personal property used in administration, general management, or marketing.
(7) Property for Which the California Low-Emission Vehicle Credit is Claimed. Any property for which the qualified taxpayer has claimed the low-emission vehicle credit provided in Revenue and Taxation Code Sections 17052.11 and 23603.
(e) Movement of Used Property Into This State. In any case where property is moved from another state or country into this state by a qualified taxpayer or by a lessor who intends to lease such property to a qualified taxpayer, the property may generally be treated as qualified property for purposes of the MIC if it satisfies the other requirements of this regulation. Thus, for example, if an item of property is acquired and placed in service in Nevada in 1994, and thereafter the item of property is moved into this state for use in a qualified activity (as defined in Regulation 17053.49-5 (b)), the property may generally be treated as qualified property. However, in the case of any such moved property, a qualified taxpayer or lessor must still satisfy the requirements of Regulation 17053.49-4 (related to qualified costs and payment of California sales or use tax) in order to claim the MIC.
(f) Property Used to Refine “Reformulated” or “Oxygenated” Gasoline. In the case of any qualified taxpayer engaged in refining activities properly classified in SIC Code 2911, “qualified property” also includes other tangible property that is defined in Section 1245(a) (3) (B) of the Internal Revenue Code and that satisfies each of the following requirements:
(A) is used in that line of business properly classified in SIC Code 2911;
(B) is primarily used in refining; and
(C) is used to produce “reformulated gasoline” or “oxygenated gasoline”, as defined in and pursuant to the requirements imposed by Section 219 of Public Law 101-549, relating to certain amendments to Section 211 of the federal Clean Air Act, and, on or after Section 211 of the federal Clean Air Act, and, on or after March 1, 1996, is used principally to produce gasoline that meets the California Air Resources Board standards set forth in Title 13, Division 3, Chapter 5, Article 1, Subarticle 2, California Code of Regulations (as in effect on February 1, 1996).
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.49, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).
2. Change without regulatory effect amending subsections (a) and (c) filed 8-14-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 33).
§17053.49-6. Leasing.
Note     •     History

(See Regulation section 17053.49-0 for Table of Contents.)
(a) In General. For purposes of Regulations 17053.49-1 through 17053.49-11, inclusive, in the case of any leasing transaction in which qualified property is leased by a qualified taxpayer, the rules of this regulation shall apply. Generally, the lessor must pay California sales tax on the lessor's acquisition of the qualified property in order for the lessee to claim the credit for that item of qualified property. Conversely, the lessee cannot claim the MIC for an item of property where the lessor acquired the qualified property without paying California sales or use tax and the lessor instead collects use tax payments from the lessee measured by the lessee's rental payments to the lessor. The determination of whether the rules in subsection (b) or subsection (c) of this regulation apply shall be made by reference to the sales and use tax treatment of the lease, rather than the income tax treatment of the lease. Thus, for example, a lease of qualified property that would be treated as a finance lease under income tax principles may still be treated as an operating lease under this regulation. In addition, under California sales and use tax law, a transaction denominated as a lease will instead be treated as a sale under a security agreement if the lease contains a nominal option price. For this purpose, California sales and use tax law generally treats the option price as nominal if it does not exceed the lesser of  $100 or 1 percent of the total contract price.
EXAMPLE 1: X, a leasing company, agrees to lease qualified property to Y, a qualified taxpayer, for use in Y's manufacturing facility in Garden Grove. Under the terms of the lease, X will lease the property to Y for $100 per year for a term of 10 years. Upon the expiration of the 10-year lease term, Y has an option to acquire the property for $1. Under these facts, the “lease” would be properly treated as a sale under a security agreement from its inception and not as a lease under Revenue and Taxation Code Section 6006.3 and California State Board of Equalization Regulation 1660 (a) (2) (A), Title 18, California Code of Regulations so that the rules of subsection (c) of this regulation would apply.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that Y's option price is $125, or 12.5% of the total contract price. Under these facts, notwithstanding that the “lease” may be treated as a finance lease (and thus as a “purchase”) for California income tax purposes, under California sales and use tax law the “lease” would generally be treated as a lease and the rules of subsection (b) of this regulation would apply.
(1) Lessor Not Entitled to MIC. A lessor of qualified property is never entitled to claim the MIC with respect to any item of qualified property it leases to another party, regardless of whether the lessor is otherwise a qualified taxpayer.
(2) Binding Contract Rules Applicable to Leases. In the case of any qualified property leased pursuant to any agreement or contract that is treated as a binding contract under the rules of subsection (e) of Regulation 17053.49-4, the allocation rules of subsection (e) of Regulation 17053.49-4 shall apply in determining the amount of the qualified cost to the lessor upon which the lessee is entitled to claim the MIC. For this purpose, if a lessor acquires qualified property under the terms of a contract that is treated as a binding contract with respect to the lessee (or a party related to the lessee within the meaning of Internal Revenue Code Sections 267 or 318), then any payments or reimbursements made by the lessor, directly or indirectly in the form of a reduction in the amount of lease rental payments to be paid by the lessee under the lease, upon or as a result of the lessor's assumption of the lessee's obligations under the binding contract, shall be treated in the same manner as if the lessor had not assumed the lessee's obligations under the contract. Finally, in any case where a lessor has acquired property prior to January 1, 1994, and thereafter leases such property, the qualified cost to the lessor upon which the lessee would be entitled to claim the MIC would generally be zero (assuming the lessor has not paid otherwise qualified costs after January 1, 1994, to improve or otherwise modify the leased property, in which case the lessor would have qualified costs to the limited extent of such post-1993 amounts that were paid).
EXAMPLE 1: D, a qualified taxpayer, is engaged in the business of manufacturing medical and surgical instruments and apparatus in Sacramento. On September 20, 1993, D enters into a contract with X to acquire 3 machines that are qualified property for a total contract price of $900. Under the terms of the contract, D makes a non-refundable deposit to X of $150 upon execution of the contract, with an additional $150 due on July 1, 1994, and the final payment of $600 payable upon delivery of the machines on February 15, 1995. Assume that this contract is treated as a binding contract under subsection (e) of Regulation 17053.49-4. On January 15, 1995, D decides that it would prefer to instead lease the machines, so D enters into a contract with L, an equipment leasing company, under which L will (i) assume D's obligations under D's contract with X, (ii) lease the qualified property to D for a term of 10 years, and (iii) refund to D the $300 in payments that D has previously made to X. Assume that L will pay California sales tax on its purchase of the qualified property from X. Under these facts, L will be treated as having $750 in qualified costs for which D will be entitled to claim the MIC, which is the total amount treated as paid by L after January 1, 1994 ($600 paid directly by L to X under X's contract with D, plus $150 paid by L to D as reimbursement for D's payment on July 1, 1994, but excluding the $150 paid by D to X prior to January 1, 1994).
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of L agreeing to refund the $300 in payments that D has previously made to X, L instead reduces the amount of the rental payments to be due from D under the lease. Under these facts, the result is the same as in EXAMPLE 1.
(3) Special Rule Applicable to All Leasing Transactions -- “Placed in Service”. In the case of any leasing transaction, the requirement that qualified property must be placed in service in California in order for a qualified taxpayer to claim the MIC shall be treated as having been satisfied at the time when all the terms and conditions of the lease contract have been completed so that the lessee has an unconditional obligation to pay all rents due under the contract to the lessor of the qualified property. However, notwithstanding the preceding sentence, the requirements of subsection (b) (3) of Regulation 17053.49-5 that property be used in an activity described in Division D of the SIC Manual and subsection (b)(4) of Regulation 17053.49-5 that property be primarily used in a qualified activity must still be satisfied in order for a lessee to claim the MIC.
EXAMPLE: On July 1, 1995, A, a qualified taxpayer, enters into a contract to lease a printing process from B, an equipment leasing company, for use in A's manufacturing facility in Roseville. Under the terms of the lease contract, A's rental obligations commence at the beginning of the month following the date that A provides B with a written statement that the printing press has been received from C, the original manufacturer of the printing press, and that the printing press has been installed and is in good working order (e.g., A provides a Certificate of Acceptance to B). On January 15, 1996, A executes and delivers the required written statement to B. Under these facts, A is treated as having satisfied the “placed in service” requirement as of February 1, 1996, and, assuming all other requirements of Revenue and Taxation Code Section 17053.49 have been satisfied, A is entitled to claim the MIC.
(b) Operating Leases. In the case of any lease that is not treated as a sale under Part 1 (commencing with Section 6001) of Division 2 of the Revenue and Taxation Code (relating to the payment and collection of California sales and use tax), the rules set forth in this subsection of this regulation shall apply. Any lease subject to the rules of this subsection of this regulation shall be referred to in this regulation as an “operating lease.”
(1) In General. Under Revenue and Taxation Code Section 6006(g)(5), a lease of tangible personal property is generally treated as a sale for California sales and use tax purposes, unless the tangible personal property is leased in substantially the same form as acquired by the lessor or leased in substantially the same form as acquired by the transferor and the lessor or transferor has paid sales tax reimbursement or has paid use tax measured by the purchase price of the property.
EXAMPLE: L, a taxpayer engaged in the equipment leasing business, purchases 20 machine tools for $10 from P, a retailer of machine tools located in Merced. L intends to immediately lease the machine tools, without modification, to X, a qualified taxpayer engaged in the business of manufacturing ferrous and nonferrous metal doors and door frames in Visalia, for a term of 10 years. L pays California sales tax on its purchase of the machine tools, and then leases the machine tools to X. Assume that X does not have an option to purchase the machine tools upon the expiration of the lease term. Since L has paid California sales tax on its purchase of the machine tools and then leased the property in substantially the same form as acquired, L's lease to X is not treated as a sale under Revenue and Taxation Code Section 6006(g)(5) and the rules of this subsection of the regulation apply.
(2) Applicable Requirements. In the case of an operating lease, the following requirements must be satisfied in order for the lessee to claim the MIC.
A. Lessee Must Be a Qualified Taxpayer. The requirement under Regulation 17053.49-3 that the user of the qualified property must be a qualified taxpayer shall be applied to the lessee and not to the lessor.
B. Use of Property in a Qualified Activity. The requirement under subsection (b)(4) of Regulation 17053.49-5 that property be used in a qualified activity in order to be treated as qualified property shall be applied to the lessee and not the lessor with respect to the property that is the subject of an operating lease.
C. Sales or Use Tax Payment Requirement. Except as provided in subsections (b)(3)(B) or (b) (5) (B) of this regulation (relating to capitalized labor), the lessor must pay California sales tax reimbursement or California use tax on the lessor's construction, reconstruction or acquisition of the qualified property. In any case where the lessor's acquisition of the qualified property is pursuant to a transaction treated as either an occasional sale under Revenue and Taxation Code Section 6006.5 or as a sale of mobile transportation equipment (as defined in Revenue and Taxation Code Section 6023), the requirement of this subsection of this regulation shall be satisfied only if the lessor makes a timely election under either Revenue and Taxation Code Section 6094.1 or 6244(d) and pays California sales tax reimbursement or California use tax with respect to the lessor's acquisition or the qualified property.
D. Qualified Costs. The requirement that costs, in order to be treated as qualified costs, must be paid or incurred for the “construction, reconstruction, or acquisition” of qualified property shall not apply to the lessee's lease rental payments. Thus, for example, although a lessee may, under the lessee's method of California tax accounting, currently deduct its lease rental payments, the lessee will still be entitled to claim the MIC if the other requirements of this subsection of this regulation are satisfied. However, the rules of Regulation 17053.49-4, including the rules relating to the allocation of costs paid or incurred pursuant to binding contracts, shall apply in determining the amount of qualified costs of the lessor upon which the lessee may determine its MIC.
E. Chargeable to Capital Account. The requirement that costs, in order to be treated as qualified costs, must be properly chargeable to the capital account of the qualified taxpayer shall not apply to the lessee's lease rental payments. Thus, for example, although a lessee may, under the lessee's method of California tax accounting, currently deduct lease rental payments, the lessee will still be entitled to claim the MIC if the other requirements of this subsection are satisfied.
(3) Amount of MIC Lessee May Claim. In general, a lessee under an operating lease is entitled to claim the MIC at the same time and in the same amount as if such lessee had instead constructed, reconstructed, or acquired the qualified property other than by lease.
A. Qualified Cost to Lessor. Except as provided in subsection(b)(3)(B) of this regulation, the qualified cost to the lessor upon which the lessee is entitled to claim the MIC is generally equal to the purchase price amount on which California sales tax reimbursement or use tax has been paid by the lessor. Thus, for example, if a lessor pays $100 for an item of qualified property, plus $8 in California sales tax reimbursement on such item, the qualified cost to the lessor would be $100.
B. Exception For Capitalized Labor. The qualified cost to the lessor under subsection (b) (3) (A) of this regulation shall also include any capitalized labor that is directly allocable to the lessor's construction, reconstruction, or acquisition of the qualified property. Thus, for example, assume a lessor pays $100 for an item of qualified property, with $25 of such amount properly treated as directly allocable capitalized labor costs that are exempt from California sales or use tax. While the lessor would pay only $6 (8% of $75) in California sales tax reimbursement on the lessor's purchase of the qualified property, the qualified cost to the lessor under the subsection of this regulation would be equal to $100 ($75 + $25).
(4) Special Rules for Operating Leases. The following special rules apply to any lease that is treated as an operating lease under this regulation.
A. Transitional Election. In the case of any operating lease entered into on or after January 1, 1994, and on or before September 22, 1994 (the effective date of SB 676, Stats. 1994, Ch. 751), the lessor under such lease may make the election to pay California use tax on its acquisition of the qualified property by paying an use tax measured by the purchase price of the property to the lessor and reporting the tax on the sales and use tax return of the lessor for the fourth calendar quarter of 1994. In computing the amount of use tax due from the lessor under this subsection of this regulation, any use tax collected and previously remitted by the lessor with respect to the lessee's rental payments under the lease shall be credited against the lessor's use tax liability under this subsection of this regulation.
EXAMPLE: T, a taxpayer engaged in the equipment leasing business in Oakland, acquires seven aluminum die-castings for $250 from S, a manufacturer of die-castings in Albany, on February 1, 1994 (assume that the purchase by T is not pursuant to a binding contract). T delivers a resale certificate to S and does not pay any California sales or use tax on T's purchase. T immediately leases the aluminum die castings to V, which is a qualified taxpayer engaged in manufacturing automatic screw machine products in Alameda, and T commences collecting the use tax on V's $5 monthly rental payments and remitting the use tax amounts on its quarterly return filed with the California State Board of Equalization. During the fourth quarter of 1994, T decides to make the election provided under subsection (b) (4) (A) of this regulation. On its fourth quarter 1994 California sales and use tax return, T would compute and remit its California use tax liability on its purchase of the aluminum die-castings based upon T's original $250 purchase price. T would receive a credit against T's use tax liability for any use tax previously remitted with respect to V's monthly lease rental payments.
B. Limitation on Qualified Costs. In determining a lessor's qualified cost under the rules of this subsection of this regulation, the allocation rule specified in Regulation 17053.49-4 shall apply to any costs actually paid by the lessor (or treated as paid by the lessor under the rules in this regulation) pursuant to a contract that was binding on January 1, 1994. Thus, for example, if a lessor has a binding contract to acquire qualified property for $100 as of January 1, 1994, and has paid a non-refundable deposit of $20 prior to January 1, 1994, and thereafter pays the remaining $80 purchase price, the lessor's qualified cost upon which a lessee may claim the MIC could not exceed $80 ($100 purchase price less $20 actually paid prior to January 1, 1994, pursuant to a binding contract).
C. Reduction in Qualified Cost to Lessor. In the case of any re-lease of qualified property by a lessor to another qualified taxpayer, the qualified cost to the lessor under subsection (b) (3) (A) of this regulation as to the subsequent lessee shall first be reduced by the amount of qualified cost taken into account by any predecessor lessee. However, the preceding sentence shall not apply to the extent that the predecessor lessee was required to recapture any MIC allowed to the predecessor lessee under the recapture rules in Regulation 17053.49-8.
EXAMPLE 1: L, a taxpayer engaged in the equipment leasing business, acquires two cranes from R, a manufacturer of cranes in Oxnard, for $100. L intends to immediately lease the cranes to M, a qualified taxpayer, for use by M in its manufacturing facility located in Ventura. Assume the lease is properly treated as an operating lease under this regulation and that L pays sales tax to R of $8 (8% of $100) at the time of L's purchase. Under these facts, M will be entitled to claim a $6 MIC (6% of $100) since L's qualified cost is $100.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that at the end of the lease term L re-leases the cranes to P, a qualified taxpayer, which manufactures synthetic resins and plastic materials at a facility in Moorpark. Under subsections (b) (3) (A) and (b) (4) (C) of this regulation, L's qualified cost upon which P may claim the MIC is zero ($0) since L's qualified cost is $0 ($100 original qualified cost to L, less $100 qualified cost taken into account by a predecessor lessee, M, when claiming the MIC).
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that M, the initial lessee, cancels the lease with L after 10 months, with L repossessing the cranes. Under the facts, M would be required to recapture (pursuant to Regulation 17053.49-8) the entire $6 MIC previously claimed by M, and L's qualified cost upon L's re-lease of the cranes to P would be $100 ($100 original qualified cost to L, less $100 qualified cost taken into account by a predecessor lessee, M, plus $100 of qualified cost recaptured upon M's cancellation of the lease with L).
D. Qualified Cost to Successor Lessor. In any case where a successor lessor acquires qualified property from a lessor that is subject to a lease (including any qualified property that is not currently being leased but which the successor lessor intends to re-lease) in a transaction that is not treated as a sale for California sales and use tax purposes, the qualified cost to the successor lessor for purposes of the MIC shall be reduced by the amount of qualified cost of the predecessor lessor that was taken into account by any lessee in computing a credit under the MIC. However, the preceding sentence does not apply in any case where the transaction in which the successor lessor acquires the qualified property from the predecessor lessor is treated as a sale for California sales and use tax purposes.
EXAMPLE 1: G is engaged in the equipment leasing business. G acquires three printing presses from Q, a manufacturer of printing presses, for $300. G immediately leases the printing presses to D, a qualified taxpayer, for use by D in D's newspaper publishing facility in Santa Barbara. Assume the lease is properly treated as an operating lease under this regulation, and that G pays sales tax to Q of $24 ($300 x 8%) at the time of purchase. Under these facts, D would be entitled to claim a MIC of $18 (6% of $300, G's qualified cost of the printing presses). Three years later G sells the printing presses to H, who is also engaged in the business of equipment leasing, for $250. Assume that G terminates its lease with D prior to the sale of the printing presses to H, and that H delivers a resale certificate to G so that H's purchase is exempt from California sales and use tax. Assume further that D agrees to re-lease the printing presses from H following H's acquisition of the printing presses from G. D terminates its lease two years after H's purchase of the printing presses, and H then re-leases the printing presses to E in a transaction treated as an operating lease under this regulation, for use by E in its magazine publishing facility in Carmel. Under these facts, H's qualified cost upon which E may claim the MIC is $0. ($250 paid by H to G, less $300 qualified cost taken into account by a predecessor lessee, D).
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that G does not terminate its lease with D prior to G's sale of the printing presses to H. Under California sales and use tax law, the sale by G to H would be subject to California sales tax and H would not be entitled to deliver a resale certificate to G. As a result, assume H pays California sales tax reimbursement to G on the $250 purchase price. Since H has paid California sales tax reimbursement to G, H's qualified cost upon which E may claim the MIC is $250.
E. Acquisition by Lessee of Leased Property. In any case where a lessee (or any party related to the lessee within the meaning of Internal Revenue Code Sections 267 or 318) of qualified property acquires the leased property from the lessor within one year of the date the qualified property is first used by the lessee, then the purchase of the qualified property by the lessee, then the purchase of the qualified property by the lessee shall be treated as a disposition of the property by the lessee and any MIC claimed by the lessee must be recaptured by the lessee under the rules of Regulation 17053.49-8. However, if the lessee (or related party) pays California sales or use tax on the acquisition of the qualified property, then the rules of Regulation 17053.49-4 shall apply to the acquisition and the lessee-purchaser may be entitled to claim the MIC with respect to its costs of acquisition.
EXAMPLE 1: J, a qualified taxpayer engaged in the business of manufacturing store fixtures, leases five lathes which are qualified property from Z, which is engaged in the equipment leasing business, for use in J's manufacturing facility in Folsom. Assume J's lease is treated as an operating lease under this regulation, and that J has claimed the MIC. Nine months after J first uses the lathes, J exercises an option under the lease to acquire the lathes from Z for their fair market value. Under the rules of this regulation, and Regulation 17053.49-8, J would be required to recapture any MIC claimed by J. However, if J paid California sales or use tax on the purchase of the lathes, then J may have qualified costs on J's purchase from Z under the rules of Regulation 17053.49-4.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that K, a partnership that is related to J, instead purchases the lathes from Z. Under the rules of this regulation, since K is related to J under Internal Revenue Code Section 267, K's acquisition of the lathes will be treated as a disposition by J of the qualified property and J will be required to recapture the MIC. If K continues to lease the lathes to J, then the rules of subsection (b)(4)(D) of this regulation shall apply in determining whether K will have qualified cost in the lathes upon which J may claim a MIC upon K's acquisition of the lathes. On the other hand, if K cancels the lease with J (assuming K may legally do so) and uses the lathes in a qualified activity conducted by K, then, assuming K has paid California sales or use tax on its acquisition, K may have qualified costs under the rules of Regulation 17053.49-4 assuming K continues to use the lathes in a qualified activity instead of re-leasing the lathes.
(5) Sale-Leaseback Transactions. In the case of any sale-leaseback transaction, the following rules shall apply:
A. General Rule. Except as provided in subsection (b) (5) (B) of this regulation, in the case of any sale-leaseback transaction in which a lessor does not pay California sales or use tax upon acquisition of an item of qualified property, the qualified cost to the lessor upon which the lessee would be entitled to claim the MIC shall be zero.
EXAMPLE: On January 15, 1994, F, a qualified taxpayer engaged in the business of manufacturing electric lamps, purchases three glass grinders that are qualified property from Y, the manufacturer of the glass grinders. Y collects California sales tax on the purchase by F. On January 30, 1994, F places the three grinders in service in its manufacturing facility in Crescent City. On May 15, 1994, G, which is engaged in the equipment leasing business, purchases the three grinders from F and immediately leases them back to F. Under the rules of this regulation, and Regulation 17053.49-8, F would be required to recapture any MIC claimed by F. In addition, since this transaction would not be treated as an “acquisition sale and leaseback” under Revenue and Taxation Code Section 6010.65, G must pay California sales or use tax on G's purchase of the grinders in order for F to claim any MIC under the rules of this regulation. If G delivers a resale certificate upon its acquisition of the grinders, so that G does not pay California sales or use tax upon G's acquisition of the grinders, then no MIC could be claimed by F upon F's lease of the grinders from G.
B. Acquisition Sale and Leaseback. In the case of any transaction that is properly treated as an “acquisition sale and leaseback” under Revenue and Taxation Code Section 6010.65, the requirement of subsection (b)(2)(C) of this regulation (relating to payment of California sales or use tax) shall be deemed satisfied by the lessor. If a transaction is treated as an “acquisition sale and leaseback” under this subsection of this regulation, then the qualified cost to the lessor under subsection (b) (3) (A) of this regulation shall be equal to the amount upon which the lessee paid California sales or use tax, plus any capitalized labor costs determined under subsection (b) (3) (B) of this regulation. However, the rules of this subsection of this regulation shall only apply if, and to the extent that, the costs originally incurred by the lessee to acquire, construct, or reconstruct the qualified property were treated as qualified costs under Regulation 17053.49-4.
EXAMPLE 1: On December 1, 1995, P, a calendar year qualified taxpayer engaged in the business of manufacturing soap and other detergents, purchases and immediately places in service two mixing tanks that are qualified property from Z, the manufacturer of the mixing tanks. Z collects sales tax on the purchase by P. On January 15, 1996, R, which is engaged in the equipment leasing business, purchases the two mixing tanks from P and immediately leases them back to P. Since R's acquisition and leaseback occurs within 90 days of P's first functional use of the mixing tanks, and assuming the other requirements of Revenue and Taxation Code Section 6010.65 are satisfied, P's sale to R and R's leaseback to P are treated as an “acquisition sale and leaseback” under Revenue and Taxation Code Section 6010.65 and the rules of subsection (b)(5)(B) of this regulation would apply. Under the rules of this regulation, and Regulation 17053.49-8, P would be required to recapture any MIC claimed on P's 1995 California return. However, R would be “deemed” to have paid California sales or use tax upon R's acquisition of the mixing tanks from P, and P would be entitled to claim an MIC on its 1996 California return in an amount equal to R's qualified cost, as determined under subsections (b) (3) (A) and (b) (3) (B) of this regulation. For this purpose, R's qualified cost could not exceed P's qualified cost determined under Regulation 17053.49-4.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that P purchases and places the mixing tanks in service on December 1, 1993, and R purchases the mixing tanks from P and immediately leases them back to P on January 15, 1994. Under these facts, even though the transaction would be treated as an “acquisition sale and leaseback” under Revenue and Taxation Code Section 6010.65, since P's qualified cost under Regulation 17053.49-4 would be equal to zero, R's qualified cost under this regulation would similarly be equal to zero, and thus no MIC would be allowed to R.
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that P purchased the mixing tanks under a contract that was treated as a binding contract under the rules in Regulation 17053.49-4. Assume further that 25 percent of P's total cost for the mixing tanks was actually paid prior to January 1, 1994, so that P's qualified cost for the mixing tanks was equal to 75 percent of the total cost of the tanks. Under these facts, since P's qualified cost under Regulation 17053.49-4 would be equal to 75 percent of P's total cost for the mixing tanks, R's qualified cost under this regulation could not exceed the amount of P's qualified cost, irrespective of the total amount paid by R to P to purchase the mixing tanks.
(6) Lessor Reporting Requirement. In the case of any lease treated as an operating lease under this regulation, the lessor shall provide the lessee with a statement within 45 days after the close of the lessee's taxable year for which the MIC is allowable to the lessee. This statement shall contain the amount of the lessor's qualified cost (as calculated under this regulation) upon which the lessee is eligible to compute the MIC and the amount of such qualified cost upon which the lessor has paid California sales or use tax. For purposes of providing this statement only, if a lessor is legally obligated to remit California sales or use tax with respect to its acquisition of qualified property, but has not yet remitted such amounts solely due to timing differences between the lessor's California sales and use tax return filing period and the lessee's taxable year, then the lessor may treat the amounts upon which the California sales or use tax liability arises as “qualified costs to the lessor.” The statement required by this subsection of this regulation should not be filed with the lessee's tax return for the taxable year, but shall instead be made available to the Franchise Tax Board upon request.
(c) Finance Leases. In the case of any leasing transaction that is treated as a sale under Part 1 (commencing with Section 6001) of Division 2 of the Revenue and Taxation Code (relating to the payment and collection of California sales and use tax), the rules set forth in this subsection of this regulation shall apply. Any lease subject to the rules of this subsection of this regulation shall be referred to in this regulation as a “finance lease.”
(1) In General. Under Revenue and Taxation Code Section 6006(g)(5), a lease of tangible personal property is generally treated as a sale for California sales and use tax purposes, unless the tangible personal property is leased in substantially the same form as acquired by the lessor or leased in substantially the same form as acquired by the transferor and the lessor or transferor has paid sales tax reimbursement or has paid use tax measured by the purchase price of the property. If the lease is not treated as a sale under Revenue and Taxation Code Section 6006(g)(5), then the rules of subsection (b) of this regulation apply.
(2) Applicable Requirements. In the case of a finance lease, the following requirements must be satisfied in order for the lessee to claim the MIC.
A. Lessee Must Be a Qualified Taxpayer. The requirement under Regulation 17053.49-3 that the user of the qualified property must be a qualified taxpayer shall be applied to the lessee and not to the lessor.
B. Use of Property in a Qualified Activity. The requirement under subsection (b)(4) of Regulation 17053.49-5 that property be used in a qualified activity in order to be treated as qualified property shall be applied to the lessee and not the lessor with respect to the property that is the subject of a finance lease.
C. Sales or Use Tax Payment Requirement. Except as provided in subsection (d) of Regulation 17053.49-4 (relating to capitalized labor), either the lessor or the qualified taxpayer must pay California sales tax reimbursement or California use tax on the lessee's purchase of the qualified property in order for the MIC to be allowed to the lessee. In the case of an “occasional sale” under Revenue and Taxation Code Section 6006.5, the lessee may satisfy the requirement of this subsection of this regulation by remitting the California sales or use tax on the lessee's purchase of the qualified property (assuming that under California sales and use tax law the lessor does not have a legal obligation to remit such amounts).
D. Qualified Costs. The requirement that costs, in order to be treated as qualified costs, must be paid or incurred for the “construction, reconstruction, or acquisition” of qualified property shall be applied by substituting the term “purchase” for the term “construction, reconstruction, or acquisition.” Since under general income tax principles a finance lease is treated as a purchase, the lessee's “lease rental payments” are treated as payments of the purchase price of the qualified property and would thus satisfy the “purchase” requirement. However, the lessee under such a lease would be obligated to pay California sales or use tax at the time the lease became effective, so that the lessee would be allowed the entire MIC on such lease in the year the lease became effective. On the other hand, if a lease is not properly treated as a finance lease under general income tax principles, then the “purchase” requirement would not be satisfied.
E. Chargeable to Capital Account. The requirement that costs, in order to be treated as qualified costs, must be properly chargeable to the capital account of the qualified taxpayer shall apply to the lessee's lease rental payments.
(3) Amount of MIC Lessee May Claim. In general, a lessee under a finance lease is entitled to claim the MIC at the same time and in the same amount as if such lessee had instead constructed, reconstructed, or acquired the qualified property other than by lease.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.49, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).
2. Change without regulatory effect amending subsection (c)(2)C. filed 7-5-2000 pursuant to section 100, title 1, California Code of Regulations (Register 2000, No. 27).
§17053.49-7. Reserved.

§17053.49-8. Recapture Rules.
Note     •     History

(See Regulation Section 17053.49-0 for Table of Contents.)
(a) In General. The MIC shall not be allowed or shall be recaptured under the rules of this regulation in any case where a disposition occurs within one year or less of the date the qualified property is first placed in service in this state.
(b) Disposition. For purposes of this regulation, the term “disposition” shall include any of the following events:
(1) Removal of the qualified property from this state;
(2) Disposition of the qualified property to any party that is not a related party (as defined in Internal Revenue Code Sections 267, 318 or 707), whether by sale, gift, a transfer upon the foreclosure of a security interest, or otherwise;
(3) Use of the qualified property by the qualified taxpayer primarily in any non-qualified activity; or
(4) Acquisition by a lessee (or any party related to the lessee under Internal Revenue Code Sections 267 or 318) of qualified property that is being leased by such lessee.
However the term “disposition” shall not include any of the following events:
A. a mere transfer of legal title to a creditor upon creation of a security interest;
B. a transfer by a qualified taxpayer of legal title to qualified property to a lessor where the lessor is not treated as the tax owner of such property and the lease is properly characterized as a financing transaction under California income tax principles;
C. any election by a C corporation to become an S corporation; or
D. any destruction of qualified property which qualifies as an involuntary conversion under Section 1033 of the Internal Revenue Code.
(c) Disposition of Qualified Property During the Taxable Year Placed in Service. In any case where there is a disposition of qualified property during the same taxable year in which such qualified property is first placed in service in this state, no MIC shall be allowed to the qualified taxpayer for the taxable year in which the qualified property is placed in service.
EXAMPLE: H, a qualified taxpayer, files its California tax returns using a fiscal year ending on September 30th. On March 1, 1996, H pays $700 (plus California sales tax) for 10 personal computers and immediately places the computers in service in H's manufacturing facility in Sunnyvale. On September 1, 1996, H acquires 10 new computers (which are immediately placed in service in H's manufacturing facility) for $800 (plus California sales tax) to replace the 10 computers already in service, and H instead uses the old computers to perform general administrative functions such as payroll and marketing. Under these facts, when H files its California tax return for its taxable year ending September 30, 1996, H is not entitled to claim the MIC for the 10 personal computers acquired on March 1, 1996, because the computers are treated as having been disposed of during the same taxable year as they were placed in service as a result of H's  use of these computers in an activity that is not a qualified activity. However, the 10 new computers acquired on September 1, 1996, may qualify for the MIC for H's taxable year ending September 30, 1996.
(d) Disposition of Qualified Property During a Taxable Year Subsequent to the Taxable Year Placed In Service. In any case where there is a disposition of qualified property within one year of the date that such qualified property is first placed in service in this state, but such disposition occurs in a different taxable year than the year in which the qualified property is placed in service in this state, then any MIC that was allowed with respect to the qualified property shall be recaptured by adding the recaptured MIC to the tax of the qualified taxpayer for the taxable year during which the disposition occurs (except as provided in subsection (e) of this regulation).
EXAMPLE: F, a qualified taxpayer, files its California tax returns using a fiscal year ending on September 30th. On August 15, 1996, F acquires 20 new computers for $600 (plus California sales tax) and immediately places the computers in service in H's manufacturing facility in Glendora. On May 15, 1997, F removes the 20 computers from F's manufacturing facility in Glendora and transports them for use in F's New Mexico manufacturing facility. Assuming F had been allowed a MIC on its taxable year ending September 30, 1996, California tax return for the computers acquired on August 15, 1996, F must recapture the entire MIC allowed by adding such amount to F's tax for its taxable year ending September 30, 1997.
(e) Adjustment of Carryforwards when Disposition Occurs. In any case where a qualified taxpayer is required to recapture any previously allowed MIC under the rules of this regulation, then, prior to the addition of any recaptured amounts to the tax under subsection (d) of this regulation, any outstanding MIC carryforwards shall first be reduced to the extent necessary to fully absorb the recapture amount. Any recapture amount remaining after application of the preceding sentence shall be added to the tax under the rules of subsection (d) of this regulation.
EXAMPLE 1: On May 1, 1999, within one year of placing qualified property in service in this state, K disposes of qualified property for which a $150 MIC was previously allowed. Under the rules of this regulation, K is required to recapture the entire $150 MIC. Assume K had $400 in MIC carryforwards that were available for use in 1999. Under these facts, K would reduce its available MIC carryforwards to $250 ($400 minus $150). Since no additional recapture amount remains, K is not required to increase its tax for 1999 to reflect the $150 recapture amount.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of $400 in available MIC carryforwards, K had only $100 in available MIC carryforwards. Under these facts, K would first reduce its available MIC carryforwards to zero, and would then increase its tax for 1999 by $50 ($150 recapture amount less $100 used to reduce available MIC carryforwards).
(f) Recapture of MIC Allowed to Pass-Through Entities.
(1) Partnerships and Partners. If a partnership places qualified property in service in this state, claims the MIC to the extent of the qualified costs paid or incurred, and thereafter removes the qualified property from this state, disposes of the qualified property to an unrelated party, or primarily uses the property for a purpose not qualifying for the MIC, then the MIC shall be recaptured under Revenue and Taxation Code Section 17053.49(g) and this regulation. The amount of MIC subject to recapture shall be allocated among the partners in the same ratio that the MIC was allocable to each partner for the qualified property subject to the recapture, and shall be added to the “net tax” of the partner for the taxable year in which the qualified property is disposed of, removed from this state, or put to a non-qualifying use.
EXAMPLE 1: Assume that C and D are equal partners of M, a partnership that is a qualified taxpayer. During M's taxable year beginning in 1995, M is allowed a total MIC of $100. C and D each are able to utilize their entire 50% share of the 1995 MIC to offset their respective 1995 tax liabilities, so that there is no MIC carryover amount for either C or D. Assume further that in 1996, within one year of the date the qualified property was placed in service, M moves the qualified property to another state, thereby triggering a recapture of the MIC. C and D are required to recapture their distributive share of the MIC already applied to their respective 1995 tax liabilities on their respective 1996 California tax returns by adding the recaptured MIC amounts to their respective “net tax” for 1996.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that C uses all of C's share of the MIC to reduce C's 1995 tax liability, but D carries over all of D's MIC to 1996. On C's 1996 California tax return, C will be required to recapture C's share of the MIC that was used to reduce C's “net tax” for 1995 and D will be required to reduce its MIC carryover to zero. D will not be required to increase D's “net tax” for 1996 by the amount of D's share of the MIC because D was unable to apply the amount to reduce D's tax liability for 1995.
(2) S Corporations and Shareholders.
A. Corporate Level Recapture. If an S corporation places qualified property in service in this state, claims the MIC to the extent of the qualified costs paid or incurred, and thereafter removes the qualified property from this state, disposes of the qualified property to an unrelated party, or primarily uses the qualified property for a purpose not qualifying for the MIC, then the MIC shall be recaptured under Revenue and Taxation Code Section 17053.49(g) and this regulation. The amount of any MIC recaptured by the S corporation shall be added to the “tax” of the S corporation imposed under Chapter 4.5 of Part 11 of the Revenue and Taxation Code, except that the MIC recapture amount added to the “tax” of the S corporation shall be appropriately reduced by the amount by which the S corporation was required to reduce such MIC under Part 11 of the Revenue and Taxation Code.
B. Pass-through of MIC Recapture to Shareholders. In any case where a “disposition” of qualified property by an S corporation occurs, the amount of MIC subject to recapture shall be allocated among the shareholders of the S corporation in the same ratio that the MIC was allocable to each shareholder for the qualified property subject to the recapture, and shall be added to the “net tax” of the shareholder for the taxable year in which the qualified property is disposed of, removed from this state, or put to a non-qualifying use.
EXAMPLE: Assume that Q, an S corporation with three equal shareholders (E, F, and G), is allowed a MIC in 1995 that Q is fully able to utilize to reduce Q's 1.5% S corporation tax liability. Assume further that E, F, and G each claims a one-third (1/3) share of the MIC allowed to Q, and that each shareholder is able to utilize their entire distributive share of this MIC on their respective 1995 California tax returns. In 1996, within one year of the date the qualified property was placed in service in California, Q sells the property to an unrelated party. Under these facts, Q, E, F, and G must each recapture the MIC allowed and claimed by each on their respective 1995 California tax returns by adding such recapture amount to their 1996 respective California “tax” or “net tax,” as the case may be.
(g) Recapture of MIC Allowed in 1994 or 1995 But Deferred Until Qualified Taxpayer's First Taxable Year Beginning on or after January 1, 1995. In the case of any qualified costs paid or incurred with respect to qualified property that is placed in service in 1994 or 1995 for which the MIC is allowed but deferred under the rules of subsection (b) of Regulation 17053.49-1, the one year period for which any disposition of such property shall trigger recapture of the MIC (as described in subsection (a) of this regulation) shall commence on the date that the qualified property is first treated as placed in service in this state by the qualified taxpayer. Any MIC required to be deferred under the rules of subsection (b) of Regulation 17053.49-1 shall be first offset against any MIC recapture amount (in the same manner as MIC carryforwards are offset under the rules of subsection (e) of this regulation) prior to being claimed on the qualified taxpayer's California tax return for its first taxable year beginning on or after January 1, 1995.
EXAMPLE 1: D, a qualified taxpayer, pays or incurs qualified costs for qualified property that is placed in service in this state on June 1, 1994. However, under subsection (b) of Regulation 17053.49-1, D may not claim the MIC for these qualified costs until D files its California tax return for D's first calendar or fiscal year beginning on or after January 1, 1995. On May 1, 1995, D removes the qualified property to Nevada, thereby triggering a recapture of the MIC allowed to D for its 1994 qualified costs. When D files its calendar year 1995 California tax return on March 15, 1996, D may not claim the MIC with respect to the qualified property D placed in service on June 1, 1994.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that D instead removes the qualified property to Nevada on June 2, 1995. In this situation, no recapture is triggered by the removal because the disposition occurs more than one year after the property was placed in service in this state by D.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.49, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).
§17053.49-9. MIC Carryforwards.
Note     •     History

(See Regulation Section 17053.49-0 for Table of Contents.)
(a) In General. In any case where the MIC exceeds the “net tax,” the excess may be carried forward to reduce the net tax in the following year, and succeeding years, as follows:
(1) Except as provided in subsection (a)(2) of this regulation and subsection (c) of this regulation, for the eight taxable years succeeding the taxable year for which the MIC is allowed, if necessary, until the credit is exhausted.
(2) Except as provided in subsection (c) of this regulation, in the case of any small business, for the ten taxable years succeeding the taxable year for which the MIC is allowed, if necessary, until the credit is exhausted.
Except as provided in this regulation, the amount of MIC that may be carried over to the following year, and succeeding years, including carryforwards from any and all prior years, is not limited.
(b) Small Business Determination Made as of the Last Day of the Taxable Year for Which the MIC is Allowed. Except as provided in subsection (c) of this regulation, the determination of which carryforward period shall apply shall be made as of the last day of the qualified taxpayer's taxable year for which the MIC is allowed.
EXAMPLE 1: Assume that as of the last day of its 1996 taxable year G, a qualified taxpayer, is a “small business” for purposes of the MIC. During G's 1996 taxable year, G purchased a machine that was qualified property for $500, thereby entitling G to a $30 MIC. Assume that the entire $30 MIC exceeds the “net tax,” so that G is required to carry forward the $30 MIC. Under these facts, G is entitled to carry forward the unused $30 MIC to each of its ten (10) succeeding taxable years, if necessary, until the MIC is exhausted, regardless of whether G is a small business in any of its succeeding taxable years.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that G purchases another machine that is qualified property in its 1997 taxable year for $750, thereby entitling G to a $45 MIC. Assume that in G's 1997 taxable year G is no longer treated as a “small business” for purposes of the MIC. Assume further that the entire $45 MIC for 1997 exceeds the “tax,” so that G is required to carry forward the $45 MIC. Under these facts, G is entitled to carry forward the unused $45 MIC to each of its eight (8) succeeding taxable years, if necessary, until the MIC is exhausted, regardless of whether G is a small business in any of its succeeding years.
(c) Special Rule for MIC Allowed in 1994 or 1995 But Deferred Until Qualified Taxpayer's First Taxable Year Beginning on or after January 1, 1995. In the case of any qualified costs paid or incurred with respect to qualified property that is placed in service in 1994 or 1995 for which the MIC is allowed but deferred under the rules of subsection (b) of Regulation 17053.49-1, the carryforward period specified in subsection (a) of this regulation shall commence with the qualified taxpayer's first taxable year beginning on or after January 1, 1995. However, the determination of whether the qualified taxpayer is a small business shall be made as of the last day of the taxable year in which the MIC is allowed, rather than as of the last day of the taxable year in which the MIC may first be claimed under subsection (b) of Regulation 1753.49-1.
EXAMPLE 1: Assume that as of the last day of its 1994 taxable year H, a qualified taxpayer filing on a calendar year basis, is a “small business” for purpose of the MIC. During H's 1994 taxable year, H purchased a machine that was qualified property for $800, thereby entitling H to a $48 MIC. Under the rules of subsection (b) of Regulation 17053.49-1, H may not claim the credit until its first taxable year beginning on or after January 1, 1995. Assume that in H's 1995 taxable year the entire $48 MIC exceeds the “net tax,” so that H is required to carry forward the $48 MIC. Under these facts, H is entitled to carry forward the unused $48 MIC to each of its ten (10) taxable years succeeding the taxable year in which the credit could first be claimed (1995), if necessary, until the MIC is exhausted, regardless of whether H is a small business in any of its succeeding taxable years.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that for its 1995 taxable year H is no longer treated as a “small business” for purposes of the MIC. Under these facts, the result is the same as in EXAMPLE 1 since the determination of whether H is a small business for purposes of the MIC is made as of the last day of the taxable year in which the MIC was allowed (1994), rather than the last day of the taxable year in which the MIC could first be claimed (1995).
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that for its 1994 taxable year H was not a “small business” for purposes of the MIC but was a “small business” for purposes of the MIC for H's 1995 taxable year. Under these facts, H is entitled to carry forward the unused MIC for the eight (8) taxable years succeeding 1995 (the taxable year in which the MIC could first be claimed), even though H was a small business in 1995, since H was not a small business in the taxable year in which the MIC was allowed (1994).
(d) Small Business. In order for a qualified taxpayer to be treated as a small business, it need satisfy only one of the three criteria specified in the definition of “small business” in subsection (t) of Regulation 17053.49-2. Thus, for example, even though a qualified taxpayer's gross receipts and net assets may exceed the applicable thresholds as of the last day of the taxable year for which a MIC is allowed, the qualified taxpayer may still be treated as a small business for purposes of Regulation 17053.49-9 if its total MIC for the taxable year is less than one million dollars ($1,000,000).
(e) Carryforwards for Pass-Through Entities. In the case of any MIC allowed to a pass-through entity, the determination of the applicable carryover period for any MIC required to be carried forward shall be made at the pass-through entity level.
(f) Carryforwards Permitted After Sunset. In the event that the MIC is repealed under Revenue and Taxation Code Section 17053.49(i), any unused MIC may be carried forward, as provided above, until the unused MIC is exhausted.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.49, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).  
§17053.49-10. Recordkeeping Requirements.
Note     •     History

(See Regulation Section 17053.49-0 for Table of Contents.)
(a) In General. For purposes of Regulations 17053.49-1 through 17053.49-11, inclusive, a qualified taxpayer shall be required to maintain books and records that are adequate to substantiate its entitlement to any claimed MIC. These books and records should be retained for as long as the statute of limitations on assessment for the taxable year for which the MIC was allowed remains open, and, in the case of any MIC that is being carried forward, for the additional number of years that the actual carryforward of such MIC occurs.
(b) Books and Records. The books and records maintained by the qualified taxpayer should be sufficient to clearly establish all necessary facts which affect the allowance and amount of the MIC. For this purpose, “adequate” recordkeeping depends upon the sufficiency of the information contained in the documentation. In many cases, the books and records normally maintained for California income tax purposes will be adequate substantiation for the MIC.
EXAMPLE 1: X, a qualified taxpayer, claims a MIC for the purchase of 100 computers to be used in X's manufacturing facility in West Los Angeles. Assume the computers were purchased from a mail order retailer located in South Dakota. If X has only retained the original invoice and a cash disbursements journal, neither of which reflect that California sales or use tax was paid by X, then the invoice would not be sufficient to establish that California sales or use tax was paid on the computers. However, if X has retained a copy of a timely filed California use tax return that clearly demonstrates that California use tax was paid by X with respect to the computers, then X would be treated as having paid or incurred qualified costs.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that X intends to use 20 of the computers for general administrative functions such as payroll and marketing. In addition to the records necessary to establish that California sales or use tax was paid, X should also retain a copy of the purchase contract containing a detailed list of the computers by model number so that X can establish which of the computers are being used in a qualified activity and which are not being used in a qualified activity.
(c) Affidavit Regarding Sales and Use Tax. For purposes of this regulation only, in the case of any lump sum or turn key contract, the requirement that California sales or use tax be paid may be established by reference to bids, contracts or affidavits from the contractor. For purposes of determining whether California sales or use tax has been paid, directly or indirectly by the contractor, when it is not a separately stated contract amount, a qualified taxpayer shall be entitled to rely on a written representation to that effect from the contractor, and California sales or use tax shall be deemed to have been paid in the absence of affirmative knowledge on the part of the qualified taxpayer that California sales or use tax was not paid.
(d) Written Statement by Lessor to Lessee. In the case of any leasing transaction described in subsection (b) of Regulation 17053.49-6 (relating to operating leases), the lessor shall provide a statement to the lessee specifying the amount of the lessor's original cost of the qualified property upon which the lessee may claim the MIC and the amount of that cost upon which California sales or use tax was paid. This statement must be provided to the lessee within 45 days after the close of the lessee's taxable year for which the MIC is allowable to the lessee. For purposes of providing this statement only, if a lessor is legally obligated to remit California sales or use tax with respect to its acquisition of qualified property, but has not yet remitted such amounts solely due to timing differences between the lessor's California sales and use tax return filing period and the lessee's taxable year, then the lessor may treat the amounts upon which the California sales or use tax liability arises as “qualified costs to the lessor.” This written statement should not be filed with any return of either the lessor or lessee, but shall instead be retained by the lessee and made available to the Franchise Tax Board upon request.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.49, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).  
§17053.49-11. Miscellaneous Provisions.
Note     •     History

(a) Operative Dates of the MIC. The MIC shall cease to be operative on January 1, 2001, or on the earliest January 1 thereafter, if the total employment in this state, excluding employment in the aerospace sector, as determined by the Employment Development Department on the preceding January 1, does not exceed by 100,000 jobs the total manufacturing sector employment in this state on January 1, 1994.
(b) Los Angeles Revitalization Zone (LARZ) Credits. Under Revenue and Taxation Code Section 17052.15, relating to the Los Angeles Revitalization Zone (“LARZ”), in any case where a credit would be allowed for qualified property under both that provision and the MIC, a qualified taxpayer must make an election, on the return filed for each taxable year, as to whether to claim the MIC or the LARZ credit. Thus, a qualified taxpayer may not claim both the MIC and a LARZ credit for the costs of the same qualified property.
(c) Election to Claim Sales and Use Tax Refund in lieu of MIC under Revenue and Taxation Code Section 6902.2. Under Revenue and Taxation Code Section 6902.2, a qualified taxpayer may elect to claim a refund of a portion of the California sales and use tax paid with respect to qualified property from the California State Board of Equalization in lieu of claiming the MIC. Under that section, however, refunds may only be claimed at the times and in the amounts that the MIC could have been actually used by the qualified taxpayer to offset its California income tax liability for the taxable year or years in which the refund claim is filed. Finally, the in-lieu election required under Revenue and Taxation Code Section 6902.2 shall apply to each specific item of qualified property and shall also include any capitalized labor costs that are directly allocable to such item of qualified property.
EXAMPLE: Assume that in X's taxable year beginning in 1995, X, a qualified taxpayer, incurs $100 in qualified costs (none of which are attributable to directly allocable capitalized labor) for an item of qualified property. Under these facts, X would be entitled to a MIC of $6 (6% of $100). X may generally claim the MIC on X's 1995 income tax return, or, under Revenue and Taxation Code Section 6902.2, X may instead elect to apply for a refund from the State Board of Equalization of the amount of such MIC that X could have utilized to offset X's 1995 income tax liability. Thus, for example, if X had a 1995 income tax liability of $3 BEFORE application of the $6 MIC, X could claim a $6 MIC, $3 of which is applied to X's 1995 tax liability and $3 of which is carried forward to subsequent taxable years. Similarly, X may only claim a $3 refund under Revenue and Taxation Code Section 6902.2 since this is the amount that “could have been used” by X to offset X's income tax liability for 1995. Finally, any MIC amounts that would have been required to be carried forward to future taxable years may not instead be claimed as a refund under Revenue and Taxation Code Section 6902.2 in lieu of claiming the MIC.
(d) Sales and Use Tax Exemption under Revenue and Taxation Code Section 6377. Under Revenue and Taxation Code Section 6377, a qualified taxpayer that is treated as a “new business” may be eligible to receive an exemption from California sales and use tax with respect to certain acquisitions of property (some of which may also be treated as qualified property under the MIC). However, Revenue and Taxation Code Section 6377(b) (9) (C) provides that such sales and use tax exemption is not available with respect to any property for which the MIC is claimed.
(e) Special Rule Applicable to Fiscal Year Taxpayers. Fiscal year taxpayers who paid or incurred qualified costs on or after January 1, 1994, and during the qualified taxpayer's taxable year beginning in 1993, shall treat any such taxable year 1993 qualified costs as 1994 qualified costs to be claimed on the qualified taxpayer's 1995 taxable year return. As a result, fiscal year taxpayers that pay or incur qualified costs during both their fiscal years beginning in 1993 and 1994 would treat such amounts as 1994 qualified costs under Regulations 17053.49-1 through 17053.49-11, inclusive.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.49, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).  
§17054(a). Credit for Personal Exemptions.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 9-30-75; effective thirtieth day thereafter (Register 75, No. 40).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17054(b). Additional Exemptions for Dependents.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 9-30-75; effective thirtieth day thereafter (Register 75, No. 40).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17054.5(a). Credits for Maintaining Certain Students As Members of Taxpayer's Household.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 9-30-75; effective thirtieth day thereafter (Register 75, No. 40).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17054.5(b). Definitions.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 9-30-75; effective thirtieth day thereafter (Register 75, No. 40).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17056. General Definition of a Dependent.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 1-9-76; effective thirtieth day thereafter (Register 76, No. 2).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17057. Rules Relating to General Definition of Dependent.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 1-9-76; effective thirtieth day thereafter (Register 76, No. 2).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17058. Multiple Support Agreements.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 1-9-76; effective thirtieth day thereafter (Register 76, No. 2).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17059.5. Support Test in Case of Child of Divorced or Separated Parents.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 1-9-76; effective thirtieth day thereafter (Register 76, No. 2).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17060. Determination of Status.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 6-10-76; effective thirtieth day thereafter (Register 76, No. 24).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17064.5. Adjustment to Items of Tax Preference Where No Tax Reduction Results.
Note     •     History

NOTE

Authority cited: Sections 17064.5(f) and 19253, Revenue and Taxation Code. Reference: Sections 17062, 17063, 17064.5 and 17064.6, Revenue and Taxation Code.
HISTORY

1. New section filed 3-12-82; effective thirtieth day thereafter (Register 82, No. 11).
2. Change without regulatory effect repealing section filed 9-30-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 40).
§17069. Special Tax Credit.
Note     •     History

NOTE

Authority cited: Sections 19253 and 26422, Revenue and Taxation Code. Reference: Section 11125, Gov. Code and Sections 17048, 17069 and 25564, Revenue and Taxation Code.
HISTORY

1. New section filed 12-31-73 as an emergency; effective upon filing (Register 74, No. 1).
2. Certificate of Compliance filed 2-27-74 (Register 74, No. 9).
3. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
Subchapter 3. Computation of Taxable Income
Article 1. Definitions of Gross Income, Adjusted Gross Income, and Taxable Income
§17071(a). Gross Income.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New Article 1 (Sections 17071(a) through 17071(q) and 17072) filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17071(b). Compensation for Services, Including Fees, Commissions, and Similar Items.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
§17071(c). Gross Income Derived from Business.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No.7).
§17071(d). Gross Income of Farmers.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No.7).
§17071(e). Gains Derived from Dealings in Property.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17071(f). Interest.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
§17071(g). Rents and Royalties.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17071(h). Dividends.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17071(i). Alimony and Separate Maintenance Payments; Annuities; Income from Life Insurance and Endowment Contracts.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17071(j). Pensions.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Amendment filed 11-26-74; effective thirtieth day thereafter (Register 74, No. 48).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17071(k). Income from Discharge of Indebtedness.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17071(<em>l</em>). Distributive Share of Partnership Gross Income; Income in Respect of a Decedent; Income from an Interest in an Estate or Trust.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17071(m). Miscellaneous Items of Gross Income.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17071(n). Salaries and Other Income of Employees of Other States and Foreign Countries.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17071(o). Income of Individuals Living in National Parks, etc.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 12-26-81; effective thirtieth day thereafter (Register 81, No. 52).
§17071(p). Income of Indians and Individuals Living on Indian Reservations.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17071(q). Income of Individuals Living on Federal Areas.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17072. Adjusted Gross Income.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Amendment filed 10-2-68; effective thirtieth day thereafter (Register 68, No. 37).
2. Amendment of subsection (c) filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
3. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
Article 2. Items Specifically Included in Gross Income
§17081-17083(a). Alimony and Separate Maintenance Payments; Income to Wife or Former Wife.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17081-17083(b). Effective Date; Taxable Years Ending After December 31, 1954.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17086. Patronage Dividends.
Note     •     History

(a) Election to Consider as Income. A taxpayer who receives noncash patronage allocations (as defined in subsection (g)) may elect to include such patronage allocations in gross income for the taxable year received. If a taxpayer elects to include such noncash patronage allocations in gross income as received, their face amount shall be reported as gross income. If, upon redemption of noncash patronage allocations, the taxpayer does not and cannot recover the full amount of the noncash patronage allocations previously reported, any loss sustained may be deducted from gross income in the taxable year during which the allocations are redeemed.
(b) Election to Exclude from Gross Income. In lieu of reporting noncash patronage allocations (as provided in subsection (a)), a taxpayer may elect to exclude noncash patronage allocations (as defined in subsection (g)) from gross income until redeemed or realized upon. In case noncash patronage allocations are excluded from gross income, only the amount realized when redeemed is required to be included in gross income. If such allocations bear interest, the interest is not includible in gross income until the allocations are redeemed or realized upon, unless prior to redemption interest thereon is paid in cash. For the method of electing to exclude noncash patronage allocations, see subsection (c).
(c) Elections. If a taxpayer includes in his gross income for his first taxable year beginning after December 31, 1956, any amount attributable to noncash patronage allocations, he shall be deemed to have elected to include the face amount of such allocations in gross income for such year and all subsequent taxable years. Furthermore, a taxpayer shall be deemed to have elected to include all noncash patronage allocations in gross income, if less than the face amount of such allocations are reported, or if noncash allocations have been received from more than one cooperative organization and allocations attributable to one or more cooperatives were included in gross income.
A taxpayer shall be deemed to have elected to exclude noncash patronage allocations from gross income if he omits the amount of such allocations from gross income for the first taxable year beginning after December 31, 1956, during which any noncash patronage allocations are received. The amount of patronage allocations which are excluded must be disclosed in the return or by a written statement filed with the return. If such written statement has not previously been filed, it must be filed before a taxpayer will be permitted to exclude noncash patronage allocations from gross income.
The elections provided for by this subsection may be made, regardless of the taxpayer's method of accounting. Once an election has been made, it may be changed only with the consent of the Franchise Tax Board. Application for permission to change an election shall be filed within 90 days after the beginning of the taxable year to be covered by the return.
(d) Statute of Limitations. Whenever a taxpayer has elected to exclude noncash patronage allocations from gross income until such allocations are redeemed or realized upon, the statutory period prescribed in Section 19057 for the assessment of any deficiency attributable to amounts excluded will not expire prior to the expiration of four years from the date the Franchise Tax Board is notified by the taxpayer that such deferred allocations have been redeemed or realized upon. Such deficiency may be assessed prior to the expiration of such four-year period notwithstanding the provisions of any other law or rule of law which might bar such assessment.
A taxpayer shall notify the Franchise Tax Board that deferred noncash patronage allocations have been realized or redeemed by including the amount of such allocations in gross income for the taxable year that such amounts are redeemed or realized upon.
(e) Records. A taxpayer electing to exclude noncash patronage allocations from gross income for the year that such allocations are made must maintain such records as are necessary to clearly reflect income in accordance with this regulation and Section 17551 (relating to accounting periods and methods of accounting under Subchapter E of Chapter 1 of Subtitle A of the Internal Revenue Code).
(f) Cross-reference. If a taxpayer who has elected to exclude patronage allocations from gross income dies before noncash patronage allocations are redeemed or realized upon, the amount realized, when redeemed, constitutes income in respect of a decedent that is subject to tax in the manner and to the extent provided for by Section 17731 (relating to rules applicable to estates, trusts, beneficiaries, and decedents under Subchapter J of Chapter 1 of Subtitle A of the Internal Revenue Code.).
(g) Noncash Patronage Allocations Defined. For purposes of this regulation the term “noncash patronage allocations” means amounts allocated on the basis of the business done with or for a patron by any cooperative organization, other than cash or merchandise, evidenced by any document which discloses the dollar amount of such allocations, such as capital stock, revolving fund certificates, certificates of indebtedness, retain certificates, or letters of advice.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17086, Revenue and Taxation Code.
HISTORY

1. Editorial renumbering and amendment of former Section 17117.5 to Section 17086 filed 4-17-85; effective thirtieth day thereafter (Register 85, No. 16). For prior history of Section 17117.5, see Registers 81, No. 52 and 64, No. 25.
2. Change without regulatory effect amending subsections (d)-(f) and Note filed 8-18-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 34).
§17101-17112.7(a). Introduction.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer of former sections 17101, 17102, 17103, 17104-17107 and 17108, and new section 17101-17112.7(a) filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30). For former sections see Register 58, No. 17.
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(b). Applicability of Sections 17101 to 17112.7, Inclusive.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(c). Excludable Amounts Not Income.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(d). Exclusion Ratio.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(e). Expected Return.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(f). Investment in the Contract.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(g). Adjustment in Investment Where a Contract Contains a Refund Feature.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(h). Effect of Certain Employer Contributions with Respect to Premiums or Other Consideration Paid or Contributed by an Employee.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(i). Tables.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(j). Effect of Transfer of Contracts on Investment in the Contract.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(k). Amounts Not Received As Annuity Payments.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(<em>l</em>). Effect of Taking an Annuity in Lieu of a Lump Sum upon the Maturity of a Contract.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(m). Special Rule for Employee Contributions Recoverable in Three Years.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(n). Exceptions from Application of Principles of Sections 17101 to 17112.7, Inclusive.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(o). Applicability of Sections 17101 to 17112.7, Inclusive, to Accident or Health Plans.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(p). Life Insurance Contracts Purchased Under Qualified Employee Plans.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(q). Special Rules Applicable to Owner-Employees.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17101-17112.7(r). Treatment of Certain Total Distributions with Respect to Self-Employed Individuals.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17114. Prizes and Awards.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17115-17116. Treatment of Bond Premiums in Case of Dealers in Tax-Exempt Securities.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17117(a). Election to Include Loans in Income.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17117(b). Effect of Election on Adjustments for Other Taxable Years.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17117.5. Patronage Dividends.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 17086, Revenue and Taxation Code.
HISTORY

1. New section filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Amendment of subsections (a)-(d) and (f) filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
3. Editorial renumbering and amendment of Section 17117.5 to Section 17086 filed 4-17-85; effective thirtieth day thereafter (Register 85, No. 16).
§17118. Salaries of Governmental Employees.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17119. Presumption of Taxability.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17120(a). General Rules Relating to Group-Term Life Insurance Purchased for Employees.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 6-10-76; effective thirtieth day thereafter (Register 76, No. 24).
2. Editorial correction in subsection (b)(1)(B)(i) (Register 76, No. 39).
3. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17120(b). Exceptions to the Rule of Inclusion.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 6-10-76; effective thirtieth day thereafter (Register 76, No. 24).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17120(c). Determination of Amount Equal to Cost of Group-Term Life Insurance.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 6-10-76; effective thirtieth day thereafter (Register 76, No. 24).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17122.5. Payments for or Reimbursements of Expenses of Moving from One Residence to Another Residence Attributable to Employment or Self-Employment.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 6-10-76; effective thirtieth day thereafter (Register 76, No. 24).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17123(a). Services of Child.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-6-76; effective thirtieth day thereafter (Register 76, No. 19).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17123(b). Compensation of Child.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-6-76; effective thirtieth day thereafter (Register 76, No. 19).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
Article 3. Items Specifically Excluded from Gross Income
§17131-17132(a). Exclusion from Gross Income of Proceeds of Life Insurance Contracts Payable by Reason of Death.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17131-17132(b). Employees' Death Benefits.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
3. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17133. Interest Payments.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17134. Payment of Life Insurance Proceeds at a Date Later Than Death.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17135(a). Alimony, etc., Payments.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17135(b). Effective Date.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17136. Gifts and Inheritances.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17137. Interest on Obligations of the United States and Territories Thereof
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 17137, Revenue and Taxation Code.
HISTORY

1. Repealer of Sections 17137(a)-(c) and new Section 17137 filed 2-11-82; effective thirtieth day thereafter (Register 82, No. 7). For prior history, see Register 64, No. 4.
2. Change without regulatory effect repealing section (Register 87, No. 15).
§17138. Compensation for Injuries or Sickness.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17139(a). Amounts Attributable to Employer Contributions.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 3-19-76; effective thirtieth day thereafter (Register 76, No. 12).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17139(b). Amounts Expended for Medical Care.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 3-19-76; effective thirtieth day thereafter (Register 76, No. 12).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17139(c). Payments Unrelated to Absence from Work.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 3-19-76; effective thirtieth day thereafter (Register 76, No. 12).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17139(d). Wage Continuation Plans.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 3-19-76; effective thirtieth day thereafter (Register 76, No. 12).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17139(e). Accident and Health Plans.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 3-19-76; effective thirtieth day thereafter (Register 76, No. 12).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17140. Contributions by Employer to Accident and Health Plans.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17141. Rental Value of Parsonages.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 9-15-58; effective thirtieth day thereafter (Register 58, No. 17).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17142(a). Income from Discharge of Indebtedness.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17142(b). Making and Filing of Consent.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17143. Exclusion from Gross Income of Lessor of Real Property of Value of Improvements Erected by Lessee.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17144-17145. Recovery of Certain Items Previously Deducted or Credited.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17146. Military Exclusion.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17146.5. Compensation of Members of the Armed Forces of the United States for Service in a Combat-Zone During an Induction Period, or for Service While Hospitalized as a Result of Such Combat-Zone Service.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-6-76; effective thirtieth day thereafter (Register 76, No. 19).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17147. Mustering-Out Payments.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17150(a). Exclusion of Amounts Received As a Scholarship or Fellowship Grant.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 9-15-58; effective thirtieth day thereafter (Register 58, No. 17).
2. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
§17150(b). Limitations.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
§17150(c). Definitions.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 9-15-58; effective thirtieth day thereafter (Register 58, No. 17).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17150(d). Items Not Considered As Scholarships or Fellowship Grants.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 9-15-58; effective thirtieth day thereafter (Register 58, No. 17).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17151. Meals and Lodging Furnished for the Convenience of the Employer.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
§17153. Salaries and Other Income of Employees of Foreign Countries.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17157. Applicable Rules Relating to Certain Reduced Uniformed Services Retirement Pay.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-9-76; effective thirtieth day thereafter (Register 76, No. 28).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17158. Exclusion of Insurance Proceeds for Reimbursement of Certain Living Expenses.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 9-23-76; effective thirtieth day thereafter (Register 76, No. 39).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
Article 4. Standard Deduction
NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New Article 4 (Sections 17171(a) through 17175) filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer of Article 4 (Sections 17171(a) through 17177) filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52). For prior history, see Register 76, No. 52.
Article 5. Deduction for Personal Exemptions
§17181(a). Deductions for Personal Exemptions.
Note     •     History

HISTORY

1. New article 5 (Sections 17181(a) through 17186) filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 9-30-75; effective thirtieth day thereafter (Register 75, No. 40).
§17181(b). Additional Exemptions for Dependents.
History

HISTORY

1. Repealer filed 9-30-75; effective thirtieth day thereafter (Register 75, No. 40).
§17182-17183(a). General Definition of a Dependent.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17182-17183(b). Rules Relating to General Definition of Dependent.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17184. Multiple Support Payments.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17186. Determination of Tax Status.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
Article 6. Itemized Deductions
§17201. Disallowance of Expenses Incurred at Private Clubs Which Discriminate.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Sections 17201, 17270 and 17270.5, Revenue and Taxation Code.
HISTORY

1. New section filed 9-1-87; operative 10-1-87 (Register 87, No. 37). For prior history, see Register 81, No. 3.
2. Change without regulatory effect repealing section filed 5-8-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 19).
§17202(a). Business Expenses--In General.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No.9).
2. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
§17202(b). Traveling Expenses.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17202(c). Cost of Materials.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-31-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17202(d). Repairs.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-31-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17202(e). Expenses for Education.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
§17202(f). Professional Expenses.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17202(g). Compensation for Personal Services.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17202(h). Treatment of Excessive Compensation.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17202(i). Bonuses to Employees.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17202(j). Certain Employee Benefits.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17202(k). Rentals.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17202(<em>l</em>). Expenses of Farmers.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Amendments filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
3. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
§17202(m). Excepted Contributions.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Amendment filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
3. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17202(n). Cross Reference.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17202(o). Reporting and Substantiation of Traveling and Other Business Expenses of Employees.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17202(p). Improper Payments to Officials or Employees of Foreign Countries.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17202(q). Legislative per Diem.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New subsection (q) filed 12-21-77 as an emergency; effective upon filing (Register 77, No. 52).
2. Certificate of Compliance filed 4-4-78 (Register 78, No. 14).
3. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17203. Deduction for Interest.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 9-15-58; effective thirtieth day thereafter (Register 81, No. 3).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17204. Federal Social Security Taxes and State Unemployment Insurance Contributions.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 17204, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Amendment filed 5-30-75 as an emergency; effective upon filing (Register 75, No. 22).
3. Certificate of Compliance filed 8-26-75 (Register 75, No. 35).
4. Editorial correction renumbering Section 17204(f) to Section 17204 and new NOTE filed 9-14-83 (Register 83, No. 38).
5. Change without regulatory effect repealing section filed 9-30-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 40).
§17204(a). Deduction for Taxes.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9)
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17204(b). Deduction Denied in Case of Certain Taxes.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Amendment filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
3. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17204(c). Federal Stamp Taxes.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17204(d). Taxes for Local Benefits.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17204(e). Certain Retail Sales Taxes and Gasoline Taxes.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17204(f). Federal Social Security Taxes and State Unemployment Insurance Contributions.
History

HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Amendment filed 5-30-75 as an emergency; effective upon filing (Register 75, No. 22).
3. Certificate of Compliance filed 8-26-75 (Register 75, No. 35).
4. Editorial correction renumbering Section 17204(f) to Section 17204 filed 9-14-83 (Register 83, No. 38).
§17204(g). Taxes of Shareholders Paid by Corporation.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17205. Apportionment of Taxes on Real Property Between Seller and Purchaser.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17205.5. Payments for Municipal Services in Atomic Energy Communities.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 6-10-76; effective thirtieth day thereafter (Register 76, No. 24).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17206(a). Losses.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17206(b). Obsolescence of Nondepreciable Property.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17206(c). Demolition of Buildings.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
§17206(d). Decline in Value of Stock.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17206(e). Worthless Securities.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17206(f). Farming Losses.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17206(g). Casualty Losses.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
§17206(h). Theft Losses.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
§17206(i). Sale of Residential Property.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17206(j). Wagering Losses.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17206.5. Election in Respect of Losses Attributable to a Disaster.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 8-27-71; effective thirtieth day thereafter (Register 71, No. 35).
2. Amendment filed 9-23-76; effective thirtieth day thereafter (Register 76, No. 39).
3. Repealer filed 1-15-81; effective thirtieth day thereafter (Register 81, No. 3).
§17207(a). Bad Debts.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17207(b). Evidence of Worthlessness.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17207(c). Partial or Total Worthlessness.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17207(d). Reserve for Bad Debts.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17207(e). Nonbusiness Debts.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17207(f). Sale of Mortgaged or Pledged Property.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17207(g). Worthless Bonds Issued by an Individual.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17207(h). Losses of Guarantors, Endorsers, and Indemnitors.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17208. Depreciation Based on Class Lives.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Sections 17208 and 17209, Revenue and Taxation Code.
HISTORY

1. Amendment filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
3. New section filed 4-21-82; effective thirtieth day thereafter (Register 82, No. 17). For prior history of Sections 17208(a)-(o), see Register 81, No. 16.
4. Change without regulatory effect repealing section filed 9-30-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 40).
§17209. Basis for Depreciation.
History

HISTORY

1. Repealer filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
§17209(a). Agreement As to Useful Life and Rates of Depreciation.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17209(b). Change Method.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17210. Reduction of Salvage Value Taken into Account for Certain Personal Property.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 12-22-76; effective thirtieth day thereafter (Register 76, No. 52).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17211. Basis for Depreciation.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17211.5. Life Tenants and Beneficiaries of Trusts and Estates.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17211.6(a). Special Rules for Section 18212 Property.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-9-77; effective thirtieth day thereafter (Register 77, No. 7).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17211.6(b). Depreciation of New Section 18212 Property.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-9-77; effective thirtieth day thereafter (Register 77, No. 7).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17211.6(c). Residential Rental Property.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-9-77; effective thirtieth day thereafter (Register 77, No. 7).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17211.6(d). Property Constructed, etc., Before January 1, 1971.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-9-77; effective thirtieth day thereafter (Register 77, No. 7).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17211.6(e). Depreciation of Used Section 18212 Property.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-9-77; effective thirtieth day thereafter (Register 77, No. 7).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17211.6(f). Depreciation of Used Residential Rental Property.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-9-77; effective thirtieth day thereafter (Register 77, No. 7).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17211.6(g). Special Operating Rules.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-9-77; effective thirtieth day thereafter (Register 77, No. 7).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17214. Charitable, etc., Contributions and Gifts; Allowance of Deduction.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17215. Charitable Deductions by Individuals; Limitations.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17216. Unlimited Deduction for Individuals.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17216.1. Disallowance of Certain Charitable Deductions.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17217-17221(a). Amortizable Bond Premium.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17217-17221(b). Determination of Bond Premium.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17217-17221(c). Election with Respect to Taxable Bonds.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17217-17221(d). Definition.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
. 2 Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17222. Circulation Expenditures.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17223(a). Research and Experimental Expenditures; In General.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17223(b). Definition of Research and Experimental Expenditures.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17223(c). Treatment As Expenses.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17223(d). Treatment As Deferred Expenses.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17224(a). Soil and Water Conservation Expenditures; in General.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 9-15-58; effective thirtieth day thereafter (Register 58, No. 17).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17224(b). Definition of Soil and Water Conservation Expenditures.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 9-15-58; effective thirtieth day thereafter (Register 58, No. 17).
2. Amendment filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
3. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17224(c). Definition of “The Business of Farming.”
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 9-15-58; effective thirtieth day thereafter (Register 58, No. 17).
2. Repealer filed 12-3-81; effective thirtieth day thereafter (Register 81, No. 52).
§17224(d). Definition of “Land Used in Farming.”
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 9-15-58; effective thirtieth day thereafter (Register 58, No. 17).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17224(e). Adoption or Change of Method.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 9-15-58; effective thirtieth day thereafter (Register 58, No. 17).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17225. Nondeductible Expenses.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17226. Amortization of Property Used for Smog Control.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17227. Election to Amortize Trademark and Trade Name Expenditures.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17228-17231(a). Depreciation or Amortization of Improvements on Leased Property and Cost of Acquiring a Lease.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17228-17231(b). Related Lessee and Lessor.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17228-17231(c). Reasonable Certainty Test.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17232(a). Expenditures by Farmers for Fertilizer, etc.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17232(b). Time and Manner of Making Election and Revocation.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17233(a). Activities Not Engaged in for Profit.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 6-10-76; effective thirtieth day thereafter (Register 76, No. 24).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17233(b). Activity Not Engaged in for Profit Defined.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 6-10-76; effective thirtieth day thereafter (Register 76, No. 24).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
Article 7. Additional Itemized Deductions
§17251. Allowance of Deductions.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17252. Nontrade or Nonbusiness Expenses.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17253-17256(a). Medical, Dental, etc., Expenses for Taxable Years Beginning Prior to January 1, 1961.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Amendment filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
3. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17253-17256(b). Medical, Dental, etc., Expenses for Years Beginning on or After January 1, 1961.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17253-17256(c). Nonresidents.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Change without regulatory effect repealing Section 17253-17261(c) filed 9-19-88 (Register 88, No. 40).
§17259-17261. Adoption Expenses.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Change without regulatory effect repealing Section 17259-17261 filed 9-19-88 (Register 88, No. 40).
§17263. Periodic Alimony, etc., Payments.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17264-17265. Amounts Representing Taxes and Interest Paid to Cooperative Apartment Corporation.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17266. Deduction for Moving Expenses Paid or Incurred in Taxable Years Beginning After December 31, 1970.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-6-76; effective thirtieth day thereafter (Register 76, No. 19).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17267.2-1. Recapture of Deduction for Qualified Property Previously Used in an Enterprise Zone.
Note     •     History

(a) In General. Section 17267.2 of the Revenue and Taxation Code allows a taxpayer to elect to expense a portion of the cost of Section 17267.2 property (as defined in Section 17267.2(d)(1)) for the taxable year in which the property is placed in service. If an item of the taxpayer's Section 17267.2 property ceases to be used exclusively in the taxpayer's trade or business in the enterprise zone before the close of the second taxable year after the property was placed in service, the taxpayer is required to recapture the amount previously expensed for that item. This amount shall be included in income in the taxable year in which the property ceases to be so used.
(b) Basis Adjustment. As of the first day of the taxable year in which the recapture event occurs, the basis of the Section 17267.2 property shall be increased by the recapture amount. For an item of Section 17267.2 property that is subject to an allowance for depreciation under Section 17250 of the Revenue and Taxation Code, the increase in basis is depreciated over the remaining useful life of the Section 17267.2 property beginning on the first day of the taxable year in which the recapture event occurs.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17267.2, Revenue and Taxation Code.
HISTORY

1. New section filed 2-26-2001; operative 3-28-2001 (Register 2001, No. 9).  
Article 8. Items Not Deductible
§17281. General Rule for Disallowance of Deductions.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Article 8 (Regs. 17281-17295) filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17282. Personal, Living, and Family Expenses.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17283(a). Capital Expenditures; In General.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Amendment filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17283(b). Examples of Capital Expenditures.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17283(c). Election to Deduct or Capitalize Certain Expenditures.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Amendment filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17284(a). Premiums on Life Insurance Taken Out in a Trade or Business.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17284(b). Single Premium Life Insurance, Endowment, or Annuity Contracts.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17285(a). Expenses Relating to Tax-Exempt Income.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17285(b). Interest Relating to Tax-Exempt Income.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17286. Taxes and Carrying Charges Chargeable to Capital Account and Treated as Capital Items.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17287. Deductions Disallowed.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17288. Relationship.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17289. Constructive Ownership of Stock.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17291. Items Attributable to an Unharvested Crop Sold with the Land.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17292. Limitation on Deductions Allowable to Individuals in Certain Cases.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
§17295. Life or Terminable Interests.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17297. Illegal Activities. Denial of Deductions.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-17-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
§17298. Tax-Free Covenant Bonds.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 4-16-81; effective thirtieth day thereafter (Register 81, No. 16).
Article 9. Deductions of Nonresidents
NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Article 9 (Regs. 17301-17302 and 17303) filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer of Article 9 (Sections 17301-17302 and 17303) filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
Subchapter 4. Corporate Distribution and Adjustments
Article 1. Corporate Organizations and Reorganizations
§17324. Recognition of Gain or Loss--Reorganizations with, or Transfers of Property to or from a Foreign Corporation.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 17324, Revenue and Taxation Code.
HISTORY

1. New Group 4 (Article 1, Section 17445) filed 7-5-83; effective thirtieth day thereafter (Register 83, No. 28). For history of former Group 4 (Articles 1-9, Sections 17321-17324 through 17481-17484(b) not consecutive), see Register 82, No. 52.
2. Editorial renumbering and amendment of former Section 17445 to Section 17324 filed 4-17-85; effective thirtieth day thereafter (Register 85, No. 16).
3. Change without regulatory effect repealing section filed 9-30-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 40).
§17445. Recognition of Gain or Loss--Reorganizations with, or Transfers of Property to or from a Foreign Corporation.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 17445, Revenue and Taxation Code.
HISTORY

1. Editorial renumbering and amendment of Section 17445 to Section 17324 filed 4-17-85; effective thirtieth day thereafter (Register 85, No. 16). For prior history, see Register 83, No. 28.
Subchapter 5. Deferred Compensation
§17501-17502.8(a). Qualified Pension, Profit-Sharing and Stock Bonus Plans.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering of Section 17501-17502(a) to 17501-17502.8(a) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30). For former section see Register 58, No. 17.
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17501-17502.8(b). Impossibility of Diversion Under the Trust Instrument.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering of Section 1751-17502(b) to 17501-17502.8(b) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30). For former section see Register 58, No. 17.
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17501-17502.8(c). Requirements As to Coverage.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering of Section 17501-17502(c) to 17501-17502.8(c) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30). For former section see Register 58, No. 17.
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17501-17502.8(d). Discrimination As to Contributions or Benefits.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering of Section 17501-17502(d) to 17501-17502.8(d) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30). For former section see Register 58, No. 17.
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17501-17502.8(e). Period for Which Requirements of Section 17501(c), (d), (e), and (f) Are Applicable.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering of Section 17501-17502(e) to 17501-17502.8(e) filed 7-23-71; effective thirtieth day thereafter (Register 7, No. 30). For former section see Register 58, No. 17.
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17501-17502.8(f). Termination of a Qualified Plan.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17501-17502.8(g). Forfeitures Under a Qualified Pension Plan.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17501-17502.8(h). Custodial Accounts.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17501-17502.8(i). Face-Amount Certificates-- Non-Transferable Annuity Contracts.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17501-17502.8(j). Definitions Relating to Plans Covering Self-Employed Individuals.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17501-17502.8(k). General Rules Relating to Plans Covering Self-Employed Individuals.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17501-17502.8(<em>l</em>). Requirements for Qualification of Trusts and Plans Benefiting Owner-Employees.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17501-17502.8(m). Excess Contributions on Behalf of Owner-Employees.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17501-17502.8(n). Inclusion of Medical Benefits for Retired Employees in Qualified Pension or Annuity Plans.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17503. Taxability of Beneficiary Under a Trust Which Meets the Requirements of Section 17501.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Amendment filed 9-23-76; effective thirtieth day thereafter (Register 76, No. 39).
3. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17504. Treatment of Beneficiary of a Trust Not Exempt Under Section 17631.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17505. Taxability of Beneficiary of Certain Foreign Situs Trusts.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17506. Effect of Section 17506.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17507. Certain Plan Terminations.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17511(a). Taxability of Beneficiary Under a Qualified Annuity Plan.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17511(b). Capital Gains Treatment for Certain Distributions.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17512. Taxability of Beneficiary Under a Nonqualified Annuity.
History

HISTORY

1. Repealer filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
§17512(a). Taxability of Beneficiary Under Annuity Purchased by Section 23701d Organization or Public School.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17512(b). Taxability of Beneficiary Under a Nonqualified Annuity.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17512(c). Taxability of Employee When Rights Under Contracts Purchased by Exempt Organizations Change from Forfeitable to Nonforfeitable Rights.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17513-17520.6(a). Contributions of an Employer to an Employees' Trust or Annuity Plan and Compensation Under a Deferred Payment Plan; General Rule.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering of Section 17513-17520(a) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17513-17520.6(b). Information to Be Furnished by Employer Claiming Deductions.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering of Section 17513-17520(b) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30). For prior history see Register 70, No. 14.
2. Amendment filed 2-22-74; effective thirtieth day thereafter (Register 74, No. 8).
3. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17513-17520.6(c). Contributions of an Employer to or Under an Employees' Pension Trust or Annuity Plan That Meets the Requirements of Section 17501; Application of Section 17514.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering of Section 17513-17520(c) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17513-17520.6(d). Pension and Annuity Plans; Limitations Under Section 17514(a).
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering of Section 17513-17520(d) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17513-17520.6(e). Pension and Annuity Plans; Limitations Under Section 17514(b).
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering of Section 17513-17520(e) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17513-17520.6(f). Pension and Annuity Plans; Limitations Under Section 17514(c).
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering of Section 17513-17520(f) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17513-17520.6(g). Pension and Annuity Plans; Contributions in Excess of Limitations Under Section 17514; Application of Section 17514(d).
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering of Section 17513-17520(g) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17513-17520.6(h). Contributions of an Employer Under an Employees' Annuity Plan Which Meets the Requirements of Section 17501; Application of Section 17515.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering from Section 17513-17520(h) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17513-17520.6(i). Contributions of an Employer to an Employees' Profit-Sharing or Stock Bonus Trust That Meets the Requirements of Section 17501; Application of Section 17516(a).
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering from Section 17513-17520.6(i) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17513-17520.6(j). Profit-Sharing Plan of an Affiliated Group; Application of Section 17516(b).
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering from Section 17513-17520.6(j) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17513-17520.6(k). Trust Created or Organized Outside This State; Application of Section 17517.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering of Section 17513-17520(k) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17513-17520.6(<em>l</em>). Contributions of an Employer Under a Plan That Does Not Meet the Requirements of Section 17501; Application of Section 17518.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering of Section 17513-17520(l) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17513-17520.6(m). Contributions of an Employer Where Deductions Are Allowable Under Section 17514 or 17515 and Also Under Section 17516; Application of Section 17520.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Renumbering of Section 17513-17520(m) and amendment filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17521. Method of Contribution, etc., Having the Effect of a Plan; Effect of Section 17521.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17522. Certain Negotiated Plans; Effect of Section 17522.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17523. Carryover of Unused Deductions: Effect of Section 17523.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17524. Contributions on Behalf of a Self-Employed Individual to or Under a Pension, Annuity, or Profit-Sharing Plan Meeting the Requirements of Sections 17501 to 17502.8, Inclusive; Application of Sections 17520.4 and 17520.6 and Sections 17524 and 17525.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17526(a). Qualified Bond Purchase Plans.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 3).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17526(b). Deduction of Contributions to Qualified Bond Purchase Plans.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 5-14-81; effective thirtieth day thereafter (Register 81, No. 20).
§17526(c). Taxation of Retirement Bonds.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17529. Definition of Earned Income.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
Article 2. Employee Stock Options
NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 2 (Sections 17531-17540(a) through 17531-17540(f)) filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26). For prior history, see Registers 64, No. 4; 62, No. 23; and 61, No. 9.
Subchapter 6. Accounting Periods and Methods of Accounting
Article 1. Taxable Year for Which Deduction Taken
§17554. Taxation of Income.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 1 (Sections 17551(a) through 17553-17556) filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26). For prior history, see Register 61, No. 9.
2. Editorial renumbering of former Article 4 (Section 17596) to Article 1 (Section 17554) filed 4-17-85; effective thirtieth day thereafter (Register 85, No. 16). For prior history of Section 17596, see Registers 82, No. 49 and 81, No. 52.
3. Change without regulatory effect repealing section filed 12-10-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 50).
Article 2. General Rule for Methods of Accounting
NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 2 (Section 17561) filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26). For prior history, see Register 74, No. 48.
Article 3. Taxable Year for Which Items of Gross Income Included
§17571(a). General Rule for Taxable Year of Inclusion.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17571(b). Constructive Receipt of Income.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17571(c). Long-Term Contracts.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17571(d). Accounting for Redemption of Trading Stamps and Coupons.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17577-17580(a). Installment Method of Reporting Income.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17577-17580(b). Special Rules Applicable to Dealers in Personal Property.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17577-17580(c). Special Rules Applicable to Casual Sales or Casual Disposition of Personal Property.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17577-17580(d). Sale of Real Property Involving Deferred Periodic Payments.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17577-17580(e). Sale of Real Property Treated on Installment Method.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17577-17580(f). Deferred-Payment Sale of Real Property Not on Installment Method.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17577-17580(g). Change from Accrual to Installment Method by Dealers.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17577-17580(h). Requirements for Adoption of or Change to Installment Method.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17577-17580(i). Gain or Loss on Disposition of Installment Obligations.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17577-17580(j). Effective Date.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17581-17582. Obligations Issued at Discount.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52).
Article 4. Taxable Year for Which Deduction Taken
§17596. Taxation of Income.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 17596, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 4 (Sections 17591-17596, not consecutive) filed 12-23-81; effective thirtieth day thereafter (Register 81, No. 52). For prior history, see Registers 77, No. 36; 76, No. 28; and 64, No. 4.
2. New Article 4 (Section 17596) filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
3. Editorial renumbering of Article 4 (Section 17596) to Article 1 (Section 17554) filed 4-17-85; effective thirtieth day thereafter (Register 85, No. 16).
Article 5. Inventories
NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 5 (Sections 17601(a) through 17602-17606(g)) filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26). For prior history, see Registers 64, No. 4; and 62, No. 23.
Article 6. Adjustments
NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 6 (Sections 17611-17614(a) through 17611-17614(e)), filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26). For prior history, see Register 62, No. 23.
Subchapter 7. Exempt Trusts and Common Trust Funds
Article 1. Taxation of Business Income of Certain Exempt Trusts
§17631-17632. Exemption from Taxation.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Article 1 (Regs. 17631-17632(a) through 17649(b)) filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Regs. 17631-17632(a) and 17631-17632(b) repealed and new Reg. 17631-17632 filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
3. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17633-17640. Exceptions, Additions, and Limitations.
History

HISTORY

1. Repealer filed 12-14-64, effective thirtieth day thereafter (Register 64, No. 25).
§17635-17637. Prohibited Transactions.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New 17635-17637 filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17638. Future Status of Organization Denied Exemption.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New Reg. 17638 filed 12-14-65; effective thirtieth day thereafter (Register 64, No. 25).
2. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17639(a). Certain Loans by Employees' Trusts.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New Reg. 17639(a) filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17639(b). Requirements.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New Reg. 17639(a) filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17639(c). Effective Dates.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New Reg. 17639(c) filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17640. Loans to Employers Who Are Prohibited from Pledging Assets.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New Reg. 17640 filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17641. Trusts Benefiting Certain Owner-Employees.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17645-17646. Definition of “Article 1 Lease.”
History

HISTORY

1. Repealer filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
§17647. Article 1 Lease Indebtedness.
History

HISTORY

1. Repealer filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
§17649(a). Lease Rents.
History

HISTORY

1. Repealer filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
§17649(b). Article 1 Lease Deductions.
History

HISTORY

1. Repealer filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
Article 2. Deductions: Computation of Taxable Income
NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 2 (Sections 17651(a) through 17659) filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
Article 3. Common Trust Funds
§17671-17676(a). Common Trust Funds.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New Article 3 (Regs. 17671-17677) filed 9-15-58; effective thirtieth day thereafter (Register 58, No. 17).
2. Amendment filed 12-22-69; effective thirtieth day thereafter (Register 69, No. 52).
3. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17671-17676(b). Income of Participants in Common Trust Fund.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17671-17676(c). Computation of Common Trust Fund Income.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Amendment filed 10-2-68; effective thirtieth day thereafter (Register 68, No. 37).
2. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17671-17676(d). Admission and Withdrawal of Participants in the Common Trust Fund.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17677. Returns of Common Trust Funds.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
Subchapter 8. Natural Resources
Article 1. Deductions
§17689. Discovery or Exploration Expenditures.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17690. Mine Development Expenditures.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
Article 2. Sales and Exchanges
NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 2 (Sections 17711-17712) filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
Subchapter 9. Estates, Trusts, Beneficiaries and Decedents
Article 1. General Rules for Taxation of Estates and Trusts
§17731(a). Scope of Chapter 9.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New Group 9, Article 1 (Regs. 17731-17745) filed 9-15-58; effective thirtieth day thereafter (Register 58, No. 17).
2. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17731(b). Scope of Articles 1, 2, 3, and 4.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17731(c). Imposition of Tax; Application of Tax.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17731(d). Gross Income of Estates and Trusts.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17731(e). Computation and Payment of Tax; Deductions and Credits of Estates and Trusts.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17731(f). Filing of Returns and Payment of the Tax.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Amendment filed 12-13-63; effective thirtieth day thereafter (Register 63, No. 25).
2. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17731(g). Termination of Estates and Trusts.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17733. Deduction for Personal Exemption of Estates and Trusts.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17734(a). Charitable Contributions Deduction.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17734(b). Reduction of Charitable Contributions Deductions by Exempt Income.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17734(c). Capital Gains Included in Charitable Contribution.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17734(d). Cross Reference.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17735. Depreciation and Depletion.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17736. Amortization of Emergency Facilities.
Note     •     History

NOTE

Authority cited: Section 19253 Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17737(a). Excess Deductions on Termination of an Estate or Trust.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17737(b). Meaning of “Beneficiaries Succeeding to the Property of the Estate or Trust.”
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17737(c). Allocation.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17738. Disallowance of Standard Deduction. (Cross Reference.)
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17739(a). Distributable Net Income; Deduction for Distributions; In General.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17739(b). Deduction for Distributions.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17739(c). Deduction for Personal Exemption.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17739(d). Capital Gains and Losses.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17739(e). Extraordinary Dividends and Taxable Stock Dividends.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17739(f). Tax-Exempt Interest.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17740(a). Definition of “Income.”
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17740(b). Dividends Allocated to Corpus.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17741(a). Definition of “Beneficiary.”
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17741(b). Illustration of the Provisions of Sections 17739 to 17740, Inclusive.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17742-17745(a). Taxability of Estates, Trusts, and Beneficiaries.
History

HISTORY

1. Repealer filed 8-18-82; effective thirtieth day thereafter (Register 82, No. 34).
§17742-17745(b). Taxes Are Charged on Corpus-Liability of Fiduciary.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17742-17745(c). Income Taxable to Beneficiaries of Estate or Trust If Taxes Are Unpaid.
History

HISTORY

1. Repealer filed 8-18-82; effective thirtieth day thereafter (Register 82, No. 34).
§17742-17745(d). Estates and Trusts Taxable As Separate Entities.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17742-17745(e). Massachusetts or Business Trusts.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17742-17745(f). Estates of Infants and Other Wards.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17742. Taxability of Estates.
Note     •     History

(a) In the case of an estate, if the decedent and noncontingent beneficiaries are all nonresidents of this State, and, in the case of a trust, if the fiduciaries and noncontingent beneficiaries are all nonresidents of this State, only income from real or personal property located in this State (see Reg. 17951-3), business carried on within this State (see Reg. 17951-4), and intangible personal property having a business or taxable situs in this State (see Section 17952) is taxable.
In computing the taxable income from these sources, only the gross income from these sources is considered. From such gross income, the deductions allowed by the law are subtracted. See Sections 17301-17303 and Section 17734. The amount remaining is taxable income of the estate or trust to which the rates of tax specified in Section 17041 apply. 
EXAMPLE. B is the executor of the estate of A, who was a nonresident of this State at the time of death. All the beneficiaries are likewise nonresidents. During the year 1980, the gross income of the estate from all sources amounted to $100,000, $50,000 of which was derived from real and personal property located, and from business transacted, in this State. The losses, depreciation, and depletion sustained with respect to the property in California, and the taxes, licenses, expenses, bad debts, etc., properly deductible from the California income amounted to $40,000. Thus, the income from California sources, prior to deducting amounts distributed to beneficiaries, amounted to $10,000. Of this amount, $6,000 was distributed to beneficiaries during the year pursuant to a partial distribution of the estate. The remaining $4,000 is the net income of the estate, as defined in Section 18411.
(b) A noncontingent beneficiary is one whose interest is not subject to a condition precedent.
(c) On the death of a married person, the deceased spouse's share of the community property is, in some circumstances, subject to administration in the hands of his or her estate (California Probate Code Sections 201-206). The estate of the deceased spouse is taxable on the income from that part of his or her one-half of the community property that is properly subject to administration. Income received by the estate, but derived from the surviving spouse's share of the community property (acquired after July 28, 1927) is taxable to the surviving spouse.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 17742, Revenue and Taxation Code; and Section 5105, Civil Code.
HISTORY

1. New section filed 8-18-82; effective thirtieth day thereafter (Register 82, No. 34).
2. Editorial correction of subsection (a) (Register 83, No. 19).
§17743. Taxability of Trust Dependent upon Residence of Fiduciary.
Note     •     History

If there are two or more fiduciaries of a trust, and one or more are residents and one or more are nonresidents, and all the beneficiaries are nonresidents, the trust is taxable upon (a) all net income (less the deductions allowed under Article 1 of Chapter 9 (Section 17731 and following)) from business carried on within this State, from real or tangible personal property located in this State, and from intangible personal property having a business or taxable situs in this State (see Reg. 17952); and (b) that proportion of the net income (less the deductions allowed under Article 1 of Chapter 9 (Section 17731 and following)) from all other sources which the number of fiduciaries who are residents of this State bears to the total number of fiduciaries.
EXAMPLE (1). B, a resident, and C, a nonresident of this State, are the trustees of a trust created by A. All the beneficiaries are nonresidents. During the year 1980, the trust received $60,000 as rent from real and tangible personal property located in, and from business carried on in this State, from which expenses of $10,000 were deducted, $60,000 from real and personal property located, and business carried on, outside this State from which expenses of $10,000 were deducted, and $50,200 income from stocks and bonds, none of which had a business or taxable situs in this State. None of the income was paid or credited to the beneficiaries during the year. The $50,000 income from real and personal property located in, and business transacted in this State is taxable. Since there are two fiduciaries, one of which is a resident of this State, one-half of the balance of the income of the trust is likewise taxable to the trust. Thus, the taxable income amounts to $100,100 ($50,000 from property located in this State, plus one-half of $100,200 which is the remainder of the trust's income).
EXAMPLE (2). E, a resident, and F and G, nonresidents of this State, are the trustees of a trust created by D. All of the beneficiaries are nonresidents. The corpus of the trust consists entirely of stocks and bonds and property located outside this State. One-third of the income taxable under Section 17742 (i.e., net income less the deductions allowed under Article 1 of Chapter 9), which is the proportion of total income taxable which the number of fiduciaries who are residents of this State bears to the total number of fiduciaries, is taxable to the trust.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 17743, Revenue and Taxation Code.
HISTORY

1. New section filed 8-18-82; effective thirtieth day thereafter (Register 82, No. 34).
2. Editorial correction of subsection (a) (Register 83, No. 19).
§17744. Taxability of Trust Dependent upon Residence of Beneficiary.
Note     •     History

If one or more of the noncontingent beneficiaries of a trust are residents and one or more are nonresidents, and the fiduciaries are nonresidents, the trust is taxable upon (a) all income (less the deduction allowed under Article 1 of Chapter 9 (Section 17731 and following) from real and tangible personal property located in this State, and from business carried on within this State and from intangible personal property having a business or taxable situs in this State (see Reg. 17952); and (b) that proportion of all net income (less the deduction allowed under Article 1 of Chapter 9 (Section 17731 and following)) from all other sources which eventually is to be distributed to the noncontingent beneficiaries who are residents of this State.
EXAMPLE (1). A transferred property located outside this State in trust to pay equal shares of the income to B, a resident, and C, a nonresident of this State. The beneficiaries have noncontingent interests. The fiduciaries of the trust are nonresidents. During the year 1980, the trust realized $50,000 from real and tangible personal property located, and business carried on, within this State, $50,000 from real and tangible personal property located, and business carried on, outside this State, and $50,000 from stocks and bonds, none of which had a business or taxable situs in this State. None of the income was paid or credited to the beneficiaries during the year. The trust is taxable upon the $50,000 realized from real and tangible personal property located, and business carried on, within this State. The trust is also taxable upon one-half of the balance of the income since one-half of such income will eventually be distributed to B, a resident of this State.
EXAMPLE (2). A transferred stocks and bonds and real and personal property located outside this State in trust to B, a nonresident of this State. Under the terms of the trust, the income from the intangible personal property is to be accumulated for a number of years and then distributed to C, a resident of this State with a noncontingent interest. The balance of the income is to be distributed to certain named beneficiaries who are nonresidents of this State. The trust is taxable upon all the income from the intangible personal property, i.e., the stocks and bonds, but is not taxable upon any of the income from the remainder of the trust property.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 17744, Revenue and Taxation Code.
HISTORY

1. New section filed 8-18-82; effective thirtieth day thereafter (Register 82, No. 34).
2. Editorial correction of subsection (a) (Register 83, No. 19).
§17746(a). Disallowance of Double Deductions; In General.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17746(b). Deductions Included.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
Article 2. Trusts Which Distribute Current Income Only
§17751(a). Simple Trusts; Deduction for Distributions; In General.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New Group 9, Article 2 (Regs. 17751-17752) filed 9-15-58; effective thirtieth day thereafter (Register 58, No. 17).
2. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17751(b). Income Required to Be Distributed Currently.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17751(c). Distribution of Amounts Other Than Income.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17751(d). Charitable Purposes.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17751(e). Estates.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17751(f). Deduction for Distributions to Beneficiaries.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 6-25-81; effective thirtieth day thereafter (Register 81, No. 26).
§17752(a). Simple Trusts: Inclusion of Amounts in Income of Beneficiaries.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17752(b). Distributions in Excess of Distributable Net Income.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17752(c). Character of Amounts.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17752(d). Allocation of Income Items.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17752(e). Allocations of Deductions.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17752(f). Different Taxable Years.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17752(g). Death of Individual Beneficiaries.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17752(h). Termination of Existence of Other Beneficiaries.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
§17752(i). Illustration of the Provisions of Sections 17751 and 17752.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
Article 3. Estates or Trusts Which May Accumulate Income or Which Distribute Corpus
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Sections 17761-17835, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 3 (Sections 17761(a)-(f) through 17767(a)-(d)) filed 8-6-81; effective thirtieth day thereafter (Register 81, No. 32). For prior history, see Registers 74, No. 48 and 58, No. 17.
Article 4. Treatment of Excess Distributions by Trusts
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Sections 17761-17835, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 4 (Sections 17771(a)-(h) through 17777(a)-(b)) filed 8-6-81; effective thirtieth day thereafter (Register 81, No. 32). For prior history, see Registers 76, No. 52 and 58, No. 17.
Article 5. Grantor and Others Treated As Substantial Owners
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Sections 17761-17835, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 5 (Sections 17781(a)-(d) through 17792(a)-(d)) filed 8-6-81; effective thirtieth day thereafter (Register 81, No. 32). For prior history, see Register 58, No. 17.
Article 6. Miscellaneous
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Sections 17761-17835, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 6 (Sections 17811-17818(a)-(f) through 17821(a)-(b)) filed 8-6-81; effective thirtieth day thereafter (Register 81, No. 32). For prior history, see Registers 61, No. 9 and 58, No. 17.
Article 7. Income in Respect of Decedents
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Sections 17761-17835, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 7 (Sections 17831-17834(a)-(e) through 17838) filed 8-6-81; effective thirtieth day thereafter (Register 81, No. 32). For prior history, see Register 61, No. 9.
Subchapter 10. Partners and Partnerships
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Sections 17761-17835, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 1 (Sections 17851-17867) filed 8-6-81; effective thirtieth day thereafter (Register 81, No. 32). For prior history, see Registers 68, No. 37 and 64, No. 4.
2. Repealer of Article 2 (Sections 17881-17883) filed 8-6-81; effective thirtieth day thereafter (Register 81, No. 32).
3. Repealer of Articles 3-7 (Sections 17892(a)-17932, not consecutive) filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35). For prior history, see Registers 81, No. 32 and 62, No. 23.
Subchapter 11. Gross Income of Nonresidents
§17951-1. * Gross Income of Nonresidents.
Note     •     History

(a) Nonresidents of the State are taxable only upon taxable income derived from sources within this State (Revenue and Taxation Code section 17041, subdivision (b)), and, accordingly, are required to include in gross income in making their returns only that portion of their gross income which is relevant in determining the amount of taxable income derived from source within this State. (For definition of nonresident, see Revenue and Taxation Code sections 17014 through 17016 and the regulations issued thereunder). For meaning of income from sources within this State, see Reg. 17951-2.
(b) The gross income of a nonresident of the State who is a member of a partnership, pool or syndicate includes, in addition to any other income from sources within this State, the member's distributive share of the taxable income of the partnership, pool or syndicate to the extent that the member's distributive share is derived from sources within this State. Amounts received from a partnership by a nonresident partner as payments for services or use of capital, constitute gross income of a nonresident. (See Reg. 17951-4).
(c) A nonresident beneficiary of an estate or trust must include in gross income, income from the estate or trust which is deductible by the estate or trust and which is derived from sources within this State. (For computation of income of estates and trusts, deductible income, etc., see Chapter 9 (Sec. 17731 and following)). However, qualified retirement income, as defined in Revenue and Taxation Code section 17952.5, received by a nonresident beneficiary of an estate or trust during a taxable year beginning on or after January 1, 1996, is not included in gross income derived from sources within this State.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Sections 17041, 17951 and 17952, Revenue and Taxation Code.
HISTORY

1. Group 11 (Regs. 17951-17954(a) through 17951-17954(f)) filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Renumbering and amendment of Sections 17951-17954(a) to Section 17951-1 filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
3. Change without regulatory effect amending subsection (c) and Note filed 7-28-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 31).
4. Change without regulatory effect amending section and Note filed 12-10-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 50).
________
* This regulation is similar to Title 18, Cal. Adm. Code, Chapter 3, Subchapter 2, Section 17211-14(a).
§17951-2. ** Income from Sources Within This State.
Note     •     History

Income from sources within this State includes income from real or tangible personal property located in this State (see Reg. 17951-3); income from a business, trade, or profession carried on within this State (see Reg. 17951-4); compensation for personal services performed within this State (see Reg. 17951-5); and income from stocks, bonds, notes, bank deposits and other intangible personal property having a business or taxable situs in this State (see Reg. 17952; and rentals or royalties for the use of, or for the privilege of using in this State, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property having a taxable or business situs in this State (see Reg. 17952). Qualified retirement income, as defined in Section 17952.5 of the Revenue and Taxation Code received by a nonresident during a taxable year beginning on or after January 1, 1996, is not included in gross income derived from sources within this State.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Sections 17041, 17951 and 17952, Revenue and Taxation Code.
HISTORY

1. Renumbering and amendment of Sections 17951-17954(b) to Section 17951-2 filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3). 
2. Change without regulatory effect amending section and Note filed 7-28-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 31).

** This regulation is substantially the same as Title 18, Cal. Adm. Code, Chapter 3, Subchapter 2, Section 17211-14(b).
§17951-3. *** Income from Real or Tangible Personal Property.
Note     •     History

Income of a nonresident from sources within this State includes rents from real or tangible personal property in this State, gains realized from the sale or transfer of such property (see Chapter 14, Sec. 18151 and following respecting capital gains) regardless of where the sale or transfer is consummated, and any other type of income derived from the ownership, control or management of real and tangible personal property located in this State irrespective of whether a trade, business or profession is carried on within this State.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Sections 17041 and 17951, Revenue and Taxation Code.
HISTORY

1. Renumbering and amendment of Sections 17951-17954(c) to Section 17951-3 filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).

***This regulation is substantially the same as Title 18, Cal. Adm. Code, Chapter 3, Subchapter 2, Section 17211-14(c).
§17951-4. *** Income from a Business, Trade or Profession.
Note     •     History

(a) If a nonresident's business, trade or profession is carried on entirely without the state, no portion of the net income therefrom is derived from sources within this state. If, on the other hand, the nonresident's business, trade or profession is conducted wholly within the state, the entire net income therefrom is derived from sources within this state.
(b) If a nonresident's business, trade or profession is conducted partly within and partly without the state, and the part within the state is so separate and distinct from and unconnected with the part without the state such that the respective business activities are not part of a unitary business, trade or profession, only the net income from the business, trade or profession within the state is derived from sources within this state. Thus, if a nonresident owns a hotel in California and an unrelated manufacturing business elsewhere, and is not significantly involved in the management of the hotel, only the net income from the hotel in California is derived from sources within this state.
(c) If a nonresident's business, trade or profession is a sole proprietorship which carries on a unitary business, trade, or profession within and without the state, the amount of net income derived from sources within this state shall be determined in the manner described below.
(1) The total business income of the unitary business shall be determined by subtracting from the gross income of the unitary business those deductions allowed by the law (See Articles 6 and 9 of Chapter 3 (Section 17201, Revenue and Taxation Code, and following)) which are attributable to that unitary business. If expenses relate to both business income and other income, the expenses shall be assigned to the respective income amounts as provided in Title 18, Cal. Code Regs., § 25120(d). 
(2) The amount of such business income derived from sources within  this state shall be determined in accordance with the provisions of the apportionment rules of the Uniform Division of Income for Tax Purposes Act, Sections 25120 to 25139, inclusive, Revenue and Taxation Code, and the regulations thereunder, except as otherwise provided in subsection (g), below, relating to professional service organizations.
(3) The source of net income which is not business income shall be determined in accordance with the sourcing rules of Sections 17951 through 17955, Revenue and Taxation Code, and the regulations thereunder, and not by reference to the nonbusiness allocation rules of the Uniform Division of Income for Tax Purposes Act, Sections 25120 to 25139, inclusive, Revenue and Taxation Code, and the regulations thereunder.
(d) If a nonresident is a partner in a partnership which carries on a unitary business, trade or profession within and without this state, the source of the partner's distributive share of partnership income derived from sources within this state shall be determined in the manner described below.
(1) Except as provided, the total business income of the partnership shall be apportioned at the partnership level in accordance with the apportionment rules of the Uniform Division of Income for Tax Purposes Act, Sections 25120 to 25139, Revenue and Taxation Code, and the regulations thereunder. Each partner's distributive share of the partnership business income apportioned to this state is income derived from sources within this state.
(2) The source of guaranteed payments received by a nonresident partner from a partnership shall be determined as if the guaranteed payments were a distributive share of partnership business income.
(3) The source of a partner's distributive share of items which do not constitute business income shall be determined in accordance with the sourcing rules of Sections 17951 through 17955, Revenue and Taxation Code, and the regulations thereunder, as if the income producing activity were undertaken by the partner in its individual capacity.
(4) Except as provided in subsection (d)(5), the business activity of a partnership will not ordinarily be considered part of a unitary business with another business activity of one or more of its partners. However, if necessary to properly reflect the income or loss of the partnership or its partners, the Franchise Tax Board shall have the discretion to treat the business activity of a partnership and a business activity of one or more of its partners as part of a single unitary business, but only after conducting a comparable uncontrolled price examination in the manner provided by Section 23801(d)(1), Revenue and Taxation Code. For this purpose, the term “business activity” includes the partner's interest in the business activity of a sole proprietorship, another partnership, a limited liability company and an S corporation. If the Franchise Tax Board determines that unitary combination is appropriate under this subsection, the business income of the unitary activity shall be apportioned in accordance with the rules prescribed under subsection (d)(5)(A), without regard to the 20 percent limitation described therein.
(5) Exception for 20 percent or more interests. Subsection (d)(4) shall not apply to partners who own, directly or indirectly, a 20 percent or more capital or profits interest in a partnership. For purposes of this section, the ownership of a capital or profits interest in a partnership shall be determined under the rules of subsection (d)(5)(B).
(A) If a partner owns a 20 percent or more interest, as described in subsection (d)(5), and the business activity of the partnership is unitary with another business activity of the partner as that phrase is described in subsection (d)(4), the income of the unitary activity shall be combined at the partner level and apportioned to this state under the provisions of the Uniform Division of Income for Tax Purposes Act, Sections 25120-25139 inclusive, Revenue and Taxation Code, and the regulations thereunder. In determining the amount of business income apportioned to this state, the partner shall combine the business income from unitary sole proprietorships and its distributive or pro rata shares of business income from 20 percent or more interests in unitary partnerships and S corporations. For purposes of the preceding sentence, the combined business income of a unitary partnership or S corporation shall be limited to the distributive or pro rata share of business income of the partner or shareholder from interests actually (not constructively) owned. The combined unitary business income shall be apportioned to this state under the provisions of the Uniform Division of Income for Tax Purposes Act, Sections 25120-25139, Revenue and Taxation Code, and the regulations thereunder, at the partner level. For that purpose, the partner shall aggregate its payroll, property and sales from unitary sole proprietorships and its proportionate share of payroll, property, and sales from unitary partnerships and S corporations in which the partner or shareholder owns a 20 percent or more interest to arrive at a single apportionment percentage. That percentage is applied to the combined unitary business income computed under this subsection to determine the partner's business income from sources within this state.
(B) For purposes of this subsection (d)(5), the actual or constructive ownership of a capital or profits interest in a partnership shall be determined in accordance with the following rules:
1. An interest in partnership capital or profits which is owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries.
2. An individual shall be considered as owning the interest in partnership capital or profits owned, directly or indirectly, by or for his or her family.
3. The family of an individual shall include only his or her brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants, and
4. An interest in partnership capital or profits constructively owned by a person by reason of the application of subsection (d)(5)(B)1. shall, for the purpose of applying subsections (d)(5)(B)1. or (d)(5)(B)2., be treated as actually owned by such person, but an interest in partnership capital or profits constructively owned by an individual by reason of the application of subsection (d)(5)(B)2. shall not be treated as owned by him for the purpose of again applying either of such subsections in order to make another the constructive owner of such interest in partnership capital or profits.
EXAMPLE: Individual X is engaged in a sole proprietorship with business income of $100,000. In addition, X directly owns a 15% capital interest in Partnership P. X's sister Y also owns a 10% capital interest in P. X's distributive share of business income from P is $30,000, and his sister's distributive share of business income from P is $20,000. P and X's sole proprietorship are engaged in a unitary business. Under subsection (d)(5)(B), X is treated as constructively owning Y's interest in the partnership. Thus X's aggregate owned or constructively owned interest in P is 25%. Accordingly, X is subject to the apportionment provisions of subsection (d)(5)(A). However, under subsection (d)(5)(A), X will combine and apportion only the sum of his $100,000 proprietorship income and his actual distributive share of business income of $30,000 from P. The 20 percent test used to determine the applicability of subsection (d)(5) does not affect the amount of partnership income taken into account in computing income actually derived from sources within this state.
(e) If a nonresident is the sole member of a limited liability company whose separate existence is disregarded for tax purposes under Section 23038, Revenue and Taxation Code, and which carries on a unitary business, trade or profession within and without this state, the source of the member's limited liability company income derived from sources within this state shall be determined in accordance with the sole proprietorship provisions of subsections (c) and (g). If a nonresident is a member of a limited liability company which is classified as a partnership for tax purposes under Section 23038, Revenue and Taxation Code, and which carries on a unitary business, trade or profession within and without this state, the source of the member's distributive share of limited liability company income derived from sources within this state shall be determined in accordance with the partnership provisions of subsections (d) and (g). The provisions of (c), (d) or (g), as the case may be, shall not be construed to apply to the determination of “total income from all sources reportable to this state” for purposes of determining the annual fee imposed on a limited liability company under Section 17942, Revenue and Taxation Code.
(f) If a nonresident is a shareholder of an S corporation (as described in Section 17087.5, Revenue and Taxation Code) which carries on a unitary business, trade or profession within and without this state, the amount of the nonresident's pro rata share of S corporation income derived from sources within this state shall be determined in the same manner as if the S corporation were a partnership. Except for subsection (d)(5)(B), the provisions of subsections (d)(1) and (d)(3) through (5) are specifically incorporated by reference. In lieu of subsection (d)(5)(B), for purposes of determining whether a nonresident shareholder has a 20 percent or more interest in an S corporation, the rules for constructive ownership of stock provided in Section 267(c) of the Internal Revenue Code shall apply. The provisions of subsection (g), relating to the computation of the payroll factor for professional service organizations, shall not apply in the case of S corporations. The source of an S corporation's items of nonbusiness income for purposes of the tax imposed on the S corporation under Part 11, Division 2, Chapter 4.5 of the Revenue and Taxation Code, shall have no relevance in determining the source of items of nonbusiness income for purposes of taxing a nonresident shareholder.
(g) If a sole proprietorship or partnership described in subsections (c) or (d) is engaged in the practice of a profession within the meaning of subsection (h), below, the payroll factor of the applicable apportionment formula shall include 60% of the net income of a sole proprietorship or 60% of the distributive share of partnership income of each partner rendering professional personal services to the partnership. For purposes of the payroll factor the net income of a sole proprietorship and a partner's distributive share of partnership income shall consist only of income properly classifiable as business income. The amount so determined is deemed to be compensation paid to an employee for purposes of the payroll factor only. If a partner does not render professional services to the partnership, no part of such partner's distributive share of partnership income shall be taken into account in the payroll factor. The amount deemed to be compensation paid to an employee shall be included in the denominator of the payroll factor and in the California numerator of the payroll factor if the principal location of such partner is in this state.
Guaranteed payments to a partner who renders professional services to a partnership engaged in the practice of a profession (within the meaning of subsection (h) below) shall be treated as part of the partner's distributive share of partnership income and has a source in this state in the same manner as a distributive share properly classified as business income and shall be apportioned under subsection (d), as modified under subsection (g). In computing the payroll factor of a partner who renders professional services to such a partnership and receives a guaranteed payment, 60 percent of the sum of the partner's distributive share of partnership income properly classified as business income, and the partner's guaranteed payment, shall be deemed to be compensation paid to an employee.  The amount deemed to be compensation shall be included in the denominator of the payroll factor and in the California numerator of the payroll factor if the principal location of such partner is in this state.
EXAMPLE: The A-B-C company is a partnership performing accounting services within and without this state.  There are three partners, A, B, and C.  Partners A and B render professional services to the partnership.  Partner C is not active in the partnership business.  Partner A is a resident of this state, and Partners B and C are nonresidents.  For purposes of this example, each partner's principal location is in his or her respective state of residence.  The partners' distributive shares of profit or loss are: A, 50%; B, 30%; and C, 20%.  In addition, Partner B receives a guaranteed payment of $10,000. Partnership profits after the deduction for the guaranteed payment are $60,000 for the year. Of that amount, $50,000 is business income and $10,000 is nonbusiness income from a California real estate rental. All of the nonbusiness income is sourced to this state for purposes of this example.  The partnership's income apportionment percentage for this state is determined as follows:  

	Everywhere	This State	%       

Property	 $200,000	$70,000	35
Sales	150,000	64,500	43
Sales	150,000	64,500	43
Payroll:			
 Employees	56,000	21,000	
 Partners:
 A---$50,000 x 50% x 60%	15,000	15,000
 B--[($50,000 x 30%)
 + $10,000] X 60%	$15,000	-0-
 Total Payroll	$86,000	$36,000	41.86
			162.86

   Apportionment percentage (162.86 P 4)		40.72%

The partnership's business income from sources within this state is:
Business income ($50,000 x 40.72%)		$20,360

Partner A

As a resident, Partner A is taxed on that partner's entire distributive share of ABC's income, irrespective of the source of the income:

A's share of partnership business income ($50,000) x 50%	$25,000

A's share of partnership nonbusiness rental income
 ($10,000 x 50%)			      $ 5,000

A's income taxed by this state			$30,000

As nonresidents, Partners B and C are taxed on their distributive share of partnership income from sources within this state, determined as follows: 

Partner B

Partner B's share of Partnership business income from sources 
 within this state ($20,360 x 30%)			$6,108

Partner B's guaranteed payment $10,000 x 40.72%		$4,072

Partner B's share of nonbusiness rental income
 ($10,000 x 30%)			$3,000

Partner B's Income from sources within this state		$13,180

Partner C

Partner C's share of Partnership business income from sources
 within this state ($20,360 x 20%)			$4,072
Partner C's share of nonbusiness rental income
 ($10,000 x 20%)			$2,000

Partner C's Income from sources in this state		$6,072
(h) The practice of law, accounting, medicine or the performance of personal services in scientific and engineering discipline and the practice of any other profession in which capital is not a material income producing factor and in which more than 80% of business gross income for the taxable year is derived from personal services actually rendered by the individual or partners shall be deemed a profession for purposes of subsection (g), above.
(i) Rules and Definitions. To give effect to the foregoing, the following rules and definitions will be applied:
(1) Other Professions Defined. For purposes of this regulation, the term “other profession” includes any occupation or vocation in which a professed knowledge of some department of science or learning, gained by a prolonged course of specialized instruction and study, is used by its practical application to the affairs of others, either advising, guiding or teaching them, and in serving their interests or welfare in the practice of an art or science founded on it. The word “profession” implies attainments in professional knowledge as distinguished from mere skill and the application of knowledge to uses for others as a vocation. The performing of services dealing with the conduct of business itself, including the promotion of sales or services of such business and consulting services, does not constitute the practice of a profession even though the services involve the application of a specialized knowledge.
(2) Capital as a Material Income Producing Factor. Whether capital is a material income producing factor in the production of the income of a profession (other than law, medicine, dentistry or architecture) is to be determined by the use to which the capital is put. Ordinarily, the use of capital in a professional activity or occupation will not be considered as a material income producing factor if it is used only to defray current operating expenses such as paying salaries of assistants, rent, traveling and other incidental expenses or for investment in furniture, machines, tools and equipment essential to the carrying on of the professional activity. Capital is a material income producing factor if a substantial portion of the gross income from the occupation is attributable to the employment of capital in the business. This is ordinarily the case where substantial inventory or substantial investment in plant, machinery or other equipment is required.
(3) Gross Income Derived From Personal Services of an Individual or Partner. For purposes of determining whether more than 80% of the unincorporated business gross income is derived from personal services actually rendered by an individual or partner, gross income from the professional practice will be deemed derived from the personal services rendered by an individual or partner if such income is personal service income as distinguished from income attributable to the sale of property or to the use of capital and such income represents fees or charges for professional services personally rendered by the individual or partner or professional fees or charges for services which are attributable to the professional activities of the individual or partner. In cases where an individual or partner employs assistants to perform part of the professional work, fees or charges relating to the services of he assistants will be attributed to the individual or partner provided the individual or partner (A) gives personal attention to the work of the business, (B) consults with clients or patients, (C) devises the work program, outlines work methods and guides and directs the work procedure of the employees in the activity, and (D) supervises the formulation of advice, conclusions and reports to clients or patients as the person responsible for the services performed by the business or establishment; or provided that some combination of the foregoing and/or other activities shows that the services of the employees are merely incidental to the practice of the profession by the individual or partner. Where the profession is carried on by a sole proprietorship or partnership, income or fees relating to work performed by employees will be attributable to an individual or partner only if, in addition to the conditions enumerated above with respect to individuals or partners, it is shown that the clients or patients are advised by an individual or partner and look to an individual or partner as being responsible for the services performed.
For example, where an accounting partnership employs assistants to do much of the detail work of making surveys, studies, audits, or other work ordinarily and customarily performed as an incident to the practice of the profession involved, income from professional charges based on services of the assistants will be deemed to be income derived from the services of the partners if a partner accepts the engagement or employment, supervises and directs the work, confers with clients, and prepares and edits or completes and approves the reports. Where the nature and character of the service rendered by the assistants is such that the services are rendered without any substantial control by a partner, such services will not be considered attributable to the partner for the purposes of this subsection.
(j) This regulation shall apply to taxable years beginning on or after January 1, 1976, except that the amendments to subsections (c)(3), (d)(3), (e) and (f), to the extent that these subsections adopt the sourcing rules of Sections 17951 through 17955, Revenue and Taxation Code, and the regulations thereunder, and not the nonbusiness allocation rules of the Uniform Division of Income for Tax Purposes Act, Sections 25120 to 25139, inclusive, Revenue and Taxation Code, and the regulations thereunder, shall apply to the computation of taxes for taxable years of sole proprietors, partners, members and shareholders beginning on or after January 1, 2001, and the amendments to subsections (d)(4), (d)(5), (e) and (f), to the extent that the business activity of a partnership, limited liability company or S corporation will not ordinarily be considered part of a unitary business activity with another business activity unless the partner, member or shareholder owns directly or indirectly a 20 percent or more capital or profits interest in a partnership, limited liability company or S corporation, or the Franchise Tax Board determines that such combination is appropriate after conducting a comparable uncontrolled price examination, shall apply to the computation of taxes for taxable years of sole proprietors, partners, members and shareholders beginning on or after January 1, 2001. In the case of the computation of additions to tax under Section 18682, Revenue and Taxation Code, for failure to pay estimated tax, and the assessment of withholding liability and penalties under Sections 18815, 18684.2, 18685, and 19409, Revenue and Taxation Code, the amendments to subsections (c)(3), (d)(3), (d)(4), (d)(5), (e) and (f) which apply to taxable years beginning on or after January 1, 2001, shall also apply for taxable years of sole proprietors, partners, members and shareholders beginning on or after January 1, 2001.
NOTE

Authority cited: Sections 17954 and 19503, Revenue and Taxation Code. Reference: Sections 17041, 17854, 17951 and 25128, Revenue and Taxation Code.
HISTORY

1. Repealer and new section filed 7-9-76; effective thirtieth day thereafter (Register 76, No. 28).
2. Renumbering and amendment of sections 17951-17954(d) to section 17951-4 filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
3. Amendment of subsections (c), (d) and (i) and Note filed 3-18-94; operative 4-18-94 (Register 94, No. 11).
4. Amendment filed 12-24-2001; operative 1-23-2002 (Register 2001, No. 52).

***This regulation is substantially the same as Title 18, Cal. Adm. Code, Chapter 3, Subchapter 2, Section 17211-14(c).
§17951-5. Wages, Salaries and Other Compensation for Personal Services Performed in This State.
Note     •     History

(a) (1) The gross income from commissions earned by a nonresident traveling salesman, agent or other employee for services performed or sales made whose compensation depends directly on the volume of business transacted by him, includes that proportion of the compensation received which the volume of business transacted by such employee within the State of California bears to the total volume of business transacted by him within and without the State.
(2) Nonresident actors, singers, performers, entertainers, wrestlers, boxers, etc., must include in gross income as income from sources within this State the gross amount received for performances in this State.
(3) Nonresident attorneys, physicians, accountants, engineers, etc., even though not regularly engaged in carrying on their professions in this State, must include in gross income as income from sources within this State the entire amount of fees or compensation for services performed in this State on behalf of their clients.
(4) If nonresident employees (including officers of corporations, but excluding employees, mentioned in (1) above) are employed continuously in this State for a definite portion of any taxable year, the gross income of the employees from sources within this State includes the total compensation for the period employed in this State.
(b) If nonresident employees are employed in this State at intervals throughout the year, as would be the case if employed in operating trains, boats, planes, motor buses, trucks, etc., between this State and other states and foreign countries, and are paid on a daily, weekly or monthly basis, the gross income from sources within this State includes that portion of the total compensation for personal services which the total number of working days employed within the State bears to the total number of working days both within and without the State. If the employees are paid on a mileage basis, the gross income from sources within this State includes that portion of the total compensation for personal services which the number of miles traversed in California bears to the total number of miles traversed within and without the State. If the employees are paid on some other basis, the total compensation for personal services must be apportioned between this State and other States and foreign countries in such a manner as to allocate to California that portion of the total compensation which is reasonably attributable to personal services performed in this State. Gross income from sources within this State does not include qualified retirement income, as defined in Section 17952.5 of the Revenue and Taxation Code received by a nonresident during a taxable year beginning on or after January 1, 1996.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Sections 17041, 17951 and 17952, Revenue and Taxation Code.
HISTORY

1. Renumbering and amendment of Sections 17951-17954(e) to Section 17951-5 filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
2. Change without regulatory effect filed 9-19-88 (Register 88, No. 40).
3. Change without regulatory effect amending subsection (b) and Note filed 7-28-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 31).
§17951-6. Income from a Covenant Not to Compete.
Note     •     History

(a) General. Income from a covenant not to compete executed in connection with the sale of a business conducted entirely within California or within and without California has a source in California to the extent the income is assigned to this state under this regulation.
(1) Income from a covenant not to compete is assigned to California by first identifying the legally enforceable area within which the promisor forfeits the right to act. The income is then assigned to locations within the legally enforceable area according to a formula consisting of the average of property, payroll and sales factors of the business which was sold weighted in accordance with Section 25128(a), Revenue and Taxation Code, as in effect for the taxable year of the sale.
(2) The factors to be used are those of the business which was sold for the taxable year in which the sale of the business occurs.
(3) Except as otherwise provided, the denominator of the factors consists of property, payroll and sales assigned to the legally enforceable area, in accordance with the provisions of the Uniform Division of Income for Tax Purposes Act, Sections 25120 through 25139, inclusive, Revenue and Taxation Code, and the regulations thereunder. The numerator of the factors consists of property, payroll and sales included in the denominator which are assigned to California in accordance with the provisions of the Uniform Division of Income for Tax Purposes Act, Sections 25120 through 25139, inclusive, Revenue and Taxation Code, and the regulations thereunder, except as otherwise provided. For purposes of computing the numerator and the denominator of the sales factor pursuant to Section 25135, Revenue and Taxation Code, all sales of tangible personal property are assigned to the state of the purchaser where the property is delivered or shipped, and the provisions of Section 25135(b), Revenue and Taxation Code (relating to throwback sales), shall not apply.
(4) A covenant not to compete includes any arrangement to refrain from engaging in an activity, directly or indirectly, similar to the business activity carried on by the business which was sold. This definition includes, but is not limited to, covenants not to create or acquire an interest in a competitor, covenants not to solicit employees, and covenants not to disclose proprietary information.
(5) The sale of a business includes all of the following:
(A) The sale or disposition of the goodwill of a sole proprietorship, partnership, limited liability company, S corporation or C corporation.
(B) The sale or disposition of substantially all of the assets, together with the goodwill, of a sole proprietorship, partnership, limited liability company, S corporation or C corporation.
(C) The sale or disposition of substantially all of an individual's interest in a sole proprietorship, partnership, limited liability company, S corporation or C corporation, including, but not limited to, the following:
1. The sale or disposition by a shareholder of substantially all of its shares in a corporation.
2. The sale or disposition by a partner of substantially all of its interest in a partnership.
(6) The use of the apportionment factors of the business that was sold for the year in which the sale occurs is required in all but unusual circumstances. However, if the use of these factors does not fairly reflect the nature of prohibited activities expressed or reasonably implied from the covenant not to compete, or does not accurately represent the location of recent historical business activities of the business sold, such that there is a gross distortion of income assigned within the legally enforceable area, the Franchise Tax Board may require, or the promisor may petition the Franchise Tax Board for:
(A) The use of factors of the business which was sold for another year or combination of years; or
(B) The employment of another method of assigning income; provided the use of another year or years or another method produces a fair and equitable assignment of income within the legally enforceable area.
(b) The provisions of this regulation will be applied in the computation of taxes for all years for which the Franchise Tax Board may propose an assessment or allow a claim for refund, as of the effective date of this regulation.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17951, Revenue and Taxation Code.
HISTORY

1. New section filed 12-24-2001; operative 1-23-2002 (Register 2001, No. 52).
§17952. * Income from Intangible Personal Property.
Note     •     History

(a) Income of nonresidents from rentals or royalties for the use of, or for the privilege of using in this State, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property is taxable, if such intangible property has a business situs in this State within the meaning of (c) below.
(b) Income of nonresidents from intangible personal property such as shares of stock in corporations, bonds, notes, bank deposits and other indebtedness is taxable as income from sources within this State only if the property has a situs for taxation in this State, except that if a nonresident buys or sells stock, bonds, and other such property in California, or places orders with brokers in California to buy or sell such property, so regularly, systematically and continuously as to constitute doing business in this State, the profit or gain derived from such activity is taxable as income from a business carried on here, irrespective of the situs of the property for taxation.
(c) Intangible personal property has a business situs in this State if it is employed as capital in this State or the possession and control of the property has been localized in connection with a business, trade or profession in this State so that its substantial use and value attach to and become an asset of the business, trade or profession in this State. For example, if a nonresident pledges stocks, bonds or other intangible personal property in California as security for the payment of indebtedness, taxes, etc., incurred in connection with a business in this State, the property has a business situs here. Again, if a nonresident maintains a branch office here and a bank account on which the agent in charge of the branch office may draw for the payment of expenses in connection with the activities in this State, the bank account has a business situs here.
If intangible personal property of a nonresident has acquired a business situs here, the entire income from the property including gains from the sale thereof, regardless of where the sale is consummated, is income from sources within this State, taxable to the nonresident.
(d) The source of gains and losses from the sale or other disposition of intangible personal property is determined at the time of the sale or disposition of that property. For example, if a California resident sells intangible personal property under the installment method, and subsequently becomes a nonresident, any later recognized gain attributable to any installment payment receipts relating to that sale will be sourced to California (absent a business situs exception). Further, a California nonresident who sells intangible personal property would be taxed by California on gain as it is recognized upon receipt of future installment payments if the intangible personal property had a business situs in California at the time of the sale.

--------
* This regulation is substantially the same as Title 18, Cal. Adm. Code, Chapter 3, Subchapter 2, Section 17211-14(f).
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Sections 17041 and 17952, Revenue and Taxation Code.
HISTORY

1. Renumbering and amendment of Sections 17951-17954(f) to Section 17952 filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
2. Change without regulatory effect amending subsection (a) and Note filed 12-10-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 50).
3. New subsection (d) filed 7-2-2007; operative 8-1-2007 (Register 2007, No. 27).
§17953. Nonresident Beneficiaries.
Note     •     History

Income of a nonresident beneficiary from an estate or trust, distributed or distributable to the beneficiary out of income from intangible personal property of the estate or trust, is not income from sources within this State and is not taxable to the nonresident beneficiary unless the property is so used by the estate or trust as to acquire a business situs in this State within the meaning of subsection (b) or (c) of Regulation 17952, or, in the case of royalties, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property, unless the estate or trust permits or licenses the property to be used in this State in the manner described in subsection (c) of Regulation 17952. 
Whether or not the executor or administrator of an estate or the trustee of a trust is a resident of this State is immaterial in so far as the taxation of income of beneficiaries from the estate or trust is concerned.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Sections 17952 and 17953, Revenue and Taxation Code.
HISTORY

1. New section filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
Subchapter 12. Credit for Taxes Paid
§18001-1. * Credit for Taxes Paid to Another State.
Note     •     History

(a) Subject to the limitations described in California Code of Regulations, title 18, section 18001-2 respecting residents, and in Revenue and Taxation Code section 18002 respecting nonresidents, resident taxpayers are allowed a credit against “net tax”, as defined in Revenue and Taxation Code section 17039, for net income taxes paid another state, and nonresidents are allowed a credit against “net tax”, as defined in Revenue and Taxation Code section 17039, for net income taxes paid to the state in which they reside. The term “state” as used in the regulations contained in this Group for taxable years beginning before December 31, 1956, includes states, foreign countries, territories and possessions of the United States, and territories, possessions and political subdivisions of foreign countries, but did not include the United States. For taxable years beginning after December 31, 1956, the term “state” includes states of the United States, the District of Columbia and the possessions of the United States, but does not include the United States or foreign countries. The credit is limited to “net tax” and may neither be taken on account of any preference, alternative, or minimum tax comparable to the tax imposed by Revenue and Taxation Code section 17062 paid to another state or interest or penalties paid to another state nor may the credit be applied against interest or penalties due under the law. Since credit may be allowed only for net income taxes or, in the case of shareholders of a S corporation, the shareholders' prorata share of any taxes on, according to or measured by income or profits which were paid by the S corporation and satisfy the requirements of Revenue and Taxation Code section 18006, subdivision (b), no credit may be allowed for taxes imposed on gross receipts, gross income, dividends, etc., which must be paid regardless of whether or not the subject of the tax constitutes net income, even though in particular instances the subject taxed is net income in whole or in part. A taxpayer may also be required to report only the net amount of dividends if a tax is imposed by a foreign country upon the profits of the corporation and the corporation deducts the tax from each dividend payment before remitting the remainder.
(b) The credit may be taken either at the time of filing returns under the law or subsequently and may be applied against the entire “net tax” if it is not paid in installments, or may be applied against each installment until the credit is exhausted. However, no credit will be allowed on account of income taxes imposed by another state or country until such taxes are actually paid. Receipts showing the payment of such taxes, and a certified copy of the return or returns upon the basis of which such taxes are assessed must be filed with the Franchise Tax Board at or prior to the time credit is claimed. If credit is claimed on account of a deficiency assessment, a certified copy of the notice assessing, or proposing, to assess the deficiency, as well as a receipt showing the payment of the deficiency must be filed. 
(c) If, for any reason, the “net tax” has been paid before credit is claimed, a refund claim (accompanied by a receipt showing payment of the taxes claimed as a credit and a certified copy of the return or returns upon which the taxes were assessed) in the amount of the credit must be filed (see Part 10.2, Chapter 6 respecting the time and manner of filing refund claims). If the refund claim is approved, the amount of the claim will either be allowed as a credit against “net tax” or refunded to the taxpayer in the manner specified in Part 10.2, Chapter 6.
(d) If a husband and wife file separate returns under the law and also file separate returns in another state, credit on account of taxes paid to the other state may be claimed by each spouse only to the extent the income of each spouse as reported under the law, has been taxed by the other state. If a husband and wife file a joint return under the law, the entire amount of taxes (subject to limitations described in California Code of Regulations, title 18, section 18001-2, and Revenue and Taxation Code section 18002) paid by either or both to another state may be claimed as a credit, regardless of whether the husband and wife filed a joint return or separate returns in such state. If a husband and wife file separate returns under the law but file a joint return in another state, each is entitled to credit (subject to the limitations described in California Code of Regulations, title 18, section 18001-2, and Revenue and Taxation Code section 18002) for that portion of the total tax paid to such other state which the income of each taxed under the law and also taxed by such other state bears to the total income taxed by such other state.
(e) For provisions relating to credit allowed:
(1) An estate or trust, see Revenue and Taxation Code sections 18003-18004;
(2) Resident beneficiaries of an estate or trust for taxes paid by the estate or trust on income taxable to the beneficiaries, see Revenue and Taxation Code section 18005;
(3) Members of a partnership where a net income tax is levied on the partnership, see Revenue and Taxation Code section 18006; 
(4) Shareholders of an S corporation where the S corporation has paid “net income taxes” to another state, which include taxes on, or according to, or measured by, income or profits paid, see Revenue and Taxation Code section 18006; and
(5) In a case where the taxpayer at any time obtains credit for, or a refund of, taxes paid another state, see Revenue and Taxation Code sections 18007-18009.

--------
* Except for limiting the credit to taxes paid to other states for taxable years beginning after December 31, 1956, this regulation is substantially the same as Title 18, Cal. Adm. Code, Chapter 3, Subchapter 2, Section 17976(a).
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Sections 18001 and 18002, Revenue and Taxation Code.
HISTORY

1. Group 12 (Regs. 18001(a) through 18006-18009) filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Renumbering and amendment of Section 18001(a) to Section 18001-1 filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
3. Editorial correction of subsections (a) and (d) (Register 83, No. 19).
4. Change without regulatory effect amending subsections (a)-(c), adding new subsection (e)(4), renumbering remaining subsection, and amending Note filed 8-19-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 34).
5. Change without regulatory effect amending subsections (a) and (c) filed 12-10-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 50).
6. Amendment of subsection (c) filed 11-16-2004; operative 12-16-2004 (Register 2004, No. 47).
7. Change without regulatory effect amending subsections (a), (d) and (e)(1)-(5) filed 1-7-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 1).
§18001-2. ** Limitations on Credit of Resident Taxpayers.
Note     •     History

In the case of resident taxpayers credit for net income taxes imposed by and paid to another state (as defined in subsection (a) of Reg. 18001-1) is allowed subject to the following conditions: 
(a) Credit may be allowed only for taxes imposed by and paid to another state on income from personal services performed within such state, from land or other property located therein, from business carried on there, or otherwise derived from sources within such state and taxable under the laws of such state irrespective of the residence or domicile of the recipient. Thus, credit may not be allowed for taxes paid to another state on income from sources without such state even though such income may be taxable by such state, either because the taxpayer is domiciled therein or is considered a resident of such state notwithstanding that he is also considered a resident of this State. This limitation is not applicable to an estate or trust which, within the meaning of the law, is considered a resident of this State and also of another state. (See Sections 18003-04.)
(b) Credit may not be allowed for taxes paid to a state which allows nonresidents credit against the taxes imposed by such state for taxes paid or payable to the state of residence. In such case credit should be obtained from the state imposing a tax upon residents of this State.
(c) The credit shall not exceed that proportion of the tax payable under the law as the income taxable in such other state and also taxable under the law bears to the total income taxable under the law. In the application of this limitation only taxable income to which the taxpayer is entitled shall be considered.

** Except for limiting the credit to taxes paid to other states, for taxable years beginning after December 31, 1956, this regulation is substantially the same as Title 18, Cal. Adm. Code, Chapter 3, Subchapter 2, Section 17976(b).
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 18001, Revenue and Taxation Code.
HISTORY

1. Renumbering and amendment of Section 18001(b) to Section 18001-2 filed 1-15-82; effective thirtieth day thereafter (Register 82, No. 3).
2. Editorial correction (Register 83, No. 19).
§18002. Limitations on Credit of Nonresident Taxpayers.
History

HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 85, No. 12).
2. Editorial correction to delete text which was repealed 1-15-82 but inadvertently left in print (Register 85, No. 12).
§18003-18004. Credit for Estates and Trusts.
History

HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 85, No. 12).
2. Editorial correction to delete text which was repealed 1-15-82 but inadvertently left in print (Register 85, No. 12).
§18005. Credit for Resident Beneficiary of an Estate or Trust.
History

HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 85, No. 12).
2. Editorial correction to delete text which was repealed 1-15-82 but inadvertently left in print (Register 85, No. 12).
§18006-18009. Refund After Credit.
History

HISTORY

1. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 85, No. 12).
2. Editorial correction to delete text which was repealed 1-15-82 but inadvertently left in print (Register 85, No. 12).
Subchapter 13. Gain or Loss on Disposition of Property
Article 1. Determination of Amount of Gain or Loss
NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 1 (Sections 18031 and 18032) filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35). For prior history, see Registers 64, No. 4, and 61, No. 9.
Article 2. Basic Rules of General Application
§18041. Adjusted Basis.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18042(a). Basis of Property.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Amendment filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
3. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18042(b). Transfers in Part a Sale and in Part a Gift.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18043. Property Included in Inventory.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18044-18047(a). Basis of Property Acquired from a Decedent.
History

HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Amendment filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
3. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 85, No.12).
4. Editorial correction to delete text which was repealed 1-15-82 but inadvertently left in print (Register 85, No. 12).
§18044-18047(b). Property Acquired from a Decedent.
History

HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 1-15-82; effective thirtieth day thereafter (Register 85, No. 12).
3. Editorial correction to delete text which was repealed 1-15-82 but inadvertently left in print (Register 85, No. 12).
§18044-18047(c). Other Basis Rules.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-31-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18044-18047(d). Uniformity of Basis; Adjustment to Basis.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18044-18047(e). Gain or Loss.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18044-18047(f). Special Rule for Adjustments to Basis Where Property Is Acquired from a Decedent Prior to His Death.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18044-18047(g). Example Applying Rules of Sections 18044-18047(d) Through (f) to Case Involving Multiple Interests.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18044-18047(h). Bequest, Devise or Inheritance of a Remainder Interest.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18047. Manner and Time for Filing Elections to Qualify Household and Personal Effects for Fair Market Value Basis.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 18047, Revenue and Taxation Code.
HISTORY

1. New section filed 8-25-78; effective thirtieth day thereafter (Register 78, No. 34).
2. Change without regulatory effect repealing section filed 9-30-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 40).
§18049-18051(a). Basis of Property Acquired by Gift After December 1, 1920.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18049-18051(b). Transfer of Property in Trust After December 31, 1920.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18049-18051(c). Gift or Transfer in Trust Before January 1, 1921.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18049-18051(d). Transfers in Part a Gift and in Part a Sale.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18052-18053(a). Adjustments to Basis; Scope of Sections.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18052-18053(b). Items Properly Chargeable to Capital Account.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18052-18053(c). Exhaustion, Wear and Tear, Obsolescence, Amortization, and Depletion for Periods Since February 28, 1913.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18052-18053(d). Exhaustion, Wear and Tear, Obsolescence, Amortization, and Depletion; Periods During Which Income Was Not Subject to Tax.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18052-18053(e). Miscellaneous Adjustments to Basis.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Amendment filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
3. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18052-18053(f). Other Applicable Rules.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18052-18053(g). Adjusted Basis; Cancellation of Indebtedness Under Bankruptcy Act.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18052-18053(h). Adjusted Basis; Cancellation of Indebtedness; Special Cases.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18052-18053(i). Substituted Basis.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18054(a). Adjusted Basis; Discharge of Indebtedness; General Rule.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New Reg. 18054(a) filed 1-7-58; effective thirtieth day thereafter (Register 58, No. 1).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18054(b). Adjusted Basis; Discharge of Indebtedness; Special Cases.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New Reg. 18054(b) filed 1-7-58; effective thirtieth day thereafter (Register 58, No. 1).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18055. Property on Which Lessee Has Made Improvements.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18057. Sale of Annuities.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 7-23-71; effective thirtieth day thereafter (Register 71, No. 30).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
Article 3. Common Nontaxable Exchanges
NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 3 (Sections 18081(a) through 18102, not consecutive) filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35). For prior history, see Registers 58, No. 1; 58, No. 17; 64, No. 4; and 70, No. 14.
Article 4. Special Rules
NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 4 (Sections 18111(a)-18112) filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
Article 5. Exchanges to Effectuate F.C.C. Policy
NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 5 (Sections 18121(a) through 18121(d)) filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 3).
Article 7. Wash Sales of Stock or Securities
NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 7 (Sections 18141-18142(a) and (b)) filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
Subchapter 14. Capital Gains and Losses
Article 1. Gain or Loss Taken into Account
NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 1 (Sections 18151-18152(a) through (e)) filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35). For prior history see Registers 58, No. 17 and 62, No. 23.
Article 2. General Rules for Determining Capital Gains and Losses
NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 2 (Sections 18161 through 18163-18171) filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35). For prior history, see Registers 58, No. 17 and 62, No. 23.
Article 3. Special Rules for Determining Capital Gains and Losses
§18181-18182(a). Gains and Losses from the Sale or Exchange of Certain Property Used in the Trade or Business.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18181-18182(b). Livestock Held for Draft, Breeding, or Dairy Purposes.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18183-18185(a). Bonds and Other Evidences of Indebtedness; Scope of Section.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 3-22-82; effective thirtieth day thereafter (Register 82, No. 13).
§18183-18185(b). Retirement.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18183-18185(c). Gain upon Sale or Exchange of Obligations Issued at a Discount After December 31, 1954.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18183-18185(d). Obligations with Excess Coupons Detached.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18186. Gains and Losses from Short Sales for Taxable Years Beginning Before January 1, 1959.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New Group 14, Article 3 (Reg. 18186) filed 9-15-58; effective thirtieth day thereafter (Register 58, No. 17).
2. Amendment filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
3. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18186-18190.2. Gains and Losses from Short Sales for Taxable Years Beginning on or After January 1, 1959.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18191. Options to Buy or Sell.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18192-18195(a). Sale or Exchange of Patents.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18192-18195(b). Definition of Terms.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18196. Dealers in Securities.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18197-18199. Real Property Subdivided for Sale.
Note     •     History

NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 3-22-82; effective thirtieth day thereafter (Register 82, No. 13).
§18200. Amortization in Excess of Depreciation.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18201. Gain from Sale or Exchange of Certain Property Between Spouses or Between an Individual and a Controlled Corporation.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18202. Capital Gains Treatment of Certain Termination Payments.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18203. Cancellation of Lease or Distributor's Agreement.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18204. Losses on Small Business Investment Company Stock.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18205. Loss of Small Business Investment Company.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18206-18210(a). Loss on Small Business Stock Treated As Ordinary Loss.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18206-18210(b). Annual Limitation.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18206-18210(c). Section 18208 Stock Defined.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18206-18210(d). Small Business Corporation Defined.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18206-18210(e). Contributions of Property Having Basis in Excess of Value.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18206-18210(f). Increases in Basis of Section 18208 Stock.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18206-18210(g). Stock Dividends, Recapitalization, Changes in Name, etc.
Note     •     History

NOTE

Authority cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
§18206-18210(h). Records to Be Kept and Information to Be Filed with the Return.
History

HISTORY

1. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
2. Repealer filed 8-25-81; effective thirtieth day thereafter (Register 81, No. 35).
Subchapter 15. Readjustment of Tax Between Years and Special Limitations
Article 1. Income Attributable to Several Years
NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. New Article 1 (Reg. 18241(a) through 18246) filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Repealer of Article 1 (Sections 18241(a) through 18246) filed 3-22-82; effective thirtieth day thereafter (Register 82, No. 13).
Article 2. War Loss Recoveries
NOTE

Authority and reference cited: Section 19253, Revenue and Taxation Code.
HISTORY

1. Repealer of Article 2 (Sections 18301 through 18311) filed 3-22-82; effective thirtieth day thereafter (Register 22, No. 13).
Subchapter 17. Returns
HISTORY

1. Change without regulatory effect repealing subchapter 17 (articles 1 through 4, sections 18401-18404(a) through 18477) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48). For prior history, see Register 78, No. 40; Register 81, No. 35; Register 82, No. 13; Register 82, No. 34; Register 85, No. 26; Register 97, No. 17 and Register 97, No. 18.
Subchapter 18. Payments and Assessments
HISTORY

1. Change without regulatory effect repealing subchapter 18 (articles 1 through 5, sections 18551-18554(a) through 18691.1(c)) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48). For prior history, see Register 82, No.13; Register 85, No. 26; Register 90, No. 3 and Register 94, No. 24. 
Subchapter 19. Collection of Tax
HISTORY

1. Change without regulatory effect repealing subchapter 19 (articles 1 through 6, sections 18663 through 19027) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48). For prior history, see Register 70, No. 27; Register 80, No. 11; Register 81, No. 11; Register 81, No. 13; Register 81, No. 15; Register 82, No. 13; Register 82, No. 34; Register 82, No. 49; Register 83, No. 19; Register 85, No. 26; Register 86, No. 8; Register 86, No. 45; Register 97, No. 22; Register 97, No. 24 and Register 97, No. 32.  
Subchapter 20. Overpayments and Refunds
HISTORY

1. Change without regulatory effect repealing subchapter 20 (articles 1 through 2, sections 19051-19062.9 through 19085) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48). For prior history, see Register 82, No. 13; Register 82, No. 34; Register 82, No. 49 and Register 97, No. 27.
Subchapter 21. Administration of Tax
HISTORY

1. Change without regulatory effect repealing subchapter 21 (article 1, sections 19141.6-0 through 19363) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48). For prior history, see Register 85, No. 37; Register 89, No. 8; Register 94, No. 25; Register 97, No. 2; Register 97, No. 24; Register 97, No. 32 and Register 97, No. 33.
Chapter 2.6. Administration of Franchise and Income Tax
Subchapter 1. General Provisions
§18409. Reporting on Magnetic Media.
Note     •     History

The standards for determining which returns shall be filed on magnetic media or in other machine-readable form shall be the standards adopted by the U.S. Treasury in Regulation Section 301.6011-2 (26 CFR 301.6011-2). This regulation shall apply to returns filed after December 31, 1986.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 18409, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect adding new chapter 2.6 (subchapters 1 through 10) and subchapter 1 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
2. Amendment renumbering former section 19524 to section 18409, including amendment of Note, filed 4-24-2006; operative 1-1-2006 pursuant to Revenue and Taxation Code section 19591(b)(2) (Register 2006, No. 17).
Subchapter 2. Returns
Article 1. Individuals and Fiduciaries
§18501. Returns, Married Couples.
Note     •     History

(a) The income limits for filing joint or separate returns by a married couple are set out in Section 18501 of the Revenue and Taxation Code. Procedures and rules for filing joint or separate returns by a married couple are set out in Section 18521 of the Revenue and Taxation Code.
For filing a joint return after filing a separate return see Sections 18522 and 18526 of the Revenue and Taxation Code.
(b) A joint return of a husband and wife shall be signed by both spouses, except that one spouse may sign the return as the agent for the other, if the return is accompanied by a power of attorney authorizing such action. The spouse acting as agent shall, with the principal, assume the responsibility for making the return and incur liability for the penalties provided for erroneous, false or fraudulent returns. The spouse who prepares the joint return of husband and wife shall execute the declaration that the joint return is made under penalties of perjury. The spouse who fills in the return shall be considered to have prepared the return. If the return is prepared by both spouses, or by neither spouse, then both spouses shall execute said declaration. Exceptions to both spouses signing are applicable to both spouses executing said declaration.
(c) If a separate return is filed by a resident married couple, each must report income from his or her separate property. Each must also report one-half of any community income, e.g., wages, salaries, and other compensation for personal services performed by either or both spouses; one-half of the income from community property owned, etc. If the husband and wife are separated and choose to file separate returns, then the entire earnings of each spouse is reported separately.
(d) Whether the income of a married couple who are nonresidents of this state must be reported by the husband or wife if a separate return is filed depends upon the spouse's domicile and the character of the income. Whether, in what fashion and to what extent income belongs to an individual spouse depends upon the character of the income. The character of the income is determined by the law of the state of domicile of the spouse earning the income.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Sections 18501, 18521, 18522 and 18526, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering former section 18402 to new section 18501, including amendment of section and Note filed 4-28-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 18).
2. Change without regulatory effect adding new subchapter 2 (articles 1 through 5), article 1 (sections 18501 through 18566) and relocating section 18501 from chapter 2.5, subchapter 17 to chapter 2.6, subchapter 2 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
3. Change without regulatory effect amending subsection (a) and Note filed 7-5-2000 pursuant to section 100, title 1, California Code of Regulations (Register 2000, No. 27).
§18505-1. Fiduciary Returns.
Note     •     History

(a) Every fiduciary, or at least one of joint fiduciaries, must make a return of income--
(1) For the individual whose income is in his charge if the income of the individual is such that the individual would be required to file a return in accordance with the provisions of Section 18501 of the Revenue and Taxation Code, were it not for the fact that the fiduciary is required to file the return for the individual. The return, in the case of a resident, should be filed on Form 540, and for a nonresident on Form 540NR.
(2) For the estate or trust for which he acts if the net income of such estate exceeds the limits set out in Section 18505 of the Revenue and Taxation Code, Form 541 should be used.
If a return is made by one of joint fiduciaries, it shall contain a statement that the fiduciary has sufficient knowledge of the affairs of the person for whom the return is made to enable him to make the return, and that the return is, to the best of his knowledge and belief, true and correct.
A return shall be filed for the taxable year of an estate which is a period of less than 12 months if the gross income of the estate for such taxable year exceeds the limit set out in Section 18505 of the Revenue and Taxation Code. The requirements as to the filing of a return for a trust remain the same, regardless of whether the taxable year of the trust is a period of less than 12 months.
(b) The executor or administrator of a decedent's estate must make a return for the decedent for the year in which the decedent died, and, in the event the decedent has not filed returns for years prior to the year in which he died, for such prior years, if, (1) in the case of the year of death, the decedent's income from the beginning of that year until the date of his death, or (2) in the case of years prior to the year of death, if the decedent's income for each of such years exceeds the limits set out in Section 18505 of the Revenue and Taxation Code.
(c) In determining whether returns must be filed for an estate or a trust, the entire income from all sources (except income specifically exempt from taxation, see Chapter 3) must be considered if, in the case of an estate, the decedent was a resident of this State, or, in the case of a trust, if either the fiduciary or any of the beneficiaries are residents of this State (as defined by Sections 17742-17745.1). If, in the case of an estate, the decedent was not a resident of this State, or, if, in the case of a trust, neither the fiduciary nor any of the beneficiaries are residents of this State, only income from sources within this State should be considered (see Regulation Section 17951-2 for the meaning of sources within this State).
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Sections 18505 and 18508, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering former section 18405-1 to new section 18505-1, including amendment of subsections (a)(1)-(c), repealer of subsection (d) and amendment of Note, filed 4-23-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 17).
2. Change without regulatory effect relocating section 18505-1 from chapter 2.5, subchapter 17 to chapter 2.6, subchapter 2 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
3. Change without regulatory effect amending subsections (b) and (c) filed 7-5-2000 pursuant to section 100, title 1, California Code of Regulations (Register 2000, No. 27).
§18505-2. Return by Guardian or Committee.
Note     •     History

A fiduciary acting as the guardian of a minor, or as the guardian or committee of an insane person must file a return for such minor or person, unless the minor himself makes a return or causes such return to be made. A return must be filed for a minor or insane person who is single where adjusted gross income of such person exceeds the limits set forth in Section 18505 of the Revenue and Taxation Code. Returns must be filed for such married couples where their adjusted gross income exceeds the limits set forth in Section 18505 of the Revenue and Taxation Code. Regardless of net income, a return must be filed for all persons, whether married or single, if their gross income exceeds the limits set forth in Section 18505 of the Revenue and Taxation Code. The return which must be filed for the persons described above is Form 540 if such persons are residents, and Form 540NR if such persons are nonresidents.
For the purpose of determining the liability of a fiduciary to render a return under the provisions of the preceding paragraph in cases where the minor or the incompetent is married, it is the aggregate gross income or the aggregate net income of both husband and wife which is controlling. (See Section 18501 of the Revenue and Taxation Code)
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 18505, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering former section 18405(b) to new section 18505-2, including amendment of section and Note, filed 4-23-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 17).
2. Change without regulatory effect relocating section 18505-2 from chapter 2.5, subchapter 17 to chapter 2.6, subchapter 2 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18505-3. Return by Receiver.
Note     •     History

A receiver of all the property of an individual who is a resident of this State must make a return of, and pay the tax upon, the income from such property if the adjusted gross income of an individual exceeds the limits set forth in Section 18505 of the Revenue and Taxation Code. If the individual is a resident of this State the entire income from his property regardless of where located, must be reported by the receiver. If the individual is a nonresident, only income from property having a business or taxable situs in this State should be reported. The return should be made on Form 540, except that if the individual is a nonresident of the State Form 540NR should be employed.
A receiver in charge of the business of a partnership shall render a return on Form 565. A receiver of the rents and profits appointed to hold and operate a mortgaged parcel of real estate but not in control of all the property or business of the mortgagor, and a receiver in partition proceedings, are not required to render returns of income. Likewise, a receiver of a corporation is not required to make a return of income but should make a return for the corporation under the Bank and Corporation Tax law if the corporation is taxable under that law.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 18505, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering former section 18405(c) to new section 18505-3, including amendment of section and Note, filed 4-23-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 17).
2. Change without regulatory effect relocating section 18505-3 from chapter 2.5, subchapter 17 to chapter 2.6, subchapter 2 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18505-4. Time for Filing Returns of Decedents, and Returns for Year in Which an Estate Is Closed or a Trust Terminated.
Note     •     History

Under the provisions of Section 17552 of the Revenue and Taxation Code, the return by a taxpayer who was not in existence throughout a taxable period of 12 months is a return for the fractional part of a year during which the taxpayer was in existence. If a return is required under the provisions of subdivision (a) of Section 18505 of the Revenue and Taxation Code, or for the last taxable year of a decedent, the executor or administrator of the decedent shall file such return at the time prescribed in Section 18566 of the Revenue and Taxation Code. If a return for the last taxable year of an estate or trust is required to be filed under the provisions of subdivision (a) of Section 18505 of the Revenue and Taxation Code, such return shall be filed at the time prescribed in Section 18566 of the Revenue and Taxation Code and the last day prescribed for such filing shall also be the due date for payment of the tax or the first installment thereof.
The executor or the administrator of an estate is required to file returns for the decedent for years prior to the year in which death occurred, if returns for such years should have been filed but have not been filed by the decedent (see Section 18505, of the Revenue and Taxation Code.). Such returns should be filed as soon as possible after the fiduciary has assumed his duties, and, in any event, must be filed prior to the time the estate is distributed (see Article 7, Chapter 4 of the Revenue and Taxation Code for penalty provisions).
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 18505, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering former section 18405(d) to new section 18505-4, including amendment of section and Note, filed 4-23-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 17).
2. Change without regulatory effect relocating section 18505-4 from chapter 2.5, subchapter 17 to chapter 2.6, subchapter 2 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
3. Change without regulatory effect amending section filed 7-5-2000 pursuant to section 100, title 1, California Code of Regulations (Register 2000, No. 27).
§18522. Joint Return After Filing Separate Returns.
History

Revenue and Taxation Code Section 18522 provides that where an individual has filed a separate return for a taxable year for which a joint return could have been made by him and his spouse under Revenue and Taxation Code Section 18521, and the time prescribed by law for filing the return for such taxable year has expired, such individual and his spouse may, under conditions hereinafter set forth, make a joint return for such taxable year. The joint return filed pursuant to Revenue and Taxation Code Section 18522 shall constitute the return of the husband and wife for such year, and all payments, credits, refunds, or other repayments, made or allowed with respect to the separate return of either spouse are to be taken into account in determining the extent to which the tax based on the joint return has been paid.
The fact that the taxpayer and his spouse are divorced or legally separated at any time after the close of the taxable year for which separate returns are filed shall not deprive them of their right to file a joint return for such taxable year pursuant to Revenue and Taxation Code Section 18522.
HISTORY

1. Change without regulatory effect renumbering and amending former section 18410-18410.9 to section 18522-18531 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
2. Change without regulatory effect renumbering and amending former subsection 18522-18531 to new section 18522, repealing former subsections 18522-18531(b)-(b)(3), renumbering and amending former subsections 18522-18531(c)-(c)(4) to new section 18526, renumbering and amending former subsection 18522-18531(d) to new section 18523 and renumbering and amending former subsection 18522-18531(e) to new section 18530 filed 5-5-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 18).
§18523. Effect on Joint Return of Elections Made in Separate Returns.
History

If a joint return is made under Revenue and Taxation Code Section 18522, any election, other than the election to file a separate return for the taxable year with respect to the treatment of any income, deduction, or credit of such spouse, shall not be changed in the making of the joint return where such election would have been irrevocable if the joint return had not been made. Thus, if one spouse has made an irrevocable election to include patronage dividends in gross income for the year received under Revenue and Taxation Code Section 17086, this election may not be changed upon making the joint return under Revenue and Taxation Code Section 18522.
HISTORY

1. Change without regulatory effect renumbering and amending former subsection 18522-18531(d) to new section 18523 filed 5-5-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 18).
§18526. When Joint Return May Not Be Made.
History

A joint return cannot be made under Revenue and Taxation Code Section 18522 with respect to a taxable year:
(a) After the expiration of four years from the last day prescribed by law for filing the return for such taxable year determined without regard to any extension of time granted to either spouse. Thus, where an extension of time for filing returns has been granted by the Franchise Tax Board in accordance with Revenue and Taxation Code Section 18567, the extension shall be disregarded in determining the last day upon which a joint return may be filed after separate returns have been filed;
(b) After there has been mailed to either spouse, with respect to such taxable year, a notice of deficiency under Revenue and Taxation Code Section 19033, if the spouse, as to such notice, files a protest under Revenue and Taxation Code Section 19041 or appeal under Revenue and Taxation Code Section 19045 which is still pending;
(c) After either spouse has commenced a suit in any court for the recovery of any part of the tax for such taxable year; or
(d) After either spouse has entered into a closing agreement under Revenue and Taxation Code Section 19441 with respect to such taxable year.
HISTORY

1. Change without regulatory effect renumbering and amending former subsections 18522-18531(c)-(c)(4) to new section 18526 filed 5-5-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 18).
§18530. Penalties Imposed When Amount on Joint Return Exceeds Amounts on Separate Returns.
History

Where the amount shown as the tax by the husband and wife on a joint return made under Revenue and Taxation Code Section 18522 exceeds the aggregate of the amounts shown as tax on the separate return of each spouse, and such excess is attributable to negligence, intentional disregard of rules and regulations, or fraud at the time of the making of such separate returns, there shall be assessed, collected, and paid in the same manner as if it were a deficiency, an additional amount as provided in the two succeeding sentences. If any part of such excess is attributable to negligence, or intentional disregard of rules and regulations at the time of the making of such separate return, but without any intent to defraud, this additional amount shall be 20 percent of the total amount of the excess. If any part of such excess is attributable to fraud with intent to evade tax at the time of the making of such separate return, this additional amount shall be 75 percent of the total amount of the excess. The above additions are in lieu of the additions to the tax provided in Revenue and Taxation Code section 19164, subdivisions (a) and (c).
HISTORY

1. Change without regulatory effect renumbering and amending former subsection 18522-18531(e) to new section 18530 filed 5-5-2005 pursuant to section 100, title 1, California Code of Regulations (Register 2005, No. 18).
§18566. Time for Filing Returns.
Note     •     History

Unless an extension of time is granted, returns made on the basis of the calendar year must be filed on or before April 15 following the close of the calendar year, and returns made on a basis of a fiscal year must be filed on or before the 15th day of the fourth month following the close of the fiscal year. If an extension is granted, returns must be filed on or before the expiration of the period of extension. If the last day for filing returns falls on a Saturday, Sunday or other legal holiday, returns may be filed on the day following without penalty. Returns filed by mail are deemed to have been filed as of the date they are placed in the United States mail. If returns are so posted, properly addressed and postage prepaid, no penalty will attach should the returns not reach the Franchise Tax Board's office until after the due date thereof. However, see Section 18567 for rules pertaining to taxpayers residing or traveling abroad.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 18433, Revenue and Taxation Code.
HISTORY

1. Amendment filed 10-6-78; effective thirtieth day thereafter (Register 78, No. 40).
2. Change without regulatory effect renumbering and amending former section 18433.1 to section 18566 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18567. Automatic Extension of Time for Filing Returns by Individuals, Fiduciaries, and Partnerships.
Note     •     History

(a) For returns by individuals, fiduciaries, and partnerships required to be filed on or after April 15, 1992, the Franchise Tax Board will allow an automatic six-month extension to file if the return is filed within six months of the original due date. No written request is required. The extension time period for fiscal and calendar year taxpayers is the original due date plus six months. This granting of the extension is conditioned solely upon the filing of a return within the automatic extension period. If the return is not filed within six months of the original due date, no extension is allowed.
This extension to file is not an extension of time to pay. Tax is due on the original due date of the return without regard to the extension to file.
(b) A delinquency penalty under Section 19131 (failure to file a return) will not be imposed on any return filed by the extended due date. However, if the return is not filed within six months of the original due date, no valid extension exists under subsection (a), and the penalty amount will be computed by reference to the original due date of the return.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 18567, Revenue and Taxation Code.
HISTORY

1. New section filed 10-12-2001; operative 10-12-2001 pursuant to Government Code section 11343.4 (Register 2001, No. 41).
Article 2. Banks and Corporations [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 2 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 3. General Provisions Applicable to All Persons [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 3 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 4. Information Returns
§18631-18681(a). Payments of Interest or Dividends.
Note     •     History

(1) Except as provided in (2) below, for calendar years beginning after December 31, 1969, every individual, partnership, bank, corporation, mutual savings bank, savings and loan association, building and loan association, cooperative bank, homestead association, credit union, stock broker, dealer in securities, or similar entity, including a nonprofit corporation, joint stock company or association, insurance company, or Massachusetts or business trust, engaged in a trade or business in this State, and making payment in the course of such trade or business, must make an information return on forms prescribed by the Franchise Tax Board for each calendar year respecting payments of interest or dividends, as described in subdivision (a) or (c) of Section 18639, and distributions out of earnings or profits accumulated since February 28, 1913 (except nontaxable stock dividends and distributions in liquidation), aggregating $10 or more to any individual, fiduciary, or partnership shareholder whose last known address is in this State. Payments or distributions to shareholders, whose last known address is outside this State need be reported only if the paying entity has reason to believe that the shareholder (or any member in case the shareholder is a partnership) is a resident of this State.
(2) In the case of distributions which are made from a depletion or depreciation reserve, or which for any other reason are deemed by the distributing entity to be nontaxable or partly nontaxable to its shareholders, the distributing entity should complete the prescribed forms and forward them to the Franchise Tax Board, Operations Division, Sacramento, California 95814, not later than February 1 of the year following the year in which made. Upon receipt of this information, the Franchise Tax Board will determine and advise the distributing entity by letter whether any portion of such distribution is subject to tax.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 18801, Rev. and Tax. Code.
HISTORY

1. New group 19 ( 18801-18804(a) through 18805-18810(h)) filed 2-4-60; effective thirtieth day thereafter (Register 60, No. 3).
2. Amendment of Sections 18801-18804(a) through 18801-18804(d) filed 3-26-68; effective thirtieth day thereafter (Register 68, No. 13).
3. Amendment filed 7-1-70; effective thirtieth day thereafter (Register 70, No. 27).
4. Change without regulatory effect adding new article 4 (sections 18631-18681(a) through 18642) and renumbering and amending former section 18801-18804(a) to section 18631-18681(a) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18631-18681(b). Payments of Salaries, Interest, Rents, Royalties, and Other Fixed or Determinable Income.
History

(1) Except as provided in subsection (2), and except for payments to which subdivisions (a) and (c) of Section 18639 apply, every individual, partnership, bank, corporation, including a nonprofit corporation or organization, joint stock company or association, insurance company, or Massachusetts or business trust, engaged in a trade or business in this State and making payment in the course of such trade or business to another person, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of this State or of any political subdivision of this State, or any city organized under a freeholder's charter, or any political body not a subdivision or agency of the State, shall make a return on forms prescribed by the Franchise Tax Board for each calendar year, with respect to wages, salaries, interest, rents, royalties, and other fixed or determinable income paid, credited or distributed. Such payments are required to be reported if the total amounts paid to a single person are $1,500 or more, and in the case of a married individual are $3,000 or more. Payments of wages, salaries and other compensation for personal services rendered in this State, and payments of rents or royalties on account of property located in this State must be reported irrespective of the residence or address of the payee. Payments of interest and payments of income on account of services performed, or property located outside this State need be reported only if the payee is a resident of this State. If the payee's residence is unknown to the payor, such payments shall be reported if the payee's last known address was in this State. If the marital status of the individual is unknown, report all such payments of $1,500 or more. Payments made to the officers of a corporation must be reported. Payments in the case of annuities with an annuity starting date before January 1, 1968, should be reported in an amount equal to 3 percent of the aggregate premiums or consideration paid for the annuity (whether or not paid during the taxable year), until the aggregate amount paid to and not required to be included by the annuitant in his gross income, had the law been in effect continuously from and after the date at which payments under such annuity were first received, equals the aggregate premiums or consideration paid for such annuity; thereafter the entire amount of the annuity payments shall be reported. Payments in the case of annuities with an annuity after January 1, 1968, should be reported except to the extent that they are considered to represent a reduction or return of premiums or other consideration paid. The part of each annuity payment which is excludable from gross income is determined by the ratio which the investment in the contract bears to the expected return under the contract. In the case of annuities with an annuity starting date on and after January 1, 1968, in lieu of the return required by this subsection, a duplicate copy of the Federal return may be filed with the Franchise Tax Board.
(2) The following payments need not be reported regardless of the amount paid:
(A) Payments of any type made to a corporation;
(B) Distributions or salaries to members of a partnership or distributions to beneficiaries of an estate or trust, which are shown on the Partnership or Fiduciary Return;
(C) Rents paid by a tenant to a real estate agent having a place of business in this State, but the agent must report payments to the landlord;
(D) Payments made by a broker to his customer;
(E) Payments to nonresidents which are reported by the withholding agent on forms prescribed by the Franchise Tax Board;
(F) Payments of income exempt from taxation under the law;
(G) Payments which are made by those not engaged in a trade or business and which are not made in the course of such trade or business, such as amounts paid by a tenant to a landlord for the renting or leasing of a residence;
(H) Payments of bills for merchandise, telegrams, telephone, freight, storage, and similar charges;
(I) Payments made by record owners to the actual owners of dividends and other distributions on stock, earnings from savings and loan associations, mutual savings banks, credit unions, etc., interest, or similar payments;
(J) Payments made to employees of interstate carriers that are exempted from reporting by Public Law 91-569; and
(K) Payments made to principals by persons carrying on the banking business, and by persons which are mutual savings banks, cooperative banks, building and loan associations, homestead associations, credit unions, or similar organizations chartered and supervised by Federal or State law, of funds collected when acting in the capacity of collection agents. This exception does not apply to collection of items on a regular and continuing basis under a so-called escrow, trust, custody or investment advisory agreement. However, returns of information are not required unless payment is of the type with respect to which such returns would otherwise be required under Section 18637 if the payor were engaged in a trade or business. The exception from reporting set forth in this paragraph shall apply until such time as the Franchise Tax Board determines that it is feasible for such persons to report the payments, and this paragraph is amended accordingly to require such reporting.
HISTORY

1. Repealer and new section filed 8-27-71; effective thirtieth day thereafter (Register 71, No. 35).
2. Change without regulatory effect renumbering and amending former section 18801-18804(b) to section 18631-18681(b) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18631-18681(c). Time and Place for Filing Returns.
History

A separate form, prescribed by the Franchise Tax Board, must be prepared for each payee to whom payments which must be reported are made, showing the name and address of the payee, and the amount paid. These forms, accompanied by a report on a form prescribed by the Franchise Tax Board showing the number of forms filed therewith, must be forwarded to the Franchise Tax Board, Operations Division, Sacramento, California 95814 on or before February 28 of the year following the year in which payments or distributions required to be reported are made.
HISTORY

1. Amendment filed 7-1-70; effective thirtieth day thereafter (Register 70, No. 27).
2. Change without regulatory effect renumbering former section 18801-18804(c) to section 18631-18681(c) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18634. Domestic Disclosure Spreadsheet and List of Related Entities.
Note     •     History

NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 18634, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering and amending section 25401d to section 18634 filed 6-16-94 pursuant to section 100, title 1,  California Code of Regulations (Register 94, No. 24).
2. Change without regulatory effect relocating section 18634 from chapter 2.5, subchapter 18 to chapter 2.6, subchapter 2 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
3. Change without regulatory effect repealing section filed 7-5-2000 pursuant to section 100, title 1, California Code of Regulations (Register 2000, No. 27).
§18634-1. List of Related Entities.
Note     •     History

NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 18634, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect adding new section filed 6-16-94 pursuant to section 100, title 1, California Code of Regulations (Register 94, No. 24).
2. Change without regulatory effect relocating section 18634-1 from chapter 2.5, subchapter 18 to chapter 2.6, subchapter 2 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
3. Change without regulatory effect repealing section filed 7-5-2000 pursuant to section 100, title 1, California Code of Regulations (Register 2000, No. 27).
§18640. Returns of Information as to Patronage Dividends, Rebates, or Refunds.
Note     •     History

(a) In General. Any corporation allocating to any patron amounts aggregating $100 or more during the calendar year as patronage dividends, rebates, or refunds (whether in cash, merchandise, capital stock, revolving fund certificates, retain certificates, letters of advice, or in some other manner that discloses to each patron the amount of such dividend, rebate, or refund) shall render a return of information with respect to such allocation on Forms 596 and 599. The allocation shall be reported for the calendar year during which the allocation is made. See Reg. 18631-18681(c).
(b) Definitions.
(1) Co-operative Association. For the purpose of this regulation, the term “co-operative association” includes any corporation operating on a co-operative basis and allocating amounts to patrons on the basis of the business done with or for such patrons.
(2) Patron. For the purpose of this regulation, the term “patron” includes any person with whom or for whom the co-operative association does business on a co-operative basis, whether member or a nonmember of the co-operative association, and whether an individual, a trust, estate, partnership, company, corporation, or co-operative association.
(3) Patronage, Dividends, Rebates, and Refunds. For the purpose of this regulation, the term “patronage dividend, rebate, or refund” includes any amount allocated (whether in cash, merchandise, capital stock, revolving fund certificates, retain certificates, certificates of indebtedness, letters of advice, or in some other manner that discloses to each patron the amount of such dividend, refund, or rebate) by a co-operative association, to the account of a patron on the basis of the business done with or for such patron. The following are not patronage dividends, rebates, or refunds:
(A) Amounts distributed in redemption of a capital stock, or in redemption or satisfaction of certificates of indebtedness, revolving fund certificates, retain certificates, letters of advice, or other similar documents;
(B) In the case of a co-operative association marketing the products of members or other patrons, the amount paid in cash or merchandise by the association for such products to the extent such amount is fixed without reference to the earnings of the co-operative association. For this purpose, the term “earnings” includes the excess of amounts retained by the association to cover expense or other items over the amount of such expenses or other items.
(4) Allocation. For the purpose of this regulation, the term “allocation” includes distributions in cash or merchandise made by a co-operative association to a patron, the issuance by such association of capital stock, revolving fund certificates, retain certificates, certificates of indebtedness, letters of advice, similar documents, or any other act by a co-operative association whereby a patron receives actual notice of the segregation on the books of such association of a portion of its assets for the account of such patron. Thus, a mere credit to the account of a patron on the books of the co-operative association, without actual notice to the patron, is not an allocation.
(c) Examples. The application of this regulation may be illustrated by the following examples:
Example 1. Co-operative A, a marketing association operating on a pooling basis, receives the products of Patron W on January 5. On the same day Co-operative A advances to W 45 cents per unit for the products so delivered and allocates to him a “retain certificate” having a face value calculated at the rate of 5 cents per unit. During the operation of the pool, and before substantially all the products in the pool are disposed of, Co-operative A advances to W an additional 40 cents per unit, the amount being determined by reference to the market price of the products sold and the anticipated price of the unsold products. At the close of the pool on November 10, Co-operative A determines the excess of its receipts over the sum of its expenses and its previous advances to patrons, and allocates to W an additional 3 cents per unit and shares of the capital stock of A having an aggregate of face value calculated at the rate of 2 cents per unit.
The amount of patronage dividends, rebates, or refunds allocated to W during 19X1 amount to 5 cents per unit, consisting of the aggregate of the following per-unit allocations: The amount of cash distributions fixed with reference to the earnings of A (3 cents), and the face value of the capital stock of A (2 cents). The amount of the two distributions in cash (85 cents) and the face amount of the “retain certificate” (5 cents), which are fixed without reference to the earnings of A, do not constitute patronage dividends, rebates, or refunds.
Example 2. Co-operative B, a marketing association, operating on a pooling basis, receives the products of Patron X on March 5, 19X1. On the same day Co-operative B pays to X $1 per unit for such products, this amount being determined by reference to the market price of the product when received, and issues to him a “participation certificate” having no face value but which entitles X on the close of the pool to the proceeds derived from the sale of his products less the previous payment of $1 and the expenses and other charges attributable to such products. On March 5, 19X3, Co-operative B, having sold the products in the pool, having deducted the previous payments for such products, and having determined the expenses and other charges of the pool, redeems the participation certificate of X in cash for 10 cents per unit. The allocation made to X during 19X3, amounting to 10 cents per unit, is a patronage dividend, rebate, or refund. Neither the payment to X in 19X1 of $1 nor the issuance to him of the participation certificate in that year constitutes a patronage dividend, rebate, or refund within the meaning of this regulation.
Example 3. Co-operative C, a purchasing association, obtains supplies for Patron Y on May 1, 19X2, and receives in return therefor $100. On February 1, 19X2, Co-operative C, having determined the excess of its receipts over its cost and expenses, allocates to Y a cash distribution of $1 and a revolving fund certificate of a face amount of $1. The amount of patronage dividends, rebates, or refunds allocated to Y for 19X2 are $2, the aggregate of the cash distribution of $1, and the face amount, $1, of the revolving fund certificate.
Example 4. Co-operative D, a service association, sells the products of members on a fee basis. It receives the products of Patron Z under an agreement not to pool his products with those of other members, to sell his products, and to deliver to him the proceeds of the sale. Patron Z makes payments to Co-operative D during 19X1 aggregating $75 for services rendered him by Co-operative D during that year. On May 15, 19X2, Co-operative D, having determined the excess of its receipts over its costs and expenses, allocates to Z a cash distribution of $2. Such amount is a patronage dividend, rebate, or refund allocated by Co-operative D during 19X2.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 18802.1, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-19-82; effective thirtieth day thereafter (Register 82, No. 34).
2. Editorial correction of subsection(a) (Register 83, No. 19).
3. Change without regulatory effect renumbering and amending former section 18802.1 to section 18640 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18641. Information Returns of Brokers.
Note     •     History

Any person doing business as a broker (as defined in subdivision (c) of Section 18641 of the Revenue and Taxation Code) with respect to personal property or services must file a return with the Franchise Tax Board in accordance with Treasury Regulation 1.6045-1 (26 CFR 1.6045-1)as amended May 23, 1984. This regulation shall apply to returns filed after December 31, 1986.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 18802.4, Revenue and Taxation Code.
HISTORY

1. Certificate of Compliance including amendment filed 1-20-87 (Register 87, No. 5)
2. Change without regulatory effect renumbering and amending former section 18802.4 to section 18641 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18642. Real Property Transfer Information Returns.
Note     •     History

(a) Pursuant to Section 18642 of the Revenue and Taxation Code, when requested by the Franchise Tax Board, all owners and transferors of an interest in real property or a mobilehome shall file an information return with the Franchise Tax Board. The information required on such returns shall include the following:
(1) The name(s) of the owner(s) or transferor(s).
(2) The current mailing address(es) of the owner(s) or transferor(s). 
(3) The social security number(s) of an individual owner(s) or transferor(s).
(4) The federal employer identification number(s) of a nonindividual owner(s) or transferor(s).
(5) If a corporation(s) filing California income or franchise tax return(s), the corporation number(s) used on such return(s).
(6) The legal entity of the owner(s) or transferor(s). (Example: individual, partnership, joint venture, trust, estate, corporation.)
(7) If the owner(s) or transferor(s) is a resident of or is a legal entity created or authorized under the laws of a foreign country, the address of the owner(s) or transferor(s) in the foreign country(ies).
(8) A description of the property transfer transaction (for example, gift, sale, installment sale, foreclosure, charitable contribution, like-kind exchange, sale with leaseback).
(9) If the owner(s) or transferor(s) held or hold only nominal title or title as an agent to the property, the name(s) of the real party(ies) in interest or principal(s) and his/her/its/their current address(es).
(10) If more than one parcel of real property was transferred in the same transaction, the parcel number and situs address of each parcel transferred.
(11) With respect to each parcel of real property or mobilehome involved in the transaction, the sale or purchase price, and the date of acquisition or disposition of the property.
(b) Pursuant to Section 18642 of the Revenue and Taxation Code, this regulation does not apply to property granted a homeowner's property tax exemption or to property which is not assessed by a California County Assessor.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 18802.3, Revenue and Taxation Code.
HISTORY

1. New section filed 6-18-86 as an emergency; effective upon filing (Register 86, No. 25). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 10-16-86.
2. Certificate of Compliance including amendment transmitted to OAL 10-10-86 and filed 11-7-86 (Register 86, No. 45).
3. Change without regulatory effect renumbering and amending former section 18802.3 to section 18642 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 5. Withholding
§18662-1. Persons Subject to Withholding Requirements.
Note     •     History

Every individual who is a resident of or has a place of business in this State, or subject to the jurisdiction of the laws of this State, and every bank located within the limits of this State, and every partnership, corporation, including a nonprofit organization, joint stock company or association, insurance company or Massachusetts trust, organized under the laws of or having a place of business in this State, or subject to the jurisdiction of the laws of this State, in whatever capacity acting (including lessees or mortgagors of real or personal property, fiduciaries, employers, and any officer or department of this State or any political subdivision or agency of this State, or any city organized under a freeholder's charter, or any political body not a subdivision or agency of this State) having the control, receipt, custody, disposal, or payment of income of the character described in Reg. 18662-2 derived from sources within this State by individuals who are nonresidents of this State must withhold from such income as provided in Reg. 18662-2 and transmit to the Franchise Tax Board the amount of tax specified in Reg. 18662-3 at the time and place specified in Reg. 18662-8.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 18662, Revenue and Taxation Code.
HISTORY

1. Amendment filed 11-27-61; effective thirtieth day thereafter (Register 61, No. 24).
2. Amendment filed 12-12-67; effective thirtieth day thereafter (Register 67, No. 50).
3. Renumbering from 18662-18810(a) filed 12-14-71; procedural amendment filed 12-16-71; effective upon filing (Register 71, No. 51).
4. Repealer and new section filed 2-22-74; effective thirtieth day thereafter (Register 74, No. 8).
5. Renumbering and amendment of Section 18662(a) to Section 18662-1 filed 8-19-82; effective thirtieth day thereafter (Register 82, No. 34).
6. Editorial correction (Register 83, No. 19).
7. Amendment filed 2-19-86; effective thirtieth day thereafter (Register 86, No. 8).
8. Change without regulatory effect adding new article 5 (sections 18662-1 through 18663) and renumbering and amending former section 18805-1 to section 18662-1 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48). 
§18662-2. Income Subject to Withholding and Requirements for Withholding.
Note     •     History

The items of income subject to withholding are interest, dividends, rent, prizes and winnings, premiums, annuities, emoluments, compensation for personal services, and other fixed or determinable annual or periodical gains, profits and income.
Withholding of tax at the source is required in the case of payments to nonresidents of compensation for personal services rendered in this State, except for wages subject to withholding under Section 13020 of the Unemployment Insurance Code or exempt therefrom under Section 13009 of the Unemployment Insurance Code or exempt from state withholding under federal law. Withholding at source is also required in the case of rentals or royalties for the use of, or for the privilege of using in this State, patents, copyrights, secret processes and formulas, good will, trademarks, brands, franchises, and other like property of such intangible property having a business or taxable situs as defined in Regs. 17951-1 through 17951-5, 17952 and 17953 in this State, and payments of prizes, premiums, rewards, winnings, etc., to nonresidents participating, or entering cars, horses, etc. in races and other contests in this State.
In the case of payments to nonresidents of items of income not specified in the second paragraph of this regulation and in the case of persons not making payments to nonresidents of the items of income specified in the first paragraph of this regulation but having the control, receipt, custody or disposal of such income, withholding of tax at source is required when the person subject to withholding as specified in Reg. 18662-1 is notified by the Franchise Tax Board or a duly authorized representative to withhold tax from such income.
Compensation for personal services includes wages, salaries and any other remuneration such as, for example, payment of expenses of nonresident employees for services rendered in this State, commissions paid to nonresident salesmen or agents for orders received on sales made in this State, fees for professional services rendered here by nonresidents, and payments to nonresident actors, singers, performers, entertainers, wrestlers, boxers, etc., for performances in this State. Compensation for personal services includes payments to independent contractors, such as leaders, managers, or owners of bands, orchestras, dance teams, circuses, and similar groups of artists, entertainers or performers pursuant to contracts under which such leaders, managers or owners agree to furnish the services of their bands, orchestras, teams, circuses, or other groups within this State.
Withholding pursuant to this regulation is not required unless and until income payments with respect to each payee by the same payor either exceed $1,500 during the calendar year or the payor is directed to withhold by the Franchise Tax Board.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 18662, Revenue and Taxation Code.
HISTORY

1. Amendment filed 12-12-67; effective thirtieth day thereafter (Register 67, No. 50).
2. Renumbering from 18662-18810(b) filed 12-14-71; procedural amendment filed 12-16-71; effective upon filing (Register 71, No. 51).
3. Repealer and new section filed 2-22-74; effective thirtieth day thereafter (Register 74, No. 8).
4. Amendment filed 4-9-81; designated effective 6-30-81 (Register 81, No. 15).
5. Renumbering and amendment of Section 18662(b) to Section 18662-2 filed 8-19-82; effective thirtieth day thereafter (Register 82, No. 34).
6. Editorial correction (Register 83, No. 19).
7. Amendment filed 2-19-86; effective thirtieth day thereafter (Register 86, No. 8).
8. Change without regulatory effect renumbering and amending former section 18805-2 to section 18662-2 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18662-3. Amount of Tax to Be Withheld.
Note     •     History

(a) The amount of tax to be withheld shall be computed by applying a rate of 7%, or such lesser rate as authorized in writing by the Franchise Tax Board.
(b) At the request of either the payor or payee, the Franchise Tax Board may consider documentation to the effect that the 7% rate will result in overwithholding. After considering such documentation, the Franchise Tax Board may waive the withholding requirements, in whole or in part, or authorize the use of a lower withholding rate. As a further condition for waiver or for authorizing a lower withholding rate, the payee will be required to assure the Franchise Tax Board, by bond, deposit or otherwise, that the source income withholding requirements applicable to the payee as a payor will be complied with. 
(c) The Franchise Tax Board's waivers and Notices to Withhold reflecting a withholding rate less than 7% shall be in writing and shall be mailed to the payor. If the payor has already withheld prior to the receipt of a waiver or Notice to Withhold, the payor may make a payment to the payee of the amount of overwithholding, if any.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 18662, Revenue and Taxation Code.
HISTORY

1. Amendment filed 12-12-67; effective thirtieth day thereafter (Register 67, No. 50).
2. Renumbering from 18662-18810(c) filed 12-14-71; procedural amendment filed 12-16-71; effective upon filing (Register 71, No. 51).
3. Repealer and new section filed 2-22-74; effective thirtieth day thereafter (Register 74, No. 8).
4. Renumbering and amendment of Section 18662(c) to Section 18662-3 filed 8-19-82; effective thirtieth day thereafter (Register 82, No. 34).
5. Editorial correction (Register 83, No. 19).
6. Repealer and new section filed 2-19-86; effective thirtieth day thereafter (Register 86, No. 8).
7. Change without regulatory effect renumbering and amending former section 18805-3 to section 18662-3 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18662-4. Withholding of Delinquent Taxes Due from Both Resident and Nonresident Taxpayers.
Note     •     History

In addition to withholding from payments of income to nonresident taxpayers in accordance with the requirements of Regs. 18662-1 to 18662-4, the individuals, firms and companies mentioned in Reg. 18662-1 must, upon notice and demand from the Franchise Tax Board or its authorized representatives, withhold from any credits or other personal property or other things of value due any individual, estate or trust, the amount of any tax due under the law from such individual, estate or trust. Furthermore, effective May 30, 1957, firms and companies mentioned in Reg. 18662-1 must, upon notice and demand, withhold from any credits or other things of value the amount of any liability incurred by any person for his failure to withhold upon notice and demand amounts due under the law from a taxpayer. The amounts so withheld must be transmitted to the Franchise Tax Board immediately.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Sections 18662 and 18817, Revenue and Taxation Code.
HISTORY

1. Renumbering from 18662-18810(f) filed 12-14-71; procedural amendment filed 12-16-71; effective upon filing (Register 71, No. 51).
2. Renumbering of Section 18662(f) to Section 18662(d) filed 4-9-81; designated effective 6-30-81 (Register 81, No. 15).
3. Renumbering and amendment of Section 18662(d) to Section 18662-4 filed 8-19-82; effective thirtieth day thereafter (Register 82, No. 34).
4. Editorial correction (Register 83, No. 19).
5. Change without regulatory effect renumbering and amending former section 18805-4 to section 18662-4 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18662-5. Remedies of Taxpayer.
Note     •     History

If, as a result of the action of a withholding agent in transmitting the tax to the Franchise Tax Board, a taxpayer's tax is overpaid, the taxpayer is entitled to file a claim for the refund of that overpayment and to an appeal to the Board of Equalization or to an action in the courts, to the same extent as if the taxpayer himself had made the overpayment. Refund claims must be filed within four years after the last day prescribed for the filing of the taxpayer's return, or within one year after the payment of the tax by the withholding agent, whichever period expires the later. Interest is to be allowed in all such cases, to be computed at the rate prescribed by Section 19062 from the 15th day of the fourth month following the close of the taxable year for which such amounts were withheld. The taxpayer cannot hold the withholding agent liable for any payment made to the Franchise Tax Board pursuant to Regs. 18662-1 to 18662-5, unless the amount withheld is refunded to the withholding agent.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 18662, Revenue and Taxation Code.
HISTORY

1. Amendment filed 12-12-67; effective thirtieth day thereafter (Register 67, No. 50).
2. Renumbering from 18662-18810(g) filed 12-14-71; procedural amendment filed 12-16-71; effective upon filing (Register 71, No. 51).
3. Renumbering of Section 18662(g) to Section 18662(e) filed 4-9-81; designated effective 6-30-81 (Register 81, No. 15).
4. Renumbering and amendment of Section 18662(e) to Section 18662-5 filed 8-19-82; effective thirtieth day thereafter (Register 82, No. 34).
5. Editorial correction (Register 83, No. 19).
6. Change without regulatory effect renumbering and amending former section 18805-5 to section 18662-5 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18662-6. Withholding Agent.
Note     •     History

The term “withholding agent” means the person, including corporations, partnerships, fiduciaries and state officers, agencies or subdivisions, charged by the law or by the Franchise Tax Board's order or regulation with the duty to withhold any tax, interest or penalties from payments to the taxpayer and to pay such amounts over to the Franchise Tax Board.
Withholding agents will be required to reimburse the Franchise Tax Board for all taxes, penalties or interest which have been due from taxpayers and have not been withheld as required, unless the delinquent withholding agent can establish that such failure to withhold was due to reasonable cause, or unless the amounts which were not withheld as required shall have been paid to the Franchise Tax Board prior to the day on which such reimbursement is demanded by the Franchise Tax Board. See Reg. 18662-6 for provisions for collecting liability incurred by a withholding agent who has incurred such liability for failure to withhold amounts due from a taxpayer upon notice and demand.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Sections 18662 and 18815, Revenue and Taxation Code.
HISTORY

1. Renumbering from 18662-18810(h) filed 12-14-71; procedural amendment filed 12-16-71; effective upon filing (Register 71, No. 51).
2. Renumbering of Section 18662(h) to Section 18662(f) filed 4-9-81; designated effective 6-30-81 (Register 81, No. 15).
3. Renumbering and amendment of Section 18662(f) to Section 18662-6 filed 8-19-82; effective thirtieth day thereafter (Register 82, No. 34).
4. Editorial correction (Register 83, No. 19).
5. Change without regulatory effect renumbering and amending former section 18805-6 to section 18662-6 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18662-7. Certificates of Residence.
Note     •     History

(a) If a payee claims exemption from withholding pursuant to this regulation on the grounds that the payee is a California resident, the payee shall execute a Certificate of Residence in a form prescribed by the Franchise Tax Board. The original and one copy of the executed certificate will be filed by the payee with the payor. The payor must transmit the original certificate to the Franchise Tax Board before making any payments to the payee. If the payee's resident status continues, the retained certificate shall relieve the payor from withholding on such payee for the remainder of the calendar year or until otherwise directed by the Franchise Tax Board's Notice to Withhold, whichever date is sooner.
(b) If a payee's status during the year changes from nonresident to resident, a Certificate of Residence should be filed with the payor, in accord with subsection (a). If the change is from resident to nonresident status, a Certificate of Nonresidence and Claim for Personal Exemption Credit on a form prescribed by the Franchise Tax Board may be filed by the payee with the payor.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 18662, Revenue and Taxation Code.
HISTORY

1. Amendment filed 12-12-67; effective thirtieth day thereafter (Register 67, No. 50).
2. Renumbering from 18662-18810(d) filed 12-14-71; procedural amendment filed 12-16-71; effective upon filing (Register 71, No. 51).
3. Repealer and new section filed 2-22-74; effective thirtieth day thereafter (Register 74, No. 8).
4. Renumbering from Section 18662(d) to Section 18662.4 and amendment of subsection (4) filed 12-20-78; effective thirtieth day thereafter (Register 78, No. 51).
5. Editorial redesignation of subsections (1)-(4) as subsections (a)-(d), respectively (Register 78, No. 51).
6. Renumbering of Section 18662.4 to Section 18662(g) filed 4-9-81; designated effective 6-30-81 (Register 81, No. 15).
7. Renumbering and amendment of Section 18662(g) to Section 18662-7 filed 8-19-82; effective thirtieth day thereafter (Register 82, No. 34).
8. Editorial correction of subsections (a), (b) and (d) (Register 83, No. 19).
9. Repealer and new section filed 2-19-86; effective thirtieth day thereafter (Register 86, No. 8).
10. Change without regulatory effect renumbering and amending former section 18805-7 to section 18662-7 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).  
§18662-8. Time and Place for Filing Returns of Tax Withheld.
Note     •     History

If a Notice to Withhold has been issued for a particular engagement, tax withheld shall be remitted by the 20th day of the month following the month of the close of that engagement. In such cases, the original copy of the Notice to Withhold will serve as a Return of Tax Withheld at Source (Form 592) as well as the Statement of Tax Withheld at Source (Form 591). Remittance shall then be made to the office of the Franchise Tax Board which issued the Notice to Withhold at Source.
When a Notice to Withhold is not issued, a Return of Tax Withheld at Source (Form 592) is due on the 20th day of the month following the month in which the total amount withheld during the calendar year and not remitted exceeds $2,500. Any amounts withheld and not previously remitted because the total did not exceed $2,500 must be submitted by January 31 following the close of the calendar year. In all cases when a Notice to Withhold has not been issued, Returns of Tax Withheld at Source (Form 592) together with Copy A of the Statement of Tax Withheld at Source (Form 591) shall be remitted to the Franchise Tax Board, Sacramento, CA 95867.
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 18662, Revenue and Taxation Code.
HISTORY

1. Amendment filed 12-12-67; effective thirtieth day thereafter (Register 67, No. 50).
2. Renumbering from 18662-18810(e) filed 12-14-71; effective upon filing (Register 71, No. 51).
3. Amendment filed 12-20-78; effective thirtieth day thereafter (Register 78, No. 51).
4. Renumbering of Section 18662.5 to Section 18662(h) filed 4-9-81; designated effective 6-30-81 (Register 81, No. 15).
5. Renumbering of Section 18662(h) to Section 18662-8 filed 8-19-82; effective thirtieth day thereafter (Register 82, No. 34).
6. Repealer and new section filed 2-19-86; effective thirtieth day thereafter (Register 86, No. 8).
7. Change without regulatory effect renumbering and amending former section 18805-8 to section 18662-8 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18662-11. Withholding Procedure--Corporations Withholding on Current Income.
Note     •     History

Every individual who is a resident of or has a place of business in this state, or is subject to the jurisdiction of the laws of this State, and every bank located within the limits of this State, and every partnership, corporation, including a nonprofit organization, joint stock company or association, insurance company or Massachusetts trust, organized under the laws of or having a place of business in this State, or subject to the jurisdiction of the laws of this State, in whatever capacity acting (including lessees or mortgagors of real or personal property, fiduciaries, employers, and any officer or department of this State or any political subdivision or agency of this state, or any city organized under a freeholder's charter, or any political body not a subdivision or agency of this State) having the control, receipt, custody, disposal, or payment of income of the character described in Reg. 18662-12 derived from sources within this state by corporations which do not have a permanent place of business (as defined in Reg. 18662-13) in this State must withhold from such income as provided in Reg. 18662-12 and transmit to the Franchise Tax Board the amount of tax specified in Reg. 18662-12 at the time and place specified in Reg. 18662-15. Where a corporation has a permanent place of business in this State the Franchise Tax Board may require withholding of tax from the income of such corporation by notice to the person having control, receipt, custody or disposal, or payment of such income. Withholding will be required unless the Franchise Tax Board is assured by bond, deposit, or otherwise, that the corporation will comply with the withholding requirements insofar as income payments made to its own employees or independent contractors are concerned. Withholding of tax by such person shall be in accordance with the provisions of Regs. 18662-11 through 18662-13 applicable to corporations which do not have a permanent place of business in this State.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 18662, Revenue and Taxation Code.
HISTORY

1. New section filed 12-13-60; effective thirtieth day thereafter (Register 60, No. 25).
2. Amendment filed 11-27-61; effective thirtieth day thereafter (Register 61, No. 24).
3. Amendment filed 12-12-67; effective thirtieth day thereafter (Register 67, No. 50).
4. Repealer and new section filed 2-22-74; effective thirtieth day thereafter (Register 74, No. 8).
5. Renumbering and amendment of Section 18662-26134(a) to Section 18662-1 filed 11-29-82; effective thirtieth day thereafter (Register 82, No. 49).
6. Amendment filed 2-19-86; effective thirtieth day thereafter (Register 86, No. 8).
7. Change without regulatory effect renumbering and amending former section 26131-1 to section 18662-11 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18662-12. Income Subject to Withholding, Requirements for Withholding, and Amount to Be Withheld.
Note     •     History

The items of income subject to withholding are interest, dividends, rent, prizes and winnings, premiums, annuities, emoluments, compensation for personal services, and other fixed or determinable annual or periodical gains, profits and income.
Withholding of tax at the source is required in the case of payments to corporations described in Reg. 18662-11 for amounts due under a contract with said corporations for services of performers furnished in the amusement, artistic, entertainment or sporting fields to fulfill engagements carried on in this State, and payments of prizes, premiums, awards, winnings, etc., to such corporations participating or entering horses, dogs, etc., in races or other contests in this State. This includes payments to such corporations for performances by dance bands, orchestras, circuses, or for payments for the service of actors, singers, performers, entertainers, wrestlers, boxers and other similar types of amusement or sporting activity carried on in this State when payment for such performance, etc., is made to a corporation instead of being made directly to the performer, etc.
Withholding pursuant to this regulation is not required unless and until income payments with respect to each payee by the same payor either exceed $1,500 during the calendar year or the payor is directed to withhold by the Franchise Tax Board.
The amount of tax to be withheld shall be computed by applying a rate of 7%, or such lesser rate as authorized in writing by the Franchise Tax Board.
At the request of either the payor or payee, the Franchise Tax Board may consider documentation to the effect that the 7% rate will result in overwithholding. After considering such documentation, the Franchise Tax Board may waive the withholding requirements, in whole or in part, or authorize the use of a lower withholding rate. As a further condition for waiver or for authorizing a lower withholding rate, the payee will be required to assure the Franchise Tax Board, by bond, deposit or otherwise, that the source income withholding requirements applicable to the payee as a payor will be complied with.
The Franchise Tax Board's waivers and Notices to Withhold reflecting a withholding rate less than 7% shall be in writing and shall be mailed to the payor. If the payor has already withheld prior to receipt of a waiver or Notice to Withhold, the payor may make a payment to the payee of the amount of overwithholding, if any.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 18662, Revenue and Taxation Code.
HISTORY

1. New section filed 12-13-60; effective thirtieth day thereafter (Register 60, No. 25).
2. Repealer and new section filed 2-22-74; effective thirtieth day thereafter (Register 74, No. 8).
3. Renumbering and amendment of Section 18662-26134(b) to Section 18662-2 filed 11-29-82; effective thirtieth day thereafter (Register 82, No. 49).
4. Amendment filed 2-19-86; effective thirtieth day thereafter (Register 86, No. 8).
5. Change without regulatory effect renumbering and amending former section 26131-2 to section 18662-12 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18662-13. Corporations Subject to Withholding.
Note     •     History

Withholding is required on income described in Reg. 18662-12 paid to corporations which do not have a permanent place of business in this State. For the purpose of the regulations contained in this article the term “corporation” is not limited to incorporated bodies, nor does it include all incorporated bodies. Banks and banking associations are excluded from the meaning of the term, and associations, Massachusetts trusts and business trusts are included in its meaning if the associations or trusts have represented or indicated to the person, firm, corporation, etc., making payments of amounts described in Reg. 18662-12 that they are corporations.
A corporation has a permanent place of business in this State if it is organized and existing under the laws of this State or if a foreign corporation if it has qualified to transact intrastate business. A corporation which has not qualified to transact intrastate business, for example, a corporation engaged exclusively in interstate commerce, will be considered as having a permanent place of business in this State only if it maintains a permanent office in this State which is permanently staffed by its employees.
A corporation that has a permanent place of business in this State may be required to withhold tax from the items of income specified in Reg. 18662-12 by notice from the Franchise Tax Board or a duly authorized representative.
Upon request the Franchise Tax Board will advise any person, firm, corporation, etc., making payments of amounts which may be subject to withholding whether or not the recipient of the income has a permanent place of business in this State. Such request should contain the exact name of the recipient of the income and be addressed to the Franchise Tax Board, Operations Division, Sacramento, California 95857.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 18662, Revenue and Taxation Code.
HISTORY

1. New section filed 12-13-60; effective thirtieth day thereafter (Register 60, No. 25).
2. Repealer and new section filed 2-22-74; effective thirtieth day thereafter (Register 74, No. 8).
3. Renumbering and amendment of Section 18662-26134(c) to Section 18662-3 filed 11-29-82; effective thirtieth day thereafter (Register 82, No. 49).
4. Change without regulatory effect renumbering and amending former section 26131-3 to section 18662-13 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18662-14. Interpleader Action by Withholding Agent.
Note     •     History

The withholding agent is not liable to the taxpayer for any amount required to be withheld. In the case of a bona fide dispute between the state and federal governments as to the priority of tax liens, the withholding agent may file an action in interpleader and pay the money into court instead of transmitting the amount withheld to the Franchise Tax Board at the time provided for by Reg. 18662-8.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 18662, Revenue and Taxation Code.
HISTORY

1. New section filed 12-13-60; effective thirtieth day thereafter (Register 60, No. 25).
2. Renumbering and amendment of Section 18662-26134(d) to Section 18662-4 filed 11-29-82; effective thirtieth day thereafter (Register 82, No. 49).
3. Change without regulatory effect renumbering and amending former section 26131-4 to section 18662-14 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§18663. Withholding Tables.
Note     •     History

Given the limited and particular interest of the subject matter, the withholding tables are not printed in the California Code of Regulations and may be obtained by contacting the nearest office of the Employment Development Department.
NOTE

Authority cited: Section 19053, Revenue and Taxation Code. Reference cited: Section 18663, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect amending and renumbering former section 18806 to new section 18663 filed 8-4-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 32).
2. Change without regulatory effect relocating section 18663 from chapter 2.5, subchapter 19 to chapter 2.6, subchapter 2 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Subchapter 3. Voluntary Contributions [Reserved.]
HISTORY

1. Change without regulatory effect adding new subchapter 3 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48). 
Subchapter 4. Payments and Assessments
Article 1. Payment of Tax by All Persons [Reserved.]
HISTORY

1. Change without regulatory effect adding new subchapter 4 (articles 1 through 7) and article 1 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 2. Banks and Corporations
§19021. Payments of Tax--Banks and Financial Corporations--Income Years Ending on or After December 31, 1964.
Note     •     History

NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Sections 19021 and 19101, Revenue and Taxation Code.
HISTORY

1. Renumbering and amendment of Section 25553-25553.5 to Section 25553 filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
2. Change without regulatory effect adding subsection (a) and (b) designators, amending newly designated subsections (a) and (b), adding subsection (c), and amending Note filed 9-29-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 40).
3. Change without regulatory effect adding new article 2 (sections 19021 through 19027) and renumbering former section 25553 to section 19021 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48). 
4. Change without regulatory effect repealing section filed 7-5-2000 pursuant to section 100, title 1, California Code of Regulations (Register 2000, No. 27).
§19024. Definition of Estimated Tax--Banks and Financial Corporations.
History

HISTORY

1. Change without regulatory effect renumbering and amending former section 25562 to section 19024 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
2. Change without regulatory effect repealing section filed 7-5-2000 pursuant to section 100, title 1, California Code of Regulations (Register 2000, No. 27).
§19027. Short Income Years.
Note     •     History

Every taxpayer, including banks and financial corporations, required by Section 19025(b) of the Revenue and Taxation Code to make payments of estimated tax for initial accounting periods of less than twelve months shall apportion its estimated tax over the number of installments due within its first income year, as follows:

			Percentage
			of Estimated
		Due Date of	Tax to be
Calendar Year Taxpayer 	Number of	Installments	Paid Each
If the Income Year Begins:	Installments	15th Day of:	Installment

Jan. 1 through Jan. 16	4	Apr.-June-Sept.-Dec.	25%
Jan. 17 through Mar. 16	3	June-Sept.-Dec.	33 1/3%
Mar. 17 through June 15	2	Sept.-Dec.	50%
June 16 through Sept. 15	1	Dec.	100%
Sept. 16 through Dec. 31	None	           	           
The same rules shall apply to fiscal year taxpayers with initial accounting periods of less than twelve months except that the dates reflected on the above schedule shall be adjusted accordingly.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 19027, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering former section 25564 to new section 19027, including amendment of section and new Note, filed 5-30-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 22).
2. Change without regulatory effect relocating section 19027 from chapter 2.5, subchapter 19 to chapter 2.6, subchapter 4 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 3. Deficiency Assessments
§19032. Audit Procedures.
Note     •     History

(a) General. 
(1) The purpose of the audit is to efficiently determine the correct amount of tax based on an analysis of relevant tax statutes and regulations and case law as applied to the facts of the audit. 
(2) In general, the audit of a tax return must be completed in sufficient time to permit the issuance of a notice of proposed deficiency assessment or proposed overpayment within the applicable statute of limitations. Consequently, audits must be completed within four years after the date the original tax return was filed unless a longer period for issuance of a notice of proposed assessment is provided for under the Revenue and Taxation Code, or the taxpayer consents to extend the period of assessment under Revenue and Taxation Code sections 19065, 19067, or 19308. To facilitate the timely and efficient completion of an audit within the above-referenced statutory timeframes, the taxpayer should have the expectation that the audit of the tax return would be conducted in a manner so that resolution of the audit will be achieved within a two-year period commencing with the date of “initial audit contact” as subsequently defined. This two-year guideline will not apply in the following circumstances: 
(A) False or fraudulent tax returns. False or fraudulent tax returns are those filed where an activity or conduct as described under Revenue and Taxation Code section 19701 or 19705 has occurred. 
(B) Audits that are delayed as a result of the taxpayer's bankruptcy proceedings. 
(C) Audits in which a demand for information letter citing the failure to furnish information penalty, Revenue and Taxation Code section 19133 has been sent to the taxpayer or the taxpayer's representative. 
(D) Audits involving proceedings concerning the enforcement or validity of a subpoena or subpoena duces tecum. 
(E) There is a request for consideration of Revenue and Taxation Code section 25137 petition, but only in relation to the effect of the petition request. The issuance of notices may be delayed pending the outcome of the petition request. 
(3) Taxpayer's Duty to Respond. A taxpayer, or the taxpayer's representative has the duty to make a timely response to requests for information or documents by the Franchise Tax Board that are relevant and reasonable or provide an explanation as to why additional time is necessary to respond or state why the request is not relevant or reasonable. 
The auditor and the taxpayer or the taxpayer's representative should work together to make information requests relevant and reasonable including the use of alternative sources of information in order to substantiate the facts and circumstances of the issue under audit. For example, the auditor and the taxpayer or the taxpayer's representative may agree to a procedure in which the auditor would draft an information request, discuss the information request with the taxpayer or the taxpayer's representative, and the auditor would take into account such comments before issuing the formal information request. 
(4) Duty of Franchise Tax Board Staff. Franchise Tax Board staff has the duty to: 
(A) apply and administer the law in a reasonable, practical manner consistent with applicable federal and California law and the Statement of Principles of Tax Administration, which is incorporated by reference. (See Statement of Principles of Tax Administration, at <http://www.ftb.ca.gov/other/Mis&Prin.html> [March 21, 2003]), 
(B) take into account the materiality of an issue being audited as defined in subsection (a)(7) of this regulation, 
(C) make relevant and reasonable information requests for the issues under examination as provided for in Revenue and Taxation Code section 19504: 
1. The auditor shall explain the relevance or reasonableness of the request when asked to do so, 
2. Requests for information are relevant if the requested information is germane to or applicable to the audit issue, and 
3. The auditor and the taxpayer or the taxpayer's representative should work together to make information requests relevant and reasonable including the use of alternative sources of information in order to substantiate the facts and circumstances of the issue under audit. 
(D) timely analyze information received or responses submitted and to request additional relevant information or inform the taxpayer of the potential audit determination. 
(E) apply the relevant statutes and regulations in a consistent manner regardless of whether the determination of the correct amount of tax results in a proposed assessment or proposed overpayment. 
(5) Duty to Maintain Records. Generally, it is the taxpayer who will be in possession or control of the necessary information, documents, books and records and who will have the knowledge regarding the circumstances of the relevant activities such that a determination of the correct tax can be made. The inability, or failure, of a taxpayer to supply requested relevant information in support of the tax return as filed may result in a Notice of Proposed Assessment being issued. A taxpayer has a duty to maintain relevant records and documents pursuant to normal accounting or regulatory rules and the rules set forth in the Revenue and Taxation Code or the Internal Revenue Code as applicable for California purposes. The Franchise Tax Board recognizes that taxpayers are sometimes not able to respond to each and every request for data. The auditor should work with the taxpayer to resolve difficult information requests or any other problems in generating information document request responses. 
(6) Application of Time Limits. The guidelines of this regulation are intended to provide for an orderly process that leads to a quick conclusion to the audit and are not to be used to foreclose or limit a taxpayer's right to provide information in support of the tax return as filed or amended. 
(A) The Franchise Tax Board recognizes that some Information Document Requests, Audit Issue Presentation Sheets or Position Letters can be responded to in less than 30 days while other responses will require time in excess of 30 days. (See subsection (b)(5) of this regulation for definitions of referenced documents.) The auditor has discretion to take into account the taxpayer's facts and circumstances in establishing the original response time or to allow extensions of time to respond. 
(B) The auditor shall take into account responses to Information Document Requests and Audit Issue Presentation Sheets received after the established date for a response, provided the audit of the taxable year has not been closed. 
(C) The guidelines identified in this regulation do not supersede or have any bearing on the statute of limitations for issuing deficiencies or refunds as provided by the Revenue & Taxation Code. Failure to adhere to the guidelines of the regulation will have no effect on the validity of a notice of proposed assessment, offset, notice of proposed overpayment, or no change letter issued within the applicable statute of limitations period, or on any rights of the taxpayer. 
(7) Materiality. Audit issues are based on the materiality of the potential adjustment and balanced with the statutory requirement to determine the correct amount of tax. If potential for an audit adjustment is likely, the issue should be pursued if the materiality of the potential adjustment warrants the audit resources necessary to audit the issue. Auditors will use judgment as to what constitutes materiality for purposes of this subsection as materiality is a facts and circumstances test. The auditor will discuss materiality at any time during the audit if so requested. 
(8) This regulation shall be applicable for initial audit contacts made on or after the effective date of this regulation within the meaning of Government Code Section 11343.4. 
(b) Audits. 
(1) Type of Audit. The Franchise Tax Board staff will determine if the audit will be a field audit or a desk audit based on the complexity of the tax return and which type of audit will be more conducive to effective and efficient tax administration. The taxpayer may offer input on the determination of the type of audit for the Franchise Tax Board staff to consider. 
(2) Field Audits. 
(A) Definition of “Field Audit”. A “field audit” is an audit that takes place at the taxpayer's residence, place of business or some other location that is not an office of the Franchise Tax Board. For field audits, “initial audit contact” as used in subsection (a)(2) of this regulation is defined as the date of the first meeting between the taxpayer and/or the taxpayer's representative and a member of the Franchise Tax Board audit staff. Generally, the Franchise Tax Board staff should first contact the taxpayer within two years of the date on which the tax return is filed. 
(B) Location of Field Audit. A field audit will generally take place at the location where the taxpayer's original books, records, and source documents pertinent to the audit are maintained. In the case of a sole proprietorship or business entity, this will usually be the taxpayer's principal place of business. Field audits can be moved to a Franchise Tax Board office, or the taxpayer's representative's office, if the taxpayer (or the taxpayer's representative) does not have the appropriate work area available or the taxpayer or the taxpayer's representative does not have time available for the audit to be conducted at their location, or as circumstances of the taxpayer warrant. 
(C) Site Visitations. Regardless of where the audit takes place, the Franchise Tax Board staff may visit the taxpayer's place of business or residence to establish facts that can only be established by direct visit, such as inventory or asset verification. The Franchise Tax Board staff generally will visit for these purposes on a normal workday of the Franchise Tax Board during the Franchise Tax Board's normal duty hours. 
(D) Requests by Taxpayers to Change Place of Audit. The Franchise Tax Board staff will consider, on a case-by-case basis, written requests by taxpayers or their representatives to change the place that the Franchise Tax Board has set for an audit. Reasonable requests to move an audit to another of the taxpayer's offices or to the taxpayer's-representative's office will be granted unless doing so would impose an unreasonable burden to the Franchise Tax Board staff or significantly interrupt the audit schedule. 
If the taxpayer requests that the audit be conducted at a Franchise Tax Board office, or the taxpayer's-representative's office, it is the taxpayer's responsibility to deliver all books and records necessary for the audit. 
(3) Definition of “Desk Audit”. A “desk audit” is an audit conducted primarily through mailed correspondence. For desk audits, “initial audit contact” as used in subsection (a)(2) of this regulation is defined as the date of the first letter to the taxpayer regarding the audit. Generally, the Franchise Tax Board staff should first contact the taxpayer within two years of the date on which the tax return is filed. 
(4) Time of the Audit. It is reasonable for the Franchise Tax Board to schedule the day or days of the audit during a normally scheduled workday or workdays of the Franchise Tax Board, during the Franchise Tax Board's normal business hours. It is reasonable for the Franchise Tax Board to schedule audits throughout the year, without regard to seasonal fluctuations in the businesses of particular taxpayers or their representatives. However, the Franchise Tax Board will work with taxpayers or their representatives to try to minimize any adverse effects in scheduling the date and time of the audit. 
(5) The following audit procedures may be used either in field or desk audits depending on the nature of the audit. 
(A) Opening Conferences. Items to be discussed during the opening conference include, but are not limited to, estimated timeframes to complete the audit, the scheduling of future audit appointments, discussion of the scope of the audit, the taxpayer's record retention policy, status of federal audits, amended returns, any corrections to information reported on the return that the taxpayer has identified and wants the auditor to take into account, information document requests, and photocopying. 
At the opening conference, or via mail if no opening conference is held, the auditor shall provide a written document stating the name and phone number of the audit supervisor and manager, and any designated issue specialists assigned to the audit. 
(B) Audit Plan. A written audit plan may be drafted as appropriate, or if requested by the taxpayer, documenting key dates related to conducting the examination, identifying key points of the examination, or identifying other items discussed during the opening conference. The audit plan should be signed by the auditor and either the taxpayer or the taxpayer's representative. The audit plan is considered a guideline for conducting the examination and can be amended throughout the audit process as circumstances warrant. 
(C) Information Document Request (IDR). The Franchise Tax Board may provide a taxpayer an Information Document Request (IDR) requesting single or multiple documents. As a general rule, response times shall be determined on an IDR-by-IDR basis with a maximum response time of 30 days from the date the IDR was hand-delivered to the taxpayer, or the taxpayer's representative by the auditor or the date mailed by the auditor or as otherwise provided for in subsection (a)(6)(A) of this regulation. 
1. As a general rule, where a reply by the auditor is appropriate or the auditor needs additional information, the auditor will notify the taxpayer or the taxpayer's representative within 30 days of the auditor's receiving the response to the IDR. Notification is achieved by issuance of additional IDRs, an Audit Issue Presentation Sheet or Position Letter, or by a response indicating additional time is necessary to respond and providing a date for future contact. 
2. Failure to provide a timely and complete response to a request from the Franchise Tax Board for additional information might result in the audit being determined by resolving questions of fact to which the requests relate against the taxpayer in addition to assessment of penalties as provided by Revenue and Taxation Code section 19133 for failure to furnish information upon demand. Before issuing a formal notice and demand to furnish information, the auditor will exercise discretion in a reasonable manner that is appropriate under the relevant circumstances related to that particular audit. In addition, subpoenas may be issued as authorized by Revenue and Taxation Code section 19504 to obtain relevant information. 
3. A formal notice and demand to furnish information may be issued upon the taxpayer's failure to comply with an initial request and second request for any item of information. 
4. Before proposing any penalties in connection with any notices and demands issued, the auditor will exercise discretion in a reasonable manner that is appropriate under the circumstances related to that particular audit. 
(D) Photocopying. The Franchise Tax Board has the authority pursuant to the provisions of Revenue and Taxation Code section 19504, to require either the submission of relevant photocopied documents, or that relevant information be made available for photocopying, scanning or other electronic reproduction at a specified time and place for the purposes of administering and verifying compliance with the tax laws. Photocopying is a benefit to both the Franchise Tax Board and the taxpayer as the photocopy provides objective evidence supporting a tax position and allows for expediting the audit. 
(E) Audit Conference. Conferences should be held throughout the audit to review the status of IDRs or to discuss proposed adjustments and to ensure that the audit is on track to finish within the estimated completion time discussed during the opening conference. 
(F) Audit Issue Presentation Sheet (AIPS). An Audit Issue Presentation Sheet (AIPS) may be used during the course of the audit as soon as the issue is completed to inform the taxpayer of proposed audit adjustments. If an AIPS is not provided, the taxpayer or the taxpayer's representative may request one. AIPS provide the facts, law, analysis and the auditor's tentative conclusion concerning a specific issue. The taxpayer will be asked to provide a response confirming or denying the correctness of the factual description of the issue and will be provided an opportunity to provide additional facts and documents or other authority to rebut the auditor's conclusion within a period not to exceed 30 days from the date the AIPS was hand delivered to the taxpayer, or the taxpayer's representative by the auditor or the date mailed by the auditor or as otherwise provided for in subsection (a)(6)(A) of this regulation. 
(G) Closing Conference. Items discussed during the closing conference will generally include an explanation of the audit adjustments, the audit schedules, the review process and protest rights. 
(H) Position Letter. At the close of an audit, the auditor may provide, or the taxpayer or the taxpayer's representative may request a position letter. The position letter will explain the facts relied on, relevant law, analysis and conclusions on all audit adjusted issues, or may refer to previous AIPS. 
1. Audit schedules, if applicable will be provided with the position letter. 
2. The taxpayer or the taxpayer's representative will be provided an opportunity to respond to the position letter within a period not to exceed 30 days from the date the position letter was hand delivered to the taxpayer, or the taxpayer's representative by the auditor or the date mailed by the auditor or as otherwise provided for in subsection (a)(6)(A) of this regulation. 
3. If the taxpayer or the taxpayer's representative responds to the position letter with additional facts or authorities for the auditor to consider, the auditor will issue a revised position letter to take into account the additional facts or authorities. 
(c) The audit results may also be subject to additional review by Franchise Tax Board staff to ensure that the audit recommendations are consistent with Franchise Tax Board policies, practices, and procedures. Adjustments to the audit recommendation made by review staff will be communicated to the taxpayer or the taxpayer's representative by the auditor or reviewer. Franchise Tax Board staff will complete its review and notices will be issued within 90 days after the close of the audit. 
(d) “Automated Audits” generally involve a routine application of well established law or address discrepancies in income or deductions as identified through matching state tax return information to federal tax return information and other income or expense information returns, including, but not limited to, wage payments shown on Form W-2, or interest payments shown on Form 1099. Automated audits may include a request for additional information from the taxpayer, such as a completed head of household audit letter, or may be completed without any additional information being requested from the taxpayer. In these cases, taxpayers will receive a Notice of Proposed Assessment proposing to assess additional tax and explaining the reasons for the proposed assessment. Usually, these audits are not assigned to a specific auditor, but may be assigned to other technical staff members. 
(e) Amended returns received after commencement of an audit. If one or more amended returns are filed after an audit of the original tax return has commenced, the audit of the amended return is distinct from the audit of the original tax return for purposes of the guidelines provided for in subsection (a)(2) of this regulation. The Franchise Tax Board will use the information developed during the audit of the original return to the extent possible to avoid duplicating prior audit activity. 
(f) Federal Audit Adjustments. 
(1) The California Revenue and Taxation Code and Internal Revenue Code contain reciprocal provisions permitting an exchange of information. Under these provisions, the Franchise Tax Board may receive a copy of a final federal determination from the Internal Revenue Service. If notification of the final federal determination is received during the audit of the original tax return, adjustments proposed as a result of the federal audit may be incorporated into an ongoing audit. If the audit of the original tax return has been completed, separate notices will be issued reflecting the federal adjustments. 
(2) The guidelines described in subsection (a)(2) of this regulation do not supersede or have any bearing on the statute of limitations as provided by the Revenue and Taxation Code to issue assessments or refunds based on final federal determination. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 19032, Revenue and Taxation Code. 
HISTORY

1. New section filed 3-25-2003; operative 4-24-2003 (Register 2003, No. 13).
§19059. Period of Limitation for Proposing Deficiency After Federal Changes.
Note     •     History

(a) Section 18622, of the Revenue and Taxation Code, requires that a taxpayer report certain specified federal changes. 
Such notification shall be made by mailing to the Franchise Tax Board, Audit Section, P.O. Box 1673, Sacramento, CA 95812-1673, Attn: RAR/VOL, the original or a copy of the final determination or renegotiation agreement as well as any other data upon which such final determination or renegotiation agreement is claimed. If requested to do so the Franchise Tax Board will make a copy of any final determination or renegotiation agreement furnished to it, and return the taxpayer's copy to him. The notification must be given by the taxpayer regardless of whether he believes any modification of his tax liability will be required. However, a nonresident taxpayer shall give such notification, and shall file an amended return as required by subsection (b) of this regulation, only if the change, results of renegotiation or amended return relate to income taxable to a nonresident under Chapter 11 of the Personal Income Tax Law. 
(b) A taxpayer who files an amended return with the United States Treasury Department shall also file, within 90 days thereafter, a similarly amended return with the Franchise Tax Board and shall pay the additional tax, if any, shown to be due thereon. 
(c) Within six months after receipt of any such notification of filing of an amended return, or at any time within four years if such notification is not given or amended return is not filed, the Franchise Tax Board will recompute the amount of tax and if it appears from such recomputation that an additional tax is due will issue an assessment, notwithstanding the limitations of time within which an assessment may otherwise be made.
(d) The Franchise Tax Board is not required to accept as correct any modification in taxable income as herein above set forth but may conduct an independent investigation in regard thereto. 
(e) A final determination is an irrevocable determination or adjustment of a taxpayer's federal tax liability from which there exists no further right of appeal either administrative or judicial. For example:
(1) a closing agreement made under Section 7121 of the Internal Revenue Code of 1986 finally and irrevocably adjusting and settling a taxpayer's tax liability. 
(2) The 90-day deficiency notice pursuant to Section 6213(a) of the Internal Revenue Code of 1986 is a final determination, unless a timely petition to redetermine the deficiency is filed in the Tax Court of the United States, in which event the judgment of the court of last resort affirming the deficiency, or the redetermination of the deficiency pursuant to a judgment of the court of last resort is the final determination. But the determination does not become final until the time for petitioning for a rehearing or appealing to a higher court has expired. 
(3) The assessment of a deficiency pursuant to a waiver filed under Section 6213(d) of the Internal Revenue Code of 1986 where no 90-day deficiency notice is issued. 
NOTE

Authority cited: Section 19253, Revenue and Taxation Code. Reference: Section 18586.3, Revenue and Taxation Code. 
HISTORY

1. Renumbering and amendment of Section 18581-18601(c) to Section 18586.3 filed 8-19-82; effective thirtieth day thereafter (Register 82, No. 34). 
2. Change without regulatory effect of subsections (a) and (e) pursuant to Section 100, Title 1, California Code of Regulations filed 12-8-89 (Register 90, No. 3).
3. Change without regulatory effect adding new article 3 (section 19059) and renumbering and amending former section 18586.3 to section 19059 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 4. Assessments Against Persons Secondarily Liable [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 4 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 5. Jeopardy Assessments [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 5 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 6. Interest [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 6 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 7. Penalties and Additions to Tax
§19133. Penalty for Failure to File Return Upon Notice and Demand.
Note     •     History

(a) In general. Revenue and Taxation Code section 19133 provides that if any taxpayer fails or refuses to file a return upon notice and demand by the Franchise Tax Board (FTB), unless the failure is due to reasonable cause and not willful neglect, the FTB may add a penalty of 25 percent of the amount of tax assessed pursuant to Revenue and Taxation Code section 19087 or of any deficiency tax assessed by the FTB concerning the assessment for which the return was required.
(b) Imposition of Penalty. For individuals subject to tax under Part 10 (Personal Income Tax Law), the notice and demand penalty under Revenue and Taxation Code section 19133 will only be imposed by the FTB if:
(1) the taxpayer fails to timely respond to a current Demand for Tax Return in the manner prescribed, and
(2) the FTB has proposed an assessment of tax under the authority of Revenue and Taxation Code section 19087, subdivision (a), after the taxpayer failed to timely respond to a Request for Tax Return or a Demand for Tax Return in the manner prescribed, at any time during the four-taxable-year period preceding the taxable year for which the current Demand for Tax Return is issued.
(c) Definitions. For purposes of this regulation, the following definitions shall apply:
(1) Demand for Tax Return. A “Demand for Tax Return” means a written notice and demand for a return from the FTB, which advises the taxpayer that failure to respond in the manner provided and within the time prescribed will make the taxpayer liable for a penalty under Revenue and Taxation Code section 19133 for failure to file upon notice and demand.
(2) Request for Tax Return. A “Request for Tax Return” means a written notice and request for a return from the FTB, which does not advise the taxpayer that failure to respond in the manner provided and within the time prescribed and will make the taxpayer liable for a penalty under Revenue and Taxation Code section 19133 for failure to file upon notice and demand.
(3) Timely Response. A “timely response” shall mean a response within the time period specified in the Demand for Tax Return or Request for Tax Return.
(d) Examples. The following examples are intended to illustrate the provisions of this regulation:
Example 1. Assume Taxpayer X has not filed a California personal income tax return for the 1999 taxable year. This is the first time that X has not filed a timely California personal income tax return. As a result of X's non-filing, the FTB mails a Request for Tax Return to X on January 15, 2001. When X does not timely respond to the Request for Tax Return, the FTB issues a Notice of Proposed Assessment (NPA) on March 20, 2001, assessing tax, a late filing penalty, and interest, but the NPA does not include a notice and demand penalty under Revenue and Taxation Code section 19133.
Example 2. Assume the same facts as in Example 1, and X does not file a California personal income tax return for the 2001 taxable year. Because X received an NPA for not filing a return within the previous four years, the FTB issues a Demand for Tax Return for the 2001 taxable year. If X fails to timely respond to the Demand for Tax Return, the FTB will issue an NPA that includes tax, a late filing penalty, interest, and a notice and demand penalty under Revenue and Taxation Code section 19133.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 19133, Revenue and Taxation Code.
HISTORY

1. New section filed 11-23-2004; operative 12-23-2004 (Register 2004, No. 48).
§19141.6. Duty to Maintain and Make Available Records.
Note     •     History

(a) General.
(1) Duty to maintain and make available records; examination and copying. Each taxpayer which determines its income subject to tax pursuant to sections 25101 or 25110 of the Revenue and Taxation Code for income years beginning on or after January 1, 1994, is required to maintain and make available, upon request, records regarding the determination of the components of any unitary business of which it might be a part, the apportionment factors of such business, the classification of an item of income or loss as business or nonbusiness, and the attribution of income to either foreign jurisdictions of the United States for the taxpayer and related parties under section 882, or Subpart F, or other similar sections of the Internal Revenue Code. Records which are made available are subject to examination and copying pursuant to section 19504 of the Revenue and Taxation Code.
(2) Penalty for failure to maintain records. Failure to maintain such records shall subject the taxpayer to a monetary penalty of ten thousand dollars ($10,000) for each income year for which the failure occurs unless reasonable cause existed for the failure. If the failure continues for a period of more than 90 days after notice of the failure has been mailed, an additional penalty of ten thousand dollars $10,000) shall accrue for each month for each income year in which the failure continues or until the taxpayer demonstrates compliance with the record maintenance requirements for the income year in which the examination occurs and subsequent years to the satisfaction of the Franchise Tax Board. (See subsection (j) (4) (B), infra.) For income years beginning on or after January 1, 1994 and prior to December 31, 1995, such additional penalty shall not exceed fifty thousand dollars ($50,000) per income year if the failure is not willful.
(3) Additional powers of the Franchise Tax Board if a taxpayer does not make records available or is not authorized to act as the limited agent of its related parties.  In addition to the monetary penalty described above, if a taxpayer fails to comply with a subpoena or subpoena duces tecum for the records which the taxpayer is required to maintain pursuant to section 19141.6 of the Revenue and Taxation Code, or if a taxpayer is not authorized to act as the limited agent of its related parties solely for purposes of applying section 19504 of the Revenue and Taxation Code, the Franchise Tax Board, in its sole discretion, and based upon its own knowledge or from other information which it obtains, may determine the components of the unitary business or businesses of which the taxpayer is a part, the apportionment factors of such business or businesses, the classification of any item of income or loss received by a component of such business or businesses as business or nonbusiness, and the correct amount of income attributable to the United States or foreign jurisdictions under section 882, Subpart F, or other similar sections of the Internal Revenue Code. The powers of the Franchise Tax Board under this authority do not allow it to disregard a properly made election to file under section 25110 of the Revenue and Taxation Code. (See subsection (1)(2) infra.)
(b) Definitions. For purposes of section 19141.6 of the Revenue and Taxation Code and this regulation--
(1) “Business income” is defined by subdivision (a) of section 25120 of the Revenue and Taxation Code and the regulations adopted pursuant thereto. Business income is subject to apportionment by formula amongst California and the other jurisdictions where the taxpayer has a taxable presence.
(2) A “combined report” means the calculations by which a unitary business apportions income on a geographic basis. In a combined report, the aggregate business income from all activities required to be included in the combined report computation (determined pursuant to either section 25101 or 25110 of the Revenue and Taxation Code) is apportioned to this state using the apportionment formula described in sections 25128 through 25137 of the Revenue and Taxation Code.
(3) A “combined report group” means all corporations or other entities whose income and apportionment factors are required to be considered pursuant to Chapter 17 of the Bank and Corporation Tax Law, determined pursuant to either section 25101 or section 25110 of the Revenue and Taxation Code, as the case may be, in computing the income of the particular taxpayer for the current year which is derived from or attributable to sources within this state.
(4) “Excluded entity” means a related party which is not included, for whatever reason, in the combined report used to determine the taxpayer's liability imposed by Part 10.2 and Part 11 of the Revenue and Taxation Code.
(5) “Foreign Related Party” means a corporation that is not created or organized under the laws of a state of the United States or the United States and which is a related party as defined in subsection (b)(9).
(6) “Maintained,” except as otherwise provided in subsections (e) (1) (B)1., (e) (1) (B) 2. and (m), means retained and preserved either in original form, on microfilm or microfiche, or in electronic media. “Maintained,” except as provided above, does not mean to create or establish records.
(7) “Nonbusiness income” is defined by subdivision (d) of section 25120 of the Revenue and Taxation Code and the regulations adopted pursuant thereto. Nonbusiness income is allocated to a specific jurisdiction.
(8) “Records” include any books, papers, or other data, on whatever medium recorded. A record will normally encompass all matters included within section 250 of the Evidence Code.
(9) “Related Party” means corporations that are related because one owns or controls directly or indirectly more than 50 percent of the voting stock of the other or because more than 50 percent of the voting stock of each is owned or controlled, directly or indirectly, by the same interests. A corporation need not be a taxpayer as defined in section 23037 of the Revenue and Taxation Code, and need not be included in any combined report filed pursuant to section 25101 or 25110 of the Revenue and Taxation Code, in order to be considered a related party. Corporations are considered related for purposes of this section if the over-50-percent-ownership or control standard is met at any time during the taxpayer's income year. If any corporation described above has more than a fifty-percent interest in the capital or profits of a domestic or foreign partnership or limited liability company (if such company is treated as a partnership for purposes of Part 11 of the Revenue and Taxation Code), such partnership or limited liability company shall be considered a related party for purposes of this section. A limited liability company which is not treated as a partnership for purposes of Part 10, Part 10.2 or Part 11 of the Revenue and Taxation Code shall be treated as a corporation for purposes of determining whether it is a “related party.”
(10) “Related party group” means the taxpayer and all related parties as defined in subsection (b) (9).
(11) A “unitary business” consists of those activities required to be included in a combined report pursuant to section 25101 of the Revenue and Taxation Code and the cases decided thereunder and reported in official published decisions of the courts of this state or the California State Board of Equalization, and in decisions of the United States Supreme Court construing the “unitary business principle.” Activities constitute a “unitary business” if unity of ownership, unity of operation, and unity of use are present, or if the activities carried on within the state contribute to or are dependent upon the activities carried on without the state, or if there is a flow of value between the activities. (See Regulation section 25120(b) which sets forth certain indicia and standards for determining whether activities constitute a single trade or business and are therefore unitary.
(12) Except as otherwise provided in this regulation or otherwise defined by the Revenue and Taxation Code, the definitions contained in Evidence Code sections 110, 115, 210, 225, 255, 260 and 1271 shall apply in implementing this regulation.
(c) General record maintenance requirements.
(1) (A) Reserved.
(B) 1. Except as provided in subsections (c)(1) (B) 3. and (c) (1) (B) 4. of this regulation, a taxpayer that has made a proper election under section 25111 of the Revenue and Taxation Code needs to maintain records necessary to determine the components of the unitary business or businesses of which it is a part, the apportionment factors and the classification of any item of income or loss as business or nonbusiness, as described by paragraphs (1), (2) and (3) of subdivision (a) of section 19141.6 of the Revenue and Taxation Code, only with respect to those entities and activities required to be included in the combined report under section 25110 of the Revenue and Taxation Code.
2. In addition to the records required by subsection (c) (1) (B) 1., a taxpayer which has made a proper election under section 25111 of the Revenue and Taxation Code needs to maintain records sufficient to determine the proper attribution of income to either foreign jurisdictions or the United States for the taxpayer and other related parties. Records which a taxpayer is required to maintain for purposes of section 6038A of the Internal Revenue Code shall be sufficient for purposes of section 19141.6 of the Revenue and Taxation Code to the extent they relate to equivalent transfer pricing issues.
3. Except as provided in subsection (c) (1)(B) 4. of this regulation, those taxpayers which have made a proper election under section 25110 of the Revenue and Taxation Code need to maintain for entities not required to be included in the combined report pursuant to section 25110 of the Revenue and Taxation Code, the records required to be maintained for purposes of section 6038A of the Internal Revenue Code, and records relating to ownership and capital structure as required by subsection (e) (2) (E) of this regulation.
4. Notwithstanding the provisions of subsection (c)(1)(B) 3., a taxpayer shall be required to maintain some or all of the records detailed in subsections (e) (2) (A) through (e) (2) (H) for entities excluded pursuant to an election under section 25110 of the Revenue and Taxation Code if it is determined by the Franchise Tax Board, in its sole discretion, that those records are necessary to properly determine the components of the unitary business or businesses of which it is a part, the apportionment factors of such business, the classification of any item of income or loss as business or nonbusiness income, and the proper attribution of income to foreign jurisdictions or the United States under section 882, Subpart F, or other similar sections of the Internal Revenue Code. The taxpayer shall be notified of the duty to maintain, or to cause another to maintain, the record by letter signed by the Executive Officer, the Chief Counsel, or an Assistant Executive Officer of the Franchise Tax Board. The duty to maintain the records shall apply to the first income year of the taxpayer beginning after the date of the letter of notification and shall continue until the Franchise Tax Board notifies the taxpayer that it is no longer required to maintain these records with respect to excluded entities. A taxpayer that fails to maintain the records after notification shall be subject to the penalties provided in subdivision (c) and (d) of section 19141.6 of the Revenue and Taxation Code. 
5. Examples
EXAMPLE 1: P, a United States corporation doing business in California, owns 100 percent of the stock of F, a corporation incorporated in Foreign Country X. F is the European distribution agent for tangible personal property manufactured in the United States by S. Pursuant to section 25111 of the Revenue and Taxation Code, P elected to report on a water's-edge basis and excluded F from its combined report. Because F is excluded from the combined report filed by P, records created by F that would be relevant to determining its apportionment factors and the correct classification of its income or loss as business or nonbusiness will generally not be subject to the record maintenance requirement of this section. If, however, on audit it is determined that the income and apportionment factors of F are required to be included in the combined report filed by P (because, for example, F is determined at audit to have Subpart F income as defined in section 952 of the Internal Revenue Code), all records relevant to determining the apportionment factors or the classification of income or loss as business or nonbusiness will be subject to the record maintenance requirements of this section. (See subsection (j) (2) for application of reasonable cause exception for avoiding penalties.)
EXAMPLE 2: F, a foreign incorporated entity, creates Sub1 and Sub2, wholly owned United States subsidiaries, in order to purchase tangible property from unrelated parties in the United States and resell such property to F. The property purchased by Sub1 and Sub2 is either used in F's business or resold to other unrelated parties by F. Sub1 is doing business in California. Sub2 is located in New York and is not a California taxpayer. The sole function of Sub1 and Sub2 is to act as a buyer for F. There are no transactions between Sub1 and Sub2. Because F is not required to be included in the combined report pursuant to section 25110 of the Revenue and Taxation Code, the records of F and Sub2 maintained for purposes of section 6038A of the Internal Revenue Code and the records required by subsection (e) (2) (E) of this regulation are subject to the record maintenance requirements of this section. In addition, F and Sub2 may be subject to additional record maintenance requirements as provided in subsection (c) (1) (B) 3. of this regulation.
EXAMPLE 3: RC, a California taxpayer, is owned 100 percent by F, a foreign country corporation. RC determines its California taxable income on the basis of a worldwide combined report. RC purchases tangible property from F for resale in the United States. Because RC files a worldwide combined report, any potential audit issue with respect to the treatment of these transactions under section 24725 of the Revenue and Taxation Code (section 482 of the Internal Revenue Code) is not relevant to determine the correct amount of any liability imposed by Part 10.2 and Part 11 of the Revenue and Taxation Code. Therefore, RC is not required to maintain the material profit and loss statements described in subsection (e) (2) (B). RC and F are required to maintain all other records specified in subsection (e) (2).
(C) 1. Under section 19141.6 of the Revenue and Taxation Code, the Franchise Tax Board may require any taxpayer or related party to render such statements, or keep such specific records as will enable the Franchise Tax Board to determine the correct liability for any of the taxes imposed by Part 10.2 and Part 11 of the Revenue and Taxation Code.
2. Such records must be permanent, accurate, and complete. They must clearly establish income, deductions and credits. Additionally, in appropriate cases, such records must include sufficient relevant cost data from which a profit and loss statement may be prepared for products or services transferred between members of a combined report of which the taxpayer is a part and any excluded entity.
3. Taxpayers which are subject to the record maintenance requirements of section 6038A of the Internal Revenue Code for equivalent profit and loss statement data shall meet the record maintenance requirements of section 19141.6 of the Revenue and Taxation Code to the extent such records relate to equivalent transfer pricing issues. In many circumstances, such equivalent profit and loss statement data, except as might otherwise be provided in this regulation, will not satisfy the requirement that a taxpayer maintain records regarding the determination of the components of any unitary business of which it might be a part, the apportionment factors of such business, or the classification of an item of income or loss as business or nonbusiness, or the proper attribution of income to foreign jurisdictions or the United States under section 882, Subpart F, or other similar provisions of the Internal Revenue Code (other than section 482).
(D) 1. These general record maintenance requirements include records of the taxpayer and all members of the combined report of which the taxpayer is a part, as well as records of any excluded entity that may be relevant to determine the correct California tax liability imposed by Part 10.2 and Part 11 of the Revenue and Taxation Code.
2. The relevance of such records with respect to transactions with any excluded entity shall be determined upon the basis of all the facts and circumstances.
3. Records which have been determined to be sufficient for purposes of section 6038A of the Internal Revenue Code shall be sufficient for purposes of section 19141.6 of the Revenue and Taxation Code if the issues to which they relate are equivalent. In many circumstances, records which have been determined to be sufficient for purposes of section 6038A of the Internal Revenue Code, except as might otherwise be provided in this regulation, will not satisfy the requirement that a taxpayer maintain records regarding the determination of the components of any unitary business of which it might be a part, the apportionment factors of such business, the classification of an item of income or loss as business or nonbusiness, or the proper attribution of income to foreign jurisdictions or the United States under section 882, Subpart F, or other similar provisions of the Internal Revenue Code (other than section 482).
(2) (A) Safe Harbor. A safe harbor for record maintenance is provided under subsection (e), which sets forth detailed guidance concerning the types of records to be maintained with respect to the correct preparation of a combined report and transactions with any excluded entity. The safe harbor consists of an all-inclusive list of record types that could be relevant to different taxpayers under a variety of facts and circumstances. It does not constitute a checklist of records that every taxpayer must maintain or that generally should be requested by the Franchise Tax Board. A taxpayer is required to maintain or cause another to maintain, and the Franchise Tax Board will request, only those records enumerated in the safe harbor that may be relevant to its business or industry for purposes of determining the components of any unitary business of which the taxpayer might be a part, the apportionment factors of such business, and the classification of any item of income or loss as business or nonbusiness; and determining the attribution of income to the United States or foreign jurisdictions under section 882, Subpart F, or other similar sections of the Internal Revenue Code, including material profit and loss statements that may be relevant for purposes of determining the proper attribution of income between the combined report group and an excluded entity. Accordingly, not every item listed in the safe harbor must be maintained by every taxpayer. A taxpayer that maintains or causes another person to maintain the records listed in subsection (e)(2) that may be relevant to the unitary business of which it is a part and to its transactions with any excluded entity will be deemed to have met the record maintenance requirements of section 19141.6 of the Revenue and Taxation Code.
(B) The ability to use reasonable approximations provided for in Regulation section 25137-6, Title 18 of the California Code of Regulations does not, however, mean that a taxpayer or related party is excused from the duty to maintain the records both of the data upon which such approximations were made and the manner in which they were made.
(d) Other record maintenance requirements.
(1) Indirectly related records.
(A) This subsection (d) applies to records that are directly or indirectly related to transactions between the combined report group of which the taxpayer is a part and any excluded entity to the extent they are relevant to determine the components of the unitary business of which the taxpayer is a part and the proper attribution of income to the United States or foreign jurisdictions. An example of records that are indirectly related to such transactions is records possessed by a foreign subsidiary of an excluded entity that documents the raw material or component costs of a product that is manufactured or assembled by the subsidiary and sold as a finished product by the excluded entity to the combined report group of which the taxpayer is a part.
(B) Records which a taxpayer is required to maintain for purposes of section 6038A of the Internal Revenue Code by the Internal Revenue Service shall be sufficient for purposes of section 19141.6 of the Revenue and Taxation Code to the extent they relate to equivalent transfer pricing issues. In many circumstances, records required to be maintained for purposes of section 6038A of the Internal Revenue Code, except as might otherwise be provided in this regulation, will not satisfy the requirement that a taxpayer maintain records regarding the determination of the components of any unitary business of which it might be a part, the apportionment factors of such business, or the classification of an item of income or loss as business or nonbusiness.
(2) Foreign related party or third-party maintenance. If records that are required to be maintained under section 19141.6 of the Revenue and Taxation Code are in the control of a foreign related party, the records may be obtained or compiled (if not already in the possession of the foreign related party or already compiled) under the direction of the taxpayer and then maintained by the taxpayer, the foreign related party, or a third party. Thus, for example, a foreign related party may either itself maintain such records outside the United States or permit a third party to maintain such records, provided that the conditions described in subsection (g) are met. Upon a request for such records by the Franchise Tax Board, a foreign related party may make arrangements with the Franchise Tax Board to furnish the records directly, rather than through the taxpayer.
(3) (A) Translation of records. When records are provided pursuant to the Franchise Tax Board's request for production, any portion of such records, except as provided in subsections (B) and (C) of this subsection, must be translated into the English language within 30 days of a request for translation of that portion by the Franchise Tax Board.
(B) There is no requirement to translate records which have already been translated and for which the translation has been or is being provided, or to translate records the substance of which is reflected on ledger sheets or other summary accounting records.
(C) To the extent that
1. any requested records for which translations are requested are identical to records that have already been translated, an explanation of how such records are identical may be provided in lieu of translating the records, or
2. there are numerous records of a similar nature, translation of an appropriate sampling of the records may be offered in lieu of translating all of such records.
The taxpayer may, however, be required to translate all or part of the records described in subsections 1. and 2. if it is determined that such translation is necessary to perform or complete an audit.
(D) An extension of the 30-day time period provided for in subsection (d) (3) (A) of this regulation may be requested under subsection (g) (3). Appropriate extensions will be liberally granted for translation requests where circumstances warrant.
(E) If a good faith effort is made to accurately translate the requested records within the specified time period, the taxpayer will not be subject to the penalties provided for in section 19141.6 of the Revenue and Taxation Code.
(F) For purposes of subsection (e) (2) (A), a taxpayer which prepares audited consolidated financial statements, and which maintains supporting documentation which meets the financial accounting standards of the United States in all material respects, will not be required to translate records described in such subsection other than the audited consolidated financial statements with footnotes, consolidating workpapers by entity, and the summary consolidating data submitted to the parent corporation.
(e) Specific records to be maintained for safe harbor.
(1) In general.
(A) A taxpayer that maintains or causes another person to maintain the records specified in this subsection (e) that are relevant to the unitary business or businesses of which it is a part, and to the attribution of income to the United States or foreign jurisdictions under the provisions of the Internal Revenue Code, including the correct California tax treatment of its transactions with an excluded entity, will be deemed to have met the record maintenance requirements of this section. This subsection provides general descriptions of the categories of records to be maintained; the particular title or label applied by the taxpayer or a related party does not control. Functional equivalents of the specified records are acceptable. Record maintenance in accordance with this safe harbor, however, requires only the maintenance of the types of records described in subsection (e) (2) that are relevant to the determination of the components of any unitary business of which the taxpayer may be a part, the apportionment factors of such business included in the combined report group of which the taxpayer is a part, the classification of an item of income or loss includable in such combined report as business or nonbusiness, and the determination of the attribution of income to the United States or foreign jurisdictions under section 882, Subpart F, or other similar sections of the Internal Revenue Code. Additionally, to the extent the taxpayer establishes to the satisfaction of the Director, Multistate Audit Program Bureau or the Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer that records in a particular category are not applicable to the above issues, maintenance of such records is not required under this subsection. Except as provided in subsections (e) (1) (B) and (C), record maintenance in accordance with subsections (c) through (g) generally does not require the original creation of records that are ordinarily not created by the taxpayer or any related parties in the ordinary course of business. If, however, a record that is actually created is described in subsection (e), it is to be maintained even if the record is not of the type ordinarily created by the taxpayer or any related parties.
(B) Exceptions.
1. Basic accounting records that are sufficient to document the California tax effects of transactions between related parties must be created and retained, if they do not otherwise exist, and,
2. Records sufficient to produce material profit and loss statements, as described in subsections (e) (2) (B) 1. and (e) (2) (B)1.c., that are relevant for determining the California tax treatment of transactions between the combined report group of which the taxpayer is a part and an excluded entity must be created if such records are not maintained in the ordinary course of business.
3. For purposes of subsection (e) (1) (B) 1., “basic accounting records” are of the type which the Internal Revenue Service would accept for purposes of section 6038A of the Internal Revenue Code.
(C) Storage, retrieval and retention procedures. All record retention procedures and policies in effect for each income year must be retained and provided upon request. All internal records storage and retrieval systems used for each income year must be retained. If an internal records storage and retrieval system is changed or revised and the data relating to prior years is revised to conform to the new system without loss of integrity, the prior systems may be discarded.
(2) Descriptions of categories of records to be maintained. The following records must be maintained in order to satisfy this subsection (e) to the extent they may be relevant to determine the correct treatment of an item or entity for purposes of section 25101 or 25110 of the Revenue and Taxation Code, or the correct California tax treatment of transactions between the combined report group of which the taxpayer is a part and an excluded entity.
(A) Financial and tax data.
1. General. This category includes relevant financial statements, workpapers, and books and records of original entry or their functional equivalents, however designated or labeled. Examples include, but are not limited to, general ledgers, sales journals, purchase order books, cash receipts books, cash disbursement books, canceled checks and bank statements, workpapers, sales contracts, purchase invoices, financial statements with footnotes and consolidating workpapers by entity, summary consolidating data submitted to the corporate parent of a group of a corporations, consolidating journal entries and explanations, cost accounting allocations and workpapers, budgets and cash flow projections, all federal tax filings with supporting schedules and workpapers, tax accrual workpapers, partnership tax returns, and financial statements for any partnership in which the taxpayer or any related party is a partner. Descriptive material to explicate entries in the foregoing types of records, such as a chart of accounts and accounting policy manuals, is included in this category.
2. Exceptions. In the case of a group of related entities which prepare and maintain audited consolidated financial statements, the maintenance of such financial statements with footnotes and consolidating workpapers by entity, the summary consolidating data submitted to the corporate parent by the affiliates, and all federal tax filings with supporting schedules and workpapers, including tax accrual workpapers will satisfy the duty to maintain the records described in this category unless the Franchise Tax Board can demonstrate that there is reason to believe that any of such records are incomplete or might not be accurate.
(B) 1. Profit and loss statements.
a. This category includes records from which the taxpayer can compile and supply, within a reasonable time, material profit and loss statements of the taxpayer and all related parties as defined in subsection (b) (9) that reflect profit or loss of the related party group attributable to U.S.-connected products or services as defined in subsection (e)(6) (A).
b. The determination of whether a profit and loss statement is material is made under the rules provided in subsection (e) (3).
c. The material profit and loss statements described herein must reflect the consolidated revenue and expenses of all members of the related party group. Thus, records in this category include the documentation of the cost of raw materials used by a related party to manufacture finished goods that are then sold to the taxpayer by that related party or another related party. The records should be kept under U.S. generally accepted accounting principles if they are ordinarily maintained in such manner; if not, an explanation of the material differences between the accounting principles used and U.S. generally accepted accounting principles must be made available. The statements need not reflect tracing of the actual costs borne by the related party group with respect to its U.S.-connected products or services; rather, any reasonable method may be used to allocate the related party group's worldwide costs to the revenues generated by the sales of those products or services. An explanation of the methods used to allocate specific items to a particular profit and loss statement must be made available. The explanation of material differences between accounting principles and the explanation of allocation methods must be sufficient to permit a comparison of the profitability of the related party group to that of the combined report group of which the taxpayer is a part that is attributable to the provision of U.S.-connected products or services.
2. Records which a taxpayer is required to maintain for purposes of section 6038A of the Internal Revenue Code by the Internal Revenue Service shall satisfy the requirements of section 19141.6 of the Revenue and Taxation Code to the extent they relate to equivalent transfer pricing issues. In many circumstances, records maintained for purposes of section 6038A of the Internal Revenue Code, except as might otherwise be provided in this regulation, will not satisfy the requirement that a taxpayer maintain records regarding the determination of the components of any unitary business of which it might be a part, the apportionment factors of such business or the classification of an item of income or loss as business or nonbusiness.
(C) Apportionment factor records.
1. This category includes books and records for each separate entity in the combined report group for which apportionment factor numerators and denominators, as defined in sections 25129 through 25137 of the Revenue and Taxation Code, are determined.
2. To the extent apportionment factor data is determined pursuant to the provisions of Regulation section 25137-6, Title 18, California Code of Regulations, which allows for the use of reasonable approximations, the records required to be maintained are those which properly reflect the data and the methods necessary to compute reasonable approximation of the apportionment factors.
3. Examples include, but are not limited to, fixed asset ledgers by location with details of historical cost by year of acquisition; inventory records by location, including details of inventory in-transit at year end; workpapers or other records detailing the asset valuation methodologies, including copies of any independent appraisals in support of asset values; rental and lease agreements with unrelated parties; payroll records, including payroll ledgers by location and California Forms DE-3; sales journals and invoices detailing sales of tangible personal property by shipping point origin and destination; and records documenting the reasonable fair market rental rate for property owned by unrelated parties and used at no charge, or rented for a nominal rate, by the taxpayer and any related party.
(D) Foreign country and third party filings.
1. This category includes financial and other documents filed with or prepared for any U.S. or foreign government entity, any independent commission, or any financial institution.
2. Examples include, but are not limited to, SEC filings; Federal Forms 940/941 and equivalent foreign jurisdiction employment tax return filings; PUC, FAA and similar reports detailing the location of movable assets; and records maintained pursuant to the Hart, Scott, Rodino Antitrust Improvement Act of 1976, 15 U.S.C. Section 1311 et seq.
(E) Ownership and capital structure records. This category includes:
1. records or charts showing the relationship between the taxpayer and all related parties;
2. the location, ownership, and entity status (for example, joint venture, partnership, branch, or division) of the taxpayer and all related parties; a worldwide organization chart;
3. records for non-publicly traded entities and closely held entities showing the names and relationships of all shareholders and their voting record;
4. analyses prepared for, or at the direction of, the Board of Directors or officers of the entity involved or the parent corporation regarding acquisitions, dispositions and reorganizations involving the taxpayer and any related party;
5. agreements regarding acquisitions, dispositions, and reorganizations involving the taxpayer and any related party; and
6. loan documents, agreements, and other documents relating to any transfer of the stock, or other incident of ownership, of the taxpayer or a related party that results in the change of status as a related party.
(F) Management structure.
1. This category includes records showing the management relationship, including any centralized or decentralized services, between the taxpayer and all related parties.
2. Examples include, but are not limited to, for each income year for the taxpayer and all related parties,
a. records detailing the corporate officers, directors, and top management;
b. records or charts showing the management structure;
c. job descriptions of each of the officers of the taxpayer and related parties;
d. minutes of the Board of Directors meetings and meetings of Committees of the Board of Directors or management, or Committees appointed by either, including all exhibits and agendas;
e. personnel files detailing transfers of officers, managers or key technical personnel among members of the related party group;
f. correspondence files of directors and officers and in-house memoranda directed to them, including electronic mail files to the extent reduced to written form or otherwise maintained in electronic media such as tape or disk;
g. employee newsletters subject to formal corporate retention restrictions;
h. manuals, guides, and handbooks providing employees instructions on corporate policy, procedures, training, and other corporate matters; and
i. internal audit reports.
(G) Records of sales transactions.
1. This category includes all records relevant to establishing the extent of, nature of, and appropriate price or rate for transactions between the combined report group of which the taxpayer is a part and any excluded entity to the extent they are relevant to determine either the components of the unitary business of which the taxpayer is a part or the attribution of income between the United States and foreign jurisdictions.
2. Examples include, but are not limited to,
a. records related to transactions involving the same or similar products or services entered into by any member of the combined report group or an excluded entity with related and unrelated parties;
b. shipping and export records;
c. commission agreements;
d. records relating to production or assembly facilities;
e. third-party and intercompany purchase invoices;
f. manuals, specifications, and similar records relating to or describing the performance of functions conducted at particular locations;
g. intercompany correspondence discussing any instructions or assistance relating to such transactions provided to any member of the combined report group of which the taxpayer is a part by any excluded entity (or vice versa);
h. intercompany and intracompany correspondence concerning the price or the negotiation of the price used in such transactions;
i. records related to the value and ownership of intangibles used or developed by any member of the combined report group of which the taxpayer is a part or any excluded entity;
j. records relating to cost of goods sold and other expenses; and
k. records related to direct and indirect selling, and general and administrative expenses (for example, relating to advertising, sales promotions, or warranties).
3. Records which a taxpayer is required to maintain for purposes of section 6038A of the Internal Revenue Code by the Internal Revenue Service shall satisfy the requirements of section 19141.6 of the Revenue and Taxation Code to the extent they relate to equivalent transfer pricing issues. In many circumstances, records maintained for purpose of section 6038A of the Internal Revenue Code, except as might otherwise be provided in this regulation, will not limit the duty of a taxpayer to maintain records regarding the determination of the components of any unitary business of which it might be a part, the apportionment factors of such business, or the classification of an item of income or loss as business or nonbusiness.
(H) Records of loans, services, and other non-sales transactions. This category includes relevant records relating to:
1. loans (including all deposits by an excluded entity or member of the combined report group of which the taxpayer is a part with an unrelated party and a subsequent loan by that unrelated party to an excluded entity or member of the combined report group of which the taxpayer is a part that is in substance a direct loan between a member of such combined report group of which the taxpayer is a part and an excluded entity);
2. guarantees by an excluded entity of debts of any member of the combined report group of which the taxpayer is a part, and vice versa;
3. hedging arrangements or other risk shifting or currency risk shifting arrangements involving any member of the combined report group of which the taxpayer is a part and any excluded entity;
4. security agreements between any member of the combined report group of which the taxpayer is a part and any excluded entity;
5. research and development expense allocations between any excluded entity and any member of the combined report group of which the taxpayer is a part;
6. research and development project logs, including details regarding the entities involved in the project and the general purpose of the project;
7. service and other operating agreements and transactions between any excluded entity and any member of the combined report group of which the taxpayer is a part, including, for example, a description of the allocation of charges for management services, with supporting records such as time reporting, telephone, or travel records, or allocation studies;
8. common advertising/marketing agreements, brochures, product catalogs, and other similar records;
9. agreements or other records for shared use of facilities or equipment between or among any related parties;
10. import and export transactions between any member of the combined report group of which the taxpayer is a part and any excluded entity;
11. the registration of patents, trademarks, copyrights and other similar property with respect to transactions between any member of the combined report group of which the taxpayer is a part and any excluded entity; and
12. records regarding lawsuits in foreign countries or the United States that relate to such transactions between any member of the combined report group of which the taxpayer is a part and any excluded entity (for example, product liability suits for U.S. products).
(3) Material profit and loss statements.
(A) For purposes of subsection (e) (2) (B), the determination of whether a profit and loss statement is material will be made according to the following rules.
1. An agreement between the taxpayer and the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee desingated by the Executive Officer, as described in subsection (f), may identify material profit and loss statements of the related party group and describe the items to be included in any profit and loss statements for which records are to be maintained to satisfy the requirements of subsection (e) (2) (B).
2. In the absence of such an agreement, a profit and loss statement will be material if it meets either of the following tests:
a. the existing records test described in subsection (e) (4), or
b. the significant industry segment test described in subsection (e) (5).
(B) An agreement entered into with the Internal Revenue Service pursuant to the authority granted by section 6038A of the Internal Revenue Code shall be accepted by the Franchise Tax Board to the extent equivalent transfer pricing issues are involved.
(4) Existing records test. A profit and loss statement is material under the existing records test described herein if any member of the related party group creates or compiles such statement in the course of its business operations and the statement reflects the profit or loss of the related party group attributable to the provision of U.S.-connected products or services (regardless of whether the profit and loss attributable to U.S.-connected products or services is shown separately or included within the calculation of aggregate figures on the statement). For example, a profit and loss statement is described herein if it was produced for internal accounting or management purposes, or for disclosure to shareholders, financial institutions, government agencies, or any other persons. Such existing statements and the records from which they were compiled (to the extent such records relate to profit and loss attributable to U.S.-connected products or services) are subject to the record maintenance requirements described in subsection (e)(2) (B).
(5) Significant industry segment test.
(A) In general. A profit and loss statement is material under the significant industry segment test described herein if--
1. The statement reflects the profit or loss of the related party group attributable to the group's provision of U.S.-connected products or services within a single industry segment (ass defined in subsection (e)(6) (B);
2. The worldwide gross revenue attributable to such industry segment is 10 percent or more of the worldwide gross revenue attributable to the related party group's combined industry segments; and
3. The amount of gross revenue earned by the related party group from the provision of U.S.-connected products or services within such industry segment is $25 million or more in the income year.
(B) Form of the statements. Profit and loss statements compiled for the related party group's provision of U.S.-connected products or services in each significant industry segment must reflect revenues and expenses attributable to the operations in such segment by all members of the related party group. Statements may show each related party's revenues and expenses separately, or may be prepared in a consolidated format. Any reasonable method may be used to allocate the group's worldwide costs within the industry segment to the U.S.-connected products or services within that segment. An explanation of the methods used to prepare consolidated statements and to allocate specific items to a particular profit and loss statement must be made available, and the records from which the consolidations and allocations were prepared must be maintained.
(C) Special rule for component sales. Where the U.S.-connected products or services consist of components that are incorporated into other products or services before sale to customers, the portion of the total gross revenue derived from sales of the finished products or services attributable to the components may be determined on the basis of relative costs of production. Thus, where relevant for determining whether the $25 million threshold in subsection (e) (5) (A) 3. has been met, the amount of gross revenue derived by the related party group from the provision of the finished products or services may be reduced by multiplying it by a fraction, the numerator of which is the costs of production of the related party group attributable to the component products or services that constitute U.S.-connected products or services and the denominator of which is the costs of production of the related party group attributable to the finished products in which such components are incorporated.
(D) Level of specificity required. In applying the significant industry segment test of this subsection (e) (5), groups of related products and services must be chosen to provide a reasonable level of specificity that results in the greatest number of separate significant industry segments in comparison to other possible classifications. This determination must be made on the basis of the particular facts presented by the operations of the related party group. The following rules, however, provide general guidelines for making such classifications. First, the related party group's operations that involve the provision of U.S.-connected products should be grouped into product lines. The rules of this subsection (e) (5) should then be applied to determine if any such product line would, standing alone, constitute a significant industry segment when compared to the related party group's operations as a whole. Any significant industry segments determined at the level of product lines should be further segregated, and tested for significant industry segments, at the level of separate products. Finally, any significant industry segments determined at the level of separate products should be segregated, and tested for significant industry segments, at the level of separate models. Similar principles should be applied in classifying and testing types of services. A profit and loss statement reflecting the related party group's provision of any product or service (or group of products or services as classified under these rules) that constitute a significant industry segment will be considered material for purposes of this subsection (e) (5). For definitions of the terms “product,” “related products or services,” “model,” and “product line,” see subsection (e) (6).
(6) Definitions. The following definitions apply for purposes of subsections (e) (2) (B) and (e) (5).
(A) U.S.-connected products or services. The term “U.S.-connected products or services” means products or services that are imported to or exported from the United States by transfers between the unitary business of which the taxpayer is a member and an excluded entity.
(B) Industry segment. An industry segment is a segment of the related party group's combined operations that is engaged in providing a product or service or a group of related products or services (as defined in subsection (e) (6) (G) primarily to customers that are not members of the related party group.
(C) Gross revenue of an industry segment. Gross revenue of an industry segment includes receipts (prior to reduction for cost of goods sold) both from sales to customers outside of the related party group and from sales or transfers to other industry segments within the related party group (but does not include sales or transfers between members of the related party group within the same industry segment). Interest from sources outside the related party group and interest earned on trade receivables between industry segments is included in gross revenue if the asset on which the interest is earned is included among the industry segment's identifiable assets, but interest earned on advances or loans to other industry segments is not included.
(D) Identifiable assets of an industry segment. The identifiable assets of an industry segment are those tangible and intangible assets of the related party group that are used by the industry segment, including assets that are used exclusively by that industry segment and an allocated portion of assets used jointly by two or more industry segments. The value of an identifiable asset may be determined using any reasonable method (such as book value or fair market value) applied consistently. Any allocation of assets among industry segments must be made on a reasonable basis, and a description of such basis must be provided. Assets of an industry segment that transfers products or services to another industry segment shall not be allocated to the receiving segment. Assets that represent part of the related party group's investment in an industry segment, such as goodwill, shall be included in the industry segment's identifiable assets. Assets maintained for general corporate purposes (that is, those not used in the operations of any industry segment) shall not be allocated to industry segments.
(E) Operating profit of an industry segment. The operating profit of an industry segment is its gross revenue (as defined in subsection (e) (6) (C)) minus all operating expenses. None of the following shall be added or deducted in computing the operating profit of an industry segment: revenue earned at the corporate level and not derived from the operations of any industry segment; general corporate expenses; interest expense; domestic and foreign income taxes; and other extraordinary items not reflecting the ongoing business operations of the industry segment.
(F) Product. The term “product” means an item of property (or combination of component parts) that is the result of a production process, is primarily sold to unrelated parties (or incorporated by the related party group into other products sold to unrelated parties), and performs a specific function.
(G) Related products or services. The term “related products or services” means groupings of products and types of services that reflect reasonable accounting, marketing, or other business practices within the industries in which the related party group operates.
(H) Model. The term “model” means a classification of products that incorporate particular components, options, styles, and any other unique features resulting in product differentiation. Examples of models are electronic products that are sold or accounted for under a single model number and automobiles sold under a single model name.
(I) Product line. The term “product line” means a group of products that are aggregated into a single classification for accounting, marketing, or other business purposes. Examples of product lines are groups of products that perform similar functions; products that are marketed under the same trade names, brand names, or trademarks; and products that are related economically (that is, having similar rates of profitability, similar degrees of risk, and similar opportunities for growth).
(f) Agreements regarding record maintenance.
(1) In general. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer may negotiate and enter into an agreement with the taxpayer that establishes the records the taxpayer must maintain or cause another to maintain, how and by whom the records must be maintained, and the period of retention for the records in order to satisfy the taxpayer's obligations under this section.
(2) Content of agreement.
(A) The agreement may include provisions that vary the rules contained in these regulations relating to the authorization of agent requirement (subsection (n)), the record maintenance requirements (subsections (c) through (g)), and the production (subsections (g) (2) and (3)) and translation (subsection (d) (3)) time periods.
(B) In addition, an agreement may include provisions for the calculation of reasonable approximations for purposes of Regulation 25137-6, Title 18, California Code of Regulations, and the records necessary to support such calculations
(C) The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer shall generally require a taxpayer to maintain or cause  another to maintain only those records specified under the safe harbor provisions of subsection (e) that permit an adequate audit of the franchise or income tax liability of the taxpayer and to provide such authorizations of agent that permit adequate access to such records. In most instances, required record maintenance for a particular taxpayer under a negotiated agreement will be less than the broad range of records described under the safe harbor provisions. For example, to the extent specific items such as apportionment factor data are determined pursuant to the provisions of Regulation section 25137-6 of Title 18 of the California Code of Regulations, which allows for the use of reasonable approximations, a taxpayer may negotiate a record maintenance agreement that limits the records required to be maintained with respect to those items to only those records which the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer agree are relevant and necessary to enable the determination of reasonable approximations.
(D) A provision specifying the effective date and the expiration date of the agreement that may vary the effective date of the regulations may be included.
(E) A taxpayer is entitled to rely upon the agreement to the extent therein provided, or until it is notified that the agreement is being terminated. Termination by notification shall only apply with respect to income years beginning subsequent to the date of notification.
(3) Circumstances of agreement. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer generally will enter into an agreement under this subsection (f) upon written request by the taxpayer when it is believed that the Franchise Tax Board has or can obtain sufficient knowledge of the business or industry of the unitary business of which the taxpayer is a part to limit the record maintenance requirement to particular records.
(4) Federal agreement on transfer pricing issues. If the Internal Revenue Service has entered into an agreement pursuant to the authority granted to it under section 6038A of the Internal Revenue Code with respect to record maintenance requirements involving transfer pricing issues which are equivalent to issues presented to the Franchise Tax Board, such an agreement shall be accepted by the Franchise Tax Board. In most circumstances, such an agreement with the Internal Revenue Service, except as might otherwise be provided in this regulation, shall not limit the duty of a taxpayer to maintain records regarding the determination of the components of any unitary business of which it might be a part, the apportionment factors of such business, or the classification of an item of income or loss as business or nonbusiness.
(g) United States maintenance of records. 
(1) General rule. Records that must be maintained under this section must be maintained within the United States, unless the conditions described in subsection (g) (2) are met.
(2) Non-U.S. maintenance requirements. A taxpayer may maintain or cause another to maintain outside the United States records not ordinarily maintained in the United States but required to be maintained in the United States under this section.
(A) However, the taxpayer must either:
1. Deliver to the Franchise Tax Board the original records (or duplicates) requested within 60 days of the request by the Franchise Tax Board for such records and provide translations, subject to the provisions of subsection (d) (3) of this regulation, of such records within 30 days of a request for translations of specific records; or
2. Within 60 days of the request of the Franchise Tax Board for such records, move the original records (or duplicates) requested to the United States, provide the Franchise Tax Board with an index to the requested records, the name and address of a custodian located within the United States having control over the records, and the address where the records are located. The taxpayer shall continue to maintain the records within the United States throughout the period of retention described in subsection (i). (For subpoena or subpoena duces tecum procedures with respect to records that have been moved to the United States, see sections 19141.6(d) (2) (A) and 19504 of the Revenue and Taxation Code.)
(B) With respect to any material profit and loss statements required to be created (either under subsection (e) or under an agreement with the Director, Multistate Audit Program Bureau Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer, unless otherwise specified, “120 days shall be substituted for “60 days” in subsection (g) (2), and labels and text with respect to such statements shall be in the English language.
(3) Scheduled production for high volume or other reasons. Upon a written request, for good cause shown, the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer may grant an extension of the time for the production or translation of the requested records. Such requests should be made within 30 days of the request for records by the Franchise Tax Board. If an extension is needed because of the volume of records requested or the amount of translation requested, the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer may allow production or translation to be scheduled over a period of time so that not all records need be produced or translated at the same time.
(4) Required U.S. maintenance. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer, with the concurrence of the Chief Counsel of the Franchise Tax Board, may require, for cause, the maintenance within the United States of any records specified in subsection (e). Such a requirement will be imposed only if there exists a clear pattern of failure to maintain or timely produce the required records. The assessment of a monetary penalty under section 19141.6(c) of the Revenue and Taxation Code and this regulation for failure to maintain records is not necessarily sufficient to require the maintenance of records within the United States.
(h) Examination and copying of records.
(1) Records shall be sorted and labeled to correspond to the categories of records which have been requested or shall be produced in the form in which they are kept in the usual course of business.
(2) Records which are compiled, stored or maintained on computers or electronic media may be provided in either printed or electronic form. If records are provided in electronic form, a taxpayer must comply with the procedures specified in Revenue Procedure 91-59, Cumulative Bulletin 1991-2 841, and provide such records on a medium which includes both the data and the program which the party maintaining the record uses to compile and analyze the data and instructions for the use of such program.
(3) Records shall be produced for examination and copying at the District Office of the Franchise Tax Board which is performing the audit of the taxpayer, at the headquarters of the taxpayer, or at any other location within the United States which is convenient to both the taxpayer and the Franchise Tax Board. Production will occur during normal business hours unless the parties mutually agree to production at other hours.
(4) Large record productions.
(A) For large record productions, a taxpayer may request reimbursement for the cost of copying records, at a rate not to exceed the cost at which the Franchise Tax Board can contract for the services of a third-party copying service, if the Franchise Tax Board will not copy, or arrange for the copying of, the records at the place of delivery.
(B) A large record production is a record production involving the copying of in excess of 1,000 pages of records provided that the auditor for the Franchise Tax Board has been allowed to examine all of the records and designate those records which are to be copied.
(5) Records which are copied for purposes of complying with the United States maintenance or records required under the provisions of subsection (g) of this regulation do not constitute a large record production.
(i) Period of retention.
(1) Except as provided in subsection (4) of this subsection, records for any income year shall be retained for the longer of:
(A) the period of time in which the taxpayer's income or franchise tax liability to this state may be subject to adjustment, including all periods in which additional income or franchise taxes may be assessed, but not to exceed eight years from the due date or extended due date of the return,
(B) the period of time during which a protest pursuant to section 19041 of the Revenue and Taxation Code with respect to such income year is pending,
(C) the period of time during which an appeal to the State Board of Equalization pursuant to sections 19045 through 19048 of the Revenue and Taxation Code with respect to such income year is pending, and
(D) the period of time during which a lawsuit for the refund of franchise or income taxes paid with respect to such income year is pending in the courts of this state or of the United States.
(2) The period of time during which a matter is pending includes the period of time between when the action is taken on a matter and when that action is final.
(3) Examples.
(A) Taxpayer A files its return for the income year ended December 31, 1994, on October 17, 1995. A does not execute any waiver of the statute of limitations with either the Franchise Tax Board or the Internal Revenue Service. The period of time for which A must maintain the required records ends on October 17, 1999.
(B) Taxpayer B files its return for the income year ended December 31, 1994, on October 17, 1995. B executes a waiver of the statute of limitations with the Internal Revenue Service which extends  the date for assessing California franchise or income tax until December 15, 2004. The period of time for which B must maintain the required records ends on October 17, 2003, eight years from the extended due date of the return.
(C) Taxpayer C files its return for the income year ended December 31, 1994, on October 17, 1995. C does not execute any waiver of the statute of limitations with either the Franchise Tax Board or the Internal Revenue Service. The Franchise Tax Board issues a timely notice of proposed assessment for the income year which C protests. After the protest is denied on November 15, 2000, C files an appeal with the State Board of Equalization and then pays the tax, converting the appeal from a denial of a protest to a claim for refund. The State Board of Equalization decides C's appeal on December 15, 2004. C files a timely petition for rehearing which is acted upon on June 15, 2005. C does not file a suit for refund from the denial of its appeal. The period of time for which C must maintain the required records ends on September 14, 2005, the day after the time period in which it could file a suit for refund pursuant to section 19384 of the Revenue and Taxation Code.
(4) A taxpayer need not maintain records described in subdivision (a) of section 19141.6 of the Revenue and Taxation Code for any period beyond that specified in subsection (i) (1) (A) of this regulation, to the extent that the records are not relevant to the subject matter of a dispute existing at the end of that period as evidenced by a pending protest, appeal, claim for refund, or suit for refund filed by the taxpayer or any member of the combined report group of which it is a member.
(j) Monetary penalty.
(1) Imposition of monetary penalty.
(A) In general. If a taxpayer fails to maintain or cause another to maintain records as required by this regulation, or, in the case of records maintained outside the United States, fails to meet the non-U.S. record maintenance requirements within the applicable time prescribed in subsection (g), a penalty of $10,000 shall be imposed for each income year with respect to which such failure occurs, subject to the approval of a majority of the Franchise Tax Board, itself.
(B) Calculation of monetary penalty. If a taxpayer fails to maintain or cause another to maintain records as required by this regulation for multiple related parties, the monetary penalty may be imposed for each failure to maintain records with respect to each related party. The monetary penalty, however, shall be imposed on a taxpayer only once for an income year with respect to each related party for a failure to maintain or cause another to maintain records, or for a failure to comply with the non-U.S. maintenance requirements described in subsection (g). Thus, unless such failures continue after notification as described in subsection (j) (4) (A), the maximum penalty under subsection (j) with respect to each related party for all such failures in an income year is $10,000. Each member of a unitary business that is a taxpayer shall be jointly and severally liable for any monetary penalty that may be imposed under this section.
(2) Reasonable cause.
(A) In general. Certain failures, including not maintaining or causing another to maintain records as required by this regulation, and not complying with the non-U.S. maintenance requirements described in subsection (g), may be excused for reasonable cause. If an affirmative showing is made that the taxpayer acted in good faith and there is reasonable cause for a failure that results in the imposition of the monetary penalty, the period during which reasonable cause exists shall be treated as ending not earlier than the last day on which reasonable cause existed for any such failure. Additionally, the beginning of the 90-day period after mailing of a notice by the Franchise Tax Board of a failure described in subsection (j) (4) (A) shall be treated as not earlier than the last day on which reasonable cause existed.
(B) Affirmative showing required.
1. In general. To show that reasonable cause exists for purposes of subsection (j) (2) (A), the taxpayer must make an affirmative showing of all the facts alleged as reasonable cause for the failure in a written statement containing a declaration that it is made under penalties of perjury. The statement must be filed with the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer, as appropriate, shall determine whether the failure was due to reasonable cause, and if so, the period of time for which reasonable cause existed. If records have been maintained as required by subsections (c) through (g), except for an omission of, or error with respect to, some of the records required or a record to be maintained, the omission or error shall not constitute a failure for purposes of section 19141.6(c) of the Revenue and Taxation Code if the taxpayer establishes to the satisfaction of the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer that it has substantially complied with the requirement to maintain records under section 19141.6 of the Revenue and Taxation Code and this regulation.
2. Small corporations. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer shall apply the reasonable cause exception liberally in the case of a small corporation that had no knowledge of the requirements imposed by section 19141.6 of the Revenue and Taxation Code, has limited presence in and contact with California, and promptly and fully complies with all requests by the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer to furnish books, records, or other relevant materials. A small bank or corporation is an entity whose gross receipts or net assets for an income year are $50,000,000 or less.
3. Facts and circumstances taken into account. The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all pertinent facts and circumstances, including the actions of related parties. Circumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of the experience and knowledge of the taxpayer. Isolated computational errors or errors in transcription generally are not inconsistent with reasonable cause and good faith. Reliance upon an information return or on the advice of a professional (such as an attorney or accountant) does not necessarily demonstrate reasonable cause and good faith. Similarly, reasonable cause and good faith is not necessarily indicated by reliance on facts that, unknown to the taxpayer, are incorrect. Reliance on an information return, professional advice or other facts, however, may constitute reasonable cause and good faith if, under all the circumstances, the reliance was reasonable.
4. Determinations of members of a combined report group. In determining whether reasonable cause exists for the failure to maintain records with respect to the determination of the combined report group of which the taxpayer is a member, the apportionment factors of such group and the business or nonbusiness income characterization of the receipts of such group, due regard will be given to the facts and circumstances nature of the determination. A consistent filing position from year to year, especially where the taxpayer's filing position has been reviewed and accepted at audit or subsequently, shall be a factor to consider in determining reasonable cause.
5. Reasonable cause includes, but is not limited to, destruction as a result of theft, riot, war or by an act of God, such as earthquake, fire, flood, tsunami, or similar natural disaster.
(C) Review of finding of no reasonable cause. A taxpayer, in addition to the right to seek a review of whether reasonable cause existed through administrative or judicial proceedings, may file a petition for review of the determination with the Franchise Tax Board, itself, not more than 60 days after it has been notified by either the Director of the Multistate Audit Program Bureau or the Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer that reasonable cause did not exist for its failure to maintain records.
(3) Failure to maintain records or to cause another to maintain records. A failure to maintain records or to cause another to maintain records is determined by the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer upon the basis of the taxpayer's and its related parties' overall compliance (including compliance with the non-U.S. maintenance requirements under subsection (g) (2)) with the record maintenance requirements. It is not an item-by-item determination. Thus, for example, a failure to maintain a single or small number of items may not constitute a failure for purposes of section 19141.6(c) of the Revenue and Taxation Code, unless the item or items are essential to the correct determination of the components of the unitary business of which the taxpayer is a part, the apportionment factors of such business, the classification of an item of income or loss as business or nonbusiness, or the determination of the attribution of income to the United States or foreign jurisdictions under section 882, Subpart F, or other similar sections of the Internal Revenue Code. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer shall notify the taxpayer in writing of any determination that it has failed to comply or failed to cause another to comply with the record maintenance requirement.
(4) Increase in penalty where failure continues after notification.
(A) In general. If any failure described in section 19141.6 of the Revenue and Taxation Code continues for more than 90 days after the day on which the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer mails notice of the failure to the taxpayer, the taxpayer shall pay a penalty (in addition to the penalty described in subsection (j) (1)) of $10,000 with respect to each related party for which a failure occurs for each 30-day period during which the failure continues after the expiration of the 90-day period. Any uncompleted fraction of a 30-day period shall count as a 30-day period for purposes of this subsection (j) (4).
(B) Cessation of accrual. The monetary penalty will cease further accrual if the taxpayer demonstrates compliance with respect to the maintenance of records (in the case of a failure to maintain records) for the income year in which the examination occurs and subsequent years to the satisfaction of the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer. The monetary penalty also will cease to accrue if requested records, kept outside the United States under the requirements of subsection (g)(2) and not produced within the time specified, are produced or moved to the United States under the rules of subsection (g)(2)(A)2.
(C) Imposition of accrued penalties. A monetary penalty which has accrued under this section may be imposed at any time after it has accrued as long as the taxpayer's return for the income year remains subject to the assessment of additional taxes.
(D) Limitation on amount of accrual. For income years beginning on or after January 1, 1994 and before December 31, 1995, the additional penalty imposed by subdivision (c) (2) of section 19141.6 of the Revenue and Taxation Code for failure to maintain or failure to cause another to maintain records as required by subdivision (a) of section 19141.6 of the Revenue and Taxation Code shall not exceed a maximum of fifty thousand dollars ($50,000) per related entity (see subsection (j) (1) (B) of this regulation).
(5) Improper use of threat of penalties.
(A) No member of the staff of the Franchise Tax Board may threaten the imposition of a penalty provided for in section 19141.6 of the Revenue and Taxation Code in an effort to obtain the agreement of a taxpayer to an audit adjustment.
(B) A taxpayer may report any threatened misuse of a penalty provided for in section 19141.6 of the Revenue and Taxation Code to the Taxpayers' Rights Advocate who shall investigate the alleged threat. The findings of the Taxpayers' Rights Advocate shall be presented in writing to the Franchise Tax Board, itself, with the copy provided to the taxpayer reporting the alleged threat.
(C) If it is concluded that the imposition of a penalty proposed under section 19141.6 of the Revenue and Taxation Code was threatened in an effort to obtain an agreement to an audit adjustment, any penalty assessed will be withdrawn and, if paid, will be refunded with appropriate interest.
(D) Negotiations entered into under the authority of section 19442 of the Revenue and Taxation Code which include a penalty or penalties assessed pursuant to section 19141.6 of the Revenue and Taxation Code shall not constitute a threat.
(k) Failure to furnish records.
(1) In general. In addition to costs and any other sanctions or penalties imposed for failure to furnish records or testimony, the rules of subsection (1) may be applied with respect to the determination of the components of any unitary business of which the taxpayer is a part, the apportionment factors of such business, the classification of an item of income or loss as business or nonbusiness, and the determination of the attribution of income to the United States or foreign jurisdictions under section 882, Subpart F, or other similar sections of the Internal Revenue Code (including any transaction engaged in by a partnership that is attributed to the unitary business of which the taxpayer is a part) if a subpoena or subpoena duces tecum is issued to the taxpayer to produce any records or testimony, either directly or as agent for any related party, to determine the correct treatment under Part 10, Part 10.2, and Part 11 of the Revenue and Taxation Code of the above described issues if--
(A) 1. The subpoena or subpoena duces tecum is not quashed in a proceeding, if any, begun under section 19141.6(d) (3) of the Revenue and Taxation Code and is not determined to be invalid in a proceeding, if any, begun under section 19504 of the Revenue and Taxation Code to enforce such subpoena or subpoena duces tecum; and
2. The taxpayer does not substantially and timely comply with the subpoena or subpoena duces tecum, and the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer has sent by certified or registered mail a notice under section 19141.6(d)(1) (C) of the Revenue and Taxation Code to the taxpayer that is has not so complied; or 
(B) The taxpayer fails to maintain or to cause another to maintain records as required by this regulation, and by reason of that failure, the subpoena or subpoena duces tecum is quashed or modified, in a proceeding, if any, under section 19141.6(d) (3) of the Revenue and Taxation Code or in a proceeding, if any, begun under section 19504 of the Revenue and Taxation Code to enforce the subpoena or subpoena duces tecum, or the taxpayer is not able to provide the records requested in the subpoena or subpoena duces tecum.
(2) Enforcement proceeding not required. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer is not required to begin an enforcement proceeding to enforce the subpoena or subpoena duces tecum in order to apply the rules of subsection (1).
(3) De minimis failure. Where the taxpayer's failure to comply with the requirement to furnish records or testimony under this section is de minimis, the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer, in the exercise of discretion, may choose not to apply the noncompliance penalty. Thus, for example, in cases where a particular record or group of records is not furnished upon request or subpoena, the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer, in their sole discretion, may choose not to apply the noncompliance penalty if they deem the record or records not to have significant or sufficient value in the determination of the correctness of the tax treatment of the components of any unitary business of which the taxpayer may be a part, the apportionment factors of such business, the classification of an item of income or loss as business or nonbusiness, and the attribution of income to the United States or foreign jurisdictions under section 882, Subpart F, or other similar sections of the Internal Revenue Code. 
(4) Suspension of statute of limitations. If the taxpayer brings an action under section 19141.6(d)(3) (A) of the Revenue and Taxation Code (proceeding to quash) or section 19141.6 (d) (3) (B) of the Revenue and Taxation Code (review of Franchise Tax Board determination of noncompliance), the running of any period of limitation under section 19057 of the Revenue and Taxation Code (relating to assessment and collection of tax) for the income year or years to which the subpoena or subpoena duces tecum that is the subject of such proceeding relates shall be suspended for the period during which such proceeding, and appeals therefrom, are pending. In no event shall any such period of limitation expire before the 90th day after the day on which there is a final determination in such proceeding.
(5) Imposition of the monetary penalties provided for in this section and the use by the Franchise Tax Board of the powers provided by this section shall not foreclose the Franchise Tax Board from recovering any costs, penalties or sanctions associated with the issuance, enforcement, or defense of a motion to quash the subpoena or subpoena duces tecum which are otherwise recoverable.
(l) Noncompliance.
(1) In general. In the case of any failure described in subsections (k) or (m), provided the requirements of section 19141.6(d) (2) are met, the rules of subsection (1) apply in addition to any other sanctions or penalties imposed. In such a case all of the following may be determined by the Franchise Tax Board--
(A) Subject to the limitations of subsection (l) (2), the components that are a part of any unitary business of which the taxpayer is a part for purposes of determining the income derived from or attributable to this state pursuant to section 25101 or section 25110 of the Revenue and Taxation Code, and
(B) The apportionment factors for purposes of Article 2 (commencing with section 25120) of Chapter 17 of Part 11 of the Revenue and Taxation Code, and
(C) Amounts that are attributable to the classification of an item of income or loss as business or nonbusiness income for purposes of Article 2 (commencing with section 25120) of Chapter 17 of Part 11 of the Revenue and Taxation Code, and
(D) the correct amount of income under section 882, Subpart F, or other similar sections of the Internal Revenue Code.
(2) Limitation on determinations of the components of a unitary business. The Franchise Tax Board shall not exercise its power to determine the components of a unitary business to add an entity or entities which were properly excluded pursuant to an election to report under section 25110 et seq. of the Revenue and Taxation Code.
(3) Determination of the items. The determination of the items described in subsections (l) (1) (A) through (D) shall be made by either the  Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer, in the sole discretion, from such knowledge, or from such information as the individual may choose to obtain through testimony or otherwise. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer shall consider any information or materials that have been submitted by the taxpayer or a related party. The Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer, however, may disregard any information, documents, or records submitted by the taxpayer or the related party if, in their sole discretion, they are deemed insufficiently probative of the relevant facts.
(4) Separate application. If the noncompliance penalty of this section applies with respect to records of a related party, it will not be applied with respect to any other related parties of the taxpayer solely upon the basis of that failure. Thus, for example, if a unitary business of which the taxpayer is a part engages in transactions with related party A and related party B, and the taxpayer does not comply with a subpoena or subpoena duces tecum for records related to the transactions between the unitary business of which the taxpayer is a part and related party A, the noncompliance penalty imposed as a result of such failure will not automatically apply to the transactions between the unitary business of which the taxpayer is a part and related party B. If a separate subpoena or subpoena duces tecum is issued for records relating to the transactions between the unitary business of which the taxpayer is a part and related party B and the taxpayer does not produce such records, the noncompliance penalty may be applied to those transactions.
(5) Review of determination. A determination made by either the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer shall be subject to the review of the Franchise Tax Board, itself, conducted in open session. To overcome a determination made by the Director, Multistate Audit Program Bureau or Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer, a taxpayer must demonstrate that the determination is arbitrary or capricious or is not supported by substantial evidence.
(6) Determination made pursuant to paragraph (d) of Section 19141.6 of the Revenue and Taxation Code may be appealed to the State Board of Equalization, in the manner and at such time, as provided by Sections 19045 and 19324 of the Revenue and Taxation Code, or may be subject of an action to recover tax, in the manner and at such time, as provided by Section 19382 of the Revenue and Taxation Code solely on the basis of whether the determinations were arbitrary or capricious, or were not supported by substantial evidence.
(7) No employee shall discuss with a taxpayer, or otherwise threaten, the potential exercise of the power to redetermine without the express prior written authorization of the Director, Multistate Audit Program Bureau or the Counsel, Multistate Tax Affairs, or a Franchise Tax Board employee designated by the Executive Officer. The power set forth in this subsection (l) shall not be exercised to make a redetermination unless prior to its exercise:
(A) the Executive Officer receives a written recommendation that the power be exercised to make the particular redetermination and the taxpayer is provided a copy of this recommendation prior to delivery to the Executive Officer,
(B) the particular redetermination is expressly approved by the Executive Officer, following notice to the taxpayer as provided in subsection (A) herein, and an opportunity to be heard by the Executive Officer is provided to the taxpayer or its designated representative,
(C) the exercise of the power and the particular redetermination are each supported by written findings of fact accompanied by detailed specifications of the evidence upon which the findings are based,
(D) a copy of the proposed findings and detailed specifications is provided to the taxpayer prior to consideration by the Executive Officer, and
(E) the taxpayer, regardless of whether it has exercised the opportunity to be heard by the Executive Officer, shall thereafter have all statutory rights of review subject to such limitations as otherwise may be established by section 19141.6 of the Revenue and Taxation Code and this regulation.
The power to make a redetermination under Revenue & Taxation Code section 19141.6(d)(1) or (d) (2) (A) (i), (iii), or (iv) shall not be exercised except in full compliance with this regulation.
(m) Failure to maintain.
(1) General. Notwithstanding any other provisions of this regulation, a taxpayer which has not maintained, or caused to be maintained, the records described in subsection (e) shall be required to maintain records in the form, manner, and location, as specifically described or enumerated by the Franchise Tax Board.
(2) Establishing failure to maintain. A failure to maintain, or cause to be maintained, shall be demonstrated by the assessment of the penalty, or penalties, provided for in subdivision (c) of section 19141.6 of the Revenue and Taxation Code. If such penalties are withdrawn, or are not sustained, the taxpayer shall be excused from its duty to maintain the records specifically described and enumerated by the Franchise Tax Board.
(3) Method of notification of duty to maintain. The taxpayer shall be notified of the duty to maintain, or to cause to be maintained, specific records by letter signed by the Executive Officer, the Chief Counsel, or an Assistant Executive Officer of the Franchise Tax Board.
(4) Period of time to which the duty to maintain applies. The duty to maintain specific records shall apply to the first income year of the taxpayer beginning after the date of the letter of notification and shall continue until the Franchise Tax Board notifies the taxpayer that it is no longer specifically required to maintain the records specified.
EXAMPLE: The taxpayer is a calendar year taxpayer. A penalty for failure to maintain records is assessed with respect to the income year 1996 on June 15, 1998. A letter notifying the taxpayer of the duty to maintain specific records is mailed on September 12, 1999. The duty to maintain the specific records exists for the income year beginning January 1, 2000.
(5) Records which can be specifically required to be maintained. The Franchise Tax Board may only require a taxpayer to maintain those records which are ordinarily created in the normal course of business, including the filing of state tax returns. Such records include, but are not limited to, profit and loss statements, balance sheets, financial consolidating workpapers if financial consolidation is a requirement of the Generally Accepted Accounting Principles of the country in which the taxpayer or the corporate owner of the taxpayer is domiciled, records for the determination of the value of each of the apportionment factors and assignment of such values to the numerator of the apportionment factors, records supporting the classification of income as business or nonbusiness, and records of all transactions with affiliates for each separate entity which is a member of the combined report group as determined by the taxpayer or as previously determined by the Franchise Tax Board in its most recent audit of the taxpayer.
(6) Penalty for failure to maintain specified records. A taxpayer which fails to maintain the records specified in the manner, form and location specified by the Franchise Tax Board shall be subject to the monetary penalties provided in subsection (j). A taxpayer may also be subject to the determinations provided for in section 19141.6(d) (2) of the Revenue and Taxation Code if the requirements of section 19141.6(d) (1) are met. A taxpayer may be excused from the penalty if it shows by clear and convincing evidence that such failure was due to reasonable cause.
(7) Review of records required to be maintained.
(A) Franchise Tax Board. A taxpayer may seek a review of the reasonableness of the list of records which it is notified are required to be maintained, the form in which they are to be maintained, and the place where they are to be maintained by petition to the Franchise Tax Board, itself. Such review shall be conducted in a regular meeting of the Franchise Tax Board, itself, conducted in open session and shall be limited only to the extent determined by the Franchise Tax Board, itself. The Franchise Tax Board, itself, shall determine what information or presentations it wishes to have made. Factors which the Board shall weigh in its consideration of the reasonableness of the records required to be maintained shall include the difficulties in obtaining necessary records encountered in prior audits of the taxpayer, the nature and extent of the records required to be maintained, the extent to which such records are normally created and maintained in the regular course of business and the availability of other alternatives. The Franchise Tax Board, itself, may modify the specification of the records to be maintained in any manner which it finds to be proper.
(B) Other review. Nothing in this section shall limit a taxpayer from seeking such other review of the requirement that it maintain specified records in the form and location specified as may be provided in law.
(n) Authorization of agent.
(1) Failure to authorize. The rules of subsection (l) shall apply to the determination of the components of any unitary business of which the taxpayer is a part, the apportionment factors of such business, the classification of an item of income or loss as business or nonbusiness, and the determination of the attribution of income to the United States or foreign jurisdictions under section 882, Subpart F, or other similar sections of the Internal Revenue Code (including any transaction engaged in by a partnership that is attributed to the unitary business of which the taxpayer is a part), unless each related party authorizes (in the manner described in subsection (n) (2)) the taxpayer to act as its limited agent solely for purposes of section 19504 with respect to any request by the Franchise Tax Board to examine records or produce testimony that may be relevant to the tax treatment of the items described above or with respect to any subpoena or subpoena duces tecum by the Franchise Tax Board for such records or testimony. The appearance of persons or the production of records by reason of the bank or corporation being an agent shall not subject those persons or records to the legal process for any purpose other than determining the correct treatment under Part 10, Part 10.2 and Part 11 of the items described in section 19141.6(a) of the Revenue and Taxation Code.
(2) Authorization by related party.
(A) In general. Upon written request by the Franchise Tax Board, a related party shall authorize the taxpayer as its agent solely for purposes of section 19504 of the Revenue and Taxation Code. The authorization must be signed by an officer of the related party possessing the authority to authorize an agent for purposes of section 416.10 of the Rules of Civil Procedure. The taxpayer will accept this appointment by providing a statement to that effect, signed by an officer of the taxpayer possessing the authority to accept such an appointment. The agency shall be effective at all times.
(B) The authorization shall be submitted in a form pre-approved by the Franchise Tax Board.
(3) Foreign affiliated groups.
(A) In general. A corporation that has effective legal authority to make the authorization of agent under subsection (n) (2) on behalf of any group of foreign related parties may execute such an authorization for any members of the group. A single authorization may be made on a consolidated basis. In such a case, the common parent must attach a schedule to the authorization of agent form stating which members of the group would otherwise be required to separately authorize the taxpayer as agent. The schedule must provide the name, address, relationship to the taxpayer, and California and U.S. taxpayer identification number, if applicable, of each member.
(B) Application of noncompliance penalty adjustment. In circumstances where a consolidated authorization of agent has been executed, if the agency authorization for any member of the group is not legally effective for purposes of section 19504 of the Revenue and Taxation Code, the noncompliance penalty adjustment under section 19141.6(d) of the Revenue and Taxation Code and subsection (l) of this regulation shall apply.
(4) Legal effect of authorization of agent. The legal consequences of a related party authorizing a taxpayer to act as its agent for purposes of section 19504 of the Revenue and Taxation Code are as follows.
(A) Agent for purposes of commencing judicial proceedings. A taxpayer that is authorized by a related party to act as its agent for purposes of section 19504 of the Revenue and Taxation Code (including service of process) is also the agent of the related party for purposes of--
1. The filing of a petition to quash under section 19141.6(d) (1) (A) of the Revenue and Taxation Code or a petition to review a Franchise Tax Board determination of noncompliance under section 19141.6(d) (1) (B) of the Revenue and Taxation Code, and
2. The commencement of a judicial proceeding to enforce a subpoena or subpoena duces tecum under section 19504 of the Revenue and Taxation Code, whether commenced in conjunction with a petition to quash under section 19141.6 (d) (3) (A) of the Revenue and Taxation Code or commenced as a separate proceeding in the Superior Courts of the Counties of Los Angeles, Sacramento and San Diego, or the City and County of San Francisco.
(B) Related party found where taxpayer found. For any purposes relating to section 19504 of the Revenue and Taxation Code (including service of process), a related party that authorizes a taxpayer to act on its behalf under section 19141.6(d) (2) (B) of the Revenue and Taxation Code and subsection (n) may be found anywhere where the taxpayer has residence or is found in California.
(5) Successors in interest. A successor in interest to a related party must execute the authorization of agent as described in subsection (n) (2).
(6) Deemed compliance.
(A) In general. In exceptional circumstances, the Franchise Tax Board may treat a taxpayer as authorized to act as agent for a related party for purposes of section 19504, California Revenue and Taxation Code, in the absence of an actual agency appointment by the related party, in circumstances where the actual absence of an appointment is reasonable. Factors to be considered include:
1. If neither the taxpayer nor the other party to the transaction knew or had reason to know that the two parties were related at the time of the transaction, and
2. The extent to which the taxpayer establishes to the satisfaction of the Franchise Tax Board that all transactions between the taxpayer and the related party were on arm's length terms and did not involve the participation of any known related party.
(B) Reason to know. Whether the taxpayer or other party had reason to know that the two parties were related at the time of the transaction will be determined by all the facts and circumstances.
(C) Effect of deemed compliance. If a taxpayer is deemed under this subsection (n) (6) to have been authorized to act as an agent for a foreign related party for purposes of section 19504, California Revenue and Taxation Code, such deemed compliance is applicable only for that particular transaction and other reportable transactions entered into prior to the time when the taxpayer knew or had reason to know that the related party, in fact, was related. The noncompliance rule of subsection (l) shall apply to any transaction subsequent to that time with the same related party, unless the related party actually authorizes the taxpayer to act as its agent under subsection (n) (1) of this section. In addition, the record maintenance requirements of subsection (g) will apply to all subsequent transactions and, with respect to prior transactions, will apply to relevant records in existance at the time the relationship was discovered.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 19141.6, Revenue and Taxation Code.
HISTORY

1. New section filed 3-28-96; operative 4-27-96 (Register 96, No. 13).
2. Editorial correction of subsections (g)(3), (k)(1), (l)(3), (m)(2) and (n)(6)(A) (Register 97, No. 2).
3. Amendment of subsections (a)(2) and (b)(9), new subsection (b)(12), amendment of subsections (c)(1)(B)4., (c)(1)(B)5. Example 3, (c)(1)(D), (e)(1)(A), (e)(2)(F)2.f., (e)(3)(A)1., (e)(6), (f)(1), (f)(2)(C), (f)(3), (g)(2)(B), (g)(3), (g)(4), (j)(2)(B)1.-2., (j)(C), (j)(C)(3), (j)(4)(A), (j)(4)(B), (j)(4)(D), (k)(1)(A)2., (k)(2), (k)(3) and (l)(3), new subsections (l)(5) and (6), subsection renumbering, and amendment of subsection (n)(3)(A) filed 1-7-97; operative 2-6-97 (Register 97, No. 2).
4. Change without regulatory effect adding new article 7 (sections 19141.6 through 19164) and relocating section 19141.6 from chapter 2.5, subchapter 21 to chapter 2.6, subchapter 4 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
5. Change without regulatory effect amending subsections (b)(3), (b)(5), (b)(9), (j)(2)(B)2. and (n)(3)(A) filed 7-5-2000 pursuant to section 100, title 1, California Code of Regulations (Register 2000, No. 27).
§19142. Additions to Tax When Combined or Consolidated Returns Are Filed.
Note     •     History

(a) Except in the case of an affiliated group as defined in Section 23361, any addition to the tax under Section 19142 for underpayment of estimated amount of the tax of a member of a group owned or controlled by the same interests as defined in Section 25105 which files a combined report for the income year shall be determined by apportioning the tax shown on the combined report to the several members of the group. The method of apportionment must be based on the ratio which the California factors bear to the total combined factors of the group. In the application of Section 19147(a) with respect to a member of the group which was included in a combined report for the year, whether or not such member is included in a combined report for the preceding income year, the “tax shown on the return” for the preceding income year shall be the portion of the tax shown on such combined report determined by apportioning such tax to the several members of the group by the procedure described above. In the application of Section 19147(b) if the taxpayer was included in a combined report for the preceding income year, the “facts shown on the return” shall be the facts shown on the combined report of the group (whether of this or another group) for the preceding income year attributable to such corporation.
(b) In the case of an affiliated group for which a consolidated or combined report or return is filed, any addition to the tax provided by Section 19142 shall be determined by reference to the tax shown on the consolidated or combined report or return.
(c) In the application of Section 19147(a) with respect to the affiliated group, described in subsection (b) of this regulation, the “tax shown on the return” shall be--
(1) If the group filed a consolidated or combined report or return for the preceding income year, the tax shown on such return, or
(2) If the group did not file a consolidated or combined report or return for the preceding income year, the aggregate of the taxes of the several members of the group shown on any separate returns of such taxpayers for the preceding income year, plus the tax shown on a consolidated or combined report or return for the preceding income year attributable to any member of the group which joined in a consolidated or combined return with another affiliated group for such preceding income year. The tax attributable to any such taxpayer which joined in a consolidated or combined report or return shall be determined by apportioning the tax shown on such consolidated or combined report or return in accordance with the procedure described in subsection (a) of this regulation.
(3) In the case of the tax imposed by Article 3 (commencing with Section 23181) of Chapter 2 of Part 11, the tax is the amount of tax shown on the return for the income year plus or minus the amount of tax payable or refundable, respectively, as shown on the notice of determination mailed by the Franchise Tax Board pursuant to Section 23186a for the income year.
(d) In the application of Section 19147(b) with respect to the affiliated group described in subsection (b) of this regulation, the “facts shown on the return” shall be
(1) If the group filed a consolidated or combined report or return for the preceding income year, the facts shown on such return, or
(2) If the group did not file a consolidated or combined report or return for the preceding income year the facts shown on the separate returns of the members of the affiliated group for the preceding income year together with the facts shown on a consolidated or combined report or return for the preceding income year attributable to any member of the group which joined in a consolidated or combined report or return with another affiliated group for such preceding income year.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Sections 19142 and 19147, Revenue and Taxation Code.
HISTORY

1. Renumbering and amendment of Section 19142-25957(b) to Section 19142 filed 11-29-82; effective thirtieth day thereafter (Register 82, No. 49).
2. Change without regulatory effect renumbering and amending former section 25951 to section 19142 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§19164. Exception to Penalty for Understatement of Tax Liability.
Note     •     History

(a) The understatement determined pursuant to this section shall not include any amounts which are attributable to the taxpayer's good faith determination, whether based on the facts or unresolved legal issues, of either:
(1) the components which are a part of one or more unitary businesses for purposes of determining the income derived from or attributable to this state pursuant to Section 25101, or
(2) amounts which are attributable to the classification of an item as business or nonbusiness income for purposes of Article 2 of Chapter 17 of this part.
(b) However, an understatement determined pursuant to this section shall include:
(1) Amounts resulting from the adjustment of any item which has been treated by the taxpayer in a manner which is inconsistent with a prior final administrative determination under this part or with a prior final decision of a court of this state or of the United States with respect to the treatment of that item under the same or substantially similar circumstances by that taxpayer or by that taxpayer's predecessor.
(2) Amounts resulting from the adjustment of any item if the taxpayer's treatment of that item differs from that previously reflected in the return or report for the immediately preceding income tax year under the same or substantially similar circumstances by the taxpayer or a predecessor of the taxpayer.
(c) For the purposes of this regulation, a prior final administrative determination shall be a decision of the Board of Equalization or Franchise Tax Board action on a protest in those cases in which the taxpayer is specifically notified as to the disposition of the particular issue.
(d) A statement in or attached to the return or report revealing the manner in which the income apportioned or allocated to California has been determined (e.g., the identification of the combined group and the treatment of intercompany transactions) shall constitute adequate disclosure for purposes of this section.
(e) Understatements shall be determined pursuant to this section commencing with respect to returns filed for income years beginning on or after January 1, 1983.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 25934.4, Revenue and Taxation Code.
HISTORY

1. New section filed 10-4-83 as an emergency; effective upon filing (Register 83, No. 41). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 2-1-84.
2. Repealed by operation of Government Code Section 11346.1(g) (Register 84, No. 13).
3. New section filed 3-21-84 as an emergency; effective upon filing (Register 84, No. 13). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 7-19-84.
4. Certificate of Compliance filed 5-30-84 (Register 84, No. 22).
5. Change without regulatory effect renumbering former section 25934.4 to section 19164 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 8. Voluntary Disclosure Program for Business Entities [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 8 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).  
Subchapter 5. Collection of Tax
Article 1. Judgment for Tax [Reserved.]
HISTORY

1. Change without regulatory effect adding new subchapter 5 (articles 1 through 6) and article 1 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 2. Lien of Tax [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 2 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 3. Warrant for Collection of Tax
§19232. Warrant for Collection of Tax.
Note     •     History

(a) In General. If any taxpayer liable to pay any tax neglects or refuses to pay such tax after an assessment becomes final, the Franchise Tax Board may proceed to collect the tax by issuing a warrant for the collection of the tax to any sheriff, constable, or marshal directing such officer to levy upon any property, or rights to property, whether real or personal, tangible or intangible, or on which there is a lien provided by Section 19203 or 19221 of the Revenue and Taxation Code resulting from the recording of an abstract of judgment or certificate of tax due for the payment of such tax. As used in this regulation the term “tax” includes any interest, additional amount, addition to tax, or assessable penalty, together with any costs and expenses that may accrue in addition thereto. For exemption of certain property from levy, see Sections 704.010 to 704.210 of the Code of Civil Procedure, as well as provisions of other codes which specifically exempt certain property from execution. Property, whether real or personal, subject to a state tax lien, which has been sold or transferred by the taxpayer, may be seized in the hands of the transferee or of any subsequent transferee. Levy of the warrant shall be made in the same manner as the levy of a writ of execution. Thus, when the Franchise Tax Board directs any sheriff, constable, marshal, or the Department of the California Highway Patrol to levy a warrant and sell the property, the Franchise Tax Board will furnish necessary instructions to the officer levying on the property at the time that it delivers the warrant.
(b) Bankruptcy or Receivership Cases. During a bankruptcy proceeding or a receivership proceeding in either a federal or state court, the assets of the taxpayer are subject to the automatic stay. Taxes cannot be collected by levy upon these assets.
(c) Successive Seizures. Whenever any property or rights to property upon which a levy has been made are not sufficient to satisfy the claim of the Franchise Tax Board for which the levy is made, the Franchise Tax Board may thereafter, and as often as may be necessary, direct any sheriff, constable, or marshal to proceed to levy in like manner upon any other property or rights to property subject to levy of the person against whom such claim exists or on which there is a lien imposed by Section 19203 or 19221 of the Revenue and Taxation Code for the payment of such claim until the amount collected from such person, together with all costs and expenses, is fully paid.
NOTE

Authority cited: Section 19053, Revenue and Taxation Code. Reference: Section 19322, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering former section 18907 to new section 19232, including amendment of section and Note, filed 6-10-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 24).
2. Change without regulatory effect adding new article 3 (section 19232) and relocating section 19232 from chapter 2.5, subchapter 21 to chapter 2.6, subchapter 5 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 4. Miscellaneous Provisions [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 4 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 5. Collection of Child Support [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 5 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 5.5. Collection of Amounts Imposed by a Court [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 5.5 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48). 
Article 6. Collections for the Department of Industrial Relations [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 6 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Subchapter 6. Overpayments and Refunds
Article 1. Claim for Refund
§19322. Refund Claim Form.
Note     •     History

(a) Grounds set forth in claim. No refund or credit will be allowed after the expiration of the statutory period of limitation applicable to the filing of a claim therefor except upon one or more of the grounds set forth in a claim filed before the expiration of such period. (See Sections 19306-19314 of the Revenue ands Taxation Code.) The claim must set forth in detail each ground upon which a refund or credit is claimed and facts sufficient to apprise the Franchise Tax Board of the exact basis thereof. The claim should be filed on Form 540X with all supporting documentation attached. A separate form should be used for each taxable year or period.
(b) Taxpayers may not, on their own initiative, offset an overpayment for one year or in one installment against taxes due for another year or in another installment. The full amount of the tax or any installment thereof for each year must be paid notwithstanding that an overpayment may have been made, unless the taxpayer has filed a claim for refund of the overpayment and has been notified that the overpayment has been credited on the tax or installment due. See Sections 19107-19110 of the Revenue and Taxation Code.
(c) Fiduciaries. If a refund claim is filed by a legal representative of a deceased individual, certified copies of the letters testamentary, letters of administration, or other similar evidence must be annexed to the claim to show the authority of the executor, administrator, or other fiduciary by whom the claim is filed. If an executor, administrator, guardian, trustee, receiver, or other fiduciary files a return and thereafter a refund claim is filed by the same fiduciary, documentary evidence to establish the legal authority of the fiduciary may be requested but need not accompany the claim, provided a statement is made in the claim showing that the return was filed by the fiduciary and that the latter is still acting. In such cases, if a refund or interest is to be paid, letters testamentary, letters of administration, or other evidence may be required, but should be submitted only upon the receipt of a specific request therefor. If a claim is filed by a fiduciary other than the one by whom the return was filed, the necessary documentary evidence should accompany the claim.
(d) Hearings. Although the law does not specifically provide for oral hearings before the Franchise Tax Board acts on claims for refund, a hearing may be arranged at such time and place as the Franchise Tax Board may determine if requested by the taxpayer.
NOTE

Authority cited: Section 19053, Revenue and Taxation Code. Reference: Section 19322, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering former section 19055 to new section 19322, including amendment of subsections (a) and (b) and Note filed filed 7-2-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 27).
2. Change without regulatory effect adding new subchapter 6 (articles 1 through 6), article 1 (sections 19322 through 19363) and relocating section 19322 from chapter 2.5, subchapter 21 to chapter 2.6, subchapter 6 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
§19363. Credits or Refunds of Overpayments of Estimated Tax.
Note     •     History

(a) General Rule. If the estimated tax required to be paid by Section 19025 for a taxable year is in excess of the tax due for that taxable year, any overpayment shall be credited or refunded as provided in Section 19301 to 19364, and the regulations issued thereunder.
(b) Date of Overpayment. There can be no refund of the estimated tax until the entire tax liability has been satisfied. Any amount paid as estimated tax for any taxable year shall be deemed to have been paid on the last day prescribed for filing the return (determined without regard to any extension of time for filing such return.)
(c) Period for Which Interest Allowable in Case of Refunds. If an overpayment of an estimated tax is refunded, interest shall be allowed from the date of the overpayment to a date determined by the Franchise Tax Board, which shall be not more than 30 days prior to the date of the refund check. The acceptance of a refund check shall not deprive the taxpayer of the right to make a claim for any additional overpayment and interest thereon, provided the claim is made within the applicable period of limitation. However, if a taxpayer does not accept a refund check, no additional interest on the amount of the overpayment included in such check shall be allowed.
(d) Period for Which Interest Allowable in Case of Credits.
If an overpayment of estimated tax is credited, interest shall be allowed from the date of the overpayment to the date of the allowance of the credit as provided by Section 19340.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 19363.
HISTORY

1. Change without regulatory effect renumbering and amending former section 26081 to section 19363 including amendment of text and adoption of Note filed 6-24-94 pursuant to section 100, title 1, California Code of Regulations (Register 94, No. 25).
2. Change without regulatory effect relocating section 19363 from chapter 2.5, subchapter 21 to chapter 2.6, subchapter 6 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 2. Suit for Tax [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 2 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 3. Suit for Refund [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 3 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 4. Recovery of Erroneous Refunds [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 4 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 5. Cancellations [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 5 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 6. Closing Agreements [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 6 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Subchapter 7. Administration of Tax
Article 1. Powers and Duties of Franchise Tax Board
§19503. Absence of Regulations.
Note     •     History

In the absence of regulations of the Franchise Tax Board and unless otherwise specifically provided, in cases where the Personal Income Tax Law or the Corporation Tax Law conform to the Internal Revenue Code, regulations under the Internal Revenue Code shall, insofar as possible, govern the interpretation of conforming state statutes, with due account for state terminology, state effective dates, and other obvious differences between state and federal law pertaining to, but not limited to, such matters as tax rates, taxable years, jurisdiction, and cross-references to other related statutes and regulations.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Sections 17024.5 and 23051.5, Revenue and Taxation Code.
HISTORY

1. New section filed 9-30-75; effective thirtieth day thereafter (Register 75, No. 40).
2. Change without regulatory effect adding new subchapter 7 (articles 1 through 3), article 1 (section 19503) and renumbering former section 26422 to section 19503 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
3. Change without regulatory effect amending section and Note filed 6-23-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 26).
Article 2. Disclosure of Information [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 2 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 3. Tax Forms [Reserved.]
HISTORY

1. Change without regulatory effect adding new article 3 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
Article 4. Tax Service Fees
§19591. Specialized Tax Service Fees.
Note     •     History

(a) In general. Revenue and Taxation Code section 19591 requires the Franchise Tax Board to impose fees for certain specialized tax services and to establish the amounts of those fees in the manner and the amounts necessary to reimburse the board for the costs of administering the specialized services, including the Franchise Tax Board's direct and indirect costs for providing specialized tax services.
(b) Specialized tax service fees and amounts. The specialized tax service fees shall be as follows:
(1) Installment payment programs.
(A) Individual taxpayers -- $34.00.
(B) Business Entity taxpayers -- $50.00.
(2) Expedited Services.
(A) Corporation revivor requests -- $56.00.
(B) Tax clearance certificate requests -- $100.00
(C) Tax-exempt status requests -- $40.00
(D) Limited Partnership revival confirmation letter requests -- $56.00
NOTE

Authority cited: Sections 19503 and 19591, Revenue and Taxation Code. Reference: Section 19591, Revenue and Taxation Code.
HISTORY

1. New article 4 (section 19591) and section filed 4-24-2006; operative 1-1-2006 pursuant to Revenue and Taxation Code section 19591(b)(2) (Register 2006, No. 17).
2. Amendment filed 9-26-2011; operative 10-26-2011 (Register 2011, No. 39).
Subchapter 8. Disposition of Proceeds [Reserved.]
HISTORY

1. Change without regulatory effect adding new subchapter 8 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48). 
Subchapter 9. Violations [Reserved.]
HISTORY

1. Change without regulatory effect adding new subchapter 9 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48). 
Subchapter 10. Res Judicata [Reserved.]
HISTORY

1. Change without regulatory effect adding new subchapter 10 (reserved) filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48). 
Chapter 2.7. Senior Citizens Property Tax Assistance
§19513. Estates Distributable to Nonresident Beneficiaries.
Note     •     History

(a) If assets of an estate are distributable to one or more nonresident beneficiaries, the final account of the fiduciary shall not be allowed by the probate court unless the fiduciary obtains from the Franchise Tax Board and files with the court a certificate to the effect that all taxes imposed by the Personal Income Tax Law upon the estate or decedent which have become payable have been paid, and that all taxes which may become due are secured by bond, deposit or otherwise.
(b) Subsection (a) only applies if the fair market value of the assets of the estate at the death of the decedent exceeds one million dollars ($1,000,000) and the fair market value of the assets distributable to one or more nonresident beneficiaries exceeds two hundred and fifty thousand dollars ($250,000).
NOTE

Authority cited: Section 19053, Revenue and Taxation Code. Reference: Section 19513, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering former section 19262 to new section 19513, including amendment of Note filed 8-14-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 33).
2. Editorial action removing repealed sections19501(a) through 19507(e) (Register 98, No. 48). For prior history, see Register 79, No. 33.
3. Amendment of subsection (b) filed 11-20-2001; operative 12-20-2001 (Register 2001, No. 47).
4. Amendment relocating section 19513 from chapter 2.7 to chapter 2.6, subchapter 7, article 1 filed 4-24-2006; operative 1-1-2006 pursuant to Revenue and Taxation Code section 19591(b)(2) (Register 2006, No. 17).
Article 2. Property Tax Assistance
§19524. Reporting on Magnetic Media.
Note     •     History

The standards for determining which returns shall be filed on magnetic media or in other machine-readable form shall be the standards adopted by the U.S. Treasury in Regulation Section 301.6011-2 (26 CFR 301.6011-2). This regulation shall apply to returns filed after December 31, 1986.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 19524, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect amending and renumbering former section 19272 to section 19524 filed 8-5-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 32). For prior history, see Register 79, No. 33.
§19526. Gross Household Income Restriction.
Note     •     History

NOTE

Authority cited: Section 20642, Revenue and Taxation Code. Reference: Section 20642, Revenue and Taxation Code.
HISTORY

1. Repealer filed 8-17-79; effective thirtieth day thereafter (Register 79, No. 33).
Article 3. Administration
§19532(a). Period for Filing Claims.
Note     •     History

NOTE

Authority cited: Section 20642, Revenue and Taxation Code. Reference: Section 20642, Revenue and Taxation Code.
HISTORY

1. Repealer filed 8-17-79; effective thirtieth day thereafter (Register 79, No. 33).
§19532(b). Granting of Assistance.
Note     •     History

NOTE

Authority cited: Section 20642, Revenue and Taxation Code. Reference: Section 20642, Revenue and Taxation Code.
HISTORY

1. Repealer filed 8-17-79; effective thirtieth day thereafter (Register 79, No. 33).
§19532(c). Extension of Period for Filing Clams.
Note     •     History

NOTE

Authority cited: Section 20642, Revenue and Taxation Code. Reference: Section 20642, Revenue and Taxation Code.
HISTORY

1. Repealer filed 8-17-79; effective thirtieth day thereafter (Register 79, No. 33).
§19532(d). Proof of Age.
Note     •     History

NOTE

Authority cited: Section 20642, Revenue and Taxation Code. Reference: Section 20642, Revenue and Taxation Code.
HISTORY

1. Repealer filed 8-17-79; effective thirtieth day thereafter (Register 79, No. 33).
§19540(a). Administrative and Legal Remedies Available to Persons Aggrieved by Denial of Claims.
Note     •     History

NOTE

Authority cited: Section 20642, Revenue and Taxation Code. Reference: Section 20642, Revenue and Taxation Code.
HISTORY

1. Repealer filed 8-17-79; effective thirtieth day thereafter (Register 79, No. 33).
§19540(b). Appeals to State Board of Equalization.
Note     •     History

NOTE

Authority cited: Section 20642, Revenue and Taxation Code. Reference: Section 20642, Revenue and Taxation Code.
HISTORY

1. Repealer filed 8-17-79; effective thirtieth day thereafter (Register 79, No. 33).
§19540(c). Suits in Court.
Note     •     History

NOTE

Authority cited: Section 20642, Revenue and Taxation Code. Reference: Section 20642, Revenue and Taxation Code.
HISTORY

1. Repealer filed 8-17-79; effective thirtieth day thereafter (Register 79, No. 33).
Chapter 2.7. Senior Citizens Property Tax Assistance
HISTORY

1. Amendment relocating section 19513 from chapter 2.7 to chapter 2.6, subchapter 7, article 1, deleting article 2 and article 3 headings and renumbering former section 19524 to section 18409 filed 4-24-2006; operative 1-1-2006 pursuant to Revenue and Taxation Code section 19591(b)(2) (Register 2006, No. 17). For prior history of sections 19526-19540(c), see Register 79, No. 33.
§20501. “Medically Incapacitated” Defined.
Note     •     History

For purposes of Revenue and Taxation Code section 20563, the term “medically incapacitated” means an individual being unable to attend to his or her own personal needs and activities of daily life, including, but not limited to, matters such as their own personal hygiene or nutritional needs.
NOTE

Authority cited: Sections 19503 and 20642, Revenue and Taxation Code. Reference: Sections 20501 and 20563, Revenue and Taxation Code.
HISTORY

1. New section filed 3-15-2005; operative 4-14-2005 (Register 2005, No. 11).
§20502. “Substantially Equivalent to Property Taxes” Defined.
Note     •     History

For purposes of Revenue and Taxation Code section 20509, subdivision (a), the term “substantially equivalent to property taxes” means payments made in lieu of property taxes, as specified in Revenue and Taxation Code section 20509, subdivision (a), must be at least 80 percent of the amount of property taxes assessed on a property of comparable assessed value without regard to any granted or applicable exemptions or exclusions granted by the property taxing authority.
NOTE

Authority cited: Sections 19503 and 20642, Revenue and Taxation Code. Reference: Sections 20502 and 20509(a), Revenue and Taxation Code.
HISTORY

1. New section filed 3-15-2005; operative 4-14-2005 (Register 2005, No. 11).
§20503. Submission of Property Tax Bill.
Note     •     History

For purposes of Revenue and Taxation Code section 20561, the following rules shall apply:
(a) In the first year for which a claim for assistance is filed, the claimant that owns a residential dwelling must submit with the claim form a copy of the property tax bill for the residential dwelling for the qualifying year for which the assistance is claimed.
(b) For all subsequent years for which the same owner files a claim for assistance with respect to the same property, no property tax bill need be filed.
(c) In any case where there has been a change of residence, change of ownership after the tax bill referenced under subsection (a) was submitted, or upon written request of the Franchise Tax Board to the claimant that such a bill be submitted for verification purposes, the rules of subsections (a) and (b) of this regulation shall not apply.
(d) The provisions of this regulation shall apply to all claims for assistance filed on or after July 1, 2003, for claims relating to the 2004 claim year.”
NOTE

Authority cited: Sections 19503, 20561(c) and 20642, Revenue and Taxation Code. Reference: Sections 20503 and 20561(c), Revenue and Taxation Code.
HISTORY

1. New section filed 3-15-2005; operative 4-14-2005 (Register 2005, No. 11).
§20504. Proof of Disability.
Note     •     History

(a) For purposes of Revenue and Taxation Code section 20561, a claimant that claims to be eligible based on being under age 62 and disabled but not blind shall submit with the claim form proof of disability in one of the following forms:
(1) Medicare Card, if receiving Social Security or Supplement Security Income benefits as a disabled person;
(2) Social Security Award Letter (the letter notifying the claimant that they are qualified for Social Security or Supplemental Security Income benefits as a disabled person);
(3) Supplement Security Income payment decision; or
(4) Documentation accepted by a local, state, or federal agency to support its determination of disability, as defined in Welfare and Institutions Code section 12050.
NOTE

Authority cited: Sections 19503, 20561(c) and 20642, Revenue and Taxation Code. Reference: Sections 20504 and 20561(c), Revenue and Taxation Code.
HISTORY

1. New section filed 3-15-2005; operative 4-14-2005 (Register 2005, No. 11).
§20505. Opportunity To Cure Deficiency.
Note     •     History

If a claimant fails to provide any of the documentation as required by sections 20501 through 20504 with the claim form, the Franchise Tax Board will notify the claimant of the defect and allow the claimant a reasonable opportunity to provide the documentation before the claim is denied.
NOTE

Authority cited: Sections 19503, 20561(c) and 20642, Revenue and Taxation Code. Reference: Sections 20505 and 20561(c), Revenue and Taxation Code.
HISTORY

1. New section filed 3-15-2005; operative 4-14-2005 (Register 2005, No. 11).
§20561. Limitations on Homeowners and Renters Property Tax Assistance.
Note     •     History

(a) All eligibility requirements contained herein shall be applied without regard to the race, creed, color, gender, religion, or national origin of the individual applying for the public benefit related to Homeowners and Renters Property Tax Assistance. 
(b) Pursuant to Section 411 of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (Pub. L. No. 104-193 (PRWORA)), (8 U.S.C. § 1621), and notwithstanding any other provision of the Senior Citizens Homeowners and Renters Property Tax Law, aliens who are not qualified aliens, nonimmigrant aliens under the Immigration and Nationality Act (INA) (8 U.S.C. § 1101 et seq.), or aliens paroled into the United States under Section 212(d)(5) of the INA (8 U.S.C. § 1182(d)(5)) for less than one year, are not eligible to receive Homeowners and Renters Property Tax Assistance as set forth in Part 10.5 of the Revenue and Taxation Code. For purposes of this section, any assistance or payment provided under Part 10.5, Chapter 1, the Senior Citizens Homeowners and Renters Property Tax Law, is a State public benefit, as that term is used in Section 411 of PRWORA.
(c) A qualified alien is an alien who, at the time he or she applies for, receives, or attempts to receive a public benefit, is, under Section 431(b) and (c) of the PWRORA (8 U.S.C. § 1641(b) and (c)), any of the following:
(1) An alien who is lawfully admitted for permanent residence under the INA (8 U.S.C. § 1101 et seq.).
(2) An alien who is granted asylum under Section 208 of the INA (8 U.S.C. § 1158).
(3) A refugee who is admitted to the United States under Section 207 of the INA (8 U.S.C. § 1157).
(4) An alien who is paroled into the United States under Section 212(d)(5) of the INA (8 U.S.C. § 1182(d)(5)) for a period of at least one year.
(5) An alien whose deportation is being withheld under Section 243(h) of the INA (8 U.S.C. § 1253(h)) (as in effect immediately before the effective date of Section 307 of division C of Public Law 104-208) or Section 241(b)(3) of such Act (8 U.S.C. § 1251(b)(3)) (as amended by Section 305(a) of division C of Public Law 104-208).
(6) An alien who is granted conditional entry pursuant to Section 203(a)(7) of the INA as in effect prior to April 1, 1980. (8 U.S.C.  § 1153(a)(7)) (See editorial note under 8 U.S.C. § 1101, “Effective Date of 1980 Amendment.”)
(7) An alien who is a Cuban or Haitian entrant (as defined in Section 501(e) of the Refugee Education Assistance Act of 1980 (8 U.S.C. § 1522 note)).
(8) An alien who meets all of the conditions of subparagraphs (A), (B), (C), and (D) below:
(A) The alien has been battered or subjected to extreme cruelty in the United States by a spouse or a parent, or by a member of the spouse's or parent's family residing in the same household as the alien, and the spouse or parent of the alien consented to, or acquiesced in, such battery or cruelty. For purposes of this subsection, the term “battered or subjected to extreme cruelty” includes, but is not limited to, being the victim of any act or threatened act of violence, including any forceful detention, which results or threatens to result in physical or mental injury. Rape, molestation, incest (if the victim is a minor), or forced prostitution shall be considered acts of violence.
(B) There is a substantial connection between such battery or cruelty and the need for the benefits to be provided in the opinion of the Franchise Tax Board. For purposes of this subsection, the following circumstances demonstrate a substantial connection between the battery or cruelty and the need for the benefits to be provided:
1. The benefits are needed to enable the alien to become self-sufficient following separation from the abuser.
2. The benefits are needed to enable the alien to escape the abuser and/or the community in which the abuser lives, or to ensure the safety of the alien from the abuser.
3. The benefits are needed due to a loss of financial support resulting from the alien's separation from the abuser.
4. The benefits are needed because the battery or cruelty, separation from the abuser, or work absences or lower job performance resulting from the battery or extreme cruelty or from legal proceedings relating thereto (including resulting child support, child custody, and divorce actions) cause the alien to lose his or her job or to earn less or to require the alien to leave his or her job for safety reasons.
5. The benefits are needed because the loss of a dwelling or source of income or fear of the abuser following separation from the abuser jeopardizes the alien's ability to care for his or her children (e.g., inability to house, feed, or clothe children or to put children into day care for fear of being found by the abuser).
(C) The alien has an approved petition or has a petition pending which sets forth a prima facie case for:
1. status as a spouse or child of a United States citizen pursuant to clause (ii), (iii), or (iv) of Section 204(a)(1)(A) of the INA (8 U.S.C.  § 1154(a)(1)(A)(ii), (iii) or (iv)),
2. classification pursuant to clause (ii) or (iii) of Section 204(a)(1)(B) of the INA (8 U.S.C. § 1154 a)(1)(B)(ii) or (iii)), 
3. suspension of deportation and adjustment of status pursuant to section 244(a)(3) of the INA (8 U.S.C. § 1254) as in effect prior to April 1, 1997 [Pub. L. 104-208. sec. 501 (effective September 30, 1996, pursuant to sec. 591), Pub. L. 104-208. sec. 304 (effective April 1, 1997, pursuant to sec. 309): Pub. L. 105-33, sec. 5581 (effective pursuant to sec. 5582)] (incorrectly codified as “cancellation of removal under section 240A of such Act [8 USCS sec. 1229b] (as in effect prior to April 1, 1997)”,
4. status as a spouse or child of a United States citizen pursuant to clause (i) of Section 204(a)(1)(A) of the INA (8 U.S.C. § 1154(a)(1)(A)(i)) or classification pursuant to clause (i) of Section 204(a)(1)(B) of the INA (8 U.S.C. § 1154(a)(1)(B)(i)), or
5. cancellation of removal pursuant to section 240A(b)(2) of the INA (8 U.S.C. § 1229b(b)(2)).
(D) For the period for which benefits are sought, the individual responsible for the battery or cruelty does not reside in the same household or family eligibility unit as the individual subjected to the battery or cruelty.
(9) An alien who meets all of the conditions of subparagraphs (A), (B), (C), (D) and (E) below:
(A) The alien has a child who has been battered or subjected to extreme cruelty in the United States by a spouse or a parent of the alien (without the active participation of the alien in the battery or cruelty), or by a member of the spouse's or parent's family residing in the same household as the alien, and the spouse or parent consented or acquiesced to such battery or cruelty. For purposes of this subsection, the term “battered or subjected to extreme cruelty” includes, but is not limited to being the victim of any act or threatened act of violence including any forceful detention, which results or threatens to result in physical or mental injury. Rape, molestation, incest (if the victim is a minor), or forced prostitution shall be considered acts of violence.
(B) The alien did not actively participate in such battery or cruelty.
(C) There is a substantial connection between such battery or cruelty and the need for the benefits to be provided in the opinion of the Franchise Tax Board. For purposes of this subsection, the following circumstances demonstrate a substantial connection between the battery or cruelty and the need for the benefits to be provided:
1. The benefits are needed to enable the alien's child to become self-sufficient following separation from the abuser.
2. The benefits are needed to enable the alien's child to escape the abuser and/or the community in which the abuser lives, or to ensure the safety of the alien's child from the abuser.
3. The benefits are needed due to a loss of financial support resulting from the alien's child's separation from the abuser.
4. The benefits are needed because the battery or cruelty, separation from the abuser, or work absences or lower job performance resulting from the battery or extreme cruelty or from legal proceedings relating thereto (including resulting child support, child custody, and divorce actions) cause the alien's child to lose his or her job or to earn less or to require the alien's child to leave his or her job for safety reasons.
5. The benefits are needed because the loss of a dwelling or source of income or fear of the abuser following separation from the abuser jeopardizes the alien's child's ability to care for his or her children (e.g., inability to house, feed, or clothe children or to put children into a day care for fear of being found by the abuser).
(D) The alien meets the requirements of subsection (c)(8)(C) above.
(E) For the period for which benefits are sought, the individual responsible for the battery or cruelty does not reside in the same household or family eligibility unit as the individual subjected to the battery or cruelty.
(10) An alien child who meets all of the conditions of subparagraphs (A), (B), and (C) below:
(A) The alien child resides in the same household as a parent who has been battered or subjected to extreme cruelty in the United States by that parent's spouse or by a member of the spouse's family residing in the same household as the parent and the spouse consented or acquiesced to such battery or cruelty. For purposes of this subsection, the term “battered or subjected to extreme cruelty” includes, but is not limited to, being the victim of any act or threatened act of violence including any forceful detention, which results or threatens to result in physical or mental injury. Rape, molestation, incest (if the victim is a minor), or forced prostitution shall be considered acts of violence.
(B) There is a substantial connection between such battery or cruelty and the need for the benefits to be provided in the opinion of the Franchise Tax Board. For purposes of this subsection, the following circumstances demonstrate a substantial connection between the battery or cruelty and the need for the benefits to be provided:
1. The benefits are needed to enable the alien child's parent to become self-sufficient following separation from the abuser.
2. The benefits are needed to enable the alien child's parent to escape the abuser and/or the community in which the abuser lives, or to ensure the safety of the alien child's parent from the abuser.
3. The benefits are needed due to a loss of financial support resulting from the alien child's parent's separation from the abuser.
4. The benefits are needed because the battery or cruelty, separation from the abuser, or work absences or lower job performance resulting from the battery or extreme cruelty or from legal proceedings relating thereto (including resulting child support, child custody, and divorce actions) cause the alien child's parent to lose his or her job or to earn less or to require the alien child's parent to leave his or her job for safety reasons.
5. The benefits are needed because the loss of a dwelling or source of income or fear of the abuser following separation from the abuser jeopardizes the alien child's parent's ability to care for his or her children (e.g., inability to house, feed, or clothe children or to put children into a day care for fear of being found by the abuser).
(C) The alien child meets the requirements of subsection (c)(8)(C) above.
(d) For purposes of this section, “nonimmigrant” is defined the same as in Section 101(a)(15) of the INA (8 U.S.C. § 1101(a)(15)).
(e) For purposes of establishing eligibility for Homeowners and Renters Property Tax Assistance under Part 10.5, Chapter 1, of the Revenue and Taxation Code, all of the following shall apply:
(1) The applicant must declare himself or herself to be a citizen of the United States, a qualified alien under subsection (c), a nonimmigrant alien under subsection (d), or an alien paroled into the United States for less than one year under Section 212(d)(5) of the INA (8 U.S.C.  § 1182(d)(5)). The applicant shall declare that status in a claim for homeowner's or renter's assistance Form 9000 or 9000R in such manner and form as the Franchise Tax Board may prescribe. This form shall contain a declaration under penalty of perjury, which must be executed by the applicant. The Franchise Tax Board may require any other evidence, documents or information from the applicant it deems relevant as may be necessary to carry out the provisions of PRWORA, this Section and Part 10.5 of the Revenue and Taxation Code, as well as to verify information and declaration(s) set forth in the Form 9000 or 9000R.
(2) If requested by the Franchise Tax Board, the applicant must present documents of a type acceptable to the Immigration and Naturalization Services (INS) which serve as reasonable evidence of the applicant's declared status. The Franchise Tax Board may identify acceptable documents within forms and instructions.
(3) The Franchise Tax Board may compare and verify information and documents, including declared status, with information and documents obtained by any other Federal, state or local governmental agency, department or administrative body as it determines necessary to accomplish the purposes of PRWORA, and this verification shall serve as reasonable evidence of the alien's declared immigration status. If an applicant has been verified by another Federal, state or local governmental agency, department or administrative body to be a United States citizen or qualified alien, nonimmigrant alien under the Immigration and Nationality Act (INA) (8 U.S.C. § 1101 et seq.), or an alien paroled into the United States under Section 212(d)(5) of the INA (8 U.S.C. § 1182(d)(5)) for less than one year, the Franchise Tax Board, upon receipt or confirmation of that determination from the other agency, department or administrative body, may, in its discretion, rely on that determination for establishing eligibility of that applicant under PRWORA with respect to Homeowners and Renters Property Tax Assistance. For purposes of this Section, a state agency shall have the same meaning as set forth in paragraph (2) of subdivision (b) of Section 11346.3 of the Government Code. 
(4) Where authorized by the INS and following a determination of the Franchise Tax Board to use INS, the documentation presented by an alien as reasonable evidence of the alien's declared immigration status shall be submitted to the INS for verification through the Systematic Alien Verification for Entitlements (SAVE) system procedures as follows:
(A) Unless the primary SAVE system is unavailable for use, the primary SAVE system verification shall be used to access the biographical/immigration status computer record contained in the Alien Status Verification Index maintained by the INS when the Franchise Tax Board elects to utilize the INS to verify documentation and alien status with respect to any alien. The Franchise Tax Board may utilize another state agency as an intermediary to obtain information from the INS to verify the status of any alien who claims to be a qualified alien and who presents an INS-issued document that contains an alien registration or alien admission number.
(B) In any of the following cases, the secondary SAVE system verification procedure may be used to forward copies of original INS documents evidencing an alien's status as a qualified alien, as a nonimmigrant alien under the INA, or as an alien paroled into the United States under Section 212(d)(5) of the INA (8 U.S.C. § 1182(d)(5)) for less than one year:
1. The primary SAVE system is unavailable for verification following the determination of the Franchise Tax Board to utilize the INS to verify documentation.
2. A primary check of the Alien Status Verification Index instructs the Franchise Tax Board to “institute secondary verification.”
3. The document presented indicates immigration status but does not include an alien registration or alien admission number.
4. The Alien Status Verification Index record includes the alien registration or admission number on the document presented by the alien but does not match other information contained in the document.
5. The document is suspected to be counterfeit or to have been altered.
6. The document includes an alien registration number in the A60 000 000 (not yet issued) or A80 000 000 (illegal border crossing) series.
7. The document is a fee receipt from INS for replacement of a lost, stolen, or unreadable INS document.
8. The document is one of the following: an INS Form I-181b notification letter issued in connection with an INS Form I-181 Memorandum of Creation of Record of Permanent Residence, an Arrival-Departure Record (INS Form I-94) or a foreign passport stamped “PROCESSED FOR I-551, TEMPORARY EVIDENCE OF LAWFUL PERMANENT RESIDENCE” that INS issued more than one year before the date of application for Homeowners and Renters Property Tax Assistance.
(5) Where verification is not accomplished as set forth in Subsections (3) or (4) above, if the documents presented do not on their face reasonably appear to be genuine or to relate to the individual presenting them, the government entity that originally issued the document shall be contacted for verification. With regard to naturalized citizens and derivative citizens presenting certificates of citizenship and aliens, the INS is the appropriate government entity to contact for verification. The Franchise Tax Board, or any party with which it may rely upon for assistance in complying with this Section and PRWORA, shall request verification by the INS by filing INS Form G-845 with copies of the pertinent documents provided by the applicant with the local INS office. If the applicant has lost his or her original documents, or presents expired documents or is unable to present any documentation evidencing his or her immigration status, the applicant shall be referred to the local INS office to obtain documentation.
(6) If the INS advises that the applicant has citizenship status or immigration status which makes him or her a qualified alien, a nonimmigrant alien under the INA, or alien paroled for less than one year under section 212(d)(5) of the INA, the INS verification shall be accepted. If the INS advises that it cannot verify that the applicant has citizenship status or an immigration status that makes him or her a qualified alien, a nonimmigrant alien under the INA, or an alien paroled for less than one year under section 212(d)(5) of the INA, benefits shall be denied and the applicant notified pursant to the regular procedures of his or her rights to appeal the denial of benefits under the Senior Citizens Homeowners and Renters Property Tax Law.
(7) Provided that the alien has submitted a completed claim for homeowner's or renter's assistance Form 9000 or 9000R signed under penalty of perjury, eligibility for Homeowners and Renters Property Tax Assistance shall not be denied, reduced or terminated while the status of the alien is verified. State employees may review documents pertaining to citizenship.
(8) The Franchise Tax Board, in its discretion with respect to any applicant, may accept photocopies of documents pertaining to declared alienage or citizenship.  
(f) Pursuant to Section 434 of the PRWORA (8 U.S.C. § 1644), where the Franchise Tax Board reasonably believes that an alien is unlawfully in the State based on the failure of the alien to provide reasonable evidence of the alien's declared status, after an opportunity to do so, said alien shall be reported to the Immigration and Naturalization Service.
(g) Any applicant who is determined to be ineligible pursuant to subsection (b) and (e) or who was made eligible for Homeowners and Renters Property Tax Assistance whose services are terminated, suspended, or reduced pursuant to subsections (b) and (e), is entitled to a hearing, pursuant to Section 20645 of the California Revenue and Taxation Code.
NOTE

Authority cited: Sections 19503, 20642 and 20645, Revenue and Taxation Code.  Reference: Sections 20541, 20561 and 20645, Revenue and Taxation Code; and 8 U.S.C. §§ 1621, 1641 and 1642.
HISTORY

1. New section filed 3-20-98 as an emergency; operative 4-1-98 (Register 98, No. 12). A Certificate of Compliance must be transmitted to OAL by 7-30-98 or emergency language will be repealed by operation of law on the following day.
2. Certificate of Compliance as to 3-20-98 order, including amendment of subsection (c)(8)(B)4., transmitted to OAL 7-7-98 and filed 8-18-98 (Register 98, No. 34).
Chapter 3. Bank and Corporation Tax

(Originally Printed June, 1952)

Preface
The Bank and Corporation Tax Law (containing the former provisions of the Bank and Corporation Franchise Tax Act and the Corporation Income Tax Act) was enacted by Chapter 557, Statutes of 1949, and became effective July 1, 1951, as Part 11 of Division 2 of the Revenue and Taxation Code. The original provisions of the predecessor acts are continued as a part of the Revenue and Taxation Code as though they had been in code form since the date of their enactment.
In the codification of the prior acts, duplicating sections applicable to both acts were eliminated. In code form all sections are applicable to tax payers under either taxing chapter (2 or 3) unless specifically limited in application. These regulations are equally applicable to taxpayers under either Chapter 2 or Chapter 3, unless similarly limited by specific language in the regulation.
The following regulations are applicable in the interpretation of the sections of the Bank and Corporation Tax Law or comparable provisions of the prior acts to which such regulations apply and during the periods such provisions of that law or prior acts were in effect.
For comparable federal regulations see table in Appendix.
The regulations issued by this department and other state agencies are compiled by the Office of Administrative Hearings and published in the California Administrative Code and Register; the regulations contained in this register are distributed by the Office of Procurement, Documents Section 8141 Elder Creek Road, Sacramento, California 95820.
NOTE

Authority cited for Subchapter 3: Section 25422, Revenue and Taxation code.
HISTORY

1. Former Bank and Corporation Franchise Tax and Corporation Income Tax regulations were originally printed 4-3-48 as Subchapter 1.5; repealer thereof was filed 2-18-52 as an emergency designated to be effective on the thirtieth day thereafter and declared not applicable to any period prior to 7-1-51 (Register 27, No. 4).
2. Subchapter 3 filed 6-28-52 as an emergency; designated to be effective 7-1-51 (Register 29, No. 1).
3. Repealer of chapter 3 (subchapters 1-15, sections 23002-26422). For prior history, see Registers 70, No. 12; 71, No. 2; 71, No. 30; 73 No. 28; and 80, No. 8.
Chapter 3.1. Taxpayer Bill of Rights [Reserved.]
HISTORY

1. Change without regulatory effect adding new chapter 3.1 (reserved) filed 11-23-98 pursuant to Government Code section 11343.4(d) (Register 98, No. 48). 
Chapter 3.5. Bank and Corporation Tax  (Taxable Years Beginning After 12-31-54)
Preface
The Bank and Corporation Tax Law (containing the former provisions of the Bank and Corporation Franchise Tax Act and the Corporation Income Tax Act) was enacted by Chapter 557, Statutes of 1949, and became effective July 1, 1951, as Part II of Division 2 of the Revenue and Taxation Code. The original provisions of the predecessor acts are continued as a part of the Revenue and Taxation Code as though they had been in code form since the date of their enactment.
In the codification of the prior acts, duplicating sections applicable to both acts were eliminated. In code form all sections are applicable to taxpayers under either taxing chapter (2 or 3) unless specifically limited in application.. These regulations are equally applicable to taxpayers under either Chapter 2 or Chapter 3, unless similarly limited by specific language in the regulation.
In 1955 the Legislature (Chapter 938 and 1590) completely revised the taxing provisions of the Bank and Corporation Tax Law so that the language of the sections adopted and their sequence would conform to the Internal Revenue Code of 1954. However, in enacting such law many provisions of he Internal Revenue code were omitted. Also as a part of such revision the law which was in effect prior to January 1, 1955, was designated the “Bank and Corporation Tax Law of 1954.” Accordingly, when referring to the law which was in effect prior to January 1, in order to distinguish between existing law and former law, after the section number add, “Bank and Corporation Tax Law of 1954.”
The following regulations are applicable to income years commencing after December 31, 1954, except as otherwise specifically stated in the text of the regulations. The regulation numbers are the same as the sections of the Bank and Corporation Tax Law which are being implemented, interpreted or made specific.
The regulations issued by this department and other state agencies are now being published by the Division of Administrative Procedure in the California Administrative Code and Register; the regulations issued by this department relating to the Bank and Corporation Tax Law are contained in Subchapter 3.5 of Chapter 3 of Title 18 of the California Administrative Code and are distributed by the Printing Division, Documents Section, North Seventh and Richards Boulevard, Sacramento, California.
The regulations issued by the department relating to the “Bank and Corporation Tax Law of 1954,” are contained in Subchapter 3 of Chapter 3 of Title 18 of the California Administrative Code.
Subchapter 1. General Provisions and Definitions
Article 1. General Provisions [Repealed]
NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New Section filed 9-19-69; effective thirtieth day thereafter (Register 69, No. 38).
2. Repealer of Article 1 (Section 23002) filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
Article 2. Definitions
§23037. “Taxpayer,” Defined.
Note     •     History

The term “taxpayer” includes persons and banks subject to tax under Chapter 2, Chapter 2.5 or Chapter 3 of the Bank and Corporation Tax Law.
“Person” includes any association, corporation, business trust, or organization of any kind. It also includes trustee, trustee in bankruptcy, receiver, executor, administrator, or assignee.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23037, Revenue and Taxation Code.
HISTORY

1. New section filed 9-19-69; effective thirtieth day thereafter (Register 69, No. 38).
2. Amendment filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23038(a). “Corporation” Defined.
Note     •     History

(1) Scope of Definition. The term “corporation” applies to all corporations, other than corporations specifically exempt under Article 1, Chapter 4, or under the provisions of Article XIII of the Constitution of the State of California. Corporations and limited liability companies classified as an association for California income and franchise tax purposes which are qualified to do or are “doing business” in this State, and domestic corporations not otherwise taxed under this part, are subject to the tax imposed under Chapter 2. See Sections 23028 and 23151-23155 of the Revenue and Taxation Code and Reg. §23151. Unless specifically exempted, foreign corporations engaged exclusively in interstate commerce, holding companies and unincorporated associations are subject to the tax imposed under Chapter 3 on income derived from sources within this State. See Reg. §23501 and Reg. §23504.
Generally, banks are included in the definition of “corporation,” but they are taxable in a different manner. The law contains special provisions for determining and computing the rate and applicable provisions.
(2) Corporations Under Chapter 3. For the purpose of the tax imposed under Chapter 3 the term “corporation” is not limited to incorporated bodies, nor does it include all incorporated bodies. Banking associations are excluded from the meaning of the term, and associations, business trusts, and other business entities classified as associations under Regs. §23038(b)-1 to §23038(b)-3 are included in its meaning.
(3)(A) Ordinary trusts. In general, the term “trust,” as used in the Personal Income Tax Law, refers to an arrangement created by a will or by an inter vivos declaration whereby trustees take title to the property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery and probate courts. The beneficiaries of such a trust generally do no more than accept the benefits thereof and are not the voluntary planners or creators of the trust arrangement. However, the beneficiaries of such a trust may be the persons who create it and it will be recognized as a trust under the Revenue and Taxation Code if it was created for the purpose of protecting or conserving the trust property for beneficiaries who stand in the same relation to the trust as they would if the trust had been created by others for them. Generally speaking, an arrangement will be treated as a trust under the Revenue and Taxation Code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit.
(B) Business trusts. There are arrangements which are known as trusts because the legal title to property is conveyed to trustees for the benefit of beneficiaries, but which are not classified as trusts for purposes of the Revenue and Taxation Code because they are not simply arrangements to protect or conserve the property for beneficiaries. These trusts, which are often known as business or commercial trusts, generally are created by the beneficiaries simply as a device to carry on a profit-making business which normally would have been carried on through business organizations that are classified as corporations or partnerships under the Revenue and Taxation Code. However, the fact that the corpus of the trust is not supplied by the beneficiaries is not sufficient reason in itself for classifying the arrangement as an ordinary trust rather than an association or a partnership. The fact that any organization is technically cast in the trust form, by conveying title to property to trustees for the benefit of persons designated as beneficiaries, will not change the real character of the organization if the organization is more properly classified as a business entity under Reg. §23038(b)-2.
(C) Certain investment trusts. An “investment” trust will not be classified as a trust if there is a power under the trust agreement to vary the investment of the certificate holders. An investment trust with a single class of ownership interests, representing undivided beneficial interests in the assets of the trust, will be classified as a trust if there is no power under the trust agreement to vary the investment of the certificate holders. An investment trust with multiple classes of ownership interests will ordinarily be classified as an association or a partnership under Reg. §23038(b)-3; however, an investment trust with multiple classes of ownership interests, in which there is no power under the trust agreement to vary the investment of the certificate holders, will be classified as a trust if the trust is formed to facilitate direct investment in the assets of the trust and the existence of multiple classes of ownership interests is incidental to that purpose.
(D) Liquidating trusts. Certain organizations which are commonly known as liquidating trusts are treated as trusts for purposes of the Revenue and Taxation Code. An organization will be considered a liquidating trust if it is organized for the primary purpose of liquidating and distributing the assets transferred to it, and if its activities are all reasonably necessary to, and consistent with, the accomplishment of that purpose. A liquidating trust is treated as a trust for purposes of the Revenue and Taxation Code because it is formed with the objective of liquidating particular assets and not as an organization having as its purpose the carrying on of a profit-making business which normally would be conducted through business organizations classified as corporations or partnerships. However, if the liquidation is unreasonably prolonged or if the liquidation purpose becomes so obscured by business activities that the declared purpose of liquidation can be said to be lost or abandoned, the status of the organization will no longer be that of a liquidating trust. Bondholders' protective committees, voting trusts, and other agencies formed to protect the interests of security holders during insolvency, bankruptcy, or corporate reorganization proceedings are analogous to liquidating trusts, but if subsequently utilized to further the control or profitable operation of a going business on a permanent continuing basis, they will lose their classification as trusts for purposes of the Revenue and Taxation Code.
(E) Environmental remediation trusts. 1. An environmental remediation trust is considered a trust for purposes of the Revenue and Taxation Code. For purposes of this subsection (E), an organization is an environmental remediation trust if the organization is organized under state law as a trust; the primary purpose of the trust is collecting and disbursing amounts for environmental remediation of an existing waste site to resolve, satisfy, mitigate, address, or prevent the liability or potential liability of persons imposed by federal, state, or local environmental laws; all contributors to the trust have (at the time of contribution and thereafter) actual or potential liability or a reasonable expectation of liability under federal, state, or local environmental laws for environmental remediation of the waste site; and the trust is not a qualified settlement fund within the meaning of Treas. Reg. §1.468B-1(a), as applicable for California income and franchise tax purposes pursuant to Sections 23051.5 and 24693 of the Revenue and Taxation Code. An environmental remediation trust is classified as a trust because its primary purpose is environmental remediation of an existing waste site and not the carrying on of a profit-making business that normally would be conducted through business organizations classified as corporations or partnerships. However, if the remedial purpose is altered or becomes so obscured by business or investment activities that the declared remedial purpose is no longer controlling, the organization will no longer be classified as a trust. For purposes of this subsection (E), environmental remediation includes the costs of assessing environmental conditions, remedying and removing environmental contamination, monitoring remedial activities and the release of substances, preventing future releases of substances, and collecting amounts from persons liable or potentially liable for the costs of these activities. For purposes of this subsection (E), persons have potential liability or a reasonable expectation of liability under federal, state, or local environmental laws for remediation of the existing waste site if there is authority under a federal, state, or local law that requires or could reasonably be expected to require such persons to satisfy all or a portion of the costs of the environmental remediation.
2. Each contributor (grantor) to the trust is treated as the owner of the portion of the trust contributed by that grantor under rules provided in Section 677 of the Internal Revenue Code and Treas. Reg. §1.677(a)-1(d), as applicable for California income and franchise tax purposes pursuant to Sections 17024.5 and 17731 of the Revenue and Taxation Code. Section 677 of the Internal Revenue and Taxation Code and Treas. Reg. §1.677(a)-1(d) provide rules regarding the treatment of a grantor as the owner of a portion of a trust applied in discharge of the grantor's legal obligation. Items of income, deduction, and credit attributable to an environmental remediation trust are not reported by the trust on California income tax return of the trust (Form 541 or any successor form), but are shown on a separate statement to be attached to that form. See Treas. Reg. §1.671-4(a). The trustee must also furnish to each grantor a statement that shows all items of income, deduction, and credit of the trust for the grantor's taxable year attributable to the portion of the trust treated as owned by the grantor. The statement must provide the grantor with the information necessary to take the items into account in computing the grantor's taxable income, including information necessary to determine the federal tax treatment of the items (for example, whether an item is a deductible expense under Section 162(a) of the Internal Revenue Code, as applicable for California income and franchise tax purposes, or a capital expenditure under Section 263(a) of the Internal Revenue Code, as applicable for California income and franchise tax purposes) and how the item should be taken into account under the economic performance rules of Section 461(h) of the Internal Revenue Code and the regulations thereunder, as applicable for California income and franchise tax purposes pursuant to Sections 17024.5, 17551, 23051.5, and 24681 of the Revenue and Taxation Code. See Treas. Reg. §1.461-4 for rules relating to economic performance.
3. All amounts contributed to an environmental remediation trust by a grantor (cash-out grantor) who, pursuant to an agreement with the other grantors, contributes a fixed amount to the trust and is relieved by the other grantors of any further obligation to make contributions to the trust, but remains liable or potentially liable under the applicable environmental laws, will be considered amounts contributed for remediation. An environmental remediation trust agreement may direct the trustee to expend amounts contributed by a cash-out grantor (and the earnings thereon) before expending amounts contributed by other grantors (and the earnings thereon). A cash-out grantor will cease to be treated as and owner of a portion of the trust when the grantor's portion is fully expended by the trust.
Effective Date: This regulation applies to taxable or income years beginning on or after January 1, 1997.
NOTE

Authority cited: Sections 19503 and 23038, Revenue and Taxation Code. Reference: Sections 17024.5, 17551, 17731, 17954, 23038, 23040, 23051.5,  24651, 24667, 24668.1, 24672, 24673, 24681 and 24693, Revenue and Taxation Code.
HISTORY

1. New section filed 7-13-73; effective thirtieth day thereafter (Register 73, No. 28).
2. Amendment of section and Note filed 4-3-96; operative 5-3-96 (Register 96, No. 14).
3. Amendment of section and Note filed 1-9-98; operative 1-9-98 pursuant to Government Code section 11343.4(d) (Register 98, No. 2).
§23038(b). Associations. [Repealed]
Note     •     History

NOTE

Authority cited for Subchapter 3.5: Section 26422, Revenue and Taxation Code.
HISTORY

1. Subchapter 3.5 (beginning with Reg. 23151-23154) filed 1-7-58; effective thirtieth day thereafter (Register 58, No. 1).
2. New section filed 11-13-62; effective thirtieth day thereafter (Register 62, No. 23).
3. Renumbering from Section 23038 and amendment filed 7-13-73; effective thirtieth day thereafter (Register 73, No. 28).
4. Editorial correction of subsection (2)(B) (Register 95, No. 42).
5. Repealer filed 1-9-98; operative 1-9-98 pursuant to Government Code section 11343.4(d) (Register 98, No. 2).
§23038(b)-1. Classification of Organizations for California Income and Franchise Tax Purposes.
Note     •     History

(a) Organizations for California income and franchise tax purposes--(1) In general. The Revenue and Taxation Code prescribes the classification of various organizations for California income and franchise tax purposes. Whether an organization is an entity separate from its owners for California income and franchise tax purposes is a matter of California income and franchise tax law and does not depend on whether the organization is recognized as an entity under local law.
(2) Certain joint undertakings give rise to entities for California income and franchise tax purposes. A joint venture or other contractual arrangement may create a separate entity for California income and franchise tax purposes if the participants carry on a trade, business, financial operation, or venture and divide the profits therefrom. For example, a separate entity exists for California income and franchise tax purposes if co-owners of an apartment building lease space and in addition provide services to the occupants either directly or through an agent. Nevertheless, a joint undertaking merely to share expenses does not create a separate entity for California income and franchise tax purposes. For example, if two or more persons jointly construct a ditch merely to drain surface water from their properties, they have not created a separate entity for California income and franchise tax purposes. Similarly, mere co-ownership of property that is maintained, kept in repair, and rented or leased does not constitute a separate entity for California income and franchise tax purposes. For example, if an individual owner, or tenants in common, of farm property lease it to a farmer for a cash rental or a share of the crops, they do not necessarily create a separate entity for California income and franchise tax purposes.
(3) Certain local law entities not recognized. An entity formed under local law is not always recognized as a separate entity for California income and franchise tax purposes. For example, an organization wholly owned by a state is not recognized as a separate entity for California income and franchise tax purposes if it is an integral part of the State. Similarly, tribes incorporated under section 17 of the Indian Reorganization Act of 1934, as amended, 25 U.S.C. §477, or under section 3 of the Oklahoma Indian Welfare Act, as amended, 25 U.S.C. §503, are not recognized as separate entities for California income and franchise tax purposes.
(4) Single owner organizations. Under Regs. §23038(b)-2 and §23038(b)-3, certain organizations that have a single owner can choose to be recognized or disregarded as entities separate from their owners, subject to certain statutory provisions which recognize the existence of otherwise disregarded entities for certain purposes including the tax and fee of a limited company under Sections 17941 and 17942 of the Revenue and Taxation Code, the return filing requirements of a limited liability company under Section 18633.5 of the Revenue and Taxation Code, and the credit limitations of a disregarded entity under Sections 17039 and 23036 of the Revenue and Taxation Code.
(b) Classification of organizations. The classification of organizations that are recognized as separate entities is determined under Regs. §23038(b)-2, §23038(b)-3, and §23038(a)(3) unless a provision of the Revenue and Taxation Code (such as section 860A of the Internal Revenue Code addressing Real Estate Mortgage Investment Conduits (REMICs), as applicable for California purposes pursuant to section 24870 of the Revenue and Taxation Code) provides for special treatment of that organization. For the classification of organizations as trusts, see Reg. §23038(a)(3). That regulation provides that trusts generally do not have associates or an objective to carry on business for profit. Regulations §23038(b)-2 and §23038(b)-3 provide rules for classifying organizations that are not classified as trusts.
(c) Qualified cost sharing arrangements. A qualified cost sharing arrangement that is described in Treas. Regs. §1.482-7 and any arrangement that is treated by the Commissioner as a qualified cost sharing arrangement under Treas. Reg. §1.482-7, as applicable for California income and franchise tax purposes pursuant to Sections 23051.5 and 24725 of the Revenue and Taxation Code (except as provided in Article 1.5 of Chapter 17 of the Bank and Corporation Tax Law, commencing with Section 25101 of the Revenue and Taxation Code), is not recognized as a separate entity for purposes of the Revenue and Taxation Code. See Treas. Regs §1.482-7 for the proper treatment of qualified cost sharing arrangements.
(d) Domestic and foreign entities. For purposes of this regulation and Regs. §23038(b)-2 and §23038(b)-3, an entity is a domestic entity if it is created or organized in the United States or under the laws of the United States or of any state; an entity is foreign if it is not domestic.
(e) State. For purposes of this regulation and Reg. §23038(b)-2, the term state includes the District of Columbia.
(f) Effective date. This regulation is effective for taxable or income years commencing on or after January 1, 1997.
NOTE

Authority cited: Sections 19503 and 23038, Revenue and Taxation Code. Reference: Sections 17039, 17941, 18633.5, 23036 and 23038, Revenue and Taxation Code.
HISTORY

1. New section filed 1-9-98; operative 1-9-98 pursuant to Government Code section 11343.4(d) (Register 98, No. 2).
§23038(b)-2. Business Entities; Definitions.
Note     •     History

(a) Business entities. For purposes of this regulation and Reg. §23038(b)-3, a business entity is any entity recognized for California income and franchise tax purposes (including an entity with a single owner that may be disregarded as an entity separate from its owner under Reg. §23038(b)-3) that is not properly classified as a trust under Reg. §23038(a)(3) or otherwise subject to special treatment under the Revenue and Taxation Code. A business entity with two or more members is classified for California income and franchise tax purposes as either a corporation or a partnership. A business entity with only one owner is classified as an association taxable as a corporation or is disregarded; if the entity is disregarded, its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner.
(b) Corporations. For purposes of the tax imposed under Chapter 3 of the Revenue and Taxation Code (commencing with Revenue and Taxation Code section 23501), the term corporation includes--
(1) A business entity organized under a federal or state statute, or under a statute of a federally recognized Indian tribe, if the statute describes or refers to the entity as incorporated or as a corporation, body corporate, or body politic;
(2) An association (as determined under Reg. §23038(b)-3);
(3) A business entity organized under a state statute, if the statute describes or refers to the entity as a joint-stock company or joint-stock association;
(4) [reserved];
(5) [reserved];
(6) [reserved];
(7) A business entity that is taxable as a corporation under a provision of the Revenue and Taxation Code other than subdivision (b) of Section 23038; and
(8) Certain foreign entities--(A) In general. Except as provided in subsections (b)(8)(B) and (d) of this regulation, the following business entities formed in the following jurisdictions:

American Samoa, Corporation
Argentina, Sociedad Anonima
Australia, Public Limited Company
Austria, Aktiengesellschaft
Barbados, Limited Company
Belgium, Societe Anonyme
Belize, Public Limited Company
Bolivia, Sociedad Anonima
Brazil, Sociedade Anonima
Canada, Corporation and Company

Chile, Sociedad Anonima
People's Republic of China, Gufen Youxian Gongsi
Republic of China (Taiwan), Ku-fen Yu-hsien Kung-szu
Columbia, Sociedad Anonima
Costa Rica, Sociedad Anonima
Cyprus, Public Limited Company

Czech Republic, Akciova Spolecnost
Denmark, Aktieselskab
Ecuador, Sociedad Anonima or Compania Anonima
Egypt, Sharikat Al-Mossahamah
El Salvador, Sociedad Anonima
Finland, Osakeyhtio/Aktiebolag
France, Societe Anonyme
Germany, Aktiengesellschaft
Greece, Anonymos Etairia

Guam, Corporation
Guatemala, Sociedad Anonima
Guyana, Public Limited Company
Honduras, Sociedad Anonima
Hong Kong, Public Limited Company
Hungary, Reszvenytarsasag
Iceland, Hlutafelag
India, Public Limited Company
Indonesia, Perseroan Terbuka
Ireland, Public Limited Company
Israel, Public Limited Company
Italy, Societa per Azioni

Jamaica, Public Limited Company
Japan, Kabushiki Kaisha
Kazakstan, Ashyk Aktsionerlik Kogham
Republic of Korea, Chusik Hoesa
Liberia, Corporation
Luxembourg, Societe Anonyme

Malaysia, Berhad
Malta, Partnership Anonyme
Mexico, Sociedad Anonima
Morocco, Societe Anonyme
Netherlands, Naamloze Vennootschap
New Zealand, Limited Company
Nicaragua, Compania Anonima
Nigeria, Public Limited Company

Northern Mariana Islands, Corporation
Norway, Aksjeselskap
Pakistan, Public Limited Company
Panama, Sociedad Anonima
Paraguay, Sociedad Anonima
Peru, Sociedad Anonima
Philippines, Stock Corporation

Poland, Spolka Akcyjna
Portugal, Sociedade Anonima
Puerto Rico, Corporation
Romania, Societe pe Actiuni
Russia, Otkrytoye Aktsionernoy Obshchestvo
Saudi Arabia, Sharikat Al-Mossahamah
Singapore, Public Limited Company
Slovak Republic, Akciova Spolocnost

South Africa, Public Limited Company
Spain, Sociedad Anonima
Surinam, Naamloze Vennootschap
Sweden, Publika Aktiebolag
Switzerland, Aktiengesellschaft
Thailand, Borisat Chamkad (Mahachon)

Trinidad and Tobago, Public Limited Company
Tunisia, Societe Anonyme
Turkey, Anonim Sirket
Ukraine, Aktsionerne Tovaristvo Vidkritogo Tipu
United Kingdom, Public Limited Company
United States Virgin Islands, Corporation
Uruguay, Sociedad Anonima
Venezuela, Sociedad Anonima or Compania Anonima
(B) Exceptions in certain cases. The following entities will not be treated as corporations under subsection (b)(8)(A) of this regulation:
1. With regard to Canada, any corporation or company formed under any federal or provincial law which provides that the liability of all of the members of such corporation or company will be unlimited; and
2. With regard to India, a company deemed to be a public limited company solely by operation of Section 43A(1) (relating to corporate ownership of the company), Section 43A(1A) (relating to annual average turnover), or Section 43A(1B) (relating to ownership interests in other companies) of the Companies Act, 1956 (or any combination of these), provided that the organizational documents of such deemed public limited company continue to meet the requirements of Section 3(1)(iii) of the Companies Act, 1956.
(C) Public companies. With regard to Cyprus, Hong Kong, Jamaica, and Trinidad and Tobago, the term public limited company includes any limited company which is not a private limited company under the laws of those jurisdictions.
(D) Limited companies. Any reference to a limited company (whether public or private) in subsection (b)(8)(A) of this regulation includes, as the case may be, companies limited by shares and companies limited by guarantee.
(E) Multilingual countries. Different linguistic renderings of the name of an entity listed in subsection (b)(8)(A) of this regulation shall be disregarded. For example, an entity formed under the laws of Switzerland as a Societe Anonyme will be a corporation and treated in the same manner as an Aktiengesellschaft.
(c) Other business entities. (1) For California income and franchise tax purposes, the term partnership means a business entity that is not a corporation under subsection (b) of this regulation and that has at least two members.
(2) Wholly owned entities--(A) In general. A business entity that has a single owner and is not a corporation under subsection (b) of this regulation is disregarded as an entity separate from its owner for purposes of Part 10 (Personal Income Tax Law commencing with Revenue and Taxation Code section 17001), Part 10.2 (Administration of Franchise and Income Tax Law commencing with Revenue and Taxation Code section 18401), and Part 11 (Corporation Tax Law commencing with Revenue and Taxation Code section 23001), subject to certain statutory provisions which recognize the existence of otherwise disregarded entities for certain purposes including the tax and fee of a limited liability company under Revenue and Taxation Code sections 17941 and 17942, the return filing requirements of a limited liability company under Revenue and Taxation Code section 18633.5, and the credit limitations of a disregarded entity under Revenue and Taxation Code sections 17039 and 23036.
(B) Special rule for certain business entities. If the single owner of a business entity is a bank (as defined in Revenue and Taxation Code section 23039), then the special rules applicable to banks will continue to apply to the single owner as if the wholly owned entity were a separate entity.
(d) Special rule for certain foreign business entities--(1) In general. Except as provided in subsection (d)(3) of this regulation, a foreign business entity described in subsection (b)(8)(A) of this regulation will not be treated as a corporation under subsection (b)(8)(A) of this regulation if--
(A) The entity was in existence on May 8, 1996;
(B) The entity's classification was relevant (as defined in Reg. §23038(b)-3(d)) on May 8, 1996;
(C) No person (including the entity) for whom the entity's classification was relevant on May 8, 1996, treats the entity as a corporation for purposes of filing such person's California income tax returns, information returns, and withholding documents for the taxable year including May 8, 1996;
(D) Any change in the entity's claimed classification within the sixty months prior to May 8, 1996, occurred solely as a result of a change in the organizational documents of the entity, and the entity and all members of the entity recognized the California income tax consequences of any change in the entity's classification within the sixty months prior to May 8, 1996;
(E) A reasonable basis (within the meaning of Section 6662 of the Internal Revenue Code) existed on May 8, 1996, for treating the entity as other than a corporation; and
(F) Neither the entity nor any member was notified in writing on or before May 8, 1996, that the classification of the entity was under examination (in which case the entity's classification will be determined in the examination).
(2) Binding contract rule. If a foreign business entity described in subsection (b)(8)(A) of this regulation is formed after May 8, 1996, pursuant to a written binding contract (including an accepted bid to develop a project) in effect on May 8, 1996, and at all times thereafter, in which the parties agreed to engage (directly or indirectly) in an active and substantial business operation in the jurisdiction in which the entity is formed, subsection (d)(1) of this regulation will be applied to that entity by substituting the date of the entity's formation for May 8, 1996.
(3) Termination of grandfather status--(A) In general. An entity that is not treated as a corporation under subsection (b)(8)(A) of this regulation by reason of subsection (d)(1) or (d)(2) of this regulation will be treated permanently as a corporation under subsection (b)(8)(A) of this regulation from the earliest of:
1. The effective date of an election to be treated as an association under Reg. §23038(b)-3;
2. A termination of the partnership under Section 708(b)(1)(B) of the Internal Revenue Code (regarding sale or exchange of 50 percent or more of the total interest in an entity's capital or profits within a twelve month period); or
3. A division of the partnership under Section 708(b)(2)(B) of the Internal Revenue Code.
(B) Special rule for certain entities. For purposes of subsection (d)(2) of this regulation, subsection (d)(3)(A)2. of this regulation shall not apply if the sale or exchange of interest in the entity is to a related person (within the meaning of Sections 267(b) and707(b) of the Internal Revenue Code) and occurs no later than twelve months after the date of the formation of the entity.
(e) Effective date. The rules of this regulation are effective for taxable or income years commencing on or after January 1, 1997.
NOTE

Authority cited: Sections 19503 and 23038, Revenue and Taxation Code. Reference: Sections 17039, 17941, 18633.5, 23036 and 23038, Revenue and Taxation Code.
HISTORY

1. New section filed 1-9-98; operative 1-9-98 pursuant to Government Code section 11343.4(d) (Register 98, No. 2).
2. Change without regulatory effect amending subsections (b) and (c)(2) filed 6-4-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 23).
3. Editorial correction of subsection (a) (Register 2011, No. 17).
§23038(b)-3. Classification of Certain Business Entities.
Note     •     History

(a) In general. A business entity that is not classified as a corporation under Reg. §23038(b)-2(b)(1), (3), (7), or (8) (an eligible entity) can elect its classification for federal tax purposes as provided in Treas. Regs §301.7701-3. An eligible entity with at least two members can elect to be classified as either an association (and thus a corporation under Reg. §23038(b)-2(b)(2)) or a partnership, and an eligible entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner. Paragraph (b) of Treas. Regs. §301.7701-3 provides a default classification for an eligible entity that does not make an election. Thus, federal elections are necessary only when an eligible entity chooses to be classified initially as other than the default classification or when an eligible entity chooses to change its classification. An entity whose classification is determined under the default classification retains that classification (regardless of any changes in the members' liability that occurs at any time during the time that the entity's classification is relevant as defined in subsection (d) of this regulation) until the entity makes an election to change that classification under paragraph (c)(1) of Treas. Regs. §301.7701-3. Paragraph (c) of Treas. Regs. §301.7701-3 provides rules for making express elections. Subsection (c) of this regulation provides that for purposes of the taxes imposed by Part 11 of the Revenue and Taxation Code (Corporation Tax Law, commencing with Revenue and Taxation Code section 23001), the classification of an eligible business entity shall be the same as the classification of the entity for federal purposes and that if the separate existence of a business entity is disregarded for federal tax purposes, the separate existence of that business entity shall be disregarded. No separate election is allowed. Subsection (d) of this regulation provides special rules for foreign eligible entities. Subsection (e) of this regulation provides special rules for classifying entities resulting from partnership terminations and divisions under Section 708(b) of the Internal Revenue Code. Subsection (f) of this regulation sets forth the effective date of this regulation and a special rule relating to prior periods.
(b) Classification of eligible entities that do not file an election--(1) Domestic eligible entities. Except as provided in subsection (b)(3) of this regulation, unless the entity elects otherwise, a domestic eligible entity is--
(A) A partnership if it has two or more members; or
(B) Disregarded as an entity separate from its owner if it has a single owner.
(2) Foreign eligible entities--(A) In general. Except as provided in subsection (b)(3) of this regulation, unless the entity elects otherwise, a foreign eligible entity is--
1. A partnership if it has two or more members and at least one member does not have limited liability;
2. An association if all members have limited liability; or
3. Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.
(B) Definition of limited liability. For purposes of subsection (b)(2)(A) of this regulation, a member of a foreign eligible entity has limited liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member. This determination is based solely on the statute or law pursuant to which the entity is organized, except that if the underlying statute or law allows the entity to specify in its organizational documents whether the members will have limited liability, the organizational documents may also be relevant. For purposes of this regulation, a member has personal liability if the creditors of the entity may seek satisfaction of all or any portion of the debts or claims against the entity from the member as such. A member has personal liability for purposes of this subsection even if the member makes an agreement under which another person (whether or not a member of the entity) assumes such liability or agrees to indemnify that member for any such liability.
(3) Federal classification of existing eligible entities. (A) In general. Unless the entity elects otherwise, an eligible entity in existence prior to the effective date of this regulation will have the same classification for federal tax purposes that the entity claimed under repealed Treas. Reg. §301.7701-1 through 301.7701-3 as in effect on the date prior to the effective date of this regulation; except that if an eligible entity with a single owner claimed to be a partnership under those regulations, the entity will be disregarded as an entity separate from its owner under this subsection (b)(3)(A) for federal tax purposes. For special rules regarding the classification of such entities for periods prior to the effective date of this regulation, see subsection (f)(2) of Treas. Reg. §301.7701-3.
(B) Special rules. For purposes of subsection (b)(3)(A) of this regulation, a foreign eligible entity is treated as being in existence prior to the effective date of this regulation only if the entity's classification was relevant (as defined in subsection (d) of this regulation) at any time during the sixty months prior to the effective date of this regulation. If an entity claimed different classifications prior to the effective date of this regulation, the entity's classification for purposes of subsection (b)(3)(A) of this regulation is the last classification claimed by the entity. If a foreign eligible entity's classification is relevant prior to the effective date of this regulation, but no California income tax, franchise tax, or information return is filed or the California income tax, franchise tax, or information return does not indicate the classification of the entity, the entity's classification for the period prior to the effective date of this regulation is determined under the regulations in effect on the date prior to the effective date of this regulation.
(4) California classification of existing entities. (A) Notwithstanding subsection (c) of this regulation (related to requirement that an eligible business entity shall be classified or disregarded for tax purposes the same as the entity is classified or disregarded for federal tax purposes), an eligible business entity which, for any income year beginning within the sixty-month period preceding the effective date of this regulation, was properly classified as an association taxable as a corporation for California income and franchise tax purposes under Revenue and Taxation Code section 23038 and the regulations thereunder, as in effect during such period, shall continue to be classified as an association taxable as a corporation until it irrevocably elects to be classified or disregarded for California income and franchise tax purposes the same as the entity is classified or disregarded for federal tax purposes.
(B) Election to be classified or disregarded the same as federal. 1. Election. An existing eligible business entity that, pursuant to subparagraph (A) of this subsection, is classified as an association taxable as a corporation for California income and franchise tax purposes for taxable or income years beginning on or after January 1, 1997, and, under Treas. Reg. §301.7701-3, is, without election, classified as a partnership or disregarded for federal tax purposes for taxable years beginning on or after January 1, 1997, may elect to be classified as a partnership or disregarded for California income and franchise tax purposes for taxable years beginning on or after the effective date of this regulation by filing an election to be classified or disregarded the same as the entity is classified or disregarded for federal tax purposes. An election under this subparagraph must be in writing, and will not be accepted unless all the information required by forms and instructions, including the taxpayer identification number of the entity and the information required by Revenue and Taxation Code sections 18633 or 18633.5, as applicable, is provided. See Treas. Reg. §301.6109-1 for rules on applying for and displaying Employer Identification Numbers.
2. Effective date of election. The election shall be effective on the date specified in the written election or on the date filed if no date is specified in the written election. Except with regard to an election filed within 90 days following the date this regulation is filed with the Secretary of State, the effective date specified in the written election can be no more than 90 days prior to the date on which the election is filed and no more than 12 months after the date on which the election is filed. An election filed within 90 days following the date this regulation is filed with the Secretary of State may specify an effective date of January 1, 1997.
3. Irrevocable election. If an eligible entity makes an election under subsection (b)(4)(B) of this regulation to be classified or disregarded the same for California income and franchise tax purposes as the eligible business entity is classified or disregarded for federal tax purposes, the election is irrevocable. However, the Franchise Tax Board, on a showing of fraud, mistake of fact, or other good cause, may permit the entity to rescind its election to be classified or disregarded for California income and franchise tax purposes the same as the entity is classified or disregarded for federal tax purposes.
4. Authorized signatures. An election made under subsection (b)(4)(B) of this regulation must be signed by each member of the electing entity who is an owner at the time the election is filed; or any officer, manager, or member of the electing entity who is authorized (under local law or the entity's organizational documents) to make the election and who represents to having such authorization under penalties of perjury. If an election under paragraph (b)(4)(B) of this regulation is to be effective for any period prior to the time that it is filed, each person who was an owner between the date the election is to be effective and the date the election is filed, and who is not an owner at the time the election is filed, must also sign the election.
(c) Federal tax classification binding for California income and franchise tax purposes. (1) In general. Except as provided in subsection (b)(4) of this regulation, the classification of an eligible business entity for California income and franchise tax purposes shall be the same as the classification of the eligible business entity for federal tax purposes under Treas. Regs. §301.7701-3. The election of an eligible business entity to be classified as an association or a partnership for federal tax purposes shall be binding for California income and franchise tax purposes. Except as provided in subsections (b)(4) and (c)(2) of this regulation, if the separate existence of an eligible business entity is disregarded for federal tax purposes, the separate existence of the eligible business entity shall be disregarded for purposes of Part 10 (Personal Income Tax Law commencing with Revenue and Taxation Code section 17001), Part 10.2 (Administration of Franchise and Income Tax Law commencing with Revenue and Taxation Code section 18401), and Part 11 (Corporation Tax Law commencing with Revenue and Taxation Code section 23001). An election to be disregarded for federal tax purposes shall be binding for purposes of Part 10 (Personal Income Tax Law commencing with Revenue and Taxation Code section 17001), Part 10.2 (Administration of Franchise and Income Tax Law commencing with Revenue and Taxation Code section 18401), and Part 11 (Corporation Tax Law commencing with Revenue and Taxation Code section 23001).
(2) Disregarded entities. Except as provided in subsection (b)(4) of this regulation, if the separate existence of an eligible business entity is disregarded for federal tax purposes, the separate existence of the eligible business entity will be disregarded for purposes of Part 10 (Personal Income Tax commencing with Revenue and Taxation Code section 17001), Part 10.2 (Administration of Franchise and Income Tax Law commencing with Revenue and Taxation Code section 18401), and Part 11 (Corporation Tax Law commencing with Revenue and Taxation Code section 23001), subject to certain statutory provisions which recognize the existence of otherwise disregarded entities for certain purposes including the tax and fee of a limited liability company under Revenue and Taxation Code sections 17941 and 17942, the return filing requirements of a limited liability company under Revenue and Taxation Code section 18633.5, and the credit limitations of a disregarded entity under Revenue and Taxation Code sections 17039 and 23036.
(3) Notification of federal election. An eligible entity required to file a California income tax, franchise tax, or information return for the taxable year for which an election is made under paragraph (c)(1)(i) of Treas. Reg. §301.7701-3 must attach a copy of its federal Form 8832 (or any successor form) to its California income tax, franchise tax, or information return for that year. If the entity is not required to file a California income tax, franchise tax, or information return for that year, a copy of its federal Form 8832 must be attached to the California income tax, franchise tax, or information return of any direct or indirect owner of the entity for the taxable year of the owner that includes the date on which the election was effective. An indirect owner of the entity does not have to attach a copy of the federal Form 8832 to its return if an entity in which it has an interest is already filing a copy of the federal Form 8832 with its return. If an entity, or one of its direct or indirect owners, fails to attach a copy of a federal Form 8832 to its return as directed in this subsection, an otherwise valid election under paragraph (c)(1)(i) of Treas. Reg. §301.7701-3 will not be invalidated, but the non-filing party may be subject to penalties, including any applicable penalties if the California franchise tax or income tax or information returns are inconsistent with the entity's election under paragraph (c)(1)(i) of Treas. Reg. §301.7701-3.
(d) Special rules for foreign eligible entities--(1) For purposes of this regulation, a foreign eligible entity's classification is relevant when its classification affects the liability of any person for California income tax, franchise tax, or information purposes. For example, a foreign entity's classification would be relevant if California source income was paid to the entity and the determination by the withholding agent of the amount to be withheld under the Revenue and Taxation Code (if any) would vary depending upon whether the entity is classified as a partnership or as an association. Thus, the classification might affect the documentation that the withholding agent must receive from the entity, the type of tax or information return to file, or how the return must be prepared. The date that the classification of a foreign eligible entity is relevant is the date an event occurs that creates an obligation to file a California income tax, franchise tax, or information return, or statement for which the classification of the entity must be determined. Thus, the classification of a foreign entity is relevant, for example, on the date that an interest in the entity is acquired which will require a California person to file an information return.
(2) Special rule when classification is no longer relevant.--If the classification of a foreign eligible entity which was previously relevant for California income and franchise tax purposes ceases to be relevant for sixty consecutive months, the entity's classification will initially be determined under the default classification when the classification of the foreign eligible entity again becomes relevant. The date that the classification of a foreign entity ceases to be relevant is the date an event occurs that causes the classification to no longer be relevant, or, if no event occurs in a taxable year that causes the classification to be relevant, then the date is the first day of that taxable year.
(e) Coordination with Section 708(b) of the Internal Revenue Code. Except as provided in Reg. §23038(b)-2(d)(3) (regarding termination of grandfather status for certain foreign business entities), an entity resulting from a transaction described in section 708(b)(1)(B) of the Internal Revenue Code (partnership termination due to sales or exchanges) or Section 708(b)(2)(B) of the Internal Revenue Code (partnership division) is a partnership.
(f) Effective date--(1) In general. The rules of this regulation are effective for taxable or income years commencing on or after January 1, 1997.
(2) Prior treatment of existing entities. In the case of a business entity that is not described in Reg. §23038(b)-2(b)(1), (3), (4), (5), (6), or (7), and that was in existence prior to January 1, 1997, the entity's claimed classification(s) will be respected for all periods prior to January 1, 1997, if--
(A) The entity had a reasonable basis (within the meaning of Section 6662 of the Internal Revenue Code) for its claimed classification;
(B) The entity and all members of the entity recognized the California income and franchise tax consequences of any change in the entity's classification within the sixty months prior to January 1, 1997; and
(C) Neither the entity nor any member was notified in writing on or before May 8, 1996, that the classification of the entity was under examination (in which case the entity's classification will be determined in the examination).
NOTE

Authority cited: Sections 19503 and 23038, Revenue and Taxation Code. Reference: Sections 17039, 17941, 18633.5, 23036 and 23038, Revenue and Taxation Code.
HISTORY

1. New section filed 1-9-98; operative 1-9-98 pursuant to Government Code section 11343.4(d) (Register 98, No. 2).
2. Change without regulatory effect amending subsections (a), (b)(4)(A)-(B) and (c)-(c)(2) filed 6-4-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 23).
§23040. Income from Sources Within This State.
Note     •     History

(a) Except as provided in Chapter 17, “Income from sources within this State” includes income from, rentals of, or gains realized from the sale of real or tangible personal property located in this State, regardless of where the sale or transfer is consummated. The term also includes income from ownership, control or management of such property located in this State, even though the taxpayer is not carrying on a business in this State. Income from business or activities carried on in this State, and from stocks, bonds, notes, bank deposits and other intangible personal property having a business situs in this State, also falls within the purview of this term and is taxable under the law.
(b) If a corporation has become derived from or attributable to sources both within and without this State within the meaning of section 25101, Revenue and Taxation Code, a portion of the income derived from the business is attributable to this State and as such constitutes income from sources within this State even though the corporation may have no offices or established place of business in this State. The portion of income attributable to this State shall be determined by apportionment or allocation as provided in Chapter 17.
(c) Except as provided in Chapter 17, in the case of corporations organized under the laws of this State which have not acquired a commercial domicile elsewhere, and foreign corporations which have acquired a commercial domicile within this State, all income, with the exceptions noted, from interest on notes, bonds, accounts receivable and other indebtedness, regardless of where the debtors reside or the debts are contracted, interest on bank deposits, including deposits in banks located outside this State, royalties from patents or copyrights, regardless of where the patents or copyrights are used, dividends on stock of both domestic and foreign banks and corporations, and all other income from intangible personal property, including gains derived from the sale or other disposition of such property, is income from sources within this State, unless the property is so used in connection with a business carried on outside this State as to have acquired a business situs outside this State. Interest on bonds or other obligations of the United States and other income which this State is prohibited from taxing under the Constitution of this State or of the United States, is not subject to the tax imposed by Chapter 3.
(d) Whether a foreign corporation has acquired a commercial domicile in this State so that all income from intangibles with the above exceptions is taxable as income from sources within this State, will depend upon the facts of each case. Generally, however, a corporation will be considered as having a commercial domicile here if its principal office or place of business is located in this State, or if its business is managed or controlled from within this State. (See also section 25120(b), Revenue and Taxation Code).
(e) Except as provided in Chapter 17, in the case of foreign corporations which have not acquired a commercial domicile in this State, income from intangible personal property is income from sources in this State only if the property has a business situs here. Intangible personal property has a business situs in this State if it is employed as capital in this State or the possession and control of the property has been localized in connection with a business, trade or profession in this State so that its substantial use and value attach to and become an asset of the business, trade or profession in this State. For example, if a corporation pledges stocks, bonds or other intangible personal property in California as security for the payment of indebtedness, taxes, etc., incurred in connection with a business in this State, the property has a business situs here. Again, if a corporation maintains a branch office here and a bank account on which the agent in charge of the branch office may draw for the payment of expenses in connection with the activities in this State, the bank account has a business situs here.
(f) As used in this regulation, “Chapter 3” refers to Chapter 3 of Part 11, Division 2 of the Revenue and Taxation Code (beginning with section 23501, Revenue and Taxation Code) and “Chapter 17” refers to Chapter 17 of Part 11, Division 2 of the Revenue and Taxation Code (beginning with section 25101, Revenue and Taxation Code).
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23040, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect redesignating former section 23040(a) to section 23040 and amending section and Note filed 4-2-2001 pursuant to section 100, title 1, California Code of Regulations (Register 2001, No. 14).
§23040(a). Income from Sources Within This State.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Sections 23038, 23040, 24651, 24667-24670, 24672, 24673, 24832-24835, Revenue and Taxation Code.
HISTORY

1. New section filed 7-13-73; effective thirtieth day thereafter (Register 73, No. 28).
2. Change without regulatory effect redesignating former section 23040(a) to section 23040 filed 4-2-2001 pursuant to section 100, title 1, California Code of Regulations (Register 2001, No. 14).
§23040(b). Application of Bank and Corporation Tax Law to Activities of Foreign Corporations in California.
History

HISTORY

1. New section filed 12-13-60; effective thirtieth day thereafter (Register 60, No. 25).
2. Change without regulatory effect repealing section filed 4-2-2001 pursuant to section 100, title 1, California Code of Regulations (Register 2001, No. 14).
§23041-23042. “Taxable Year” and “Income Year”--Defined.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 9-19-69; effective thirtieth day thereafter (Register 69, No. 38).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
Subchapter 2. The Bank and Corporation Franchise Tax
Article 1. Definitions and General Provisions
§23101. “Doing Business”--Defined.
Note     •     History

(a) Except as otherwise provided, every corporation “doing business” in this State is subject to tax under Chapter 2. “Doing business” is defined as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” This includes the purchase and sale of stocks or bonds, endorsing the notes of a subsidiary corporation by a parent corporation and the leasing of real property by the parent corporation to the subsidiary and other tenants, and liquidating activities consisting of sales, rentals, collections on notes, etc. A foreign corporation which engages in a transaction for the purpose of financial or pecuniary gain or profit in California is considered “doing business” in this State whether or not the transaction is considered exclusively engaged in interstate commerce, and is therefore subject to tax under Chapter 2. However, if the only activities of employees of foreign corporations within this State engaging exclusively in interstate commerce are the solicitation of orders for goods to be shipped to customers in this State from points outside this State, the corporations are probably within the purview of Public Law 86-272 (15 U.S.C. Sections 381, et.seq.). Accordingly, such corporations would not be subject to either a tax measured by income imposed under Chapter 2 or the income tax imposed under Chapter 3. However, the corporation may be subject to the minimum tax imposed by section 23153, Revenue and Taxation Code.
(b) The mere receipt of dividends and interest by a corporation and the distribution of such income to its shareholders does not constitute “doing business.” (See section 23102, Revenue and Taxation Code). The corporation, however, is subject to tax under Chapter 3 if its income is from California sources.
(c) As used in this regulation, “Chapter 2” refers to Chapter 2 of Part 11, Division 2 of the Revenue and Taxation Code (beginning with section 23101 of the Revenue and Taxation Code) and “Chapter 3” refers to Chapter 3 of Part 11, Division 2 of the Revenue and Taxation Code (beginning with section 23501, Revenue and Taxation Code).
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23101, Revenue and Taxation Code.
HISTORY

1. New section filed 12-13-60; effective thirtieth day thereafter (Register 60, No. 25).
2. Amendment filed 2-22-74; effective thirtieth day thereafter (Register 74, No. 8).
3. Change without regulatory effect amending section and adding Note filed 4-2-2001 pursuant to section 100, title 1, California Code of Regulations (Register 2001, No. 14).
§23101.5. Exclusion of Certain Activities from Taxing Jurisdiction.
Note     •     History

(a) The Franchise Tax Board may determine that a corporation is neither “doing business” and subject to the corporation franchise tax under Chapter 2 nor “deriving income from sources within the state” and subject to the corporation income tax under Chapter 3 if the number of the corporation's employees and its only activities within the state are limited to those described in Revenue and Taxation Code section 23101.5, subdivision (a).
(b) Purchasing, Inspecting, and Consulting Activities. All of the employees' duties enumerated in Revenue and Taxation Code section 23101.5, subdivision (a)(1), refer to activities in connection with the corporation's purchase of personal property or services in this state. The term “purchase of personal property” includes the storage of property purchased, manufactured or assembled in this state pending shipment to destinations outside California. An employee “temporarily present in this state” will not invalidate a corporation's qualification for this exclusion by causing the corporation to exceed the limitation of 100 or 200 employees, as applicable. An employee is “temporarily present in California” if his contact with this state, disregarding the provisions of Revenue and Taxation Code section 23101.5, would not be sufficient to subject his employer to California's franchise or income tax. 
(c) Educational Activities. A corporation may qualify for the exclusion provided by Revenue and Taxation Code section 23101.5, if the presence of employees in this state is only for the purpose of attending a public or private school, college or university or other educational or training program, including those at industrial facilities.
(d) Information to Be Reported. A corporation claiming an exclusion with respect to the activities described in Revenue and Taxation Code section 23101.5, subdivisions (a)(1) and (b), must submit an application containing the following information:
(1) Applicant's corporate name and federal employer identification number, if any,
(2) Applicant's mailing address,
(3) Applicant's date of incorporation,
(4) Applicant's accounting period for tax purposes,
(5) Years applicant has filed California franchise tax or corporate income tax returns within the four taxable years preceding the taxable year for which the exemption is sought,
(6) Corporations in which applicant owns 50 percent or more of the voting stock,
(7) Corporations which own 50 percent or more of applicant's voting stock,
(8) Names and addresses of businesses or individuals with which the applicant expects to or has purchased personal property or services and which are to be covered by the exclusion,
(9) To the extent determinable, the names of employees applicant expects to be present within the state during the taxable year, and the expected duration of each employee's presence in this state,
(10) To the extent determinable, destination and use of personal property and services contracted for which are to be covered by the exclusion,
(11) The period for which the exclusion is requested, or facts which would support an exclusion of indefinite duration,
(12) The estimated number of California jobs created and economic effect upon California resulting from the activities for which the exclusion is sought.
(e) A corporation claiming an exclusion with respect to the activities described in Revenue and Taxation Code section 23101.5, subdivisions (a)(2) and (c), must submit an application containing the following information:
(1) Applicant's corporate name and federal employer identification number, if any,
(2) Applicant's mailing address,
(3) Applicant's date of incorporation,
(4) Applicant's accounting period for tax purposes,
(5) Years applicant has filed California franchise tax or corporate income tax returns within the four taxable years preceding the taxable year for which the exemption is sought,
(6) Corporations in which applicant owns 50 percent or more of the voting stock,
(7) Corporations which own 50 percent or more of applicant's voting stock,
(8) Names of schools, colleges, and universities in this state at which applicant's employees are enrolled, or are to be enrolled and the names of such employees to the extent known,
(9) The period for which the exclusion is requested, or facts which would support an exclusion of indefinite duration.
(f) The exclusion provided by Revenue and Taxation Code section 23101.5, will not be granted to a corporation which has as its principal business activity one or more of the activities specified in subsection (b) of this regulation, unless such corporation is engaged in a unitary business with one or more other corporations outside California, and the principal activity of such unitary business is not one or more of the activities specified in subsection (b) of this regulation.
(g) Filing Requirements. The initial application and the annual confirmation must be submitted to Chief Counsel, Franchise Tax Board, P. O. Box 1720, Rancho Cordova, CA 95741-1720, as soon as the corporation contemplates having employees within this state. If an exclusion of an indefinite duration is requested, the Board need not actually have issued its determination on or before December 31, 1977. Any member of a group of corporations engaged in a unitary business is eligible for an exclusion of indefinite duration if any one member has met the qualification requirements for the exclusion of indefinite duration. All corporations shall annually confirm within two months and 15 days after the close of their fiscal years that facts relevant to the granting of the exclusion then in effect remain unchanged or shall state and explain the changes which have occurred since the preceding report was filed. The activities of a corporation (other than one which qualifies for exemption under Revenue and Taxation Code section 24320), which exceed those excluded from taxing jurisdiction under Revenue and Taxation Code section 23101.5, will cause all members of an affiliated group with which the corporation is engaged in a unitary business to be subjected to California's franchise or income tax. If an exclusion has expired or if the Franchise Tax Board or the corporation determines that because of changed circumstances the original exclusion is invalidated but believes another exclusion should be granted, a new application setting forth all the information listed in subsections (d) and/or (e) of this regulation shall be submitted. A corporation that has been granted an exclusion of indefinite duration which has lapsed will be eligible for a renewed exclusion with a maximum effective period of five years. During the period of exclusion, the corporation's records will be subject to audit to the same extent as are the records of any other corporation doing business or deriving income from sources within this state.
(h) Waiver of Confidentiality Provisions. Corporations applying for exclusions under Revenue and Taxation Code, section 23101.5, shall be deemed to have waived the confidentiality provisions of Revenue and Taxation Code section 19542, with respect to legislative reports required by Revenue and Taxation Code section 23101.5.
(i) As used in this regulation, “Chapter 2” refers to Chapter 2 of Part 11, Division 2 of the Revenue and Taxation Code (beginning with Revenue and Taxation Code, section 23101) and “Chapter 3” refers to Chapter 3 of Part 11, Division 2 of the Revenue and Taxation Code (beginning with Revenue and Taxation Code section 23501.)
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23101.5, Revenue and Taxation Code.
HISTORY

1. New section filed 10-7-77 as an emergency; effective upon filing (Register 77, No. 41).
2. Refiling and amendment of section filed 1-16-78; effective thirtieth day thereafter (Register 78, No. 3).
3. Amendment filed 8-22-80; effective thirtieth day thereafter (Register 80, No. 34).
4. Change without regulatory effect amending section and Note filed 9-17-2001 pursuant to section 100, title 1, California Code of Regulations (Register 2001, No. 38).
5. Change without regulatory effect amending section filed 5-29-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 22).
Article 2. Tax on General Corporations
§23151. Minimum Tax.
Note     •     History

The minimum tax shall be paid even though the tax measured by the corporation's net income is less than that amount during the income year. Such payment shall be made by cooperatives, domestic holding companies, corporations sustaining a net loss, and inactive corporations. An inactive gold mining corporation shall not be considered to have done business if it engages in incidental activities, other than mining. Every domestic corporation is subject to the annual minimum tax from the date of incorporation until the certificate of dissolution is filed with the Secretary of State, even though the corporation may cease doing business prior thereto. If a foreign corporation qualifies to engage in intrastate activities, it is subject to the minimum tax until it files a certificate of withdrawal with the Secretary of State or dissolves in the state of incorporation, even though it never engages in intrastate activities. A foreign corporation which does not qualify to engage in intrastate activities, but nevertheless engages in such activities, is subject to at least the minimum tax for any year or years that it engages in such activities.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23153, Revenue and Taxation Code.
HISTORY

1. New section filed 1-7-58; effective thirtieth day thereafter (Register 58, No. 1).
2. Amendment filed 9-19-69; effective thirtieth day thereafter (Register 69, No. 38).
3. Renumbering and amendment of Section 23151-23154 to Section 23151 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
Article 3. Tax on Banks and Financial Corporations
§23183. Financial Corporation - Defined.
Note     •     History

(a) “Financial corporation” means a corporation, except as provided in subdivision (b) of California Revenue and Taxation Code section 23183, which predominantly deals in money or moneyed capital in substantial competition with the business of national banks.
(b) Definitions.
(1) “Predominantly” means over 50% of a corporation's total gross income is attributable to dealings in money or moneyed capital in substantial competition with the business of national banks. Generally, the determination of predominance will be made based upon the division of gross income of for the year in issue. However, the classification of a corporation as a financial corporation or as a nonfinancial corporation will not be changed based upon an occasional year in which its gross income does not or does not exceed the 50% level. For the classification of a corporation as a financial (or nonfinancial) corporation to be changed, there must be a shift in the predominant character of the gross income for two consecutive years and the average of the corporation's gross income in the current and the immediately preceding two years must fail (or satisfy) the predominance test. Where substantial amounts of gross income arise from an incidental or occasional sale of an asset of the taxpayers, such gross income shall be excluded from the for purposes of this subsection. For example, gross income from the sale of a headquarters building shall be excluded. 
EXAMPLE: Corporation A earns 80%, 75%, 37%, and 78% of its total gross income from dealings in money or moneyed capital, for years #1, #2, #3, and #4, respectively. Assuming A meets all the other requirements of being classified as a financial corporation, it will be classified as such for year #3 as well as for years #1, #2 and #4, respectively. Assuming A meets all the other requirements for being classified as a financial corporation, it will be classified as such for year #3 as well as for years #1, #2, and #4, because the gross income of 37% in year #3 is within the acceptable range for an occasional variation from the 50% standard ((80 + 75 + 37) / 3 = 64%).
(2) “Deals in” means conducting transactions in the course of a trade or business on its own account as opposed to brokering the capital of others. A corporation which buys, sells, places or invests its own assets in dealing in moneyed capital.
EXAMPLE: Corporation B is a stock brokerage firm. Sixty percent of its total gross income is attributable to fees charged for buying and selling stocks and bonds on behalf of customers. B is not a financial corporation because the buying and selling of stocks and bonds on behalf of others does not constitute dealing in moneyed capital.
(3) “Money or moneyed capital” includes, but is not limited to, coin, cash, currency, mortgages, deeds of trust, conditional sales contracts, loans, commercial paper, installment notes, credit cards, and accounts receivable.
(4) “In substantial competition” means that a corporation and national banks both engage in seeking and securing in the same locality capital investment of the same class which are substantial in amount, even though the terms and conditions of the business transactions of the same class are not identical. It does not mean there must be competition as to all phases of the business of national banks, or competition as to all types of loans or all possible borrowers. The activities of a corporation need not be identical to those performed by a national bank in order to constitute substantial competition, it is sufficient if there is competition with some, but not all, bases of the business of national banks, or capital is invested in particular operations or investments like those of national banks. 
EXAMPLE: Corporation C engages exclusively in purchasing, at a discount, conditional sales contracts of household furnishings and other low price articles of personal property from small local retail sellers of those articles under such contracts. C never makes loans. From 60% to 100% of the contracts were purchased by C without recourse to the seller. C requires credit references and information from the buyers named in the contracts, which must meet C's approval before it will purchase the contracts. No part of the payment to the seller for the contracts is withheld as a reserve to protect C if the credit buyer defaulted. National banks in the same area as C make personal loans for the purchase of household equipment, but rely solely on the buyer's credit and do not take the property as security. Those national banks also purchase at a discount conditional sales contracts from sellers of  household equipment, but rely solely upon the credit of the seller rather than the buyer named in the contract; take all contracts with recourse; and withhold payment to the seller of 20% to 40% of the price as a reserve against default under the contract. C is a financial corporation. 
EXAMPLE: Corporation D is a wholly owned subsidiary of E corporation. E engages exclusively in the sale of retail household items and clothing to the general public. E corporation extends credit to its customers by issuing credit cards. F then sells to D the credit card customer receivables arising out of E's retail business. D engages exclusively in purchasing these receivables from E and collecting on those receivables. D is a financial corporation.
EXAMPLE: Corporation F makes loans which are secured by first mortgages or first deeds of trust on real estate. The loans made by F are government insured FHA or VA loans, or conventional or uninsured loans. A substantial number of such loans are similar to real estate loans made by national banks. All loans made are intended for subsequent sale to institutional investors, usually within six months from the time they are originally made. After the loans are sold, F services them by collecting installments and providing other services, such as making certain that the underlying properties are kept insured and that taxes upon them are paid. F services only those loans made by it. F is a financial corporation.
(5) “Business of national banks” means the businesses in which national banks are permitted to operate.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23183, Revenue and Taxation Code.
HISTORY

1. New section filed 3-1-91; operative 3-31-91 (Register 91, No. 14).
Article 4. Commencing Corporations
§23222. Commencing Corporations.
Note     •     History

A corporation commencing to do business in California after qualification or after having filed its articles of incorporation with the Secretary of State, a period of one-half month may be disregarded provided the corporation was not doing business in and received no income from sources in the State during such period, and a period of more than one-half a calendar month may be treated as a period of one month. For example, a corporation files its articles of incorporation on December 17th, and elects to file its return on a calendar year basis. No return will be required and no tax will be due for the period from December 17th to December 31st provided the corporation was not doing business in and received no income from sources in California during this period. However, if in the above example the corporation filed its articles on December 16th and elected to file its return on a calendar year basis, it will be required to file a return and pay a tax for the period from December 16th to December 31st, regardless of the fact that it may have been inactive and received no income during such period.
In determining whether a corporation comes within the provisions of this ruling, affidavits on behalf of the corporation that it did no business in and received no income from sources in California during such period shall be required if deemed necessary. Where it appears the corporation filed its articles only one or two days before commencement of its fiscal year period, affidavits normally will not be required.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23222, Revenue and Taxation Code.
HISTORY

1. New Regs. 23221-23226 filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Renumbering and amendment of Section 23221-23226 to Section 23222 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
Article 5. Reorganization of Corporations
§23251. Reorganizations--Transferee Liability.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23251, Revenue and Taxation Code.
HISTORY

1. New Reg. 23251-23254 filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Renumbering and amendment of Section 23251-23254 to Section 23251 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37). For prior history, see register 70, No. 12.
3. Change without regulatory effect repealing section filed 4-16-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 16).
Article 6. Corporations Resuming Business
§23281. Corporations Resuming Business.
Note     •     History

A corporation which ceases to do business during any taxable year and does not dissolve or withdraw during that year, but remains inactive during that year and one or more succeeding taxable years, shall, upon the resumption of business, pay a tax for the year it resumes business at the tax rate applicable for the year that business is resumed measured by the income of the year in which it discontinued doing business. 
EXAMPLE (1):
The A Corporation, not a financial corporation, and reporting on a calendar year basis, ceased to do business on June 30, 19X1, after several years of normal operations. During the first six months of 19X1, A had a net income of $10,000. A resumes business on January 1, 19X3, on a calendar year basis. A must pay a tax equal to one-half the tax measured by its income in 19X1, on or before March 15, 19X3, and the balance on or before September 15, 19X3. 
EXAMPLE (2):
The A Corporation, not a financial corporation, and reporting on a calendar year basis, ceased doing business on June 30, 19X1, after several years of normal operations. During the first six months of 19X1, A had a net income of $10,000. A resumes business on April 15, 19X3, on a calendar year basis. A must pay a tax equal to one-half the tax measured by its income in 19X1, on April 15, 19X3, and the balance on or before October 15, 19X3.
Note: If A resumed business on August 1, 1961, the first installment would be payable on that date and the balance on or before December 31, 19X3.
This rule does not apply to commencing corporations which have paid the tax for the year in which the corporation goes inactive; in such event the corporation shall pay a tax for the year it resumes business measured by the income of the year of resumption of business. Nor does it apply to corporations which were taxable under Chapter 3 after they cease to do business in this State; see Section 23224.
Corporations which have undergone suspension or forfeiture under Section 23301, and revive in a subsequent taxable year without having done business during the period of suspension or forfeiture are subject to the commencing corporation provisions of Article 4. Payment of the minimum tax is a condition precedent to the issuance of the certificate of revivor.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23281, Revenue and Taxation Code.
HISTORY

1. New Regs. 23281-23282 filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Renumbering and amendment of Section 23281-23282 to Section 23281 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
Article 7. Suspension and Revivor
NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New Reg. 23301-23305a filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Amendment filed 1-6-69; effective thirtieth day thereafter (Register 69, No. 2).
3. Repealer of Article 7 (Section 23301-23305a) filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
Article 8. Dissolution or Withdrawal
§23331. Dissolution or Withdrawal.
Note     •     History

(a) Effective Date. For the purposes of Article 8 a corporation, other than a credit union, is deemed dissolved or withdrawn when either a copy of the court decree of dissolution, certificate of dissolution under Section 1905 of the Corporations Code, or a certificate of surrender under Section 2112 of the Corporations Code has been filed in the office of the Secretary of State. A credit union for purposes of this article is considered dissolved at the time that it files a certificate of election to dissolve in the office of the Secretary of State.
For procedure under Chapter 3, see Reg. 23561.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Sections 23331 and 23332, Revenue and Taxation Code.
HISTORY

1. Reg. 23331-23334 filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Amendment filed 8-27-71; effective thirtieth day thereafter (Register 71, No. 35).
3. Renumbering and amendment of Section 23331-23334 to Section 23331 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23334. Tax Clearance Certificate.
Note     •     History

(a) In General. A domestic corporation, including a tax-exempt domestic corporation, must obtain a tax clearance certificate from the Franchise Tax Board before it can dissolve. A domestic corporation, including a tax exempt domestic corporation, that is the disappearing corporation in a merger with a foreign corporation not qualified to transact intrastate business must obtain a tax clearance certificate before the Secretary of State may file the merger agreement. A foreign corporation, including a tax exempt foreign corporation, that is qualified to transact intrastate business must obtain a tax clearance certificate before the Secretary of State may file a certificate of surrender of the corporation's right to transact intrastate business or before the Secretary of State may file the merger agreement when the disappearing corporation is a foreign corporation qualified to transact intrastate business. 
(b) Tax Clearance Certificate Procedures. 
(1) Within thirty days after the Franchise Tax Board receives a request for a tax clearance certificate, the Franchise Tax Board will either issue a tax clearance certificate or inform the requestor of the conditions that must be satisfied before the Franchise Tax Board will issue a tax clearance certificate.
(A) The Franchise Tax Board may issue a tax clearance certificate on an expedited basis. A corporation needing a tax clearance certificate on an expedited basis must have a specific justification for requesting the expedited service, such as legal or financial difficulties that will occur if the Franchise Tax Board fails to issue a tax clearance within twenty-four hours of receipt. 
(B) A corporation that is suspended or becomes suspended during the tax clearance process cannot receive a tax clearance certificate from the Franchise Tax Board. If a suspended corporation requests a tax clearance certificate, the Franchise Tax Board will advise the requestor of the requirements to revive the suspended corporation in response to the request for a tax clearance certificate. 
(2) Except in the case of a corporation that is suspended (see subsection (b)(1)(B) above), the Franchise Tax Board will issue a tax clearance certificate once all taxes have been paid or secured and once the corporation has filed all required returns, if necessary. 
(A) A tax clearance certificate may be issued based upon any of the following: 
1. Taxes paid: If a corporation requests a tax clearance certificate on the basis that the corporation paid or will pay all taxes due, the corporation must file a final tax return and pay any outstanding tax liability before the Franchise Tax Board will issue a tax clearance certificate. After the Franchise Tax Board reviews the corporation's file, including a final return, and determines that the corporation has paid all outstanding tax liability, the Franchise Tax Board will issue the tax clearance certificate and forward a copy to the Secretary of State. 
2. Assumption of liability: If a corporation requests a tax clearance based on assumption of tax liability, the Franchise Tax Board will accept any individual or organization that can verify the financial ability to satisfy the entire potential tax liability of the corporation as an assumer for that corporation. As long as all relevant information to request a tax clearance certificate is included, the assumption of tax liability has a current date and original signatures, and the assumer has the financial ability to satisfy the entire potential tax liability, the Franchise Tax Board will issue a tax clearance certificate and forward a copy to the Secretary of State. The assumption of tax liability will become effective when the Secretary of State files the dissolution, merger, or surrender documents and the corporation receives a tax clearance certificate from the Franchise Tax Board. 
3. Surety bond: If a corporation requests a tax clearance based on a surety bond, the Franchise Tax Board will inform the corporation of the required amount of the surety bond, which will be no less than two thousand dollars ($2,000). Once the corporation submits the requisite surety bond, the Franchise Tax Board will issue the tax clearance certificate and forward a copy to the Secretary of State. After the Franchise Tax Board audits the corporation's final return and all outstanding tax liability is satisfied, the Franchise Tax Board will release the surety bond. 
4. Cash deposit: If a corporation requests a tax clearance based on a cash deposit, the Franchise Tax Board will inform the corporation of the required amount of the cash deposit, which will be no less than two thousand dollars ($2,000). Once the corporation submits the requisite cash deposit, the Franchise Tax Board will issue the tax clearance certificate and forward a copy to the Secretary of State. After the Franchise Tax Board audits the corporation's final return and uses the deposit to offset any outstanding tax liability, the Franchise Tax Board will release any remaining amount of cash deposit. 
(B) Receiving a tax clearance certificate does not relieve the corporation, or its transferees, of any tax liability (including interest and penalties) that may be due or found to be due under Part 11 of Division 2 of the Revenue and Taxation Code. 
(C) If the corporation has not filed a final return before the Franchise Tax Board issues a tax clearance certificate, the corporation, or its transferees, is responsible for filing one within two months and fifteen days after the close of the month in which the corporation ceases to exist. 
(D) Notwithstanding anything in this regulation, all returns, including the final return, remain subject to audit until the expiration of the normal statute of limitations. 
(c) Domestic General Corporations Seeking Dissolution. 
(1) A domestic general corporation seeking dissolution must submit to the Secretary of State all documents required under the Corporations Code to effectuate dissolution and submit either i) a tax clearance certificate, ii) a request for a tax clearance certificate, or iii) the submitted Certificate of Dissolution must contain language stating that the tax liability will be satisfied on a taxes paid basis or that a person or organization assumes the tax liability, if any, of the dissolving corporation as security for the issuance of a tax clearance certificate from the Franchise Tax Board and is responsible for additional corporate taxes, if any, that are assessed and that become due after the date of the assumption of the tax liability, pursuant to Corporations Code section 1905, subdivision (a), subpart (3). 
(A) When the corporation submits the required documents to the Secretary of State for filing pursuant to Corporations Code section 1905, the Secretary of State will file the Certificate of Dissolution. If a tax clearance certificate does not accompany the filing, the corporation's dissolution will be “conditional” pending the issuance of a valid tax clearance certificate by the Franchise Tax Board, pursuant to Corporations Code section 1905, subdivision (c). 
(B) For tax purposes the corporation's existence continues until the Franchise Tax Board has issued, and the Secretary of State has received, a valid tax clearance certificate. Therefore, if a corporation does not satisfy all of the conditions necessary to receive a tax clearance certificate within a reasonable time, the corporation may be suspended and must be revived before a tax clearance certificate will be issued. Under Corporations Code section 1905, subdivision (c), however, the corporate powers, rights, and privileges cease when the Secretary of State files the Certificate of Dissolution. 
(2) In the case where the corporation submits a request for a tax clearance certificate to the Secretary of State, the Secretary of State will forward the request for a tax clearance certificate to the Franchise Tax Board. 
(3) A general corporation will not be liable for the minimum franchise tax for the taxable year in which the Franchise Tax Board issues the tax clearance certificate if: 
(A) the Secretary of State filed the corporation's Certificate of Dissolution before the beginning of that year and the corporation did not do business in this state during that taxable year; or 
(B) the corporation's taxable year is 15 days or less before the Secretary of State filed the corporation's Certificate of Dissolution and the corporation did not do business in this state during that taxable year. 
(d) Domestic Nonprofit Corporations Seeking Dissolution 
(1) A domestic nonprofit corporation must request and receive a valid and current tax clearance certificate and submit all required documents to the Secretary of State before the Secretary of State may file the Certificate of Dissolution, pursuant to Corporations Code section 6615 (public benefit), Corporations Code section 8615 (mutual benefit) and Corporations Code section 9680 (religious). 
(2) When the domestic nonprofit corporation receives a tax clearance certificate from the Franchise Tax Board, that corporation must file a Certificate of Dissolution with the Secretary of State on or before the expiration date shown on the tax clearance certificate. 
(3) If the domestic nonprofit corporation does not have tax-exempt status, then the franchise tax, including the minimum franchise tax, will continue to be imposed until the domestic nonprofit corporation has ceased doing business in this state or the Secretary of State has filed the Certificate of Dissolution, whichever is later. If the nonprofit corporation's taxable year is 15 days or less before the Secretary of State files the nonprofit corporation's Certificate of Dissolution, however, the corporation will not be liable for the minimum franchise tax as long as the corporation did not do business in this state during that taxable year. 
(e) Qualified Foreign Corporations Seeking Surrender. 
(1) A qualified foreign corporation must request and receive a valid tax clearance certificate from the Franchise Tax Board and submit all required documents to the Secretary of State before the Secretary of State may file a Certificate of Surrender of Right to Transact Intrastate Business. 
(2) When the qualified foreign corporation receives a tax clearance certificate from the Franchise Tax Board, that corporation must file a Certificate of Surrender of Right to Transact Intrastate Business with the Secretary of State, on or before the expiration date shown on the tax clearance certificate. (See Corp. Code § 2112.) 
(3) If the qualified foreign corporation does not have tax-exempt status, the franchise tax, including the minimum franchise tax, will continue to be imposed until the qualified foreign corporation has ceased doing business in this state or the Secretary of State has filed the Certificate of Surrender of Right to Transact Intrastate Business, whichever is later. If the corporation's taxable year is 15 days or less before the Secretary of State files the corporation's Certificate of Surrender of Right to Transact Intrastate Business, however, the corporation will not be liable for the minimum franchise tax as long as the corporation did not do business in this state during that taxable year. 
(f) General Corporations Merging with Other General Corporations. In the case of a statutory merger between two or more general corporations: 
(1) When the surviving corporation is a foreign corporation not qualified to transact intrastate business and the disappearing corporation is a domestic general corporation, the merger becomes effective in accordance with the law of the surviving corporation's jurisdiction, except as provided by Corporations Code section 1108, subdivision (e). However, the disappearing domestic corporation must obtain a tax clearance certificate from the Franchise Tax Board and submit the tax clearance certificate along with the merger documents required by the Corporations Code before the Secretary of State will file the merger documents and terminate the existence of the domestic corporation. (See Corp. Code §§ 1108 and 1107.5.) 
(2) When both the surviving and disappearing corporations are domestic general corporations, the merger becomes effective when the Secretary of State files the required merger documents. The Secretary of State will file the merger documents without a tax clearance certificate issued by the Franchise Tax Board and will notify the Franchise Tax Board of the merger. (See Corp. Code § 1107.5.) 
(3) When the surviving corporation is a qualified foreign corporation and the disappearing corporation is a domestic general corporation, the merger becomes effective in accordance with the law of the surviving corporation's jurisdiction, except as provided by Corporations Code section 1108, subdivision (e). However, the surviving corporation must submit the required merger documents to the Secretary of State for filing. The Secretary of State will file the merger documents without requiring the domestic corporation to obtain a tax clearance certificate from the Franchise Tax Board and will notify the Franchise Tax Board of the merger. (See Corp. Code §§ 1108 and 1107.5.) 
(4) When the surviving corporation is a domestic general corporation and the disappearing corporation is a qualified foreign corporation, it is necessary to obtain a tax clearance certificate from the Franchise Tax Board for the disappearing qualified foreign corporation. The tax clearance certificate and the required merger documents must be submitted to the Secretary of State for filing. Each disappearing qualified foreign corporation, by virtue of filing the required merger documents, will automatically surrender its right to transact intrastate business as of the date of the filing by the Secretary of State. (See Corp. Code § 1108.) 
(g) Other Organizations. 
(1) Other Organizations Required to Obtain a Tax Clearance Certificate. 
(A) Domestic limited liability companies seeking cancellation of their articles of organization and foreign limited liability companies seeking cancellation of their registration to transact intrastate business are required to obtain a tax clearance certificate under Revenue and Taxation Code section 17941 et seq. (See Rev. and Tax. Code § 17945.) 
(B) Domestic limited liability partnerships seeking cancellation or cessation of their registration as a limited liability partnership and foreign limited liability partnerships seeking cessation of their registration either as a limited liability partnership, or to conduct intrastate business are required to obtain a tax clearance certificate under Revenue and Taxation Code section 17948 et seq. (See Rev. and Tax. Code § 17948.1.) 
(2) Organizations Not Required to Obtain a Tax Clearance Certificate. 
(A) A tax clearance certificate is not required for organizations not created under the laws of California or qualified to transact intrastate business in California with the Secretary of State. 
(B) These organizations, however, are still required to file a final return with the Franchise Tax Board pursuant to the applicable provision of the Revenue and Taxation Code. 
(h) Examples. 
EXAMPLE 1: Corporation B, a calendar year taxpayer that is a general corporation incorporated in this state, ceases all business activities on December 22, 2000. On December 29, 2000, B submits to the Secretary of State dissolution documents conforming with the Corporations Code and a request for a tax clearance certificate based on taxes already paid, whereupon the Secretary of State files the Certificate of Dissolution and grants B a dissolution conditioned on the Franchise Tax Board issuing a tax clearance certificate. The Secretary of State forwards the request for a tax clearance certificate to the Franchise Tax Board on January 3, 2001. On January 29, 2001, the Franchise Tax Board informs B that, as conditions precedent to receiving a tax clearance certificate, B must file a final tax return and pay the franchise tax for the 2000 taxable year. B files the final return and pays the franchise tax on March 1, 2001. The Franchise Tax Board audits the returns for all outstanding taxable years, including the final return, and then issues the tax clearance certificate, sending a copy to the Secretary of State. The dissolution will then become final as of December 29, 2000, the date the documents were filed with the Secretary of State. Pursuant to Revenue and Taxation Code section 23332, B will not be subject to the minimum franchise tax for the 2001 taxable year because B has met each of the requirements of that section by ceasing all business activities and filing the dissolution papers before commencement of the 2001 taxable year. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that B does not file the final return and pay the franchise tax for 2000 on March 1, 2001. On January 3, 2002, the Franchise Tax Board suspends B pursuant to Revenue and Taxation Code section 23301. On February 13, 2002, B files a final return but the Franchise Tax Board is unable to issue a final tax clearance certificate because B is suspended. 
EXAMPLE 3: Corporation C, a domestic general corporation, is in the process of merging with Corporation D, another domestic general corporation, where D will be the surviving corporation. C and D have agreed to the terms of the merger and file merger documents with the Secretary of State. The Secretary of State will file the merger documents without receiving a tax clearance certificate for C from the Franchise Tax Board. The Secretary of State will inform the Franchise Tax Board of the merger and termination of C's existence. 
EXAMPLE 4: Assume the same facts as in EXAMPLE 3, except Corporation D, the surviving corporation, is a foreign general corporation not qualified to transact intrastate business. To effectuate the merger D is required to follow the laws of the jurisdiction under which it is incorporated. However, D is required to submit the required merger documents to the Secretary of State and C must obtain a tax clearance certificate from the Franchise Tax Board before the Secretary of State will file the merger documents. 
(i) Definitions. For purposes of this regulation, the following terms mean: 
(1) “Domestic” means any corporation formed under the laws of the State of California. 
(2) “Corporation” means any entity recognized as a corporation for purposes of the Corporations Code and Chapter 2 of Part 11, Division 2 of the Revenue and Taxation Code, including both general corporations and nonprofit corporations. 
(3) “Corporations Code” means the California Corporations Code. 
(4) “Foreign” means any corporation formed under the laws of any jurisdiction other than the State of California. 
(5) “General corporation” means a corporation that is organized under Division 1 of Title 1 or the Corporations Code, section 100 et seq., commonly referred to as stock corporation or business corporation. 
(6) “Nonprofit” means a corporation organized under Division 2 of Title 1 of the Corporations Code section 5000 et seq., commonly referred to as non-stock corporations. 
(7) “Organization” includes a corporation, a limited liability company, or a limited liability partnership, limited partnership, partnership, trust, or any other entity. 
(8) “Qualified” means the foreign corporation has received a certificate of qualification from the Secretary of State for the right to transact intrastate business. 
(9) “Secretary of State” means the State of California, Office of Secretary of State. 
(j) Cross-References. All references to provisions of the Corporations Code, discussion of the corporate law consequences of various transactions, and discussion of the Secretary of State's procedures are intended to be illustrative only and are not intended to have substantive effect. For information regarding the Corporations Code provisions used in this regulation, the corporate law consequences of the various transactions, and the Secretary of State's procedures relating to dissolution, surrender, or merger please contact the Secretary of State. The following cross-references are relevant for purposes of this regulation: 
(1) For rules describing the corporate law procedures for effectuating dissolution of a general corporation, see Corporations Code section 1900 et seq. 
(2) For rules describing the corporate law procedures for effectuating dissolution of a nonprofit corporation, see Corporations Code section 6610 et seq. (public benefit), Corporations Code section 8610 et seq. (mutual benefit) and Corporations Code section 9680 (religious). 
(3) For rules describing the corporate law procedures effectuating surrender of the right to conduct intrastate business for a foreign corporation, see Corporations Code section 2112. 
(4) For rules describing the corporate law procedures for effectuating a merger of general corporations, see Corporations Code section 1100 et seq. 
(5) For rules describing the corporate law procedures for effectuating a merger of nonprofit corporations, see Corporations Code section 6010 et seq. (public benefit), Corporations Code section 8010 et seq. (mutual benefit) and Corporations Code section 9640 (religious). 
(6) For rules describing the corporate law procedures for effectuating interspecies mergers see Corporation Code section 1113. 
(7) For rules describing the suspension and revivor process, see Revenue and Taxation Code sections 23282 and 23301 et seq. 
(8) For rules describing the imposition of the franchise tax for the last taxable year of domestic corporations, see Revenue and Taxation Code sections 23114 and 23332. 
(9) For rules describing the use of a final return as a request for a tax clearance certificate, see Revenue and Taxation Code section 23335. 
(10) For rules describing audit procedures, including statute of limitations for issuing a notice of proposed assessment, see Revenue and Taxation Code section 19031 et seq. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Sections 23332 and 23334, Revenue and Taxation Code.
HISTORY

1. Renumbering of Section 23331-23334(d) to Section 23334 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
2. Amendment of section heading, section and Note filed 1-9-2003; operative 2-8-2003 (Register 2003, No. 2).
Article 9. Affiliated Railroads
NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New Reg. 23361-23364a filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Repealer of Article 9 (Section 23361-23364a) filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
Subchapter 3. Corporation Income Tax
Article 1. Imposition of Tax
§23501. Corporations Subject to Tax Under Chapter 3.
Note     •     History

(a) In General. Every corporation, domestic or foreign, which is not doing business in this State and not expressly exempt under Article 1 of Chapter 4 or the Constitution of the State of California, but which derives income from sources within this State or from activities carried on in this State, is subject to the tax imposed under Chapter 3.
The income from sources within this State of corporations doing business in this State is included in the measure of the tax imposed under Chapter 2. Consequently, such corporations are not subject to the tax imposed under Chapter 3.
(b) Foreign Corporations. If the only activities of employees of foreign corporations within this State engaging exclusively in interstate commerce are the solicitation of orders for goods to be shipped to customers in this State from points outside this State, the corporations are probably within the purview of Public Law 86-272 (15 U.S.C. Sections 381, et. seq),. Accordingly, such corporations would not be subject to the tax imposed under Chapter 3. 
(c) The income from sources within this State of holding companies, i.e., corporations organized to hold the stocks or bonds of other corporations and which engage in no other activities, inactive business corporations, and corporations whose activities are not of such a character as to constitute doing business, is likewise taxable under Chapter 3, since such corporations, are not subject to the franchise tax measured by net income imposed by Chapter 2. However, such corporations are subject to the minimum franchise tax imposed by section 23153, Revenue and Taxation Code, if they are incorporated in this State or are qualified to do business in this State, even if they do not actually do business in this State.
(d) As used in this regulation, “Chapter 2” refers to Chapter 2 of Part 11, Division 2 of the Revenue and Taxation Code (beginning with section 23101 of the Revenue and Taxation Code) and “Chapter 3” refers to Chapter 3 of Part 11, Division 2 of the Revenue and Taxation Code (beginning with section 23501, Revenue and Taxation Code).
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23501, Revenue and Taxation Code.
HISTORY

1. New Reg. 23501-23504 filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Renumbering and amendment of Section 23501-23504 to Section 23501 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
3. Change without regulatory effect amending section and Note filed 4-2-2001 pursuant to section 100, title 1, California Code of Regulations (Register 2001, No. 14).
§23504. Taxpayers Formerly Subject to Franchise Tax.
Note     •     History

Every corporation, the income of which was included in the measure of tax imposed under Chapter 2, and which becomes subject to the tax imposed by this article, shall, in the income year that the change occurs, remain subject to the tax imposed under Chapter 2. In subsequent years its income, to the extent derived from sources in this State, is taxable under this article.
Such corporations are also required to file a return for the calendar year in which such change occurs, even though in most cases, because its tax will have been prepaid under Chapter 2, no tax is due. The provisions of this paragraph may be illustrated by the following example: 
EXAMPLE:
The A Corporation was doing business in California and reporting on a calendar year basis. It commenced doing business in 19X1 and ceased business activities and surrendered its right to do intrastate business in this State on June 30, 19X8, but continued to derive income from sources within this State; thereby becoming subject to the tax imposed by this article. It filed a franchise tax return for the income year ended December 31, 19X7, which under Section 23222 paid its tax for taxable year ending December 31, 19X8. A is required to file a tax return for information purposes for the income year ended December 31, 19X8, even though no tax may be due. If A continues to derive income from sources within this State, it will be required to file an income tax return under this article for the income year ending December 31, 19X9, and subsequent income years. The fact that A is required to file an information return for the income year ended December 31, 19X8, does not affect A's right to have its tax prorated for the year of withdrawal. See Reg. 23331, 23332 and 23334.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23504, Revenue and Taxation Code.
HISTORY

1. Renumbering and amendment of Section 23501-23504(c) to Section 23504 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
Article 3. Tax Credits
§23636-0. Table of Contents.
Note     •     History

Table of Contents -- Regulation Sections 23636-1 through 23636-9 
Section 23636-1. The Joint Strike Fighter (JSF) Wage Credit. 
(a) In General 
(b) Joint Strike Fighter Property Credit 
(c) Cross References 
(d) General References 
Section 23636-2. Definitions. 
(a) Joint Strike Fighter 
(b) Initial Contract or Initial Subcontract 
(c) Joint Strike Fighter Program 
(d) Manufactured 
(e) Product For Ultimate Use in a Joint Strike Fighter 
Section 23636-3. Qualified Taxpayer. 
(a) Regulation 23637-3 Shall Apply 
Section 23636-4. Qualified Wages. 
(a) In General 
(b) Amount of Qualified Wages 
Section 23636-5. Qualified Employee. 
(a) In General 
(b) Limitation 
(1) Computation 
(c) Services Directly Related 
Section 23636-6. JSF Contract Bidding. 
(a) In General 
(b) Bid 
(c) JSF Wage Credit Reflected Within the Bid 
(d) JSF Wage Credit Allowable 
(e) Pass-Through Entities 
(f) Copies Provided to Franchise Tax Board 
Section 23636-7. JSF Wage Credit Carryforwards. 
(a) In General 
(b) Carryforwards for Pass-Through Entities 
(c) Carryforwards Permitted After Sunset 
Section 23636-8. Recordkeeping Requirements. 
(a) In General 
(b) Books and Records 
Section 23636-9. Miscellaneous Provisions. 
(a) Effective Dates of the JSF Wage Credit 
(b) Enterprise Zone Hiring Credit 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23636, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4). For prior history of article 2, see Register 97, No. 33.
2. Editorial correction amending History 1, repealing article 2 heading and relocating sections 23636-0 through 23637-11 to article 3 (Register 2004, No. 6).
§23636-1. The Joint Strike Fighter (JSF) Wage Credit.
Note     •     History

The Joint Strike Fighter (JSF) Wage Credit -- (See Regulation 23636-0 for Table of Contents.) 
(a) In General. The Joint Strike Fighter (JSF) Wage Credit is allowed to any qualified taxpayer for each taxable year beginning on or after January 1, 2001, and before January 1, 2006, in the following amounts: 
(1) Fifty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2001, and before January 1, 2002. 
(2) Forty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2002, and before January 1, 2003. 
(3) Thirty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2003, and before January 1, 2004. 
(4) Twenty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2004, and before January 1, 2005. 
(5) Ten percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2005, and before January 1, 2006. 
The credit allowed by Revenue and Taxation Code section 23636 and this regulation shall not exceed ten thousand dollars ($10,000) per year, per qualified employee, subject to reduction as provided in Revenue and Taxation Code section 23636, subsection (c), and this Regulation 23636-5 for employees that are qualified employees for only part of a taxable year. 
(b) Joint Strike Fighter Property Credit. The Joint Strike Fighter Property Credit contained in Revenue and Taxation Code section 23637 provides a credit for qualified property and capitalized direct labor costs to construct, modify or install qualified property used to manufacture products for ultimate use in a Joint Strike Fighter. In contrast, the Joint Strike Fighter Wage Credit allowed by Revenue and Taxation Code section 23636 and this regulation provides a credit for certain capitalized direct labor costs to develop and manufacture inventory property designed to be physically installed in or attached to a Joint Strike Fighter. 
(c) Cross References. Regulation 23636-2 contains definitions applicable to Regulations 23636-1 through 23636-9, inclusive, Regulation 23636-3 contains rules relating to qualified taxpayers, Regulation 23636-4 contains rules relating to qualified wages, Regulation 23636-5 contains rules relating to qualified employees, Regulation 23636-6 contains rules relating to contract bidding, Regulation 23636-7 contains rules relating to carryforwards, Regulation 23636-8 contains general recordkeeping requirements, and Regulation 23636-9 contains other miscellaneous provisions. For rules relating to the JSF Wage Credit allowed to taxpayers under the Personal Income Tax Law, see Revenue and Taxation Code section 17053.36 and the regulations thereunder. 
(d) General References. For purposes of Regulations 23636-1 through 23636-9, inclusive, the following general references shall apply: 
(1) All citations to the Revenue and Taxation Code are to the California Revenue and Taxation Code. 
(2) All citations to the Internal Revenue Code are to the Internal Revenue Code of 1986, as amended. 
(3) The credits provided for in Revenue and Taxation Code sections 17053.36 and 23636 shall be collectively referred to as the “Joint Strike Fighter Wage Credit” or the “JSF Wage Credit.” 
(4) Unless otherwise provided, any reference to wages in the examples in this regulation shall mean wages that are direct labor costs, as used in Internal Revenue Code section 263A and defined in the regulations thereunder, and shall assume that the wages are qualified wages paid to qualified employees to manufacture property in this state for ultimate use in a Joint Strike Fighter. In addition, unless otherwise provided, all examples in this regulation shall assume that the qualified taxpayer's bid to manufacture property for ultimate use in a Joint Strike Fighter reflected a reduction in the amount of the Joint Strike Fighter Wage Credit allowable as provided in Revenue and Taxation Code section 23636, subsection (e), and Regulation 23636-6. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23636, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23636-2. Definitions.
Note     •     History

Definitions -- (See Regulation 23636-0 for Table of Contents.) 
For purposes of Regulations 23636-1 through 23636-9, inclusive, the following definitions shall apply: 
(a) Joint Strike Fighter. The term “Joint Strike Fighter” shall mean the next-generation air combat strike aircraft developed and produced under the Joint Strike Fighter Program of the United States government. 
(b) Initial Contract or Initial Subcontract. The term “initial contract” shall mean the contract awarded by the United States government to a prime contractor for any phase, including the Engineering and Manufacturing Development Phase, of the Joint Strike Fighter Program to produce the Joint Strike Fighter. The term “initial subcontract” shall mean a contract between a prime contractor and any other contractor, or between two contractors where one of those contractors is under contract with the prime contractor or where the prime contractor or a contractor under contract with the prime contractor has consented to the contract in writing, to produce a product that is designed to be physically attached to or installed in a Joint Strike Fighter under the initial contract. 
(c) Joint Strike Fighter Program. The term “Joint Strike Fighter program” shall mean the multiservice, multinational project conducted by the United States government to develop and produce the next generation of air combat strike aircraft. 
(d) Manufactured. The term “manufactured” shall mean the process of developing, converting or conditioning stock in trade or other property properly includible in the inventory of the taxpayer for ultimate use in a Joint Strike Fighter by changing the form, composition, quality, or character of the property, and includes any improvements to property that result in a greater service life or greater functionality than that of the original property. The term “manufactured” shall include the design, engineering and testing activities necessary to develop the property. Property shall be treated as having a greater service life if such property can be used for a longer period than such property could have been used prior to the conversion or conditioning of such property. Property shall be treated as having greater functionality if it has been improved in such a manner that it can be used to perform new or different functions. 
(e) Product for Ultimate Use in a Joint Strike Fighter. The term “product for ultimate use in a Joint Strike Fighter” shall mean a product that is properly treated as inventory in the hands of the taxpayer and is designed to be physically installed in or attached to a Joint Strike Fighter. The term “product for ultimate use in a Joint Strike Fighter” shall not include any product that is not designed to form a part of the Joint Strike Fighter. For this purpose, the term “product” shall include any studies, drawings, pilot model or prototype used in connection with the development of the product. For this purpose, the term “inventory” includes any property which is required to be included in the qualified taxpayer's inventory costs under Internal Revenue Code section 263A or that is described in Internal Revenue Code section 1221(1). 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23636, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23636-3. Qualified Taxpayer.
Note     •     History

Qualified Taxpayer -- (See Regulation 23636-0 for Table of Contents.) 
(a) Regulation 23637-3 Shall Apply. For purposes of Regulations 23636-1 through 23636-9, inclusive, the provisions of Regulation 23637-3, as in effect on the date these regulations become effective, shall apply and are incorporated herein by reference. The term “qualified taxpayer” in this regulation shall have the same meaning as the term qualified taxpayer in Regulation 23637-3. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23636, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23636-4. Qualified Wages.
Note     •     History

Qualified Wages -- (See Regulation 23636-0 for Table of Contents.) 
(a) In General. For purposes of Regulations 23636-1 through 23636-9, inclusive, the term “qualified wages” shall mean that portion of wages paid or incurred by the qualified taxpayer to qualified employees that are direct labor costs, as used in Internal Revenue Code section 263A and defined in the regulations thereunder, included in inventory costs for property manufactured in this state by the qualified taxpayer for ultimate use in a Joint Strike Fighter. For this purpose, the term employee encompasses both full-time and part-time employees but shall not include contract employees or independent contractors referenced in Treasury Regulation section 263A-1. Qualified wages shall include wages for engineering, design, and testing activities to the extent those wages are treated as direct labor costs capitalized to and included in inventory costs for property manufactured in this state by the qualified taxpayer for ultimate use in a Joint Strike Fighter under the same method of allocation for California income or franchise tax purposes that the taxpayer used for federal income tax purposes under the uniform capitalization allocation rules specified in Treasury Regulation section 1.263A-1 (as in effect on the date Regulation 23636-4 is effective). 
(1) Direct labor costs shall include all elements of compensation, such as basic compensation, overtime pay, vacation pay, holiday pay, sick leave pay (other than payments pursuant to a wage continuation plan under Internal Revenue Code section 105(d) as it existed prior to its repeal in 1983), shift differential, payroll taxes, and payments to a supplemental unemployment benefit plan, but shall not include any indirect labor costs. 
(2) Indirect labor costs shall include that portion of qualified wages that are not direct labor costs. Indirect labor costs include, but are not limited to, training costs, officers' compensation, pension and other related costs, and employee benefit expenses (including payments pursuant to a wage continuation plan under Internal Revenue Code section 105(d) as it existed prior to its repeal in 1983). 
(3) In determining whether direct costs of labor are properly included in inventory costs for property manufactured in this state by the qualified taxpayer for ultimate use in a Joint Strike Fighter, the qualified taxpayer shall be required to use the same method of allocation for California income or franchise tax purposes that the taxpayer used for federal income tax purposes under the uniform capitalization allocation rules specified in Treasury Regulation section 1.263A-1 (as in effect on the date Regulation 23636-4 is effective). 
EXAMPLE 1: A, a qualified taxpayer, manufactures aircraft navigational instruments in its plant in Lancaster. A's manufacturing facility employees 20 people that assemble the instrument components. Assume that all of A's employees' activities are allocable to property manufactured in this state by the qualified taxpayer designed for ultimate use in a Joint Strike Fighter. A pays its employees $20 per hour, plus the following amounts as an employer: Social Security $1.54; Unemployment Insurance $.18; Workers' Compensation Insurance $.60; Health and Life Insurance $2.08 and Retirement Benefits $1.68 for total compensation of $26.08 per hour. Pursuant to Treasury Regulation section 263A-1, the Workers' Compensation Insurance, Health and Life Insurance and Retirement Benefits amounts are classified as indirect labor costs and are not qualified wages. Accordingly, $21.72 of the total wages of $26.08 paid by A constitute direct labor costs and qualified wages for purposes of Revenue and Taxation Code section 23636 and this regulation. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except A purchases pressurized sealing equipment for the navigational instruments and installs the equipment in B's manufacturing facility located in Burbank. A then enters into a contract with B to pressure seal all of A's navigational equipment following assembly by A. A pays B a specified hourly rate for sealing the equipment. B is properly classified as an independent contractor. Under these facts, even though the payments are made to operate equipment owned by A, the payments to B are not qualified wages as B is not an employee of A and the payments are not qualified wages eligible for the credit. However, if B is a qualified taxpayer and B meets all of the other requirements of Revenue and Taxation Code section 23636 and this regulation, B would be able to claim the JSF Wage Credit for wages paid to its own employees, if any, in connection with the instrument sealing activity. 
(b) Amount of Qualified Wages. The amount of qualified wages allowed as a credit under Section 23636 and this regulation shall be as follows: 
(1) Fifty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2001, and before January 1, 2002. 
(2) Forty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2002, and before January 1, 2003. 
(3) Thirty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2003, and before January 1, 2004. 
(4) Twenty percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2004, and before January 1, 2005. 
(5) Ten percent of qualified wages paid or incurred during any taxable year beginning on or after January 1, 2005, and before January 1, 2006. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23636, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23636-5. Qualified Employee.
Note     •     History

Qualified Employee -- (See Regulation 23636-0 for Table of Contents.) 
(a) In General. The Joint Strike Fighter Wage Credit is allowed to any qualified taxpayer for certain qualified wages paid to qualified employees. For purposes of Regulations 23636-1 through 23636-9, inclusive, the term “employee” means any employee, as described in Sections 13004, 13004.1 and 13004.5 of the Unemployment Insurance Code, whose services for the qualified taxpayer are performed in this state and are at least 90 percent directly related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter. In order to properly compute the limitation contained in subsection (b), the determination of whether an employee is a qualified employee must be made on a monthly basis. 
(b) Limitation. The credit allowed by Revenue and Taxation Code section 23636 and this regulation shall not exceed ten thousand dollars ($10,000) per year, per qualified employee. For employees that are qualified employees for part of a taxable year, the credit shall not exceed ten thousand dollars ($10,000) multiplied by a fraction, the numerator of which is the number of months of the taxable year that the employee is a qualified employee, and the denominator of which is 12. 
(1) Computation. There are two requirements for a qualified employee: (1) services must be performed in California and (2) 90% of those services must be directly related to the qualified taxpayer's initial contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter. Moreover, the dollar limitation contained in Revenue and Taxation Code section 23636, subsection (c), and this regulation is based upon the number of months during the taxable year that the employee is a qualified taxpayer. Accordingly, the determination of a qualified employee must be made on a monthly basis during the taxable year. For purposes of this regulation, a qualified taxpayer must first determine the amount of wages paid for the employee's services performed while physically located within and without California. Then, with respect to the California wages, at least 90 percent of the services performed for which California wages are paid each month must be directly related to the qualified taxpayer's initial contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter. If at least 90 percent of the California services are directly related, then the employee is a qualified employee for that month. If less than 90 percent of the California services are directly related or if all of the employee's services are performed outside of California, then the employee is not a qualified employee for that month. 
EXAMPLE 1: A, a qualified taxpayer, manufactures avionics systems in San Diego and Houston, Texas. B, one of A's employees, works from January 1, 2002, in Houston before being transferred to San Diego on July 1, 2002, to manufacture avionics systems for the Joint Strike Fighter. B works in San Diego exclusively on the avionics systems through the remainder of the 2002 taxable year. Under these facts, B is not a qualified employee for the months of January through June, inclusive, since all of B's services were performed outside of California during those months. Only wages paid for B's services performed in California are potentially eligible for the JSF Wage Credit. Assume B works a total of 160 hours per month. Under these facts, B's 160 hours of service related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter is divided by 160 total hours of California service each month. As a result, 100% of B's California services are related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter and B is a qualified employee for six months of the 2002 taxable year. To compute the $10,000 maximum dollar credit limitation, $10,000 would be multiplied by 6/12 (the numerator being the number of months B is a qualified employee and the denominator being 12) and A would be allowed a maximum JSF Wage Credit of $5,000 for B's California services for the 2002 taxable year. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that B is transferred to San Diego on December 8, 2002, and begins working on the avionics systems. Under these facts, B's California wages would be separated from the Texas wages. Assume B works a total of 160 hours per month and B worked 144 of these hours in California for the month of December 2002. B's 144 total hours of California service (a portion of B's total December hours) related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter is divided by 144 (total hours of California services). As a result, 100% of B's California services are related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter and B is a qualified employee for one month of the year. To compute the $10,000 maximum dollar credit limitation, $10,000 would be multiplied by 1/12 (the numerator being the number of months B is a qualified employee and the denominator being 12) and A would be allowed a maximum JSF Wage Credit of $833 for B's California services. 
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except B instead is promoted to a management position on December 1, 2002, in A's general administrative division in San Diego. Services in general administrative functions are not services directly related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter. Assume B works a total of 160 hours per month. Under these facts, B's 160 hours of service related to the qualified taxpayer's contract or subcontract to manufacture property designed for ultimate use in the Joint Strike Fighter are divided by 160 total hours of California service for each month from July through November. As a result, 100% of B's California services for the months of July through November are related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter and B is a qualified employee for five months of the year. B's December hours of service related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter (0 hours) is divided by 160 total hours of California service. As a result, none of B's December California service is directly related to the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in the Joint Strike Fighter and B is a qualified employee for only five months of the 2002 taxable year (but not for December). To compute the $10,000 wage credit limitation, $10,000 would be multiplied by 5/12 (the numerator being the number of months B is a qualified employee and the denominator being 12) and A would be allowed a maximum JSF Wage Credit of $4,167 for B's California services for the months of June through November. 
(c) Services Directly Related. For purposes of computing the 90% directly related service requirement under this regulation, services are directly related if the wages for those services are properly characterized as direct labor costs, as that term is used in Internal Revenue Code section 263A and defined in the regulations thereunder, as provided in Regulation 23636-4, and are included in inventory costs for property manufactured in this state by the qualified taxpayer for ultimate use in a Joint Strike Fighter. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23636, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23636-6. JSF Contract Bidding.
Note     •     History

JSF Contract Bidding -- (See Regulation 23636-0 for Table of Contents.) 
(a) In General. The JSF Wage Credit shall not be allowed unless the credit is reflected within the bid that forms the basis for the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in a Joint Strike Fighter. 
(b) Bid. For purposes of this regulation, the term “bid” shall mean a written bid or offer to perform a contract to produce a product that is designed to be physically attached to or installed in a Joint Strike Fighter, in response to a request for bids to construct all or a portion of the Joint Strike Fighter. The bid shall be submitted in a competitive process where the contract will be awarded to the lowest possible bidder or as otherwise indicated in the conditions under which the bids will be received and the contract awarded. Where the scope of work, request for proposal or relationship of the contracting parties is such that only a single party will be submitting a proposal or contract to construct all or a portion of the Joint Strike Fighter, the term “bid” shall include the proposal submitted or contract ultimately executed. 
(c) JSF Wage Credit Reflected Within the Bid. For purposes of this regulation, the term “reflected within the bid” shall mean: 
(1) the bid that forms the basis of the contact or subcontract is reduced by the amount of the JSF Wage Credit allowable, and 
(2) the face of the bid, or an attachment to the bid, contains a calculation showing the original bid price, the amount of the JSF Wage Credit allowable and the resulting reduced bid amount. 
The JSF Wage Credit allowable shall be a lump sum number reflected on the contract or subcontract and the aggregate credit allowable over the term of the contract or subcontract is not required to be calculated on the basis of the year in which the credit amount is expected to be claimed. 
EXAMPLE 1: X, a qualified taxpayer, submits a bid to the prime contractor in the amount of $70 to manufacture retractable landing gear for the Joint Strike Fighter. The bid price without the JSF Wage Credit would have been $100. The bid form contains an attachment that states the JSF Wage Credit allowable for the subcontract is $30 ($100 contract price less JSF Wage Credit in the amount of $30 for a reduced contract price of $70). X is the successful bidder on the retractable landing gear and thereafter is awarded the contract to produce the part for the Joint Strike Fighter. X and the prime contractor execute a contract in the amount of $70. Under these facts, the $30 JSF Wage Credit amount is reflected within the bid that forms the basis for X's subcontract to manufacture property for ultimate use in a Joint Strike Fighter and X may claim the $30 JSF Wage Credit if all of the other requirements of Revenue and Taxation Code section 23636 and this regulation are met. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that the bid form reflects a price of $100. In this circumstance, X is not eligible to claim the credit because X has not reduced the amount of the bid by the amount of the JSF Wage Credit allowable. 
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that the bid form reflects a price of $70, but the bid form does not contain an attachment showing the amount of the JSF Wage Credit allowable. In this circumstance, X is not eligible to claim the credit because even though the bid amount has been reduced by the amount of the credit allowable, the amount of the credit allowable is not included on the face of the bid or in an attachment to the bid. 
EXAMPLE 4: Assume the same facts as in EXAMPLE 1, except that the scope of the project changes after the bid is submitted and X and the prime contractor execute a contract in the amount of $125, reflecting an increase of $55 dollars in the original bid amount. In this circumstance, the cost for the expanded scope of the contract was added to the original bid amount. As a result, X would only be allowed to claim a $30 JSF Wage Credit since this amount was reflected within the original bid. 
EXAMPLE 5: X, a qualified taxpayer, is the prime contractor awarded the initial contract from the United States government for the Engineering and Manufacturing Development Phase of the Joint Strike Fighter Program. X does not include any reduction for the JSF Wage Credit in its bid for the Engineering and Manufacturing Development Phase accepted by the United States government. Under these facts, X is not able to claim the JSF Wage Credit since the credit amount was not reflected within the bid that formed the basis for the initial contract for the Engineering and Manufacturing Development Phase. 
EXAMPLE 6: Assume the same facts as in EXAMPLE 5, except that Y responds to a request from X and submits a bid to subcontract a portion of the scope of the work covered in the Engineering and Manufacturing Development Phase of the Joint Strike Fighter Program. The bid form includes an attachment that shows the JSF Wage Credit allowable for the subcontract is $20 ($100 contract price less JSF Wage Credit in the amount of $20 for a reduced contract price of $80). Y is the successful bidder on that portion of the scope of the work and thereafter is awarded the contract to produce the part for the Joint Strike Fighter. X and Y execute a contract in the amount of $80. Under these facts, the $20 JSF Wage Credit amount is reflected within the bid that forms the basis for Y's subcontract to manufacture property for ultimate use in a Joint Strike Fighter. Even though X, the prime contractor, did not reduce its bid for the prime contract and is not eligible to claim the JSF Wage Credit, Y's bid met the bidding requirements for claiming the credit and Y may claim the $20 JSF Wage Credit if all of the other requirements of Revenue and Taxation Code section 23636 and this Regulation are met. 
(3) With respect to a contract to construct all or a portion of the Joint Strike Fighter that is executed on a “cost plus” basis, the term “reflected within the bid” shall mean that (1) California income or franchise taxes are treated as an item of cost to be reimbursed under the terms of the contract, (2) the cost plus contract, or an attachment to the contract, contains a calculation showing the amount of the JSF Wage Credit allowable, and (3) the California income or franchise taxes reimbursed under the contract reflect the reduction for the amount of the JSF Wage Credit allowable. 
(d) JSF Wage Credit Allowable. For purposes of this regulation, the term “credit allowable” shall mean at the time the bid for the initial contract or subcontract is submitted, the amount of the credit the qualified taxpayer expects to claim as a result of qualified wages paid in connection with the contract or subcontract. The amount of the JSF Wage Credit allowed to any qualified taxpayer shall be computed pursuant to Revenue and Taxation Code section 23636 and these regulations, but shall not exceed the lesser of the credit amount reflected within the bid of the qualified taxpayer or the credit allowed for actual amounts paid or incurred by the qualified taxpayer. 
EXAMPLE: Y, a qualified taxpayer, submits a bid to the prime contractor to manufacture the cockpit canopy for the Joint Strike Fighter. The bid form contains an attachment that shows the JSF Wage Credit allowable of $30 ($100 contract price less JSF Wage Credit in the amount of $30 for a reduced contract price of $70). X is the successful bidder on the cockpit canopy and thereafter is awarded the contract to produce the part for the Joint Strike Fighter. X and the prime contractor execute a contract in the amount of $70. Thereafter, Y's wage costs to produce the cockpit canopy increase by 20% and Y determines that its increase in wages paid would result in a JSF Wage Credit in the amount of $36. In this circumstance, even though Y's wage costs have increased, Y is only able to claim a JSF Wage credit in the amount of $30 since that is the amount of the JSF Wage Credit allowable that was reflected within Y's bid. 
(e) Pass-Through Entities. For purposes of this regulation: 
(1) The amount of the JSF Wage Credit allowable reflected on a bid submitted by a partnership or an S corporation shall be the amount of the JSF Wage Credit expected to be passed through the partnership to the partners or the S corporation to the shareholders in accordance with the applicable provisions of Part 10 (commencing with section 17001) and Part 11 (commencing with section 23001) of the Revenue and Taxation Code. 
EXAMPLE: Z, a qualified taxpayer, submits a bid to the prime contractor to manufacture a portion of the hydraulic system for the Joint Strike Fighter. Z calculates the total allowable JSF Wage Credit to be $150. Z has a valid S corporation election in effect for California tax purposes. Under Revenue and Taxation Code section 23803, subsection (a)(1)(A), Z's JSF Wage Credit is limited to $50 (one-third of the amount of the credit otherwise allowable). However, the amount of the JSF Wage Credit that is expected to be passed through to Z's shareholders is $150 and Z must reflect the $150 credit amount on the bid submitted to the prime contractor as provided in this regulation. 
(f) Copies Provided to Franchise Tax Board. The qualified taxpayer shall provide, upon request of the Franchise Tax Board, a copy of any bid that forms the basis for a contract or subcontract to manufacture a product for ultimate use in a Joint Strike Fighter. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23636, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23636-7. JSF Wage Credit Carryforwards.
Note     •     History

JSF Wage Credit Carryforwards -- (See Regulation 23636-0 for Table of Contents.) 
(a) In General. In any case where the JSF Wage Credit exceeds the “tax,” the excess may be carried forward to reduce the “tax” for the eight taxable years succeeding the taxable year for which the JSF Wage Credit is allowed, if necessary, until the credit is exhausted. 
(b) Carryforwards for Pass-Through Entities. In the case of any JSF Wage Credit allowed to a pass-through entity, the determination of the applicable carryover period for any JSF Wage Credit required to be carried forward shall be made at the pass-through entity level. 
(c) Carryforwards Permitted After Sunset. For taxable years commencing on or after January 1, 2006, any unused JSF Wage Credit may be carried forward, as provided above, until the unused JSF Wage Credit is exhausted. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23636, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23636-8. Recordkeeping Requirements.
Note     •     History

Recordkeeping Requirements -- (See Regulation 23636-0 for Table of Contents.) 
(a) In General. For purposes of Regulations 23636-1 through 23636-9, inclusive, a qualified taxpayer shall be required to maintain books and records that are adequate to substantiate its entitlement to any claimed JSF Wage Credit. These books and records should be retained for as long as the statute of limitations on assessment for the taxable year for which the JSF Wage Credit was allowed remains open, and, in the case of any JSF Wage Credit that is being carried forward, for the additional number of years that the actual carryforward of such JSF Wage Credit occurs. 
(b) Books and Records. The books and records maintained by the qualified taxpayer should be sufficient to clearly establish all necessary facts that affect the allowance and amount of the JSF Wage Credit. For this purpose, “adequate” recordkeeping depends upon the sufficiency of the information contained in the documentation. In many cases, the books and records normally maintained for California income or franchise tax purposes and wage reporting purposes will be adequate substantiation for the JSF Wage Credit. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23636, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23636-9. Miscellaneous Provisions.
Note     •     History

Miscellaneous Provisions -- (See Regulation 23636-0 for Table of Contents.) 
(a) Effective Dates of the JSF Wage Credit. The JSF Wage Credit shall cease to be effective on December 1, 2006; however, any unused credit may be carried forward, as provided in Revenue and Taxation Code section 23637, subsection (g), and this regulation. 
(b) Enterprise Zone Hiring Credit. Under Revenue and Taxation Code sections 23636 and 23622.7, a qualified taxpayer that also operates in an Enterprise Zone may claim both the JSF Wage Credit and the Enterprise Zone hiring credit for wages paid to an employee to the extent that all of the requirements of each of those sections are satisfied. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23636, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23637-0. Table of Contents.
Note     •     History

Table of Contents -- Regulation Sections 23637-1 through 23637-11 
Section 23637-1. The Joint Strike Fighter (JSF) Property Credit. 
(a) In General 
(b) Cross References 
(c) General References 
Section 23637-2. Definitions. 
(a) Capitalized Labor 
(b) Fabricating 
(c) Joint Strike Fighter 
(d) Initial Contract or Initial Subcontract 
(e) Joint Strike Fighter Program 
(f) Manufacturing 
(g) Packaging 
(h) Placed in Service 
(i) Product For Ultimate Use in a Joint Strike Fighter 
(j) Primarily 
(k) Process 
(l) Processing 
(m) Qualified Activities 
Section 23637-3. Qualified Taxpayer. 
(a) In General 
(b) Pass-Through Entities 
Section 23637-4. Qualified Costs. 
(a) In General 
(b) California Sales and Use Tax Payment Requirement 
(c) Capitalization Requirement 
(d) Capitalized Labor Costs 
(1) Capitalized Labor Costs Under Third-Party Contracts 
(e) Qualified Costs Paid or Incurred Pursuant to Binding Contracts 
(1) Allocation of Costs Actually Paid Prior to January 1, 2001 
(2) Binding Contract Bid Amount Reduced by Credit 
(3) Binding Contracts 
(4) Successor or Replacement Contracts 
(5) Option Contracts 
(6) Conditional Contracts 
Section 23637-5. Qualified Property. 
(a) In General 
(b) General Requirements for Qualified Property 
(1) Tangible Personal Property 
(2) Section 1245(a)(3)(A) Property 
(3) Used to Manufacture a Product for Ultimate Use in a Joint Strike Fighter 
(4) Primarily Used in Qualified Activities 
(c) Specifically Excluded Property 
(1) Furniture 
(2) Facilities Used for Warehousing Purposes 
(3) Inventory 
(4) Equipment Used to Store Finished Products 
(5) Tangible Personal Property Used in Administration, General Management, or Marketing 
(d) Movement of Used Property Into This State 
Section 23637-6. Leasing. 
(a) In General 
(1) Lessor Not Entitled to JSF Property Credit 
(2) Binding Contract Rules Applicable to Leases 
(3) Special Rules Applicable to All Leasing Transactions 
(A) Placed in Service 
(B) Bid Amount Reduced By Credit 
(b) Operating Leases 
(1) In General 
(2) Applicable Requirements 
(A) Lessee Must Be a Qualified Taxpayer 
(B) Use of Property in Qualified Activities 
(C) Sales or Use Tax Payment Requirement 
(D) Qualified Costs 
(E) Chargeable to Capital Account 
(3) Amount of JSF Property Credit Lessee May Claim 
(A) Qualified Cost to Lessor 
(B) Exception For Capitalized Labor 
(4) Special Rules for Operating Leases 
(A) Limitation on Qualified Costs 
(B) Reduction in Qualified Cost to Lessor 
(C) Qualified Cost to Successor Lessor 
(D) Acquisition by Lessee of Leased Property 
(5) Sale-Leaseback Transactions 
(A) General Rule 
(B) Acquisition Sale and Leaseback 
(6) Lessor Reporting Requirement 
(c) Finance Leases 
(1) In General 
(2) Applicable Requirements 
(A) Lessee Must Be a Qualified Taxpayer 
(B) Use of Property in Qualified Activities 
(C) Sales or Use Tax Payment Requirement 
(D) Qualified Costs 
(E) Chargeable to Capital Account 
(3) Amount of JSF Property Credit Lessee May Claim 
Section 23637-7. JSF Contract Bidding. 
(a) In General 
(b) Bid 
(c) JSF Property Credit Reflected Within the Bid 
(d) JSF Property Credit Allowable 
(e) Pass-Through Entities 
(f) Copies Provided to Franchise Tax Board 
Section 23637-8. Recapture Rules. 
(a) In General 
(b) Disposition 
(c) Disposition of Qualified Property During the Taxable Year Placed in Service 
(d) Disposition of Qualified Property During a Taxable Year Subsequent to the Taxable Year Placed In Service 
(e) Adjustment of Carryforwards when Disposition Occurs 
(f) Recapture of JSF Property Credit Allowed to Pass-Through Entities 
(1) Partnerships and Partners 
(2) S Corporations and Shareholders 
(A) Corporate Level Recapture 
(B) Pass-through of JSF Property Credit Recapture Amount to Shareholders 
Section 23637-9. JSF Property Credit Carryforwards. 
(a) In General 
(b) Carryforwards for Pass-Through Entities 
(c) Carryforwards Permitted After Sunset 
Section 23637-10. Recordkeeping Requirements. 
(a) In General 
(b) Books and Records 
(c) Affidavit Regarding Sales and Use Tax 
(d) Written Statement by Lessor to Lessee 
Section 23637-11. Miscellaneous Provisions. 
(a) Effective Dates of the JSF Property Credit 
(b) Manufacturers' Investment Credit (MIC) 
(c) Enterprise Zone Sales or Use Tax Credit 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23637, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23637-1. The Joint Strike Fighter (JSF) Property Credit.
Note     •     History

The Joint Strike Fighter (JSF) Property Credit (See Regulation 23637-0 for Table of Contents.) 
(a) In General. The Joint Strike Fighter (JSF) Property Credit is allowed to any qualified taxpayer in an amount equal to ten percent (10%) of any qualified costs paid or incurred on or after January 1, 2001, and before January 1, 2006, for qualified property that is placed in service in this state and used by a qualified taxpayer in qualified activities to manufacture a product for ultimate use in a Joint Strike Fighter. A qualified taxpayer who leases qualified property for use in qualified activities of the qualified taxpayer may also claim the JSF Property Credit. Qualified property may be either new or used and must be placed in service in this state and used by a qualified taxpayer in qualified activities for more than one year to avoid recapture of the JSF Property Credit. The basis of any qualified property for which the JSF Property Credit is claimed is not required to be reduced by the amount of any JSF Property Credit claimed. 
(b) Cross References. Regulation 23637-2 contains definitions applicable to Regulations 23637-1 through 23637-11, inclusive, Regulation 23637-3 contains rules relating to qualified taxpayers, Regulation 23637-4 contains rules relating to qualified costs, Regulation 23637-5 contains rules relating to qualified property, Regulation 23637-6 contains rules applicable to leases of qualified property by qualified taxpayers, Regulation 23637-7 contains rules relating to contract bidding, Regulation 23637-8 contains recapture rules, Regulation 23637-9 contains rules relating to carryforwards, Regulation 23637-10 contains general recordkeeping requirements, and Regulation 23637-11 contains other miscellaneous provisions. For rules relating to the JSF Property Credit allowed to taxpayers under the Personal Income Tax Law, see Revenue and Taxation Code section 17053.37 and the regulations thereunder. 
(c) General References. For purposes of Regulations 23637-1 through 23637-11, inclusive, the following general references shall apply: 
(1) All citations to the Revenue and Taxation Code are to the California Revenue and Taxation Code. 
(2) All citations to the Internal Revenue Code are to the Internal Revenue Code of 1986, as amended. 
(3) The credits provided for in Revenue and Taxation Code sections 17053.37 and 23637 shall be collectively referred to as the “Joint Strike Fighter Property Credit” or the “JSF Property Credit.” 
(4) Any reference to sales or use tax shall mean California sales or use tax imposed under Part 1 (commencing with section 6001) of Division 2 of the Revenue and Taxation Code. Any discussion of California sales and use tax law in Regulations 23637-1 through 23637-11, inclusive, is based upon such law as in effect on the date these regulations become effective, and is generally intended to restate the requirements set forth in Revenue and Taxation Code section 23637 and to be illustrative of, but have no effect on, the California sales and use tax law and the regulations thereunder. All examples which contain references to an amount of California sales or use tax shall be at an assumed hypothetical sales or use tax rate of eight percent (8%). 
(5) Unless otherwise provided, any reference to capitalized labor costs in the examples in this regulation shall mean labor costs that are direct costs, as that term is used in Internal Revenue Code section 263A and defined in the regulations thereunder, that can be identified or associated with and are properly allocable to construction or modification of qualified property. 
(6) Unless otherwise provided, any reference to qualified property in the examples in this regulation shall assume that the qualified property is being used primarily to manufacture a product for ultimate use in a Joint Strike Fighter. In addition, unless otherwise provided, all examples in this regulation shall assume that the qualified taxpayer's bid to manufacture property for ultimate use in a Joint Strike Fighter reflected a reduction in the amount of the Joint Strike Fighter credit allowable as provided in Revenue and Taxation Code section 23637, subsection (i)(2), and Regulation 23637-7. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23637, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23637-2. Definitions.
Note     •     History

Definitions -- (See Regulation 23637-0 for Table of Contents.) 
For purposes of Regulations 23637-1 through 23637-11, inclusive, the following definitions shall apply: 
(a) Capitalized Labor. The term “capitalized labor” shall mean all costs of labor that are direct costs, as that term is used in Internal Revenue Code section 263A and defined in the regulations thereunder, that can be identified or associated with and are properly allocable to the construction, modification, or installation of specific items of qualified property. For this purpose, labor encompasses full-time and part-time employees, as well as contract employees and independent contractors. 
(1) Direct labor costs shall include all elements of compensation, such as basic compensation, overtime pay, vacation pay, holiday pay, sick leave pay (other than payments pursuant to a wage continuation plan under Internal Revenue Code section 105(d) as it existed prior to its repeal in 1983), shift differential, payroll taxes, and payments to a supplemental unemployment benefit plan, but shall not include any indirect labor costs. 
(2) Indirect labor costs are costs that cannot be identified or associated with the construction, modification, or installation of specific items of qualified property. Indirect labor costs include, but are not limited to, training costs, officers' compensation, pension and other related costs, and employee benefit expenses (including payments pursuant to a wage continuation plan under Internal Revenue Code section 105(d) as it existed prior to its repeal in 1983). 
(3) In determining whether direct costs of labor are properly allocable to the construction, modification, or installation of a specific item of qualified property, the qualified taxpayer shall be required to use the same method of allocation for California income and franchise tax purposes that the taxpayer used for federal income tax purposes under the uniform capitalization allocation rules specified in Treasury Regulation section 1.263A-1 (as in effect on the date Regulation 23637-2 is effective). 
(b) Fabricating. The term “fabricating” shall mean the process of making, building, creating, producing, or assembling components or property to work or be useable in a new or different manner. 
(c) Joint Strike Fighter. The term “Joint Strike Fighter” shall mean the next-generation air combat strike aircraft developed and produced under the Joint Strike Fighter Program of the United States government. 
(d) Initial Contract or Initial Subcontract. The term “initial contract” shall mean the contract awarded by the United States government to a prime contractor for any phase, including the Engineering and Manufacturing Development Phase, of the Joint Strike Fighter Program to produce the Joint Strike Fighter. The term “initial subcontract” shall mean a contract between a prime contractor and any other contractor, or between two contractors where one of those contractors is under contract with the prime contractor, or where the prime contractor or a contractor under contract with the prime contractor has consented to the contract in writing, to produce a product that is designed to be physically attached to or installed in a Joint Strike Fighter Aircraft under the initial contract. 
(e) Joint Strike Fighter Program. The term “Joint Strike Fighter program” shall mean the multiservice, multinational project conducted by the United States government to develop and produce the next generation of air combat strike aircraft. 
(f) Manufacturing. The term “manufacturing” shall mean the process of converting or conditioning property by changing the form, composition, quality, or character of the property for ultimate use in a Joint Strike Fighter, and includes any improvements to tangible personal property that result in a greater service life or greater functionality than that of the original property. Tangible personal property shall be treated as having a greater service life if such property can be used for a longer period than such property could have been used prior to the conversion or conditioning of such property. Tangible personal property shall be treated as having greater functionality if it has been improved in such a manner that it can be used to perform new or different functions. 
(g) Packaging. The term “packaging” shall mean to wrap, seal, box, or put together as a unit, but shall include only that portion of any wrapping, sealing, boxing, or putting together as a unit that is necessary to prepare the goods for delivery to and placement in the qualified taxpayer's finished goods inventory, or to prepare the goods so that they are suitable for delivery to and placement in finished goods inventory. Additional wrapping, sealing, boxing, or putting together as a unit, such as any wrapping, sealing, boxing, or putting together as a unit that is necessary to consolidate the finished goods prior to shipping or to protect them during transportation, shall not be treated as packaging. 
(h) Placed in Service. The term “placed in service” shall mean the earliest taxable year in which either of the following occurs: 
(1) under the depreciation method used by the qualified taxpayer for California tax purposes, the period for depreciation with respect to the qualified property commences; or 
(2) the qualified property is placed in a condition or state of readiness and availability for a specifically assigned function. If qualified property meets the conditions of subsection (h)(2) of this regulation in any taxable year, it shall be considered placed in service in such year, notwithstanding that the period for depreciation with respect to the qualified property begins in a succeeding taxable year. For example, if under the qualified taxpayer's California depreciation practice such qualified property is accounted for in a multiple asset account and depreciation is computed under an averaging convention, or depreciation is computed under the completed contract method, the unit of production method, or the retirement method, then the qualified property is treated as in a condition or state of readiness and availability for a specifically assigned function. Specific examples where qualified property shall be considered in a condition or state of readiness and available for a specifically assigned function include (A) parts that are acquired and set aside during the taxable year for use as replacements for a particular item or items of qualified property in order to avoid operational time loss, (B) operational items of qualified property that are acquired for a specifically assigned function during the taxable year where it is not practicable to use such item of qualified property for its specifically assigned function in the qualified taxpayer's business until the following taxable year, and (C) qualified property acquired for a specifically assigned function that is operational but is still undergoing testing to eliminate any defects. Materials and parts acquired to be used in the construction of an item of qualified property shall not be considered in a condition or state of readiness and availability for a specifically assigned function. 
(i) Product for Ultimate Use in a Joint Strike Fighter. The term “product for ultimate use in a Joint Strike Fighter” shall mean a product that is designed to be physically installed in or attached to a Joint Strike Fighter aircraft. The term “product for ultimate use in a Joint Strike Fighter” shall not include any product that is not designed to form a physical part of the Joint Strike Fighter aircraft. For this purpose, the term “product” shall include any pilot model or prototypes used in connection with the development of the product. 
(j) Primarily. The term “primarily” shall mean that property is used 50 percent or more of the time in qualified activities. For purposes of the preceding sentence, the term “time” shall mean the total number of hours that the property is actually in use during the 12-month period immediately following the date the property is placed in service in this state. For example, if an item of property is used by a qualified taxpayer for a total of 100 hours for all uses during the 12-month period immediately following the date the property is placed in service in this state, then “primarily” used in qualified activities means at least 50 hours of the property's use is in qualified activities. 
(k) Process. The term “process” shall mean the period beginning at the point at which any raw materials are received by the qualified taxpayer and introduced into the manufacturing, processing, or fabricating activity of the qualified taxpayer and ending at the point at which the manufacturing, processing, or fabricating activity of the qualified taxpayer has altered tangible personal property to its completed form, including packaging, if required. Raw materials will be considered to have been introduced into the process when the raw materials are stored on the same premises where the qualified taxpayer's manufacturing, processing, or fabricating activity is conducted. Raw materials that are stored on premises other than where the qualified taxpayer's manufacturing, processing, or fabricating activity is conducted, shall not be considered to have been introduced into the manufacturing, processing, or fabricating process. 
(l) Processing. The term “processing” shall mean the process of physically applying the materials and labor necessary to modify or change the characteristics of property. 
(m) Qualified Activities. The term “qualified activities” shall mean activities engaged in by a qualified taxpayer that involve manufacturing, processing or fabricating a product for ultimate use in a Joint Strike Fighter. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23637, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23637-3. Qualified Taxpayer.
Note     •     History

Qualified Taxpayer - (See Regulation 23637-0 for Table of Contents.) 
(a) In General. For purposes of Regulations 23637-1 through 23637-11, inclusive, a qualified taxpayer is any taxpayer under an initial contract or initial subcontract to manufacture property for ultimate use in a Joint Strike Fighter. The term “initial contract” shall mean the contract executed by the United States government and a prime contractor for any phase, including the Engineering and Manufacturing Development Phase, of the Joint Strike Fighter Program to produce the Joint Strike Fighter Aircraft. The term “initial subcontract” shall mean a contract between a prime contractor and any other contractor, or between two contractors where one of those contractors is under contract with the prime contractor or where the prime contractor or a contractor under contract with the prime contractor has consented to the contract in writing, to produce a product that is physically attached to or installed in a Joint Strike Fighter Aircraft under the initial contract. 
EXAMPLE 1: X is awarded the contract for the Engineering and Manufacturing Development Phase of the Joint Strike Fighter Program and executes a contract with the United States government for completion of that phase. Under these facts, X is a qualified taxpayer because X is a prime contractor awarded the initial contract from the United States government for a phase of the Joint Strike Fighter Program. 
EXAMPLE 2: Assume the same facts as EXAMPLE 1, except that X and Y are both awarded a portion of the contract for the Engineering and Manufacturing Development Phase of the Joint Strike Fighter Program and both execute contracts with the United States government for completion of their respective portions of that phase. Under these facts, both X and Y are qualified taxpayers because they are prime contractors awarded initial contracts from the United States government for a phase of the Joint Strike Fighter Program. 
EXAMPLE 3: Assume the same facts as EXAMPLE 1, except that Z submits a bid to X, the prime contractor, and is awarded a subcontract to manufacture a product for ultimate use in a Joint Strike Fighter under the scope of the initial contract. Under these facts, Z is a qualified taxpayer because Z is a subcontractor under an initial subcontract for a phase of the Joint Strike Fighter Program. 
EXAMPLE 4: Assume the same facts as EXAMPLE 3, except that A submits a bid to Z and is awarded a contract with Z to perform a portion of Z's work under the scope of Z's contract with X. Under these facts, A is also a qualified taxpayer because Z is under contract with one of the prime contractors and A is therefore a subcontractor under an initial subcontract for a phase of the Joint Strike Fighter Program. 
EXAMPLE 5: Assume the same facts as EXAMPLE 4, except that A contracts with B to complete a portion of the work under A's contract with Z. Neither X nor Z consent in writing to the contract between A and B. B thereafter completes all of the work in its contract with A. Even though A has assisted in manufacturing a product for ultimate use in a Joint Strike Fighter under the scope of the initial contract, A is not a qualified taxpayer because X has not consented in writing to the contract and B is thus not a subcontractor under an initial subcontract for a phase of the Joint Strike Fighter Program. 
(b) Pass-Through Entities. For purposes of Regulations 23637-1 through 23637-11, inclusive, in the case of any partnership or S corporation, the determination of whether a taxpayer is a qualified taxpayer shall be made at the entity level. Any credit allowed under Revenue and Taxation Code section 23637 and this regulation shall be passed through to the partners or shareholders in accordance with applicable provisions of Part 10 (commencing with section 17001) or Part 11 (commencing with section 23001) of the Revenue and Taxation Code. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23637, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23637-4. Qualified Costs.
Note     •     History

Qualified Costs -- (See Regulation 23637-0 for Table of Contents.) 
(a) In General. For purposes of Regulations 23637-1 through 23637-11, inclusive, the term “qualified costs” includes any costs paid or incurred by a qualified taxpayer for the construction, reconstruction, or acquisition of qualified property on or after January 1, 2001, and before January 1, 2006, provided that California sales or use tax has been paid, directly or indirectly, on such costs (except for costs paid or incurred for capitalized labor), and such costs are properly chargeable to the qualified taxpayer's capital account. However, the term “qualified costs” does not include the amount of any California sales or use tax paid, directly or indirectly, by the qualified taxpayer. 
(b) California Sales and Use Tax Payment Requirement. In order for costs to be treated as qualified costs, California sales or use tax must be paid, directly or indirectly as a separately stated contract amount or as determined from the books and records of the qualified taxpayer, with respect to the qualified property. For purposes of Regulations 23637-1 through 23637-11, inclusive, the requirement that California sales or use tax be paid prior to claiming the JSF Property Credit shall be deemed satisfied as of the date the California sales or use tax is due and payable under Part 1 (commencing with section 6001) of Division 2 of the Revenue and Taxation Code. In the case of any costs paid or incurred by the qualified taxpayer upon which California sales or use tax has not been paid (except in the case of amounts properly treated as capitalized direct labor for the construction, modification, or installation of qualified property), such amounts shall not be treated as qualified costs. In the case of any leasing transaction, Regulation 23637-6 contains special rules applicable to the California sales and use tax payment requirement. 
EXAMPLE 1: D, a qualified taxpayer, purchases three hydraulic turbines from B, a California manufacturer of hydraulic turbines, for $500 to be used in D's manufacturing facility in Escondido. Under the terms of the purchase contract, B agrees to install the turbines at D's manufacturing facility by affixing them to the facility's concrete floor for an additional $100. Assume $36 of the $100 installation charge constitutes direct labor costs paid by B to its employees under Internal Revenue Code section 263A. B charges and collects from D $40 in California sales tax under the contract ($500 X 8%), with the $100 in installation charges being separately stated in the purchase contract and for purposes of this example are assumed to be exempt from California sales and use tax. Under these facts, D has $536 in qualified costs ($500 in costs upon which California sales tax was paid and $36 in capitalized direct labor costs, but excluding the $40 in sales tax). 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of D purchasing the turbines from B, D enters into a “fixed-price, turn-key” contract with C, the terms of which require D to pay C a total of $640 upon delivery and installation of the turbines in D's manufacturing facility. C, instead of delivering a resale certificate to B, pays $40 ($500 X 8%) in California sales tax to B on its purchase of the turbines. Under C's contract with D, the $40 California sales tax paid by C is a separately stated item. Under these facts, since the sales tax was separately stated in D's contract with C and paid by C on behalf of D, D is treated as having satisfied the California sales tax payment requirement. However, since $40 of the total contract price represents the sales tax paid indirectly by D, the amount of D's qualified costs is $536 ($500 for the turbines plus $36 in capitalized direct labor costs, but excluding the $40 in sales tax). 
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that D's contract with C does not separately state the amount of California sales tax paid by C. However, D's books and records substantiate that C paid California sales tax on behalf of D and that the total contract price of $640 is broken down between $500 for the turbines, $40 in California sales tax, and $100 in installation charges. Under these facts, the result is the same as in EXAMPLE 2 since the amount of California sales tax treated as being paid indirectly by D can be determined from D's books and records. 
(c) Capitalization Requirement. In order for costs to be treated as qualified costs, they must be amounts properly chargeable to the capital account of the qualified taxpayer. Amounts shall be treated as properly chargeable to capital account if under the qualified taxpayer's method of tax accounting they are properly includible in the qualified taxpayer's basis for computing depreciation on the qualified property under Revenue and Taxation Code section 24353. However, any amounts not required to be included in the qualified taxpayer's basis for depreciation purposes shall not be treated as qualified costs. For example, Internal Revenue Code section 179 provides that amounts for which an election is made under that section to currently deduct such amounts are “not chargeable to capital account.” Thus, any amounts for which a qualified taxpayer makes an election to currently expense for California income or franchise tax purposes under either Internal Revenue Code sections 179 or 179A, or amounts for which a qualified taxpayer makes an election for California purposes to currently expense under Internal Revenue Code section 179-type provisions such as Revenue and Taxation Code sections 24356.6 (Targeted Tax Area businesses), 24356.7 (Enterprise Zone businesses), or 24356.8 (Local Agency Military Base Recovery Area businesses), are treated as amounts that are not properly chargeable to capital account. In addition, any costs paid or incurred for property with a useful life of less than one year which may properly be expensed under Internal Revenue Code section 162 would be treated as amounts not properly chargeable to capital account. Although costs that are not properly chargeable to capital account are not treated as qualified costs, the portion of the cost of any item of qualified property that is properly chargeable to capital account (such as, for example, the amount in excess of what may be currently deducted under Internal Revenue Code section 179) may be a qualified cost under Revenue and Taxation Code section 23637. 
EXAMPLE 1: F, a qualified taxpayer which is a California S corporation, purchases 50 stainless steel racks for $900 from G for use in F's production line in Palmdale. F pays $72 ($900 X 8%) in California sales tax on the purchase. F makes an election for California franchise tax purposes to currently expense the entire cost of the stainless steel racks under Revenue and Taxation Code section 23802, subsection (f)(1) (Internal Revenue Code section 179). Under these facts, the $900 paid by F for the stainless steel racks would not be treated as a qualified cost since the $900 is not properly chargeable to F's capital account under Revenue and Taxation Code section 23802, subsection (f)(1) (Internal Revenue Code section 179). 
EXAMPLE 2: H, a qualified taxpayer doing business in the Fresno Enterprise Zone, purchases a drill press for $25 from I, and pays $2 (8% of $25) in California sales tax on the purchase. H makes an election under Revenue and Taxation Code section 24356.7 to expense 40% of the cost of the drill press. Under these facts, $10 of the $25 paid by H would not be treated as a qualified cost since the $10 is not properly chargeable to H's capital account. 
(d) Capitalized Labor Costs. For costs paid or incurred by the qualified taxpayer for capitalized labor, the requirement that California sales or use tax be paid in order for the costs to be treated as qualified costs shall not apply. The qualified taxpayer shall have the burden of establishing the amount of any cost paid or incurred for capitalized labor that is a direct labor cost, as that term is used in Internal Revenue Code section 263A and defined in the regulations thereunder, that can be identified or associated with and are properly allocable to the construction, modification, or installation of any item of qualified property. This burden may, for example, ordinarily be satisfied by either an invoice, supported by the books and records of the qualified taxpayer, that separately states the amount of capitalized direct labor for qualified property acquired by purchase or, in the case of self-constructed qualified property, from books and records of the qualified taxpayer that establish the amount of capitalized direct labor for the construction of the item of qualified property. 
EXAMPLE 1: G, a qualified taxpayer, purchases a machine that is qualified property from X for $500. The price of the machine includes $50 in separately stated shipping charges. X collects California sales tax of $34 (8% of $450) from G, with the shipping charges assumed to be exempt from California sales and use tax. Upon receipt of the machine, G incurs an additional $50 in capitalized direct labor costs to have G's employees install the machine in G's manufacturing facility in Riverside, and $25 in training costs to train G's personnel to properly operate the machine. Under these facts, only the cost of the machine upon which California sales tax was paid ($450), plus the capitalized direct labor installation costs ($50), would be treated as qualified costs. The $50 paid for shipping charges is not a qualified cost since no California sales tax was paid on such amounts, nor are the shipping charges treated as capitalized direct labor costs. The $25 incurred by G in training costs is not a qualified cost since training costs are indirect labor costs under subsection (a)(2) of Regulation 23637-2. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that the $50 in freight charges are not separately stated and X collects $40 (8% of $500) in California sales tax from G. Under these facts, the cost of the machine, including the freight charges, upon which California sales tax was paid ($500), plus the capitalized direct labor installation costs ($50), would be treated as qualified costs. 
EXAMPLE 3: J, a qualified taxpayer, purchases an extended warranty contract on qualified property. J's extended warranty contract provides that all unscheduled maintenance and repairs will be performed at no cost by the seller or its agent. Assume that the costs of the extended warranty contract are exempt from California sales and use tax. Under these facts, the extended warranty contract is not treated as a capitalized direct labor cost since it is not for the construction, modification, or installation of qualified property. As a result, the costs paid for the extended warranty contract are not qualified costs. 
EXAMPLE 4: K, a qualified taxpayer, purchases a machine that is qualified property and then uses its own employees to install and modify the machine, including necessary adjustments, alignments and “debugging,” so that the machine will properly run K's assembly line. Under these facts, assuming that K properly capitalizes for California tax purposes its direct labor costs for installing and modifying the machine, the labor costs are treated as capitalized direct labor costs and are thus qualified costs. 
EXAMPLE 5: L, a qualified taxpayer, purchases a comprehensive insurance policy on an item of qualified property. L may not include the premiums for the insurance policy as qualified costs because the insurance policy covers risk of loss, and is not a capitalized direct labor cost that is associated with the construction, modification or installation of qualified property. 
(1) Capitalized Labor Costs Under Third-Party Contracts. Only capitalized direct labor costs, as that term is used in Internal Revenue Code section 263A and defined in the regulations thereunder, that can be identified or associated with and are properly allocable to the construction, modification, or installation of specific items of qualified property, constitute qualified costs for purposes of the JSF Property Credit. For capitalized labor costs paid or incurred by a qualified taxpayer to a third-party contractor for the construction, modification or installation of qualified property, a qualified taxpayer is only allowed to include as qualified costs those direct labor costs that the qualified taxpayer could include if the qualified taxpayer had itself constructed the qualified property using its own employees. To determine whether the labor costs can be included as capitalized direct labor costs for the JSF Property Credit, the qualified taxpayer is required to look through its contract with the third party and put itself in the shoes of the third party for purposes of computing qualified costs. 
EXAMPLE: H, a qualified taxpayer, contracts with I for $100 to have a machine that is qualified property modified to increase its per-unit output. Assume that the labor costs associated with the modification are exempt from California sales and use tax. Assume also that $45 of the $100 contract constitutes direct labor costs paid by I to its employees under Internal Revenue Code section 263A and the regulations thereunder. Although H does not pay California sales or use tax on the modification work, H may include in its qualified costs a portion of the costs of modifying the machine since $45 of the $100 is properly treated as a capitalized direct labor cost for the modification of qualified property. H must “look-through” the contract with I so that only those costs that constitute capitalized direct labor costs with respect to payments made by I to its employees shall constitute direct labor costs with respect to H. 
(a) Qualified Costs Paid or Incurred Pursuant to Binding Contracts. For any qualified property constructed, reconstructed, or acquired by the qualified taxpayer (or any person related to the qualified taxpayer within the meaning of Internal Revenue Code sections 267 or 707) pursuant to a binding contract in existence on or prior to January 1, 2001, costs paid pursuant to that contract shall be subject to allocation under the rules in this subsection. 
(1) Allocation of Costs Actually Paid Prior to January 1, 2001. In any case where a qualified taxpayer has actually paid amounts (including, without limitation, contractual deposits and option payments) prior to January 1, 2001, under a binding contract, any such amounts shall not be treated as qualified costs. However, if under any binding contract a qualified taxpayer has paid amounts both before and after January 1, 2001, then the amounts actually paid after December 31, 2000, to the extent properly allocable to the construction, reconstruction, or acquisition of qualified property, shall be treated as qualified costs. In the case of any contract that was binding on January 1, 2001, under the terms of which a qualified taxpayer will acquire both qualified property and non-qualified property, and the qualified taxpayer has actually paid amounts both before and after January 1, 2001, then the amounts paid prior to January 1, 2001, and the amounts paid after December 31, 2000, must be allocated between the qualified property and the non-qualified property in proportion to the actual amounts paid prior to January 1, 2001, and the total contract price. 
(2) Binding Contract Bid Amount Reduced by Credit. In no event shall the allocation provided in this subsection be allowed unless the bid that was the basis of the binding contract in existence on or prior to January 1, 2001, was reduced by the amount of the JSF Property Credit allowable as required by Revenue and Taxation Code section 23637, subsection (i)(2), and Regulation 23637-7. 
EXAMPLE 1: On October 1, 2000, M, a qualified taxpayer, executes a contract to purchase five machines and ten computers that are qualified property for a total of $100 (plus applicable California sales tax). M will use the qualified property to complete a subcontract where the bid amount was reduced by the amount of the JSF Property Credit allowable. Under the terms of the contract, M is required to make a non-refundable $20 deposit upon execution of the contract and pay the remaining $80 upon delivery of the machines and computers. On May 1, 2001, the machines and computers are delivered and M pays the remaining $80 due under the contract. Under these facts, the $20 actually paid by M in 2000 will not be treated as a qualified cost, but the remaining $80 paid in 2001 will be treated as a qualified cost. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that the computers are not qualified property because M intends to use them for general administrative purposes. The computers represent $20 of the total $100 contract price. Under these facts, since M is purchasing both qualified property and non-qualified property under a binding contract, the $20 paid prior to January 1, 2001, and the $80 paid after December 31, 2000, must be allocated between the machines and the computers. Since the cost of the machines represent 80% of the total contract price ($80/$100), and $20 was actually paid prior to January 1, 2001, $16 (80% of $20) of the total $80 paid for the machines is treated as having been paid prior to January 1, 2001, and is thus not treated as a qualified cost. However, the remaining $64 ($80-$16) paid for the machines is treated as a qualified cost. 
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that the qualified taxpayer did not reduce the amount of the bid that formed the basis of the subcontract by the amount of the JSF Property Credit allowable. Under these facts, M is not entitled to any credit since the bid amount was not reduced by the amount of the JSF Property Credit allowable. 
(3) Binding Contracts. For purposes of Regulations 23637-1 through 23637-11, inclusive, a contract shall be treated as binding where the contract is enforceable under state law against the qualified taxpayer (or any related party within the meaning of Internal Revenue Code sections 267 or 707) and the amount of potential damages (whether by an express liquidated damages provision or otherwise) for which the qualified taxpayer may be liable upon cancellation or breach of the contract would equal or exceed five percent (5%) of the total contract price. However, a contract to acquire a component part of a larger item of property shall only be treated as a binding contract to acquire such component part and shall not be treated as a binding contract to acquire the larger item of property under the general rule for binding contracts. For example, a written binding contract to acquire a motor to power a drill press would be a binding contract only for the motor, not for the entire drill press. 
EXAMPLE 1: X, a qualified taxpayer, enters into a written contract with Y on August 15, 2000, under which X agrees to purchase 10 machines for $150 for delivery on December 1, 2001. Under the terms of the contract, X is required to make a non-refundable deposit of $10 upon execution of the contract. Under these facts, since X's potential damages upon cancellation or breach of the contract equal or exceed 5% of the total contract price ($10/$150, or 6.7%), X's contract with Y is treated as a binding contract in existence on or prior to January 1, 2001. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that Y is required to refund half of X's $10 deposit in the event X cancels the contract. Assume further that X's potential damages to Y upon breach of the contract are limited by a liquidated damages provision to the $5 of X's deposit that Y is not required to refund to X. Under these facts, X's contract is not treated as a binding contract in existence on or prior to January 1, 2001, since X's potential damages under the contract are less than 5% of the total contract price ($5/$150, or 3.3%). 
(4) Successor or Replacement Contracts. Any contract entered into on or after January 1, 2001, that is a successor or replacement contract to a contract that was binding prior to January 1, 2001, shall be treated as a binding contract in existence prior to January 1, 2001, and shall be subject to the same rules described in this section applicable to binding contracts generally. However, if a successor or replacement contract is entered into on or after January 1, 2001, and the subject of the successor or replacement contract relates both to amounts to be paid or incurred for the construction, reconstruction, or acquisition of qualified property described in the original binding contract and to amounts to be paid or incurred for the construction, reconstruction, or acquisition of qualified property not described in the original binding contract, then the portion of those amounts described in the successor or replacement contract that were not described in the original binding contract shall not be treated as costs paid or incurred pursuant to a binding contract in existence prior to January 1, 2001. 
EXAMPLE 1: On December 15, 2000, P, a qualified taxpayer, enters into a binding contract with Q to purchase three drill presses that are qualified property for a total contract price of $50. Under the terms of the contract, P makes a non-refundable $10 deposit to Q on December 20, 2000. On February 15, 2001, P and Q mutually agree to rescind the original contract and simultaneously execute a new contract under which P requests minor modifications to the specifications for the drill presses. Under the new contract, the total contract price is increased to $55 to compensate Q for Q's additional costs of modifying the specifications for the drill presses. Under these facts, the February 15, 2001, contract is treated as a replacement contract to the December 15, 2000, contract, and the $10 deposit made by P on December 20, 2000, is not treated as a qualified cost. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that upon rescission of the original contract Q refunds P's $10 deposit. Under the terms of the new contract P is legally obligated to make a non-refundable deposit of $15 to Q within 30 days of the execution of the contract. Under these facts, the new contract is still treated as a replacement contract. Despite Q's refund to P, $10 of the total $15 deposit made by P under the new contract is properly treated as having been actually paid prior to January 1, 2001, and will not be treated as a qualified cost. 
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that under the new contract P agrees to purchase five drill presses instead of the three drill presses under the original contract. The total contract price for the new contract is increased to $85. Under these facts, the new contract is still treated as a replacement contract with respect to the three drill presses which were the subject of the original contract, and the $10 actually paid by P prior to January 1, 2001, is not treated as a qualified cost. 
EXAMPLE 4: On November 1, 2000, R, a qualified taxpayer, enters into a binding contract with S to purchase two machines for $10 each and five computers for $2 each, for a total contract price of $30. Assume that the machines are qualified property, but since R will use the computers in its general administrative office, the computers are not qualified property. Under the terms of the contract, R makes a non-refundable $10 deposit to S on November 5,2000. On March 1, 2001, R and S mutually agree to rescind the original contract and simultaneously execute a new contract under which R agrees to purchase three machines and five computers for $40. Under these facts, the March 1, 2001, contract is treated as a replacement contract to the November 1, 2000, contract to the extent of the two machines and the five computers, but is not treated as a replacement contract as to the third machine added by the March 1, 2001, contract. The $10 deposit actually paid prior to January 1, 2001, is not treated as a qualified cost. However, none of this $10 deposit amount is required to be allocated to the third machine for purposes of allocating the total contract price between the qualified property and the non-qualified property because the March 1, 2001, contract is not treated as a binding contract under this section as to the third machine, so that the entire $10 cost of the third machine is a qualified cost. 
(5) Option Contracts. For purposes of Regulations 23637-1 through 23637-11, inclusive, in any case where a qualified taxpayer (or any related party within the meaning of Internal Revenue Code sections 267 or 707) had an option to acquire qualified property on or prior to January 1, 2001, the option shall generally be treated as a binding contract. However, if the option holder would be required to forfeit an amount that is less than ten percent (10%) of the fixed option price upon cancellation or non-exercise of the option, then the option shall not be treated as a binding contract. 
EXAMPLE 1: On May 1, 2000, F, a qualified taxpayer, pays $150 to G for the right to purchase G's aluminum die-casting equipment for a total contract price of $900 (including the amount paid for the option) at any time prior to May 1, 2002. Under the terms of the option, the $150 is not refundable in the event F does not exercise its option. On January 15, 2002, F exercises its option to purchase G's casting equipment and delivers the remaining $750 due to G under the terms of the option. Since the option holder would have been required to forfeit more than 10% of the fixed option price upon cancellation or non-exercise of the option ($150/900, or 17%), the option is treated as a binding contract and the $150 paid by F prior to January 1, 2001, is not treated as a qualified cost. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that F pays only $80 for the option and is not obligated to forfeit any additional monies to G in the event F chooses not to exercise the option. Under these facts, the option is not treated as a binding contract since the maximum amount that F would be required to forfeit under the option contract is less than 10% of the fixed option price ($80/900, or 9%). 
(6) Conditional Contracts. A contract shall be treated as binding notwithstanding the fact that the contract is subject to a condition. 
EXAMPLE: On December 1, 2000, T, a qualified taxpayer, enters into a contract to purchase seven machines that are qualified property. The contract provides for a twenty percent (20%) down payment on December 1, 2000, with the balance to be paid on January 30, 2001. However, T's obligations under the contract are expressly conditioned upon the completion of T's new manufacturing facility in Palmdale. Despite this condition, the contract is treated as a binding contract in existence on or prior to January 1, 2001. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23637, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23637-5. Qualified Property.
Note     •     History

(Qualified Property -- See Regulation 23637-0 for Table of Contents.) 
(a) In General. For purposes of Regulations 23637-1 through 23637-11, inclusive, the term “qualified property” includes tangible personal property, whether new or used, that is defined in Internal Revenue Code section 1245(a)(3)(A) and is used by a qualified taxpayer primarily in qualified activities to manufacture a product for ultimate use in a Joint Strike Fighter. The term “qualified property” does not include certain types of property described in subsection (c) of this regulation. The basis of any qualified property for which the JSF Property Credit is claimed is not required to be reduced by the amount of any JSF Property Credit claimed. 
(b) General Requirements for Qualified Property. In order for property to be treated as qualified property, the property must satisfy each of the requirements of this subsection of this regulation. 
(1) Tangible Personal Property. For purposes of this section, property must be tangible personal property. The term “tangible personal property” means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). Tangible personal property includes all property (other than structural components) which is contained in or attached to a building. Thus, for example, production machinery, printing presses, and testing equipment which is contained in or attached to a building are tangible personal property. Furthermore, all property which is in the nature of machinery (other than structural components of a building or other inherently permanent structures) shall be considered tangible personal property even though located outside a building. The determination of whether property will be treated as an inherently permanent structure shall be made under Internal Revenue Code section 1245(a), so that generally property will be treated as an inherently permanent structure (and thus not tangible personal property) if the property is either intended to be or is in fact affixed permanently, and is either incapable of being moved or, if movable, would suffer a significant degree of damage upon its removal. Local law, including state, county, city, or regional, shall not be controlling for purposes of determining whether property is or is not “tangible” or “personal,” so that the fact that under local law property is held to be personal property or tangible property shall not affect the determination of whether such property is tangible personal property for purposes of the JSF Property Credit. 
EXAMPLE 1: B, a qualified taxpayer, manufactures aircraft engines in a manufacturing plant located in Tustin. B decides to upgrade its assembly line by installing a heavy-duty overhead crane which will be permanently affixed to the building structure. Prior to installing the crane B constructs steel columns that extend from the crane's girder to the roof of the building. Under these facts, while the steel columns may be treated as “other tangible property” under Internal Revenue Code section 1245(a)(3)(B), the steel columns are not tangible personal property and thus are not qualified property. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except instead consider the heavy-duty overhead crane. The crane moves back and forth along the assembly line on craneway tracks that are permanently bolted to the building's ceiling beams and is hard-wired to the building's electrical system. Despite its permanent affixation to the building, the crane is an item of tangible personal property. 
(2) Section 1245(a)(3)(A) Property. Only personal property described in Internal Revenue Code section 1245(a)(3)(A) is treated as qualified property for purposes of the JSF Property Credit. Other tangible property that is described in Internal Revenue Code section 1245(a)(3)(B) through (F), is not “personal” property and is thus not qualified property under Revenue and Taxation Code section 23637. 
EXAMPLE 1 F, a qualified taxpayer, manufactures airplane fuselages. F constructs a building which is open at both ends through which a length of track travels to move the fuselages during several steps in the manufacturing process. Since the building is not tangible personal property defined in Internal Revenue Code section 1245(a)(3)(A), it would not be treated as qualified property. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, but in addition, F constructs and installs machinery in the building to facilitate the assembly of the fuselages. Although the machinery is permanently installed in the building, it is not a structural component of the building and can be removed without dismantling the building. As a result, the machinery is tangible personal property that is defined in Internal Revenue Code section 1245(a)(3)(A). 
(3) Used to Manufacture a Product for Ultimate Use in a Joint Strike Fighter. Property must be used in qualified activities to manufacture a product for ultimate use in a Joint Strike Fighter. This requirement will be satisfied if the qualified taxpayer is using the qualified property primarily to manufacture a product that is properly treated as inventory of the qualified taxpayer and that is designed to be physically installed in or attached to a Joint Strike Fighter aircraft. For this purpose, the term “inventory” includes any property that is required to be included in the qualified taxpayer's inventory under Internal Revenue Code section 263A or that is described in Internal Revenue Code section 1221(1). 
EXAMPLE 1: B, a qualified taxpayer, manufactures aircraft radar antennas that are attached to a Joint Strike Fighter. B constructs a compressor for use in B's assembly line. B uses the compressor exclusively to manufacture the antennas. Since B uses the compressor to manufacture a product that is physically attached to a Joint Strike Fighter aircraft, the compressor is primarily used in a qualified activity. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except B manufactures ground based radar equipment to be used in connection with the Joint Strike Fighter program. Under these facts, even though the radar equipment is being manufactured in connection with the Joint Strike Fighter program, the compressor is not used in qualified activities since the compressor is used to manufacture a product that is not physically attached to a Joint Strike Fighter aircraft. 
(4) Primarily Used in Qualified Activities. Property must be primarily used in qualified activities. 
EXAMPLE 1: B, a qualified taxpayer, manufactures avionics systems in San Diego. B constructs a compressor for use in B's assembly line. The compressor is used for 500 hours in the assembly line, which is part of B's qualified activities, and for 250 hours in B's warehouse, which is part of B's non-qualified activity. Since B used the compressor in B's qualified activities for more than 50 percent of the time the compressor was actually in use during the 12-month period following the date the compressor was placed in service in California by B (500 hours/750 hours, or 66.7%), the compressor is primarily used in a qualified activity. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except B instead uses the compressor for 500 hours in the non-qualified activity and 250 hours in the qualified activity. Under these facts, the compressor is not primarily used in a qualified activity since the compressor was used less than 50 percent of the time during the 12-month period following the date the compressor was placed in service in California by B in a qualified activity (250 hours/750 hours, or 33.3%). 
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except B uses the compressor for a total of 100 days during the 12-month period following the date the compressor was placed in service in California by B. During each of those 100 days, B uses the compressor for four hours in the qualified activity and six hours in the non-qualified activity. Although B is using the compressor in the qualified activity during each of the 100 days that it is actually in operation, the compressor is not primarily used in a qualified activity because the total number of hours the compressor is used in a qualified activity is less than 50 percent of the total hours of operation of the compressor during the 12-month period following the date the compressor was placed in service in California by B. 
EXAMPLE 4: C, a qualified taxpayer, manufactures aircraft communications equipment in San Jose. C purchases ten personal computers to be used in the company offices. The computers are to be used in part for administration and management, a non-qualified activity, but are also used for the tracking of assembly line operations by directly monitoring the performance, safety, and production of the assembly line, a qualified activity. As long as the computers are used at least 50 percent of the time in the qualified activity during the 12-month period following the date the compressor was placed in service in California by C, then C shall be treated as primarily using the computers in a qualified activity. 
EXAMPLE 5: R, a qualified taxpayer, manufactures aircraft instrument lights from raw materials such as glass, tungsten, aluminum, copper and paper. R initially receives the raw materials at its warehouse in North Hollywood, and then, when needed, transports them using its own trucks to R's manufacturing plant in Burbank. Upon delivery to the manufacturing plant, the raw materials are placed in a receiving area where they are then moved via forklift to their respective areas in the plant for introduction into the process of manufacturing the light bulbs. Under these facts, R's qualified property does not include the trucks used to transport the raw materials from the warehouse to the manufacturing plant since the raw materials have not been introduced into R's manufacturing “process” until the raw materials have been delivered to the manufacturing plant. However, the forklift would be qualified property (assuming it was not used more than 50 percent of the time to unload the raw materials from the trucks to the receiving area) since once the raw materials are received at the same premises where R's manufacturing activity is being conducted, the movement of the raw materials via forklift is treated as part of R's manufacturing process. 
EXAMPLE 6: T, a qualified taxpayer, manufactures copper wire in Santa Ana. As part of T's manufacturing process, T purchases a machine to process the copper wire by coating it with white or black insulation prior to wrapping the wire in white plastic insulation. T's machine applies the materials and labor necessary to modify or change the characteristics of the copper wire. T's machine is used in “processing” the wire and thus would be qualified property. 
EXAMPLE 7: Assume the same facts as in EXAMPLE 7, except that T also uses the machine to coat its mailing labels for shipment of the wire. Assume that the processing of the copper wire is complete upon its being wrapped in the plastic insulation, and that the number of hours the machine is used during the 12-month period following the date the machine was placed in service in California by T for the “processing” of the wire is less than 50 percent of the machine's total use during such period. Under these facts, the machine is no longer primarily used for “processing,” a qualified activity, but is instead primarily used to coat the mailing labels, a non-qualified activity, so that the machine is not qualified property. 
EXAMPLE 8: C, a qualified taxpayer, manufactures hydraulic lines in Milpitas. The employees of C fabricate and assemble shelving to be used to store the manufactured lines following completion of C's manufacturing process. Assume that the costs of fabricating the shelving, including the direct labor costs, are properly capitalized by C. Although C has “fabricated” the shelving, the shelving is not qualified property since it is not used in C's manufacturing process, which is a qualified activity, but is rather used for storage, which is a non-qualified activity. 
EXAMPLE 9: C, a qualified taxpayer, manufactures ground based radar equipment and radar equipment that is designed to be physically installed in or attached to a Joint Strike Fighter aircraft. C purchases a compressor to use on its assembly line. The compressor is used for a total of 500 hours on the assembly line, 300 hours to manufacture the radar equipment that is designed to be physically installed in or attached to a Joint Strike Fighter aircraft and 200 hours to manufacture the ground based equipment. Since B used the compressor in B's qualified activities for more than 50 percent of the time the compressor was actually in use during the 12-month period following the date the compressor was placed in service in California by B (300 hours/500 hours, or 60%), the compressor is primarily used in a qualified activity. 
EXAMPLE 10: Assume the same facts as in EXAMPLE 10, except the compressor is used 200 hours to manufacture the radar equipment that is designed to be physically installed in or attached to a Joint Strike Fighter aircraft and 300 hours to manufacture the ground based equipment. Since B used the compressor in B's qualified activities for less than 50 percent of the time the compressor was actually in use during the 12-month period following the date the compressor was placed in service in California by B (200 hours/500 hours, or 40%), the compressor is not primarily used in a qualified activity. 
(c) Specifically Excluded Property. Notwithstanding subsections (b) or (d) of this regulation, qualified property does not include any of the following: 
(1) Furniture. Any item of furniture, regardless of how used or where located. 
(2) Facilities Used for Warehousing Purposes. Any property used for warehousing purposes after completion of the manufacturing process. Thus, for example, a manufacturer of engine components that stores its finished products in a separate warehouse building prior to shipment, and thereafter uses forklifts and other heavy equipment to move the inventory within the warehouse building, shall not treat the forklifts and other heavy equipment as qualified property. 
(3) Inventory. Any property that is properly treated as inventory of the qualified taxpayer. For this purpose, the term “inventory” includes any property which is required to be included in the qualified taxpayer's inventory under Internal Revenue Code section 263A or that is described in Internal Revenue Code section 1221(1). 
(4) Equipment Used to Store Finished Products. Any equipment used to store finished products that have completed the manufacturing process. Thus, for example, if a qualified taxpayer primarily uses a forklift in the finished goods portion of its manufacturing plant to transport finished products to its loading dock for shipping to customers, the forklift would not be qualified property. On the other hand, if the forklift was primarily used to transport raw materials to the assembly line and was occasionally used to transport finished products to the loading dock for shipment to customers, the forklift would be treated as qualified property. 
(5) Tangible Personal Property Used in Administration. General Management, or Marketing. Any tangible personal property that is used in administration, general management, or marketing. For this purpose, an item of property that is used both in a qualified activity and for administration, general management, or marketing, shall be treated as qualified property only if the item is primarily used in a qualified activity. However, property primarily used to clean and maintain the factory floor and fire safety equipment primarily used on the factory floor are not considered tangible personal property used in administration, general management, or marketing. 
(d) Movement of Used Property Into This State. In any case where property is moved from another state or country into this state by a qualified taxpayer or by a lessor who intends to lease such property to a qualified taxpayer, the property may generally be treated as qualified property for purposes of the JSF Property Credit if it satisfies the other requirements of this regulation. Thus, for example, if an item of property is acquired and placed in service in Nevada in 2000, and thereafter the item of property is moved into this state for use in a qualified activity (as defined in Regulation 23637-5(b)), the property may generally be treated as qualified property. However, in the case of any such moved property, a qualified taxpayer or lessor must still satisfy the requirements of Regulation 23637-4 (relating to qualified costs and payment of California sales or use tax) in order to claim the JSF Property Credit. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23637, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23637-6. Leasing.
Note     •     History

Leasing -- (See Regulation 23637-0 for Table of Contents.) 
(a) In General. For purposes of Regulations 23637-1 through 23637-11, inclusive, in the case of any leasing transaction in which qualified property is leased by a qualified taxpayer, the rules of this regulation shall apply. Generally, the lessor must pay California sales tax on the lessor's acquisition of the qualified property in order for the lessee to claim the credit for that item of qualified property. Conversely, the lessee cannot claim the JSF Property Credit for an item of property where the lessor acquired the qualified property without paying California sales or use tax and the lessor instead collects use tax payments from the lessee measured by the lessee's rental payments to the lessor. The determination of whether the rules in subsection (b) or subsection (c) of this regulation apply shall be made by reference to the sales and use tax treatment of the lease, rather than the income tax treatment of the lease. Thus, for example, a lease of qualified property that would be treated as a finance lease under income tax principles may still be treated as an operating lease under this regulation. In addition, under California sales and use tax law, a transaction denominated as a lease will instead generally be treated as a sale under a security agreement if the lease contains a nominal option price. For this purpose, California sales and use tax law generally treats the option price as nominal if it does not exceed the lesser of $100 or 1 percent of the total contract price. 
EXAMPLE 1: X, a leasing company, agrees to lease qualified property to Y, a qualified taxpayer, for use in Y's manufacturing facility in Garden Grove. Under the terms of the lease, X will lease the property to Y for $100 per year for a term of 10 years. Upon the expiration of the 10-year lease term, Y has an option to acquire the property for $1. Under these facts, the “lease” would be properly treated as a sale under a security agreement from its inception and not as a lease under Revenue and Taxation Code section 6006.3 and California State Board of Equalization Regulation 1660(a)(2)(A), Title 18, California Code of Regulations, so that the rules of subsection (c) of this regulation would apply. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that Y's option price is $125, or 12.5% of the total contract price. Under these facts, notwithstanding that the “lease” may be treated as a finance lease (and thus as a “purchase”) for California franchise and income tax purposes, under California sales and use tax law the “lease” would generally be treated as a lease and the rules of subsection (b) of this regulation would apply. 
(1) Lessor Not Entitled to JSF Property Credit. A lessor of qualified property is never entitled to claim the JSF Property Credit with respect to any item of qualified property it leases to another party, regardless of whether the lessor is otherwise a qualified taxpayer. 
(2) Binding Contract Rules Applicable to Leases. In the case of any qualified property leased pursuant to any agreement or contract that is treated as a binding contract under the rules of subsection (e) of Regulation 23637-4, the allocation rules of subsection (e) of Regulation 23637-4 shall apply in determining the amount of the qualified cost to the lessor upon which the lessee is entitled to claim the JSF Property Credit. For this purpose, if a lessor acquires qualified property under the terms of a contract that is treated as a binding contract with respect to the lessee (or a party related to the lessee within the meaning of Internal Revenue Code sections 267 or 318), then any payments or reimbursements made by the lessor, directly or indirectly in the form of a reduction in the amount of lease rental payments to be paid by the lessee under the lease, upon or as a result of the lessor's assumption of the lessee's obligations under the binding contract, shall be treated in the same manner as if the lessor had not assumed the lessee's obligations under the contract. Finally, in any case where a lessor has acquired property prior to January 1, 2001, and thereafter leases such property, the qualified cost to the lessor upon which the lessee would be entitled to claim the JSF Property Credit would generally be zero (assuming the lessor has not paid otherwise qualified costs after January 1, 2001, to improve or otherwise modify the leased property, in which case the lessor would have qualified costs to the limited extent of such post-2000 amounts that were paid). 
EXAMPLE 1: D, a qualified taxpayer, is engaged in the business of manufacturing aircraft landing gear in Palmdale. On September 20, 2000, D enters into a contract with X to acquire 3 machines that are qualified property for a total contract price of $900. Under the terms of the contract, D makes a non-refundable deposit to X of $150 upon execution of the contract, with an additional $150 due on July 1, 2001, and the final payment of $600 payable upon delivery of the machines on February 15, 2002. Assume that this contract is treated as a binding contract under subsection (e) of Regulation 23637-4. On January 15, 2002, D decides that it would prefer to instead lease the machines, so D enters into a contract with L, an equipment leasing company, under which L will (i) assume D's obligations under D's contract with X, (ii) lease the qualified property to D for a term of 10 years, and (iii) refund to D the $300 in payments that D has previously made to X. Assume that L will pay California sales tax on its purchase of the qualified property from X. Under these facts, L will be treated as having $750 in qualified costs for which D will be entitled to claim the JSF Property Credit, which is the total amount treated as paid by L after January 1, 2001 ($600 paid directly by L to X under X's contract with D, plus $150 paid by L to D as reimbursement for D's payment on July 1, 2001, but excluding the $150 paid by D to X prior to January 1, 2001). 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of L agreeing to refund the $300 in payments that D has previously made to X, L instead reduces the amount of the rental payments to be due from D under the lease. Under these facts, the result is the same as in EXAMPLE 1. 
(3) Special Rules Applicable to All Leasing Transactions: 
(A) Placed in Service. In the case of any leasing transaction, the requirement that qualified property must be placed in service in California in order for a qualified taxpayer to claim the JSF Property Credit shall be treated as having been satisfied at the time when all the terms and conditions of the lease contract have been completed so that the lessee has an unconditional obligation to pay all rents due under the contract to the lessor of the qualified property. However, notwithstanding the preceding sentence, the requirement of subsection (b)(4) of Regulation 23637-5 that property be primarily used in qualified activities to manufacture a product for ultimate use in a Joint Strike Fighter must still be satisfied in order for a lessee to claim the JSF Property Credit. 
(B) Bid Amount Reduced by Credit. In no event shall any leasing transaction qualify for the JSF Property Credit unless the bid reduction requirements contained in Revenue and Taxation Code section 23637, subsection (i)(2) and Regulation 23637-7 have been satisfied with respect to the bid which contains the Joint Strike Fighter Property Credit allowable for the qualified property that is the subject of the lease. 
EXAMPLE: On July 1, 2001, A, a qualified taxpayer, enters into a contract to lease a drill press from B, an equipment leasing company, for use in A's manufacturing facility in Roseville. Under the terms of the lease contract, A's rental obligations commence at the beginning of the month following the date that A provides B with a written statement that the drill press has been received from C, the original manufacturer of the drill press, and that the drill press has been installed and is in good working order (e.g., A provides a Certificate of Acceptance to B). On January 15, 2002, A executes and delivers the required written statement to B. Under these facts, A is treated as having satisfied the “placed in service” requirement as of February 1, 2002, and, assuming all other requirements of Revenue and Taxation Code Section 23637 have been satisfied, A is entitled to claim the JSF Property Credit. 
(b) Operating Leases. In the case of any lease that is not treated as a sale under Part 1 (commencing with section 6001) of Division 2 of the Revenue and Taxation Code (relating to the payment and collection of California sales and use tax), the rules set forth in this subsection of this regulation shall apply. Any lease subject to the rules of this subsection of this regulation shall be referred to in this regulation as an “operating lease.” 
(1) In General. Under Revenue and Taxation Code section 6006, subsection (g)(5), a lease of tangible personal property is generally treated as a sale for California sales and use tax purposes, unless the tangible personal property is leased in substantially the same form as acquired by the lessor or leased in substantially the same form as acquired by the transferor and the lessor or transferor has paid sales tax reimbursement or has paid use tax measured by the purchase price of the property. 
EXAMPLE: L, a taxpayer engaged in the equipment leasing business, purchases 20 machine tools for $10 from P, a retailer of machine tools. L intends to immediately lease the machine tools, without modification, to X, a qualified taxpayer engaged in the business of manufacturing aircraft cockpit canopies in Visalia, for a term of 10 years. L pays California sales tax on its purchase of the machine tools, and then leases the machine tools to X. Assume that X does not have an option to purchase the machine tools upon the expiration of the lease term. Since L has paid California sales tax on its purchase of the machine tools and then leased the property in substantially the same form as acquired, L's lease to X is not treated as a sale under Revenue and Taxation Code section 6006, subsection (g)(5), and the rules of this subsection of this regulation apply. 
(2) Applicable Requirements. In the case of an operating lease, the following requirements must be satisfied in order for the lessee to claim the JSF Property Credit. 
(A) Lessee Must Be a Qualified Taxpayer. The requirement under Regulation 23637-3 that the user of the qualified property must be a qualified taxpayer shall be applied to the lessee and not to the lessor. 
(B) Use of Property in Qualified Activities. The requirement under subsection (b)(4) of Regulation 23637-5 that property be used in qualified activities in order to be treated as qualified property shall be applied to the lessee and not the lessor with respect to the property that is the subject of an operating lease. 
(C) Sales or Use Tax Payment Requirement. Except as provided in subsections (b)(3)(B) or (b)(5)(B) of this regulation (relating to capitalized labor), the lessor must pay California sales tax reimbursement or California use tax on the lessor's construction, reconstruction or acquisition of the qualified property. In any case where the lessor's acquisition of the qualified property is pursuant to a transaction treated as either an occasional sale under Revenue and Taxation Code section 6006.5 or as a sale of mobile transportation equipment (as defined in Revenue and Taxation Code section 6023), the requirement of this subsection of this regulation shall be satisfied only if the lessor makes a timely election under either Revenue and Taxation Code sections 6094.1 or 6244(d) and pays California sales tax reimbursement or California use tax with respect to the lessor's acquisition of the qualified property. 
(D) Qualified Costs. The requirement that costs, in order to be treated as qualified costs, must be paid or incurred for the “construction, reconstruction, or acquisition” of qualified property shall not apply to the lessee's lease rental payments. Thus, for example, although a lessee may, under the lessee's method of California tax accounting, currently deduct its lease rental payments, the lessee will still be entitled to claim the JSF Property Credit if the other requirements of this subsection of this regulation are satisfied. However, the rules of Regulation 23637-4, including the rules relating to the allocation of costs paid or incurred pursuant to binding contracts, shall apply in determining the amount of qualified costs of the lessor upon which the lessee may determine its JSF Property Credit. 
(E) Chargeable to Capital Account. The requirement that costs, in order to be treated as qualified costs, must be properly chargeable to the capital account of the qualified taxpayer shall not apply to the lessee's lease rental payments. Thus, for example, although a lessee may, under the lessee's method of California tax accounting, currently deduct lease rental payments, the lessee will still be entitled to claim the JSF Property Credit if the other requirements of this subsection are satisfied. 
(F) Amount of JSF Property Credit Lessee May Claim. In general, a lessee under an operating lease is entitled to claim the JSF Property Credit at the same time and in the same amount as if such lessee had instead constructed, reconstructed, or acquired the qualified property other than by lease. 
(G) Qualified Cost to Lessor. Except as provided in subsection (b)(3)(B) of this regulation, the qualified cost to the lessor upon which the lessee is entitled to claim the JSF Property Credit is generally equal to the purchase price amount on which California sales tax reimbursement or use tax has been paid by the lessor. Thus, for example, if a lessor pays $100 for an item of qualified property, plus $8 in California sales tax reimbursement on such item, the qualified cost to the lessor would be $100. 
(H) Exception For Capitalized Labor. The qualified cost to the lessor under subsection (b)(3)(A) of this regulation shall also include any capitalized labor that is a direct cost, as that term is used in Internal Revenue Code section 263A and defined in the regulations thereunder, that can be identified or associated with and are properly allocable to the construction or modification of the qualified property. Thus, for example, assume a lessor pays $100 for an item of qualified property, with $20 of a $50 total labor cost properly treated as capitalized direct labor costs that are exempt from California sales or use tax. While the lessor would pay only $4 (8% of $50) in California sales tax reimbursement on the lessor's purchase of the qualified property, the qualified cost to the lessor under this subsection of this regulation would be equal to $70 ($50 + $20). 
(3) Special Rules for Operating Leases. The following special rules apply to any lease that is treated as an operating lease under this regulation. 
(A) Limitation on Qualified Costs. In determining a lessor's qualified cost under the rules of this subsection of this regulation, the allocation rule specified in Regulation 23637-4 shall apply to any costs actually paid by the lessor (or treated as paid by the lessor under the rules in this regulation) pursuant to a contract that was binding on January 1, 2001. Thus, for example, if a lessor has a binding contract to acquire qualified property for $100 as of January 1, 2001, and has paid a non-refundable deposit of $20 prior to January 1, 2001, and thereafter pays the remaining $80 purchase price, the lessor's qualified cost upon which a lessee may claim the JSF Property Credit could not exceed $80 ($100 purchase price less $20 actually paid prior to January 1, 2001, pursuant to a binding contract). 
(B) Reduction in Qualified Cost to Lessor. In the case of any re-lease of qualified property by a lessor to another qualified taxpayer, the qualified cost to the lessor under subsection (b)(3)(A) of this regulation as to the subsequent lessee shall first be reduced by the amount of qualified cost taken into account by any predecessor lessee. However, the preceding sentence shall not apply to the extent that the predecessor lessee was required to recapture any JSF Property Credit allowed to the predecessor lessee under the recapture rules in Regulation 23637-8. 
EXAMPLE 1: L, a taxpayer engaged in the equipment leasing business, acquires two cranes from R, a manufacturer of cranes in Oxnard, for $100. L intends to immediately lease the cranes to M, a qualified taxpayer, for use by M in its manufacturing facility located in Ventura. Assume the lease is properly treated as an operating lease under this regulation and that L pays sales tax to R of $8 (8% of $100) at the time of L's purchase. Under these facts, M will be entitled to claim a $10 JSF Property Credit (10% of $100) since L's qualified cost is $100. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that at the end of the lease term L re-leases the cranes to P, a qualified taxpayer, which manufactures synthetic resins and composite materials at a facility in Moorpark. Under subsections (b)(3)(A) and (b)(4)(B) of this regulation, L's qualified cost upon which P may claim the JSF Property Credit is zero ($0) since L's qualified cost is $0 ($100 original qualified cost to L, less $100 qualified cost taken into account by a predecessor lessee, M, when claiming the JSF Property Credit). 
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that M, the initial lessee, cancels the lease with L after 10 months, with L repossessing the cranes. Under these facts, M would be required to recapture (pursuant to Regulation 23637-8) the entire $10 JSF Property Credit previously claimed by M, and L's qualified cost upon L's re-lease of the cranes to P would be $100 ($100 original qualified cost to L, less $100 qualified cost taken into account by a predecessor lessee, M, plus $100 of qualified cost recaptured upon M's cancellation of the lease with L). 
(C) Qualified Cost to Successor Lessor. In any case where a successor lessor acquires qualified property from a lessor that is subject to a lease (including any qualified property that is not currently being leased but which the successor lessor intends to re-lease) in a transaction that is not treated as a sale for California sales and use tax purposes, the qualified cost to the successor lessor for purposes of the JSF Property Credit shall be reduced by the amount of qualified cost of the predecessor lessor that was taken into account by any lessee in computing a credit under the JSF Property Credit. However, the preceding sentence does not apply in any case where the transaction in which the successor lessor acquires the qualified property from the predecessor lessor is treated as a sale for California sales and use tax purposes. 
EXAMPLE 1: G is engaged in the equipment leasing business. G acquires three drill presses from Q, a manufacturer of drill presses, for $300. G immediately leases the printing presses to D, a qualified taxpayer, for use by D in D's machine tool facility in Santa Barbara. Assume the lease is properly treated as an operating lease under this regulation, and that G pays sales tax to Q of $24 ($300 X 8%) at the time of purchase. Under these facts, D would be entitled to claim a JSF Property Credit of $30 (10% of $300, G's qualified cost of the drill presses). Three years later G sells the drill presses to H, who is also engaged in the business of equipment leasing, for $250. Assume that G terminates its lease with D prior to the sale of the drill presses to H, and that H delivers a resale certificate to G so that H's purchase is exempt from California sales and use tax. Assume further that D agrees to re-lease the drill presses from H following H's acquisition of the drill presses from G. D terminates its lease two years after H's purchase of the drill presses, and H then re-leases the drill presses to E in a transaction treated as an operating lease under this regulation, for use by E in its tool and die facility in Bakersfield. Under these facts, H's qualified cost upon which E may claim the JSF Property Credit is $0 ($250 paid by H to G, less $300 qualified cost taken into account by a predecessor lessee, D). 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that G does not terminate its lease with D prior to G's sale of the drill presses to H. Under California sales and use tax law, the sale by G to H would be subject to California sales tax and H would not be entitled to deliver a resale certificate to G. As a result, assume H pays California sales tax reimbursement to G on the $250 purchase price. Since H has paid California sales tax reimbursement to G, H's qualified cost upon which E may claim the JSF Property Credit is $250. 
(D) Acquisition by Lessee of Leased Property. In any case where a lessee (or any party related to the lessee within the meaning of Internal Revenue Code sections 267 or 318) of qualified property acquires the leased property from the lessor within one year of the date the qualified property is first used by the lessee, then the purchase of the qualified property by the lessee shall be treated as a disposition of the property by the lessee and any JSF Property Credit claimed by the lessee must be recaptured by the lessee under the rules of Regulation 23637-8. However, if the lessee (or related party) pays California sales or use tax on the acquisition of the qualified property, then the rules of Regulation 23637-4 shall apply to the acquisition and the lessee-purchaser may be entitled to claim the JSF Property Credit with respect to its costs of acquisition. 
EXAMPLE 1: J, a qualified taxpayer, leases five lathes which are qualified property from Z, which is engaged in the equipment leasing business, for use in J's manufacturing facility in Folsom. Assume J's lease is treated as an operating lease under this regulation, and that J has claimed the JSF Property Credit. Nine months after J first uses the lathes, J exercises an option under the lease to acquire the lathes from Z for their fair market value. Under the rules of this regulation, and Regulation 23637-8, J would be required to recapture any JSF Property Credit claimed by J. However, if J paid California sales or use tax on the purchase of the lathes, then J may have qualified costs on J's purchase from Z under the rules of Regulation 23637-4. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that K, a wholly-owned subsidiary of J, instead purchases the lathes from Z. Under the rules of this regulation, since K is related to J under both Internal Revenue Code sections 267 and 318, K's acquisition of the lathes will be treated as a disposition by J of the qualified property and J will be required to recapture the JSF Property Credit. If K continues to lease the lathes to J, then the rules of subsection (b)(4)(C) of this regulation shall apply in determining whether K will have qualified cost in the lathes upon which J may claim a JSF Property Credit upon K's acquisition of the lathes. On the other hand, if K cancels the lease with J (assuming K may legally do so) and uses the lathes in a qualified activity conducted by K, then, assuming K has paid California sales or use tax on its acquisition, K may have qualified costs under the rules of Regulation 23637-4 assuming K continues to use the lathes in a qualified activity instead of re-leasing the lathes. 
(4) Sale-Leaseback Transactions. In the case of any sale-leaseback transaction, the following rules shall apply: 
(A) General Rule. Except as provided in subsection (b)(5)(B) of this regulation, in the case of any sale-leaseback transaction in which a lessor does not pay California sales or use tax upon acquisition of an item of qualified property, the qualified cost to the lessor upon which the lessee would be entitled to claim the JSF Property Credit shall be zero. 
EXAMPLE: On January 15, 2001, F, a qualified taxpayer engaged in the business of manufacturing aircraft navigational instruments, purchases three glass grinders that are qualified property from Y, the manufacturer of the glass grinders. Y collects California sales tax on the purchase by F. On January 30, 2001, F places the three grinders in service in its manufacturing facility in Crescent City. On May 15, 2001, G, which is engaged in the equipment leasing business, purchases the three grinders from F and immediately leases them back to F. Under the rules of this regulation, and Regulation 23637-8, F would be required to recapture any JSF Property Credit claimed by F. In addition, since this transaction would not be treated as an “acquisition sale and leaseback” under Revenue and Taxation Code section 6010.65, G must pay California sales or use tax on G's purchase of the grinders in order for F to claim any JSF Property Credit under the rules of this regulation. If G delivers a resale certificate upon its acquisition of the grinders, so that G does not pay California sales or use tax upon G's acquisition of the grinders, then no JSF Property Credit could be claimed by F upon F's lease of the grinders from G. 
(B) Acquisition Sale and Leaseback. In the case of any transaction that is properly treated as an “acquisition sale and leaseback” under Revenue and Taxation Code section 6010.65, the requirement of subsection (b)(2)(C) of this regulation (relating to payment of California sales or use tax) shall be deemed satisfied by the lessor. If a transaction is treated as an “acquisition sale and leaseback” under this subsection of this regulation, then the qualified cost to the lessor under subsection (b)(3)(A) of this regulation shall be equal to the amount upon which the lessee paid California sales or use tax, plus any capitalized labor costs determined under subsection (b)(3)(B) of this regulation. However, the rules of this subsection of this regulation shall only apply if, and to the extent that, the costs originally incurred by the lessee to acquire, construct, or reconstruct the qualified property were treated as qualified costs under Regulation 23637-4. 
EXAMPLE 1: On December 1, 2001, P, a calendar year qualified taxpayer engaged in the business of manufacturing composite material, purchases and immediately places in service two mixing tanks that are qualified property from Z, the manufacturer of the mixing tanks. Z collects sales tax on the purchase by P. On January 15, 2002, R, which is engaged in the equipment leasing business, purchases the two mixing tanks from P and immediately leases them back to P. Since R's acquisition and leaseback occurs within 90 days of P's first functional use of the mixing tanks, and assuming the other requirements of Revenue and Taxation Code section 6010.65 are satisfied, P's sale to R and R's leaseback to P are treated as an “acquisition sale and leaseback” under Revenue and Taxation Code section 6010.65 and the rules of subsection (b)(5)(B) of this regulation would apply. Under the rules of this regulation, and Regulation 23637-8, P would be required to recapture any JSF Property Credit claimed on P's 2001 California return. However, R would be “deemed” to have paid California sales or use tax upon R's acquisition of the mixing tanks from P, and P would be entitled to claim an JSF Property Credit on its 2002 California return in an amount equal to R's qualified cost, as determined under subsections (b)(3)(A) and (b)(3)(B) of this regulation. For this purpose, R's qualified cost could not exceed P's qualified cost determined under Regulation 23637-4. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that P purchases and places the mixing tanks in service on December 1, 2000, and R purchases the mixing tanks from P and immediately leases them back to P on January 15, 2001. Under these facts, even though the transaction would be treated as an “acquisition sale and leaseback” under Revenue and Taxation Code section 6010.65, since P's qualified cost under Regulation 23637-4 would be equal to zero, R's qualified cost under this regulation would similarly be equal to zero, and thus no JSF Property Credit would be allowed to R. 
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that P purchased the mixing tanks under a contract that was treated as a binding contract under the rules in Regulation 23637-4. Assume further that 25 percent of P's total cost for the mixing tanks was actually paid prior to January 1, 2001, so that P's qualified cost for the mixing tanks was equal to 75 percent of the total cost of the tanks. Under these facts, since P's qualified cost under Regulation 23637-4 would be equal to 75 percent of P's total cost for the mixing tanks, R's qualified cost under this regulation could not exceed the amount of P's qualified cost, irrespective of the total amount paid by R to P to purchase the mixing tanks. 
(5) Lessor Reporting Requirement. In the case of any lease treated as an operating lease under this regulation, the lessor shall provide the lessee with a statement within 45 days after the close of the lessee's taxable year for which the JSF Property Credit is allowable to the lessee. This statement shall contain the amount of the lessor's qualified cost (as calculated under this regulation) upon which the lessee is eligible to compute the JSF Property Credit and the amount of such qualified cost upon which the lessor has paid California sales or use tax. For purposes of providing this statement only, if a lessor is legally obligated to remit California sales or use tax with respect to its acquisition of qualified property, but has not yet remitted such amounts solely due to timing differences between the lessor's California sales and use tax return filing period and the lessee's taxable year, then the lessor may treat the amounts upon which the California sales or use tax liability arises as “qualified costs to the lessor.” The statement required by this subsection of this regulation should not be filed with the lessee's tax return for the taxable year, but shall instead be made available to the Franchise Tax Board upon request. 
(c) Finance Leases. In the case of any leasing transaction that is treated as a sale under Part 1 (commencing with section 6001) of Division 2 of the Revenue and Taxation Code (relating to the payment and collection of California sales and use tax), the rules set forth in this subsection of this regulation shall apply. Any lease subject to the rules of this subsection of this regulation shall be referred to in this regulation as a “finance lease.” 
(1) In General. Under Revenue and Taxation Code section 6006, subsection (g)(5), a lease of tangible personal property is generally treated as a sale for California sales and use tax purposes, unless the tangible personal property is leased in substantially the same form as acquired by the lessor or leased in substantially the same form as acquired by the transferor and the lessor or transferor has paid sales tax reimbursement or has paid use tax measured by the purchase price of the property. If the lease is not treated as a sale under Revenue and Taxation Code section 6006, subsection (g)(5), then the rules of subsection (b) of this regulation apply. 
(2) Applicable Requirements. In the case of a finance lease, the following requirements must be satisfied in order for the lessee to claim the JSF Property Credit. 
(A) Lessee Must Be a Qualified Taxpayer. The requirement under Regulation 23637-3 that the user of the qualified property must be a qualified taxpayer shall be applied to the lessee and not to the lessor. 
(B) Use of Property in Qualified Activities. The requirement under subsection (b)(4) of Regulation 23637-5 that property be used in qualified activities in order to be treated as qualified property shall be applied to the lessee and not the lessor with respect to the property that is the subject of a finance lease. 
(C) Sales or Use Tax Payment Requirement. Except as provided in subsection (d) of Regulation 23637-4 (relating to capitalized labor), either the lessor or the qualified taxpayer must pay California sales tax reimbursement or California use tax on the lessee's purchase of the qualified property in order for the JSF Property Credit to be allowed to the lessee. In the case of an “occasional sale” under Revenue and Taxation Code section 6006.5, the lessee may satisfy the requirement of this subsection of this regulation by remitting the California sales or use tax on the lessee's purchase of the qualified property (assuming that under California sales and use tax law the lessor does not have a legal obligation to remit such amounts). 
(D) Qualified Costs. The requirement that costs, in order to be treated as qualified costs, must be paid or incurred for the “construction, reconstruction, or acquisition” of qualified property shall be applied by substituting the term “purchase” for the term “construction, reconstruction, or acquisition.” Since under general income tax principles a finance lease is treated as a purchase, the lessee's “lease rental payments” are treated as payments of the purchase price of the qualified property and would thus satisfy the “purchase” requirement. However, the lessee under such a lease would be obligated to pay California sales or use tax at the time the lease became effective, so that the lessee would be allowed the entire JSF Property Credit on such lease in the year the lease became effective. On the other hand, if a lease is not properly treated as a finance lease under general income tax principles, then the “purchase” requirement would not be satisfied. 
(E) Chargeable to Capital Account. The requirement that costs, in order to be treated as qualified costs, must be properly chargeable to the capital account of the qualified taxpayer shall apply to the lessee's lease rental payments. 
(3) Amount of JSF Property Credit Lessee May Claim. In general, a lessee under a finance lease is entitled to claim the JSF Property Credit at the same time and in the same amount as if such lessee had instead constructed, reconstructed, or acquired the qualified property other than by lease. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23637, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23637-7. JSF Contract Bidding.
Note     •     History

JSF Contract Bidding -- (See Regulation 23637-0 for Table of Contents.) 
(a) In General. The JSF Property Credit shall not be allowed unless the credit is reflected within the bid that forms the basis for the qualified taxpayer's contract or subcontract to manufacture property for ultimate use in a Joint Strike Fighter. 
(b) Bid. For purposes of this regulation, the term “bid” shall mean a written bid or offer to perform a contract to produce a product that is designed to be physically attached to or installed in a Joint Strike Fighter in response to a request for bids to construct all or a portion of the Joint Strike Fighter Aircraft. The bid shall be submitted in a competitive process where the contract will be awarded to the lowest possible bidder or as otherwise indicated in the conditions under which the bids will be received and the contract awarded. Where the scope of work, request for proposal or relationship of the contracting parties is such that only a single party will be submitting a proposal or contract to construct all or a portion of the Joint Strike Fighter, the term “bid” shall include the proposal or contract ultimately executed. 
(c) JSF Property Credit Reflected Within the Bid. For purposes of this regulation, the term “reflected within the bid” shall mean: 
(1) the bid that forms the basis of the contact or subcontract is reduced by the amount of the JSF Property Credit allowable, and 
(2) the amount of the JSF Property Credit allowable is included on the face of the bid or an attachment to the bid that forms the basis of the contract or subcontract. 
The JSF Property Credit allowable shall be a lump sum number reflected on the contract or subcontract and the aggregate credit allowable over the term of the contract or subcontract is not required to be calculated on the basis of the year in which the credit amount is expected to be claimed. 
EXAMPLE 1: X, a qualified taxpayer, submits a bid to the prime contractor in the amount of $90 to manufacture retractable landing gear for the Joint Strike Fighter. The bid price without the JSF Property Credit would have been $100. The bid form includes an attachment that states the JSF Property Credit allowable for the subcontract is $10 ($100 contract price less JSF Property Credit in the amount of $10, for a reduced contract price of $90). X is the successful bidder on the retractable landing gear and thereafter is awarded the contract to produce the part for the Joint Strike Fighter. X and the prime contractor execute a contract in the amount of $90. Under these facts, the $10 JSF Property Credit amount is reflected within the bid that forms the basis for X's subcontract to manufacture property for ultimate use in a Joint Strike Fighter and X may claim the $10 JSF Property Credit if all of the other requirements of Section 23637 of the Revenue and Taxation Code and this regulation are met. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that the bid form reflects a price of $100. In this circumstance, X is not eligible to claim the credit because X has not reduced the amount of the bid by the amount of the JSF Property Credit allowable. 
EXAMPLE 3: Assume the same facts as in Example 1, except that the bid form reflects a price of $90, but the bid form does not contain an attachment showing the amount of the JSF Property Credit allowable. In this circumstance, X is not eligible to claim the credit because even though the bid amount has been reduced by the amount of the credit allowable, the amount of the credit allowable is not included on the face of the bid or in an attachment to the bid. 
EXAMPLE 4: Assume the same facts as in EXAMPLE 1, except that the scope of the project changes after the bid is submitted and X and the prime contractor execute a contract in the amount of $120, reflecting an increase of $30 dollars in the original bid amount. In this circumstance, the cost for the expanded scope of the contract was added to the original bid amount. As a result, X would only be allowed to claim a $10 JSF Property Credit since that amount was reflected within the original bid. 
EXAMPLE 5: X, a qualified taxpayer, is the prime contractor awarded the initial contract from the United States government for the Engineering and Manufacturing Development Phase of the Joint Strike Fighter Program. X does not include any amount for the Joint Strike Fighter credit in its bid for the Engineering and Manufacturing Development Phase accepted by the United States government. Under these facts, X is not able to claim the JSF Property Credit since the credit amount was not reflected within the bid that formed the basis for the initial contract for the Engineering and Manufacturing Development Phase. 
EXAMPLE 6: Assume the same facts as in Example 5, and Y responds to a request from X and submits a bid to subcontract a portion of the scope of the work covered in the Engineering and Manufacturing Development Phase of the Joint Strike Fighter Program. The bid form includes an attachment that shows the JSF Property Credit allowable for the subcontract is $10 ($100 contract price less JSF Property Credit in the amount of $10 for a reduced contract price of $90). Y is the successful bidder on that portion of the scope of the work and thereafter is awarded the contract to produce the part for the Joint Strike Fighter. X and Y execute a contract in the amount of $90. Under these facts, the $10 JSF Property Credit amount is reflected within the bid that forms the basis for Y's subcontract to manufacture property for ultimate use in a Joint Strike Fighter. Even though X, the prime contractor, did not reduce its bid for the prime contract and is not eligible to claim the JSF Property Credit, Y's bid met the bidding requirements for claiming the credit and Y may claim the $10 JSF Property Credit if all of the other requirements of Revenue and Taxation Code section 23637 and this regulation are met. 
(3) With respect to a contract to construct all or a portion of the Joint Strike Fighter that is executed on a “cost plus” basis, the term “reflected within the bid” shall mean that (1) California income or franchise taxes are treated as an item of cost to be reimbursed under the terms of the contract, (2) the cost plus contract, or an attachment to the contract, contains a calculation showing the amount of the JSF Property Credit allowable, and (3) the California income or franchise taxes reimbursed under the contract reflect the reduction for the amount of the JSF Property Credit allowable. 
(d) JSF Property Credit Allowable. For purposes of this regulation, the term “credit allowable” shall mean at the time the bid for the initial contract or subcontract is submitted, the amount of the credit the qualified taxpayer expects to claim as a result of qualified activities in connection with the contract or subcontract. The amount of the JSF Property Credit allowed to any qualified taxpayer under Revenue and Taxation Code section 23637 and these regulations shall not exceed the lesser of the credit amount reflected within the bid of the qualified taxpayer or the credit allowed for actual amounts paid or incurred by the qualified taxpayer. 
EXAMPLE: Y, a qualified taxpayer, submits a bid to the prime contractor to manufacture the cockpit canopy for the Joint Strike Fighter. The bid form includes an attachment that shows the JSF Property Credit allowable for the subcontract is $10 ($100 contract price less JSF Property Credit in the amount of $10 for a reduced contract price of $90). X is the successful bidder on the cockpit canopy and thereafter is awarded the contract to produce this part for the Joint Strike Fighter. X and the prime contractor execute a contract in the amount of $90. Thereafter, Y's costs to produce the cockpit canopy increase by 10% and Y determines that its actual qualified costs would result in a JSF Property Credit in the amount of $11. In this circumstance, even though Y's qualified costs have increased, Y is only able to claim a JSF Property Credit in the amount of $10 since that is the amount of the credit allowable that was reflected within Y's bid. 
(e) Pass-Through Entities. For purposes of this regulation: 
(1) The amount of the JSF Property Credit allowable reflected on a bid submitted by a partnership or an S corporation shall be the amount of the JSF Property Credit expected to be passed through the partnership to the partners or through the S corporation to the shareholders in accordance with the applicable provisions of Part 10 (commencing with section 17001) of the Revenue and Taxation Code. 
EXAMPLE: Z, a qualified taxpayer, submits a bid to the prime contractor to manufacture a portion of the hydraulic system for the Joint Strike Fighter. Z calculates the total allowable JSF Property Credit to be $75. Z has a valid S corporation election in effect for California tax purposes. Under Revenue and Taxation Code section 23803, subsection (a)(1)(A), Z's JSF Property Credit is limited to one-third of the amount of the credit otherwise allowable ($25). However, the amount of the JSF Property Credit that is expected to be passed through to Z's shareholders is $75 and Z must reflect the $75 reduced credit amount on the bid submitted to the prime contractor as provided in this regulation. 
(f) Copies Provided to Franchise Tax Board. The qualified taxpayer shall provide, upon request of the Franchise Tax Board, a copy of any bid that forms the basis for a contract or subcontract to manufacture property for ultimate use in a Joint Strike Fighter. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23637, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23637-8. Recapture Rules.
Note     •     History

Recapture Rules -- (See Regulation 23637-0 for Table of Contents.) 
(a) In General. The JSF Property Credit shall not be allowed or shall be recaptured under the rules of this regulation in any case where a disposition occurs within one year or less of the date the qualified property is first placed in service in this state. 
(b) Disposition. For purposes of this regulation, the term “disposition” shall include any of the following events: 
(1) Removal of the qualified property from this state; 
(2) Disposition of the qualified property to any party that is not a related party (as defined in Internal Revenue Code sections 267, 318 or 707), whether by sale, gift, a transfer upon the foreclosure of a security interest, or otherwise; 
(3) Use of the qualified property by the qualified taxpayer primarily in any non-qualified activity; or 
(4) Acquisition by a lessee (or any party related to the lessee under Internal Revenue Code sections 267 or 318) of qualified property that is being leased by such lessee. 
However, the term “disposition” shall not include any of the following events: 
(A) a mere transfer of legal title to a creditor upon creation of a security interest; 
(B) a transfer by a qualified taxpayer of legal title to qualified property to a lessor where the lessor is not treated as the tax owner of such property and the lease is properly characterized as a financing transaction under California income tax principles; 
(C) any election by a C corporation to become an S corporation; or 
(D) any destruction of qualified property which qualifies as an involuntary conversion under Internal Revenue Code section 1033. 
(c) Disposition of Qualified Property During the Taxable Year Placed in Service. In any case where there is a disposition of qualified property during the same taxable year in which such qualified property is first placed in service in this state, no JSF Property Credit shall be allowed to the qualified taxpayer for that property for the taxable year in which the qualified property is placed in service. 
EXAMPLE: H, a qualified taxpayer, files its California tax returns using a fiscal year ending on September 30th. On March 1, 2001, H pays $700 (plus California sales tax) for 10 personal computers and immediately places the computers in service in H's manufacturing facility in Burbank. On September 1, 2001, H acquires 10 new computers (which are immediately placed in service in H's manufacturing facility) for $800 (plus California sales tax) to replace the 10 computers already in service, and H instead uses the old computers to perform general administrative functions such as payroll and marketing. Under these facts, when H files its California tax return for its taxable year ending September 30, 2001, H is not entitled to claim the JSF Property Credit for the 10 personal computers acquired on March 1, 2001, because the computers are treated as having been disposed of during the same taxable year as they were placed in service as a result of H's use of these computers in an activity that is not a qualified activity. However, the 10 new computers acquired on September 1, 2001, may qualify for the JSF Property Credit for H's taxable year ending September 30, 2001. 
(d) Disposition of Qualified Property During a Taxable Year Subsequent to the Taxable Year Placed in Service. In any case where there is a disposition of qualified property within one year of the date that such qualified property is first placed in service in this state, but such disposition occurs in a different taxable year than the year in which the qualified property is placed in service in this state, then any JSF Property Credit that was allowed with respect to the qualified property shall be recaptured by adding the recaptured JSF Property Credit to the tax of the qualified taxpayer for the taxable year during which the disposition occurs (except as provided in subsection (e) of this regulation). 
EXAMPLE: F, a qualified taxpayer, files its California tax returns using a fiscal year ending on September 30th. On August 15, 2001, F acquires 20 new computers for $600 (plus California sales tax) and immediately places the computers in service in H's manufacturing facility in Glendora. On May 15, 2002, F removes the 20 computers from F's manufacturing facility in Glendora and transports them for use in F's New Mexico manufacturing facility. Assuming F had been allowed a JSF Property Credit on its taxable year ending September 30, 2001, California tax return for the computers acquired on August 15, 2001, F must recapture the entire JSF Property Credit allowed by adding such amount to F's tax for its taxable year ending September 30, 2002. 
(e) Adjustment of Carryforwards when Disposition Occurs. In any case where a qualified taxpayer is required to recapture any previously allowed JSF Property Credit under the rules of this regulation, then, prior to the addition of any recaptured amounts to the tax under subsection (d) of this regulation, any outstanding JSF Property Credit carryforwards shall first be reduced to the extent necessary to fully absorb the recapture amount. Any recapture amount remaining after application of the preceding sentence shall be added to the tax under the rules of subsection (d) of this regulation. 
EXAMPLE 1: On May 1, 2002, within one year of placing qualified property in service in this state, K disposes of qualified property for which a $150 JSF Property Credit was previously allowed. Under the rules of this regulation, K is required to recapture the entire $150 JSF Property Credit. Assume K had $400 in JSF Property Credit carryforwards that were available for use in 2002. Under these facts, K would reduce its available JSF Property Credit carryforwards to $250 ($400 minus $150). Since no additional recapture amount remains, K is not required to increase its tax for 2002 to reflect the $150 recapture amount. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of $400 in available JSF Property Credit carryforwards, K had only $100 in available JSF Property Credit carryforwards. Under these facts, K would first reduce its available JSF Property Credit carryforwards to zero, and would then increase its tax for 2002 by $50 ($150 recapture amount less $100 used to reduce available JSF Property Credit carryforwards). 
(f) Recapture of JSF Property Credit Allowed to Pass-Through Entities. 
(1) Partnerships and Partners. If a partnership places qualified property in service in this state, claims the JSF Property Credit to the extent of the qualified costs paid or incurred, and thereafter removes the qualified property from this state, disposes of the qualified property to an unrelated party, or primarily uses the property for a purpose not qualifying for the JSF Property Credit, then the JSF Property Credit shall be recaptured under Revenue and Taxation Code section 23637, subsection (g), and this regulation. The amount of JSF Property Credit subject to recapture shall be allocated among the partners in the same ratio that the JSF Property Credit was allocable to each partner for the qualified property subject to the recapture, and shall be added to the “tax” of the partner for the taxable year in which the qualified property is disposed of, removed from this state, or put to a non-qualifying use. 
EXAMPLE 1: Assume that C and D are equal partners of M, a partnership that is a qualified taxpayer. During M's taxable year beginning in 2001, M is allowed a total JSF Property Credit of $100. C and D each are able to utilize their entire 50% share of the 2001 JSF Property Credit to offset their respective 2001 tax liabilities, so that there is no JSF Property Credit carryover amount for either C or D. Assume further that in 2002, within one year of the date the qualified property was placed in service, M moves the qualified property to another state, thereby triggering a recapture of the JSF Property Credit. C and D are required to recapture their distributive share of the JSF Property Credit already applied to their respective 2001 tax liabilities on their respective 2002 California tax returns by adding the recaptured JSF Property Credit amounts to their respective “tax” for 2002. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that C uses all of C's share of the JSF Property Credit to reduce C's 2001 tax liability, but D carries over all of D's JSF Property Credit to 2002. On C's 2002 California tax return, C will be required to recapture C's share of the JSF Property Credit that was used to reduce C's “tax” for 2001 and D will be required to reduce its JSF Property Credit carryover to zero. D will not be required to increase D's “tax” for 2002 by the amount of D's share of the JSF Property Credit because D was unable to apply the amount to reduce D's tax liability for 2001. 
(2) S Corporations and Shareholders. 
(A) Corporate Level Recapture. If an S corporation places qualified property in service in this state, claims the JSF Property Credit to the extent of the qualified costs paid or incurred, and thereafter removes the qualified property from this state, disposes of the qualified property to an unrelated party, or primarily uses the qualified property for a purpose not qualifying for the JSF, then the JSF Property Credit shall be recaptured under Revenue and Taxation Code section 23637, subsection (g), and this regulation. The amount of any JSF Property Credit recaptured by the S corporation shall be added to the “tax” of the S corporation imposed under Chapter 4.5 of Part 11 of the Revenue and Taxation Code, except that the JSF Property Credit recapture amount added to the “tax” of the S corporation shall be appropriately reduced by the amount by which the S corporation was required to reduce such JSF Property Credit under Part 11 of the Revenue and Taxation Code. 
(B) Pass-through of JSF Property Credit Recapture Amount to Shareholders. In any case where a “disposition” of qualified property by an S corporation occurs, the amount of JSF Property Credit subject to recapture shall be allocated among the shareholders of the S corporation in the same ratio that the JSF Property Credit was allocable to each shareholder for the qualified property subject to the recapture, and shall be added to the “tax” of the shareholder for the taxable year in which the qualified property is disposed of, removed from this state, or put to a non-qualifying use. 
EXAMPLE: Assume that Q, an S corporation with three equal shareholders (E, F, and G), is allowed a JSF Property Credit in 2001 that Q is fully able to utilize to reduce Q's 1.5% S corporation tax liability. Assume further that E, F, and G each claims a one-third (1/3) share of the JSF Property Credit allowed to Q, and that each shareholder is able to utilize their entire distributive share of this JSF Property Credit on their respective 2001 California tax returns. In 2002, within one year of the date the qualified property was placed in service in California, Q sells the property to an unrelated party. Under these facts, Q, E, F, and G must each recapture the JSF Property Credit allowed and claimed by each on their respective 2001 California tax returns by adding such recapture amount to their 2002 respective California “tax” or “net tax,” as the case may be. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23637, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23637-9. JSF Property Credit Carryforwards.
Note     •     History

JSF Property Credit Carryforwards -- (See Regulation 23637-0 for Table of Contents.) 
(a) In General. In any case where the JSF Property Credit exceeds the “tax,” the excess may be carried forward to reduce the “tax” for the eight taxable years succeeding the taxable year for which the JSF Property Credit is allowed, if necessary, until the credit is exhausted. 
(b) Carryforwards for Pass-Through Entities. In the case of any JSF Property Credit allowed to a pass-through entity, the determination of the applicable carryover period for any JSF Property Credit required to be carried forward shall be made at the pass-through entity level. 
(c) Carryforwards Permitted After Sunset. For taxable years commencing on or after January 1, 2006, any unused JSF Property Credit may be carried forward, as provided above, until the unused JSF Property Credit is exhausted. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23637, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23637-10. Recordkeeping Requirements.
Note     •     History

Recordkeeping Requirements -- (See Regulation 23637-0 for Table of Contents.) 
(a) In General. For purposes of Regulations 23637-1 through 23637-11, inclusive, a qualified taxpayer shall be required to maintain books and records that are adequate to substantiate its entitlement to any claimed JSF Property Credit. These books and records should be retained for as long as the statute of limitations on assessment for the taxable year for which the JSF Property Credit was allowed remains open, and, in the case of any JSF Property Credit that is being carried forward, for the additional number of years that the actual carryforward of such JSF Property Credit occurs. 
(b) Books and Records. The books and records maintained by the qualified taxpayer should be sufficient to clearly establish all necessary facts which affect the allowance and amount of the JSF Property Credit. For this purpose, “adequate” recordkeeping depends upon the sufficiency of the information contained in the documentation. In many cases, the books and records normally maintained for California income or franchise tax purposes will be adequate substantiation for the JSF Property Credit. 
EXAMPLE 1: X, a qualified taxpayer, claims a JSF Property Credit for the purchase of 100 computers to be used in X's manufacturing facility in West Los Angeles. Assume the computers were purchased from a mail order retailer located in South Dakota. If X has only retained the original invoice and a cash disbursements journal, neither of which reflect that California sales or use tax was paid by X, then the invoice would not be sufficient to establish that California sales or use tax was paid on the computers. However, if X has retained a copy of a timely filed California use tax return that clearly demonstrates that California use tax was paid by X with respect to the computers, then X would be treated as having paid or incurred qualified costs. 
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that X intends to use 20 of the computers for general administrative functions such as payroll and marketing. In addition to the records necessary to establish that California sales or use tax was paid, X should also retain a copy of the purchase contract containing a detailed list of the computers by model number so that X can establish which of the computers are being used in qualified activities and which are not being used in qualified activities. 
(c) Affidavit Regarding Sales and Use Tax. For purposes of this regulation only, in the case of any lump sum or turn key contract, the requirement that California sales or use tax be paid may be established by reference to bids, contracts or affidavits from the contractor. For purposes of determining whether California sales or use tax has been paid, directly or indirectly by the contractor, when it is not a separately stated contract amount, a qualified taxpayer shall be entitled to rely on a written representation to that effect from the contractor, and California sales or use tax shall be deemed to have been paid in the absence of affirmative knowledge on the part of the qualified taxpayer that California sales or use tax was not paid. 
(d) Written Statement by Lessor to Lessee. In the case of any leasing transaction described in subsection (b) of Regulation 23637-6 (relating to operating leases), the lessor shall provide a statement to the lessee specifying the amount of the lessor's original cost of the qualified property upon which the lessee may claim the JSF Property Credit and the amount of that cost upon which California sales or use tax was paid. This statement must be provided to the lessee within 45 days after the close of the lessee's taxable year for which the JSF Property Credit is allowable to the lessee. For purposes of providing this statement only, if a lessor is legally obligated to remit California sales or use tax with respect to its acquisition of qualified property, but has not yet remitted such amounts solely due to timing differences between the lessor's California sales and use tax return filing period and the lessee's taxable year, then the lessor may treat the amounts upon which the California sales or use tax liability arises as “qualified costs to the lessor.” This written statement should not be filed with any return of either the lessor or lessee, but shall instead be retained by the lessee and made available to the Franchise Tax Board upon request. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23637, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23637-11. Miscellaneous Provisions.
Note     •     History

Miscellaneous Provisions -- (See Regulation 23637-0 for Table of Contents.) 
(a) Effective Dates of the JSF Property Credit. The JSF Property Credit shall cease to be effective on December 1, 2006; however, any unused credit may be carried forward, as provided in Revenue and Taxation Code section 23637, subsection (g), and Regulation 23637-9. 
(b) Manufacturers' Investment Credit (MIC). Under Revenue and Taxation Code section 23637, in any case where a credit would be allowed for qualified property under both that provision and the Manufacturers' Investment Credit (MIC) provided in Revenue and Taxation Code section 23649, a qualified taxpayer may claim either the MIC credit or the JSF Property Credit. Thus, a qualified taxpayer may not claim both the JSF Property Credit and the MIC for the costs of the same qualified property. 
(c) Enterprise Zone Sales or Use Tax Credit. Under Revenue and Taxation Code sections 23637 and 23612.2, a qualified taxpayer that also operates in an Enterprise Zone may claim both the JSF Property Credit and the Enterprise Zone sales or use tax credit on the same item of qualified property to the extent that all of the requirements of each of those sections are satisfied. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23637, Revenue and Taxation Code.
HISTORY

1. New section filed 1-23-2003; operative 2-22-2003 (Register 2003, No. 4).
§23649-0. Table of Contents.
Note     •     History

Regulation Sections 23649-1 Through 23649-11

§23649-0. The Manufacturers' Investment Credit (MIC)
(a) In General
(b) MIC for Qualified Costs Paid or Incurred in 1994 Must Be Claimed on Qualified Taxpayer's Return for First Income Year Beginning on or After January 1, 1995
(c) Cross References
(d) General References

§23649-2. Definitions
(a) Biopharmaceutical Activities
(b) Capitalized Labor
(c) Fabricating
(d) Gross Receipts
(e) Manufacturing
(f) Net Assets
(g) Other Biotechnology Activities
(h) Packaging
(i) Placed in Service
(j) Pollution Control
(k) Primarily
(l) Process
(m) Processing
(n) Qualified Activity
(o) Recycling
(p) Refining
(q) Research and Development
(r) SIC Codes
(s) SIC Manual
(t) Small Business
(u) Total MIC

§23649-3. Qualified Taxpayer
(a) In General
(b) Business Activities Treated as an Establishment
(1) Establishment
A. Activities Conducted at Different Physical Locations
B. Activities Conducted at a Single Physical Location
(2) Auxiliary Establishments
A. Auxiliary Activities Conducted at a Different Physical Location than the Supported Establishment
B. Auxiliary Activities Conducted at the Same Physical Location as the Supported Establishment
(3) Operating Establishments
(4) Determining Whether Employment is Significant
(5) Activities Properly Assigned a SIC Code in a Non-Qualified Activity

§23649-4. Qualified Costs
(a) In General
(b) California Sales and Use Tax Payment Requirement
(c) Capitalization Requirement
(d) Capitalized Labor Costs
(e) Qualified Costs Paid or Incurred Pursuant to Binding Contracts
(1) Allocation of Costs Actually Paid Prior to January 1, 1994
(2) Binding Contracts
(3) Successor or Replacement Contracts
(4) Option Contracts
(5) Conditional Contracts

§23649-5. Qualified Property
(a) In General
(b) General Requirements for Qualified Property
(1) Tangible Personal Property
(2) Section 1245(a) Property
(3) Used in an Activity Described in Division D of the SIC Manual
(4) Primarily Used in a Qualified Activity
(c) Special Purpose Buildings and Foundations
(1) Defined
(2) Exclusive Use for a Qualified Purpose
(3) Property Which is not a Special Purpose Building and Foundation
(4) Research Facilities
(d) Specifically Excluded Property
(1) Furniture
(2) Facilities Used for Warehousing Purposes
(3) Inventory
(4) Equipment Used in the Extraction Process
(5) Equipment Used to Store Finished Products
(6) Tangible Personal Property Used in Administration, General Management, or Marketing
(7) Property for Which the California Low-Emission Vehicle Credit is Claimed
(e) Movement of Used Property Into This State
(f) Property Used to Refine Reformulated or Oxygenated Gasoline

§23649-6. Leasing
(a) In General
(1) Lessor Not Entitled to MIC
(2) Binding Contract Rules Applicable to Leases
(3) Special Rule Applicable to All Leasing Transactions -- “Placed in Service”
(b) Operating Leases
(1) In General
(2) Applicable Requirements
A. Lessee Must Be a Qualified Taxpayer
B. Use of Property in a Qualified Activity
C. Sales or Use Tax Payment Requirement
D. Qualified Costs
E. Chargeable to Capital Account
(3) Amount of MIC Lessee May Claim
A. Qualified Cost to Lessor
B. Exception For Capitalized Labor
(4) Special Rules for Operating Leases
A. Transitional Election
B. Limitation on Qualified Costs
C. Reduction in Qualified Cost to Lessor
D. Qualified Cost to Successor Lessor
E. Acquisition by Lessee of Leased Property
(5) Sale-Leaseback Transactions
A. General Rule
B. Acquisition Sale and Leaseback
(6) Lessor Reporting Requirement
(c) Finance Leases
(1) In General
(2) Applicable Requirements
A. Lessee Must Be a Qualified Taxpayer
B. Use of Property in a Qualified Activity
C. Sales or Use Tax Payment Requirement
D. Qualified Costs
E. Chargeable to Capital Account
(3) Amount of MIC Lessee May Claim

§23649-7. Reserved.

§23649-8. Recapture Rules
(a) In General
(b) Disposition
(c) Disposition of Qualified Property During the Income Year Placed in Service
(d) Disposition of Qualified Property During an Income Year Subsequent to the Income Year Placed in Service
(e) Adjustment of Carryforwards when Disposition Occurs
(f) Recapture of MIC Allowed to Pass-Through Entities
(1) Partnerships and Partners
(2) S Corporations and Shareholders
A. Corporate Level Recapture
B. Pass-through of MIC Recapture to Shareholders
(g) Recapture of MIC Allowed in 1994 or 1995 But Deferred Until Qualified Taxpayer's First Income Year Beginning on or after January 1, 1995

§23649-9. MIC Carryforwards
(a) In General
(b) Small Business Determination Made as of the Last Day of the Income Year for Which the MIC is allowed
(c) Special Rule for MIC Allowed in 1994 or 1995 But Deferred Until Qualified Taxpayer's First Income Year Beginning on or after January 1, 1995
(d) Small Business
(e) Carryforwards for Pass-Through Entities
(f) Carryforwards Permitted After Sunset

§23649-10. Recordkeeping Requirements
(a) In General
(b) Books and Records
(c) Affidavit Regarding Sales and Use Tax
(d) Written Statement by Lessor to Lessee

§23649-11. Miscellaneous Provisions
(a) Operative Dates of the MIC
(b) Los Angeles Revitalization Zone (LARZ) Credits
(c) Election to Claim Sales and Use Tax Refund in lieu of MIC under Revenue and Taxation Code Section 6902.2
(d) Sales and Use Tax Exemption under Revenue and Taxation Code Section 6377
(e) Special Rule Applicable to Fiscal Year Taxpayers
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23649, Revenue and Taxation Code.
HISTORY

1. New article 3 (sections 23649-0--23649-11) and section filed 5-1-96; operative 5-31-96 (Register 96, No. 18). For prior history of article 3, see Register 82, No. 37.
2. Change without regulatory effect amending table of contents for section 23649-2 filed 8-14-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 33).
3. Editorial correction moving article 3 heading to precede section 23636-0 (Register 2004, No. 6).
§23649-1. The Manufacturers' Investment Credit.
Note     •     History

(See Section 23649-0 for Table of Contents.)
(a) In General. The Manufacturers' Investment Credit (MIC) is allowed to any qualified taxpayer in an amount equal to six percent (6%) of any qualified costs paid or incurred on or after January 1, 1994, for qualified property that is placed in service in this state. A qualified taxpayer who leases qualified property for use in a qualified activity of the qualified taxpayer may also claim the MIC. Qualified property may be either new or used and must be placed in service in this state and used by a qualified taxpayer in a qualified activity for more than one year to avoid recapture of the MIC. The basis of any qualified property for which the MIC is claimed is not required to be reduced by the amount of any MIC claimed.
(b) MIC for Qualified Costs Paid or Incurred in 1994 Must Be Claimed on Qualified Taxpayer's Return for First Income Year Beginning on or After January 1, 1995. In the case of any qualified costs paid or incurred on or after January 1, 1994, and prior to the first income year of the qualified taxpayer beginning on or after January 1, 1995, the MIC shall be treated as having been allowed as of the date the qualified property is placed in service in this state but shall not be claimed by the qualified taxpayer until the qualified taxpayer files its California tax return for its first income year beginning on or after January 1, 1995. No MIC shall be claimed on any return filed for any income year commencing prior to the qualified taxpayer's first income year beginning on or after January1, 1995. Fiscal year taxpayers who paid or incurred qualified costs on or after January 1, 1994, and during the qualified taxpayer's income year beginning in 1993, shall treat any such income year 1993 qualified costs as 1994 qualified costs to be claimed on the qualified taxpayer's 1995 income year return.
(c) Cross References. Regulation 23649-2 contains definitions applicable to Regulations 23649-1 through 23649-11, inclusive, Regulation 23649-3 contains rules relating to qualified taxpayers, Regulation 23649-4 contains rules relating to qualified costs, Regulation 23649-5 contains rules relating to qualified property, Regulation 23649-6 contains rules applicable to leases of qualified property by qualified taxpayers, Regulation 23649-7 is reserved, Regulation 23649-8 contains recapture rules, Regulation 23649-9 contains rules relating to carryforwards, Regulation 23649-10 contains general recordkeeping requirements, and Regulation 23649-11 contains other miscellaneous provisions. For rules relating to the MIC allowed to taxpayers under the Personal Income Tax Law, see Revenue and Taxation Code Section 17053.49 and the regulations thereunder.
(d) General References. For purposes of Regulations 23649-1 through 23649-11, inclusive, the following general references shall apply:
(1) All citations to the Revenue and Taxation Code are to the California Revenue and Taxation Code.
(2) All citations to the Internal Revenue Code are to the Internal Revenue Code of 1986.
(3) The credits provided for in Revenue and Taxation Code Sections 17053.49 and 23649 shall be collectively referred to as the “Manufacturers' Investment Credit” or the “MIC.”
(4) Any reference to a taxpayer's income year shall means the income year as defined in Revenue and Taxation Code Section 23042.
(5) Any reference to sales or use tax shall mean California sales or use tax imposed under Part 1 (commencing with Section 6001) of Division 2 of the Revenue and Taxation Code. Any discussion of California sales and use tax law in Regulations 23649-1 through 23649-11, inclusive, is based upon such law as in effect on the date these regulations become effective, and is generally intended to restate the requirements set forth in Revenue and Taxation Code Section 23649 and to be illustrative of, but have no effect on, the California sales and use tax law and the regulations thereunder. All examples which contain references to an amount of California sales or use tax shall be at an assumed hypothetical sales or use tax rate of eight percent (8%).
(6) Any reference to “Division D of the SIC Manual” shall mean that portion of the SIC Manual which includes Codes 2011 through 3999, inclusive.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23649, Revenue and Taxation Code.
HISTORY

1. New Section filed 5-1-96; operative 5-31-96 (Register 96, No. 18). 
2. Change without regulatory effect amending subsection (d)(6) filed 8-14-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 33).
§23649-2. Definitions.
Note     •     History

(See Section 23649-0 for Table of Contents.)
For purposes of Regulations 23649-1 through 23649-11, inclusive, the following definitions shall apply:
(a) Biopharmaceutical Activities. The term “biopharmaceutical activities” shall mean those activities, including research, development, production, or provision of biotechnology, which use organisms or materials derived from organisms, and their cellular, subcellular or molecular components, in order to provide pharmaceutical products or processes for human or animal therapeutics, diagnostics, medical, pharmaceutical, nutritional, or other health-related purposes. Biopharmaceutical activities use recombinant DNA technology and living organisms to make commercial products, as opposed to pharmaceutical activities which make use of chemical compounds to produce commercial products.
(b) Capitalized Labor. The term “capitalized labor” shall mean all direct costs of labor that can be identified or associated with and are properly allocable to the construction, modification, or installation of specific items of qualified property. For this purpose, labor encompasses full-time and part-time employees, as well as contract employees and independent contractors.
(1) Direct labor costs shall include all elements of compensation, such as basic compensation, overtime pay, vacation pay, holiday pay, sick leave pay (other than payments pursuant to a wage continuation plan under Internal Revenue Code Section 105(d) as it existed prior to its repeal in 1983), shift differential, payroll taxes, and payments to a supplemental unemployment benefit plan, but shall not include any indirect labor costs.
(2) Indirect labor costs are costs that cannot be identified or associated with the construction, modification, or installation of specific items of qualified property. Indirect labor costs include, but are not limited to, training costs, officers' compensation, pension and other related costs, and employee benefit expenses (including payments pursuant to a wage continuation plan under Internal Revenue Code Section 105(d) as it existed prior to its repeal in 1983).
(3) In determining whether direct costs of labor are properly allocable to the construction, modification, or installation of a specific item of qualified property, the qualified taxpayer shall be required to use the same method of allocation that is required to be used by the qualified taxpayer for California income or franchise tax purposes under the uniform capitalization allocation rules specified in Treasury Regulation Section 1.263A-1 (as in effect on the date Regulation 23649-2 is effective).
(c) Fabricating. The term “fabricating” shall mean the process of making, building, creating, producing, or assembling components or property to work or be useable in a new or different manner.
(d) Gross Receipts. The term “gross receipts” shall mean gross income, as defined in Revenue and Taxation Code Section 24271, plus cost of goods sold.
(e) Manufacturing. The term “manufacturing” shall mean the process of converting or conditioning property by changing the form, composition, quality, or character of the property for ultimate sale at retail or for use in the manufacturing of a product to be ultimately sold at retail, and includes any improvements to tangible personal property that result in a greater service life or greater functionality than that of the original property. Tangible personal property shall be treated as having a greater service life if such property can be used for a longer period than such property could have been used prior to the conversion or conditioning of such property. Tangible personal property shall be treated as having greater functionality if it has been improved in such a manner that it can be used to perform new or different functions.
(f) Net Assets. The term “net assets” shall mean total assets less total liabilities, as determined for California income or franchise tax purposes.
(g) Other Biotechnology Activities. The term “other biotechnology activities” shall means activities consisting of the application of recombinant DNA technology to produce commercial products, as well as activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(h) Packaging. The term “packaging” shall mean to wrap, seal, box, or put together as a unit, but shall include only that portion of any wrapping, sealing, boxing, or putting together as a unit that is necessary to prepare the goods for delivery to and placement in the qualified taxpayer's finished goods inventory, or to prepare the goods so that they are suitable for delivery to and placement in finished goods inventory. Additional wrapping, sealing, boxing, or putting together as a unit, such as any wrapping, sealing, boxing, or putting together as a unit that is necessary to consolidate the finished goods prior to shipping or protect them during transportation, shall not be treated as packaging.
(i) Placed in Service. The term “placed in service” shall mean the earliest income year in which either of the following occurs:
(1) under the depreciation method used by the qualified taxpayer for California tax purposes, the period for depreciation with respect to the qualified property commences; or
(2) the qualified property is placed in a condition or state of readiness and availability for a specifically assigned function.
If qualified property meets the conditions of subsection (i)(2) of this regulation in any income year, it shall be considered placed in service in such year, notwithstanding that the period for depreciation with respect to the qualified property begins in a succeeding income year. For example, if under the qualified taxpayer's California depreciation practice such qualified property is accounted for in a multiple asset account and depreciation is computed under an averaging convention, or depreciation is computed under the completed contract method, the unit of production method, or the retirement method, then the qualified property is treated as in a condition or state of readiness and availability for a specifically assigned function. Specific examples where qualified property shall be considered in a condition or state of readiness and available for a specifically assigned function include (A) parts that are acquired and set aside during the income year for use as replacements for a particular item or items of qualified property in order to avoid operational time loss, (B) operational items of qualified property that are acquired for a specifically assigned function during the income year where it is not practicable to use such item of qualified property for its specifically assigned function in the qualified taxpayer's business until the following income year, and (C) qualified property acquired for a specifically assigned function that is operational but is still undergoing testing to eliminate any defects. Materials and parts acquired to be used in the construction of an item of qualified property shall not be considered in a condition or state of readiness and availability for a specifically assigned function.
(j) Pollution Control. The term “pollution control” shall mean any activity that results in the abatement, reduction, or control of water, land, or atmospheric pollution or contamination by removing, altering, disposing, storing, or preventing the creation or emission of pollutants, contaminants, wastes, or heat, but only to the extent that such activity meets or exceeds standards established by this state or by any local or regional government agency within this state.
(k) Primarily. The term “primarily” shall mean that property is used 50 percent or more of the time in any qualified activity. For purposes of the preceding sentence, the term “time” shall mean the total number of hours that the property is actually in use during the 12-month period immediately following the date the property is placed in service in this state. For example, if an item of property is used by a qualified taxpayer for a total of 100 hours for all uses during the 12-month period immediately following the date the property is placed in service in this state, then “primarily” used in a qualified activity means at least 50 hours of the property's use is in a qualified activity.
(l) Process. The term “process” shall mean the period beginning at the point at which any raw materials are received by the qualified taxpayer and introduced into the manufacturing, processing, refining, fabricating, or recycling activity of the qualified taxpayer and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling activity of the qualified taxpayer has altered tangible personal property to its completed form, including packaging, if required. Raw materials will be considered to have been introduced into the process when the raw materials are stored on the same premises where the qualified taxpayer's manufacturing, processing, refining, fabricating, or recycling activity is conducted. Raw materials that are stored on premises other than where the qualified taxpayer's manufacturing, processing, refining, fabricating, or recycling activity is conducted, shall not be considered to have been introduced into the manufacturing, processing, refining, fabricating, or recycling process.
(m) Processing. The term “processing” shall mean the process of physically applying the materials and labor necessary to modify or change the characteristics of property.
(n) Qualified Activity. The term “qualified activity” shall mean an activity engaged in by a qualified taxpayer that involves manufacturing, processing, refining, fabricating, recycling, research and development, or pollution control, and shall also include the maintenance, repairing, measuring, or testing of any qualified property.
(o) Recycling. The term “recycling” shall mean the process of modifying, changing, or altering the physical properties of manufacturing, processing, refining, fabricating, secondary or postconsumer waste which results in the reduction, avoidance or elimination of the generation of waste, but shall not include transportation, baling, shredding, grinding, compressing, or any other activity that does not otherwise change the physical properties of any such waste. Recycling includes, but is not limited to, each of the following:
(1) Any “input change,” which shall mean any change in the raw materials or feedstocks used in any process for the purpose of reducing, avoiding, or eliminating the generation of hazardous waste.
(2) Any “operational improvement,” which shall mean improved site management for the purpose of reducing, avoiding, or eliminating the generation of hazardous waste.
(3) Any “production process change,” which shall mean any change in any process, method or technique which is used to produce a product or a desired result, including the return of materials or their components for reuse within any existing process or operation, for the purpose of reducing, avoiding, or eliminating the generation of hazardous waste.
(4) Any “product reformulation,” which shall mean changes in design, composition, or specifications of an end product, including product substitution, for the purpose of reducing, avoiding, or eliminating the generation of hazardous waste.
(p) Refining. The term “refining” shall mean the process of converting a natural resource to an intermediate or finished product, but shall not include any transportation, storage, conveyance or piping of the natural resources prior to commencement of the refining process, or any other activities which are not part of the process of converting the natural resource into the intermediate or finished product.
(q) Research and Development. The term “research and development” shall mean those activities that are described in Internal Revenue Code Section 174 or in any regulations thereunder. Research and development shall include activities intended to discover information that would eliminate uncertainty concerning the development or improvement of a product. For this purpose, uncertainty exists if the information available to the qualified taxpayer does not establish the capability or method for developing or improving the product or the appropriate design of the product.
(r) SIC Codes. The term “SIC Codes” shall mean those codes listed in the SIC Manual.
(s) SIC Manual. The term “SIC Manual” shall mean the Standard Industrial Classification Manual published by the United States Office of Management and Budget, 1987 edition.
(t) Small Business. The term “small business” shall mean a qualified taxpayer that, as of the last day of the income year for which the MIC is allowed, satisfies any of the following requirements: (1) has gross receipts of less than fifty million dollars ($50,000,000), (2) has net assets  of less than fifty million dollars ($50,000,000), (3) has a total MIC of less than one million dollars ($1,000,000), or (4) for income years beginning on or after January 1, 1997, is engaged in biopharmaceutical activities or other biotechnology activities that are described in Codes 2833 to 2836, inclusive, of the SIC Manual, published by the United States Office of Management and Budget, 1987 edition, and as further amended, and has not received regulatory approval for any product from the United States Food and Drug Administration. The determination of whether a qualified taxpayer is a “small business” shall be made on a separate entity basis, and, in the case of any qualified taxpayer engaged in multiple lines of business or that has multiple establishments, shall be made by aggregating all of the qualified taxpayer's business activities.
(u) Total MIC. The term “total MIC” shall mean the aggregate amount of MIC allowed to a qualified taxpayer for the income year (including any amounts allowed in the current income year but required to be carried forward), but shall not include any MIC carryforward amounts from prior years.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23649, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18). 
2. Change without regulatory effect repealing subsection (b), relettering subsections, adding new subsection (g), and amending subsections (l) and (t) filed 8-14-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 33).
§23649-3. Qualified Taxpayer.
Note     •     History

(See Section 23649-0 for Table of Contents.)
(a) In General. For purposes of Regulations 23649-1 through 23649-11, inclusive, a qualified taxpayer is any taxpayer that is engaged in an activity that is described in Division D of the SIC Manual. The determination of whether a taxpayer is engaged in an activity that is described in Division D of the SIC Manual shall be made under the rules and methods described in the SIC Manual, 1987 edition, herein incorporated by reference, and the rules in this regulation on the basis of all of the facts and circumstances. Thus, for example, a taxpayer is a qualified taxpayer where such taxpayer is engaged in multiple business activities, one or more of which constitutes an activity that is described in Division D of the SIC Manual. For purposes of the MIC, a SIC Code assignment to a given taxpayer's activity made by any federal, state (other than the Franchise Tax Board), regional, or local government agency shall not be controlling.
(b) Business Activities Treated as an Establishment. The determination of whether a taxpayer is engaged in an activity that is described in Division D of the SIC Manual shall be made by reference in the SIC Manual. If a taxpayer is engaged in one or more lines of business that is treated as an establishment under the SIC Manual, and that establishment is properly classified in Division D of the SIC Manual, then the taxpayer is a qualified taxpayer. In contrast, if a taxpayer is only engaged in business activities that are properly classified in any division or divisions of the SIC Manual other than Division D of the SIC Manual, then the taxpayer shall not be treated as a qualified taxpayer.
(1) Establishment. For purposes of this section, the term “establishment” shall mean an economic unit (as distinguished from subunits such as departments), generally at a single physical location, where business is conducted or where services or manufacturing or other industrial operations are performed. For example, a factory, mill, store, hotel, movie theater, mine, farm, ranch, bank, railroad depot, airline terminal, sales office, warehouse, or central administrative office would each be treated as an establishment. There are two types of establishments under the SIC Manual, auxiliary establishments and operating establishments.
A. Activities Conducted at Different Physical Locations. Business activities conducted at different physical locations shall generally be treated as separate establishments. Thus, for example, if a taxpayer manufactures clay tiles in Los Angeles and operates a retail tile store in Tarzana, each of these activities would be generally treated as a separate establishment.
B.  Activities Conducted at a Single Physical Location. Where distinct and separate business activities are performed at a single physical location (such as construction activities operated out of the same physical location as a lumber yard), each activity shall be treated as a separate establishment where all of the following are satisfied:
1. No single industry description in the SIC Manual includes such combined activities;
2. Separate reports are prepared on the number of employees, their wages and salaries, sales or receipts, property and equipment, and other types of financial data, such as financial statements, job costing, and profit center accounting; and
3. Employment in each such economic activity is significant (as defined in subsection (b)(4)).
Where all of the requirements in subsection (b)(1)B. of this regulation are not satisfied, then all of the activities conducted at that location shall be assigned a single SIC Code based upon the principal activity being conducted at that location. For example, where there are five distinct and separate business activities being conducted at a single physical location and none of those activities meet all of the requirements of subsection (b)(1)B. of this regulation, that location would properly be assigned a single SIC Code representing the principal business activity.
(2) Auxiliary Establishments. Auxiliary establishments are establishments that are principally engaged in performing management or support services for other establishments of the same taxpayer. Auxiliary establishments shall generally be assigned the same SIC Code as the principal activity of the operating establishment that they serve. However, establishments principally engaged in producing goods or providing services for other establishments of the same taxpayer, when such goods or services are covered by industries in Divisions A through D, inclusive, of the SIC Manual, shall be classified as operating establishments in such divisions of the SIC Manual on the basis of their principal activity. Examples of auxiliary establishments include, but are not limited to, the provisions of management and other general administrative functions, such as accounting, data processing, legal services, research and development, testing, and warehousing.
A. Auxiliary Activities Conducted at a Different Physical Location than the Supported Establishment. Auxiliary activities conducted at a different physical location from the supported establishment or establishments shall be treated as a separate establishment, and shall be classified as either an auxiliary establishment or an operating establishment under the rules of this regulation. Thus, for example, if a taxpayer manufactures plastic foam products in San Jose and has a finished goods warehouse in Fremont from which it fills orders and ships the finished goods to its customers, each of these activities will be treated as a separate establishment.
EXAMPLE 1: C manufactures computers, an activity properly classified under SIC Code 3571, at its manufacturing plant in San Diego. C also conducts research and development activities at C's facility in Rancho Cordova for the purpose of enhancing the performance by C. Assume that C's Rancho Cordova research facility is properly treated as a separate establishment under the rules in this regulation and principally performs research and development activities in support of C's manufacturing facility in San Diego. Under these facts, C's research facility in Rancho Cordova would be properly classified as an “auxiliary establishment” under the rules in this regulation. Moreover, since C's research facility is properly classified as an auxiliary establishment, it would be assigned the same SIC Code (SIC Code 3571) as C's manufacturing establishment in San Diego.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that C's manufacturing plant is located in Austin, Texas. Under these facts, the result is the same as in EXAMPLE 1 because the physical location of the auxiliary establishment is irrelevant to the determination of whether the activity being classified will be treated as an auxiliary establishment.
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that C's research facility principally performs commercial research and development performed on a contract basis for parties other than C. Under these facts, while C's research facility would still be treated as an “establishment” under the rules in this regulation, it would not be treated as an “auxiliary establishment” since C's research facility in Rancho Cordova does not “primarily” support C's manufacturing activity. Instead, C's research facility would be treated as a separate operating establishment, and would be assigned a separate SIC Code based on its primary activity (SIC Code 8731, Commercial Research and Development).
B. Auxiliary Activities Conducted at the Same Physical Location as the Supported Establishment. Where auxiliary activities are performed at the same physical location where the supported establishment or establishments are located, the auxiliary activities shall be treated as a separate establishment, and shall be classified as either an auxiliary establishment or an operating establishment under the rules of this regulation, when each of the following is satisfied:
1. Separate reports are prepared on the number of employees, their wages and salaries, sales or receipts, property and equipment, and other types of financial data, such as financial statements, job costing, and profit center accounting;
2. The auxiliary unit serves other establishments of the same taxpayer; and
3. Employment is significant (as defined in subsection (b)(4) for both the auxiliary and operating activity.
(3) Operating Establishments. Any establishment that is not treated as an auxiliary establishment shall be treated as an operating establishment and shall be assigned a SIC Code on the basis of its principal activity, which shall be determined by reference to its principal product or group of products produced or distributed, or services rendered. In the case of activities classified under Division D of the SIC Manual, the principal activity of the establishment shall be determined by reference to the value of production of each product being produced. For purposes of this section, the product or service contributing the largest proportion of the cost of goods manufactured, excluding overhead, shall be treated as the principal activity of the establishment. However, in cases where multiple manufacturing and non-manufacturing activities are conducted at an establishment and the taxpayer can demonstrate that value of production does not adequately represent the relative economic importance of each of the varied activities being conducted at the establishment, the taxpayer may instead use employment or payroll information in the same manner to determine the principal activity of the establishment.
EXAMPLE 1: D is solely engaged in the following two activities, both of which are conducted at the same physical location -- the manufacturing of wood kitchen cabinets and the retail sale of packaged dairy products. D employs 1 individual to manufacture the wood cabinets and 10 individuals to run the retail store. Assume the retail sale of packaged dairy products is the principal activity being conducted at this location. D does not maintain separate books and records for each of the activities, but instead maintains a single set of books and records. Since D does not maintain separate books and records for the manufacturing operation under subsection (b)(1)(B)2., and since the employment in this activity is less than 25% of the total employment and thus not significant under subsection (b)(1)(B)3., the manufacturing activity does not constitute a separate establishment from the retail operation. Moreover, under the rules in this section, D's principal activity at the establishment would be classified under SIC Code 5451 (Dairy Products Stores). Therefore, D is not engaged in an activity described in Division D of the SIC Manual and is thus not a qualified taxpayer.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that D employs 4 individuals in its wood cabinet manufacturing activity, but still does not maintain separate books and records for the wood cabinet manufacturing activity. Because the number of individuals employed in both the manufacturing operation and the retail operation is more than 25 percent of the total number of individuals D employs, employment in each of the activities would be considered significant. However, because D does not maintain separate books and records for each activity, D is treated and having only one establishment. Since the retail operation (SIC Code 5451 - Dairy Products Stores) is the principal activity of D's single establishment, D is not engaged in an activity described in Division D of the SIC Manual, and is thus not a qualified taxpayer.
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that D maintains separate books and records for the manufacturing activity. Since D is maintaining separate books and records, and the number of individuals employed in both the manufacturing operation and the retail operation is more than 25 percent of the total number of individuals D employs and thus treated as significant, both the manufacturing operation and the retail operation constitute separate establishments. As a result, D is engaged in an activity described in Division D of the SIC Manual, the manufacturing of wood kitchen cabinets (SIC Code 2434), and is a qualified taxpayer.
(4)Determining Whether Employment is Significant. For purposes of this section, the determination of whether employment is significant shall be based upon all of the facts and circumstances. However, employment in an economic activity shall be deemed “significant” whenever more than 25 percent of the taxpayer's total number of employees at a single physical location, or more than 25 percent of the taxpayer's total dollar value of payroll at a single physical location, is attributable to the business activity being tested for separate establishment status.
(5) Activities Properly Assigned a SIC Code in a Non-Qualified Activity. In the case of certain manufacturing-type activities that are conducted at establishments principally engaged in activities that are properly classified under divisions other than Division D of the SIC Manual, such activities shall not be treated as an activity described in Division D of the SIC Manual. Examples of these types of activities include, but are not limited to, the following:
A. processing on farms if the raw materials are grown on the farm and the manufacturing activities are on a small scale without the extensive use of paid labor;
B. threshing;
C. cotton ginning;
D. the dressing and beneficiating of ores;
E. the breaking, washing, and grading of coal;
F. the crushing and breaking of stone;
G. the crushing, grinding, or other preparation of sand, gravel, and nonmetallic chemical and fertilizer minerals other than barite;
H. fabricating operations performed at the site of construction by contractors;
I. cutting and selling purchased carcasses;
J. preparing feed at grain elevators and farm supply stores;
K. stemming leaf tobacco at wholesale establishments;
L. production of wiping rags;
M. the breaking of bulk and redistribution in smaller lots, including packaging, repackaging, or bottling products, such as liquors or chemicals;
N. establishments principally engaged in selling, to the general public, products produced on the same premises from which they are sold, such as bakeries, candy stores, ice cream parlors, and custom tailors;
O. tire retreading and rebuilding;
P. sign painting and lettering shops;
Q. computer software production; and
R. the production of motion picture films (including video types).
EXAMPLE 1: B is engaged in the retail sale of bakery products and the manufacturing of fresh bread products primarily for direct sale by B on B's premises to retail consumers. Both activities are conducted at a single physical location in Auburn. While B's manufacturing activity appears to be “described in” SIC Code 2051 (Bread and Other Bakery Products), if B's principal activity is the retail sale of these bakery products, then B will not be treated as engaged in an activity described in Division D of the SIC Manual since B is properly treated as being principally engaged in the retail sale of bakery products under SIC Code 5461 (Retail Bakeries). As a result, assuming that the baking operation is not properly treated as a separate establishment under the rules of this section, the baking operation would be properly classified as being part of the retail bakery operation.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of selling most of its bakery products through its retail store, B sells 80 percent of its bakery products to the wholesale bakery trade. Assuming that B's manufacturing operation would otherwise be properly treated as a separate establishment from its retail store, then B would be treated as engaged in an activity that is properly classified under SIC Code 2051 (Bread and Other Bakery Products).
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23649, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).
2. Editorial correction of subsection (b)(1)A. (Register 2002, No. 7).
§23649-4. Qualified Costs.
Note     •     History

(See Section 23649-0 for Table of Contents.)
(a) In General. For purposes of Regulations 23649-1 through 23649-11, inclusive, the term “qualified costs” includes any costs paid or incurred by a qualified taxpayer for the construction, reconstruction, or acquisition of qualified property on or after January 1, 1994, provided that California sales or use tax has been paid, directly or indirectly, on such costs (except for costs paid or incurred for capitalized labor), and such costs are properly chargeable to the qualified taxpayer's capital account. However, the term “qualified costs” does not include the amount of any California sales or use tax paid, directly or indirectly, by the qualified taxpayer.
(b) California Sales and Use Tax Payment Requirement. In order for costs to be treated as qualified costs, California sales or use tax must be paid, directly or indirectly as a separately stated contract amount or as determined from the books and records of the qualified taxpayer, with respect to the qualified property. For purposes of Regulations 23649-1 through 23649-11, inclusive, the requirement that California sales or use tax be paid prior to claiming the MIC shall be deemed satisfied as of the date the California sales or use tax is due and payable under Part 1 (commencing with Section 6001) of Division 2 of the Revenue and Taxation Code. In the case of any costs paid or incurred by the qualified taxpayer upon which California sales or use tax has not been paid, except in the case of amounts properly treated as capitalized labor directly allocable to the construction, such amounts shall not be treated as qualified costs. In the case of any leasing transaction, Regulation 23649-6 contains special rules applicable to the California sales and use tax payment requirement.
EXAMPLE 1: D, a qualified taxpayer, purchases three hydraulic turbines from B, a California manufacturer of hydraulic turbines, for $500 to be used in D's manufacturing facility in Escondido. Under the terms of the purchase contract, which is dated February 15, 1994, B agrees to install the turbines at D's manufacturing facility by affixing them to the facility's concrete floor for an additional $100. B charges and collects from D $40 in California sales tax under the contract ($500 X 8%), with the $100 installation charges being separately stated in the purchase contract and for purposes of this example are assumed to be exempt from California sales and use tax. Under these facts, D has $600 in qualified costs ($500 in costs upon which California sales tax was paid and $100 in capitalized labor, but excluding the $40 in sales tax).
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of D purchasing the turbines from B, D enters into a “fixed-price, turn-key” contract with C, the terms of which require D to pay C a total of $640 upon delivery and installation of the turbines in D's manufacturing facility. C, instead of delivering a resale certificate to B, pays $40 ($500 X 8%) in California sales tax to B on its purchase of the turbines. Under C's contract with D, the $40 California sales tax paid by C is a separately stated item. Under these facts, since the sales tax was separately stated in D's contract with C and paid by C on behalf of D, D is treated as having satisfied the California sales tax payment requirement. However, since $40 of the total contract price represents the sales tax paid indirectly by D, the amount of D's qualified costs is $600 ($500 for the turbines plus $100 in capitalized labor, but excluding the $40 in sales tax).
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that D's contract with C does not separately state the amount of California sales tax paid by C. However, D's books and records substantiate that C paid California sales tax on behalf of D and that the total contract price of $640 is broken down between $500 for the turbines, $40 in California sales tax, and $100 in installation charges. Under these facts, the result is the same as in EXAMPLE 2 since the amount of California sales tax treated as being paid indirectly by D can be determined from D's books and records.
(c)  Capitalization Requirement. In order for costs to be treated as qualified costs, they must be amounts properly chargeable to the capital account of the qualified taxpayer. Amounts shall be treated as properly chargeable to capital account if under the qualified taxpayer's method of tax accounting they are properly includible in the qualified taxpayer's basis for computing depreciation on the qualified property under Revenue and Taxation Code Section 24353. However, any amounts not required to be included in the qualified taxpayer's basis for depreciation purposes shall not be treated as qualified costs. For example, Internal Revenue Code Section 179 provides that amounts for which an election is made under that section to currently deduct such amounts are “not chargeable to capital account.” Thus, any amounts for which a qualified taxpayer makes an election to currently expense for California income or franchise tax purpose under either Internal Revenue Code Sections 179 or 179A, or amounts for which a qualified taxpayer makes an election for California purposes to currently expense under Internal Revenue Code Section 179-type provisions such as Revenue and Taxation Code Sections 24356.2 (Enterprise Zone businesses), 24356.3 (Program Area businesses), 24356.4 (Los Angeles Revitalization Zone businesses), or 24356.8 (Local Agency Military Base Recovery Area businesses), are treated as amounts that are not properly chargeable to capital account. In addition, any costs paid or incurred for property with a useful life of less than one year which may properly be expensed under Internal Revenue Code Section 162 would be treated as amounts not properly chargeable to capital account. Although costs that are not properly chargeable to capital account are not treated as qualified costs, the portion of the cost of any item of qualified property that is properly chargeable to capital account (such as, for example, the amount in excess of what may be currently deducted under Section 179 of the Internal Revenue Code) may be a qualified cost under Revenue and Taxation Code Section 23649.
EXAMPLE 1: F, a qualified taxpayer which is a California S corporation, purchases 50 stainless steel racks for $900 from G for use in F's cheese production line in Santa Cruz. F pays $72 ($900 X 8%) in California sales tax on the purchase. F makes an election for California franchise tax purposes to currently expense the entire cost of the stainless steel racks under Revenue and Taxation Code Section 23802(f)(1) (Internal Revenue Code Section 179). Under these facts, the $900 paid by F for the stainless steel racks would not be treated as a qualified cost since the $900 is not properly chargeable to F's capital account under Revenue and Taxation Code Section 23802(f)(1) (Internal Revenue Code Section 179).
EXAMPLE 2: H, a qualified taxpayer doing business in the Los Angeles Revitalization Zone, purchases a commercial baking oven for $25 from I, and pays $2 (8% of $25) in California sales tax on the purchase. H makes an election under Revenue and Taxation Code Section 24356.4 to expense the entire cost of the oven. Under these facts, the $25 paid by H would not be treated as a qualified cost since the $25 is not properly chargeable to H's capital account.
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that H is instead doing business in the Fresno enterprise zone. Under the provisions of Revenue and Taxation Code Section 24356.2, H elects to expense $10 of the cost of the oven. Under these facts, H may treat only $15 of the total $25 paid for the oven as a qualified cost since the $10 being expensed under Revenue and Taxation Code Section 24356.2 is not properly chargeable to H's capital account.
(d) Capitalized Labor Costs. For costs paid or incurred by the qualified taxpayer for capitalized labor, the requirement that California sales or use tax be paid in order for the costs to be treated as qualified costs shall not apply. The qualified taxpayer shall have the burden of establishing the amount of any cost paid or incurred for capitalized labor that is directly allocable to the construction, modification or installation of any item of qualified property. This burden may, for example, ordinarily be satisfied by either an invoice, supported by the books and records of the qualified taxpayer, that separately states the amount of directly allocable capitalized labor on qualified property acquired by purchase or, in the case of self-constructed qualified property, from books and records of the qualified taxpayer that establish the amount of capitalized labor that is directly allocable to the construction of the item of qualified property.
EXAMPLE 1: G, a qualified taxpayer, purchases a machine that is qualified properly from X for $500. The price of the machine includes $50 in separately stated shipping charges. X collects California sales tax of $34 (8% of $450) from G, with the shipping charges assumed to be exempt from California sales and use tax. Upon receipt of the machine, G incurs an additional $50 in directly allocable capitalized labor costs to have G's employees install the machine in G's manufacturing facility in Riverside, and $25 in training costs to train G's personnel to properly operate the machine. Under these facts, only the cost of the machine upon which California sales tax was paid ($450), plus the directly allocable installation costs ($50), would be treated as qualified costs. The $50 paid for shipping charges is not a qualified cost since no California sales tax was paid on such amounts, nor are the shipping charges treated as directly allocable capitalized labor. The $25 incurred by G in training costs is not a qualified cost since training costs are indirect labor costs under subsection (c)(2) of regulation 23649-2.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that the $50 in freight charges are not separately stated and X collects $40 (8% of $500) in California sales tax from G. Under these facts, the cost of the machine, including the freight charges, upon which California sales tax was paid ($500), plus the directly allocable installation costs ($50), would be treated as qualified costs.
EXAMPLE 3: H, a qualified taxpayer, contracts with I for $100 to have a machine that is qualified property modified to increase its per-unit output. Assume that the labor costs associated with the modification are exempt from California sales and use tax. Although H does not pay California sales or use tax on the modification work, H may include in its qualified costs the costs of modifying the machine since the $100 is properly treated as a capitalized labor cost that is directly allocable to the modification of qualified property.
EXAMPLE 4: J, a qualified taxpayer, purchases an extended warranty contract on qualified property. J's extended warranty contract provides that all unscheduled maintenance and repairs will be performed at no cost by the seller or its agent. Assume that the costs of the extended warranty contract are exempt from California sales and use tax. Under these facts, the extended warranty contract is not treated as a directly allocable capitalized labor cost since it is not for the construction, modification, or installation of qualified property. As a result, the costs paid for the extended warranty contract are not qualified costs.
EXAMPLE 5: K, a qualified taxpayer, purchases a machine that is qualified property and then uses its own employees to install and modify the machine, including necessary adjustments, alignments and “debugging,” so that the machine will properly run K's assembly line. Under these facts, assuming that K properly capitalizes for California tax purposes its direct labor costs for installing and modifying the machine, then the direct labor costs are treated as directly allocable capitalized labor costs and are thus qualified costs.
EXAMPLE 6: L, a qualified taxpayer, purchases a comprehensive insurance policy on an item of qualified property. L may not include the premiums for the insurance policy as qualified costs because the insurance policy covers risk of loss, and is not a directly allocable capitalized labor cost that is associated with the construction, modification or installation of qualified property.
(e) Qualified Costs Paid or Incurred Pursuant to Binding Contracts. For any qualified property constructed, reconstructed, or acquired by the qualified taxpayer (or any person related to the qualified taxpayer within the meaning of Internal Revenue Code Sections 267 or 707) pursuant to a binding contract in existence on or prior to January 1, 1994, costs paid pursuant to that contract shall be subject to allocation under the rules in this subsection.
(1) Allocation of Costs Actually Paid Prior to January 1, 1994. In any case where a qualified taxpayer has actually paid amounts (including, without limitation, contractual deposits and option payments) prior to January 1, 1994, under a binding contract, any such amounts shall not be treated as qualified costs. However, if under any binding contract a qualified taxpayer has paid amounts both before and after January 1, 1994, then the amounts actually paid after December 31, 1993, to the extent properly allocable to the construction, reconstruction, or acquisition of qualified property, shall be treated as qualified costs. In the case of any contract that was binding on January 1, 1994, under the terms of which a qualified taxpayer will acquire both qualified property and non-qualified property, and the qualified taxpayer has actually paid amounts both before and after January 1, 1994, then the amounts paid prior to January 1, 1994 and the amounts paid after December 31, 1993, must be allocated between the qualified property and the non-qualified property in proportion to the actual amounts paid prior to January 1, 1994, and the total contract price.
EXAMPLE 1: On October 1, 1993, M, a qualified taxpayer, executes a contract to purchase five machines and ten computers that are qualified property for a total of $100 (plus applicable California sales tax). Under the terms of the contract, M is required to make a non-refundable $20 deposit upon execution of the contract and pay the remaining $80 upon delivery of the machines and computers. On May 1, 1994, the machines and computers are delivered and M pays the remaining $80 due under the contract. Under these facts, the $20 actually paid by M in 1993 will not be treated as a qualified cost, but the remaining $80 paid in 1994 will be treated as a qualified cost.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that the computers are not qualified property because M intends to use them for general administrative purposes. The computers represent $20 of the total $100 contract price. Under these facts, since M is purchasing both qualified property and nonqualified property under a binding contract, the $20 paid prior to January 1, 1994, and the $80 paid after December 31, 1993, must be allocated between the machines and the computers. Since the cost of the machines represent 80% of the total contract price ($80/$100), and $20 was actually paid prior to January 1, 1994, $16 (80% of $20) of the total $80 paid for the machines is treated as having been paid prior to January 1, 1994, and is thus not treated as a qualified cost. However, the remaining $64 ($80 - $16) paid for the machines is treated as a qualified cost.
(2) Binding Contracts. For purposes of Regulations 23649-1 through 23649-11, inclusive, a contract shall be treated as binding where the contract is enforceable under state law against the qualified taxpayer (or any related party within the meaning of Internal Revenue Code Sections 267 or 707) and the amount of potential damages (whether by an express liquidated damages provision or otherwise) for which the qualified taxpayer may be liable upon cancellation or breach of the contract would equal or exceed five percent (5%) of the total contract price. However, a contract to acquire a component part of a larger item of property shall only be treated as a binding contract to acquire such component part and shall not be treated as a binding contract to acquire the larger item of property under the general rule for binding contracts. For example, a written binding contract to acquire an engine to power a printing press would be a binding contract only for the engine, not for the entire printing press.
EXAMPLE 1: X, a qualified taxpayer, enters into a written contract with Y on August 15, 1993, under which X agrees to purchase 10 machines for $150 for delivery on December 1, 1994. Under the terms of the contract, X is required to make a nonrefundable deposit of $10 upon execution of the contract. Under these facts, since X's potential damages upon cancellation or breach of the contract equal or exceed 5% of the total contract price ($10/$150, or 6.7%), X's contract with Y is treated as a binding contract in existence on or prior to January 1, 1994.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that Y is required to refund half of X's $10 deposit in the event X cancels the contract. Assume further that X's potential damages to Y upon breach of the contract are limited by a liquidated damages provision to the $5 of X's deposit that Y is not required to refund to X. Under these facts, X's contract is not treated as a binding contract in existence on or prior to January 1, 1994, since X's potential damages under the contract are less than 5% of the total contract price ($5/$150, or 3.3%).
(3) Successor or Replacement Contracts. Any contract entered into on or after January 1, 1994, that is a successor or replacement contract to a contract that was binding prior to January 1, 1994, shall be treated as a binding contract in existence prior to January 1, 1994, and shall be subject to the same rules described in this section applicable to binding contracts generally. However, if a successor or replacement contract is entered into on or after January 1, 1994, and the subject of the successor or replacement contract relates both to amounts to be paid or incurred for the construction, reconstruction, or acquisition of qualified property described in the original binding contract and to amounts to be paid or incurred for the construction, reconstruction, or acquisition of qualified property not described in the original binding contract, then the portion of those amounts described in the successor or replacement contract that were not described in the original binding contract shall not be treated as costs paid or incurred pursuant to a binding contract in existence prior to January 1, 1994.
EXAMPLE 1: On December 15, 1993, P, a qualified taxpayer, enters into a binding contract with Q to purchase three drill presses that are qualified property for a total contract price of $50. Under the terms of the contract, P makes a non-refundable $10 deposit to Q on December 20, 1993. On February 15, 1994, P and Q mutually agree to rescind the original contract and simultaneously execute a new contract under which P requests minor modifications to the specifications for the drill presses. Under the new contract, the total contract price is increased to $55 to compensate Q for Q's additional costs of modifying the specifications for the drill presses. Under these facts, the February 15, 1994, contract is treated as a replacement contract to the December 15, 1993, contract, and the $10 deposit made by P on December 20, 1993, is not treated as a qualified cost.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that upon rescission of the original contract Q refunds P's $10 deposit. Under the terms of the new contract P is legally obligated to make a non-refundable deposit of $15 to Q within 30 days of the execution of the contract. Under these facts, the new contract is still treated as a replacement contract. Despite Q's refund to P, $10 of the total $15 deposit made by P under the new contract is properly treated as having been actually paid prior to January 1, 1994, and will not be treated as a qualified cost.
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that under the new contract P agrees to purchase five drill presses instead of the three drill presses under the original contract. The total contract price for the new contract is increased to $85. Under these facts, the new contract is still treated as a replacement contract with respect to the three drill presses which were the subject of the original contract, and the $10 actually paid by P prior to January 1, 1994, is not treated as a qualified cost.
EXAMPLE 4: On November 1, 1993, R, a qualified taxpayer, enters into a binding contract with S to purchase two machines for $10 each and five computers for $2 each, for a total contract price of $30. Assume that the machines are qualified property, but since R will use the computers in its general administrative office, the computers are not qualified property. Under the terms of the contract, R makes a non-refundable $10 deposit to S on November 5, 1993. On March 1, 1994, R and S mutually agree to rescind the original contract and simultaneously execute a new contract under which R agrees to purchase three machines and five computers for $40. Under these facts, the March 1, 1994, contract is treated as a replacement contract to the November 1, 1993, contract to the extent of the two machines and the five computers, but is not treated as a replacement contract as to the third machine added by the March 1, 1994, contract. The $10 deposit actually paid prior to January 1, 1994, is not treated as a qualified cost. However, none of this $10 deposit amount is required to be allocated to the third machine for purposes of allocating the total contract price between the qualified property and the non-qualified property because the March 1, 1994, contract is not treated as a binding contract under this section as to the third machine, so that the entire $10 cost of the third machine is a qualified cost.
(4) Option Contracts. For purposes of Regulations 23649-1 through 23649-11, inclusive, in any case where a qualified taxpayer (or any related party within the meaning of Internal Revenue Code Sections 267 or 707) had an option to acquire qualified property on or prior to January 1, 1994, the option shall generally be treated as a binding contract. However, if the option holder would be required to forfeit an amount that is less than ten percent (10%) of the fixed option price upon cancellation or non-exercise of the option, then the option shall not be treated as a binding contract.
EXAMPLE 1: On May 1, 1993, F, a qualified taxpayer, pays $150 to G for the right to purchase G's manufacturing facility in Stockton for a total contract price of $900 (less the amount paid for the option) at any time prior to May 1, 1995. Under the terms of the option, the $150 is not refundable in the event F does not exercise its option. On January 15, 1995, F exercises its option to purchase G's manufacturing facility and delivers the remaining $750 due to G under the terms of the option. Since the option holder would have been required to forfeit more than ten percent (10%) of the fixed option price upon cancellation or non-exercise of the option, the option is treated as a binding contract and the $150 paid by F prior to January 1, 1994, is not treated as a qualified cost.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that F pays only $80 for the option and is not obligated to forfeit any additional monies to G in the event F chooses not to exercise the option. Under these facts, the option is not treated as a binding contract since the maximum amount that F would be required to forfeit under the option contract is less than ten percent (10%) of the fixed option price.
(5) Conditional Contracts. A contract shall be treated as binding notwithstanding the fact that the contract is subject to a condition.
EXAMPLE: On December 1, 1993, T, a qualified taxpayer, enters into a contract to purchase seven machines that are qualified property. The contract provides for a twenty percent (20%) down payment on December 1, 1993, with the balance to be paid on January 30, 1994. However, T's obligations under the contract are expressly conditioned upon the completion of T's new manufacturing facility in Compton. Despite this condition, the contract is treated as a binding contract in existence on or prior to January 1, 1994.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23649, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).
§23649-5. Qualified Property.
Note     •     History

(See Section 23649-0 for Table of Contents.)
(a) In General. For purposes of Regulations 23649-1 through 23649- 11, inclusive, the term “qualified property” includes tangible personal property, whether new or used, that is defined in Internal Revenue Code Section 1245(a)(3)(A) and is used by a qualified taxpayer in both an activity that is described in Division D of the SIC Manual and primarily in a qualified activity. The term “qualified property” also includes certain “off-the-shelf” computer software that is used by a qualified taxpayer primarily in a qualified activity, any special purpose building or foundation, or portion thereof, that is primarily used by any qualified taxpayer in a qualified activity that is described in SIC Codes 3571-3579, inclusive (computer and office equipment), SIC Codes 3671-3679, inclusive (electronic components and accessories), an activity related to biotechnology described in SIC Code 8731 (commercial physical and biological research), a biopharmaceutical activity described in SIC Codes 2833-2836, inclusive (drugs), those activities related to space vehicles and parts described in SIC Codes 3761-3769, inclusive, those activities related to space satellites and communications  satellites and equipment described in SIC Codes 3663 and 3812 (but only with respect to “qualified property” that is placed in service on or after January 1, 1996), or those activities related to semiconductor equipment manufacturing described in SIC Code 3559 (but only with respect to “qualified property” that is placed in service on or after January 1, 1997), or property described in subsection (f) of this regulation. The term “qualified property” does not include certain types of property described in subsection (d) of this regulation. The basis of any qualified property for which the MIC is claimed is not required to be reduced by the amount of any MIC claimed.
(b) General Requirements for Qualified Property. Except as provided in subsections (c) or (f) of this regulation, in order for property to be treated as qualified property, the property must satisfy each of the requirements of this subsection of this regulation.
(1) Tangible Personal Property. Except for any “off-the-shelf” computer software upon which California sales or use tax has been paid and except for property described in subsection (f) of this regulation, property must be tangible personal property. For purposes of this section, the term “tangible personal property” means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). Tangible personal property includes all property (other than structural components) which is contained in or attached to a building. Thus, for example, production machinery, printing presses, and testing equipment which is contained in or attached to a building is tangible personal property. Furthermore, all property which is in the nature of machinery (other than structural components of a building or other inherently permanent structures) shall be considered tangible personal property even though located outside a building. The determination of whether property will be treated as an inherently permanent structure shall be made under Internal Revenue Code Section 1245(a), so that generally property will be treated as an inherently permanent structure (and thus not tangible personal property) if the property is either intended to be or is in fact affixed permanently, and is either incapable of being moved or, if movable, would suffer a significant degree of damage upon its removal. Local law, including state, county, city, or regional, shall not be controlling for purposes of determining whether property is or is not “tangible” or “personal,” so that the fact that under local law property is held to be personal property or tangible property shall not affect the determination of whether such property is tangible personal property for purposes of the MIC.
EXAMPLE 1: B, a qualified taxpayer, manufactures heavy tractors in a manufacturing plant located in Tustin. B decides to upgrade its assembly line by installing a heavy duty overhead crane which will be permanently affixed to the building structure. Prior to installing the crane B constructs steel columns that extend from the crane's girder to the roof of the building. Under these facts, while the steel columns may be treated as “other tangible property” under Internal Revenue Code Section 1245(a)(3)(B), the steel columns are not tangible personal property and thus are not qualified property.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except instead consider the heavy duty overhead crane. The crane moves back and forth along the assembly line on craneway tracks that are permanently bolted to the building's ceiling beams and is hard- wired to the building's electrical system. Despite its permanent affixation to the building, the crane is an item of tangible personal property.
(2) Section 1245(a) Property. Property must be defined in Internal Revenue Code Section 1245(a). However, since property must also be tangible personal property under subsection (b)(1) of this regulation, then, except for any “off-the-shelf” computer software upon which California sales or use tax has been paid and except for property described in subsection (f) of this regulation, only personal property described in Internal Revenue Code Section 1245(a)(3)(A) will be treated as qualified property for purposes of the MIC. Except as provided in the previous sentence, other tangible property that is described in Internal Revenue Code Sections 1245(a)(3)(B) through (F) is not “personal” property and is thus not qualified property under Revenue and Taxation Code Section 23649.
EXAMPLE 1: F, a qualified taxpayer, manufactures railroad cars. F constructs a building which is open at both ends through which a length of track travels to move the cars during several steps in the manufacturing process. Since the building is not tangible personal property defined in Internal Revenue Code Section 1245(a)(3)(A), it would not be treated as qualified property.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, but in addition, F constructs and installs machinery in the building to facilitate the assembly of the railroad cars. Although the machinery is permanently installed in the building, it is not a structural component of the building and can be removed without dismantling the building. As a result, the machinery is tangible personal property that is defined in Internal Revenue Code Section 1245(a)(3)(A).
(3) Used in an Activity Described in Division D of the SIC Manual. Property must be used in an activity that is described in Division D of the SIC Manual. Generally, this requirement will be satisfied if the taxpayer is using the property, in the same activity that made the taxpayer a qualified taxpayer under Regulation 23649-3. Thus, for example, if a taxpayer that is engaged in manufacturing electromedical equipment (SIC Code 3845) is treated as a qualified taxpayer under Regulation 23649-3, and the qualified taxpayer purchases tangible personal property that is defined in Internal Revenue Code Section 1245(a)(3)(A) for use in its electromedical equipment manufacturing activity, the requirement that the property be used in an activity described in Division D of the SIC Manual would be satisfied. In addition, in the case of a qualified taxpayer that is engaged in two or more activities that are properly classified under Division D of the SIC Manual, the use of property in any of such Division D activities will satisfy this requirement that property be used in an activity described in Division D of the SIC Manual.
(4) Primarily Used in a Qualified Activity. Property must be primarily used in a qualified activity.
EXAMPLE 1: B, a qualified taxpayer, manufactures trucks and automobiles in San Diego. B constructs a compressor for use in B's assembly line. The compressor is used for 500 hours in the assembly line, which is part of B's qualified activity, and for 250 hours in B's warehouse, which is part of B's non-qualified activity. Since B used the compressor in B's qualified activity for more than 50 percent of the time the compressor was actually in use during the 12-month period following the date the compressor was placed in service in California by B (500 hours/750 hours, or 66.7%), the compressor is primarily used in a qualified activity.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except B instead uses the compressor for 500 hours in the non-qualified activity and 250 hours in the qualified activity. Under these facts, the compressor is not primarily used in a qualified activity since the compressor was used less than 50 percent of the time during the 12- month period following the date the compressor was placed in service in California by B in a qualified activity (250 hours/750 hours, or 33.3%).
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except B uses the compressor for a total of 100 days during the 12-month period following the date the compressor was placed in service in California by B. During each of those 100 days, B uses the compressor for four hours in the qualified activity and six hours in the non-qualified activity. Although B is using the compressor in the qualified activity during each of the 100 days that it is actually in operation, the compressor is not primarily used in a qualified activity because the total number of hours the compressor is used in a qualified activity is less than 50 percent of the total hours of operation of the compressor during the 12-month period following the date the compressor was placed in service in California by B.
EXAMPLE 4: C, a qualified taxpayer, manufactures telephone equipment in San Jose. C purchases ten personal computers to be used in the company offices. The computers are to be used in part for administration and management, a non-qualified activity, but are also used for the tracking of assembly line operations by directly monitoring the performance, safety, and production of the assembly line, a qualified activity. As long as the computers are used at least 50 percent of the time in the qualified activity during the 12-month period following the date the compressor was placed in service in California by C, then C shall be treated as primarily using the computers in a qualified activity.
EXAMPLE 5: R, a qualified taxpayer, manufactures light bulbs from raw materials such as glass, tungsten, aluminum, copper and paper. R initially receives the raw materials at its warehouse in North Hollywood, and then, when needed, transports them using its own trucks to R's manufacturing plant in Burbank. Upon delivery to the manufacturing plant, the raw materials are placed in a receiving area where they are then moved via forklift to their respective areas in the plant for introduction into the process of manufacturing the light bulbs. Under these facts, R's qualified property does not include the trucks used to transport the raw materials from the warehouse to the manufacturing plant since the raw materials have not been introduced into R's manufacturing “process” until the raw materials have been delivered to the manufacturing plant. However, the forklift would be qualified property since once the raw materials are received at the same premises where R's manufacturing activity is being conducted, the movement of the raw materials via forklift is treated as part of R's manufacturing process.
EXAMPLE 6: Q, a qualified taxpayer, is an integrated oil producer that refines petroleum products. Q owns the wells from which the oil is extracted and, after extracting the oil from the ground, Q then pumps the oil, via pipeline, to its refinery located several miles from the well sites. The pipeline traverses other property for which Q has easements but does not own. Once the oil reaches the refinery, it is immediately introduced into Q's refining process. Q may not include as qualified property the oil wells or the pipelines because these are not used as part of the refining process.
EXAMPLE 7: T, a qualified taxpayer, manufactures copper “romex” wire in Santa Ana. As part of T's manufacturing process, T purchases a machine to process the copper wire by coating it with white or black insulation prior to wrapping the wire in white plastic insulation. T's machine applies the materials and labor necessary to modify or change the characteristics of the copper wire. T's machine is used in “processing” the “romex” wire and thus would be qualified property.
EXAMPLE 8: Assume the same facts as in EXAMPLE 7, except that T also uses the machine to coat its mailing labels for shipment of the wire. Assume that the processing of the copper “romex” wire is complete upon its being wrapped in the white plastic insulation, and that the number of hours the machine is used during the 12- month period following the date the machine was placed in service in California by T for the “processing” of the wire is less than 50 percent of the machine's total use during such period. Under these facts, the machine is no longer primarily used for “processing,” a qualified activity, but is instead primarily used to coat the mailing labels, a nonqualified activity, so that the machine is not qualified property.
EXAMPLE 9: C, a qualified taxpayer, manufactures cameras in Milpitas. The employees of C fabricate and assemble shelving to be used to store the manufactured cameras following completion of C's manufacturing process. Assume that the costs of fabricating the shelving, including the labor costs, are properly capitalized by C. Although C has “fabricated” the shelving, the shelving is not qualified property since it is not used in C's manufacturing process, which is a qualified activity, but is rather used for storage, which is a non-qualified activity.
EXAMPLE 10: J, a qualified taxpayer, manufactures aquariums in Whittier. As part of J's manufacturing process, J uses specialized equipment which recycles used styrofoam packing material by converting it into plastic parts that J then uses in manufacturing the aquariums. The specialized recycling equipment is primarily used in recycling, a qualified activity, so that it is treated as qualified property.
EXAMPLE 11: Assume the same facts as in EXAMPLE 10, except that J does not use postconsumer waste, but instead converts its own manufacturing waste (generated by the construction of plastic aquarium parts) into finished aquarium parts. J may include as qualified property the equipment used to convert the waste resulting from J's manufacturing process into the aquarium parts.
EXAMPLE 12: V, a qualified taxpayer, manufactures explosives in Barstow. V's research team attempts through research and experimentation to create a new process for making explosives that can be more easily detected by standard metal detectors. Due to the high danger associated with testing and manufacturing the explosives, V constructs an explosion containment chamber to both conduct the research and to insert fuses into the explosives being manufactured by V. Assume that during the 12-month period following the date the explosion containment chamber was placed in service in California by V that it was used 60% of the time to conduct research, and 40% of the time to insert the fuses into the manufactured explosives. Assuming the explosion containment chamber is tangible personal property defined in Internal Revenue Code Section 1245(a)(3)(A), and assuming V's research is described in Internal Revenue Code Section 174 or the regulations thereunder, V may treat the explosion containment chamber as qualified property.
EXAMPLE 13: W, a qualified taxpayer, manufactures engines for propeller airplanes in Long Beach. W constructs two engine test stands. The first engine test stand is used to evaluate design enhancements to the engines manufactured by W. Assuming this first engine test stand is tangible personal property that is defined in Internal Revenue Code Section 1245(a)(3)(A), and assuming W's research activity is described in Internal Revenue Code Section 174 or the regulations thereunder, W may treat the first engine test stand as qualified property because it is used in research and development. The second test stand is used to evaluate and test assembled engines prior to their shipment to customers. Assuming this second test stand is tangible personal property that is defined in Internal Revenue Code Section 1245(a)(3)(A), W may treat the second engine test stand as qualified property because it is used as part of W's manufacturing process.
EXAMPLE 14: X, a qualified taxpayer, manufactures garden and lawn fertilizer products in Arcata. One of the byproducts of X's manufacturing process is a large volume of highly alkaline water. This water is considered waste water by the local water quality control agency that has jurisdiction over the discharge of waste water. To comply with the local waste water discharge standards, which are assumed for purposes of this example to exceed any applicable federal standards, X purchases equipment to reduce the alkalinity of the waste water so that it can be first reused in X's manufacturing process and then treated for discharge into local evaporative ponds. Since the waste water treatment equipment treats the waste water to meet or exceed the local agency's standards, X may include as qualified property the equipment purchased for treating the waste water since it is used in pollution control, a qualified activity.
EXAMPLE 15: E, a qualified taxpayer, manufactures metal barrels and drums in Richmond. E purchases an electric welder which is qualified property and a portable diagnostic computer for regular and/or non-regular testing of the welder. E may include as qualified property the diagnostic computer since it is used primarily to maintain, repair, measure, or test the welder.
EXAMPLE 16: F, a qualified taxpayer, manufactures aluminum die- casting equipment in Bakersfield. F purchases a laser micrometer measuring device to periodically check the alignment of extruders which are assumed to be qualified property. F may include as qualified property the laser micrometer measuring device since it is used primarily to measure the extruding equipment.
EXAMPLE 17: G, a qualified taxpayer, manufactures motor vehicle parts in Van Nuys. G purchases a specialized wrench set to be used primarily for repair of G's specialized extruding press that is used by G in its manufacturing process. Since G uses the wrench set primarily on qualified property, G may include the wrench set as qualified property.
EXAMPLE 18: H, a qualified taxpayer, manufactures elevators in Hayward. H purchases a standard electronic multi-tester. During the 12-month period following the date the electronic multi-tester was placed in service in California by H, the multi-tester is used 30 percent of the time to test electrical equipment which is qualified property, and the remainder of the time H uses the multi-tester to test the electrical system of its fleet of vehicles which are used by senior management personnel. Under these facts, assuming that the vehicles are not qualified property, H may not include as qualified property the multi-tester since it is not primarily used for the testing of qualified property.
(c) Special Purpose Buildings and Foundations. In the case of any qualified taxpayer that is engaged in a manufacturing activity described in SIC Codes 3571-3579, inclusive (computer and office equipment), SIC Codes 3671-3679, inclusive (electronic components and accessories), an activity related to biotechnology described in SIC Code 8731 (commercial physical and biological research), a biopharmaceutical activity described in SIC Codes 2833-2836, inclusive (drugs), those activities related to space vehicles and parts described in SIC Codes 3761-3769, inclusive, those activities related to space satellites and communications  satellites and equipment described in SIC Codes 3663 and 3812 (but only with respect to “qualified property” that is placed in service on or after January 1, 1996), or those activities related to semiconductor equipment manufacturing described in SIC Code 3559 (but only with respect to “qualified property” that is placed in service on or after January 1, 1997), qualified property also includes special purpose buildings and foundations, or any portion thereof, that are used in any of the above-described SIC Code activities and which satisfy the other requirements of this subsection of this regulation.
(1) Defined. For purposes of this regulation, the term “special purpose building and foundation” shall mean an entire building, or any portion of any building, and the foundation immediately underlying such building, or any portion of such foundation, that is specifically designed and constructed or reconstructed for the installation, operation, and use of specific machinery and equipment with a special purpose, which machinery and equipment, after installation, will become affixed to or a fixture of the real property, and the construction or reconstruction of which is specifically designed and used exclusively for the qualified purpose. A building shall be treated as specifically designed and constructed or modified for a qualified purpose if it is not economic to design and construct the building for the intended purpose and thereafter use the building for a different purpose.
(2) Exclusive Use for a Qualified Purpose. A special purpose building will be treated as being used exclusively for a qualified purpose only if its use does not include a use for which it was not specifically designed and constructed or modified. Incidental use for a non-qualified purpose is permissible. Incidental use means a use which is both related and subordinate to the qualified purpose. For purposes of this regulation, it will be conclusively presumed that a use is not subordinate if more than one-third of the total usable volume of the building is devoted to a use which is not a qualified purpose. In the event an entire building does not qualify as a special purpose building, a qualified taxpayer may establish that a portion of a building, and the foundation immediately underlying such portion, qualifies for treatment as a special purpose building and foundation if such portion satisfies all of the definitional provisions of Revenue and Taxation Code Section 23649 and this subsection of this regulation. To the extent that a building is not a special purpose building as defined in this regulation, but a portion of the building qualifies for treatment as a special purpose building, then all equipment which exclusively supports the qualified purpose occurring within that portion and which would qualify as Internal Revenue Code Section 1245(a)(3)(A) property if it were not a fixture or affixed to the building shall be treated as a cost of the portion of the building which qualifies for treatment as a special purpose building.
(3) Property Which is not a Special Purpose Building and Foundation. Buildings and foundations which do not meet the definition of a special purpose building and foundation include, but are not limited to:
A. buildings designed and constructed or reconstructed principally to function as a general purpose manufacturing, industrial, or commercial building;
B. research facilities that are used primarily prior to and after, or prior to or after, the manufacturing process; or 
C. storage facilities that are used primarily prior to and after, or prior to or after, completion of the manufacturing process.
(4) Research Facilities. A research facility shall not be considered to be primarily used prior to and after, or prior to or after, completion of the manufacturing process if its purpose and use relate exclusively to the development and regulatory approval of the manufacturing process for specific biopharmaceutical products. A research facility which is used primarily in connection with the discovery of an organism from which a biopharmaceutical product or process is developed does not meet the requirements of Revenue and Taxation Code Section 23649 and the preceding sentence and is not to be considered used in the manufacturing process.
EXAMPLE 1: K, a qualified taxpayer, manufactures medicinal antiseptics (SIC Code 2834) in Fairfield. K constructs a 5,000 square foot “clean room” for the purpose of manufacturing sterile antiseptics, a product that requires, under applicable federal Food and Drug Administration criteria, absolute sterility and controlled humidity in the manufacturing environment. The “clean room” is not economic to design for any purpose other than manufacturing medicinal antiseptics. While the clean room and its foundation appear to satisfy the definition of a special purpose building and foundation, K may not include as qualified property the clean room and its foundation because K, while in a line of business described in SIC Codes 2830-2836, inclusive, is not a biopharmaceutical establishment. If, however, the antiseptic is a biopharmaceutical product, then the special purpose building and foundation may be qualified property.
EXAMPLE 2: L, a qualified taxpayer, owns a 40,000 square foot warehouse facility in Santa Clara. L modifies part of the facility to manufacture computer microprocessors, which is an activity described in SIC Code 3674. A portion of this microprocessor manufacturing is to be done in a “clean room” since the microprocessors must be manufactured with specialized equipment which is sensitive to air, humidity and pollutants in order to ensure the economic value of the microprocessors. Although the entire 40,000 square foot building is not a special purpose building, the portion of the building which is used as the “clean room” and the cost of its ancillary support equipment is treated as a special purpose building under this regulation because the equipment used therein has a special purpose which can only be achieved in the “clean room.”
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except the “clean room” is used merely for long-term storage of the finished product where a controlled environment will greatly extend the shelf life of the product. The “clean room” is not being used in the manufacturing process since it only serves a storage function and thus the “clean room” is not treated as a special purpose building.
EXAMPLE 4: M, a qualified taxpayer, manufactures typewriters (SIC Code 3579) in Chatsworth. M specially designs and constructs a building for the purpose of housing and supporting a high-powered, high-speed hydraulic press for the production of precision carriages. It is not economic to design the building for any other purpose. The building requires heavily reinforced foundational pilings with strategically located floor pylons for anchoring the press. In addition, the walls and ceiling of the building have many integral permanent features to accept the size, shape, plumbing, and electrical needs of the press. Even though the building may be viewed as “specifically designed and constructed for a qualified purpose,” it would not be treated as a special purpose building because the equipment has no “special purpose” and the building is merely a general purpose manufacturing building.
EXAMPLE 5: N is solely engaged in performing commercial research and development for biotech companies (SIC Code 8731) in Palo Alto. N constructs a special purpose building for the purpose of conducting its commercial research and development activities. Although the building may otherwise be a special purpose building, N may not claim the MIC because N is not a qualified taxpayer under Regulation 23649-3.
EXAMPLE 6: P, a qualified taxpayer, is engaged in two lines of business: manufacturing computer terminals (SIC Code 3575) and performing commercial research and development for biotech companies (SIC Code 8731). P constructs a special purpose building for the exclusive purpose of conducting research in connection with its commercial research and development activity for biotech companies. The special purpose building and foundation would be qualified property even though P is only conducting research in the building. However, if P instead uses the research building in connection with its manufacturing activity, the building is no longer qualified property since the use of the building is now a part of a research facility used prior to and after, or prior to or after, the manufacturing process, and thus is used for a non- qualified purpose under this regulation.
EXAMPLE 7: Assume the same facts as in EXAMPLE 6, except that P is also engaged in manufacturing a new type of blank computer software disks (SIC Code 3695) that require an environment that only the highest level of “clean rooms” can provide, and that P constructs such a “clean room” for the sole purpose of manufacturing the disks. Although P is a qualified taxpayer that may claim the MIC with respect to certain special purpose buildings and foundations, and notwithstanding the fact that the “clean room” otherwise meets the definition of a “special purpose building and foundation,” P's “clean room” that is used to manufacture the blank disks does not qualify as a special purpose building and foundation for purposes of the MIC because the activity being conducted in the “clean room” is properly classified under SIC Code 3695, which is not one of those SIC Code activities that entitles a qualified taxpayer to the MIC for their special purpose buildings and foundations.
(d) Specifically Excluded Property. Notwithstanding subsections (b), (c), (e) or (f) of this regulation, qualified property does not include any of the following:
(1) Furniture. Any item of furniture, regardless of how used or where located.
(2) Facilities Used for Warehousing Purposes. Any property used for warehousing purposes after completion of the manufacturing process. Thus, for example, a manufacturer of engine components that stores its finished products in a separate warehouse building prior to shipment and thereafter uses forklifts and other heavy equipment to move the inventory within the warehouse building shall not treat the forklifts and other heavy equipment as qualified property.
(3) Inventory. Any property that is properly treated as inventory of the qualified taxpayer. For this purpose, the term “inventory” includes any property which is required to be included in the qualified taxpayer's inventory under Internal Revenue Code Section 263A or that is described in Internal Revenue Code Section 1221(1).
(4) Equipment Used in the Extraction Process. Any equipment used in the extraction process. Thus, for example, drill bits, rigging, and pumps used in wells and mines to extract oil, water or minerals shall not be treated as qualified property since this is equipment used in the extraction process.
(5) Equipment Used to Store Finished Products. Any equipment used to store finished products that have completed the manufacturing process. Thus, for example, if a qualified taxpayer primarily uses a forklift in the finished goods portion of its manufacturing plant to transport finished products to its loading dock for shipping to customers, the forklift would not be qualified property. On the other hand, if the forklift was primarily used to transport raw materials to the assembly line and was occasionally used to transport finished products to the loading dock for shipment to customers, the forklift would be treated as qualified property.
(6) Tangible Personal Property Used in Administration, General Management, or Marketing. Any tangible personal property that is used in administration, general management, or marketing. For this purpose, an item of property that is used both in a qualified activity and for administration, general management, or marketing, shall be treated as qualified property only if the item is primarily used in a qualified activity. However, property primarily used to clean and maintain the factory floor and fire safety equipment primarily used on the factory floor are not considered tangible personal property used in administration, general management, or marketing.
(7) Property for Which the California Low-Emission Vehicle Credit is Claimed. Any property for which the qualified taxpayer has claimed the low-emission vehicle credit provided in Revenue and Taxation Code Sections 17052.11 and 23603.
(e) Movement of Used Property Into This State. In any case where property is moved from another state or country into this state by a qualified taxpayer or by a lessor who intends to lease such property to a qualified taxpayer, the property may generally be treated as qualified property for purposes of the MIC if it satisfies the other requirements of this regulation. Thus, for example, if an item of property is acquired and placed in service in Nevada in 1994, and thereafter the item of property is moved into this state for use in a qualified activity (as defined in Regulation 23649-5 (b)), the property may generally be treated as qualified property. However, in the case of any such moved property, a qualified taxpayer or lessor must still satisfy the requirements of Regulation 23649-4 (relating to qualified costs and payment of California sales or use tax) in order to claim the MIC.
(f) Property Used to Refine Reformulated or Oxygenated Gasoline. In the case of any qualified taxpayer engaged in refining activities properly classified in SIC Code 2911, “qualified property” also includes other tangible property that is defined in Section 1245(a)(3)(B) of the Internal Revenue Code and that satisfies each of the following requirements:
(A) is used in that line of business properly classified in SIC Code 2911;
(B) is primarily used in refining; and
(C) is used to produce “reformulated gasoline” or “oxygenated gasoline”, as defined in and pursuant to the requirements imposed by Section 219 of Public Law 101-549, relating to certain amendments to Section 211 of the federal Clean Air Act, and, on or after March 1, 1996, is used principally to produce gasoline that meets the California Air Resources Board standards set forth in Title 13, Division 3, Chapter 5, Article 1, Subarticle 2, California Code of Regulations (as in effect on February 1, 1996).
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23649, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).
2. Change without regulatory effect amending subsections (a) and (c) filed 8-14-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 33).
§23649-6. Leasing.
Note     •     History

(See Section 23649-0 for Table of Contents.)
(a) In General. For purposes of Regulations 23649-1 through 23649- 11, inclusive, in the case of any leasing transaction in which qualified property is leased by a qualified taxpayer, the rules of this regulation shall apply. Generally, the lessor must pay California sales tax on the lessor's acquisition of the qualified property in order for the lessee to claim the credit for that item of qualified property. Conversely, the lessee cannot claim the MIC for an item of property where the lessor acquired the qualified property without paying California sales or use tax and the lessor instead collects use tax payments from the lessee measured by the lessee's rental payments to the lessor. The determination of whether the rules in subsection (b) or subsection (c) of this regulation apply shall be made by reference to the sales and use tax treatment of the lease, rather than the income tax treatment of the lease. Thus, for example, a lease of qualified property that would be treated as a finance lease under income tax principles may still be treated as an operating lease under this regulation. In addition, under California sales and use tax law, a transaction denominated as a lease will instead be treated as a sale under a security agreement if the lease contains a nominal option price. For this purpose, California sales and use tax law generally treats the option price as nominal if it does not exceed the lesser of $100 or 1 percent of the total contract price.
EXAMPLE 1: X, a leasing company, agrees to lease qualified property to Y, a qualified taxpayer, for use in Y's manufacturing facility in Garden Grove. Under the terms of the lease, X will lease the property to Y for $100 per year for a term of 10 years. Upon the expiration of the 10-year lease term, Y has an option to acquire the property for $1. Under these facts, the “lease” would be properly treated as a sale under a security agreement from its inception and not as a lease under Revenue and Taxation Code Section 6006.3 and California State Board of Equalization Regulation 1660(a)(2)(A), Title 18, California Code of Regulations so that the rules of subsection (c) of this regulation would apply.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that Y's option price is $125, or 12.5% of the total contract price. Under these facts, notwithstanding that the “lease” may be treated as a finance lease (and thus as a “purchase”) for California franchise and income tax purposes, under California sales and use tax law the “lease” would generally be treated as a lease and the rules of subsection (b) of this regulation would apply.
(1) Lessor Not Entitled to MIC. A lessor of qualified property is never entitled to claim the MIC with respect to any item of qualified property it leases to another party, regardless of whether the lessor is otherwise a qualified taxpayer.
(2) Binding Contract Rules Applicable to Leases. In the case of any qualified property leased pursuant to any agreement or contract that is treated as a binding contract under the rules of subsection (e) of Regulation 23649-4, the allocation rules of subsection (e) of Regulation 23649-4 shall apply in determining the amount of the qualified cost to the lessor upon which the lessee is entitled to claim the MIC. For this purpose, if a lessor acquires qualified property under the terms of a contract that is treated as a binding contract with respect to the lessee (or a party related to the lessee within the meaning of Internal Revenue Code Sections 267 or 318), then any payments or reimbursements made by the lessor, directly or indirectly in the form of a reduction in the amount of lease rental payments to be paid by the lessee under the lease, upon or as a result of the lessor's assumption of the lessee's obligations under the binding contract, shall be treated in the same manner as if the lessor had not assumed the lessee's obligations under the contract. Finally, in any case where a lessor has acquired property prior to January 1, 1994, and thereafter leases such property, the qualified cost to the lessor upon which the lessee would be entitled to claim the MIC would generally be zero (assuming the lessor has not paid otherwise qualified costs after January 1, 1994, to improve or otherwise modify the leased property, in which case the lessor would have qualified costs to the limited extent of such post-1993 amounts that were paid).
EXAMPLE 1: D, a qualified taxpayer, is engaged in the business of manufacturing medical and surgical instruments and apparatus in Sacramento. On September 20, 1993, D enters into a contract with X to acquire 3 machines that are qualified property for a total contract price of $900. Under the terms of the contract, D makes a non-refundable deposit to X of $150 upon execution of the contract, with an additional $150 due on July 1, 1994, and the final payment of $600 payable upon delivery of the machines on February 15, 1995. Assume that this contract is treated as a binding contract under subsection (e) of Regulation 23649-4. On January 15, 1995, D decides that it would prefer to instead lease the machines, so D enters into a contract with L, an equipment leasing company, under which L will (i) assume D's obligations under D's contract with X, (ii) lease the qualified property to D for a term of 10 years, and (iii) refund to D the $300 in payments that D has previously made to X. Assume that L will pay California sales tax on its purchase of the qualified property from X. Under these facts, L will be treated as having $750 in qualified costs for which D will be entitled to claim the MIC, which is the total amount treated as paid by L after January 1, 1994 ($600 paid directly by L to X under X's contract with D, plus $150 paid by L to D as reimbursement for D's payment on July 1, 1994, but excluding the $150 paid by D to X prior to January 1, 1994).
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of L agreeing to refund the $300 in payments that D has previously made to X, L instead reduces the amount of the rental payments to be due from D under the lease. Under these facts, the result is the same as in EXAMPLE 1.
(3) Special Rule Applicable to All Leasing Transactions -- “Placed in Service”. In the case of any leasing transaction, the requirement that qualified property must be placed in service in California in order for a qualified taxpayer to claim the MIC shall be treated as having been satisfied at the time when all the terms and conditions of the lease contract have been completed so that the lessee has an unconditional obligation to pay all rents due under the contract to the lessor of the qualified property. However, notwithstanding the preceding sentence, the requirements of subsection (b)(3) of Regulation 23649-5 that property be used in an activity described in Division D of the SIC Manual and subsection (b)(4) of Regulation 23649-5 that property be primarily used in a qualified activity must still be satisfied in order for a lessee to claim the MIC.
EXAMPLE: On July 1, 1995, A, a qualified taxpayer, enters into a contract to lease a printing press from B, an equipment leasing company, for use in A's manufacturing facility in Roseville. Under the terms of the lease contract, A's rental obligations commence at the beginning of the month following the date that A provides B with a written statement that the printing press has been received from C, the original manufacturer of the printing press, and that the printing press has been installed and is in good working order (e.g., A provides a Certificate of Acceptance to B). On January 15, 1996, A executes and delivers the required written statement to B. Under these facts, A is treated as having satisfied the “placed in service” requirement as of February 1, 1996, and, assuming all other requirements of Revenue and Taxation Code Section 23649 have been satisfied, A is entitled to claim the MIC.
(b) Operating Leases. In the case of any lease that is not treated as a sale under Part 1 (commencing with Section 6001) of Division 2 of the Revenue and Taxation Code (relating to the payment and collection of California sales and use tax), the rules set forth in this subsection of this regulation shall apply. Any lease subject to the rules of this subsection of this regulation shall be referred to in this regulation as an “operating lease.”
(1) In General. Under Revenue and Taxation Code Section 6006(g)(5), a lease of tangible personal property is generally treated as a sale for California sales and use tax purposes, unless the tangible personal property is leased in substantially the same form as acquired by the lessor or leased in substantially the same form as acquired by the transferor and the lessor or transferor has paid sales tax reimbursement or has paid use tax measured by the purchase price of the property.
EXAMPLE: L, a taxpayer engaged in the equipment leasing business, purchases 20 machine tools for $10 from P, a retailer of machine tools located in Merced. L intends to immediately lease the machine tools, without modification, to X, a qualified taxpayer engaged in the business of manufacturing ferrous and nonferrous metal doors and door frames in Visalia, for a term of 10 years. L pays California sales tax on its purchase of the machine tools, and then leases the machine tools to X. Assume that X does not have an option to purchase the machine tools upon the expiration of the lease term. Since L has paid California sales tax on its purchase of the machine tools and then leased the property in substantially the same form as acquired, L's lease to X is not treated as a sale under Revenue and Taxation Code Section 6006(g)(5) and the rules of this subsection of this regulation apply.
(2) Applicable Requirements. In the case of an operating lease, the following requirements must be satisfied in order for the lessee to claim the MIC.
A. Lessee Must Be a Qualified Taxpayer. The requirement under Regulation 23649-3 that the user of the qualified property must be a qualified taxpayer shall be applied to the lessee and not to the lessor.
B. Use of Property in a Qualified Activity. The requirement under subsection (b)(4) of Regulation 23649-5 that property be used in a qualified activity in order to be treated as qualified property shall be applied to the lessee and not the lessor with respect to the property that is the subject of an operating lease.
C. Sales or Use Tax Payment Requirement. Except as provided in subsections (b)(3)(B) or (b)(5)(B) of this regulation (relating to capitalized labor), the lessor must pay California sales tax reimbursement or California use tax on the lessor's construction, reconstruction or acquisition of the qualified property. In any case where the lessor's acquisition of the qualified property is pursuant to a transaction treated as either an occasional sale under Revenue and Taxation Code Section 6006.5 or as a sale of mobile transportation equipment (as defined in Revenue and Taxation Code Section 6023), the requirement of this subsection of this regulation shall be satisfied only if the lessor makes a timely election under either Revenue and Taxation Code Section 6094.1 or 6244(d) and pays California sales tax reimbursement or California use tax with respect to the lessor's acquisition of the qualified property.
D. Qualified Costs. The requirement that costs, in order to be treated as qualified costs, must be paid or incurred for the “construction, reconstruction, or acquisition” of qualified property shall not apply to the lessee's lease rental payments. Thus, for example, although a lessee may, under the lessee's method of California tax accounting, currently deduct its lease rental payments, the lessee will still be entitled to claim the MIC if the other requirements of this subsection of this regulation are satisfied. However, the rules of Regulation 23649-4, including the rules relating to the allocation of costs paid or incurred pursuant to binding contracts, shall apply in determining the amount of qualified costs of the lessor upon which the lessee may determine its MIC.
E. Chargeable to Capital Account. The requirement that costs, in order to be treated as qualified costs, must be properly chargeable to the capital account of the qualified taxpayer shall not apply to the lessee's lease rental payments. Thus, for example, although a lessee may, under the lessee's method of California tax accounting, currently deduct lease rental payments, the lessee will still be entitled to claim the MIC if the other requirements of this subsection are satisfied.
(3) Amount of MIC Lessee May Claim. In general, a lessee under an operating lease is entitled to claim the MIC at the same time and in the same amount as if such lessee had instead constructed, reconstructed, or acquired the qualified property other than by lease.
A. Qualified Cost to Lessor. Except as provided in subsection (b)(3)(B) of this regulation, the qualified cost to the lessor upon which the lessee is entitled to claim the MIC is generally equal to the purchase price amount on which California sales tax reimbursement or use tax has been paid by the lessor. Thus, for example, if a lessor pays $100 for an item of qualified property, plus $8 in California sales tax reimbursement on such item, the qualified cost to the lessor would be $100.
B. Exception For Capitalized Labor. The qualified cost to the lessor under subsection (b)(3)(A) of this regulation shall also include any capitalized labor that is directly allocable to the lessor's construction, reconstruction, or acquisition of the qualified property. Thus, for example, assume a lessor pays $100 for an item of qualified property, with $25 of such amount properly treated as directly allocable capitalized labor costs that are exempt from California sales or use tax. While the lessor would pay only $6 (8% of $75) in California sales tax reimbursement on the lessor's purchase of the qualified property, the qualified cost to the lessor under this subsection of this regulation would be equal to $100 ($75 + $25).
(4) Special Rules for Operating Leases. The following special rules apply to any lease that is treated as an operating lease under this regulation.
A. Transitional Election. In the case of any operating lease entered into on or after January 1, 1994, and on or before September 22, 1994 (the effective date of SB 676, Stats. 1994, Ch. 751), the lessor under such lease may make the election to pay California use tax on its acquisition of the qualified property by paying an use tax measured by the purchase price of the property to the lessor and reporting the tax on the sales and use tax return of the lessor for the fourth calendar quarter of 1994. In computing the amount of use tax due from the lessor under this subsection of this regulation, any use tax collected and previously remitted by the lessor with respect to the lessee's rental payments under the lease shall be credited against the lessor's use tax liability under this subsection of this regulation.
EXAMPLE: T, a taxpayer engaged in the equipment leasing business in Oakland, acquires seven aluminum die-castings for $250 from S, a manufacturer of die-castings in Albany, on February 1, 1994 (assume that the purchase by T is not pursuant to a binding contract). T delivers a resale certificate to S and does not pay any California sales or use tax on T's purchase. T immediately leases the aluminum die-castings to V, which is a qualified taxpayer engaged in manufacturing automatic screw machine products in Alameda, and T commences collecting the use tax on V's $5 monthly rental payments and remitting the use tax amounts on its quarterly return filed with the California State Board of Equalization. During the fourth quarter of 1994, T decides to make the election provided under subsection (b)(4)(A) of this regulation. On its fourth quarter 1994 California sales and use tax return, T would compute and remit its California use tax liability on its purchase of the aluminum die- castings based upon T's original $250 purchase price. T would receive a credit against T's use tax liability for any use tax previously remitted with respect to V's monthly lease rental payments.
B. Limitation on Qualified Costs. In determining a lessor's qualified cost under the rules of this subsection of this regulation, the allocation rule specified in Regulation 23649-4 shall apply to any costs actually paid by the lessor (or treated as paid by the lessor under the rules in this regulation) pursuant to a contract that was binding on January 1, 1994. Thus, for example, if a lessor has a binding contract to acquire qualified property for $100 as of January 1, 1994, and has paid a non-refundable deposit of $20 prior to January 1, 1994, and thereafter pays the remaining $80 purchase price, the lessor's qualified cost upon which a lessee may claim the MIC could not exceed $80 ($100 purchase price less $20 actually paid prior to January 1, 1994, pursuant to a binding contract).
C. Reduction in Qualified Cost to Lessor. In the case of any re- lease of qualified property by a lessor to another qualified taxpayer, the qualified cost to the lessor under subsection (b)(3)(A) of this regulation as to the subsequent lessee shall first be reduced by the amount of qualified cost taken into account by any predecessor lessee. However, the preceding sentence shall not apply to the extent that the predecessor lessee was required to recapture any MIC allowed to the predecessor lessee under the recapture rules in Regulation 23649-8.
EXAMPLE 1: L, a taxpayer engaged in the equipment leasing business, acquires two cranes from R, a manufacturer of cranes in Oxnard, for $100. L intends to immediately lease the cranes to M, a qualified taxpayer, for use by M in its manufacturing facility located in Ventura. Assume the lease is properly treated as an operating lease under this regulation and that L pays sales tax to R of $8 (8% of $100) at the time of L's purchase. Under these facts, M will be entitled to claim a $6 MIC (6% of $100) since L's qualified cost is $100.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that at the end of the lease term L re-leases the cranes to P, a qualified taxpayer, which manufactures synthetic resins and plastic materials at a facility in Moorpark. Under subsections (b)(3)(A) and (b)(4)(C) of this regulation, L's qualified cost upon which P may claim the MIC is zero ($0) since L's qualified cost is $0 ($100 original qualified cost to L, less $100 qualified cost taken into account by a predecessor lessee, M, when claiming the MIC).
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that M, the initial lessee, cancels the lease with L after 10 months, with L repossessing the cranes. Under these facts, M would be required to recapture (pursuant to Regulation 23649-8) the entire $6 MIC previously claimed by M, and L's qualified cost upon L's re-lease of the cranes to P would be $100 ($100 original qualified cost to L, less $100 qualified cost taken into account by a predecessor lessee, M, plus $100 of qualified cost recaptured upon M's cancellation of the lease with L).
D. Qualified Cost to Successor Lessor. In any case where a successor lessor acquires qualified property from a lessor that is subject to a lease (including any qualified property that is not currently being leased but which the successor lessor intends to re-lease) in a transaction that is not treated as a sale for California sales and use tax purposes, the qualified cost to the successor lessor for purposes of the MIC shall be reduced by the amount of qualified cost of the predecessor lessor that was taken into account by any lessee in computing a credit under the MIC. However, the preceding sentence does not apply in any case where the transaction in which the successor lessor acquires the qualified property from the predecessor lessor is treated as a sale for California sales and use tax purposes.
EXAMPLE 1: G is engaged in the equipment leasing business. G acquires three printing presses from Q, a manufacturer of printing presses, for $300. G immediately leases the printing presses to D, a qualified taxpayer, for use by D in D's newspaper publishing facility in Santa Barbara. Assume the lease is properly treated as an operating lease under this regulation, and that G pays sales tax to Q of $24 ($300 X 8%) at the time of purchase. Under these facts, D would be entitled to claim a MIC of $18 (6% of $300, G's qualified cost of the printing presses). Three years later G sells the printing presses to H, who is also engaged in the business of equipment leasing, for $250. Assume that G terminates its lease with D prior to the sale of the printing presses to H, and that H delivers a resale certificate to G so that H's purchase is exempt from California sales and use tax. Assume further that D agrees to re-lease the printing presses from H following H's acquisition of the printing presses from G. D terminates its lease two years after H's purchase of the printing presses, and H then re-leases the printing presses to E in a transaction treated as an operating lease under this regulation, for use by E in its magazine publishing facility in Carmel. Under these facts, H's qualified cost upon which E may claim the MIC is $0 ($250 paid by H to G, less $300 qualified cost taken into account by a predecessor lessee, D).
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that G does not terminate its lease with D prior to G's sale of the printing presses to H. Under California sales and use tax law, the sale by G to H would be subject to California sales tax and H would not be entitled to deliver a resale certificate to G. As a result, assume H pays California sales tax reimbursement to G on the $250 purchase price. Since H has paid California sales tax reimbursement to G, H's qualified cost upon which E may claim the MIC is $250.
E. Acquisition by Lessee of Leased Property. In any case where a lessee (or any party related to the lessee within the meaning of Internal Revenue Code Sections 267 or 318) of qualified property acquires the leased property from the lessor within one year of the date the qualified property is first used by the lessee, then the purchase of the qualified property by the lessee shall be treated as a disposition of the property by the lessee and any MIC claimed by the lessee must be recaptured by the lessee under the rules of Regulation 23649-8. However, if the lessee (or related party) pays California sales or use tax on the acquisition of the qualified property, then the rules of Regulation 23649-4 shall apply to the acquisition and the lessee-purchaser may be entitled to claim the MIC with respect to its costs of acquisition.
EXAMPLE 1: J, a qualified taxpayer engaged in the business of manufacturing store fixtures, leases five lathes which are qualified property from Z, which is engaged in the equipment leasing business, for use in J's manufacturing facility in Folsom. Assume J's lease is treated as an operating lease under this regulation, and that J has claimed the MIC. Nine months after J first uses the lathes, J exercises an option under the lease to acquire the lathes from Z for their fair market value. Under the rules of this regulation, and Regulation 23649-8, J would be required to recapture any MIC claimed by J. However, if J paid California sales or use tax on the purchase of the lathes, then J may have qualified costs on J's purchase from Z under the rules of Regulation 23649-4.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that K, a wholly-owned subsidiary of J, instead purchases the lathes from Z. Under the rules of this regulation, since K is related to J under both Internal Revenue Code Sections 267 and 318, K's acquisition of the lathes will be treated as a disposition by J of the qualified property and J will be required to recapture the MIC. If K continues to lease the lathes to J, then the rules of subsection (b)(4)(D) of this regulation shall apply in determining whether K will have qualified cost in the lathes upon which J may claim a MIC upon K's acquisition of the lathes. On the other hand, if K cancels the lease with J (assuming K may legally do so) and uses the lathes in a qualified activity conducted by K, then, assuming K has paid California sales or use tax on its acquisition, K may have qualified costs under the rules of Regulation 23649-4 assuming K continues to use the lathes in a qualified activity instead of re-leasing the lathes.
(5) Sale-Leaseback Transactions. In the case of any sale-leaseback transaction, the following rules shall apply:
A. General Rule. Except as provided in subsection (b)(5)(B) of this regulation, in the case of any sale-leaseback transaction in which a lessor does not pay California sales or use tax upon acquisition of an item of qualified property, the qualified cost to the lessor upon which the lessee would be entitled to claim the MIC shall be zero.
EXAMPLE: On January 15, 1994, F, a qualified taxpayer engaged in the business of manufacturing electric lamps, purchases three glass grinders that are qualified property from Y, the manufacturer of the glass grinders. Y collects California sales tax on the purchase by F. On January 30, 1994, F places the three grinders in service in its manufacturing facility in Crescent City. On May 15, 1994, G, which is engaged in the equipment leasing business, purchases the three grinders from F and immediately leases them back to F. Under the rules of this regulation, and Regulation 23649-8, F would be required to recapture any MIC claimed by F. In addition, since this transaction would not be treated as an “acquisition sale and leaseback” under Revenue and Taxation Code Section 6010.65, G must pay California sales or use tax on G's purchase of the grinders in order for F to claim any MIC under the rules of this regulation. If G delivers a resale certificate upon its acquisition of the grinders, so that G does not pay California sales or use tax upon G's acquisition of the grinders, then no MIC could be claimed by F upon F's lease of the grinders from G.
B. Acquisition Sale and Leaseback. In the case of any transaction that is properly treated as an “acquisition sale and leaseback” under Revenue and Taxation Code Section 6010.65, the requirement of subsection (b)(2)(C) of this regulation (relating to payment of California sales or use tax) shall be deemed satisfied by the lessor. If a transaction is treated as an “acquisition sale and leaseback” under this subsection of this regulation, then the qualified cost to the lessor under subsection (b)(3)(A) of this regulation shall be equal to the amount upon which the lessee paid California sales or use tax, plus any capitalized labor costs determined under subsection (b)(3)(B) of this regulation. However, the rules of this subsection of this regulation shall only apply if, and to the extent that, the costs originally incurred by the lessee to acquire, construct, or reconstruct the qualified property were treated as qualified costs under Regulation 23649-4.
EXAMPLE 1: On December 1, 1995, P, a calendar year qualified taxpayer engaged in the business of manufacturing soap and other detergents, purchases and immediately places in service two mixing tanks that are qualified property from Z, the manufacturer of the mixing tanks. Z collects sales tax on the purchase by P. On January 15, 1996, R, which is engaged in the equipment leasing business, purchases the two mixing tanks from P and immediately leases them back to P. Since R's acquisition and leaseback occurs within 90 days of P's first functional use of the mixing tanks, and assuming the other requirements of Revenue and Taxation Code Section 6010.65 are satisfied, P's sale to R and R's leaseback to P are treated as an “acquisition sale and leaseback” under Revenue and Taxation Code Section 6010.65 and the rules of subsection (b)(5)(B) of this regulation would apply. Under the rules of this regulation, and Regulation 23649-8, P would be required to recapture any MIC claimed on P's 1995 California return. However, R would be “deemed” to have paid California sales or use tax upon R's acquisition of the mixing tanks from P, and P would be entitled to claim an MIC on its 1996 California return in an amount equal to R's qualified cost, as determined under subsections (b)(3)(A) and (b)(3)(B) of this regulation. For this purpose, R's qualified cost could not exceed P's qualified cost determined under Regulation 23649-4.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that P purchases and places the mixing tanks in service on December 1, 1993, and R purchases the mixing tanks from P and immediately leases them back to P on January 15, 1994. Under these facts, even though the transaction would be treated as an “acquisition sale and leaseback” under Revenue and Taxation Code Section 6010.65, since P's qualified cost under Regulation 236494 would be equal to zero, R's qualified cost under this regulation would similarly be equal to zero, and thus no MIC would be allowed to R.
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that P purchased the mixing tanks under a contract that was treated as a binding contract under the rules in Regulation 23649-4. Assume further that 25 percent of P's total cost for the mixing tanks was actually paid prior to January 1, 1994, so that P's qualified cost for the mixing tanks was equal to 75 percent of the total cost of the tanks. Under these facts, since P's qualified cost under Regulation 23649-4 would be equal to 75 percent of P's total cost for the mixing tanks, R's qualified cost under this regulation could not exceed the amount of P's qualified cost, irrespective of the total amount paid by R to P to purchase the mixing tanks.
(6) Lessor Reporting Requirement. In the case of any lease treated as an operating lease under this regulation, the lessor shall provide the lessee with a statement within 45 days after the close of the lessee's income year for which the MIC is allowable to the lessee. This statement shall contain the amount of the lessor's qualified cost (as calculated under this regulation) upon which the lessee is eligible to compute the MIC and the amount of such qualified cost upon which the lessor has paid California sales or use tax. For purposes of providing this statement only, if a lessor is legally obligated to remit California sales or use tax with respect to its acquisition of qualified property, but has not yet remitted such amounts solely due to timing differences between the lessor's California sales and use tax return filing period and the lessee's income year, then the lessor may treat the amounts upon which the California sales or use tax liability arises as “qualified costs to the lessor.” The statement required by this subsection of this regulation should not be filed with the lessee's tax return for the income year, but shall instead be made available to the Franchise Tax Board upon request.
(c) Finance Leases. In the case of any leasing transaction that is treated as a sale under Part 1 (commencing with Section 6001) of Division 2 of the Revenue and Taxation Code (relating to the payment and collection of California sales and use tax), the rules set forth in this subsection of this regulation shall apply. Any lease subject to the rules of this subsection of this regulation shall be referred to in this regulation as a “finance lease.”
(1) In General. Under Revenue and Taxation Code Section 6006(g)(5), a lease of tangible personal property is generally treated as a sale for California sales and use tax purposes, unless the tangible personal property is leased in substantially the same form as acquired by the lessor or leased in substantially the same form as acquired by the transferor and the lessor or transferor has paid sales tax reimbursement or has paid use tax measured by the purchase price of the property. If the lease is not treated as a sale under Revenue and Taxation Code Section 6006(g)(5), then the rules of subsection (b) of this regulation apply.
(2) Applicable Requirements. In the case of a finance lease, the following requirements must be satisfied in order for the lessee to claim the MIC.
A. Lessee Must Be a Qualified Taxpayer. The requirement under Regulation 23649-3 that the user of the qualified property must be a qualified taxpayer shall be applied to the lessee and not to the lessor.
B. Use of Property in a Qualified Activity. The requirement under subsection (b)(4) of Regulation 23649-5 that property be used in a qualified activity in order to be treated as qualified property shall be applied to the lessee and not the lessor with respect to the property that is the subject of a finance lease.
C. Sales or Use Tax Payment Requirement. Except as provided in subsection (d) of Regulation 23649-4 (relating to capitalized labor), either the lessor or the qualified taxpayer must pay California sales tax reimbursement or California use tax on the lessee's purchase of the qualified property in order for the MIC to be allowed to the lessee. In the case of an “occasional sale” under Revenue and Taxation Code Section 6006.5, the lessee may satisfy the requirement of this subsection of this regulation by remitting the California sales or use tax on the lessee's purchase of the qualified property (assuming that under California sales and use tax law the lessor does not have a legal obligation to remit such amounts).
D. Qualified Costs. The requirement that costs, in order to be treated as qualified costs, must be paid or incurred for the “construction, reconstruction, or acquisition” of qualified property shall be applied by substituting the term “purchase” for the term “construction, reconstruction, or acquisition.” Since under general income tax principles a finance lease is treated as a purchase, the lessee's “lease rental payments” are treated as payments of the purchase price of the qualified property and would thus satisfy the “purchase” requirement. However, the lessee under such a lease would be obligated to pay California sales or use tax at the time the lease became effective, so that the lessee would be allowed the entire MIC on such lease in the year the lease became effective. On the other hand, if a lease is not properly treated as a finance lease under general income tax principles, then the “Purchase” requirement would not be satisfied.
E. Chargeable to Capital Account. The requirement that costs, in order to be treated as qualified costs, must be properly chargeable to the capital account of the qualified taxpayer shall apply to the lessee's lease rental payments.
(3) Amount of MIC Lessee May Claim. In general, a lessee under a finance lease is entitled to claim the MIC at the same time and in the same amount as if such lessee had instead constructed, reconstructed, or acquired the qualified property other than by lease.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23649, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).
2. Change without regulatory effect amending subsection (c)(2)C. filed 7-5-2000 pursuant to section 100, title 1, California Code of Regulations (Register 2000, No. 27).
§23649-7. [Reserved].

§23649-8. Recapture Rules.
Note     •     History

(See Section 23649-0 for Table of Contents.)
(a) In General. The MIC shall not be allowed or shall be recaptured under the rules of this regulation in any case where a disposition occurs within one year or less of the date the qualified property is first placed in service in this state.
(b) Disposition. For purposes of this regulation, the term “disposition” shall include any of the following events:
(1) Removal of the qualified property from this state;
(2) Disposition of the qualified property to any party that is not a related party (as defined in Internal Revenue Code Sections 267, 318 or 707), whether by sale, gift, a transfer upon the foreclosure of a security interest, or otherwise;
(3) Use of the qualified property by the qualified taxpayer primarily in any non-qualified activity; or
(4) Acquisition by a lessee (or any party related to the lessee under Internal Revenue Code Sections 267 or 318) of qualified property that is being leased by such lessee.
However, the term “disposition” shall not include any of the following events:
A. a mere transfer of legal title to a creditor upon creation of a security interest;
B. a transfer by a qualified taxpayer of legal title to qualified property to a lessor where the lessor is not treated as the tax owner of such property and the lease is properly characterized as a financing transaction under California income tax principles;
C. any election by a C corporation to become an S corporation; or
D. any destruction of qualified property which qualifies as an involuntary conversion under Section 1033 of the Internal Revenue Code.
(c) Disposition of Qualified Property During the Income Year Placed in Service. In any case where there is a disposition of qualified property during the same income year in which such qualified property is first placed in service in this state, no MIC shall be allowed to the qualified taxpayer for the income year in which the qualified property is placed in service.
EXAMPLE: H, a qualified taxpayer, files its California tax returns using a fiscal year ending on September 30th. On March 1, 1996, H pays $700 (plus California sales tax) for 10 personal computers and immediately places the computers in service in H's manufacturing facility in Sunnyvale. On September 1, 1996, H acquires 10 new computers (which are immediately placed in service in H's manufacturing facility) for $800 (plus California sales tax) to replace the 10 computers already in service, and H instead uses the old computers to perform general administrative functions such as payroll and marketing. Under these facts, when H files its California tax return for its income year ending September 30, 1996, H is not entitled to claim the MIC for the 10 personal computers acquired on March 1, 1996, because the computers are treated as having been disposed of during the same income year as they were placed in service as a result of H's use of these computers in an activity that is not a qualified activity. However, the 10 new computers acquired on September 1, 1996, may qualify for the MIC for H's income year ending September 30, 1996.
(d) Disposition of Qualified Property During an Income Year Subsequent to the Income Year Placed In Service. In any case where there is a disposition of qualified property within one year of the date that such qualified property is first placed in service in this state, but such disposition occurs in a different income year than the year in which the qualified property is placed in service in this state, then any MIC that was allowed with respect to the qualified property shall be recaptured by adding the recaptured MIC to the tax of the qualified taxpayer for the income year during which the disposition occurs (except as provided in subsection (e) of this regulation).
EXAMPLE: F, a qualified taxpayer, files its California tax returns using a fiscal year ending on September 30th. On August 15, 1996, F acquires 20 new computers for $600 (plus California sales tax) and immediately places the computers in service in H's manufacturing facility in Glendora. On May 15, 1997, F removes the 20 computers from F's manufacturing facility in Glendora and transports them for use in F's New Mexico manufacturing facility. Assuming F had been allowed a MIC on its income year ending September 30, 1996, California tax return for the computers acquired on August 15, 1996, F must recapture the entire MIC allowed by adding such amount to F's tax for its income year ending September 30, 1997.
(e) Adjustment of Carryforwards when Disposition Occurs. In any case where a qualified taxpayer is required to recapture any previously allowed MIC under the rules of this regulation, then, prior to the addition of any recaptured amounts to the tax under subsection (d) of this regulation, any outstanding MIC carryforwards shall first be reduced to the extent necessary to fully absorb the recapture amount. Any recapture amount remaining after application of the preceding sentence shall be added to the tax under the rules of subsection (d) of this regulation.
EXAMPLE 1: On May 1, 1999, within one year of placing qualified property in service in this state, K disposes of qualified property for which a $150 MIC was previously allowed. Under the rules of this regulation, K is required to recapture the entire $150 MIC. Assume K had $400 in MIC carryforwards that were available for use in 1999. Under these facts, K would reduce its available MIC carryforwards to $250 ($400 minus $150). Since no additional recapture amount remains, K is not required to increase its tax for 1999 to reflect the $150 recapture amount.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that instead of $400 in available MIC carryforwards, K had only $100 in available MIC carryforwards. Under these facts, K would first reduce its available MIC carryforwards to zero, and would then increase its tax for 1999 by $50 ($150 recapture amount less $100 used to reduce available MIC carryforwards).
(f) Recapture of MIC Allowed to Pass-Through Entities.
(1) Partnerships and Partners. If a partnership places qualified property in service in this state, claims the MIC to the extent of the qualified costs paid or incurred, and thereafter removes the qualified property from this state, disposes of the qualified property to an unrelated party, or primarily uses the property for a purpose not qualifying for the MIC, then the MIC shall be recaptured under Revenue and Taxation Code Section 23649(g) and this regulation. The amount of MIC subject to recapture shall be allocated among the partners in the same ratio that the MIC was allocable to each partner for the qualified property subject to the recapture, and shall be added to the “tax” of the partner for the income year in which the qualified property is disposed of, removed from this state, or put to a non-qualifying use.
EXAMPLE 1: Assume that C and D are equal partners of M, a partnership that is a qualified taxpayer. During M's taxable year beginning in 1995, M is allowed a total MIC of $100. C and D each are able to utilize their entire 50% share of the 1995 MIC to offset their respective 1995 tax liabilities, so that there is no MIC carryover amount for either C or D. Assume further that in 1996, within one year of the date the qualified property was placed in service, M moves the qualified property to another state, thereby triggering a recapture of the MIC. C and D are required to recapture their distributive share of the MIC already applied to their respective 1995 tax liabilities on their respective 1996 California tax returns by adding the recaptured MIC amounts to their respective “tax” for 1996.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that C uses all of C's share of the MIC to reduce C's 1995 tax liability, but D carries over all of D's MIC to 1996. On C's 1996 California tax return, C will be required to recapture C's share of the MIC that was used to reduce C's “tax” for 1995 and D will be required to reduce its MIC carryover to zero. D will not be required to increase D's “tax” for 1996 by the amount of D's share of the MIC because D was unable to apply the amount to reduce D's tax liability for 1995.
(2) S Corporations and Shareholders.
A. Corporate Level Recapture. If an S corporation places qualified property in service in this state, claims the MIC to the extent of the qualified costs paid or incurred, and thereafter removes the qualified property from this state, disposes of the qualified property to an unrelated party, or primarily uses the qualified property for a purpose not qualifying for the MIC, then the MIC shall be recaptured under Revenue and Taxation Code Section 23649(g) and this regulation. The amount of any MIC recaptured by the S corporation shall be added to the “tax” of the S corporation imposed under Chapter 4.5 of Part 11 of the Revenue and Taxation Code, except that the MIC recapture amount added to the “tax” of the S corporation shall be appropriately reduced by the amount by which the S corporation was required to reduce such MIC under Part 11 of the Revenue and Taxation Code.
B. Pass-through of MIC Recapture to Shareholders. In any case where a “disposition” of qualified property by an S corporation occurs, the amount of MIC subject to recapture shall be allocated among the shareholders of the S corporation in the same ratio that the MIC was allocable to each shareholder for the qualified property subject to the recapture, and shall be added to the “tax” of the shareholder for the income year in which the qualified property is disposed of, removed from this state, or put to a non-qualifying use.
EXAMPLE: Assume that Q, an S corporation with three equal shareholders (E, F, and G), is allowed a MIC in 1995 that Q is fully able to utilize to reduce Q's 1.5% S corporation tax liability. Assume further that E, F, and G each claims a one-third (1/3) share of the MIC allowed to Q, and that each shareholder is able to utilize their entire distributive share of this MIC on their respective 1995 California tax returns. In 1996, within one year of the date the qualified property was placed in service in California, Q sells the property to an unrelated party. Under these facts, Q, E, F, and G must each recapture the MIC allowed and claimed by each on their respective 1995 California tax returns by adding such recapture amount to their 1996 respective California “tax” or “net tax,” as the case may be.
(g) Recapture of MIC Allowed in 1994 or 1995 But Deferred Until Qualified Taxpayer's First Income Year Beginning on or after January 1, 1995. In the case of any qualified costs paid or incurred with respect to qualified property that is placed in service in 1994 or 1995 for which the MIC is allowed but deferred under the rules of subsection (b) of Regulation 23649-1, the one year period for which any disposition of such property shall trigger recapture of the MIC (as described in subsection (a) of this regulation) shall commence on the date that the qualified property is first treated as placed in service in this state by the qualified taxpayer. Any MIC required to be deferred under the rules of subsection (b) of Regulation 23649-1 shall be first offset against any MIC recapture amount (in the same manner as MIC carryforwards are offset under the rules of subsection (e) of this regulation) prior to being claimed on the qualified taxpayer's California tax return for its first income year beginning on or after January 1, 1995.
EXAMPLE 1: D, a qualified taxpayer, pays or incurs qualified costs for qualified property that is placed in service in this state on June 1, 1994. However, under subsection (b) of Regulation 23649-1, D may not claim the MIC for these qualified costs until D files its California tax return for D's first calendar or fiscal year beginning on or after January 1, 1995. On May 1, 1995, D removes the qualified property to Nevada, thereby triggering a recapture of the MIC allowed to D for its 1994 qualified costs. When D files its calendar year 1995 California tax return on March 15, 1996, D may not claim the MIC with respect to the qualified property D placed in service on June 1, 1994.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that D instead removes the qualified property to Nevada on June 2, 1995. In this situation, no recapture is triggered by the removal because the disposition occurs more than one year after the property was placed in service in this state by D.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23649, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).
§23649-9. MIC Carryforwards.
Note     •     History

(See Section 23649-0 for Table of Contents.)
(a) In General. In any case where the MIC exceeds the “tax,” the excess may be carried forward to reduce the “tax” in the following year, and succeeding years, as follows:
(1) Except as provided in subsection (a)(2) of this regulation and subsection (c) of this regulation, for the eight income years succeeding the income year for which the MIC is allowed, if necessary, until the credit is exhausted.
(2) Except as provided in subsection (c) of this regulation, in the case of any small business, for the ten income years succeeding the income year for which the MIC is allowed, if necessary, until the credit is exhausted.
Except as provided in this regulation, the amount of MIC that may be carried over to the following year, and succeeding years, including carryforwards from any and all prior years, is not limited.
(b) Small Business Determination Made as of the Last Day of the Income Year for Which the MIC is Allowed. Except as provided in subsection (c) of this regulation, the determination of which carryforward period shall apply shall be made as of the last day of the qualified taxpayer's income year for which the MIC is allowed.
EXAMPLE 1: Assume that as of the last day of its 1996 income year G, a qualified taxpayer, is a “small business” for purposes of the MIC. During G's 1996 income year, G purchased a machine that was qualified property for $500, thereby entitling G to a $30 MIC. Assume that the entire $30 MIC exceeds the “tax,” so that G is required to carry forward the $30 MIC. Under these facts, G is entitled to carry forward the unused $30 MIC to each of its ten (10) succeeding income years, if necessary, until the MIC is exhausted, regardless of whether G is a small business in any of its succeeding income years.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1 except that G purchases another machine that is qualified property in its 1997 income year for $750, thereby entitling G to a $45 MIC. Assume that in G's 1997 income year G is no longer treated as a “small business” for purposes of the MIC. Assume further that the entire $45 MIC for 1997 exceeds the “tax,” so that G is required to carry forward the $45 MIC. Under these facts, G is entitled to carry forward the unused $45 MIC to each of its eight (8) succeeding income years, if necessary, until the MIC is exhausted, regardless of whether G is a small business in any of its succeeding income years.
(c) Special Rule for MIC Allowed in 1994 or 1995 But Deferred Until Qualified Taxpayer's First Income Year Beginning on or after January 1, 1995. In the case of any qualified costs paid or incurred with respect to qualified property that is placed in service in 1994 or 1995 for which the MIC is allowed but deferred under the rules of subsection (b) of Regulation 23649-1, the carryforward period specified in subsection (a) of this regulation shall commence with the qualified taxpayer's first income year beginning on or after January 1, 1995. However, the determination of whether the qualified taxpayer is a small business shall be made as of the last day of the income year in which the MIC is allowed, rather than as of the last day of the income year in which the MIC may first be claimed under subsection (b) of Regulation 23649-1.
EXAMPLE 1: Assume that as of the last day of its 1994 income year H, a qualified taxpayer filing on a calendar year basis, is a “small business” for purposes of the MIC. During H's 1994 income year, H purchased a machine that was qualified property for $800, thereby entitling H to a $48 MIC. Under the rules of subsection (b) of Regulation 23649-1, H may not claim the credit until its first income year beginning on or after January 1, 1995. Assume that in H's 1995 income year the entire $48 MIC exceeds the “tax,” so that H is required to carry forward the $48 MIC. Under these facts, H is entitled to carry forward the unused $48 MIC to each of its ten (10) income years succeeding the income year in which the credit could first be claimed (1995), if necessary, until the MIC is exhausted, regardless of whether H is a small business in any of its succeeding income years.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that for its 1995 income year H is no longer treated as a “small business” for purposes of the MIC. Under these facts, the result is the same as in EXAMPLE 1 since the determination of whether H is a small business for purposes of the MIC is made as of the last day of the income year in which the MIC was allowed (1994), rather than the last day of the income year in which the MIC could first be claimed (1995).
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that for its 1994 income year H was not a “small business” for purposes of the MIC but was a “small business” for purposes of the MIC for H's 1995 income year. Under these facts, H is entitled to carry forward the unused MIC for the eight (8) income years succeeding 1995 (the income year in which the MIC could first be claimed), even though H was a small business in 1995, since H was not a small business in the income year in which the MIC was allowed (1994).
(d) Small Business. In order for a qualified taxpayer to be treated as a small business, it need satisfy only one of the three criteria specified in the definition of “small business” in subsection (t) of Regulation 23649-2. Thus, for example, even though a qualified taxpayer's gross receipts and net assets may exceed the applicable thresholds as of the last day of the income year for which a MIC is allowed, the qualified taxpayer may still be treated as a small business for purposes of Regulation 23649-9 if its total MIC for the income year is less than one million dollars ($1,000,000).
(e) Carryforwards for Pass-Through Entities. In the case of any MIC allowed to a pass-through entity, the determination of the applicable carryover period for any MIC required to be carried forward shall be made at the pass-through entity level.
(f) Carryforwards Permitted After Sunset. In the event that the MIC is repealed under Revenue and Taxation Code Section 23649(i), any unused MIC may be carried forward, as provided above, until the unused MIC is exhausted.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23649, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).
§23649-10. Recordkeeping Requirements.
Note     •     History

(See Section 23649-0 for Table of Contents.)
(a) In General. For purposes of Regulations 23649-1 through 23649- 11, inclusive, a qualified taxpayer shall be required to maintain books and records that are adequate to substantiate its entitlement to any claimed MIC. These books and records should be retained for as long as the statute of limitations on assessment for the income year for which the MIC was allowed remains open, and, in the case of any MIC that is being carried forward, for the additional number of years that the actual carryforward of such MIC occurs.
(b) Books and Records. The books and records maintained by the qualified taxpayer should be sufficient to clearly establish all necessary facts which affect the allowance and amount of the MIC. For this purpose, “adequate” recordkeeping depends upon the sufficiency of the information contained in the documentation. In many cases, the books and records normally maintained for California income or franchise tax purposes will be adequate substantiation for the MIC.
EXAMPLE 1: X, a qualified taxpayer, claims a MIC for the purchase of 100 computers to be used in X's manufacturing facility in West Los Angeles. Assume the computers were purchased from a mail order retailer located in South Dakota. If X has only retained the original invoice and a cash disbursements journal, neither of which reflect that California sales or use tax was paid by X, then the invoice would not be sufficient to establish that California sales or use tax was paid on the computers. However, if X has retained a copy of a timely filed California use tax return that clearly demonstrates that California use tax was paid by X with respect to the computers, then X would be treated as having paid or incurred qualified costs.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that X intends to use 20 of the computers for general administrative functions such as payroll and marketing. In addition to the records necessary to establish that California sales or use tax was paid, X should also retain a copy of the purchase contract containing a detailed list of the computers by model number so that X can establish which of the computers are being used in a qualified activity and which are not being used in a qualified activity.
(c) Affidavit Regarding Sales and Use Tax. For purposes of this regulation only, in the case of any lump sum or turn key contract, the requirement that California sales or use tax be paid may be established by reference to bids, contracts or affidavits from the contractor. For purposes of determining whether California sales or use tax has been paid, directly or indirectly by the contractor, when it is not a separately stated contract amount, a qualified taxpayer shall be entitled to rely on a written representation to that effect from the contractor, and California sales or use tax shall be deemed to have been paid in the absence of affirmative knowledge on the part of the qualified taxpayer that California sales or use tax was not paid.
(d) Written Statement by Lessor to Lessee. In the case of any leasing transaction described in subsection (b) of Regulation 23649-6 (relating to operating leases), the lessor shall provide a statement to the lessee specifying the amount of the lessor's original cost of the qualified property upon which the lessee may claim the MIC and the amount of that cost upon which California sales or use tax was paid. This statement must be provided to the lessee within 45 days after the close of the lessee's income year for which the MIC is allowable to the lessee. For purposes of providing this statement only, if a lessor is legally obligated to remit California sales or use tax with respect to its acquisition of qualified property, but has not yet remitted such amounts solely due to timing differences between the lessor's California sales and use tax return filing period and the lessee's taxable year, then the lessor may treat the amounts upon which the California sales or use tax liability arises as “qualified costs to the lessor.” This written statement should not be filed with any return of either the lessor or lessee, but shall instead be retained by the lessee and made available to the Franchise Tax Board upon request.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23649, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).
§23649-11. Miscellaneous Provisions.
Note     •     History

(See Section 23649-0 for Table of Contents.)
(a) Operative Dates of the MIC. The MIC shall cease to be operative on January 1, 2001, or on the earliest January 1 thereafter, if the total employment in this state, excluding employment in the aerospace sector, as determined by the Employment Development Department on the preceding January 1, does not exceed by 100,000 jobs the total manufacturing sector employment in this state on January 1, 1994.
(b) Los Angeles Revitalization Zone (LARZ) Credits. Under Revenue and Taxation Code Section 23612.6, relating to the Los Angeles Revitalization Zone (“LARZ”), in any case where a credit would be allowed for qualified property under both that provision and the MIC, a qualified taxpayer must make an election, on the return filed for each income year, as to whether to claim the MIC or the LARZ credit. Thus, a qualified taxpayer may not claim both the MIC and a LARZ credit for the costs of the same qualified property.
(c) Election to Claim Sales and Use Tax Refund in lieu of MIC under Revenue and Taxation Code Section 6902.2. Under Revenue and Taxation Code Section 6902.2, a qualified taxpayer may elect to claim a refund of a portion of the California sales and use tax paid with respect to qualified property from the California State Board of Equalization in lieu of claiming the MIC. Under that section, however, refunds may only be claimed at the times and in the amounts that the MIC could have been actually used by the qualified taxpayer to offset its California franchise or income tax liability for the income year or years in which the refund claim is filed. Finally, the in-lieu election required under Revenue and Taxation Code Section 6902.2 shall apply to each specific item of qualified property and shall also include any capitalized labor costs that are directly allocable to such item of qualified property.
EXAMPLE: Assume that in X's income year beginning in 1995, X, a qualified taxpayer, incurs $100 in qualified costs (none of which are attributable to directly allocable capitalized labor) for an item of qualified property. Under these facts, X would be entitled to a MIC of $6 (6% of $100). X may generally claim the MIC on X's 1995 franchise or income tax return, or, under Revenue and Taxation Code Section 6902.2, X may instead elect to apply for a refund from the State Board of Equalization of the amount of such MIC that X could have utilized to offset X's 1995 franchise or income tax liability. Thus, for example, if X had a 1995 income or franchise tax liability of $3 BEFORE application of the $6 MIC, X could claim a $6 MIC, $3 of which is applied to X's 1995 tax liability and $3 of which is carried forward to subsequent income years. Similarly, X may only claim a $3 refund under Revenue and Taxation Code Section 6902.2 since this is the amount that “could have been used” by X to offset X's income or franchise tax liability for 1995. Finally, any MIC amounts that would have been required to be carried forward to future income years may not instead be claimed as a refund under Revenue and Taxation Code Section 6902.2 in lieu of claiming the MIC.
(d) Sales and Use Tax Exemption under Revenue and Taxation Code Section 6377. Under Revenue and Taxation Code Section 6377, a qualified taxpayer that is treated as a “new business” may be eligible to receive an exemption from California sales and use tax with respect to certain acquisitions of property (some of which may also be treated as qualified property under the MIC). However, Revenue and Taxation Code Section 6377(b)(9)(C) provides that such sales and use tax exemption is not available with respect to any property for which the MIC is claimed.
(e) Special Rule Applicable to Fiscal Year Taxpayers. Fiscal year taxpayers who paid or incurred qualified costs on or after January 1, 1994, and during the qualified taxpayer's income year beginning in 1993, shall treat any such income year 1993 qualified costs as 1994 qualified costs to be claimed on the qualified taxpayer's 1995 income year return. As a result, fiscal year taxpayers that pay or incur qualified costs during both their fiscal years beginning in 1993 and 1994 would treat such amounts as 1994 qualified costs under Regulations 23649-1 through 23649-11, inclusive.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23649, Revenue and Taxation Code.
HISTORY

1. New section filed 5-1-96; operative 5-31-96 (Register 96, No. 18).
Subchapter 4. Exempt Corporations
Article 1. Exemptions from Franchise or Corporate Tax
§23701. Exemption from Taxation.
Note     •     History

(a)(1) In General Revenue and Taxation Code section 23701 provides an exemption from franchise or corporate income tax for organizations organized and operated for nonprofit purposes within the provisions of a specific section of Article 1, Chapter 4, or are subject to Revenue and Taxation Code sections 23701h or 23701x (relating to certain title-holding companies), if:
(A) An application for exemption is submitted in the form prescribed by the Franchise Tax Board; 
(B) A filing fee of twenty-five dollars ($25) is paid with each application for exemption filed with the Franchise Tax Board after June 30, 1983; and
(C) The Franchise Tax Board issues a determination exempting the organization from tax.
(2) The exemption provided does not extend to the unrelated business taxable income of such organization (see Revenue and Taxation Code section 23731). Also the exemption is not applicable to an organization determined to be a feeder organization under Revenue and Taxation Code section 23702. An organization which has been determined to be exempt by the Franchise Tax Board can rely upon such determination so long as there are no substantial changes in the law or the organization's charter, purposes or method of operation. However, to retain exempt status the organization must elect an annual accounting period, must submit an annual return or statement, and pay appropriate filing fees.
(3) Notwithstanding anything to the contrary in this regulation, for requests filed on or after January 1, 2008, an organization that is exempt from federal income tax under Internal Revenue Code section 501(c)(3) shall, upon submission of a copy of its federal determination letter to the Franchise Tax Board, be exempt from franchise or corporate income tax under Part 11 of Division 2 of the Revenue and Taxation Code, except to the extent noted in the preceding paragraph, under the authority of Revenue and Taxation Code section 23701d, subdivision (c). The additional filing requirements specified in subsection (b) shall not apply to any organization described in this paragraph.
(b) Proof of Exemption. An organization must be organized (chartered, incorporated) and operated (conducting activities) primarily (in some cases exclusively) for one or more of the purposes specified in the particular section describing the exempt organization. If the organization fails to meet the organizational or operational test for the particular section describing the exempt organization, it is not entitled to exemption.
(1) Except as provided in subsection (a)(3), an organization claiming exemption under Revenue and Taxation Code section 23701 and described in Revenue and Taxation Code sections 23701a through 23701z shall file with the Franchise Tax Board an exemption application (Form FTB 3500) filled out in accordance with the instructions on the form or issued therewith. The exemption application and the attachments thereto shall show the character of the organization, the purpose for which it was organized, its actual and proposed activities, the sources of its income and the receipts and disposition thereof, whether or not any of its income or receipts is credited to surplus or may inure to the benefit of any private shareholder or individual, and in general all facts relating to its operations which may affect its right to exemption. To each application there shall be attached a copy of the articles of incorporation, declaration of trust or other organizational document, the bylaws or other code of regulations, and financial statements showing assets, liabilities, receipts and disbursements (actual or as proposed) of the organization. The organizational document must meet the organizational test set out below and the activities or proposed activities must meet the operational test.
(A) Inurement of Income to Member or Individual. Sufficient information must be furnished about benefits and compensation to be received by members, officers, directors and employees to insure that it can be said they will not receive personal or private inurement. An organization is not operated for one or more exempt purposes contained in Revenue and Taxation Code sections 23701a through 23701z (with some exceptions discussed below) if net earnings inure directly or indirectly in whole or in part to the personal or private benefit of a member, officer, director, employee or individual.
Inurement means that an individual receives some special benefit which is unreasonable under the circumstances because of his membership or relationship to the organization. Where organizations, exempt under Revenue and Taxation Code sections 23701d or 23701n are involved, the activity that leads to inurement may also be a prohibited transaction under Revenue and Taxation Code section 23736.1. If the organization is a private foundation, the violation of the prohibitions upon self-dealing set forth in the Internal Revenue Code would normally constitute inurement if not corrected.
1. Under Revenue and Taxation Code sections 23701a, 23701b, 23701i, 23701j, 23701n and 23701s the payment of sick, accident, death, unemployment or retirement benefits out of employer, employee or member contributions does not result in personal or private inurement. In most cases, a limited amount of income, which may be taxable as unrelated business income, may be used for the payment of permitted benefits. Local associations of employees may receive contributions from employers that benefit employees without loss of exempt status. Payment of profits to participants of exempt diversified management corporations are also permissible benefits.
2. Inurement has been held to have occurred in many situations, including the following:
(I) Unreasonable compensation for services. The facts and circumstances of each case must be examined to determine if the compensation is unreasonable.
(II) Unreasonable rental charges.
(III) Unsecured loans of doubtful safety.
(IV) Deferred or retained interest in the assets of an organization claiming exemption under Revenue and Taxation Code sections 23701c, 23701d, 23701f, or 23701r.
(V) Operation of an organization to serve private interests.
(VI) Self-dealing with the organization; such as, making sales to or purchases from the organization which are not reasonable on their face.
(VII) Lack of a reasonable return on the capital of an organization exempt under Revenue and Taxation Code section 23701d.
(VIII) Use of the organization's property without adequate payment.
(IX) Reduction of dues, increase in assets, or provision of more services to members for the same dues which occurs as a result of a social and recreational organization's receiving income from the general public may be inurement to members. Use of limited income received from the general public for the above purposes may be permissible if it is taxable as unrelated business income.
(X) Reimbursement of founder for expenses incurred in connection with organization before it was exempt.
(XI) Payment of part of the general operating expenses of a membership organization out of income received from the general public normally results in inurement.
(B) Change of exempt classification.
1. An organization requesting a change of exempt status more than one year after exemption has been granted must submit a new exemption application, unless clause 2. is applicable. However, supporting information that is still current need not be resubmitted.
2. If an initial federal exemption application is timely filed and the exempt classification when received is different than that issued by the Franchise Tax Board, a change of classification will be considered without a formal application if the request for reclassification is submitted within ninety days after issuance of the federal exemption letter. The request shall be accompanied by a copy of the federal determination letter and any supporting information not previously furnished the Franchise Tax Board.
(2) In addition to the information specifically required under this regulation, the Franchise Tax Board may require additional information as deemed necessary to determine whether an organization is entitled to exemption under Revenue and Taxation Code section 23701, including evidence that the organization has established exempt status with the Internal Revenue Service.
(3) An organization applying for exemption from tax or for a change (reclassification) of exempt status must pay an application fee of $25 with the exemption application. However, exceptions to the payment of the fee may be made for subordinates (processed on a group basis) and for unincorporated associations or trusts operating in California which were exempt from federal taxation prior to January 1, 1970. A copy of the Internal Revenue Service exempt determination letter should be furnished with the application.
(4) Retroactivity of Exemption. Exempt status may be granted for years prior to approval of the exemption application but only to the extent the organization establishes it satisfied the exemption requirements during each of such prior years. In no event shall a claim for refund be allowed unless timely filed under Revenue and Taxation Code section 19306. In the case of exemptions granted under subsection (a)(3), the effective date of an organization's tax-exempt status for California franchise or income tax purposes shall be no later than the effective date of the organization's tax-exempt status, under Section 501(c)(3) of the Internal Revenue Code, for federal income tax purposes.
(c) Organizational Test.
(1) In General.
(A) An organization is organized primarily (in some cases exclusively) for one or more exempt purposes only if its articles of organization (“articles”) as defined in paragraph (2) of this subsection:
1. Expressly set out an exempt purpose consistent with the purposes stated in the section which describes the exempt organization; and
2. Limit any other purposes or powers of the organization, except to an insubstantial degree, to those in furtherance of the purpose. 
3. In the case of an unincorporated association (that is not a trust), expressly state that the organization is organized for nonprofit purposes and that individuals will not profit therefrom. However, associations described in Revenue and Taxation Code sections 23701h or 23701x (relating to certain title-holding companies) are not subject to this requirement.
4. In the case of a domestic corporation, incorporate the organization under Division 2, Parts 1, 2, 3, 4 or 6, of the California Corporations Code. However, incorporation under other provisions of the Corporations Code is permitted to the extent provided in Revenue and Taxation Code sections 23701h and 23701x (relating to certain title-holding companies).
(B) In meeting the organizational test, the organization's specific purpose may be as broad as, or more specific than, the purposes stated in the section which describes the exempt organization. The purpose should normally be accomplished by the primary activity of the organization.
(C) An organization is not organized primarily for one or more exempt purposes if its articles expressly empower it to carry on, other than as an insubstantial part of its activities, activities which are not in furtherance of one or more exempt purposes, even though such organization is, by the terms of such articles, created for a purpose that is no broader than the purposes specified in a section describing an exempt organization. Thus, an organization that is empowered by its articles “to engage in a manufacturing business,” or “to engage in the operation of a social club” does not meet the organizational test of an organization desiring exemption under Revenue and Taxation Code section 23701d regardless of the fact that its articles may state that such organization is created “for charitable purposes” within the meaning of Revenue and Taxation Code section 23701d.
(2) Articles of Organization. For the purposes of this section, the term “articles of organization” or “articles” includes the trust instrument, the corporate charter, the articles of association, or any other written instrument by which the organization is created.
(3) If before January 1, 1970, an organization has been determined to be an exempt organization by the Franchise Tax Board, the fact that such organization does not meet the organizational test prescribed by this paragraph shall not be a basis for revoking such determination.
(d) Operational Test.
(1) Primary Activities. An organization will be regarded as “operated primarily” or “operated exclusively” for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in the section (Revenue and Taxation Code sections 23701a through 23701z) which describes the exempt organization. An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.
(2) Exempt status will be recognized in advance of operations (or incorporation), where proposed operations are planned to begin within one year and can be described in sufficient detail to permit a conclusion that the organization will clearly meet the particular requirements of the section under which exemption is claimed. A mere restatement of purposes or a statement that proposed activities will be in furtherance of such purposes will not satisfy these requirements. The organization must fully describe the activities in which it expects to engage, including the standards, criteria, procedures, or other means adopted or planned for carrying out the activities; the anticipated source of receipts, and the nature of contemplated expenditures. Where the Franchise Tax Board considers it warranted, a record of actual operations may be required before a determination letter will be issued.
(A) Where exempt operations do not actually begin within the year, an attachment should be added to the annual report to explain the delay and to outline plans for conducting activities during the next year. Failure to explain such inactivity will be cause for revocation of the exempt status since an inactive organization is not operated for exempt purposes and therefore is not entitled to exemption from tax.
(B) Organizations that commence exempt operations and later become inactive are subject to loss of exempt status unless they include an attachment on their annual report to explain that their inactivity is temporary and to outline their plans for becoming active in the near future.
(e) The words “private shareholder or individual” in Revenue and Taxation Code sections 23701a through 23701z refer to persons having a personal or private interest in the activities of the organization.
(f) Every organization which has established its right to exemption shall submit an annual report or statement as required by Revenue and Taxation Code section 23772. Also, the organization shall maintain adequate operational and financial records to show that its operations are conducted in an exempt manner. Changes in the character, operations or purposes of an exempt organization shall be reported in writing to the Franchise Tax Board for evaluation as to whether the organization's exempt status is affected. In cases where the organization's exempt status is revoked, either by suspension of corporate powers, for failure to elect an accounting period, or to file an annual return or statement, then Revenue and Taxation Code sections 23776 and 23778 are applicable for reinstatement provisions.
(g) Every exempt organization shall make its records available or shall submit, in addition to its annual information return or statement, such additional information as may be required by the Franchise Tax Board for the purpose of enabling it to inquire further into the organization's exempt status and to administer the provisions of Chapter 4 of the Corporation Tax Law.
(h) Withdrawal of Applications. Applications for exemption may be withdrawn, upon the written request of one of the principal organizers or his/her attorney, at any time prior to the issuance of a determination letter. However, even though the application is withdrawn, the application, supporting documents and the application fee will be retained by the Franchise Tax Board and will not be returned to the organization.
(i) Group Exemptions for Subordinates.
(1) A central organization (one which has one or more California subordinates under its general supervision or control) may apply for exemption for itself and its subordinates (chapter, local, post or unit). A central organization may be a subordinate itself; for example, a state organization which has subordinate units and may itself be affiliated with a national organization or a district of a state organization. This procedure will relieve each of the subordinates from applying separately for exemption.
(2) The organization applying for a group exemption letter must establish its own exempt status. It must also establish that the subordinates to be included in the group are:
(A) Affiliated with it;
(B) Subject to its general supervision and control; and
(C) Exempt under the same lettered section under Revenue and Taxation Code section 23701, including organizations exempt under subsection (a)(3), although not necessarily exempt under the same section as the national, state or parent (central) organization.
(3) Each subordinate to be included in the exempt determination must be formed under a standard constitution, articles of association, articles of incorporation or bylaws, and must authorize the central organization in writing to include it in the group exemption letter.
(4) A central organization seeking a group exemption letter for its subordinates must establish its own exemption separately by filing an exemption application form. In addition to the information required to establish its own exemption or information not previously furnished, if it is already exempt, it must include in the application for group exemption:
(A) Information verifying the existence of the relationships set out in subsection 2(A) and (B) above.
(B) A description of the principal purposes and activities of subordinates.
(C) A sample copy of the uniform governing instrument for subordinates.
(D) An affirmation to the effect that, to the best of the central organization's knowledge, the subordinates are operating in accordance with the stated purposes.
(E) A statement that each subordinate to be included in the group exemption letter has furnished written authorization to the parent organization.
(F) A list of all California subordinates, mailing addresses and corporation numbers or Franchise Tax Board organization numbers if assigned. If an annual group report will be submitted, the organizations to be included in the report should be identified. 
(5) Information required annually to maintain a group exemption letter. The national, central or state organization must submit to the Franchise Tax Board annually within 45 days after the close of the annual accounting period of its subordinates:
(A) Information regarding all changes in the purpose, character, or method of operation of subordinates included in the group exemption letter.
(B) A complete listing, with addresses, of all active California subordinates, showing the corporation or organization number assigned by the Franchise Tax Board (when one has been assigned). If a group report will be submitted, the listings should indicate all subordinates that are authorized to and will be included in the group report. The list should be marked to indicate which subordinates have changed their names or addresses during the year. Any new subordinate formed during the year shall be clearly identified.
(C) A separate listing should show all subordinates that have ceased to exist since the last report and those that have disaffiliated from the central organization.
(D) Each subordinate must be included in an information return or statement submitted annually. Subordinates that meet the requirements may be included in a group report, while any subordinate not authorized and not included in the group return must submit an individual return or statement.
(E) Submission of the above information does not relieve the central organization or any of its subordinates of the duty to submit such additional information as the Franchise Tax Board may require to permit it to determine whether the conditions for continued exemption are met.
(6) Termination of a group exemption letter.
(A) Termination of a group exemption letter will result in nonrecognition of the exempt status of all included subordinates. To reestablish an exempt status in such cases, each subordinate must file an exemption application or a new group exemption must be applied for and secured.
(B) If a central or state organization covered by a group exemption letter ceases to exist, the group exemption letter will be terminated.
(C) Failure of the central or state organization to submit an annual listing or information return for itself (where required) and for its subordinates which are included in the group letter and designated to be included in a group report may result in termination of the group exemption letter.
(D) If a subordinate which is covered by the group letter and which is required to report separately to the Franchise Tax Board does not submit an annual report, its exempt status may be terminated on an individual basis. The group exemption letter will no longer be applicable to such subordinate, but will otherwise remain in effect. Where a subordinate's exemption is terminated on an individual basis, it must reapply for exemption on an individual basis.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23701, Revenue and Taxation Code.
HISTORY

1. New Article 1 (Sections 23701, 23701(a)-23701(i), 23701(k)-23701(m), 23701n(1)-23701n(3), 23701(r), 23701(s), 23702, 23703, 23707-23709) filed 7-13-73; effective thirtieth day thereafter (Register 73, No. 28).
2. Amendment of subsection (b) filed 2-7-78; effective thirtieth day thereafter (Register 78, No. 6).
3. Amendments of subsections (b) and (c) filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
4. Amendment filed 6-9-86; effective thirtieth day thereafter (Register 86, No. 26).
5. Amendment filed 8-25-88; operative 9-24-88 (Register 88, No. 36).
6. Change without regulatory effect amending subsections (a)(1), (b)(1)(A), (b)(4), (c)(1)(A)4., (d)(1) and (e) and amending Note filed 7-28-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 31).
7. Amendment filed 3-19-2009; operative 4-18-2009 (Register 2009, No. 12).
§23701a. Labor, Agricultural, and Horticultural Organizations. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No 37.
§23701b. Fraternal Beneficiary Societies. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No 37).
§23701c. Cemetery Companies and Crematoriums.  [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No 37).
§23701d. Religious, Charitable, Scientific, Literary, Educational Organizations and Prevention of Cruelty to Children or Animals. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No 37).
§23701e. Business Leagues. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No 37).
§23701f. Dedication of Assets.
Note     •     History

The assets of organizations desiring exemption under Section 23701f must be irrevocably dedicated to an exempt purpose. The dedication must be in the articles of incorporation.
(a) All organizations desiring exemption under Section 23701f (except a local association of employees) must provide in their articles of incorporation that their assets are irrevocably dedicated to social welfare purposes. The dedication must cover any income of the organization (including dues, fees or assessments or services) or assets purchased with such income. That in case of dissolution the assets of the organization will be distributed to an organization organized and operated for social welfare purposes and exempt under Section 501(c)(3) or 501(c)(4) of the Internal Revenue Code. A sample irrevocable dedication-dissolution clause is as follows:
“The assets of this corporation are irrevocably dedicated to social welfare purposes and no part of the profits shall ever inure to the benefit of a director, officer member or the benefit of any private shareholder or individual. On the dissolution or winding up of this corporation, its assets remaining after payment of, or provision for the payment of, all debts and liabilities of this corporation shall be distributed to a nonprofit organization that is organized and operated exclusively for social welfare purposes and that has established its tax exempt status under Section 501(c)(3) or 501(c)(4) of the Internal Revenue Code.”
(b) A local association of employees must provide in their articles of incorporation that in case of dissolution their assets will be distributed for charitable, educational or “public recreational purposes.” The deduction should normally be to an organization which has established its exempt status under Section 501(c)(3) of the Internal Revenue Code.
(c) Lack of a dedication clause in the articles will not be made the sole basis for revocation of an exempt determination made by the Franchise Tax Board prior to 1972.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23701(f), Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23701g. Social and Recreation Organizations. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23701h. Title Holding Corporations. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23701i. Voluntary Employees' Beneficiary Association. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37)
§23701k. Religious or Apostolic Associations or Corporations. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23701l. Fraternal Society. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23701m. Diversified Management Corporations. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23701m, Revenue and Taxation Code.
HISTORY

1. Repealer filed 8-25-88; operative 9-24-88 (Register 88, No. 36).
§23701n(1). Supplemental Unemployment Benefit Trust. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23701n(2). General Rules. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422 Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23701n(3). Relation to Other Sections of the Code. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422 Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23701r. Support of Political Candidates. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23701s. Certain Funded Pension Trusts. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23702. Feeder Organizations. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23703. Loss of Exemption for Failure to Register or File Periodic Reports with Attorney General.
Note     •     History

(a) Any organization which receives or holds assets for charitable purposes must normally register with the Attorney General (Registry of Charitable Trusts) within six months after the receipt of assets for charitable purposes. Also the above described organization must file an annual report with the Registry of Charitable Trusts.
(b) Failure to register or file the annual report may cause the Attorney General (Registry of Charitable Trusts) to notify this department to disallow the exemption for the period involved. When such a notice is received, the department will notify the organization and make an assessment of the minimum tax, as provided by Section 23153, for each year or part thereof which is involved. Failure to pay the tax will result in the suspension (termination of the corporate status) or the current revocation of exempt status.
(c) To be reinstated, the organization must satisfy the requirements of the Attorney General and pay the taxes assessed. This department must receive notice from the Attorney General (Registry of Charitable Trusts) that the organization is now in compliance with these requirements. Also, if suspension or current revocation of exempt status occurred because the minimum tax was not paid, the organization must comply with the requirements of Section 23776 or 23778.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23703, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (b) filed 8-25-88; operative 9-24-88 (Register 88, No. 36).
§23707. Termination of a Private Foundation.

(a) Section 23707 states that a termination of a private foundation under federal law is a valid termination under state law. Also a termination by the State Attorney General is a valid termination for Franchise Tax Board purposes.
(1) Where a private foundation receives notice that its status as a private foundation has been changed or terminated, a copy of any such notice should be forwarded by the private foundation to the Franchise Tax Board within 60 days.
(2) Where a private foundation terminates its status as a private foundation by distribution of all its assets to a properly qualified organization, this information should be indicated on its final annual information report, submitted on or before the 15th day of the fifth month following such termination.
§23708. Classification as a Private Foundation.
Note     •     History

(a) Any organization that has been classified as a private foundation or informed that it will be treated as a private foundation under federal law must inform the Franchise Tax Board of this classification on its annual information return (Form 199).
(b) Section 23708 as well as Corporations Code Section 5260 and impose federal restrictions on private foundations. The enforcement of these restrictions is considered the responsibility of the Attorney General working in conjunction with the Internal Revenue Service. Therefore, if violators of the above restrictions are discovered by the Franchise Tax Board they will be called to the attention of the Attorney General rather than revoking the exemption as might otherwise be proper.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23708, Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23709. Definition of a Private Foundation.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
Article 2. Taxation of Business Income of Most Exempt Organizations
§23731. *  Imposition of Rates of Tax.
Note     •     History

(a) Section 23731 of the Revenue and Taxation Code imposes a tax upon the unrelated business taxable income of all organizations (including some trusts) otherwise exempt from tax under Section 23701 of the Revenue and Taxation Code. The tax is also applicable to some nonexempt trusts. However, quasi-governmental organizations that are formed to carry out a function of the state and which are under the control of the state are considered state agencies to which the tax is not applicable. Under subdivision (a) corporations, associations and business trusts are subject to the corporation rates imposed by Section 23151 or Section 23501 of the Revenue and Taxation Code. Under subdivision (b) trusts are subject to individual rates imposed by Section 17041 of the Revenue and Taxation Code. No deduction for personal exemption or exemption credit is allowed a trust in computing unrelated business taxable income.
(b) Applicability of Unrelated Business Income Tax.
(1) Subdivision (a) is applicable for income years beginning after December 31, 1970.
(2) For income years beginning before January 1, 1971 the tax set out in Subdivision (a) is applicable only at the corporation rate and only applicable to organizations exempt under Section 23701 of the Revenue and Taxation Code and described in Sections 23701a, 23701d, 23701e or 23701n of the Revenue and Taxation Code and to organizations described in Section 23701h of the Revenue and Taxation Code if income is payable to an organization which itself is subject to the tax imposed under Section 23731 of the Revenue and Taxation Code or to a church or convention of churches.
(3) (A) For income years beginning before January 1, 1970, the tax was not applicable to churches or associations of churches which are exempt under Section 23701d of the Revenue and Taxation Code.
(B) The term “church” includes a religious order or a religious organization if such order or organization (a) is an integral part of a church, and (b) is engaged in carrying out the functions of a church, whether as a civil law corporation or otherwise. In determining whether a religious order or organization is an integral part of a church, consideration will be given to the degree to which it is connected with, and controlled by, such church. A religious order or organization shall be considered to be engaged in carrying out the functions of a church if its duties include the ministration of sacerdotal functions and the conduct of religious worship.
If a religious order or organization is not an integral part of a church, or if such an order or organization is not authorized to carry out the functions of a church (ministration of sacerdotal functions and conduct of religious worship) then it is subject to the tax imposed by Section 23731 of the Revenue and Taxation Code whether or not it engages in religious, educational, or charitable activities approved by a church. What constitutes the conduct of religious worship or the ministration of sacerdotal functions depends on the tenets and practices of a particular religious body constituting a church. If a religious order or organization can fully meet the requirements stated in this subparagraph, exemption from the tax imposed by Section 23731 of the Revenue and Taxation Code will apply to all its activities (prior to 1970), including those which it conducts through a separate corporation (other than a corporation described in Section 23701h of the Revenue and Taxation Code) or other separate entity which it wholly owns and which is not operated for the primary purpose of carrying on a trade or business for profit. Such exemption from tax will also apply to activities conducted through a separate corporation (other than a corporation described in Section 23701h of the Revenue and Taxation Code) or other separate entity which is wholly owned by more than one religious order or organization, if all such orders or organizations fully meet the requirements stated in this subparagraph and if such corporation or other entity is not operated for the primary purpose of carrying on a trade or business for profit.
(C) Churches and conventions or associations of churches are not entitled to most of the transitional rules provided for under federal law.
(4) Trusts.
(A) The taxes imposed by Section 23731 of the Revenue and Taxation Code apply in case of a trust which is exempt under Section 23701 of the Revenue and Taxation Code. The tax also applies to nonexempt trusts treated as exempt organizations because of Section 4947(a)(1) of the Internal Revenue Code. The tax is also imposed on many types of trusts under the Personal Income Tax Law by Section 17651 of the Revenue and Taxation Code. These trusts include exempt deferred compensation trusts (as defined in Section 17501 of the Revenue and Taxation Code, with any tax imposed by Section 17651 of the Revenue and Taxation Code).
(B) However, if any of the above trusts conduct a business which is a separate taxable entity on the basis of all of the facts and circumstances, for example, an association taxable as a corporation, the business will be taxable as a feeder organization described in Section 23702 of the Revenue and Taxation Code.
(c) Title Holding Companies.
(1) In General. If a corporation described in Section 23701h of the Revenue and Taxation Code pays any amount of its net income to an organization exempt from taxation under Section 23701 of the Revenue and Taxation Code (or would pay such an amount but for the fact that the expenses of collecting its income exceed its income), and if such corporation and such organization file a consolidated federal information tax return for such taxable year, then such corporation shall be treated, for purposes of the tax imposed by Section 23731 of the Revenue and Taxation Code, as being organized and operated for the same purposes as such organization, as well as for its title-holding purpose if it attaches a copy of its federal consolidated return to its Form 199, 199B, or 109. Therefore, if an item of income of the Section 23701h of the Revenue and Taxation Code corporation is derived from a source which is related to the exempt function of the exempt organization to which such income is payable and with which such corporation files a consolidated federal information return, such item is, together with all deductions connected therewith, excluded from the determination of unrelated business taxable income under Section 23732 of the Revenue and Taxation Code and shall not be subject to the tax imposed by Section 23731 of the Revenue and Taxation Code. If, however, such item of income is derived from a source which is not so related, then such item, less all deductions directly connected therewith, is, subject to the modifications provided in Section 23732(b) of the Revenue and Taxation Code, unrelated business taxable income subject to the tax imposed by Section 23731 of the Revenue and Taxation Code. 
(2) The provisions of subparagraph (1) may be illustrated by the following example:
EXAMPLE.
The income of X, a Section 23701h of the Revenue and Taxation Code corporation, is required to be distributed to exempt organization A. During the taxable year X realizes net income of $900,000 from source M and $100,000 from source N. Source M is related to A's exempt function, while source N is not so related. X and A file a consolidated Federal Form 990T for such taxable year and furnish a copy of the 990T with X's Form 109. X has net unrelated business income of $100,000, subject to the modifications in Section 23732(b) of the Revenue and Taxation Code. If no unrelated business income tax is due, a copy of the consolidated Federal Form 990 will be filed with X's Form 199.
(3) Effective Dates. Paragraphs (1) and (2) of this subdivision apply with respect to taxable years beginning after December 31, 1970. For taxable years beginning before January 1, 1971, a corporation described in Section 23701h of the Revenue and Taxation Code and otherwise exempt from taxation under Section 23701 of the Revenue and Taxation Code is taxable upon its unrelated business taxable income only if such income is payable either--
(A) to a church or convention or association of churches, or
(B) to any organization subject, for taxable years beginning before January 1, 1971, to the tax imposed by Section 23731 of the Revenue and Taxation Code.
(d) The fact that any class of organizations exempt from taxation under Section 23701 of the Revenue and Taxation Code is subject to the unrelated business income tax under Section 27731 of the Revenue and Taxation Code and this regulation does not in any way enlarge the permissible scope of business activities of such class for purposes of the continued qualification of such class under Section 23701 of the Revenue and Taxation Code.
(e) Assessment and Collections: Since the taxes imposed by Article 2 of Chapter 4 are taxes imposed by Section 23151, or Section 23501, or Section 17041 of the Revenue and Taxation Code, all provisions of law and of the regulations applicable to taxes imposed under Section 23151 or Section 23501, or Section17041 of the Revenue and Taxation Code are applicable to the assessment and collection of taxes imposed by Section 23731 of the Revenue and Taxation Code. Organizations subject to the tax imposed by Section 23731 of the Revenue and Taxation Code are subject to the same provisions, including penalties, as are provided in the case of the income tax of other corporations. In the case of a trust subject to tax under Section 23731 or Section 17651 of the Revenue and Taxation Code, the fiduciaries for such trusts are subject to the same provisions, including penalties, as are applicable to fiduciaries in the case of the income tax of other trusts.
(f) Returns. For requirements of filing annual returns with respect to unrelated business income tax see Section 23771 of the Revenue and Taxation Code. Estimated tax returns must be filed but as the tax is imposed by Chapter 3 of Part II, Division 2, the payment of at least the minimum tax with the first installment is not required. Filing of Form 109 is in addition to Form 199 or 199B.
(g) Tax on Preference Items. The tax imposed by Section 23400 or Section 17062 of the Revenue and Taxation Code applies to an organization subject to tax under Section 23731 or Section 17651 of the Revenue and Taxation Code with respect to items of tax preference which enter into the computation of unrelated business taxable income. For this purpose, only those items of income and those deductions entering into the determination of tax imposed by this section are considered in the determination of the items of tax preference under Section 17063 of the Revenue and Taxation Code.
(h) Taxable Years, Method of Accounting, Etc. The taxable year (fiscal year or calendar year, as the case may be) of an organization shall be determined without regard to the fact that such organization may have been exempt from tax during any prior period. In computing unrelated business net income, the determination of the taxable year for which an item of income or expense is taken into account shall be made under the provisions of the Bank and Corporation Tax Law, and the regulations thereunder, whether or not the item arose during a taxable year beginning before, on or after December 31, 1950. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23731, Revenue and Taxation Code.
HISTORY

1. Repealer of Sections 23732, 23732e-23732h, 23733-23733a, 23734, 23735, 23735a, 23735c, 23735c.1, 23771, 23772.5 and new Sections 23731, 23732(a)(1), 23732(a)(2), 23732(b)(1), 23733, 23734-23734a(1), 23734-23734a(2), 23735(a)(2), 23735(f)(1), 23735(g)(1) filed 7-13-73; effective thirtieth day thereafter (Register 73, No. 28). For prior history, see Register 64, No. 25.
2. Amendment of subsection (f) filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
3. Change without regulatory effect amending section and Note filed 8-28-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 35).

________  * This regulation is substantially the same as Fed. Reg. 1.511.
§23732-1. Definition. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23732, Revenue and Taxation Code.
HISTORY

1. Renumbering and amendment of Section 23732(a)(1) to Section 23732-1 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
2. Change without regulatory effect repealing Section 23732-1 filed 9-19-88 (Register 88, No. 40).
§23732-2. Definition Applicable to Taxable Years Beginning Before December 13, 1967. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23732, Revenue and Taxation Code.
HISTORY

1. Renumbering and amendment of Section 23732(a)(2) to Section 23732-1 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
2. Change without regulatory effect repealing Section 23732-2 filed 9-19-88 (Register 88, No. 40).
§23732-3. Modifications. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23732, Revenue and Taxation Code.
HISTORY

1. Renumbering and amendment of Section 23732(b)(1) to Section 23732-3 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
2. Change without regulatory effect repealing Section 23732-3 filed 9-19-88 (Register 88, No. 40).
§23733. Special Rules Applicable to Partnerships. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23734-23734a(1). Definition of Unrelated Trade or Business. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23734-23734a(2). Definition of Unrelated Trade or Business Applicable to Taxable Years Beginning Before December 13, 1967. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23735(a)(1). Unrelated Debt-Financed Income and Deductions. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 2-22-74; effective thirtieth day thereafter (Register 74, No. 8).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23735(a)(2). Article 2 Lease Rents and Deductions for Taxable Years Beginning Before January 1, 1971. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23735(b)(1). Definition of Debt-Financed Property. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 2-22-74; effective thirtieth day thereafter (Register 74, No. 8).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23735(c)(1). Acquisition Indebtedness. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 2-22-74; effective thirtieth day thereafter (Register 74, No. 8).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23735(d)(1). Basis of Debt-Financed Property Acquired in Corporate Liquidation. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 2-22-74; effective thirtieth day thereafter (Register 74, No. 8).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23735(e)(1). Allocation Rules. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 2-22-74; effective thirtieth day thereafter (Register 74, No. 8).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23735(f)(1). Definition of Article 2 (Business Lease). [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23735(g)(1). Article 2 Lease Indebtedness. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23736-23736.4(a). Denial of Exemption to Organizations Engaged in Prohibited Transactions. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23736-23736.4b. Future Status of Organization Denied Exemption. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23736-23736.4c. Disallowances of Certain Charitable, etc., Deductions. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§23737. *  Denial of Exemption Under Section 23701d in the Case of Certain Organizations Accumulating Income.

The restrictions enumerated in Section 23737 are in addition to and not in limitation of the restrictions contained in Section 23701d. Even though an organization has not violated any of the terms of Section 23737, it still may not qualify for tax exemption in view of the general provisions of Section 23701d. Thus, if an officer, director, trustee or fiduciary of the organization (whether or not he is also a creator of such organization) enters into a transaction with the organization, such transaction will be closely scrutinized in light of the fiduciary principle requiring undivided loyalty to ascertain whether the organization is in fact being operated for the stated exempt purposes.
For any income year beginning after December 31, 1950, any organization described in Section 23701d other than an organization described in Section 23736 shall not be exempt under Section 23701d if the amounts accumulated out of income during the income year or any prior income year, (including income years beginning prior to January 1, 1951), and not actually paid out for exempt purposes by the end of the income year are unreasonable. Amounts accumulated out of income become unreasonable when more income is accumulated than is needed, or when the duration of the accumulation is longer than is needed, in order to carry out the purpose constituting the basis for the organization's exemption. Furthermore, an organization shall not be exempt under Section 23701d if amounts accumulated out of income are used to a substantial degree for purposes or functions other than those constituting the basis for the organization's exemptions, or if such amounts are invested in such a manner as to jeopardize the carrying out of the purpose or function constituting the basis for the organization's exemption.
For the purpose of Section 23737, the term “income” means gains, profits, and income determined under the principles applicable in determining the earnings or profits of a corporation. The amount accumulated out of income during the income year or any prior income year shall be determined under the principles applicable in determining the accumulated earnings or profits of a corporation. In determining the reasonableness of an accumulation out of income, there will be disregarded the following: (1) the accumulation of gain upon the sale or exchange of a donated asset to the extent that such gain represents the excess of the fair market value of such asset when acquired by the organization over its substituted basis in the hands of the organization; (2) the accumulation of gain upon the sale or exchange of property held for the production of investment income, such as dividends, interest, and rents, where the proceeds of such sale or exchange are within a reasonable time reinvested in property acquired and held in good faith for the production of investment income.
Where the conditions specified in paragraphs (a), (b), and (c) of Section 23737 are present in any case must be determined from all the facts. The conditions specified in Section 23737 may result from the use of only one organization or of a chain of two or more organizations.
An organization that has lost its exempt status by reason of the provisions of Section 23737 may, in order to re-establish its exemption, file a claim for exemption with the Franchise Tax Board. Form 190, the exemption application, a copy of which may be obtained from any branch office, shall be used for this purpose. The claim for exemption must contain or be accompanied by information or evidence showing that the circumstances that caused the loss of exemption under Section 23737 no longer exist, and an affidavit, by a principal officer of such organization authorized to make such affidavit, that the organization will not knowingly again violate the terms of Section 23737. See Section 23701 for proof of exemption requirements in general. The provisions of Section 23737 contemplate that an organization denied exemption thereunder will be subject to taxation for at least one full income year. For the purpose of this regulation, the term “income year” means the established annual accounting period of the organization next succeeding the year in which the transaction occurred; or, if the organization has no such established annual accounting period, the “income year” of the organization means the calendar year next succeeding the year in which the transaction occurred.
In the case of an organization denied exemption under Section 23701d solely by reason of the provisions of Section 23737, deductions otherwise allowable under Sections 24357 to 24359, inclusive, for gifts or contributions to such organizations shall not be disallowed.

* This regulation is substantially the same as Section 29.3814-1, Fed. Reg. 111.
Article 3. Returns, Revocation and Suspension of Exempt Organizations
§23771. Unrelated Business Income Returns--Exempt Organizations.
Note     •     History

(a) Every organization or trust which is otherwise exempt under Section 23701, except quasi-governmental organizations which are controlled by the state, shall make a return on Form 109 for each taxable year if it has gross income, including in computing unrelated business taxable income for such taxable year, of $1,000 or more. The filing of a return of unrelated business income does not relieve the organization of the duty of filing other required returns.
(b) For calendar years prior to 1971 subdivision (a) is only applicable to organizations described in Sections 23701a, 23701d, 23701e, 23701n and 23701h (where income is payable to an organization which is subject to the tax or to a church or to a convention or association of churches).
(c) Subdivision (a) is applicable to churches only for calendar year 1970, and subsequent years.
(d) Deferred compensation plans exempt under Section 17631 which have unrelated business income of $1,000 or more are required to file Form 109 for accounting periods ending December 1971, and subsequent.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Sections 23701, 23701a, 23732-23734, 23734a, 23735, 23771, 23772, 23774-23778, Revenue and Taxation Code.
HISTORY

1. New Article 3 (Regs. 23771 and 23772.5) filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Repealer of Article 3 (Regs. 23771 and 23772.5) and new Article 3 (Regs. 23771, 23772-23774, 23775-23778) filed 7-13-73; effective thirtieth day thereafter (Register 73, No. 28).
§23772. Information Returns and Statements.
Note     •     History

Exempt Organizations.
(a) For income years ending December 31, 1971, and subsequent years, all exempt organizations or trusts and nonexempt trusts treated as a private foundation because of Internal Revenue Code section 4947(a)(1) must file a Form 199 (Exempt Organization Annual Information Return).
(1) A completed Form 199 is required from any organization, except:
(A) A church, an interchurch organization of local units of a church, a convention or association of churches, or an integrated auxiliary of a church such as a men's or women's organization, religious school, mission society, or youth group;
(B) An exclusively religious activity of any religious order;
(C) An organization (other than a private foundation) the gross receipts of which in each taxable year are normally not more than $25,000 (as described in subsection (i));
(D) A mission society sponsored by or affiliated with one or more churches or church denominations, more than one-half of the activities of which society are conducted in, or directed at persons in, foreign countries;
(E) Nonprofit exempt quasi-governmental organizations formed to carry out a function of the State or a public body, that are carrying out that function and are controlled by the State or a public body. Such an organization must have been formed to support a function of the State, county, city or other political body, it must be operating for this purpose and the majority of the directors must be under the control of the State or appropriate political body. Upon dissolution, the assets must be turned over to the State, county, city, or other political body.

Note: A stock bonus, pension or profit-sharing trust exempt under Revenue and Taxation Code section 17631 is not required to file Form 199. However, unrelated business income of $1,000 or more requires the filing of Form 109. (See Revenue and Taxation Code section 18506.)
(2)(A) The information required to be furnished by each organization required to file Form 199 is:
1. Its gross sales and receipts from all sources during the year, except dues and contributions set out in clauses 2. and 3. below. For this purpose, gross receipts includes tax exempt income. The cost of goods sold and the cost or other basis and sales expenses of assets will be shown and subtracted from the above to arrive at gross income.
2. Gross dues and assessments from members and affiliates for the year. Social or recreational clubs must furnish additional information on source of receipts.
3. The total of the contributions, gifts, grants and similar amounts received during the taxable year.
4. Gross receipts for filing requirements.
5. Its expenses incurred within the year attributable to gross income.
6. Its disbursements (including prior years' accumulations) made within the year for the purposes for which it is exempt.
7. Increase or decrease in net worth.
8. The total assets and liabilities at the beginning and end of the year.
9. Information on legislative and political activities.
10. Other information that may be found necessary to insure that the organization is operating in an exempt manner.
11. For additional information required to be furnished by private foundations, see subparagraphs (B) and (C) below.
(B) Alternative detailed reporting requirements.
1. Any organization, including a private foundation, that is required to complete Part II of Form 199 can comply fully with its reporting requirements by completing page 1 of the Form 199 and paying $10.00 filing fee, if required, and:
(I) Attaching a completed copy of the current Registry of Charitable Trusts Report CT-2; or
(II) Attaching a completed copy of Federal Form 990 which includes Part I, II, and any required schedules. In the case of private foundations with assets of $5,000 or more, at any time during its accounting period, must furnish a copy of the annual report of private foundation (Federal Form 990A-R or substitute report) filed with the Internal Revenue Services; or
(III) In case of a labor organization, a copy of Labor Department Form LM-3 may be attached.
(C) Special rules for organizations which are required to complete Part II of Form 199 but which do not use alternative detailed reporting requirements permitted in subparagraph (B) above.
1. An itemized schedule must be attached to Form 199 if money, securities or other property of $5,000 or more is received as a contribution gift or grant directly or indirectly from one person during the year showing name, address, date received and total amount received from such person. In the case of a private foundation (as defined in Internal Revenue Code Section 509(a)), the names and addresses of all persons who became substantial contributors (as defined in Internal Revenue Code section 507(d)(2)) during the taxable year shall be furnished.
(I) An organization described in Revenue and Taxation Code section 23701d which meets the 33 1/3 percent-of-support test of the regulations under Internal Revenue Code section 170(b)(1)(A)(vi) (without regard to whether such organization otherwise qualifies as an organization described in Internal Revenue Code section 170(b)(1)(A) I.R.C.) is required to provide the name and address of a person who contributed, bequeathed or devised $5,000 or more during the year only if this amount is in excess of 2 percent of the total contributions, bequests and devises received by the organization during the year.
(II) An organization other than a private foundation is required to report only the names and addresses of contributors of whom it has actual knowledge. For instance, an organization need not require an employer who withholds contributions from the compensation of employees and pays over to the organization periodically the total amounts withheld, to specify the amounts paid over with respect to a particular employee. In such case, unless the organization has actual knowledge that a particular employee gave more than $5,000 (and in excess of 2 percent if 1. of this subdivision is applicable), the organization need report only the name and address of the employer, and the total amount paid over by him.
(III) Separate and independent gifts made by one person in a particular year need be aggregated to determine if his contributions and bequests exceed $5,000 (and in excess of 2 percent if 1. of this subsection is applicable), only if such gifts are of $1,000 or more.
(IV) Organizations described in Revenue and Taxation Code sections 23701b or 23701l and organizations described in Revenue and Taxation Code section 23701g that receive contributions or bequests to be used exclusively for purposes described in Revenue and Taxation Code section 17214(d) must attach a schedule with respect to all gifts which aggregate more than $1,000 from any one person, showing the name of the donor, the amount of the contribution or bequest, the specific purpose for which such amount was received, and the specific use to which such amount was put. In the case of an amount set aside for such purposes, the organization shall indicate the manner in which such amount is held (for instance, whether such amount is commingled with amounts held for other purposes). If the contribution or bequest was transferred to another organization, the schedule must include the name of the transferee organization, a description of the nature of such organization, and a description of the relationship between the transferee and transferor organizations. Such organizations must also attach a statement showing the total dollar amount of contributions and bequests which are $1,000 or less received for such purposes.
2. Attach a schedule detailing the gross amount received from the sale of assets, including inventory items.
3. Attach a schedule itemizing other income, except contributions, gifts and grants.
4. Attach a schedule showing amount of:
(I) Death, sickness, hospitalization or disability benefits;
(II) Unemployment compensation benefits; and
(III) Other benefits (state nature) paid out.
5. Attach schedule for officers, directors, trustees or individuals having similar responsibilities, showing name, address, social security number, compensation and time devoted to position, and in the case of a private foundation, all persons who are foundation managers, within the meaning of Internal Revenue Code section 4946(b)(1). Organizations described in Revenue and Taxation Code section 23701d must also attach a schedule showing the names and addresses of the five employees (if any) who received the greatest amount of annual compensation in excess of $30,000 and amounts received; the total number of other employees who received annual compensation in excess of $30,000; the names and addresses of the five independent contractors (if any) who performed personal services of a professional nature for the organization (such as attorneys, accountants, and doctors, whether such services are performed by such persons in their individual capacity or as employees of a professional service corporation) and who received in excess of $30,000, from the organization for the year for the performance of such services; and the total number of other such independent contractors who received in excess of $30,000 for the year for the performance of such services.
6. Attach schedules to explain depreciation (or depletion), other expenses, and to explain items on balance sheet where requested in Part II of Form 199.
(b) Accounting Period for Filing Return or Statement. A return on Form 199 shall be filed on the basis of the established annual accounting period of the organization. If the organization has no established accounting period, the return shall be filed on the basis of the calendar year.
(c) Returns When Exempt Status not Established. Where an organization has a reasonable claim for exemption and submits an exemption application prior to the time a taxable return is due, if it does not appear that the exemption will be denied, an exempt return may be submitted within ten days of the due date even if the Franchise Tax Board has not yet issued an exempt determination letter. If the exemption should be denied at a later time, the above action should be reasonable grounds for filing a late taxable return. In other cases, a taxable return should be submitted on or before the due date with a payment for any tax that is due.
(d) Group Returns.
(1) A group return may be filed by a central organization (for the purposes of this subsection, this includes a parent, state, district, or similar type organization) for its subordinate organizations (for the purposes of this subsection, this includes a branch, local or similar organization) none of which are private foundations, provided the subordinate organizations:
(A) are affiliated with the central organization at the close of the central organization's annual accounting period;
(B) are subject to the general supervision and control of the central organization; and
(C) do not have unrelated trade or business income in excess of $1,000.
1. The group return shall consist of the following:
(I) a completed annual return or statement for the central organization;
(II) a list of names, current addresses and corporate or association numbers of the qualified subordinates which are to be included in the group return; and
(III) any additional information which may be required by the Franchise Tax Board.
2. After the initial group return is filed, Item 1.(II) above may be replaced by a list to include only:
(I) subordinates that were added;
(II) subordinates deleted; or
(III) a statement of no change from the previous year's report.
3. If the central organization has not been issued a group exemption letter, it must secure a group exemption determination from the Franchise Tax Board to cover its subordinates before a group return may be filed. The Franchise Tax Board may determine the requirements for a group exemption.
4. If the central organization has previously been issued a group exemption letter, all new subordinate organizations formed during the year must be identified on the roster. 
5. A group return may be submitted by central church associations for subordinate churches or church associated groups that are permitted to file the exempt organization annual information statement. Schedules required in 1.(II) above must be attached to the information statement submitted by the parent church. Any subordinate having more than $1,000 of unrelated trade or business may not be included in the group report.
(e) Time and Place for Filing. The annual return on Form 199 shall be filed on or before the 15th day of the fifth month (4 1/2 months) following the close of the annual accounting period for which the return is required to be filed. The annual return on Form 565 required to be filed by a religious or apostolic association or corporation shall be attached to Form 199. Each such return shall be filed in accordance with the instructions applicable thereto.
(f) Payment of Filing Fee. All organizations required to file Form 199 (including group returns), except those described below, must pay a $10.00 filing fee with Form 199. If payment is not made on or before the due date (or extended due date), the fee is $25.00 unless there is reasonable cause for late payment. Organizations required to file Form 199 but not required to pay the filing fee should check the appropriate box on Form 199. Organizations exempt under Revenue and Taxation Code section 23701d which are not required to pay a filing fee are described as follows:
(1) Exclusively religious organizations.
(2) An exclusively educational organization exempt under Revenue and Taxation Code section 23701d, if the organization normally maintains a regular faculty and curriculum and normally has a regularly organized body of pupils or students in attendance at the place where its educational activities are regularly carried on.
(3) An exclusively charitable organization, or an organization for the prevention of cruelty to children or animals, exempt as provided under Revenue and Taxation Code section 23701d, if the organization is supported, in whole or in part, by funds contributed by the United States or any state or political subdivision thereof, or is primarily supported by contributions of the general public.
(4) An organization exempt under Revenue and Taxation Code section 23701d, if the organization is operated, supervised, or controlled by or in connection with a religious organization.
(g) Penalties for Failure to File a Return. If an organization or trust required to file a Form 199 fails to file the return on or before the due date, it will have to pay $5.00 for each month, or part thereof, after the due date, not to exceed $40.00, until the form is filed, unless it can be shown that the failure was due to reasonable cause. In the case of a private foundation, the Franchise Tax Board may make written demand that such delinquent return or foundation report be filed within a reasonable time after notice of mailing such demand. The person failing to file (unless it can be shown to be due to reasonable cause) will have to pay $5.00 for each month, or part thereof, (not to exceed $25.00) after the period expires.
(h) Records, Statements, and Other Returns of Tax-Exempt Organizations. Every organization which is exempt from tax, whether or not it is required to file an annual information return or statement shall submit such additional information as may be required by the Franchise Tax Board for the purpose of inquiring into its exempt status and administering the provisions of Chapter 4 of the Corporation Tax Law. (See Revenue and Taxation Code section 23701 and the regulations thereunder with respect to the authority of the Franchise Tax Board to require such additional information, and with respect to the books of account or records to be kept by such organizations.)
(i) Definitions. For the purposes of this regulation, the following definitions are applicable:
(1) Gross receipts of an organization are normally not more than $25,000 if--
(A) In the case of an organization which has been in existence for 1 year or less, the organization has received, or donors have pledged to give, gross receipts of $37,500 or less during the first taxable year of the organization,
(B) In the case of an organization which has been in existence for more than one but less than 3 years, the average of the gross receipts received by the organization in its first 2 taxable years is $30,000 or less, and
(C) In the case of an organization which has been in existence for 3 years or more, the average of the gross receipts received by the organization in the immediately preceding 3 taxable years, including the year for which the return would be required to be filed, is $25,000 or less.
(2) “Gross Receipts” means the gross amount received by the organization during its annual accounting period from all sources, without reduction for any costs or expenses. Gross receipts include, for example, cost of goods or assets sold, cost of operations, and expenses of earning, raising, or collecting such amounts. Thus “gross receipts” includes but is not limited to:
(A) the gross amount received as contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting such amounts,
(B) the gross amount received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of such amounts,
(C) gross sales or receipts from business activities (including business activities unrelated to the purpose for which the organization qualified for exemption), the net income or less from which may be required to be reported on Form 109,
(D) the gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale, and
(E) the gross amount received as investment income, such as interest, dividends, rents, and royalties.

Note: Gross receipts of local lodges do not include funds collected for insurance premiums of members by local lodges and thereafter remitted to the home or parent office in connection with benefit contracts issued by the home office.
(j) Unrelated Business Income Tax Returns. In addition to the foregoing requirements of this section, most organizations otherwise exempt from tax under Revenue and Taxation Code section 23701 are subject to tax on unrelated business taxable income and also required to file returns on Form 109 if they receive such income. (See Revenue and Taxation Code section 23731 and regulations thereunder.)
(k) This regulation shall be applied to income years beginning on or after January 1, 1986, except that paragraph (1) of subsection (i) and subparagraph (C) of paragraph (1) of subsection (a) shall be applied to income years beginning on or after January 1, 1982; subsection (f) and clause (i) of subparagraph (B) of paragraph (3) of subsection (a) shall be applied with respect to fees imposed on or after July 1, 1983; and subparagraph (A) of paragraph (1) of subsection (a) shall be applicable to filings made on or after January 1, 1984.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 23772, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (d) filed 12-20-74 as an emergency; effective upon filing (Register 74, No. 51).
2. Certificate of Compliance filed 2-21-75 (Register 75, No. 8).
3. Renumbering and amendment of Section 23772-23774 to Section 23772 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
4. Amendment filed 6-9-86; effective thirtieth day thereafter (Register 86, No. 26).
5. Amendment filed 8-25-88; operative 9-24-88 (Register 88, No. 36).
6. Change without regulatory effect amending subsection (a)(1)(E) and amending Note filed 7-28-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 31).
7. Amendment filed 3-19-2009; operative 4-18-2009 (Register 2009, No. 12).
§23775. Suspension of Exempt Corporate Status.
Note     •     History

(a) The corporate powers, rights and privileges of an exempt domestic corporation may be suspended and the exercise of corporate powers, rights and privileges of a foreign exempt corporation in this state may be forfeited if the organization fails to--
(1) File an annual return (Form 199) required under Section 23772 on or before the close of the last day of the 12th month following the close of the income year.
(2) Pay any amount due under Section 23703 or 23772 on or before the close of the last day of the 12th month following the close of the income year.
(3) File a return or notify the Franchise Tax Board of its annual accounting period within nine months after its date of incorporation or qualification.
(b) Corporations will normally receive at least one notice of their delinquency before suspension is effected. However, there is no legal requirement that such notice be sent to or received by the organization.
(c) A suspended or forfeited corporation cannot exercise any of the corporate powers, other than to set forth a new name by amending its articles of incorporation. Thus, a suspended or forfeited corporation may not prosecute or defend an action at law or in equity, but may obtain a continuance to permit revivor to be accomplished. The exemption of a suspended corporation that continues to operate (other than for winding up) may be revoked and the organization will be subject to at least the minimum tax under Section 23303.
(d) Evidence of suspension or forfeiture is in the form of a list issued by the Franchise Tax Board and transmitted to the Secretary of State. The suspension or forfeiture is effective upon transmittal of said list to the Secretary of State. Also, a notice of suspension is normally mailed to the last known address of the corporation by the Franchise Tax Board.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Sections 23775, 23301.5 and 23302, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (a)(1) filed 8-25-88; operative 9-24-88 (Register 88, No. 36).
§23776. Relief from Suspension Imposed Under Section 23775.
Note     •     History

(a) Any corporation that was suspended under the provisions of Section 23775 may be relieved therefrom upon the filing of:
(1) A new application for exemption and payment of the ten-dollar ($10) application fee; and
(2) An application for revivor; and
(3) Any information returns, notifications, or amounts due under Sections 23772 or 23775 which was not previously submitted or paid and which resulted in the suspension or forfeiture; and
(4) Any information return and amounts specified under Section 23772 for each year or part thereof during the period of suspension in which the organization conducted any activities or received income, grants, gifts, or other assets. Where the exemption of the corporation was also revoked the minimum franchise tax will be due under Section 23303, unless there was reasonable cause for the deficiency which resulted in the revocation.
(b) Any corporation that was suspended or forfeited under Section 23775 may be revived as indicated in (a) above:
(1) For corporations formed in the last year and suspended for failure to elect an accounting period only a certificate of revivor, the front page of the exemption application (FTB 3500) with the $10.00 revivor fee is normally required. However, if a return or statement is overdue or will be due within two weeks, it must be enclosed, with appropriate filing fee and penalties.
(2) For other corporations formed or granted exemption in 1968 or subsequent years, abbreviated information may be furnished to support the exemption application. (Include application for revivor.)
(A) Complete page one of the exemption application and the appropriate question number 11 through 21.
(B) Do not include a copy of the articles of incorporation, but include any amendments made after the exemption letter was issued. A xerox copy is satisfactory so long as Secretary of State's endorsed stamp is shown.
(C) Include a copy of current by-laws.
(D) Furnish a statement of all significant activities conducted by the organization during the last three years.
(E) Submit any returns, reports, or statements for accounting periods ending in 1970 and subsequent years that have not previously been filed. Also include filing fees or fees resulting from Registrar of Charitable Trusts actions that have not previously been paid.
(i) Any time a Form 199 is submitted late or was submitted on time without filing fees the filing fee is increased from $10.00 to $25.00. Therefore, any old returns or reports submitted should normally include a $25.00 fee. If a return or report was submitted without a fee or a minimum tax assessment was made under Section 23703, the organization should have notice of the amount due.
(ii) Where a Form 199 is due for December, 1971, or subsequent, a penalty of $5.00 a month not exceeding $40.00 is due unless there is reasonable cause for the late filing of the report.
(3) Corporations formed or granted an exemption prior to 1968 must furnish any additional information required by page two of the exemption application in addition to a copy of the articles of incorporation. An exception can be made to submission of articles of incorporation if they have been furnished to the Franchise Tax Board subsequent to the granting of exemption.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23776, Revenue and Taxation Code.
HISTORY

1. Amendment filed 8-25-88; operative 9-24-88 (Register 88, No. 36).
§23777. Revocation of Exempt Status.
Note     •     History

(a) The exemption granted to any organization or trust under Section 23701 may be revoked if the organization fails to:
(1) File an annual return (Form 199) required under Section 23772 on or before the close of the last day of the 12th month following the close of the income year.
(2) Pay any amount due under Section 23703 or 23772 on or before the close of the last day of the 12th month following the close of the income year.
(3) Confine its activities to those permitted by the section under which the exemption was granted.
(b) Corporations that fail to elect an accounting period, to file returns or statements on time or pay amounts due on time will normally be suspended under the provisions of Section 23775.
(c) Unincorporated associations or trusts that are believed to be active that fail to file returns or statements on time or pay amounts due on time will have their exemptions revoked under Section 23777.
(d) Where unincorporated associations or trusts become inactive or terminated prior to the due date of a report or a filing fee, the organization will normally be made inactive on the Franchise Tax Board files rather than being revoked and made a taxable organization. The organization or its parent (if there is one) must submit a notice of inactivity of the organization prior to the date the revocation is authorized.
(e) Any organization that is revoked for the conduct of improper activities will be taxable as a taxable corporation or trust so long as exempt status is not reestablished.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23777, Revenue and Taxation Code.
HISTORY

1. Amendment of subsection (a)(1) filed 8-25-88; operative 9-24-88 (Register 88,No. 36).
§23778. Relief from Revocation of Exempt Status.
Note     •     History

(a) An organization whose exemption was revoked under Section 23777 may reestablish itself as an exempt organization upon the filing of:
(1) A new application for exemption and payment of the twenty-five dollar ($25) filing fee required under Section 23701; and
(2) Any information returns, statements, notifications, or amounts due under Section 23772, 23774 or 23775 which were not previously submitted or paid which resulted in the revocation; and
(3) When revocation occurred because of the conduct of improper activities of the organization, satisfactory proof must be furnished that the improper activities have ceased and that the organization will operate in an exempt manner in the future and the payment of any tax due for the period it operated as a taxable organization.
(b) Where the organization or trust was granted an exemption in 1968 or subsequent years, abbreviated information may be furnished to support the exemption application if the revocation occurred for failure to submit a return or statement or to pay an annual filing fee.
(1) Complete page one of the application and the appropriate question number 11 through 21.
(2) Do not furnish a copy of the constitution or bylaws or trust document unless they have been revised after exemption was granted.
(3) Furnish a statement of all significant activities conducted during the last three years.
(4) Submit any returns, or statements, or filing fees, or assessments made under Section 23703 that have not been submitted that resulted in the revocation. Any time a $10.00 filing fee is due and it will be paid late, it is automatically increased to $25.00.
(5) Where a Form 199 must be submitted for December, 1971, or later, a penalty of $5.00 a month not exceeding $40.00 is due unless there is a reasonable cause for the late filing of the report.
(c) Organizations or trusts which were granted an exemption prior to 1968 should furnish all the information required on page two of the exemption application, including the information requested in subdivision (b) above.
(d) Organizations whose exemption was revoked for improper activities must include a copy of the revocation letter, a detailed statement as to the change of activities, and a description of action that has been taken to prevent the reoccurrence of the improper activities in addition to all the information required on the exemption application. Copies of any income tax returns submitted during the period the organization was taxable (not to exceed the three latest years) must be submitted.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 23778, Revenue and Taxation Code.
HISTORY

1. Amendment of subsections (a)(1) and (b)(4) filed 8-25-88; operative 9-24-88 (Register 88, No. 36).
Subchapter 5. Computation of Tax When Law Changed [Repealed]
NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Regular and new Reg. 24251 filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Repealer of Group 5 (Section 24251) filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
Subchapter 6. Gross Income
Article 1. Definitions
§24271(a). Gross Income. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New Article 1 (Regs. 24271(a)-24271(h), 24273(a), 24273(b), 24273.5) filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24271(b). Gross Income Derived from Business. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24271(c). Gross Income of Farming Corporations. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24271(d). *  Gains Derived from Dealings in Property.

(1) In General. Gain realized on the sale or exchange of property is included in gross income, unless excluded by law. For this purpose property includes tangible items, such as a building, and intangible items, such as goodwill. Generally, the gain is the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged. The specific rules for computing the amount of gain or loss are contained in Section 24901 and the regulations thereunder. When a part of a larger property is sold, the cost or other basis of the entire property shall be equitably apportioned among the several parts, and the gain realized or loss sustained on the part of the entire property sold is the difference between the selling price and the cost or other basis allocated to such part. The sale of each part is treated as a separate transaction and gain or loss shall be computed separately on each part. Thus, gain or loss shall be determined at the time of sale of each part and not deferred until the entire property has been disposed of. This rule may be illustrated by the following examples
EXAMPLE (1).
Corporation A acquires a 10-acre tract for $10,000, which it divides into 20 lots. The $10,000 cost must be equitably apportioned among the lots so that on the sale of each, Corporation A can determine its taxable gain or deductible loss. 
EXAMPLE (2).
Corporation B purchases for $25,000 property consisting of a used car lot and adjoining filling station. At the time, the fair market value of the filling station is $15,000 and the fair market value of the used car lot is $10,000. Five years later Corporation B sells the filling station for $20,000 at a time when $2,000 has been properly allowed as a depreciation thereon. Corporation B's gain on this sale is $7,000, since $7,000 is the amount by which the selling price of the filling station exceeds the portion of the cost equitably allocable to the filling station at the time of purchase reduced by the depreciation properly allowed.
(2) Nontaxable Exchanges. Certain realized gains or losses on the sale or exchange of property are not “recognized,” that is, are not included in or deducted from gross income at the time the transaction occurs. Gain or loss from such sales or exchanges is generally recognized at some later time. Examples of such sales or exchanges are the following:
(A) Certain formations, reorganizations, and liquidations of corporations, see Sections 24501, 24503, 24512, 24513, 24514, 24521, 24531, 24532, 24533, and 24551.
(B) Exchange of certain property held for productive use or investment for property of like kind, see Section 24941;
(C) Certain involuntary conversions of property, if replaced, see Sections 24943 through 24949.2;
(D) Certain exchanges of insurance policies and annuity contracts, see Section 24950; and
(E) Certain exchanges of stock for stock in the same corporation, see Section 24951.

* Except for provisions relating to capital assets, this regulation is substantially the same as Section 26 CFR 1.61-6.
§24271(e). **  Interest.

(1) In General. As a general rule, interest received by or credited to the taxpayer constitutes gross income and is fully taxable. Interest income includes interest on savings or other bank deposits; interest on coupon bonds; interest on an open account, a promissory note, a mortgage, or a corporate bond or debenture; the interest portion of a condemnation award; usurious interest (unless by State law it is automatically converted to a payment on the principal); interest on legacies; interest on life insurance proceeds held under an agreement to pay interest thereon; and interest on refunds of State or Federal taxes. For rules determining the income year in which interest, including interest accrued or constructively received, is included in gross income, see Section 24661 and the regulations thereunder.
(2)(A) Interest on Governmental Obligations--Chapter 2. Interest received from federal, state, municipal or other bonds is includible in the gross income of taxpayers taxable under Chapter 2. Since the tax imposed under Chapter 2 is a privilege tax for the right to exercise the corporate franchise, it is not a tax upon such income, but merely uses such income of the preceding year as a measure of the tax for the privilege of exercising the corporate franchise during the taxable year. See Section 24272.
(B) Interest on Government Obligations--Chapter 3. Interest on bonds and other obligations of the United States, the District of Columbia, and territories of the United States is exempt from state taxation under the Constitution and the laws of the United States. Interest upon bonds of this State or its political subdivisions issued after November 4, 1902 is exempt from state taxation under the State Constitution.
Interest received or accrued on warrants, judgments, claims for refund, etc., and similar obligations of California, its subdivisions, or the United States and its territories is not exempt from tax. Interest on all bonds and obligations of other states and foreign countries, including those of the Philippines, the commonwealth of the Philippines or the political subdivisions thereof issued on or after March 24, 1934, is also subject to tax.
Although interest on bonds and obligations of the United States is exempt from taxation, gains and profits from the sale or other disposition of such bonds and obligations are taxable to the same extent as gains and profits from the sale or exchange of other property.
(3) Obligations Bought at a Discount; Bonds Bought When Interest Defaulted or Accrued. When notes, bonds, or other certificates of indebtedness are issued by a corporation at a discount and are later redeemed by the debtor at the face amount, the original discount is interest, except as otherwise provided by law. If a taxpayer purchases bonds when interest has been defaulted or when the interest has accrued but has not been paid, any interest which is in arrears but has accrued at the time of purchase is not income and is not taxable as interest if subsequently paid. Such payments are returns of capital which reduce the remaining cost basis. Interest which accrues after the date of purchase, however, is taxable interest income for the year in which received or accrued (depending on the method of accounting used by the taxpayer).
(4) Bonds Sold Between Interest Dates; Amounts Received in Excess of Original Issue Discount; Interest on Life Insurance. When bonds are sold between interest dates, part of the sales price represents interest accrued to the date of the sale and must be reported as interest income.

** Except for paragraph (2) and the provisions in paragraph (4) relating to individuals, this regulation is substantially the same as Section 26 CFR 1.61-7.
§24271(f). Rents and Royalties.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24271(g). Dividends.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24271(h). *  Income from Discharge of Indebtedness.
Note     •     History

(1) Sale and Purchase by Corporation of its Bonds.
(A) If bonds are issued by a corporation at their face value, the corporation realizes no gain or loss. If the corporation purchases any of such bonds at a price in excess of the issuing price or face value, the excess of the purchase price over the issuing price or face value is a deductible expense of the income year. If, however, the corporation purchases any of such bonds at a price less than the issuing price or face value, the excess of the issuing price or face value over the purchase price is income for the income year. 
(B) If subsequent to December 31, 1927, in the case of taxpayers subject to Chapter 2 or December 31, 1936, in the case of taxpayers subject to Chapter 3, bonds are issued by a corporation at a premium, the net amount of such premium is income which should be prorated or amortized over the life of the bonds. If the corporation purchases any of such bonds at a price in excess of the issuing price minus any amount of premium already returned as income, the excess of the purchase price over the issuing price minus any amount of premium already returned as income (or over the face value plus any amount of premium not yet returned as income) is a deductible expense for the income year. If, however, the corporation purchases any of such bonds at a price less than the issuing price minus any amount of premium already returned as income, the excess of the issuing price, minus any amount of premium already returned as income (or of the face value plus any amount of premium not yet returned as income), over the purchase price is income for the income year.
(C) If bonds are issued by a corporation at a discount, the net amount of such discount is deductible and should be prorated or amortized over the life of the bonds. If the corporation purchases any of such bonds at a price in excess of the issuing price plus any amount of discount already deducted, the excess of the purchase price over the issuing price plus any amount of discount already deducted (or over the face value minus any amount of discount not yet deducted) is a deductible expense for the income year. If, however, the corporation purchases any of such bonds at a price less than the issuing price plus any amount of discount already deducted, the excess of the issuing price, plus any amount of discount already deducted (or of the face value minus any amount of discount not yet deducted), over the purchase price is income for the income year.
(D) If bonds were issued by a corporation prior to January 1, 1928, in the case of taxpayers subject to Chapter 2, or January 1, 1937 in the case of taxpayers subject to Chapter 3, at a premium, the net amount of such premium was income for the year in which the bonds were issued and should not be prorated or amortized over the life of the bonds. If the corporation purchases any of such bonds at a price in excess of the face value of the bonds, the excess of the purchase price over the face value is a deductible expense for the income year. If, however, the corporation purchases any of such bonds at a price less than the face value, the excess of the face value over the purchase price is income for the income year.
NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer of subsections (1), (2) and (4), and renumbering of subsection (3) to subsection (1) filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).

*This regulation is substantially the same as Section 26 CFR 1.61-12.
§24272. Gross Income--Chapter 2.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Renumbered from Reg. 23851 in Subchapter 3 (Register 71, No. 2).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24273(a). *  Election to Consider Commodity Credit Corporation Loans As Income.

A taxpayer who receives a loan from the Commodity Credit Corporation may, at its election, include the amount of such loan in its gross income for the income year in which the loan is received. If a taxpayer makes such an election (or has made such an election under Sections 23854 and 23854.1 of the Bank and Corporation Tax Law of 1954), then for subsequent income years it shall include in its gross income all amounts received during those years as loans from the Commodity Credit Corporation, unless it secures the permission of the Franchise Tax Board to change to a different method of accounting. Application for permission to change such method of accounting and the basis upon which the return is made shall be filed with the Franchise Tax Board, 1025 P Street, Sacramento, California, within 90 days after the beginning of the income year to be covered by the return.

*This regulation is substantially the same as Section 26 CFR 1.77-1.
§24273(b). **  Effect of Election to Consider Commodity Credit Loans As Income.

(1) If a taxpayer elects or has elected under Section 23854 and 23854.1 of the Bank and Corporation Tax Law of 1954, to include in its gross income the amount of a loan from the Commodity Credit Corporation for the income year in which it is received, then--
(A) No part of the amount realized by the Commodity Credit Corporation upon the sale or other disposition of the commodity pledged for such loan shall be recognized as income to the taxpayer, unless the taxpayer receives an amount in addition to that advanced to it as the loan, in which event such additional amount shall be included in the gross income of the taxpayer for the income year in which it is received, and
(B) No deductible loss to the taxpayer shall be recognized on account of any deficiency realized by the Commodity Credit Corporation on such loan if the taxpayer was relieved from liability for such deficiency.
(2) The application of paragraph (1) of this regulation may be illustrated by the following example: 
EXAMPLE. Corporation A, a taxpayer who elected for its income year 1956 to include in gross income amounts received as loans from the Commodity Credit Corporation, received as loans $500 in 1956, $700 in 1957, and $900 in 1958. In 1960 all the pledged commodity was sold by the Commodity Credit Corporation for an amount $100 and $200 less than the loans with respect to the commodity pledged in 1956 and 1957, respectively, and for an amount $150 greater than the loan with the respect to the commodity pledged in 1958. Corporation A, in making its return for 1960, shall include in gross income the sum of $150 if it is received during that year, but will not be allowed a deduction for the deficiencies of $100 and $200 unless it is required to satisfy such deficiencies and does satisfy them during that year.

**This regulation is substantially the same as Section 26 CFR 1.77-2.
§24273.5. Patronage Dividends.

(a) Election to Consider as Income. A taxpayer which receives noncash patronage allocations (as defined in paragraph (f)) may elect to include such allocations in gross income for the income year received. If a taxpayer elects to include such noncash patronage allocations in gross income as received, their face amount shall be reported as gross income. If, upon redemption of noncash patronage allocations, the taxpayer does not and cannot recover the full amount of the allocations previously reported, any loss sustained may be deducted from gross income in the income year during which the allocations are redeemed.
(b) Election to Exclude from Gross Income. In lieu of reporting noncash patronage allocations, (as provided in paragraph (a)), a taxpayer may elect to exclude noncash patronage allocations (as defined in paragraph (f)), from gross income until redeemed or realized upon. In case noncash patronage allocations are excluded from gross income, only the amount realized when redeemed is required to be included in gross income. If such allocations bear interest, the interest is not includible in gross income until the allocations are redeemed or realized upon, unless prior to redemption interest thereon is paid in cash. For the method of electing to exclude noncash patronage allocations, see paragraph (c).
(c) Elections. If a taxpayer includes in its gross income, for its first income year beginning after December 31, 1956, any amount attributable to noncash patronage allocations, it shall be deemed to have elected to include the face amount of such allocations in gross income for such year and all subsequent income years. Furthermore, a taxpayer shall be deemed to have elected to include all noncash allocations in gross income, if less than the face amount of such allocations are reported, or if noncash allocations have been received from more than one cooperative organization and allocations attributable to one or more cooperatives were included in gross income.
A taxpayer shall be deemed to have elected to exclude noncash patronage allocations from gross income if it omits the amount of such allocations from gross income for the first income year beginning after December 31, 1956, during which any noncash patronage allocations are received. The amount of patronage allocations which are excluded must be disclosed in the return or by a written statement filed with the returns. If such written statement has not previously been filed, it must be filed before a taxpayer will be permitted to exclude noncash patronage allocations from gross income.
The elections provided for by this paragraph may be made, regardless of the taxpayer's method of accounting. Once an election has been made, it may be changed only with the consent of the Franchise Tax Board. Application for permission to change an election shall be filed within 90 days after the beginning of the income year to be covered by the return.
(d) Statute of Limitations. Whenever a taxpayer has elected to exclude noncash patronage allocations from gross income until such allocations are redeemed or realized upon, the statutory period prescribed in Section 25663 for the assessment of any deficiency attributable to amounts excluded will not expire prior to the expiration of four years from the date the Franchise Tax Board is notified by the taxpayer that such deferred allocations have been redeemed or realized upon. Such deficiency may be assessed prior to the expiration of such four-year period notwithstanding the provisions of any other law or rule of law which might bar such assessment.
A taxpayer shall notify the Franchise Tax Board that deferred noncash patronage allocations have been realized or redeemed by including the amount of such allocations in gross income for the income year that such amounts are redeemed or realized upon.
(e) Records. A taxpayer electing to exclude noncash patronage allocations from gross income for the year that such allocations are made must maintain such records as are necessary to clearly reflect income in accordance with this regulation, Section 17561, and Reg. 17561(a).
(f) Noncash Patronage Allocations Defined. For purposes of this regulation the term “noncash patronage allocations” means amounts allocated on the basis of the business done with or for a patron by any cooperative organization, other than cash or merchandise, evidenced by any document which discloses the dollar amount of such allocations, such as capital stock, revolving fund certificates, certificates of indebtedness, retain certificates, or letters of advice.
Article 2. Exclusions
§24302. Life Insurance Payments Made Other Than by Reason of Death of Insured.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Renumbered from Reg. 23881b in Subchapter 3 (Register 71, No. 2).
2. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
§24305. *  Life Insurance Payments Made by Reason of Death of Insured.
History

The proceeds of life insurance policies, paid by reason of the death of the insured to any corporate beneficiary, directly or in trust, shall be excluded from the gross income of the beneficiary. It is immaterial whether the proceeds are received in a single sum or in installments. If, however, such proceeds are held by the insurer under an agreement to pay interest thereon, the interest payments must be included in gross income.
HISTORY

1. Renumbered from Reg. 23881a in Subchapter 3 (Register 71, No. 2).

*Compare Section 29.22(b)(1)-1, Fed. Reg. III.
§24307(a). Income from Discharge of Indebtedness.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24307, Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-19-69; effective thirtieth day thereafter (Register 69, No. 38).
2. Change without regulatory effect repealing Section 24307(a) filed 9-19-88 (Register 88, No. 40).
§24307(b). Making and Filing of Consent.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24307, Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-19-69; effective thirtieth day thereafter (Register 69, No. 38).
2. Change without regulatory effect repealing Section 24307(b) filed 9-19-88 (Register 88, No. 40).
§24307(c). Income from Discharge of Indebtedness of Railroad Corporations.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24307, Revenue and Taxation Code.
HISTORY

1. Amendment filed 9-19-69; effective thirtieth day thereafter (Register 69, No. 38).
2. Change without regulatory effect repealing Section 24307(c) filed 9-19-88 (Register 88, No. 40). 
§24308. Cancellation of Indebtedness by Stockholder.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New Reg. 24308 filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24309. Exclusion from Gross Income of Lessor of Real Property of Value of Improvements Erected by Lessee.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 1-6-69; effective thirtieth day thereafter (Register 69, No. 2).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24310. Recovery of Certain Items Previously Deducted or Credited.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 9-19-69; effective thirtieth day thereafter (Register 69, No. 38).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
Subchapter 7. Net Income
Article 1. Deductions
§24343. Disallowance of Expenses Incurred at Private Clubs Which Discriminate.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. References cited: Sections 24343 and 24443-24446, Revenue and Taxation Code.
HISTORY

1. New section filed 9-1-87; operative 10-1-87 (Register 87, No. 37).
2. Change without regulatory effect repealing section filed 5-8-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 19).
§24344(a). *  Interest Deduction in General.
History

(1) Except as limited by Section 24344(b) and as otherwise provided in Sections 24424 to 24430, inclusive, interest paid or accrued within the income year on indebtedness shall be allowed as a deduction in computing net income.
(2) Section 24344(b) provides that if the income of the taxpayer is determined by the allocation formula contained in Section 25101, the interest deductible shall be an amount equal to interest income subject to allocation by formula, plus the amount, if any, by which the balance of interest expense exceeds interest and dividend income (except dividends deductible under the provisions of Section 24402) not subject to allocation by formula. Interest expense not included in the preceding sentence shall be directly offset against interest and dividend income (except dividends deductible under the provisions of Section 24402) not subject to allocation by formula.
(3) Interest calculated for costkeeping or other purposes on account of capital or surplus invested in the business which does not represent a charge arising under an interest-bearing obligation, is not an allowable deduction from gross income. Interest paid by a corporation on scrip dividends is an allowable deduction. So-called interest on preferred stock, which is in reality a dividend thereon, cannot be deducted in computing net income. In the case of banks and loan or trust companies, interest paid within the year on deposits, such as interest paid on moneys received for investment and secured by interest-bearing certificates of indebtedness issued by such bank or loan or trust company, may be deducted from gross income.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).

*Compare Section 26 CFR 1.163-1.
§24344(b). Deduction for Bond Discount.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24344(c). Offset of Interest Expense Incurred for Foreign Investment.
Note     •     History

(1) General. Revenue and Taxation Code section 24344 relates generally to the deductibility of interest expense. Revenue and Taxation Code section 24344, subdivision (c)(1), provides that interest expense allowable pursuant to Internal Revenue Code section 163 that is incurred for purposes of foreign investment may be offset against dividends deductible pursuant to Revenue and Taxation Code section 24411. Because all business activities require funds, and common ownership allows a business's management substantial flexibility both as to the source of funds and as to the use of funds, it is difficult if not impossible to specifically assign the cost of funds to specific activities. Normally, creditors of a taxpayer subject the money advanced to the taxpayer to the risk of the taxpayer's entire activities and look to the general credit of the taxpayer for payment of the debt. When money is borrowed for a specific purpose, such borrowing will generally free other funds for other purposes, and it is reasonable to attribute part of the cost of borrowing to such other purposes. Interest expense shall therefore be attributed to foreign investment pursuant to the rules set forth in subsection (3) of this regulation.
(2) Definitions.
(A) Foreign investment. 
1. Except as provided in subsection (2)(A)3. of this regulation, for purposes of this regulation foreign investment means stock or other equity investment, regardless of when it was made, in:
a. an entity whose dividends would be qualifying dividends for purposes of Revenue and Taxation Code section 24411, or
b. a nonaffiliated corporation which is organized under the laws of a country or political subdivision of a country other than the United States.
2. Foreign investment includes only that portion of the equity described in subsections (2)(A)1.a. and 1.b. of this regulation which is included in total assets pursuant to subsection (2)(C) of this regulation.
(B) Interest expense. Except as provided in subsection (2)(B)3. of this regulation, for purposes of this regulation, interest expense includes:
1. all allowable interest expense incurred or paid within the taxable year by a corporation included in a combined report by reason of Revenue and Taxation Code section 25110, subdivisions (a)(1), (2), (3) or (5), and
2. a portion of the interest expense incurred or paid within the taxable year by a corporation, a portion of whose net income and apportionment factors are included in a combined report by reference to Revenue and Taxation Code section 25110, subdivisions (a)(4), (6) or (7)(B).
a. For purposes of a corporation described in Revenue and Taxation Code section 25110, subdivisions (a)(4) or (7)(B), such portion will be the interest expense reflected on the books of account maintained with respect to the activities conducted within the United States.
b. For purposes of a corporation described in Revenue and Taxation Code section 25110, subdivision (a)(6), such portion shall bear the same relationship to its total interest expense as the portion of the income of such corporation taken into account under Revenue and Taxation Code section 25110 bears to its total income.
3. Notwithstanding subsections (2)(B)1. and 2. of this regulation, intercompany accounts of interest of a corporation in a second corporation will be eliminated from total interest expense to the extent that the second corporation is included in the combined report. In making such elimination, the provisions of California Code of Regulations, title 18, section 25106.5-1, will be followed.
(C) Total assets. Except as provided in subsection (2)(C)3. of this regulation, for purposes of this regulation “total assets” includes:
1. all of the assets of a corporation included in a combined report by reason of Revenue and Taxation Code section 25110, subdivisions (a)(1), (2), (3), or (5), and
2. a portion of the assets of a corporation, a portion of whose net income and apportionment factors are included in a combined report by reference to Revenue and Taxation Code section 25110, subdivision (a)(4), (6) or (7)(B).
a. For purposes of a corporation described in Revenue and Taxation Code section 25110, subdivisions (a)(4) or (7)(B), such portion will be the total assets reflected on the books of account maintained with respect to the activities conducted within the United States.
b. For purposes of a corporation described in Revenue and Taxation Code section 25110, subdivision (a)(6), such portion shall bear the same relationship to its total assets as the portion of the income of such corporation taken into account under Revenue and Taxation Code section 25110, bears to its total income.
3. Notwithstanding subsections (2)(C)1. and 2. of this regulation, intercompany accounts of assets, including equities, of a corporation in a second corporation will be eliminated from total assets to the extent that the second corporation is included in the combined report. In making such elimination the provisions of California Code of Regulations, title 18,  section 25106.5-1, will be followed.
4. Assets relating to both business and nonbusiness income will be considered in total assets.
(D) Member of the water's-edge group. A member of the water's-edge group is an entity which is described in Revenue and Taxation Code section 25110, subdivision (a), whose income and apportionment factors are to be taken into account in computing the taxpayer's income derived from or attributable to sources within California. Entities which are described in Revenue and Taxation Code section 25110 must be affiliated and, in general, include corporations incorporated in the United States, corporations incorporated without the United States but with 20 percent or more of the average of their property, payroll and sales in the United States, DISC's and FSC's, export trade corporations, foreign incorporated banks, or foreign corporations with less than 20 percent of the average of their property, payroll and sales in the United States to the extent such entities are within the United States or have Subpart F income. For a more specific description, see Revenue and Taxation Code section 25110 and the regulations adopted pursuant thereto.
(E) United States. For purposes of this section, the “United States” means each of the states of the United States and the District of Columbia.
(F) Dividends deductible under section 24411. For purposes of Revenue and Taxation Code section 24344, subdivision (c), “dividends deductible under section 24411” means the deduction calculated pursuant to Revenue and Taxation Code section 24411, subdivision (a). It does not mean qualifying dividends as used in Revenue and Taxation Code section 24411.
(G) Affiliated corporation. An “affiliated corporation” is a corporation that is a member of a commonly controlled group as defined by Revenue and Taxation Code section 25105.
EXAMPLE 1:
Corporation A owns 60% of Corporation B's voting stock and 30% of Corporation C's voting stock. Corporation B owns 30% of Corporation C's voting stock. A, B and C are affiliated. 
EXAMPLE 2:
Corporation A owns 40% of corporation B's voting stock and 30% of Corporation C's voting stock. Corporation B owns 60% of Corporation C's stock. A is not affiliated with B and C.
(3) Calculation of amount to be offset.
(A) Calculation of interest. The amount of interest expense attributable to foreign investment shall be equal to the amount of interest expense specifically assignable to foreign investment pursuant to subsection (4) of this regulation plus the amount of interest expense assigned to foreign investment pursuant to subsection (5) of this regulation, but in no event any amount greater than the total deduction allowed for the taxable year pursuant to Revenue and Taxation Code section 24411. If no deduction is allowed pursuant to Revenue and Taxation Code section 24411, no interest will be offset pursuant to Revenue and Taxation Code section 24344, subdivision (c).
(B) Amount of offset.
1. For taxable years beginning prior to January 1, 1997, the amount of interest expense calculated pursuant to subsection (3)(A) of this regulation shall be offset against the dividend deduction allowed pursuant to Revenue and Taxation Code section 24411, and shall not otherwise be taken into account in computing the taxpayer's net income derived from or attributable to sources within California.
2. For taxable years beginning on or after January 1, 1997, the amount of interest expense calculated pursuant to subsection (3)(A) shall be multiplied by the same percentage used to determine the dividend deduction pursuant to Revenue and Taxation Code section 24411, to determine the amount of interest that shall be offset against dividends deductible pursuant to section 24411, and that amount shall not otherwise be taken into account in computing the taxpayer's net income derived from or attributable to sources within California.
(C) Amount in excess of offset. To the extent interest expense assignable to foreign investment as calculated pursuant to subsections (4) and (5) of this regulation exceeds the total deduction allowed for the income year pursuant to Section 24411 of the Revenue and Taxation Code, it shall be subject to the applicable provisions of Revenue and Taxation Code section 24344.
EXAMPLE 1: Corporation A has interest expense of $100, of which $15 is assignable to foreign investment pursuant to subsections (4) and (5) of this regulation.
A receives qualifying dividends in the amount of $10 of which $7.50 ($10 x 75% = $7.50) is deductible pursuant to Revenue and Taxation Code Section 24411.
For taxable years beginning prior to January 1, 1997, the amount of interest offset pursuant to Revenue and Taxation Code section 24344, subdivision (c), shall be $7.50.
For taxable years beginning on or after January 1, 1997, the amount of interest offset pursuant to Revenue and Taxation Code section 24344(c) shall be $5.63.

	Qualifying dividends defined in Revenue and Taxation 
	 Code section 24411	$10
	Multiply by applicable section 24411 percentage	75%
	Equals dividends deductible under section 24411	$7.50
	Interest expenses assignable to foreign investments	$15
	Enter lesser of dividend deductible under section 24411 
	 or interest expense assignable to foreign investments	$7.50
	Multiply by applicable section 24411 percentage	75%
	Equals section 24344(c) foreign investment interest offset	$5.63
EXAMPLE 2. Assume the same facts as in Example 1, except Corporation A receives qualifying dividends of $30, of which $22.50 ($30 x 75% = $22.50) is deductible pursuant to Revenue and Taxation Code section 24411.
For taxable years beginning prior to January 1, 1997, the amount of interest expense pursuant to Revenue and Taxation Code section 24344, subdivision (c), shall be $15.
For taxable years beginning on or after January 1, 1997, the amount of interest offset pursuant to Revenue and Taxation Code section 24344, subdivision (c), shall be $11.25.

	Qualifying dividends defined in section 24411	$30
	Multiply by applicable section 24411 percentage	75%
	Equals dividends deductible under section 24411	$22.50
	Interest expenses assignable to foreign investments	$15
	Enter lesser of dividend deductible under section 24411 
	 or interest expense assignable to foreign investments	$15
	Multiply by applicable section 24411 percentage	75%
	Equals section 24344(c) foreign investment interest offset	$11.25
(4) Allocation of interest to specific property.
(A) If the existence of all of the facts and circumstances described below is established, interest expense shall be considered to be related solely to specific property which may be either a foreign investment or other property.
1. The indebtedness on which the interest was paid was specifically incurred for the purpose of purchasing, maintaining, or improving the specific property;
2. The proceeds of the borrowing were actually applied to the specified purpose; and,
3. The creditor can look only to the specific property (or any lease or other interest therein) as security for payment of the principal and interest of the loan and, thus, has no secured interest in any other property of the borrower or the borrower itself with respect to repayment of the loan.
Even though the above facts and circumstances are present in substance as well as in form, a deduction for interest shall not be considered definitely related to specific property where the motive for structuring the transaction in the manner described above was without any economic significance.
(B) Exclusion. Where an interest deduction is definitely related solely to specific property pursuant to subsection (4)(A) of this regulation, such interest deduction and such property, or the portion thereof to which such interest deduction relates, shall not be included in the allocation described in subsection (5) of this regulation.
(5) Otherwise unassigned interest expense attributable to foreign investment. The amount of unassigned interest expense attributable to foreign investment shall be calculated in the following manner.
(A) Otherwise unassigned interest. Otherwise unassigned interest expense shall be calculated by reducing total allowable interest expense by the amount specifically assigned pursuant to subsection (4) of this regulation.
(B) Interest expense paid on debt incurred prior to January 1, 1988. Otherwise unassigned interest expense paid on debt incurred prior to January 1, 1988 shall be assigned as follows:
1. Assignment to foreign investment. The amount calculated pursuant to subsection (5)(A) of this regulation shall be multiplied by the ratio of the value of foreign investment to the total value of all assets as determined pursuant to subsection (6) of this regulation.
2. Assets not considered. In calculating the ratio required by subsection (5)(B), foreign investment and assets to which interest expense has been specifically assigned pursuant to subsection (4) of this regulation shall not be considered.
EXAMPLE: Corporation A has total interest expense of $1,200. Specifically assigned interest expense is $200. A has foreign investments valued at $500 and total assets valued at $5,600. The $200 of specifically assigned interest expense relates to assets of $600, none of which is foreign investment. Corporation A receives qualifying dividends as defined by Revenue and Taxation Code section 24411 $50 of which $37.50 ($50 dividends x 75% = $37.50) is deductible.
The amount of unassigned interest expense attributable to foreign investment is calculated as follows: total interest expense--less specifically assigned interest expense = equals unassigned interest expense ($1,200 - $200 = $1,000). Unassigned interest expense multiplied by the ratio of the value of unassigned foreign investment to the value of unassigned total assets equals Interest Expense Assignable to foreign investment ($1,000 x ($500/$5,000) = $100). 
The amount of unassigned interest expense subject to offset against dividends deductible pursuant to Revenue and Taxation Code section 24411 is $100.
Only $37.50 of the qualifying dividends received was deductible pursuant to Revenue and Taxation Code section 24411. For taxable years beginning prior to January 1, 1997, the interest offset pursuant to Revenue and Taxation Code section 24344, subdivision (c), is limited to $37.50 (the lessor of the $100 interest expense assignable to foreign investment or $37.50 dividend deductible pursuant to Revenue and Taxation Code section 24411).
For taxable years beginning on or after January 1, 1997, the interest offset pursuant to Revenue and Taxation Code section 24344, subdivision (c), is limited to $28.13.

	Qualifying dividends defined in Revenue and Taxation 
	 Code section 24411	$50
	Multiply by applicable section 24411 percentage	75%
	Equals dividends deductible under section 24411	$37.50
	Interest expenses assignable to foreign investments	$100
	Enter lesser of dividend deductible under section 24411 
	 or interest expense assignable to foreign investments	$37.50
	Multiply by applicable section 24411 percentage	75%
	Equals section 24344(c) foreign investment interest offset	$28.13
(C) Interest expense paid on new debt incurred on or after January 1, 1988. Otherwise unassigned interest expense paid with respect to debt incurred on or after January 1, 1988 shall be assigned pursuant to subsection (5)(B) of this regulation except for interest expense paid with respect to the proceeds of debt which is paid into an account which is restricted as to its purpose so as to preclude its use for foreign investment and which account is not in fact used for foreign investment. Debt the majority of which was used to refinance debt incurred prior to January 1, 1988, or debt arising pursuant to a line of credit or similar account or arrangement, shall not be treated as debt incurred on or after January 1, 1988.
1. Use of funds deposited in such restricted account for purposes of foreign investment shall cause the account to be viewed as unrestricted only for the year in which such use occurs.
2. The transfer of funds to or through an unrestricted account or accounts from which proceeds are disbursed for purposes of foreign investment within 60 days, both prior to and subsequent to, of the transfer shall be disregarded and the disbursement shall be treated as being made from the restricted account and shall be subject to the provisions of subsection (5)(C)1. of this regulation.
(6) Asset value. A deduction for interest expense relates more closely to the amount of capital utilized or invested in an activity or property than to the gross income generated therefrom; therefore, the deduction for interest shall be apportioned on the basis of asset values.
(A) Assets other than stock or other equity investment. For purposes of this regulation, all assets other than stock in an affiliated corporation shall be taken into account at federal tax book value (original cost for federal tax purposes less depreciation, amortization or depletion allowed for such purposes).
(B) Stock or other equity investment. For purposes of this regulation, stock or other equity investment in an affiliated corporation shall be taken into account at its adjusted basis for federal tax purposes
1. increased by the amount of the earnings and profits of such corporation attributable to such stock or other equity investment and accumulated during the period the stock or other equity investment was owned by another affiliated corporation, or
2. reduced (but not below zero) by any deficit in earnings and profits of such bank or corporation attributable to such stock or other equity investment for such period.
(C) Average values of assets. For purposes of determining values of assets under subsection (6)(C) of this regulation, an average of values shall be computed for the year on the basis of values of assets at the beginning and end of the year. The Franchise Tax Board may permit or require the averaging of monthly values during the taxable year if reasonably required to reflect properly the average value of the assets of the corporation included in a combined report.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 24344, Revenue and Taxation Code.
HISTORY

1. New section filed 1-3-89; operative 1-3-89 (Register 89, No. 4).
2. Change without regulatory effect amending section and Note filed 3-12-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 11).
3. Amendment of subsections (2)(A)1.a. and (2)(G) filed 10-9-2002; operative 11-8-2002 (Register 2002, No. 41).
§24345-1. Deduction for Taxes or Licenses in General.
Note     •     History

(a) Taxes or licenses which may be deducted include ad valorem property taxes (but see Regulation 24345-2, respecting special assessments), automobile registration fees, city license fees, import or customs duties paid to federal customs officers, liquor or alcoholic beverage license fees, and other business, privilege or excise taxes paid to the United States or to a state. Postage is not a tax and may be deducted only insofar as it constitutes a business expense.
(b) Double deductions are not permitted. Accordingly, if taxes are deducted as a business expense or are added to the cost of the property with respect to which they are imposed, they may not be deducted separately as taxes.
(c) For income years beginning before January 1, 1961, taxes on property could be deducted only by the one owning the property, or in possession of the property under a contract to purchase at the time the taxes became a lien.
Generally, taxes on property in California become a lien on the first Monday in March of each year. An exception exists in the case of taxes of certain cities having a lien date other than the first Monday in March.
Although a purchaser of property may not deduct taxes which become a lien on the property prior to the time it was purchased, even though paid by the purchaser, the purchaser may add any such taxes paid by it to the cost of the property, and thus increase the basis of the property for the purpose of computing depreciation, gain or loss, etc.
See Section 24346 for apportionment of taxes on real property between seller and purchaser for income years beginning after December 31, 1960.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24345, Revenue and Taxation Code.
HISTORY

1. New Reg. 24345(a) filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Renumbering and amendment of Section 24345(a) to Section 24345-1 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37.)
§24345-2. Taxes for Local Benefits.
Note     •     History

(a) Except as provided in subsection (b) of this regulation, so-called taxes, more properly assessments, paid for local benefits, such as street, sidewalk, and other like improvements, imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied do not constitute an allowable deduction from gross income. A tax is considered assessed against local benefits when the property subject to the tax is limited to property benefited. Special assessments such as flood control district assessments are not deductible, even though an incidental benefit may inure to the public welfare. The real property taxes deductible are those levied for the general public welfare by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction. For treatment of assessments for local benefits as adjustments to the basis of property see Section 24916(a).
(b)(1) Insofar as assessments against local benefits are made for the purpose of maintenance or repair or for the purpose of meeting interest charges with respect to such benefits, they are deductible. In such cases the burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes. If the allocation cannot be made, none of the amount so paid is deductible.
(2) Taxes or assessments levied by an irrigation or other water district are deductible if such taxes or assessments are levied at a uniform rate upon all property within the district.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24345, Revenue and Taxation Code.
HISTORY

1. New Reg. 24345(b) filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Renumbering and amendment of Section 24345(b) to Section 24345-2 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24345-3. Federal Stamp Taxes.
Note     •     History

No deduction is allowed under Section 24345 for Federal stamp taxes (not described in Section 24345-1(b) or (c)), paid or accrued within the income year. The fact that any such tax is not deductible as a tax under Section 24345 does not prevent its deduction under Section 24343, provided it represents an ordinary and necessary expense paid or incurred during the income year by a corporation in the conduct of any trade or business or, its being taken into account during the income year as a part of the cost of acquiring or producing property in the trade or business.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24345, Revenue and Taxation Code.
HISTORY

1. New Reg. 24345(c) filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Renumbering and amendment of Section 24345(c) to Section 24345-3 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24345-4. Sales and Gasoline Taxes.
Note     •     History

Amounts representing gasoline and sales taxes paid by a purchaser of services or tangible personal property are deductible by such purchaser as taxes, provided they are not paid in connection with its trade or business. The fact that, under the law imposing it, the incidence of the gasoline or sales tax does not fall on the purchaser is immaterial.
As used in this regulation the term “gasoline or sales tax” means a tax imposed by any state, territory, district, or possession of the United States, or any political subdivision thereof upon persons engaged in selling tangible personal property at retail, which is measured by the gross sales price or the gross receipts from the sale, or which is a stated sum per unit of such property sold. The term also includes a tax imposed by such

authorities upon persons engaged in furnishing services at retail, which is measured by the gross receipts for furnishing such services.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 24345, Revenue and Taxation Code.
HISTORY

1. New Reg. 24345(d) filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Renumbering of Section 24345(d) to Section 24345-4 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
3. Change without regulatory effect amending first paragraph and Note filed 8-7-2003 pursuant to section 100, title 1, California Code of Regulations (Register 2003, No. 32).
§24345-5. Federal Social Security Taxes and State Unemployment Insurance Contributions.
Note     •     History

Taxes on, according to or measured by income or profits, imposed by the Government of the United States or any foreign country or any state, territory, or political subdivision thereof, including all taxes paid or accrued to this State under this part, are not deductible.
Taxes and contributions paid by employers pursuant to the Federal Social Security Act or the California Unemployment Insurance Act are deductible from gross income in computing the employer's net income.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24345, Revenue and Taxation Code.
HISTORY

1. New Reg. 24345(e) filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Renumbering of Section 24345(e) to Section 24345-5 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24345-6. Taxes of Shareholder Paid by Corporation.
Note     •     History

Banks and other corporations paying taxes assessed against their shareholders on account of their ownership of the shares of stock issued by such corporations without reimbursement from such shareholders may deduct the amount of taxes so paid. In such cases no deduction shall be allowed to the shareholders for such taxes. The amount so paid should not be included in the gross income of the shareholder.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24345, Revenue and Taxation Code.
HISTORY

1. New Reg. 24345(f) filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Renumbering of Section 24345(f) to Section 24345-6 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24345-7. Foreign Taxes.
Note     •     History

(a) Definitions, as used in this regulation;
(1) “Income tax” means a tax on or according to or measured by gross or net income or profits paid or accrued within the income year imposed by the authority of any foreign country.
(2) “Foreign tax” means a compulsory payment imposed by and pursuant to the authority of a foreign country to levy taxes. A penalty, fine, interest or customs duty is not a tax. Whether a foreign tax requires a compulsory payment pursuant to a foreign country's authority to levy taxes is determined by principles of United States law and not by principles of law of the foreign country.
(3) “Foreign country” means any jurisdiction other than one embraced within the United States, including a political subdivision of such jurisdiction.
(4) “Dual capacity tax” means a tax which is paid to a foreign country or to an agency or instrumentality of a foreign country which is all or in part an income tax and which is also for receipt of or future receipt of, directly or indirectly, a specific economic benefit from a foreign country or from an agency or instrumentality of a foreign country.
(5) “Specific economic benefit” means an economic benefit that is not made available on substantially the same terms to substantially all persons who are subject to an income tax that is generally imposed by the foreign country, or, if there is no such generally imposed income tax, an economic benefit that is not made available on substantially the same terms to the population of the country in general.
(6) “Paid” means “paid or accrued”; the term “payment” means “payment or accrual”; and the term “paid by” means “paid or accrued by or on behalf of.”
(7) “Entity” means a corporation, partnership, bank, association, business trust or organization of any kind.
(b) Income tax.
(1) In general. Section 24345(b) of the Revenue and Taxation Code allows, in part, a deduction for taxes paid or accrued during the income year except taxes on or according to or measured by income or profits paid or accrued within the income year imposed by the authority of the government of any foreign country. Whether a foreign tax is an income tax is determined independently for each separate foreign tax. If the initial amount of one foreign tax is reduced or satisfied by credit or otherwise by the amount of another foreign tax, the amount of the first tax that is paid or accrued is the excess of the initial tax over the other tax. No deduction shall be allowed under section 24345(b) of the Revenue and Taxation Code for payments of foreign taxes which are refunded, credited, rebated, abated or forgiven by a foreign government.
(2) Realization. An “income” tax can only be imposed upon realized income, and to the extent a foreign tax is not imposed on realized income, it is not an income tax. Although the technical concept of realization does not require the receipt of money or property by the taxpayer, it does require the taxpayer to obtain the fruition of the economic gain which has accrued to it or it requires some identifiable event whereby the taxpayer obtains the final enjoyment of whatever economic gain or benefit has accrued to it.
(3) Burden of Proof. 
(A) In general. The burden of proof rests upon the taxpayer to prove entitlement to a deduction under section 24345(b) of the Revenue and Taxation Code. Whether a foreign tax is properly characterized as an income tax will be decided on its own facts by reference to the specific activity taxed. Thenature of a foreign tax is determined by its operation, not by labels placed upon it, and a determination must be made as to how a foreign tax is actually imposed on the tax payer for the given income year for which a deduction is claimed under section 24345(b) of the Revenue and Taxation Code. A single foreign tax may be deductible in part, based upon the manner in which the tax is actually imposed upon the taxpayer for the given year for which the deduction is claimed. A taxpayer shall be entitled to a deduction for only that portion of the tax actually imposed upon the taxpayer for the given income year for which the deduction is claimed which the taxpayer can establish is not an income tax.
EXAMPLE:
Corporation B is engaged in foreign country Y in the business of extracting petroleum. B pays to Y a foreign tax based upon a tax base comprised of two elements: (1) gross income of B from activities within Y, and (2) the value of B's end of year inventory in Y. B had gross income of 100, and inventory in Y of 10 at the end of the year. B is entitled to a deduction of the tax paid to Y on the value of B's end of year inventory of 10 which is a non-income tax element of the foreign tax, but is not entitled to a deduction on the tax paid to Y on its 100 of gross income which is an income tax. These conclusions are determined without regard to how Y's foreign tax law is applied to other taxpayers.
(B) Presumption. It shall be presumed, subject to rebuttal, that a payment to a foreign country is an income tax if the foreign country asserts that the payment is all or in part pursuant to the foreign country's authority to levy taxes. 
(4) Nonapplicability of federal provisions. Sections 901 and 903 of the Internal Revenue Code, and the federal regulations promulgated thereunder, shall not be used to determine the character or deductibility of a foreign tax under section 24345 of the Revenue and Taxation Code. 
(c) Dual capacity taxes.
(1) In general. The deductibility of a foreign tax, or a portion of it, is determined under this subsection if the tax paid is a dual capacity tax. Otherwise, the deductibility of a foreign tax is to be determined under subsection (b). If in applying the principles of California law, a foreign tax requires a compulsory payment in exchange for a specific economic benefit, the tax is considered to have two distinct elements; an income tax, and a tax in exchange for the specific economic benefit. In such a situation, these two distinct elements of the foreign tax (and the amount paid pursuant to each such element) shall be separated.
(2) Burden of proof for dual capacity taxes.
(A) In order for a taxpayer to deduct all or a portion of a dual capacity tax, the burden is upon the taxpayer claiming a deduction to prove that the imposition of the foreign tax is directly related to the receipt or future receipt of, directly or indirectly, a specific economic benefit from the foreign country and the amount, if any, that is not an income tax, by use of one of two alternative methods. Those methods are the facts and circumstances method (described in subsection (c)(3)(A)) and the safe harbor method (described in subsection (c)(3)(B)). 
(B) Presumption. It shall be presumed, subject to rebuttal, that a payment to a foreign country is an income tax if the foreign country asserts that the payment is all or in part pursuant to the foreign country's authority to levy taxes.
(3) Satisfaction of burden of proof.
(A) Facts and circumstances method. If the taxpayer claiming a deduction establishes, based on all the relevant facts and circumstances, the specific amount, if any, of the dual capacity tax that is not an income tax within the meaning of subsection (b), such amount is deductible. In determining the deductible amount under the facts and circumstances method, neither the methodology nor the results that would be obtained if a taxpayer elected to apply the safe harbor method is a relevant fact or circumstance.
(B) Safe harbor method. Under the safe harbor method, the taxpayer claiming a deduction for a dual capacity tax makes an election on its California return with respect to the foreign country which asserted that tax upon an entity included in its combined report as provided in subsection (c)(4) and, pursuant to such election, applies the safe harbor method formula described in subsection (c)(5).
(4) Election to use the safe harbor method.
(A) Scope of election. An election to use the safe harbor method is made on a country-by-country basis. If an election is made to use the safe harbor method for dual capacity taxes paid to a particular foreign country, the election applies to all entities included in a taxpayer's combined report which paid dual capacity taxes to that foreign country and to all dual capacity taxes paid to that foreign country. The election applies to the first income year for which the election is made and to all subsequent income years of the electing taxpayer, unless the election is revoked in accordance with subsection (c)(4)(D). The election to use the safe harbor method is made in the time and manner set forth in subsection (c)(4)(C).
(B) Effect of election. An election to use the safe harbor method constitutes a specific waiver by the taxpayer of the right to use the facts and circumstances method for any dual capacity taxes for the elected foreign country for the years to which the election applies. An election to use the safe harbor method also constitutes a specific waiver by the taxpayer to pursue any additional deduction for any dual capacity taxes for the elected foreign country for the years to which the election applies through any litigation pursuant to sections 26101 through 26107 of the Revenue and Taxation Code, or by protest pursuant to section 25664 of the Revenue and Taxation Code, or by appeal pursuant to sections 25666(b) and 25667 of the Revenue and Taxation Code or by refund or credit pursuant to sections 26071 through 26081 of the Revenue and Taxation Code.
(C) Time and manner of making the election to use the safe harbor method.
1. In general. An electing taxpayer shall attach a statement, for each foreign country for which the election is made which asserted a dual capacity tax upon an entity included in its combined report, to its California Franchise or Income Tax Return for the first income year for which the election is made and shall file such return by the due date (including extensions), pursuant to sections 25401 through 25406 of the Revenue and Taxation Code, for the filing thereof. The statement shall provide that the electing taxpayer elects to use the safe harbor method for each such foreign country.
2. Certain retroactive elections. Notwithstanding the requirements of subsection (c)(4)(C)1. an election may be made for any years ended on or before December 31, 1990 for which returns have previously been filed by timely filing (including extensions), pursuant to sections 26073 and 26073.2 Of the Revenue and Taxation Code, an amended California Franchise or Income Tax Return setting forth the calculation(s) of the safe harbor method deduction(s) for the first of the election income years and applying the safe harbor method in such amended return; by attaching to such first election year return a statement containing the statement and information set forth in subsection (c)(4)(C)1. and by timely filing (including extensions) amended returns setting forth the calculation(s) of the safe harbor method deduction(s) for all other election years for which returns have previously been filed and applying the safe harbor method in such amended returns. All such amended returns must be filed on or before June 30, 1991, unless the Franchise Tax Board agrees in writing to a later filing and the applicable statutes of limitations on deficiency assessments or refund claims have not expired by the time of such later filing.
(D) Revocation of election. An election to use the safe harbor method can only be revoked with the written consent of the Franchise Tax Board. Request for consent to revoke an election shall be made by filing a statement providing that the taxpayer revokes the safe harbor election with the Franchise Tax Board, Post Office Box 1468, Sacramento, CA 95812-1468. Such statement shall be mailed to the Franchise Tax Board no later than the 90th day before the due date (including extensions), pursuant to sections 25401 through 25406 of the Revenue and Taxation Code, for the filing of the return for the first income year for which the revocation is sought to be effective. The Franchise Tax Board shall make its consent to any revocation conditioned upon necessary adjustments being made in one or more income years so as to prevent the revocation from resulting in amounts being duplicated or omitted.
(5) Safe harbor method formula.
(A) In general. The elective safe harbor method formula applies to determine the portion, if any, of a dual capacity tax that is not an income tax. The safe harbor method formula addresses two possible parts of a dual capacity tax payment. The first part is the “posted price differential” payment, which is defined as an actual payment of a foreign tax imposed on the differential between the market and posted price of crude oil (hereinafter “PPD” payment). A PPD payment is generally computed by subtracting from the actual tax paid to a foreign country the tax that would have been payable had gross receipts been calculated based on the market price, not the posted price, of crude oil. The second part of the payment, is the NONPPD payment which is defined as an actual payment of dual capacity tax which is not a PPD payment. Unless otherwise provided, both PPD and NONPPD payments exclude those payments which are refunded, credited, rebated, abated or forgiven by a foreign country. In no case shall payments representing withholding of taxes imposed on interest, dividends, rent, salaries, wages, premiums, annuities, remunerations, emoluments and other fixed or determinable annual or periodic gains, profits and income (“withholding taxes”) payable by the payee of such amounts be included in the elective safe harbor method formula computation or components.
(B) Under the safe harbor method formula the amount paid in an income year which is not an income tax is determined by two part computation:

PART ONE:	A-X(B-C)=D

PART TWO:	A-X[B-(C+D)]+E=F
The components of the safe harbor method formula are defined asfollows:
A =The aggregate amount of NONPPD payments plus amounts of liability actually paid during the income year for taxes which are not dual capacity taxes and which are not separately deductible under subsection (b), excluding any withholding tax.
B = The amount of total gross receipts which relate to all activity taxed in the foreign country as determined under subsection (c)(5)(C).
C = The amount of cost of goods sold and operating expenses incurred in the income year to which the election pertains that related to the gross receipts included in component B, above, as determined under subsection (c)(5)(C), excluding NONPPD payments, but including PPD payments, if any.
D = The result of the PART ONE computation, but not less than zero.
E = PPD payments, if any.
F = The safe harbor deduction.
X = Fifty-five percent (.55) for all income years ended on or before December 31, 1986. Fifty two percent (.52) for all income years beginning on or after January 1, 1987.
In no case shall the deductible amount exceed the actual payment amount; and the deductible amount is zero if the safe harbor method formula yields a deductible amount less than zero. In no case shall the deductible amount be less than the PPD payments. In no case shall more than a single deduction be allowed for any payment of a foreign tax.
(C) Determination of gross receipts, cost of goods sold and operating expenses. For purposes of safe harbor formula, gross receipts, cost of goods sold and operating expenses are those same items as determined under accounting methods set forth in subsections (b)(3) and (d) of section 25137-6 of title 18 of the California Code of Regulations. Gross receipts exclude the difference between the posted price and market price of crude oil.
(D) Combined operations. If the operations in a foreign country were carried on by more than one entity combinable in a taxpayer's California report, those operations are to be combined in computing the deduction under the safe harbor method.
(E) Examples of application of the safe harbor formula method. 
EXAMPLE 1:
The Petroleum Profits Tax Law (PPTL) of foreign country A provides, in part, that all underground oil and gas in that country is the property of the government of country A and that no person shall mine or produce petroleum unless authorized by a concession agreement issued under that law. The PPTL imposes a tax on the profits of all companies engaged in “petroleum operations” which are defined as activities involved in and incidental to obtaining petroleum and natural gas. The General Income Tax Law (GITL) of country A subjects all income generated in that country to taxation. However, income from petroleum operations is exempted by the GITL. The tax imposed under the PPTL is based on net income and the amount of the tax is set at a flat rate of 70 percent, a rate higher than the GITL tax rate which is set at a flat 55 percent. For purposes of calculating net income under the PPTL, profits are calculated based on the posted price of crude oil, which is higher in amount than the actual market price. In 1985 S is a concession holder whose income generated within country A is solely from its petroleum extraction operations therein. S is a wholly owned subsidiary of, and includible in the combined group of, a California taxpayer.
The PPTL tax is a dual capacity tax. Pursuant to procedures of computing tax liability and the methods of accounting set forth in the PPTL (which are different than the methods of accounting that pertain to the safe harbor method formula set forth in subsection (c)(5)(C)), S had 165 in grossreceipts, 45 in cost of goods sold and operating expenses, and a net income of 120 (165 less 45). A tax liability of 84 (120 net income multiplied by the 70 percent tax rate) is imposed on and paid by S under the PPTL.
For purposes of the safe harbor method formula, of the 84 imposed and paid under the PPTL, 10 is determined to be a PPD payment within the meaning of component E because that is the amount by which the actual tax paid under the PPTL exceeded the tax that would have been payable had profits been calculated based on the market price of crude oil. Component A, the NONPPD payment, is 74 (84 less 10). S received 150 in gross receipts within the meaning of component B and the methods of accounting attendant thereto. S also incurred 50 in cost of goods sold and operating expenses (including the PPD payment of 10) within the meaning of component C and the methods of accounting attendant thereto. Component X is .55 because the income year in issue is prior to 1987.
The deduction allowed by the safe harbor method formula is determined as follows: A=74, B=150, C=50, E=10 and X=.55.

PART ONE:	A-X(B-C)=D
74-.55(150-50)=D
74-.55(100)=D
74-55=D
D=19

PART TWO:	A-X[B-(C+D)]+E=F
74-.55[150-(50+19)]+10=F
74-.55[150-69]+10=F
74-.55[81]+10=F
74-44.55+10=F
F=39.45
Thus, of the 84 imposed on and paid by S to country A, 39.45 is deductible. The remaining 44.55 is not deductible.
EXAMPLE 2:
The Petroleum Tax Law (PTL) of foreign country B provides, in part, that all underground oil and gas in that country is the property of the government of country B and that no person shall mine or produce petroleum unless authorized by a concession agreement issued under that law. Furthermore, the PTL specifies that an oil company or other concession holder under the PTL shall pay such income tax and other taxes as are payable under the laws of country B. The PTL requires that if the total annual amount of income tax and other direct taxes falls short of 70 percent of a concession holder's profits from all its country B concessions, such concession holder must pay such sum by way of a “surtax” as will make the total of its payments equal 70 percent of its profits. Credit is allowed for the payment of income tax and other direct taxes of country B against the PTL liability.
Under the PTL, “profits” are defined as the income resulting from the operations of the concession holder after deducting certain expenses. No deduction is allowed for income taxes and other direct taxes paid to country B. For purposes of calculating “income resulting from the operations of the concession holder,” profits are calculated based on the posted price of crude oil, which is higher in amount than the actual market price. In 1985 S is a concession holder whose income generated within country B is solely from its petroleum extraction operations therein. S is a wholly owned subsidiary of, and includible in the combined group of, a California taxpayer.
All companies engaged in business activities in country B must pay an income tax imposed under the Corporation Income Tax Law (CITL). The CITL is the general income tax law of country B and is imposed at a flat rate of 55 percent.
The PTL tax is a dual capacity tax. Pursuant to procedures of computing tax liability and the methods of accounting set forth in the PTL (which are different than the methods of accounting that pertain to the safe harbor method formula set forth in subsection (c)(5)(C) and the methods of accounting set forth in the CITL), S had 165 in gross receipts, 45 in cost of goods sold and operating expenses and a net income of 120 (165 less 45). A tax liability of 84 (120 net income multiplied by the 70 percent tax rate) is imposed on S under the PTL.
The CITL tax is determined not to be deductible under subsection (b). Pursuant to procedures of computing tax liability and the methods of accounting set forth in the CITL (which are different than the methods of accounting that pertain to the safe harbor method formula set forth in subsection (c)(5)(C) and the methods of accounting set forth in the PTL), S had 150 in gross receipts, 50 in cost of goods sold and operating expenses and a net income of 100 (150 less 50). A tax liability of 55 (100 net income multiplied by the 55 percent tax rate) is imposed on and paid by S under that law. However, S is allowed a credit of the amount paid under the CITL against its PTL tax liability. Therefore, the net amount of tax S actually pays under the PTL is 29 (84 less 55).
For purposes of the safe harbor method formula, of the 29 paid under the PTL, 10 is determined to be a PPD payment within the meaning of component E because that is the amount by which the actual tax paid under the PTL exceeded the tax that would have been payable had profits been calculated based on the market price of crude oil. No portion of the CITL is a PPD payment. Component A, the NONPPD payment, is 19 (29 less 10) plus 55 paid under the CITL which was credited against S's liability under the PTL, for a total value of 74. S received 150 in gross receipts within the meaning of component B and the methods of accounting attendant thereto. S also incurred 50 in cost of goods sold and
operating expenses (including the PPD payment of 10) within the meaning of component C and the methods of accounting attendant thereto. Component X is .55 because the income year in issue is prior to 1987.
The deduction allowed under the safe harbor method formula is determined as follows: 
A=74, B=150, C=50, E=10 and X=.55.

PART ONE:	A-X(B-C)=D
74-.55(150-50)=D
74-.55(100)=D
74-55=D
D=19

PART TWO:	A-X[B-(C+D)]+E=F
74-.55[150-(50+19)]+10=F
74-.55[150-69]+10=F
74-.55[81]+10=F
74-44.55+10=F
F=39.45
Thus, of the 84 imposed on and paid by S to country B, 39.45 is deductible. The remaining 44.55 is not deductible.
EXAMPLE 3:
The Petroleum Revenue Law (PRL) of foreign country C provides, in part, that all underground oil and gas in country C, its territorial waters and its continental shelf is the property of country C and that no person shall extract such oil and gas except under license from the government of country C. Securing such a license to extract oil and gas in country C subjects a taxpayer to the tax imposed under the PRL. The PRL imposes a tax on all profits from oil extraction at a flat rate of 60 percent. Gross receipts for purposes of the PRL are calculated based on the current market value of oil and gas. The PRL tax is generally based on net income and is imposed in addition to the tax imposed by the Corporation Income Tax Law (CITL), the general income tax law of country C. The tax liability paid under the PRL is allowed as a deduction in computing a taxpayer's liability under the CITL. In 1985 S is a license holder under the PRL whose income generated within country C is solely from its petroleum extraction operations therein. S is a wholly owned subsidiary of, and includible in the combined group of, a California tax payer.
The CITL imposes a tax on the aggregate of net income of a corporation and its rate is set at a flat 50 percent.
The PRL tax is a dual capacity tax. Pursuant to procedures of computing tax liability and the methods of accounting set forth in the PRL (which are different than the methods of accounting that pertain to the safe harbor method formula set forth in subsection (c)(5)(C) and the methods of accounting set forth in the CITL), S had 150 in gross receipts, 40 in cost of goods sold and operating expenses and a net income of 110 (150 less 40). A tax liability of 66 (110 net income multiplied by the 60 percent tax rate) is imposed on and paid by S under the PRL.
The CITL tax is determined to not be deductible under subsection (b). Pursuant to the procedures of computing tax liability and the methods of accounting set forth in the CITL (which are different than the methods of accounting that pertain to the safe harbor method formula set forth in subsection (c)(5)(C) and the methods of accounting set forth in the PRL), S had 150 in gross receipts, 52 in cost of goods sold and operating expenses, a deduction for the payment of its PRL liability of 66, and a net income of 32 (150 less 52 and 66). A tax liability of 16 (32 net income multiplied by the 50 percent tax rate) is imposed on and paid by S under the CITL.
For purposes of the safe harbor method formula, the value of component A is 82 (66 paid under the PRL plus 16 paid under the CITL). S received 150 in gross receipts within the meaning of component B and the methods of accounting attendant thereto. S also incurred 40 in cost of goods sold and operating expenses within the meaning of component C and the methods of accounting attendant thereto. The value of component E is zero because there were no PPD payments. Component X is .55 because the income year in issue is prior to 1987.
The deduction allowed under the safe harbor method formula is determined as follows: A=82, B=150, C=40, E=O and X=.55.

PART ONE:	A-X(B-C)=D
82-.55(150-40)=D
82-.55(110)=D
82-60.5
D=21.5
PART TWO:
82-.55[150-(40+21.5)]+0=F
82-.55[150-61.5]+0=F
82-.55[88.5]+0=F
82-48.675+0=F
F=33.325
Thus of the 82 imposed on and paid by S to country C, 33.325 is deductible. The remaining 48.675 is not deductible.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24345, Revenue and Taxation Code.
HISTORY

1. New section filed 3-1-91; operative 3-31-91 (Register 91, No. 15).
§24347-1. Losses.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24347, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Renumbering and amendment of Section 24347(a) to Section 24347-1 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
3. Change without regulatory effect repealing section filed 11-4-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 45).
§24347-2. Obsolescence of Nondepreciable Property.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24347, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Renumbering and amendment of Section 24347(b) to Section 24347-2 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
3. Change without regulatory effect repealing section filed 11-4-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 45).
§24347-3. Demolition of Buildings.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24347, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Renumbering and amendment of Section 24347(c) to Section 24347-3 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
3. Change without regulatory effect repealing section filed 11-4-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 45).
§24347-4. Decline in Value of Stock.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24347, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Renumbering and amendment of Section 24347(d) to Section 24347-4 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
3. Change without regulatory effect repealing section filed 11-4-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 45).
§24347-5. Worthless Securities.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24347, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Renumbering and amendment of Section 24347(e) to Section 24347-5 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
3. Change without regulatory effect repealing section filed 11-4-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 45).
§24347-6. Losses of Farming Corporations.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24347, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Renumbering and amendment of Section 24347(f) to Section 24347-6 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
3. Change without regulatory effect repealing section filed 11-4-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 45).
§24347-7. Casualty Losses.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24347, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Renumbering and amendment of Section 24347(g) to Section 24347-7 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
3. Change without regulatory effect repealing section filed 11-4-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 45).
§24347-8. Theft Losses.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24347, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Renumbering and amendment of Section 24347(h) to Section 24347-8 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
3. Change without regulatory effect repealing section filed 7-5-2000 pursuant to section 100, title 1, California Code of Regulations (Register 2000, No. 27).
§24348(a). ** Bad Debt Deduction for Building and Loan Associations.
Note     •     History

NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 24348, Revenue and Taxation Code.
HISTORY

1. Amendment filed 12-24-71; effective thirtieth day thereafter (Register 71, No. 52). For prior history, see Register 63, No. 24.
2. Amendment filed 11-27-74; effective thirtieth day thereafter (Register 74, No. 48).
3. Change without regulatory effect amending subsection (3)(ii), repealing old Note, and adopting new Note filed 7-30-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 31).
4. Change without regulatory effect repealing section filed 12-4-2003 pursuant to section 100, title 1, California Code of Regulations (Register 2003, No. 49).

**See Section 50500, Title 18, for Income Eligibility Trusts established by Department of Housing and Community Development.
§24348(b). Bad Debt Deduction for Banks and Savings and Loan Associations.
Note     •     History

NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 24348, Revenue and Taxation Code.
HISTORY

1. Amendment filed 6-3-77; effective thirtieth day thereafter (Register 77, No. 23). For prior history, see Register 74, No. 48.
2. Amendment of subsections (3) and (5) filed 2-7-86 as an emergency; effective upon filing (Register 86, No. 6). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed on 6-9-86.
3. Certificate of Compliance transmitted to OAL 6-4-86 and filed 7-2-86 (Register 86, No. 27).
4. Change without regulatory effect amending subsection (3)(E) and Note filed 7-30-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 31).
5. Change without regulatory effect repealing section filed 12-2-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 49).
§24348(c). Taxability of Bad Debt Reserves of Taxpayers Who Cease to Be Subject to Tax.
History

Section 24348 provides in part that there shall be allowed as a deduction, in the discretion of the Franchise Tax Board, a reasonable addition to a reserve for bad debts. As authorized by Section 24348 the Franchise Tax Board has issued rulings and regulations relating to the amount allowable as an addition to a reserve for bad debts. This regulation, however, relates to the treatment of a bad debt reserve when all reason for maintaining the reserve ceases.
Since additions to a bad debt reserve reduced the amount of tax which otherwise would have been due, any amount received from the sale or other disposition of receivables for more than their net tax basis in the year that a taxpayer ceases to be subject to the tax imposed by this part or ceases to be subject to a tax measured by net income is required to be included in the measure of tax for the last year that a taxpayer was subject to tax measured by or imposed upon net income to the extent that the amounts derived from such sale resulted in a tax benefit. As used in this regulation the term “net tax basis” means the face value of accounts receivable when sold, less amounts which have been set aside as a reserve for bad debts. The provisions of this paragraph may be illustrated by the following example: 
EXAMPLE:
X Corporation, whose accounting period is the calendar year, has as of December 31, 1961, accounts receivable in the amount of $1,000,000. Its reserve for bad debts as of such date is $75,000, $25,000 of which was added during the calendar year 1961. Thus, the net tax basis of its accounts receivables as of December 31, 1961 is $925,000 ($1,000,000 --$75,000). On December 31, 1961, X Corporation ceases to do business and sells its accounts receivable for $1,000,000. The amount to be included in the measure of the tax for the calendar year ended December 31, 1960, the last year that X Corporation was subject to tax measured by income, is $50,000 ($75,000 [the amount added to the reserve for the calendar year 1961, which did not result in a tax benefit]). The tax attributable to this amount must be paid for the calendar year that X Corporation ceased doing business. 
The tax measured by the inclusion of such income shall not be subject to the proration provided for in Section 23332.
The provisions of this regulation shall not be applicable where the assets of a taxpayer are transferred to another taxpayer in a reorganization as defined in Section 23251, if the transferee taxpayer succeeds to and takes the amount of the transferee taxpayer's bad debt reserve into account.
Any taxpayer which has established a reserve for bad debts and thereafter requests a tax clearance certificate prior to dissolving or withdrawing, shall, at the time it requests a tax clearance, advise the Franchise Tax Board as to the disposition of its reserve for bad debts. Any additional tax due as the result of the application of this regulation shall be secured or paid before a tax clearance certificate is issued.
HISTORY

1. New section filed 8-6-62; effective thirtieth day thereafter (Register 62, No. 16).
2. Renumbering from Section 24348(b) filed 12-24-71; effective thirtieth day thereafter (Register 71, No. 52).
§24348(d). Bad Debts.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24348(e). Evidence of Worthlessness.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter. (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24348(f). Partial or Total Worthlessness.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter. (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24348(g). Reserve for Bad Debts.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24348(h). Sale of Mortgaged or Pledged Property.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24349(a). *  Depreciation in General.

(1) Reasonable Allowance. Section 24349 provides that a reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in the trade or business shall be allowed as a depreciation deduction. The allowance is that amount which should be set aside for the income year in accordance with a reasonably consistent plan (not necessarily at a uniform rate) so that the aggregate of the amounts set aside, plus the salvage value, will, at the end of the estimated useful life of the depreciable property, equal the cost or other basis of the property. An asset shall not be depreciated below a reasonable salvage value. See paragraph (3) of this regulation for definition of salvage. The allowance shall not reflect amounts representing a mere reduction in market value.
(2) Useful Life. For the purpose of Section 24349 the estimated useful life of an asset is not necessarily the useful life inherent in the asset but is the period over which the asset may reasonably be expected to be useful to the taxpayer in its trade or business. This period shall be determined by reference to its experience with similar property taking into account present conditions and probable future development. Some of the factors to be considered in determining this period are (a) wear and tear and decay or decline from natural causes, (b) the normal progress of the art, economic changes, inventions, and current developments within the industry and the taxpayer's trade or business, (c) the climatic and other local conditions peculiar to the taxpayer's trade or business, and (d) the taxpayer's policy as to repairs, renewals, and replacements. Salvage value is not a factor for the purpose of determining useful life. If the taxpayer's experience is inadequate, the general experience in the industry, may be used until such time as the taxpayer's own experience forms an adequate basis for making the determination. The estimated remaining useful life may be subject to modification by reason of conditions known to exist at the end of the income year and shall be redetermined when necessary. However, estimated remaining useful life shall be redetermined only when the change in the useful life is significant and there is a clear and convincing basis for the redetermination.
(3) Salvage. Salvage value is the amount (determined at the time of acquisition) which is estimated will be realizable upon sale or other disposition of an asset when it is no longer useful in the taxpayer's trade or business and is to be retired from service by the taxpayer. Salvage value shall not be changed at any time after the determination made at the time of acquisition merely because of changes in price levels. However, if there is a redetermination of useful life under the rules of paragraph (2) of this regulation, salvage value may be redetermined based upon facts known at the time of such redetermination of useful life. Salvage, when reduced by the cost of removal, is referred to as net salvage. The time at which an asset is retired from service may vary according to the policy of the taxpayer. If the taxpayer's policy is to dispose of assets which are still in good operating condition, the salvage value may represent a relatively large proportion of the original basis of the asset. However, if the taxpayer customarily uses an asset until its inherent useful life has been substantially exhausted, salvage value may represent no more than junk value. Salvage value must be taken into account in determining the depreciation deduction either by a reduction of the amount subject to depreciation or by a reduction in the rate of depreciation, but in no event shall an asset (or an account) be depreciated below a reasonable salvage value. The taxpayer may use either salvage or net salvage in determining depreciation allowances but such practice must be consistently followed and the treatment of the costs of removal must be consistent with the practice adopted. When an asset is retired or disposed of, appropriate adjustments shall be made in the asset and depreciation reserve accounts. For example, the amount of the salvage adjusted for the costs of removal may be credited to the depreciation reserve.

*Except for the deletion of provisions in the federal regulations regarding new methods of computing depreciation, this regulation is substantially the same as Section 26 CFR 1.167(a)-1.
§24349(b). *  Tangible Property.

The depreciation allowance in the case of tangible property applies only to that part of the property which is subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence. The allowance does not apply to inventories or stock in trade, or to land apart from the improvements or physical development added to it. The allowance does not apply to natural resources which are subject to the allowance for depletion provided in Chapter 14.

*This regulation is similar to Section 26 CFR 1.167(a)-2.
§24349(c). **  Intangibles.

If an intangible asset is known from experience or other factors to be of use in the business for only a limited period, the length of which can be estimated with reasonable accuracy, such an intangible asset may be the subject of a depreciation allowance. Examples are patents and copyrights. An intangible asset, the useful life of which is not limited, is not subject to the allowance for depreciation. No allowance will be permitted merely because, in the unsupported opinion of the taxpayer, the intangible asset has a limited useful life. No deduction for depreciation is allowable with respect to goodwill. 

**Except for the deletion of the last sentence of the federal regulation, this regulation is the same as section 26 CFR 1.167(a)(3).
§24349(d). ***  Leased Property.

Capital expenditures made by a lessee for the erection of buildings or the construction of other permanent improvements on leased property are recoverable through allowances for depreciation or amortization. If the useful life of such improvements in the hands of the taxpayer is equal to or shorter than the remaining period of the lease, the allowances shall take the form of depreciation under Section 24349. If, on the other hand, the estimated useful life of such property in the hands of the taxpayer, determined without regard to the terms of the lease, would be longer than the remaining period of such lease, the allowances shall take the form of annual deductions from gross income in an amount equal to the unrecovered cost of such capital expenditures divided by the number of years remaining of the term of the lease. Such deductions shall be in lieu of allowances for depreciation. See Section 24343 and the regulations thereunder. Capital expenditures made by a lessor for the erection of buildings or other improvements shall, if subject to depreciation allowances, be recovered by him over the estimated life of the improvements without regard to the period of the lease.

***This regulation is substantially the same as Section 26 CFR 1.167(a)(4).
§24349(e). ****  Apportionment of Basis.

In the case of the acquisition on or after March 1, 1913, of a combination of depreciable and nondepreciable property for a lump sum, as for example, buildings and land, the basis for depreciation cannot exceed an amount which bears the same proportion to the lump sum as the value of the depreciable property at the time of acquisition bears to the value of the entire property at that time. In the case of property which is subject to both the allowance for depreciation and amortization, depreciation is allowable only with respect to the portion of the depreciable property which is not subject to the allowance for amortization and may be taken concurrently with the allowance for amortization. After the close of the amortization period or after amortization deductions have been discontinued with respect to any such property, the unrecovered cost or other basis of the depreciable portion of such property will be subject to depreciation. For adjustments to basis, see Section 24916 and other applicable provisions of the law. 

****This regulation is substantially the same as Section 26 CFR 1.167(a)(5).
§24349(f). *****  Depreciation in Special Cases.

(a) Depreciation of Patents or Copyrights.
The cost or other basis of a patent or copyright shall be depreciated over its remaining useful life. Its cost to the patentee includes the various government fees, cost of drawings, models, attorney's fees, and similar expenditures. If a patent or copyright becomes valueless in any year before its expiration the unrecovered cost or other basis may be deducted in that year.
(b) Depreciation in Case of Farmers. A reasonable allowance for depreciation may be claimed on farm buildings, farm machinery, and other physical property but not including land. Livestock acquired for work, breeding, or dairy purposes may be depreciated unless included in an inventory used to determine profits in accordance with Section 24271 and the regulations thereunder. Such depreciation should be determined with reference to the cost or other basis, salvage value, and the estimated useful life of the livestock. See also Section 24343 and the regulations thereunder relating to trade or business expenses, Section 24347 and the regulations thereunder relating to losses of farmers and Section 24369 and the regulations thereunder relating to soil or water conservation expenditures. 

*****This regulation is substantially the same as Section 26 CFR 1.167(a)-6.
§24349(g). ******  Accounting for Depreciable Property.

(1) Depreciable property may be accounted for by treating each individual item as an account, or by combining two or more assets in a single account. Assets may be grouped in an account in a variety of ways. For example, assets similar in kind with approximately the same useful lives may be grouped together. Such an account is commonly known as a group account. Another appropriate grouping might consist of assets segregated according to use without regard to useful life, for example, machinery and equipment, furniture and fixtures, or transportation equipment. Such an account is commonly known as a classified account. A broader grouping, where assets are included in the same accounts regardless of their character or useful lives, is commonly referred to as a composite account. For example, all the assets used in a business may be included in a single account. Group, classified, or composite accounts may be further broken down on the basis of location, dates of acquisition, cost, character, use, etc.
(2) When group, classified, or composite accounts are used with average useful lives an a normal retirement occurs, the full cost or other basis of the asset retired, unadjusted for depreciation or salvage, shall be removed from the asset account and shall be charged to the depreciation reserve. Amounts representing salvage ordinarily are credited to the depreciation reserve. When an asset is disposed of for reasons other than normal retirement, the full cost or other basis of the asset shall be removed from the asset and the depreciation reserve shall be charged with the depreciation applicable to the retired asset. For rules with respect to losses on normal retirements, see Reg. 24349(h).
(3) A taxpayer may establish as many accounts for depreciable property as it desires. Depreciation allowances shall be computed separately for each account. Such depreciation preferably should be recorded in a depreciation reserve account; however, in appropriate cases it may be recorded directly in the asset account. Where depreciation reserves are maintained, a separate reserve account shall be maintained for each asset account. The regular books of account or permanent auxiliary records shall show for each account the basis of the property, including adjustments necessary to conform to the requirements of Sections 24916 and 24917 and other provisions of law relating to adjustments to basis, and the depreciation allowances for tax purposes. In the event that reserves for book purposes do not correspond with reserves maintained for tax purposes, permanent auxiliary records shall be maintained with the regular books of accounts reconciling the differences in depreciation for tax and book purposes because of different methods of depreciation, bases, rates, salvage, or other factors. Depreciation schedules filed with the tax return shall show the accumulated reserves computed in accordance with the allowances for tax purposes.
(4) In classified or composite accounts, the average useful life and rate shall be redetermined whenever additions, retirements, or replacements substantially alter the relative proportion of types of assets in the accounts. See example (2) in Reg. 24349(e) for a method of determining the depreciation rate for a classified or composite account.

******This regulation is substantially the same as Section 26 CFR 1.167(a)-7.
§24349(h). *  Retirements.

(1) Gains and Losses on Retirements. For the purposes of this regulation the term “retirement” means the permanent withdrawal of depreciable property from use in the trade or business. The withdrawal may be made in one of several ways. For example, the withdrawal may be made by selling or exchanging the asset, or by actual abandonment. In addition, the asset may be withdrawn from such productive use without disposition as, for example, by being placed in a supplies or scrap account. The tax consequences of a retirement depend upon the form of the transaction, the reason therefor, the timing of the retirement, the estimated useful life used in computing depreciation, and whether the asset is accounted for in a separate or multiple asset account. Upon the retirement of assets, the rules in this regulation apply in determining whether gain or loss will be recognized, the amount of such gain or loss, and the basis for determining gain or loss: 
(a) Where an asset is retired by sale at arm's length, recognition of gain or loss will be subject to the provisions of Sections 24901, 24902, and other applicable provisions of law.
(b) Where an asset is retired by exchange, the recognition of gain or loss will be subject to the provisions of sections 24901, 24902, 24941, and other applicable provisions of law.
(c) Where an asset is permanently retired from use in the trade or business but is not disposed of by the taxpayer or physically abandoned (as, for example, when the asset is transferred to a supplies or scrap account), gain will not be recognized. In such a case loss will be recognized measured by the excess of the adjusted basis of the asset at the time of retirement over the estimated salvage value or over the fair market value at the time of such retirement if greater, but only if--
(i) The retirement is an abnormal retirement, or
(ii) The retirement is a normal retirement from a single asset account (but see paragraph (4) of this regulation for special rule for item accounts), or
(iii) The retirement is a normal retirement from a multiple asset account in which the depreciation rate was based on the maximum expected life of the longest lived asset contained in the account.
(d) Where an asset is retired by actual physical abandonment (as, for example, in the case of a building condemned as unfit for further occupancy or other use), loss will be recognized measured by the amount of the adjusted basis of the asset abandoned at the time of such abandonment. In order to qualify for the recognition of loss from physical abandonment, the intent of the taxpayer must be irrevocably to discard the asset so that it will neither be used again by it nor retrieved by it for sale, exchange, or other disposition. Experience with assets which have attained an exceptional or unusual age shall, with respect to similar assets, be disregarded in determining the maximum expected useful life of the longest lived asset in a multiple asset account. For example, if a manufacturer establishes a proper multiple asset account for 50 assets which are expected to have an average life of 30 years but which will remain useful to him for varying periods between 20 and 40 years, the maximum expected useful life will be 40 years, even though an occasional asset of this kind may last 60 years.
(2) Definition of Normal and Abnormal Retirements. For the purpose of this regulation the determination of whether a retirement is normal or abnormal shall be made in the light of all the facts and circumstances. In general, a retirement shall be considered a normal retirement unless the taxpayer can show that the withdrawal of the asset was due to a cause not contemplated in setting the applicable depreciation rate. For example, a retirement is considered normal if made within the range of years taken into consideration in fixing the depreciation rate and if the asset has reached a condition at which, in the normal course of events, the taxpayer customarily retires similar assets from use in his business. On the other hand, a retirement may be abnormal if the asset is withdrawn at an earlier time or under other circumstances, as, for example, when the asset has been damaged by casualty or has lost its usefulness suddenly as the result of extraordinary obsolescence.
(3) Basis of Assets Retired. The basis of an asset at the time of retirement for computing gain or loss shall be its adjusted basis for determining gain or loss upon a sale or other disposition as determined in accordance with the provisions of Section 24911 and the following rules:
(a) In the case of a normal retirement of an asset from a multiple asset account where the depreciation rate is based on average expected useful life, the term “adjusted basis” means the salvage value estimated in determining the depreciation deduction in accordance with the provisions of Reg. 24349(a)(3),
(b) In the case of a normal retirement of an asset from a multiple asset account in which the depreciation rate was based on the maximum expected life of the longest lived asset in the account, the adjustment for depreciation allowed or allowable shall be made at the rate which would have been proper if the asset had been depreciated in a single asset account (under the method of depreciation used for the multiple asset account) using a rate upon the maximum expected useful life of that asset, and
(c) In the case of an abnormal retirement from a multiple asset account the adjustment for depreciation allowed or allowable shall be made at the rate which would have been proper had the asset been depreciated in a single asset account and using a rate based upon either the average expected useful life or he maximum expected useful life of the asset, depending upon the method of determining the rate of depreciation used in connection with the multiple asset account.
(4) Special Rule for Item Accounts. (a) As indicated in paragraphs (1)(c)(ii) and (iii) of this regulation, a loss is recognized upon the normal retirement of an asset from a single asset account but a loss on the normal retirement of an asset in a multiple asset account is not allowable where the depreciation rate is based upon the average useful life of the assets in the account. Where a taxpayer with more than one depreciable asset chooses to set up a separate account for each such asset and the depreciation rate is based on the average useful life of such assets (so that it uses the same life for each account), the question arises whether its depreciation deductions in substance are the equivalent of those which would result from the use of multiple asset accounts and therefore, it should be subject to the rules governing losses on retirements of assets from multiple asset accounts. Where a taxpayer has only a few depreciable assets which it chooses to account for in single asset accounts, particularly where such assets cover a relatively narrow range of lives, it cannot be said in the usual case that the allowance of losses on retirements from such accounts clearly will distort income. This results from the fact that where a taxpayer has only a few depreciable assets it is usually not possible clearly to determine that the depreciation rate is based upon the average useful life of such assets. Accordingly, it cannot be said that the taxpayer is in effect clearly operating with a multiple asset account using an average life rate so that losses should not be allowed on normal retirements. Therefore, losses normally will be allowed upon retirement of assets from single asset accounts where the taxpayer who has only a few depreciable assets. On the other hand, when a taxpayer who has only a few depreciable assets chooses to account for them in single asset accounts, using for each account a depreciation rate based on the average useful life of such assets, and the assets cover a wide range of lives, the likelihood that income will be distorted is greater than where the group of assets covers a relatively narrow range of lives. In those cases where the allowance of losses would distort income, the rules with respect to the allowance of losses on normal retirement shall be applied to such assets in the same manner as though the assets had been accounted for in multiple asset accounts using a rate based upon average expected useful life.
(b) Where a taxpayer has a large number of depreciable assets and depreciation is based on the average useful life of such assets, then, whether such assets are similar or dissimilar and regardless of whether they are accounted for in individual asset accounts or multiple asset accounts the allowance of losses on the normal retirement of such assets would distort income. Such distortion would result from the fact that the use of average useful life (and, accordingly, average rate) assumes that while some assets normally will be retired before the expiration of the average life, others normally will be retired after expiration of the average life. Accordingly, if instead of accounting for a large number of similar or dissimilar depreciable assets in multiple asset accounts, the taxpayer chooses to account separately for such assets, using a rate based upon the average life of such assets, the rules with respect to the allowances of losses on normal retirements will be applied to such assets in the same manner as though the assets were accounted for in multiple asset accounts using a rate based upon average expected useful life.
(c) Where a taxpayer who does not have a large number of depreciable assets (and who therefore is not subject to subparagraph (b) of this paragraph) chooses to set up a separate account for each such asset, and has sought to compute an average life for such assets on which to base its depreciation deductions (so that it uses the same life for each account), allowance of losses on normal retirement from such accounts may in some situations substantially distort income. Such distortion would result from the fact that the use of average useful life (and, accordingly, average rate) assumes that while some assets normally will be retired before expiration of the average life, others normally will be retired after expiration of the average life. Accordingly, where a taxpayer chooses to account separately for such assets instead of accounting for them in multiple asset accounts, and the result is to substantially distort his income, the rules with respect to the allowance of losses on normal retirements shall be applied to such assets in the same manner as though the assets had been accounted for in multiple asset accounts using a rate based upon average expected useful life.
(d) Whenever a taxpayer is treated under this paragraph as though its assets were accounted for in a multiple asset account using an average life rate, and, therefore, it is denied a loss on retirements, the unrecovered cost less salvage of each asset which was accounted for separately may be amortized in accordance with the rule stated in paragraph (5)(a)(ii) of this regulation.
(5) Accounting Treatment of Asset Retirements. (a) In the case of a normal retirement where under the foregoing rules no loss is recognized and where the asset is retired without disposition or abandonment, (i) if the asset was contained in a multiple asset account, the full cost of such asset reduced by estimated salvage, shall be charged to the depreciation reserve, or (ii) if the asset was accounted for separately, the unrecovered cost or other basis, less salvage, of the asset may be amortized through annual deductions from gross income in amounts equal to the unrecovered cost or other basis of such asset, divided by the average expected useful life (not the remaining useful life) applicable to the asset at the time of retirement. For example, if an asset is retired after six years of use and at the time of retirement depreciation was being claimed on the basis of an average expected useful life of 10 years, the unrecovered cost or other basis less salvage would be amortized through equal annual deductions over a period of 10 years from the time of retirement.
(b) Where multiple asset accounts are used and acquisitions and retirements are numerous, if a taxpayer, in order to avoid unnecessarily detailed accounting for individual retirements, consistently follows the practice of charging the reserve with the full cost or other basis of assets retired and of crediting it with all receipts from salvage, the practice may be continued so long as, in the opinion of the Franchise Tax Board, it clearly reflects income. Conversely, where the taxpayer customarily follows a practice of reporting all receipts from salvage as ordinary taxable income such practice may be continued so long as, in the opinion of the Franchise Tax Board, it clearly reflects income.

*Except for the deletion of references in the federal regulation to new methods of computing depreciation this regulation is substantially the same as Section 26 CFR 1.167(a)-8.
§24349(i). *  Obsolescence.

The depreciation allowance includes an allowable for normal obsolescence which should be taken into account to the extent that the expected useful life of property will be shortened by reason thereof. Obsolescence may render an asset economically useless to the taxpayer regardless of its physical condition. Obsolescence is attributable to many causes, including technological improvements and reasonable foreseeable economic changes. Among these causes are normal progress of the arts and sciences, supercession or inadequacy brought about by developments in the industry, products, methods, markets, sources of supply, and other like changes, and legislative or regulatory action. In any case in which the taxpayer shows that the estimated useful life previously used should be shortened by reason of obsolescence greater than had been assumed in computing such estimated useful life, a change to a new and shorter estimated useful life computed in accordance with such showing will be permitted. No such change will be permitted merely because in the unsupported opinion of the taxpayer the property may become obsolete. For rules governing the allowance of a loss when the usefulness of an asset is suddenly terminated, see Section 24347 and the regulations thereunder.

*This regulation is substantially the same as Section 26 CFR 1.167(a)-9.
§24349(j). **  When Depreciation Deduction Is Allowable.

(1) A taxpayer should deduct the proper depreciation allowance each year and may not increase its depreciation allowances in later years by reason of its failure to deduct any depreciation allowance or of its action in deducting an allowance plainly inadequate under the known facts in prior years. The inadequacy of the depreciation allowance for property in prior years shall be determined on the basis of the straight line method if no allowance has ever been claimed for such property. For rules relating to adjustments to basis, see Sections 24916 and 24917 and the regulations thereunder.
(2) The period for depreciation of an asset shall begin when the asset is placed in service and shall end when the asset is retired from service. A proportionate part of one year's depreciation is allowable for that part of the first and last year during which the asset was in service. However, in the case of a multiple asset account, the amount of depreciation may be determined by using what is commonly described as an “averaging convention,” that is, by using an assumed timing of additions and retirements. For example, it might be assumed that all additions and retirements to the asset account occur uniformly throughout the income year, in which case depreciation is computed on the average of the beginning and ending balances of the asset account for the income year. Among still other averaging conventions which may be used is the one under which it is assumed that all additions and retirements during the first half of a given year were made on the first day of that year and that all additions and retirements during the second half of the year were made on the first day of the following year. Thus, a full year's depreciation would be taken on additions in the first half of the year and no depreciation would be taken on additions in the second half. Moreover, under this convention, no depreciation would be taken on retirements in the first half of the year and a full year's depreciation would be taken on the retirements in the second half. An averaging convention, if used, must be consistently followed as to the account or accounts for which it is adopted, and must be applied to both additions and retirements. In any year in which an averaging convention substantially distorts the depreciation allowance for the income year, it may not be used. 

**Except for the deletion of provisions relating to new methods of computing depreciation this regulation is substantially the same as Section 26 CFR 1.167(a)-10.
§24349(k). Method of Computing Depreciation.
Note     •     History

(1) In General. Regardless of the method used in computing depreciation, deductions for depreciation shall not exceed such amounts as may be necessary to recover the unrecovered cost or other basis less salvage during the remaining useful life of the property. The reasonableness of any claim for depreciation shall be determined upon the basis of conditions known to exist at the end of the period for which the return is made. It is the responsibility of the taxpayer to establish the reasonableness of the deduction for depreciation claimed. Generally, depreciation deductions so claimed will be changed only where there is a clear and convincing basis for a change.
(2) Approved Methods. Any method of depreciation which was acceptable prior to the 1955 revision of the law or under the Internal Revenue Code of 1939 is an approved method. The most common of these methods is the straight line, whereby the annual allowance for depreciation is determined by dividing the cost of the property, less its estimated salvage value, by the number of years of its estimated life. While other methods may be used, the amount set aside for depreciation should be in accordance with a reasonably consistent plan (not necessarily at a uniform rate), whereby the aggregate of the amounts so set aside, plus the salvage value, will, at the end of the useful life of the property in the business, equal the cost or other basis of the property determined in accordance with Articles 1 and 2 of Chapter 15.
Since counterparts of Section 167(b)(2), (3), (4), (c), (d), and (e) of the Internal Revenue Code of 1954, were not enacted by the Legislature and made a part of this law until 1959, the “200 percent declining balance” and “sum-of-the-digits” methods of computing depreciation were not approved methods for determining income for state tax purposes until income years ending after December 31, 1958. However, if the declining balance method was in use prior to the 1955 revision of the law such method may be continued, but the rate must be limited to 150 percent of the applicable straight line method. In the case of new assets, i.e., assets acquired after December 31, 1954, the declining balance method may be used if the rate is limited to 150 percent of the applicable straight line method.
No deduction may be taken on account of depreciation actually sustained before January 1, 1928, under Chapter 2, or January 1, 1937, under Chapter 3.
(A) Straight line method. (i) Application of method. Under the straight line method the cost or other basis of the property less its estimated salvage value is deductible in equal annual amounts over the period of the estimated useful life of the property. The allowance for depreciation for the taxable year is determined by dividing the adjusted basis of the property at the beginning of the taxable year, less salvage value, by the remaining useful life of the property at such time. For convenience, the allowance so determined may be reduced to a percentage or fraction. The straight line method may be used in determining a reasonable allowance for depreciation for any property which is subject to depreciation under section 167 and it shall be used in all cases where the taxpayer has not adopted a different acceptable method with respect to such property. 
(ii) Illustrations. The straight line method is illustrated by the following examples:
EXAMPLE (1).
Under the straight line method items may be depreciated separately:

			Cost or other
		basis less
Year	Item 	salvage	Useful life 	                                    Depreciation Allowable                             

			Years	1954	1955	1956
1954	Asset A	$1,600	4	$2001	$400	$400
	Asset B	12,000	40	1501	300	300

1 In this example it is assumed that the assets were placed in service on July 1, 1954.
EXAMPLE (2).
In group, classified, or composite accounting, a number of assets with the same or different useful lives may be combined into one account, and a single rate of depreciation, i.e., the group, classified, or composite rate used for the entire account. In the case of group accounts, i.e., accounts containing assets which are similar in kind and which have approximately the same estimated useful lives, the group rate is determined from the average of the useful lives of the assets. In the case of classified or composite accounts, the classified or composite rate is generally computed by determining the amount of one year's depreciation for each item or each group of similar items, and by dividing the total depreciation thus obtained by the total cost or other basis of the assets. The average rate so obtained is to be used as long as subsequent additions, retirements, or replacements do not substantially alter the relative proportions of different types of assets in the account. An example of the computation of a classified or composite rate follows: 

Cost or other basis	Estimated useful life	Annual depreciation
	Years 

	$10,000	5	$2,000
	 10,000	15	    667
 	20,000		2,667
Average rate is 13.33 percent ($2,667 ¸ $20,000) unadjusted for salvage. Assuming the estimated salvage value is 10 percent of the cost or other basis, the rate adjusted for salvage will be 13.33 percent minus 10 percent of 13.33 percent (13.33% - 1.33%), or 12 percent.
EXAMPLE (3).
The use of the straight line method for group, classified, or composite accounts is illustrated by the following example: A taxpayer filing his returns on a calendar year basis maintains an asset account for which a group rate of 20 percent has been determined, before adjustment for salvage. Estimated salvage is determined to be 6 2/3 percent, resulting in an adjusted rate of 18.67 percent. During the years illustrated, the initial investment, additions, retirements, and salvage recoveries, which were determined not to change the composition of the group sufficiently to require a change in rate, were assumed to have been made as follows:
1954--Initial investment of $12,000
1957--Retirement $2,000, salvage realized $200
1958--Retirement $2,000, salvage realized $200
1959--Retirements $4,000, salvage realized $400
1959--Additions $10,000
1960--Retirement $2,000, no salvage realized
1961--Retirement $2,000, no salvage realized

                                                                   Depreciable Asset Account and Depreciation Computation on Average Balances
	Asset			Asset
	balance	Current	Current	balance	Average	Rate 	Allowable
Year	 Jan. 1	additions	retirements	Dec. 31	balance	(percent) 	depreciation

1954	--	$12,000	 --	$12,000	$6,000	18.67	$1,120
1955 	$12,000	 --	 --	12,000	12,000	18.67	2,240
1956 	12,000	 --	--	12,000	12,000	18.67	2,240
1957 	12,000	 --	$2,000	10,000	11,000	18.67	2,054
1958 	10,000	--	 2,000	  8,000	  9,000	18.67	1,680
1959 	 8,000	10,000	 4,000	14,000	11,000	18.67	2,054
1960 	14,000	--	 2,000	12,000	13,000	18.67	2,427
1961 	12,000	--	 2,000	 10,000	11,000	18.67	2,054

Corresponding Depreciation Reserve Account

	Depreciation	Depreciation	Current	Salvage	Depreciation
Year	reserve Jan. 1	allowable	retirements	realized	reserve Dec. 31

1954	--	$1,120	--	--	$1,120
1955 	$1,120	2,240	--	--	3,360
1956 	3,360	2,240	--	--	5,600
1957 	5,600	2,054	$2,000	$200	5,854
1958	 5,854	1,680	2,000	 200	5,734
1959 	5,734	2,054	4,000	 400	4,188
1960 	4,188	2,427	2,000	--	4,615
1961 	4,615	2,054	2,000	--	4,669

(B) Declining Balance Method. (i) Application of Method. Under the declining balance method a uniform rate is applied each year to the unrecovered cost or other basis of the property. The unrecovered cost or other basis is the basis provided by Section 24353 adjusted for depreciation previously allowed or allowable, and for all other adjustments provided by Section 24916 and other applicable provisions of law. The declining balance rate may be determined without resort to formula. Such rate determined under Section 24349(b)(2) shall not exceed twice the appropriate straight line rate computed without adjustment for salvage. While salvage is not taken into account in determining the annual allowances under this method, in no event shall an asset (or an account) be depreciated below a reasonable salvage value. However, see Section 24352.5 for rules which permit a reduction in the amount of salvage value to be taken into account for certain personal property acquired after December 8, 1971. Also, see Section 24350 for restrictions on the use of the declining balance method.
(ii) Illustrations. The declining balance method is illustrated by the following examples: 
EXAMPLE (1).
A new asset having an estimated useful life of 20 years was purchased on January 1, 1959, for $1,000. The normal straight line rate (without adjustment for salvage) is 5 percent, and the declining balance rate at twice the normal straight line rate is 10 percent. The annual depreciation allowances for 1959, 1960, and 1961 are as follows:

		Declining 
		balance rate	Depreciation
Year	Basis	(percent) 	allowance

1959	 $1,000	10	$100
1960	 900	10	90
1961	 810	10	81
(iii) Change in estimated useful life. In the declining balance method when a change is justified in the useful life estimated for an account, subsequent computations shall be made as though the revised useful life had been originally estimated. For example, assume that an account has an estimated useful life of ten years and that a declining balance rate of 20 percent is applicable. If, at the end of the sixth year, it is determined that the remaining useful life of the account is six years, computations shall be made as though the estimated useful life was originally determined as twelve years. Accordingly, the applicable depreciation rate will be 162/3 percent. This rate is thereafter applied to the unrecovered cost or other basis.
(C) Sum of the years-digits method. (i) Applied to a single asset. Under the sum of the years-digits method annual allowances for depreciation are computed by applying changing fractions to the cost or other basis of the property reduced by estimated salvage. The numerator of the fraction changes each year to a number which corresponds to the remaining useful life of the asset (including the year for which the allowance is being computed), and the denominator which remains constant is the sum of all the years digits corresponding to the estimated useful life of the asset. See Section 24350 for restrictions on the use of the sum of the years-digits method.
(I) Illustrations. Computation of depreciation allowances on a single asset under the sum of the years-digits method is illustrated by the following examples: 
EXAMPLE (1).
A new asset having an estimated useful life of five years was acquired on January 1, 1959, for $1,750. The estimated salvage is $250. For a taxpayer filing its returns on a calendar year basis, the annual depreciation allowances are as follows:

	Cost or
	other basis		Allowable	Depreciation
Year	less salvage	             Fraction 1	depreciation	 reserve
1959	$1,500	5/15	$500	$500
1960	1,500	4/15	400	900
1961	1,500	3/15	300	1,200
1962	1,500	2/15	200	1,400
1963	1,500	1/15	100	1,500
                          Unrecovered value (salvage)		250

1 The denominator of the fraction is the sum of the digits representing the years of useful life, i.e., 5, 4, 3, 2, and 1, or 15.
EXAMPLE (2).
Assume in connection with an asset acquired in 1959 that 3/4 of a year's depreciation is allowable in that year. The following illustrates a reasonable method of allocating depreciation:

	Depreciation
	                               for                        ____	           Allowable depreciation            
	 12 months	1959	1960	1961

1st year	$500	(3/4) $375	(1/4) $125
2nd year	400		(3/4)   300	 (1/4) $100
3rd year	300	 _____	______	(3/4)  225
		375	425	325

(II) Change in useful life. Where in the case of a single asset, a change is justified in the useful life, subsequent computations shall be made as though the remaining useful life at the beginning of the income year of change were the useful life of a new asset acquired at such time and with a basis equal to the unrecovered cost or other basis of the asset at that time. For example, assume that a new asset with an estimated useful life of ten years is purchased in 1959. At the time of making out its return for 1964, the taxpayer finds that the asset has a remaining useful life of seven years from January 1, 1964. Depreciation for 1964 should then be computed as though 1964 were the first year of the life on an asset estimated to have a useful life of seven years, and the allowance for 1964 would be 7/28 of the unrecovered cost or other basis of the asset after adjustment for salvage. 
(ii) Remaining life. (I) Application. Under the sum of the years-digits method, annual allowances for depreciation may also be computed by applying changing fractions to the unrecovered cost or other basis of the asset reduced by estimated salvage. The numerator of the fraction changes each year to a number which corresponds to the remaining useful life of the asset (including the year for which the allowance is being computed), and the denominator changes each year to a number which represents the sum of the digits corresponding to the years of estimated remaining useful life of the asset. For decimal equivalents of such fractions, see Table I of subdivision (ii) of subparagraph 1.167(b)(3) Code of Federal Regulations. For example, a new asset with an estimated useful life of 10 years is purchased January 1, 1959, for $6,000. Assuming a salvage value of $500, the depreciation allowance for 1959 is $1,000 ($5,500 x 0.1818, the applicable rate from Table I). For 1960, the unrecovered balance is $4,500, and the remaining life is 9 years. The depreciation allowance for 1960 would then be $900 ($4,500 x .2000, the applicable rate from Table I).
(D) Other Methods. (a) Under Section 24349(b)(4) a taxpayer may use any consistent method of computing depreciation, such as the sinking fund method, provided depreciation allowances computed in accordance with such method do not result in accumulated allowances at the end of any income year greater than the total of the accumulated allowances which could have resulted from the use of the declining balance method described in Section 24349(b)(2). This limitation applies only during the first two-thirds of the useful life of the property. For example, an asset costing $1,000 having a useful life of six years may be depreciated under the declining balance method in accordance with Reg. 24349(k)(2)(B), at a rate of 33 1/3 percent. During the first four years or 2/3 of its useful life, maximum depreciation allowances under the declining balance method would be as follows:

	Current 	Accumulated
	depreciation	depreciation	Balance

Cost of asset			 $1,000
First year	 $333	$333	667
Second year	 222	555	445
Third year	 148	703	297
Fourth year	 99	802	198

An annual allowance computed by any other method under Section 24349(b)(4) could not exceed $333 for the first year, and at the end of the second year the total allowances for the two years could not exceed $555. Likewise, the total allowances for the three years could not exceed $703 and for the four years could not exceed $802. This limitation would not apply in the fifth and sixth years. See Section 24350 for restrictions on the use of certain methods.
(b) It shall be the responsibility of the taxpayer to establish to the satisfaction of the Franchise Tax Board that a method of depreciation under Section 24349(b)(4) is both a reasonable and consistent method and that it does not produce depreciation allowances in excess of the amount permitted under the limitations provided in such section.
(3) Limitations on Methods of Computing Depreciation Under Section 24349(b)(2), (3), and (4). 
(A) In General. (i) Section 24350 provides limitations on the use of the declining balance method described in Section 24349(b)(2), the sum of the years-digits method described in Section 24349(b)(3), and certain other methods authorized by Section 24349(b)(4). These methods are applicable only to tangible property having a useful life of three years or more. If construction, reconstruction, or erection by the taxpayer began before January 1, 1959, and was completed after December 31, 1958, these methods apply only to that portion of the basis of the property which is properly attributable to construction, reconstruction, or erection after December 31, 1958. Property is considered as constructed, reconstructed, or erected by the taxpayer if the work is done for him in accordance with his specifications. The portion of the basis of such property attributable to construction, reconstruction, or erection after December 31, 1958, consists of all cost of the property allocable to the period after December 31, 1958, including the cost or other basis of materials entering into such work. It is not necessary that such materials be acquired after December 31, 1958, or that they be new in use. If construction or erection by the taxpayer began after December 31, 1958, the entire cost or other basis of such construction or erection qualifies for these methods of depreciation. In the case of reconstruction of property, these methods do not apply to any part of the adjusted basis of such property on December 31, 1958. For purposes of this regulation, construction, reconstruction, or erection by the taxpayer begins when physical work is started on such construction, reconstruction, or erection.
(ii) If the property was not constructed, reconstructed, or erected by the taxpayer, these methods apply only if it was acquired after December 31, 1958, and if the original use of the property commences with the taxpayer and commences after December 31, 1958. For the purpose of the preceding sentence, property shall be deemed to be acquired when reduced to physical possession, or control. The term “original use” means the first use to which the property is put, whether or not such use corresponds to the use of such property by the taxpayer. For example, a reconditioned or rebuilt machine acquired after December 31, 1958, will not be treated as being put to original use by the taxpayer even though it is put to a different use, nor will a horse acquired for breeding purposes be treated as being put to original use by the taxpayer if prior to the purchase the horse was used for racing purposes. See Regs. 24349(k)(2)(B), (C) and (D) of the various methods.
(iii) Assets having an estimated average useful life of less than three years shall not be included in a group, classified or composite account to which the methods described in Regs. 24349(k)(2)(B), (C) and (D), are applicable. However, an incidental retirement of an asset from such an account prior to the expiration of a useful life of three years will not prevent the application of these methods to such an account.
(iv) The methods of depreciation described in Regs. 24349(k)(2)(B), (C), and (D), are not applicable to property in the hands of a distributee, vendee, transferee, donee, or grantee unless the original use of the property begins with such person and the conditions required by Section 24350 and this regulation are otherwise met.
(B) Illustrations. (i) The application of these methods to property constructed, reconstructed, or erected by the taxpayer after December 31, 1958, may be illustrated by the following examples:
EXAMPLE (1).
If a building with a total cost of $100,000 is completed after December 31, 1958, and the portion attributable to construction after December 31, 1958, is determined by engineering estimates or by cost accounting records to be $80,000, the method referred to in subparagraph (A)(i) above, are applicable only to the $30,000 portion of the total.
EXAMPLE (2).
In 1959, a taxpayer has an old machine with an unrecovered cost of $1,000. If he contracts to have it reconditioned, or reconditions it himself, at a cost of an additional $5,000, only the $5,000 may be depreciated under the methods referred to in subparagraph (A)(i) above, whether or not the materials used for reconditioning are new in use.
EXAMPLE (3).
A taxpayer who acquired a building in 1945 makes major maintenance or repair expenditure in 1959 of a type which must be capitalized. For these expenditures the taxpayer may use a method of depreciation different from that used on the building (for example, the methods referred to in subparagraph (A)(i) above) only if he accounts for such expenditures separately from the account which contained the original building. In such case, the unadjusted basis on any parts replaced shall be removed from the asset account and shall be charged to the appropriate depreciation reserve account. In the alternative he may capitalize such expenditures by charging them to the depreciation reserve account for the building.
(ii) The application of these methods to property which was not constructed, reconstructed, or erected by the taxpayer but which was acquired after December 31, 1958, may be illustrated by the following examples:
EXAMPLE (1).
A taxpayer contracted in 1958 to purchase a new machine which he acquired in 1959 and put into first use in that year. He may use the methods referred to in subparagraph (A)(i) above, in recovering the cost of the new machine.
EXAMPLE (2).
A taxpayer instead of reconditioning his old machine buys a “factory reconditioned” machine in 1959 to replace it. He cannot apply the methods referred to in subparagraph (A)(i) above, to any part of the cost of the reconditioned machine since he is not the first user of the machine.
EXAMPLE (3).
In 1959, a taxpayer buys a house for $20,000 which had been used as a personal residence and thus had not been subject to depreciation allowances. He makes a capital addition of $5,000 and rents the property to another. The taxpayer may use the methods referred to in subparagraph (A)(i) above, only with respect to the $5,000 cost of the addition.
(C) Election to Use Methods. Subject to the limitations set forth in subparagraph (A) of this regulation, the methods of computing the allowance for depreciation specified in Section 24349(k)(2)(B), (C), and (D) may be adopted without permission and no formal election is required. In order for a taxpayer to elect to use these methods for any property described in subparagraph (A) of this regulation, he need only compute depreciation thereon under any of these methods for any taxable year ending after December 31, 1958, in which the property may first be depreciated by him. The election with respect to any property shall not be binding with respect to acquisitions of similar property in the same year or subsequent year which are set up in separate accounts. If a taxpayer has filed his return for a taxable year ending after December 31, 1958, an election to compute the depreciation allowance under any of the methods specified in Section 24349 or a change in such an election may be made in an amended return only with the consent of the Franchise Tax Board.
(4) Adjustment for Federal Investment Credit. (A) In order to eliminate the necessity of maintaining separate depreciation schedules for State and federal tax purposes with respect to property which qualifies for the investment credit provided for by the Federal Revenue Bill of 1962 (Public Law 87-834), every taxpayer, at its election may deduct the proper depreciation allowed under the Internal Revenue Code of 1954, and:
(1) Depreciate separately over the life of the property an additional amount equal to the investment credit allowed with respect to such property;
(2) Increase the salvage value of the property by an amount equal to the investment credit allowed with respect to such property; or
(3) For the year succeeding the useful life of the property deduct the amount of the investment credit allowed with respect to such property.
A timely election under this regulation shall be made for the first income year to which the election applies, or in the case of income years beginning before January 1, 1964 on or before the last day prescribed by law (including extensions thereof) for filing a return for the last income year beginning before January 1, 1964. The election shall consist of a computation made in accordance with one of the provisions of this regulation or by filing a written statement signed by the taxpayer declaring which of the methods provided by this regulation is adopted. If a taxpayer has elected to deduct the proper depreciation allowed under the Internal Revenue Code of 1954, and has not made an election in its return or otherwise within the period provided for by this regulation, it shall be deemed to have elected to adopt method number (2).
(B) (1) The Federal Revenue Act of 1964 permits the basis of property placed in service before January 1, 1964, which qualified for the investment credit provided for by Section 38 of the Internal Revenue Code of 1954, to be increased by an amount equal to the federal investment credit. To eliminate the necessity of maintaining separate depreciation schedules for state and federal purposes and make provisions for the various methods which were provided for treatment of the investment tax credit under paragraph (A) of this regulation the following provisions apply:
(i) To adjust the allowance for depreciation under the Bank and Corporation Tax Law, for income years beginning after December 31, 1963, a taxpayer which elected to adjust its depreciation under method (1) of Paragraph (A) of this regulation may elect to:
(a) Adjust its State depreciation allowance by reducing the proper depreciation allowed for the income year under the Internal Revenue Code of 1954, equally for each income year over the remaining life of the property as follows:
(1) Determine the amount of depreciation allowed under the Bank and Corporation Tax Law which exceeded the amount allowed under the Internal Revenue Code of 1954 attributable to property placed in service before January 1, 1964, for which the federal investment credit was allowed; and
(2) Divide such excess amount by the remaining useful life of the property.
EXAMPLE:
A new asset having a useful life of 10 years for which the federal investment credit was allowed was acquired on January 1, 1962, for $1,000. It has no salvage value and the depreciation allowance is determined under the straight line method. The depreciation allowances for 1962, 1963, and 1964 under state and federal law are as follows:

	Adjusted Basis	Depreciation
	As of December 31	    Allowance    

Year	State	Federal		State	Federal	Difference
1962	 $900	 $8371		$100	$93	$7
1963	 $800	$744		$100	$93	 $7
						$14
1964	 $700	$712.252			$101.75
   State adjustment 				    -1.753 
					$100.00
If the taxpayer in the above example had used the declining balance method, with a rate not exceeding twice the straight line allowance, the adjustment would be as follows:

	Adjusted Basis	Depreciation
	As of December 31	     Allowance   

Year	State	Federal		State	Federal	Difference

1962	 $800	$744		$200	$186	$14
1963	 $640	$595.20		$160	$148.80	$11.20
						$25.20
1964	 $510.11	$532.165			$133.04
  State adjustment 4				 -3.15
					$129.89

1 Cost	             	$1,000
  Less: Investment credit 	       $70
  1962 depreciation 	         93	    163
		$837
2 1963 adjusted basis	              	$744.00
  Plus investment credit	             	 70.00
		$814.00
Less 1964 depreciation	              	$101.75
    ($814.00 ¸ 8)	             	$712.25
3   Adjustment (Remaining life $14 ¸ 8 difference between State
     and Federal depreciation)
4  Adjustment (Remaining life $25.20 ¸ 8 difference between
    State and Federal adjustment)
5 1963 adjusted basis	              	$595.20
    Plus investment credit	             	  70.00
		$665.20
Less 1964 depreciation	             	$133.04
		$532.16
(b) Claim the same depreciation as allowed by the Internal Revenue Code of 1954 and the Federal Revenue Act of 1964 for income years beginning after December 31, 1963, provided the taxpayer reports as net income for its first income year ending after December 31, 1963, the total amount attributable to the State depreciation deduction which exceeded the depreciation deduction allowed under the Internal Revenue Code of 1954, because of the reduction in basis required by Section 48(g). A taxpayer may make the adjustment provided for by this paragraph only if the excess State depreciation deduction is subject to tax measured by net income.
(c) Claim the same depreciation as allowed by the Internal Revenue Code of 1954 and the Federal Revenue Act of 1964, for income years beginning after December 31, 1963, provided that:
(1) Amended returns or schedules are filed for any income years for which method (1) of paragraph (A) was applicable; and
(2) Any additional taxes due for additional amounts deducted for the period method (1) of paragraph (A) was applicable are paid, including interest thereon.
(2) No adjustment is required in the case of taxpayers which elected to adopt methods (2) or (3) of paragraph (A) of this regulation. Such taxpayers may elect within the time prescribed by paragraph (3) to deduct the same depreciation allowance which is allowed under the Internal Revenue Code of 1954 with respect to qualified property.
(3) If property subject to the provisions of this regulation is sold or exchanged prior to the end of its useful life, and its basis for determining gain or loss is determined by reference to its adjusted basis under the Internal Revenue Code of 1954, in addition to any other adjustments, proper adjustment in respect of the property shall be made for any difference between depreciation allowed under the Bank and Corporation Tax Law and the Internal Revenue Code of 1954. 
The elections provided by this paragraph shall be made for the first income year ending after December 31, 1963. Adjustments may be made in returns filed for any income year ending on or before December 31, 1966, provided that the required adjustments are made for all applicable years. An election to make the adjustment provided for by this regulation shall be made by computing the depreciation allowance in the manner provided for by this regulation.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24349, Revenue and Taxation Code.
HISTORY

1. Repealer and new section filed 1-6-77; effective thirtieth day thereafter (Register 77, No. 2).
§24349(k)(1). Adjustment for Federal Investment Credit.
History

HISTORY

1. Repealer filed 1-6-77; effective thirtieth day thereafter (Register 77, No. 2).
§24349(<em>l</em>). Depreciation Based on Class Lives.
Note     •     History

(1) Depreciation based on class lives for property placed in service after December 31, 1970. Federal Asset Depreciation Range (ADR) Regulation 1.167(a)(11) adopted by T.D. 7128 on June 23, 1971 as amended by T.D. 7272, April 20, 1973 and T.D. 7315, June 6, 1974 is hereby adopted by reference as though set out in full herein, subject to the following exceptions:
(A) The permissible asset depreciation period for any asset guideline class shall be the asset guideline period without any range or variance.
(B) Special rules with respect to the normalization of depreciation on public utility property are not applicable where they are at variance with provisions of the Revenue and Taxation Code.
(C) An election to apply this subsection to eligible property shall be made with the return filed for the income year in which the property is first placed in service by the taxpayer. An election to compute the allowance for depreciation under this subsection is a method of accounting but consent of the Franchise Tax Board will be deemed granted to make an annual election. The election may be made with an amended return only if such amended return is filed no later than the time prescribed by law (including extensions thereof) for filing the return for the income year of election. In the case of an income year ending on or before December 31, 1975 (with respect to which the statute of limitations for assessment of deficiencies has not expired), the election may be made with an amended return only if such amended return is filed on or before March 15, 1977. If an election is not made within the time and manner prescribed in this subparagraph, no election may be made for such income year (by the filing of an amended return or any other manner) with respect to any eligible property placed in service in the income year.
(D) Form FTB 3888 will be provided for the submission of required information to the Franchise Tax Board.
(2) Depreciation based on class lives for property first placed in service before January 1, 1971. Federal Class Life System (CLS) Regulation 1.167(a)(12) adopted by T.D. 7278 on June 6, 1973 as amended by T.D. 7315, June 6, 1974, is hereby adopted by reference as though set out in full herein, subject to the following exceptions. 
(A) The revocation of the provisions of Revenue Procedure 62-21 shall not apply for income years ending before January 1, 197. A taxpayer may elect to be examined under the provisions of Revenue Procedure 62-21 for an income year ended before January 1, 1977 only in accordance with the rules set forth in 1.167(a)-12(f) of the Code of Federal Regulations.
(B) An election to apply this subsection for an income year ending after December 31, 1970, is a method of accounting but the consent of the Franchise Tax Board will be deemed granted to make an annual election. An election to apply this subsection to qualified property for an income year shall be made with the return for that year. If the taxpayer does not file a timely return (taking into account extensions of time for filing) for the income year, the election shall be filed at the time the taxpayer files his first return for the year. The election may be made with an amended return only if such amended return is filed no later than the time prescribed by law (including extensions thereof) for filing the return for the income year of election. In the case of an income year ending on or before December 31, 1975 (with respect to which the statute of limitations for assessment of deficiencies has not expired), the election may be made with an amended return only if such amended return is filed on or before March 15, 1977. Form FTB 3887 will be provided for making the election and submission of required information.
(C) An election under this Paragraph does not constitute permission to change the method of estimating salvage. Permission to change the manner of estimating salvage must be obtained by filing a request with the Franchise Tax Board within the time prescribed by Section 24651 and Regulation 24651(e)(3).
(3) Conversion of Federal depreciation data. In order to eliminate the necessity of maintaining separate depreciation schedules for State and Federal tax purposes with respect to property which is covered by an election under paragraph (1) of this section and under Federal Asset Depreciation Range (ADR) Regulation 1.167(a)-11 or by an election under paragraph (2) of this section and Federal Class Life System (CLS) Regulation 1.167(a)-12, a taxpayer may apply to the Franchise Tax Board for an approval to adopt a method or formula for converting Federal ADR/CLS depreciation data into State depreciation data and to make such other adjustments as are required to base State depreciation computations upon Federal ADR/CLS depreciation data. The application shall be made on the tax return (or, in the case of an income year ending on or before December 31, 1975, the amended tax return referred to in subsections (1) and (2)) for the first income year in which such method or formula is to be used. It shall be the responsibility of the taxpayer to establish to the satisfaction of the Franchise Tax Board that any such method or formula does not produce depreciation allowances in excess of the amount permitted under the limitations provided in these regulations.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24349, Revenue and Taxation Code.
HISTORY

1. Repealer and new section filed 1-6-77; effective thirtieth day thereafter (Register 77, No. 2).
§24349(m). Change in Method.
History

HISTORY

1. Repealer filed 1-6-77; effective thirtieth day thereafter (Register 77, No. 2).
§24349(n). *  Basis for Depreciation.

The basis upon which the allowance for depreciation is to be computed with respect to any property shall be the adjusted basis provided in Article 2 of Chapter 15 for the purpose of determining gain on the sale or other disposition of such property.

*Except for the deletion of the last sentence of the federal regulation this regulation is substantially the same as Section 26 CFR 1.167(g)-1.
§24349(o). **  Depreciation of Improvements in the Case of Mines, Etc.

Property used in the trade or business which is subject to the allowance for depreciation provided in Section 24835 shall be treated for all purposes of this part as if it were property subject to the allowance for depreciation under Section 24349.

**This regulation is substantially the same as Section 26 CFR 1.167(h)-1.
§24351. Agreement As to Useful Life and Rates of Depreciation.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 9-19-69; effective thirtieth day thereafter (Register 69, No. 38).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24352. ***  Change in Method.
Note     •     History

(a) In General. Any change in the method of computing the depreciation allowances with respect to a particular account is a change in method of accounting, and such a change will be permitted only with the consent of the Franchise Tax Board, except that certain changes to the straight line method shall be permitted without consent as provided in Section 24352 and subsection (b) of this regulation. A change in method of computing depreciation will be permitted only with respect to all the assets contained in a particular account as defined in Reg. 24349(g). Any change in the percentage of the current straight line rate under the declining balance method, as for example, from 200 percent of the straight line rate to any other percent of the straight line rate, or any change in the interest factor used in connection with a compound interest or sinking fund method will constitute a change in method of depreciation and will require the consent of the Franchise Tax Board. Any request for a change in method of depreciation shall be made in accordance with Section 24651 and the regulations thereunder and shall state the character and location of the property, method of depreciation being used and the method proposed, the date of acquisition, the cost or other basis and adjustments thereto, amounts recovered through depreciation and other allowances, the estimated salvage value, the estimated remaining life of the property, and such other information as may be required.
(b) Declining Balance to Straight Line. In the case of an account to which the method described in Section 24349(b)(2) is applicable, a taxpayer may change without the consent of the Franchise Tax Board, from the declining balance method of depreciation to the straight line method at any time during the useful life of the property under the following conditions. Such a change may not be made if a provision prohibiting such a change is contained in an agreement under Section 24351. When the change is made, the unrecovered cost or other basis (less a reasonable estimate for salvage) shall be recovered through annual allowances over the estimated remaining useful life determined in accordance with the circumstances existing at that time. With respect to any account, this change will be permitted only if applied to all the assets in the account as defined in Reg. 24349(g). The taxpayer shall furnish a statement with respect to the property which is the subject of the change showing the date of acquisition, cost or other basis, amounts recovered through depreciation and other allowances, the estimated salvage value, the character of the property, the remaining useful life of the property, and such other information as may be required. The statement shall be attached to the taxpayer's return for the income year in which the change is made. A change to the straight line method must be adhered to for the entire income year of the change and for all subsequent income years unless, with the consent of the Franchise Tax Board, a change to another method is permitted. 
NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 9-19-69; effective thirtieth day thereafter (Register 69, No. 38).

***This regulation is based on Section 26 CFR 1.167(e)-1.
§24355(a). Amortization of Emergency Facilities.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 3-31-70; effective thirtieth day thereafter (Register 70, No. 14).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24355(b). Amortization of Grain Storage Facilities.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 3-31-70; effective thirtieth day thereafter (Register 70, No. 14).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24356(a). *  Additional First-Year Depreciation Allowance.
Note     •     History

(1) In General. For income years ending after December 31, 1958, in the case of “Section 24356 property” acquired by purchase after December 31, 1958, a taxpayer may elect for the first income year for which a deduction with respect to such property is allowable under Sections 24349 through 24354 to the taxpayer to include as part of the “reasonable allowance” allowable under Section 24349(a) an additional allowance of 20 percent of the cost or of a portion of the cost of such property. The allowance under Section 24356 is in addition to the depreciation allowable under Sections 24349 through 24354 computed on the balance of the unrecovered cost of the property after adjustment for the allowance under this regulation. For application of the dollar limitations of Section 24356(b) see Reg. 24356(b). For a definition of the term “Section 24356 property” and for special rules, see Reg. 24356(c). For the time and manner of making the election under this regulation, see Reg. 24356(d). 
(2) Proration Not Required. The allowance under Section 24356 is determined without any proration based on the period of time the Section 24356 property has been in service during the income year. For example, taxpayer A, which makes its tax returns on the calendar year basis, purchased and placed in service on August 7, 1959, Section 24356 property costing $8,000. A elects to claim the additional first-year depreciation on the total cost of $8,000. A is entitled to a deduction of $1,600 (20 percent of $8,000) under this section for 1959, without proration for the number of days in 1959 during which the property was in service.
(3) Amount Subject to Allowance. The allowance under Section 24356 is equal to 20 percent of the cost, or portion of the cost, of Section 24356 property selected by the taxpayer. Thus, all or a part of the cost of one item of property, or all or parts of the cost of several items of property, may be selected, subject to the dollar limitations of Section 24356(b) and Reg. 24356(b). For example, Corporation B, which makes its tax returns on the basis of the calendar year, purchased Section 24356 property costing $9,000 in March 1959. B elects to claim the additional first-year depreciation allowance, but only with respect to $3,000 of the cost of the property. B's allowance under Section 24356 for 1959 is $600 (20 percent of $3,000).
(4) Salvage. The allowance under Section 24356 is computed without regard to any salvage value which is estimated will be realizable upon the sale or other disposition of the Section 24356 property when it is no longer useful in the taxpayer's trade or business or in the production of its income and is to be retired from service by the taxpayer.
(5) When Allowance Is Available.
(A) (i) The term “the first income year for which a deduction is allowable under Sections 24349 through 24354 to the taxpayer with respect to such property” means the first income year for which depreciation is allowable under Section 24349 on such property. See subsection (2) of Reg. 24349(j). The provisions of this subparagraph may be illustrated by the following examples:
EXAMPLE (1).
Corporation M, which makes its tax returns on the calendar year basis, purchases Section 24356 property costing $10,000 on December 27, 1960, places it in service on the same date, and does not use an averaging convention in determining the depreciation allowance. Since depreciation is allowable for the December 27-31, 1960, period, Corporation M may elect to claim the additional first-year depreciation allowance of $2,000 (20 percent of $10,000) for 1960.
EXAMPLE (2).
Corporation N, which files its tax returns on the calendar year basis, purchases Section 24356 property costing $10,000 on August 10, 1960, and places it in service on the same date. Corporation N places the Section 24356 property in a multiple asset account under which it is assumed, for purposes of computing depreciation, that all additions and retirements during the first half of the income year were made on the first day of that year, and that all additions and retirements during the second half of the income year were made on the first day of the following year. Under these circumstances, Corporation N is entitled to elect the additional first-year depreciation allowance under Section 24356 on such property only for 1961, since that is the first year for which a deduction is allowable under Section 24349 on such property.
(ii) In the case of an emergency facility which the taxpayer elects to amortize under the provisions of Section 24355, and which facility also qualifies as Section 24356 property, the additional first-year depreciation allowance is not available (except as hereafter provided) unless the taxpayer elects under Reg. 24355(b) to begin the amortization deductions under Section 24355 with the succeeding income year. If the taxpayer elects under Reg. 24355(b) to begin the amortization deductions under Section 24355 with the month following the month in which the facility was completed or acquired, and the facility qualifies as Section 24356 property, the additional first-year allowance is available only with respect to the portion of the facility which is not certified in accordance with Section 24355 and the regulations thereunder. If 100 percent of the facility is certified in accordance with Section 24355 and the regulations thereunder and the taxpayer elects under Reg. 24355(b) to begin the amortization deductions under Section 24355 with such following month, no additional first-year allowance is available with respect to any portion of the facility.
(B) The additional first-year depreciation allowance on Section 24356 property is not available if the cost of such property is to be recovered through amortization deductions under Section 24343 and the regulations thereunder instead of through depreciation allowances under Section 24349
NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 3-31-70; effective thirtieth day thereafter (Register 70, No. 14).

*This regulation is based on Section 26 CFR 1.179-1.
§24356-1. Dollar Limitation.
Note     •     History

(a) Maximum Amount Subject to election.
(1) In any one income year the maximum amount of the cost of Section 24356 property with respect to which the taxpayer may elect to take an allowance under Section 24356 is $10,000. If the Section 24356 property purchased by the taxpayer exceeds the $10,000 limitation, the taxpayer may select the cost or portion of the cost of Section 24356 property to which its election is to apply. For example, Corporation X purchased five new delivery trucks in February 1959 at a cost of $5,000 each. The trucks qualify as Section 24356 property. X may select $2,000 of the cost of each truck to be subject to the allowance, or the total cost of $5,000 for each of any two trucks, or X may allocate the $10,000 maximum cost among some or all of the trucks in any other manner it chooses. The selection of property made by X is irrevocable unless X obtains consent of the Franchise Tax Board to change. See subsection (2) of Reg. 24356(d).
(2) The dollar limitations of Section 24356 apply to each taxpayer and not to each trade or business in which the taxpayer has an interest. For example, Corporation G makes its tax returns on the calendar year basis. G operates two separate businesses on its own account and is a member of a partnership engaged in business. During 1960, G purchased Section 24356 property costing $8,000 for one of its businesses and Section 24356 property costing $6,000 for the other. In addition, G's distributive share of the partnership's Section 24356 allowance for 1959 is $300. The maximum allowance available to G under Section 24356 for 1960, including its $300 distributive share from the partnership is $2,000 (20 percent of $10,000).
(b) Affiliated Group. Taxpayers which constitute an affiliated group, as defined in subsection (c) of this regulation, shall be treated as one taxpayer in applying the $10,000 limitation of this regulation. The allowance may be taken by any one such member or allocated among the several members in any manner in accordance with an agreement entered into by the members of the group. The amount of the allowance allocated to any member, however, shall not exceed 20 percent of the cost of Section 24356 property actually purchased by the member in the income year. Each member of an affiliated group to which is allocated any part of the deduction under Section 24356 shall file a separate statement attached to its tax return in which an election is made to claim an additional first-year depreciation allowance. Such statement shall include the names of all the members of the affiliated group, the income years of the members of the affiliated group, and a description of the manner in which the deduction under Section 24356 has been divided among them.
An allocation among the members of an affiliated group of the allowance under Section 24356 shall not be revoked after the due date of the return (including extensions of time) of the member corporation filing the latest return for an income year for which an election to take the allowance is made. For the purpose of the preceding sentence, the income years of the other members of the affiliated group ending with or within the income year of the member corporation filing the latest return shall be considered as corresponding to the income year of this member corporation. Thus, where this member corporation's income year ends November 30, 1960, the allowance will apply with respect to Section 24356 property purchased in August 1959 by an affiliated corporation whose income year ends June 30, 1960 (an income year ending within the income year of the member corporation filing the latest return).
(c) Affiliated Group. For purposes of Section 24356, the term “affiliated group” has the meaning assigned to it by Section 1504 of the Internal Revenue Code of 1954, except that the phrase “more than 50 percent” shall be substituted for the phrase “at least 80 percent” each place it appears in Section 1504(a) of the Internal Revenue Code of 1954.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24356, Revenue and Taxation Code.
HISTORY

1. New section filed 3-31-70; effective thirtieth day thereafter (Register 70, No. 14).
2. Renumbering and amendment of Section 24356(b) to Section 24356-1 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24356(c). *  Definitions and Special Rules.
Note     •     History

The following definitions and special rules apply for purposes of Section 24356, Regs. 24356(a), 24356(b), 24356(d), and this regulation.
(1) Section 24356 Property. The term “Section 24356 property” means any tangible personal property, new or used, of a character subject to the allowance for depreciation under Sections 24349 through 24354, acquired by purchase after December 31, 1958, for use in the taxpayer's trade or business or in the production of its income, and which has an estimated useful life (determined at the time of acquisition) of 6 years or more. For purposes of determining the estimated useful life of Section 24356 property, the provisions of Reg. 24349(a)(2) shall be applied. For definition of the term “purchase,” see subsection (3) of this regulation.
(2) Tangible Personal Property. Local law definitions will not be controlling for purposes of determining the meaning of the term “tangible personal property” as it is used in Section 24356 and the regulations thereunder. For purposes of Section 24356, the term “tangible personal property” includes any tangible property except land, and improvements thereto, such as buildings or other inherently permanent structures thereon (including items which are structural components of such buildings or structures). Assets accessory to the operation of a business, such as machinery, printing presses, transportation or office equipment, refrigerators, individual air conditioning units, grocery counters, etc., generally constitute tangible personal property for purposes of Section 24356, even though such assets may be termed fixtures under local law. The term does not include, for example, the wiring in a building, plumbing systems, nor central heating or central air conditioning machinery, pipes, or ducts or other items, which are structural components of a building or other permanent structure, nor does the term include trademarks, goodwill, or other intangibles.
(3) Purchase. (A) The term “purchase” means any acquisition of property after December 31, 1958, but only if all the requirements of subparagraphs (i), (ii), and (iii) of this paragraph are satisfied.
(i) The property is not acquired by purchase if it is acquired from a taxpayer whose relationship to the taxpayer acquiring it would result in the disallowance of losses under Sections 24427 to 24430, inclusive. In applying the rules of Sections 24428 and 24429, subdivision (d) of Section 24429 shall be treated as providing that the family of an individual shall include only his spouse, ancestors, and lineal descendants. For example, a purchase of property by a corporation from a taxpayer who owns, directly or indirectly, more than 50 percent in value of the outstanding stock of such corporation does not qualify as a “purchase” under Section 24356(d)(2), nor does the purchase of property from the wife of such a shareholder qualify. However, the purchase of Section 24356 property by a corporation from a brother or sister of a more than 50% shareholder of the corporation does qualify as a purchase for purposes of Section 24356(d)(2).
(ii) The property is not acquired by purchase if acquired from any one member of an affiliated group (as defined in subsection (5) of this regulation) by another member of the same affiliated group.
(iii) The property is not acquired by purchase if the basis of the property in the hands of the taxpayer acquiring it is determined in whole or in part by reference to the adjusted basis of such property in the hands of the taxpayer from whom acquired. For example, property acquired by gift does not qualify as property acquired by purchase, for purposes of Section 24356(d)(2), nor does property received in a corporate distribution the basis of which is determined under Section 24454(b), nor property acquired by a corporation in a transaction to which Section 24521 applies.
(B) If property is in the process of construction, reconstruction, or erection on December 31, 1958, the term “purchase” will apply only to that part of the cost of such property which is attributable to such construction, reconstruction, or erection after December 31, 1958. The portion of the cost of such property attributable to construction, reconstruction, or erection after December 31, 1958, consists of all costs of the property allocable to the period after that date, including the cost or other basis of materials entering into such property. It is not necessary that such materials be acquired after December 31, 1958, or that their estimated useful lives independently determined be 6 years or more provided, however, that the property constructed, reconstructed, or erected has an estimated useful life of 6 years or more.
(4) Cost. The cost of Section 24356 property does not include so much of the basis of such property as is determined by reference to the basis of other property held at any time by the taxpayer. For example, Corporation N purchases a new drill press costing $9,000 in November 1960 which qualifies as Section 24356 property, and is granted a trade-in allowance of $2,000 on its old drill press. The old drill press had a basis of $1,200. Under the provisions of Sections 24912 and 24941(d), the basis of the new drill press is $8,200 ($1,200 basis of old drill press plus cash expended of $7,000). However, only $7,000 of the basis of the new drill press qualifies as cost for purposes of the allowance under Reg. 24356(a); the remaining $1,200 is not part of the cost because it is determined by reference to the basis of the old drill press.
(5) Affiliated Group. For purposes of Section 24356, the term “affiliated group” has the meaning assigned to it by Section 1504 of the Internal Revenue Code of 1954, except that the phrase “more than 50 percent” shall be substituted for the phrase “at least 80 percent” each place it appears in Section 1504(a) of the Internal Revenue Code of 1954.
(6) Adjustment to Basis. A taxpayer which elects the additional first-year depreciation allowance under Section 24356 must make the necessary adjustment to basis of the Section 24356 property, as required by Section 24356(d)(6), in the records it is required to keep under Reg. 24349(g), before any other deduction allowable by Section 24349 is computed. For example, Corporation M which makes its return on the basis of the calendar year and uses the straight-line method of depreciation, purchases a $15,000 machine on July 1, 1960, which qualifies as Section 24356 property, and elects to claim the additional first-year depreciation allowance. The machine has an estimated 10-year life and an estimated salvage value of $1,000. For 1960, Corporation M is entitled to an allowance of $2,000 (20 percent of $10,000) under Section 24356. The cost basis of $15,000 must be adjusted by the $2,000 allowance before any other deduction under Section 24349 is computed. The adjusted basis of $13,000, less $1,000 salvage, or $12,000 may then be depreciated over the 10-year useful life of the machine in accordance with the provisions of Section 24349 and the regulations thereunder. Since Corporation M uses the straight-line method of depreciation for the machine, it will be entitled to a total deduction of $2,600 in 1960; that is $2,000 for additional first-year depreciation plus $600 ($12,000 x 10 percent x 6 mos.) depreciation on the balance of $12,000.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 3-31-70; effective thirtieth day thereafter (Register 70, No. 14).

*This regulation is based on Section 26 CFR 1.179-3.
§24356(d). *  Time and Manner of Making Election.
Note     •     History

(1) Election. A separate election must be made for each income year in which an additional first-year depreciation allowance is claimed with respect to Section 24356 property. The election under Section 24356 and Reg. 24356(a) to claim an additional first-year depreciation allowance on Section 24356 property shall be made on the taxpayer's tax return for the income year to which the election applies. For the election to be valid, the return must be filed not later than the time prescribed by law (including extensions thereof) for filing the return for such income year. The election shall be made by showing as a separate item on the taxpayer's tax return the total additional first-year depreciation claimed with respect to Section 24356 property selected. The additional first-year depreciation claimed with respect to Section 24356 property must not be included in the depreciation claimed under Sections 24349 through 24354 with respect to such property. The taxpayer shall maintain records which permit specific identification of each piece of Section 24356 property and reflect how and from whom such property was acquired. The election to claim an additional first-year depreciation allowance under this regulation with respect to any property is irrevocable and shall be binding on the taxpayer with respect to such property for the income year for which the election is made and for all subsequent income years, unless the Franchise Tax Board gives its consent to revoke the election. Similarly, the selection of Section 24356 property by the taxpayer to be subject to the additional first-year depreciation allowance must be adhered to in computing the taxpayer's net income for the income year for which the selection is made and for all subsequent income years, unless consent to change the selection of property is given by the Franchise Tax Board.
(2) Revocation. A request to revoke an election under Section 24356 and Reg. 24356(a) or to change the property selected for the additional first-year depreciation allowance shall be in writing and shall be addressed to the Franchise Tax Board. The request shall include the name and address of the taxpayer and shall be signed by a principal officer of the taxpayer or its duly authorized representative. It must be filed no later than 6 months after the date prescribed by law (without regard to extensions of time) for filing the tax return for the year in which the allowance under Reg. 24356(a) was claimed, shall be accompanied by a statement showing the year and property involved, and shall set forth in detail the reasons for the request to revoke the election or to change the selection of property. Ordinarily, a request for consent to revoke the election or to change the selection of property will not be granted if it appears from all the facts and circumstances that the only reason for the desired change is to obtain a tax advantage.
(3) Effective Date. The provisions of this regulation apply to all income years ending after December 31, 1958.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 3-31-70; effective thirtieth day thereafter (Register 70, No. 14).

*This regulation is based on Section 26 CFR 1.179-4.
§24356.1(a). *  Change from Retirement to Straight-Line Method of Computing Depreciation.
History

HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Change without regulatory effect repealing section filed 8-4-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 32).

*Except for provisions relating to elections this regulation is substantially the same as Section 26 CFR 1.9001-1.
§24356.1(b). *  Basis Adjustments for Taxable Years Beginning on or After 1959 Adjustment Dates.
History

HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Change without regulatory effect repealing section filed 8-4-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 32).

*Except for differences in dates this regulation is substantially the same as Section 26 CFR 1.9001-2.
§24356.1(c). *  Basis Adjustments for Taxable Years Between Changeover Date and 1959 Adjustment Date.
History

HISTORY

1. New section filed 2-20-64; effective thirtieth day thereafter (Register 64, No. 4).
2. Change without regulatory effect repealing section filed 8-4-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 32).

*This regulation is substantially the same as Section 26 CFR 1.9001-3.
§24356.7-1. Recapture of Deduction for Qualified Property Previously Used in an Enterprise Zone.
Note     •     History

(a) In General. Section 24356.7 of the Revenue and Taxation Code allows a taxpayer to elect to expense a portion of the cost of Section 24356.7 property (as defined in Section 24356.7(c)(1)) for the income year in which the property is placed in service. If an item of the taxpayer's Section 24356.7 property ceases to be used exclusively in the taxpayer's trade or business in the enterprise zone before the close of the second income year after the property was placed in service, the taxpayer is required to recapture the amount previously expensed for that item. This amount shall be included in income in the income year in which the property ceases to be so used.
(b) Basis Adjustment. As of the first day of the income year in which the recapture event occurs, the basis of the Section 24356.7 property shall be increased by the recapture amount. For an item of Section 24356.7 property that is subject to an allowance for depreciation under Section 24349 of the Revenue and Taxation Code, the increase in basis is depreciated over the remaining useful life of the Section 24356.7 property beginning on the first day of the income year in which the recapture event occurs.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 24356.7, Revenue and Taxation Code.
HISTORY

1. New section filed 2-26-2001; operative 3-28-2001 (Register 2001, No. 9).  
§24357-1. Charitable, etc., Contributions and Gifts; Allowance of Deduction.
Note     •     History

(a) In General.
(1) General rule. Any charitable contribution (as defined in Section 24359) actually paid during the income year is allowable as a deduction in computing net income, regardless of the method of accounting employed or when pledged. In addition, contributions by a bank or corporation may under certain circumstances be deductible even though not paid during the income year (See Reg. 24357-2(b)). The deduction is subject to the limitations of Section 24358 (See Reg. 24357-2) and is subject to verification by the Franchise Tax Board.
(2) Information required in support of deductions for income years beginning before January 1, 1964. In connection with claims for deductions for charitable contributions paid in income years beginning before January 1, 1964, taxpayers shall state in their tax returns the name and address of each organization to which a contribution was made and the amount and approximate date of the actual payment of each contribution. Any deduction for a charitable contribution must be substantiated, when required by the Franchise Tax Board, by a statement from the organization to which the contribution was made indicating whether the organization is a domestic organization, the name and address of the contributor, the amount of the contribution, and the date of its actual payment, and by such other information as the Franchise Tax Board may deem necessary.
(3) Information required in support of deductions for income years beginning after December 31, 1963.
(A) In general. In connection with claims for deductions for charitable contributions paid in income years beginning after December 31, 1963, taxpayers shall state in their tax returns the name of each organization to which a contribution was made and the amount and date of the actual payment of each contribution. If a contribution is made in property other than money, the taxpayer shall state the kind of property contributed (for example, used clothing, paintings, securities) and shall state the method utilized in determining the fair market value of the property at the time the contribution was made. In any case in which a taxpayer makes numerous cash contributions to an organization during the income year, the taxpayer may state the total cash payments made to such organization during the income year in lieu of listing each cash contribution and the date of payment.
(B) Statement from donee organization. Any deduction for a charitable contribution must be substantiated, when required by the Franchise Tax Board, by a statement from the organization to which the contribution was made indicating whether the organization is a domestic organization, the name and address of the contributor, the amount of the contribution, the date of actual receipt of the contribution, and such other information as the Franchise Tax Board may deem necessary. If the contribution includes an item of property (other than money or securities which are regularly traded on a stock exchange or in an over-the-counter market) which the donee deems to have a fair market value in excess of $200 at the time of receipt, such statement shall also indicate for each such item its location if retained by the organization, the amount received by the organization on any sale of the property and the date of sale, or in case of other disposition of the property, the method of disposition.
(b) Time of Making Contribution. Ordinarily a contribution is made at the time delivery is effected. In the case of a check, the unconditional delivery (or mailing) of a check which subsequently clears in due course will constitute an effective contribution on the date of delivery (or mailing). If a taxpayer unconditionally delivers (or mails) a properly endorsed stock certificate to a charitable donee or the donee's agent, the gift is completed on the date of delivery (or mailing, provided that such certificate is received in the ordinary course of the mails). If the donor delivers the certificate to its bank or broker as the donor's agent, or to the issuing corporation or its agent, for transfer into the name of the donee, the gift is completed on the date the stock is transferred on the books of the corporation.
(c) Contribution in Property.
(1) General Rules. If a contribution is made in property other than money, the amount of the deduction is determined by the fair market value of the property at the time of the contribution. The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. If the contribution is made in property of a type which the taxpayer sells in the course of its business, the fair market value is the price which the taxpayer would have received if it had sold the contributed property in the lowest usual market in which it customarily sells, at the time and place of the contribution (and in the case of a contribution of goods in quantity, in the quantity contributed). The usual market of a manufacturer or other producer consists of the wholesalers or other distributors to or through whom it customarily sells, unless it sells only at retail in which event it is its retail customers. If a donor makes a charitable contribution of, for example, stock in trade at a time when it could not reasonably have been expected to realize its usual selling price, the value of the gift is not the usual selling price but is the amount for which the quantity of merchandise contributed would have been sold by the donor at the time of the contribution. Costs and expenses incurred in the year of contribution in producing or acquiring the contributed property are not deductible and are not a part of the cost of goods sold. Similarly, to the extent that costs and expenses incurred in a prior income year in producing or acquiring the contributed property are reflected in the cost of goods sold in the year of contribution, cost of goods sold must be reduced by such costs and expenses. Transfers of property to an organization described in Section 24359 which bear a direct relationship to the taxpayer's business and which are made with a reasonable expectation of financial return commensurate with the amount of the transfer may constitute allowable deductions as trade or business expenses rather than as charitable contributions. See Section 24343.
(d) For disallowance of certain charitable deductions otherwise allowable under Sections 24357 and 24359 (relating to organizations engaged in prohibited transactions).
(1) For denial of deduction for charitable contributions as trade or business expenses and rules with respect to treatment of payments to organizations other than those described in Section 24359, see Section 24343.
(2) No deduction shall be allowed under Section 24357 for amounts paid to an organization--
(A) A substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, or
(B) Which participates in or intervenes in any political campaign on behalf of any candidate for public office.
For purposes of determining whether an organization is attempting to influence legislation or is engaging in political activities, see Section 23701d. Moreover, no deduction shall be allowed under Section 24357 for expenditures for lobbying purposes, promotion or defeat of legislation, etc.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24357, Revenue and Taxation Code.
HISTORY

1. New section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Amendment filed 12-22-69; effective thirtieth day thereafter (Register 69, No. 52).
3. Renumbering and amendment of Section 24357-24359(a) to Section 24357-1 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24357-2. Contributions or Gifts by Banks and Corporations.
Note     •     History

(a) In General. The deduction by a bank or corporation in any income year for charitable contributions, as defined in Section 24359, is limited to 5 per cent of its net income for the year, computed without regard to:
(1) The deduction for charitable contributions.
(2) The special deductions for banks and corporations allowed under Article 2 (commencing at Section 24401) of Chapter 7 (except Sections 24407 to 24409, inclusive). A contribution by a bank or corporation to a trust, chest, fund, or foundation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals is deductible only if the contribution is to be used in the United States or its possessions for those purposes. See Section 24359(b).
(b) Election by Banks and Corporations on an Accrual Method. A bank or corporation reporting its net income on an accrual method may elect to have a charitable contribution (as defined in Section 24359) considered as paid during the income year, if payment is actually made on or before the fifteenth day of the third month following the close of the year and if, during the year, the board of directors authorized the contribution. The election must be made at the time the return for the income year is filed, by reporting the contribution on the return. There shall be attached to the return when filed a written declaration that the resolution authorizing the contribution was adopted by the board of directors during the income year, and the declaration shall be verified by a statement signed by an officer authorized to sign the return that it is made under the penalties of perjury. There shall also be attached to the return when filed a copy of the resolution of the board of directors authorizing the contribution.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24357, Revenue and Taxation Code.
HISTORY

1. New Section filed 5-3-61; effective thirtieth day thereafter (Register 61, No. 9).
2. Amendment filed 12-22-69; effective thirtieth day thereafter (Register 69, No. 52).
3. Renumbering and amendment of Section 24357-24359(b) to Section 24357-2 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24360-24363(a). *  Amortizable Bond Premium.
Note     •     History

(1) In General. Under Section 24360, bond premium is amortizable by the owner of the bond (as defined in Reg. 24360-24363(d)) in accordance with paragraph (A) or (B) of this subsection as follows:
(A) Amortization of bond premium is mandatory with respect to--
(i) Fully tax-exempt bonds (the interest on which is excludable from gross income under Chapter 3).
(B) Amortization of bond premium is optional, at the election of the taxpayer, with respect to--
(i) Fully taxable bonds.
(2) Operation.
(A) In the case of a fully tax-exempt bond, the amortizable bond premium for the income year is simply an adjustment to the basis or adjusted basis of the bond. Thus, if such premium is $1, the basis or adjusted basis of the bond is reduced by $1. No deduction is allowable on account of such amortizable bond premium. See subsection (2)(B) of Reg. 24360-24363(b) for treatment of bonds with alternative call dates.
(B) In the case of a fully taxable bond to which Section 24360 is applicable, the amortizable bond premium is applied both as an adjustment to the basis or adjusted basis of the bond and as a deduction in computing net income. For the disallowance of a deduction in certain cases, see subsection (1)(C) of Reg. 24360-24363(b).
NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 12-22-69; effective thirtieth day thereafter (Register 69, No. 52).

*This regulation is based on Section 26 CFR 1.171-1.
§24360-24363(b). *  Determination of Bond Premium.
Note     •     History

(1) In general.
(A) Except as otherwise provided in this regulation, bond premium on any bond to which Section 24360 applies is the excess of the amount of the basis (for determining loss on sale or exchange under Section 24911) of the bond over the amount payable at maturity or, in the case of a callable bond, the earlier call date. For determination of applicable call date, see subsection (2) of this regulation.
(B)(i) The amortizable bond premium on a wholly taxable bond described in 24362(a) shall be computed by reference to the amount payable on maturity or on an earlier call date. For purposes of this subparagraph, the date of acquisition of a bond shall be the date such bond was ordered under a firm commitment to buy and not the date the bond was delivered to the taxpayer.
(ii) The application of the provisions of subparagraph (i) of this paragraph may be illustrated by the following example:
EXAMPLE (1).
Assume that the taxpayer acquired at the date of issue, January 1, 1956, a $100 wholly taxable bond for $112, callable at any time thereafter upon 30 days' notice. The premium of $12 attributable to such bond may be amortized only with reference to the maturity date of the bond. Similarly, assume that in 1957 the taxpayer acquired a $100, 20-year bond, issued on January 1, 1954, for $115. The bond was callable 2 years after the date of issuance or, if not then called, 10 years after the date of issuance. The premium of $15 attributable to such bond may be amortized in accordance with the method of amortization authorized by subsection  24360-24363(b)(6).
(iii) In the case of a wholly taxable bond described in Section 24361(b), which has a call date not more than three years after the date of such issue, the amount of bond premium attributable to the income year in which the bond is called shall include an amount equal to the excess of the amount of the adjusted basis (for determining loss on sale or exchange) of such bond as of the beginning of the income year over the amount received on redemption of the bond or (if greater than the amount received on redemption) the amount payable on maturity. For determining whether an earlier call date is a date more than three years after the date of original issue, consideration will be given to the terms under which a bond is issued. For adjustments proper to reflect unamortized bond premium for the period before the date as of which Section 24360 becomes applicable to the bond in the hands of the taxpayer, see paragraph (D) of this subsection. For example, if a wholly taxable bond, issued on January 1, 1954, and acquired by the taxpayer on January 1, 1955, at a price of $109, matures in 10 years from the date of issue (9 years from the date of acquisition) but is callable at $105 on 30 days' notice, Section 24361(a)(2) requires that the bond be amortized to maturity, that is, at the rate of $1 per year. If the bond is called on December 31, 1956, for $105, then $3, the excess of the adjusted basis of $108 ($109 less $1 deducted in 1955) over the amount received on redemption, $105, may be deducted for the year 1956.
(C) Whether the purchase and immediate transfer of callable bonds occurs in such a manner as to make the entire transaction not bona fide, and hence the deductions for amortization for bond premium not allowable, will depend on all the facts and circumstances.
(D) If the date as of which the basis of the bond was established precedes the first income year with respect to which Section 24360 applies to the bond, proper adjustments shall be made to reflect unamortized bond premium on such bond for the period including the holding period before the date as of which Section 24360 first becomes applicable to the bond in the hands of the taxpayer. Such adjustment is required whether an election was made under Section 24121(o) of the Bank and Corporation Tax Law of 1954 or under Section 24360 and applies to all bonds to which Section 24360 is applicable.
(E) The rule relating to adjustments set forth in paragraph (D) of this subsection may be illustrated by the following examples:
EXAMPLE (1).
On January 1, 1956, T Corporation, which makes its tax returns on the calendar year basis, owns a fully taxable $100 bond, maturing on January 1, 1966. T purchased this bond on January 1, 1946, for $120. T elects to have Section 24360 apply to such bond for 1957 and subsequent income years. In determining the amount of bond premium to be amortized over the remaining 9 years of the life of the bond, T is required but solely for such purpose, to treat the bond as if it had amortized the bond premium thereon during the prior 11 year, and to make the proper adjustments in the original bond premium. Accordingly, T would treat $11 as having been amortized during the first 11 years and would be required to amortize the remaining $9 over the following 9 years. When the bond is redeemed on January 1, 1966, for $100, only the $9 attributable to the last 9 years will actually have been amortized, and the basis of the bond will have been reduced only by that amount. The $11 attributable to the first 11 years will have been treated as an adjustment to the original bond premium but will not have been amortized nor will the basis of the bond have been reduced by that amount. Consequently, T will have a capital loss in the year of redemption on account of the $11 attributable to the period January 1, 1946, to January 1, 1957.
EXAMPLE (2).
Y Corporation makes its income tax returns on the calendar year basis, owns a fully tax-exempt $100 bond maturing on January 1, 1962. It purchased this bond on January 1, 1942, for $120. On December 31, 1955, Y sells the bond for $108 and realizes a gain of $1, computed as follows:

 (i) Total bond premium ($120-$100)	 $20
(ii) Amount of bond premium amortizable if held to maturity
	(total bond premiums minus unamortized
	bond premium attributable to 1942 (a year to
	which Section 24121(o) of the Bank and Corporation
	Tax Law of 1954 was not applicable), $20-$1)	 19
(iii) Amount of bond premium amortized from January 1,
	1943, through December 31, 1955
	($1 for each such year)	 13
(iv) Adjusted basis of bond at close of 1954 ($120--$13)	 107
(v) Gains ($108--$107)	 1
(F) Amortizable bond premium on any bond to which Section 24360 applies is that part of the bond premium on the bond which is attributable to the income year.
(2) Callable Bonds.
(A) For purposes of Section 24360, in the case of a callable bond, the earlier call date will be considered as the maturity date, except as provided in subsection (1)(B) and (C) of this regulation. The amount due on the earlier call date will be considered as the amount payable on maturity unless it is determined under a different method of amortization regularly employed by the taxpayer that another amount shall be the amount payable on maturity. Hence, in the case where a bond premium is to be amortized to the earlier call date, the bond premium on such bond is required to be spread over the period from the date as of which the basis for loss of the bond is established down to the earlier call date, rather than to the maturity date. The earlier call date my be the earliest call date specified in the bond as a day certain, the earliest interest payment date if the bond is callable at such date, the earliest date at which the bond is callable at par, or such other call date, prior to maturity, specified in the bond as may be selected by the taxpayer.
(B) Where a deduction for amortizable bond premium may be determined with respect to alternative call dates, the amount of amortizable bond premium calculated with reference to a particular call date must be calculated thereafter with reference to the same call data. However, if, upon such call data originally selected, the bond has not in fact been called, the bond premium then unamortized must be amortized to a succeeding call date or to maturity. Thus, assume a $100 bond is acquired at time of issue for $125. The bond is callable in five years at $115 and in 10 years at $110. The taxpayer may amortize $10 of premium during the first five years and, if the bond is not then called, an additional $5 of premium during the next five years. If the bond is not called at the end of ten years, the remaining $10 of premium must be amortized to maturity.
(3) Convertible Bonds.
(A) The fact that a bond is convertible into stock does not, in itself, prevent the application of Section 24360. A convertible bond is within the scope of such section if the option to convert on a date certain specified in the bond rests with the holder thereof. However, for the purpose of determining the amount of amortizable bond premium on a convertible bond for the income year, the amount of bond premium shall not include any amount attributable to the conversion features of the bond. For the purpose of the rule stated in the preceding sentence, the term “convertible bond” includes a bond issued with detachable stock-purchase warrants.
(B) The value of the conversion features of a particular bond shall be ascertained as of the time of acquisition by reference to the assumed price at which such bond would be purchased on the open market if without conversion features, and by subtracting such assumed price from the cost of the bond. The assumed price of the bond without conversion features shall be ascertained by comparison to the yields on which bonds of similar character, not having conversion features, are sold on the open market and adjusting the price of the bond in question to this yield. This adjustment may be made by the use of standard bond tables. In selecting quotations for comparative purposes, bonds of the same classification and grade shall be used.
(C) The application of the principles set forth in this subsection may be illustrated as follows:
EXAMPLE.
T Corporation purchased for $115 a $100 bond, maturing in 10 years, on which interest is payable semiannually at the rate of 3 percent a year. This bond is convertible into common stock at the option of the holder. It is found that bonds of the same character, not having conversion features, were sold on the open market on or about the time of T's purchase on a basis to yield 2.6 percent. By recourse to a standard bond table. It is found that bonds of the same character, not having conversion features, were sold on the open market on or about the time of T's purchase on an basis to yield 2.6 percent. By recourse to a standard bond table, it is found that the cost of a 3 percent. 10-year, $100 bond to yield 2.6 percent would have been $103.50. Since the taxpayer paid $115 for the convertible bond, the difference between $115 and $103.50, or $11.50, represents the value of the conversion features of the bond at the time of purchase. The balance of $3.50 represents the bond premium subject to amortization under Section 24360.
(D) If a convertible bond acquired on or before June 15, 1950, is held during the income year, the amortizable bond premium shall be computed as if the provisions for the determination of the bond premium without the inclusion of any amount attributable to the conversion features of the bond were applicable for each year for which the bond was held prior to such income year. Thus, if T, in the example in paragraph (C) of this subsection, had acquired the bond on January 1, 1949, and if T makes its tax returns on the basis of the calendar year, the amortizable bond premium for 1957 would be $0.35, determined as follows:

	Bond premium not attributable to conversion feature 	 $3.50
	Amortizable bond premium for 1949 and 1950, determined
	by reference to bond premium not attributable to conversion
	feature	 .70
	Portion of bond premium amortizable over remaining life
	of bond	 $2.80
	Amortizable bond premium for each of the remaining
	8 years, including the income year 1957 (one-eighth of
	$2.80)	 .35
(4) Capitalized Expenses.
(A) In the case of a bond to which Section 24360 otherwise applies, on which the bond premium is attributable only to capitalized expenses (such as buying commission), if a taxpayer--
(i) Regularly employs a reasonable method of amortization under which capitalized expenses are amortized,
(ii) Is required by the regulations to use the method of amortization prescribed by subsection (6) of this regulation, or
(iii) Regularly employs a reasonable method of amortization but does not amortize capitalized expenses, such taxpayer is permitted, but is not required, to amortize capitalized expenses in accordance with such method.
(B) In the case of a bond to which Section 24360 applies and on which there is bond premium exclusive of capitalized expenses--
(i) If a taxpayer regularly employs a reasonable method of amortization under which capitalized expenses are treated as being part of the bond premium for purposes of amortization, such capitalized expenses must be treated as being a part of the bond premium for the purposes of Section 24360.
(ii) If a taxpayer is required by regulations to use the method of amortization prescribed by subsection (6) of this regulation, it must treat capitalized expenses as being part of the bond premium for purposes of Section 24360.
(iii) If a taxpayer regularly employs a method of amortization under which capitalized expenses are not treated as being part of the bond premium for the purposes of amortization, it is permitted, but is not required, to treat such capitalized expenses as being part of the bond premium for the purposes of Section 24360.
(5) Income years in which interest not received or accruable. In the case of a taxpayer who makes its tax returns on the cash receipts and disbursements method or one who makes its returns on the accrual method and who owns a bond to which Section 24360 applies and in respect of which no interest is received or accrued by the taxpayer during the income year, if the taxpayer--
(A) Regularly employs a reasonable method of amortization under which the bond premium on such bond for such income year is amortized, or
(B) Is required by the regulations to use the method of amortization prescribed by subsection (6) of the regulation, or
(C) Regularly employs a reasonable method of amortization under which the bond premium on such bond for such income year is not amortized, such taxpayer is permitted, but not required, to amortize bond premium on the bond for such income year in accordance with such method.
(6) Methods of Amortization.
(A) Determination of the bond premium and amortizable bond premium on any bond to which Section 24360 applied shall be made in accordance with:
(i) The method of amortization regularly employed by the taxpayer, if such method is reasonable; or
(ii) In the other eases, the method of amortization prescribed by this regulation.

A method of amortization, will be deemed “regularly employed” by a taxpayer if the method was consistently followed in income years beginning before January 1, 1955, or if for income years beginning on or after such date a taxpayer who has never previously taken a deduction for amortization initiates in the first income year for which such deduction is taken a reasonable method of amortization and consistently follows such method thereafter. A taxpayer who regularly employs a method of amortization may be one, for example, who is subject to the jurisdiction of a State or Federal regulatory agency and who, for the purposes of such agency, amortizes the bond premium on its bonds in accordance with a method prescribed or approved by such agency. However, it is not necessary that the taxpayer be subject to the jurisdiction of such an agency or that the method be prescribed or approved by such agency. It is sufficient if the taxpayer regularly employs a method of amortization and if such method is reasonable.
(B) The bond premium to be amortized shall be determined under the following method:
(i) The amortizable bond premium on such bond attributable to the income year under subsection (1)(F) of this regulation shall be an amount which bears the same ratio to the bond premium on the bond as the number of months in the income year during which the bond was held by the taxpayer bears to the number of months from the beginning of the income year (or, if the bond was acquired in the income year, from the date of acquisition) to the date of maturity or earlier call date. For the purposes of this subparagraph, a fractional part of a month shall be disregarded unless it amounts to more than half of a month, in which case it shall be considered as a month.
(ii) For purposes of subparagraph (i) of this paragraph, the bond premium as of any date on any bond to which Section 24360 applies shall be determined in accordance with subsection (1) of this regulation by ascertaining the excess of the amount of the basis of the bond, as determined under Section 24911 (adjusted to date for amortizable bond premium under Section 24916), over the amount payable at maturity or, in the case of a callable bond, the earlier call date (except as otherwise provided in subsection (1)(B) and (C) of this regulation).
(C) The application of the provisions of this subsection relating to method of amortization may be illustrated by the following example:
EXAMPLE:
(i) A corporation, who makes calendar year returns, on June 20 [30], 1955, acquires at a cost of $119 a $100 bond issued January 1, 1955, maturing January 1, 1965. The amortizable bond premium as of the last day of 1955 is computed as follows:

Bond premium at date of acquisition	 $19
Number of months in 1955 during which bond is held by the taxpayer	 6
Number of months from date of acquisition to date of maturity	 114
Amortizable bond premium (6/114 x $19) equals	 1
(ii) The bond premium as of the close of 1955 would be computed as follows:

Bond premium at date of acquisition (or first day of
 taxable year)	 $19
Amortizable bond premium for period during which bond
 was owned in 1955	 1
Bond premium as of the close of the income year 1955	 18
NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 12-22-69; effective thirtieth day thereafter (Register 69, No. 52).

*This regulation is based on Section 26 CFR 1.171-2.
§24360-1. Election with Respect to Taxable Bonds.
Note     •     History

(a) In General. In the case of a bank or corporation, the election provided in Section 24362 may be made with respect to bonds the interest of which is not excludable from gross income. Such election shall be made by the taxpayer by claiming a deduction for the bond premium in its return for the first income year to which it desires the election to be applicable. No other method of making such election will be recognized. If the election is so made, the taxpayer should attach to its return a statement showing the computation of deduction. The election shall apply to all the bonds in respect of which it was made owned by the taxpayer at the beginning of the first income year to which the election applies and also to all the bonds of such class (or classes) thereafter acquired by it, and shall be binding for all subsequent income years. Upon application by the taxpayer, the Franchise Tax Board may permit it to revoke the election, subject to such conditions as the Franchise Tax Board deems necessary.
(b) Special Rule for Transition Period. For income years beginning after December 31, 1954, and ending after June 6, 1955, the election to deduct amortizable bond premium applies to premiums on both the following type bonds:
(1) Those with interest coupons or in registered form, and
(2) Those without interest coupons and not in registered form, including those commonly referred to as “corporate mortgages.”
(c) Definition. The term “bond” as used in Section 24360, means any bond, debenture, note, or certificate or other evidence of indebtedness, issued by any bank or corporation and bearing interest (including any like obligation issued by a government or political subdivision thereof), but the term does not include any such obligation which constitutes stock in trade of the taxpayer or any such obligation of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the income year, or any such obligation held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business. This definition of a bond is applicable to bonds, whether or not with coupons or in registered form, held or acquired in income years beginning after December 31, 1954, and ending after June 6, 1955.
(d) For income years beginning before January 1, 1955, or income years beginning after December 31, 1954, but ending on or before June 6, 1955, the term “bond,” as defined in subsection (c) of this regulation, applies only to a bond, debenture, note, or certificate or other evidence of indebtedness with interest coupons or in registered form.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24360, Revenue and Taxation Code.
HISTORY

1. New section filed 12-22-69; effective thirtieth day thereafter (Register 69, No. 52).
2. Renumbering and amendment of Section 24360-24363(c) and Section 24360-24363(d) to Section 24360-1 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24360-24363(d). Definition.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 12-22-69; effective thirtieth day thereafter (Register 69, No. 52).
2. Renumbering and amendment of Section 24360-24363(d) to subsections (c) and (d) of Section 24360-1 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24364. *  Circulation Expenditures.
History

(a) Allowance of Deduction. Section 2464 provides for the deduction from gross income of all expenditures to establish, maintain, or increase the circulation of a newspaper, magazine, or other periodical, subject to the following limitations:
(1) No deduction shall be allowed for expenditures for the purchase of land or depreciable property or for the acquisition of circulation through the purchase of any part of the business of another publisher of a newspaper, magazine, or other periodical;
(2) The deduction shall be allowed only to the publisher making the circulation expenditures; and
(3) The deduction shall be allowed only for the income year in which such expenditures are paid or incurred. Subject to the provisions of paragraph (c) of this regulation, the deduction permitted under Section 24364 and this paragraph shall be allowed without regard to the method of accounting used by the taxpayer and notwithstanding the provisions of Section 24422 and the regulations thereunder, relating to capital expenditures.
(b) Deferred Expenditures. Notwithstanding the provisions of paragraph (a)(3) of this regulation, expenditures paid or incurred in a year subject to the Bank and Corporation Tax Law of 1954 which are deferrable pursuant to I.T. 3369, as modified by Rev. Rul. 57-87, which will be followed by the Franchise Tax Board, may be deducted in the income year subject to the law, as amended in 1955 to which so deferred.
(c) Election to Capitalize.
(1) A taxpayer entitled to the deduction for circulation expenditures provided in Section 24364 and paragraph (a) of this regulation may, in lieu of taking such deduction, elect to capitalize the portion of such circulation expenditures which is properly chargeable to capital account. As a general rule, expenditures normally made from year to year in an effort to maintain circulation are not properly chargeable to capital account; conversely, expenditures made in an effort to establish or to increase circulation are properly chargeable to capital account. For example, if a newspaper normally employs five persons to obtain renewals of subscriptions by telephone, the expenditures in connection therewith would not be properly chargeable to capital account. However, if such newspaper, in a special effort to increase its circulation, hires for a limited period 20 additional employees to obtain new subscriptions by means of telephone calls to the general public, the expenditures in connection therewith would be properly chargeable to capital account. If an election is made by a taxpayer to treat any portion of its circulation expenditures as chargeable to capital account, the election must apply to all such expenditures which are properly so chargeable. In such case, no deduction shall be allowed under Section 24364 for any such expenditures. In particular cases, the extent to which any deductions attributable to the amortization of capital expenditures are allowed may be determined under Sections 24343, 24422, 24423, and 24681.
(2) A taxpayer may make the election referred to in subparagraph (1) of this paragraph by attaching a statement to its return for the first income year to which the election is applicable. Once an election is made, the taxpayer must continue in subsequent income years to charge to capital account all circulation expenditures properly so chargeable, unless the Franchise Tax Board, on application made to it in writing by the taxpayer, permits a revocation of such election for any subsequent income year or years. Permission to revoke such election may be granted subject to such conditions as the Franchise Tax Board deems necessary.
(3) Elections filed under Section 24121q of the Bank and Corporation Tax Law of 1954 shall be given the same effect as if they were filed under Section 24364.
HISTORY

1. New Reg. 24364 filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).

*This regulation is substantially the same as Section 26 CFR 1.173-1.
§24365-24368(a). *  Research and Experimental Expenditures; In General.
History

Sections 24365 to 24368, inclusive, provide two methods for treating research or experimental expenditures paid or incurred by the taxpayer in connection with its trade or business. These expenditures may be treated as expenses not chargeable to capital account and deducted in the year in which they are paid or incurred (see Reg. 24365-24368(c)), or they may be deferred and amortized (see Reg. 24365-24368(d)). Research or experimental expenditures which are neither treated as expenses nor deferred and amortized under Sections 24365 to 24368, inclusive, must be charged to capital account. The expenditures to which Sections 24365 to 24368, inclusive, apply may relate either to a general research program or to a particular project. See Reg. 24365-24368(b) for the definition of research and experimental expenditures. The term “paid or incurred,” as used in Sections 24365 to 24368, inclusive, and in Regs. 24365-24368(a) to 24365-24368(d), inclusive, is to be construed according to the method of accounting used by the taxpayer in computing net income. See Section 23033.
HISTORY

1. New Section filed 1-6-69; effective thirtieth day thereafter (Register 69, No. 2).

*This regulation is substantially the same as Section 26 CFR 1.174-1.
§24365-24368(b). **   Definition of Research and Experimental Expenditures.
History

(1) In General.
(A) The term “research or experimental expenditures,” as used in Sections 24365 to 24368, inclusive, means expenditures incurred in connection with the taxpayer's trade or business which represent research and development costs in the experimental or laboratory sense. The term includes generally all such costs incident to the development of an experimental or pilot model, a plant process, a product, a formula, an invention, or similar property, and the improvement of already existing property of the type mentioned. The term does not include expenditures such as those for the ordinary testing or inspection of materials or products for quality control or those for efficiency surveys, management studies, consumer surveys, advertising, or promotions. However, the term includes the costs of obtaining a patent, such as attorneys' fees expended in making and perfecting a patent application. On the other hand, the term does not include the costs of acquiring another's patent, model, production or process, nor does it include expenditures paid or incurred for research in connection with literary, historical, or similar projects.
(B) The provisions of this regulation apply not only to costs paid or incurred by the taxpayer for research or experimentation undertaken directly by it but also to expenditures paid or incurred for research or experimentation carried on in its behalf by another person or organization (such as a research institute, foundation, engineering company, or similar contract). However, any expenditures for research or experimentation carried on in the taxpayer's behalf by another person are not expenditures to which Sections 24365 to 24368, inclusive, relate, to the extent that they represent expenditures for the acquisition or improvement of land or depreciable property, used in connection with the research or experimentation, to which the taxpayer acquires rights of ownership.
(C) The application of paragraph (B) of this subsection may be illustrated by the following examples:
EXAMPLE (1).
A Corporation engages B, to undertake research and experimental work in order to create a particular product. B will be paid annually a fixed sum plus an amount equivalent to his actual expenditures. In 1961, A pays to B in respect of the project the sum of $150,000 of which $25,000 represents an addition to B's laboratory and the balance represents charges for research and experimentation on the project. It is agreed between the parties that A will absorb the entire cost of this addition to B's laboratory which will be retained by B. A may treat the entire $150,000 as expenditures under Sections 24365 to 24368, inclusive.
EXAMPLE (2).
X Corporation, a manufacturer of explosives, contracts with the Y research organization to attempt through research and experimentation the creation of a new process for making certain explosives. Because of the danger involved in such an undertaking, Y is compelled to acquire an isolated tract of land on which to conduct the research and experimentation. It is agreed that upon completion of the project Y will transfer this tract, including any improvements thereon, to X. Sections 24365 to 24368, inclusive, do not apply to the amount paid to Y representing the costs of the tract of land and improvements.
(2) Certain Expenditures With Respect to Land and Other Property.
(A) Expenditures by the taxpayer for the acquisition or improvement of land, or for the acquisition or improvement of property which is subject to an allowance for depreciation under Sections 24349 to 24354, inclusive, or depletion under Section 24831 to 24835, inclusive, are not deductible under Sections 24365 to 24368, inclusive, irrespective of the fact that the property or improvements may be used by the taxpayer in connection with research or experimentation. However, allowances for depreciation or depletion of property are considered as research or experimental expenditures, for purposes of Sections 24365 to 24368, inclusive, to the extent that the property to which the allowances relate is used in connection with research or experimentation. If any part of the cost of acquisition or improvement of depreciable property is attributable to research or experimentation (whether made by the taxpayer or another), see paragraphs (B), (C), and (D) of this subsection.
(B) Expenditures for research or experimentation which result, as an end product of the research or experimentation, in depreciable property to be used in the taxpayer's trade or business may, subject to the limitations of paragraph (D) of this subsection, be allowable as a current expense deduction under Section 24365. Such expenditures cannot be amortized under Section 24366 except to the extent provided in subsection (1) (D) of Reg. 24365-24368(d).
(C) If expenditures for research or experimentation are incurred in connection with the construction or manufacture of depreciable property by another, they are deductible under Section 24365 only if made upon the taxpayer's order and at its risk. No deduction will be allowed (i) if the taxpayer purchases another product under a performance guarantee (whether express, implied, or imposed by local law) unless the guarantee is limited, to engineering specifications or otherwise, in such a way that economic utility is not taken into account; or (ii) for any part of the purchase price of a product in regular production. For example, if a taxpayer orders a specially-built automatic milling machine under a guarantee that the machine will be capable of producing a given number of units per hour, no portion of the expenditure is deductible since none of it is made at the taxpayer's risk. Similarly, no deductible expense is incurred if a taxpayer enters into a contract for the construction of a new type of chemical processing plant under a turnkey contract guaranteeing a given annual production and a given consumption of raw material and fuel per unit. On the other hand, if the contract contained no guarantee of quality of production and of quantity of units in relation to consumption of raw material and fuel, and if real doubt existed as to the capabilities of the process, expenses for research or experimentation under the contract are at the taxpayer's risk and are deductible under Section 24365. However, see paragraph (D) of this subsection.
(D) The deductions referred to in paragraphs (B) and (C) of this subsection for expenditures in connection with the acquisition or production of depreciable property to be used in the taxpayer's trade or business are limited to amounts expended for research or experimentation. For the purpose of the preceding sentence, amounts expended for research or experimentation do not include the costs of the component materials of the depreciable property, the costs of labor or other elements involved in its construction and installation, or costs attributable to the acquisition or improvement of the property. For example, a taxpayer undertakes to develop a new machine for use in its business. It expends $30,000 on the project of which $10,000 represents the actual costs of material, labor, etc., to construct the machine, and $20,000 represents research costs which are not attributable to the machine itself. Under Section 24365 the taxpayer would be permitted to deduct the $20,000 as expenses not chargeable to capital account, but the $10,000 must be charged to the asset account (the machine).
(3) Exploration Expenditures. The provisions of Sections 24365 to 24368, inclusive, are not applicable to any expenditures paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore, oil, gas or other mineral. See Sections 24422 and 24837.
HISTORY

1. New section filed 1-6-69; effective thirtieth day thereafter (Register 69, No. 2).

**This regulation is substantially the same as Section 26 CFR 1.174-2.
§24365-24368(c). * Treatment As Expenses.
Note     •     History

(1) In General. Research or experimental expenditures paid or incurred by a taxpayer during the income year in connection with its trade or business are deductible as expenses, and are not chargeable to capital account, if the taxpayer adopts the method provided in Section 24365. See subsection (2) of this regulation. If adopted, the method shall apply to all research and experimental expenditures paid or incurred in the income year of adoption and all subsequent income years, unless a different method is authorized by the Franchise Tax Board under Section 24365(c) with respect to part or all of the expenditures. See subsection (2) (C) of this regulation. Thus, if a change to the deferred expense method under Section 24366 is authorized by the Franchise Tax Board with respect to research or experimental expenditures attributable to a particular project or projects, the taxpayer, for the income year of the change and for subsequent income years, must apply the deferred expense method to all such expenditures paid or incurred during any of those income years in connection with the particular project or projects, even though all other research and experimental expenditures are required to be deducted as current expenses under this regulation. In no event will the taxpayer be permitted to adopt the method described in this regulation as to part of the expenditures relative to a particular project and adopt for the same income year a different method of treating the balance of the expenditures relating to the same project. 
(2) Adoption and Change of Method. 
(A) Adoption Without Consent. The method described in this regulation may be adopted for any income year beginning after December 31, 1960, and ending after June 23, 1961. The consent of the Franchise Tax Board is not required if the taxpayer adopts the method for the first such income year in which it pays or incurs research or experimental expenditures. The taxpayer may do so by claiming in its tax return for such year a deduction for its research or experimental expenditures. If the taxpayer fails to adopt the method for the first income year in which it incurs such expenditures, it cannot do so in subsequent income years unless it obtains the consent of the Franchise Tax Board under Section 24365(b)(2) and paragraph (B) of this subsection. See, however, paragraph (D) of this subsection, relating to extensions of time. 
(B) Adoption With Consent. A taxpayer may, with the consent of the Franchise Tax Board, adopt at any time the method provided in Section 24365. The method adopted in this manner shall be applicable only to expenditures paid or incurred during the income year for which the request is made and in subsequent income years. A request to adopt this method shall be in writing and shall be addressed to the Franchise Tax Board, P.O. Box 1468, Sacramento, CA 95812-1468. The request shall set forth the name and address of the taxpayer, the first income year for which the adoption of the method is requested, and a description of the project or projects with respect to which research or experimental expenditures are to be, or have already been, paid or incurred. The request shall be signed by a principal officer of the corporation or its duly authorized representative and shall be filed not later than the last day of the first income year for which the adoption of the method is requested. See, however, paragraph (D) of this subsection, relating to extensions of time. 
(C) Change of Method. An application for permission to change to a different method of treating research or experimental expenditures shall be in writing and shall be addressed to the Franchise Tax Board, P.O. Box 1468, Sacramento, CA 95812-1468. The application shall include the name and address of the taxpayer, shall be signed by a principal officer of the corporation or its duly authorized representative, and shall be filed not later than the last day of the first income year for which the change in method is to apply. See, however, paragraph (D) of this subsection, relating to extensions of time. The application shall--
(i) State the first year to which the requested change is to be applicable;
(ii) State whether the change is to apply to all research or experimental expenditures paid or incurred by the taxpayer, or only to expenditures attributable to a particular project or projects; 
(iii) Include such information as will identify the project or projects to which the change is applicable; 
(iv) Indicate the number of months (not less than 60) selected for amortization of the expenditures, if any, which are to be treated as deferred expenses under Section 24366; 
(v) State that, upon approval of the application, the taxpayer will make an accounting segregation on its books and records of the research or experimental expenditures to which the change in method is to apply; and
(vi) State the reasons for the change. If permission is granted to make the change, the taxpayer shall attach a copy of the letter granting permission to its income tax return for the first income year in which the different method is effective. 
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Sections 24365-24368, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-6-69; effective thirtieth day thereafter (Register 69, No. 2). 
2. Change without regulatory effect pursuant to Section 100, Title 1, California Code of Regulations filed 12-8-89 (Register 90, No. 3). 

*This regulation is substantially the same as Section 26 CFR 1.174-3.
§24365-24368(d). *  Treatment As Deferred Expenses.
Note     •     History

(1) In General.
(A) If a taxpayer has not adopted the method provided in Section 24365 of treating research or experimental expenditures paid or incurred by it in connection with its trade or business as currently deductible expenses, it may, for any income year beginning after December 31, 1960, elect to treat such expenditures as deferred expenses under Section 24366, subject to the limitations of paragraph (B) of this subsection. If a taxpayer has adopted the method of treating such expenditures as expenses under Section 24365, it may not elect to defer and amortize any such expenditures unless permission to do so is granted under Section 24365(c). See subsection (2) of this regulation. 
(B) The election to treat research or experimental expenditures as deferred expenses under Section 24366 applies only to those expenditures which are chargeable to capital account but which are not chargeable to property of a character subject to an allowance for depreciation or depletion under Sections 24349 to 24354, inclusive, or Sections 24831 to 24835, inclusive, respectively. Thus, the election under Section 24366 applies only if the property resulting from the research or experimental expenditures has no determinable useful life. If the property resulting from the expenditures has a determinable useful life, Section 24366 is not applicable, and the capitalized expenditures must be amortized or depreciated over the determinable useful life. Amounts treated as deferred expenses are properly chargeable to capital account for purposes of Section 24916(a), relating to adjustments to basis of property. See Section 24916(g). See Section 24367 and subsection (2)(A) of Reg. 24365- 24368(b) for treatment of expenditures for the acquisition or improvement of land or of depreciable or depletable property to be used in connection with the research or experimentation.
(C) Expenditures which are treated as deferred expenses under Section 24366 are allowable as a deduction ratably over a period of not less than 60 consecutive months beginning with the month in which the taxpayer first realizes benefits from the expenditures. The length of the period shall be selected by the taxpayer at the time it makes the election to defer the expenditures. If a taxpayer has two or more separate projects, it may select a different amortization period for each project. In the absence of a showing to the contrary, the taxpayer will be deemed to have begun to realize benefits from the deferred expenditures in the month in which the taxpayer first puts the process, formula, invention, or similar property to which the expenditures relate to an income-producing use. See Section 24916(g) for adjustments to basis of property for amounts allowed as deductions under Section 24366 and this regulation. See Section 24347 and the regulations thereunder for rules relating to the treatment of losses resulting from abandonment. 
(D) If expenditures which the taxpayer has elected to defer and deduct ratably over a period of time in accordance with Section 24366 result in the development of depreciable property, deductions for the unrecovered expenditures, beginning with the time the asset becomes depreciable in character, shall be determined under Sections 24349 to 24354, inclusive (relating to depreciation) and the regulations thereunder. For example, for the income year 1961, A Corporation, who reports its income on the basis of a calendar year, elects to defer and deduct ratably over a period of 60 months research and experimental expenditures made in connection with a particular project. In 1963, the total of the deferred expenditures amounts to $60,000. At that time, A has developed a process which it seeks to patent. On July 1, 1963, A first realized benefits from the marketing of products resulting from this process. Therefore, the expenditures deferred are deductible ratably over the 60-month period beginning with July 1, 1963 (when A first realized benefits from the project). In its return for the year 1963, A deducted $6,000; in 1964, A deducted $12,000 ($1,000 per month). On July 1, 1965, a patent protecting its process is obtained by A. In its return for 1965, A is entitled to a deduction of $6,000, representing the amortizable portion of the deferred expenses attributable to the period prior to July 1, 1965. The balance of the unrecovered expenditures ($60,000 minus $24,000, or $36,000) is to be recovered as a depreciation deduction over the life of the patent commencing with July 1, 1965. Thus, one-half of the annual depreciation deduction based upon the useful life of the patent is also deductible for 1965 (from July 1 to December 31.) 
(E) The election shall be applicable to all research and experimental expenditures paid or incurred by the taxpayer or, if so limited by the taxpayer's election, to all such expenditures with respect to the particular project, subject to the limitations of paragraph (B) of this subsection. The election shall apply for the income year for which the election is made and for all subsequent income years, unless a change to a different treatment is authorized by the Franchise Tax Board under Section 24366(b). See subsection (2)(B)of this regulation. Likewise, the taxpayer shall adhere to the amortization period selected at the time of the election unless a different period of amortization with respect to a part or all of the expenditures is similarly authorized. However, no change in method will be permitted with respect to expenditures paid or incurred before the income year to which the change is to apply. In no event will the taxpayer be permitted to treat part of the expenditures with respect to a particular project as deferred expenses under Section 24366 and to adopt a different method of treating the balance of the expenditures relating to the same project for the same income year. The election under this regulation shall not apply to any expenditures paid or incurred before the income year for which the taxpayer makes the election. 
(2) Election and Change of Method. 
(A) Election. The election under Section 24366 shall be made not later than the time (including extensions) prescribed by law for filing the return for the income year for which the method is to be adopted. The election shall be made by attaching a statement to the taxpayer's return for the first income year to which the election is applicable. The statement shall be signed by a principal officer of the corporation or its duly authorized representative, and shall--
(i) Set forth the name and address of the taxpayer; 
(ii) Designate the first income year to which the election is to apply;
(iii) State whether the election is intended to apply to all expenditures within the permissible scope of the election, or only to a particular project or projects, and, if the latter, include such information as will identify the project or projects as to which the election is to apply; 
(iv) Set forth the amount of all research or experimental expenditures paid or incurred during the income year for which the election is made;
(v) Indicate the number of months (not less than 60) selected for amortization of the deferred expenses for each project; and 
(vi) State that the taxpayer will make an accounting segregation in its books and records of the expenditures to which the election relates. 
(B) Change to a Different Method or Period. Application for permission to change to a different method of treating research or experimental expenditures or to a different period of amortization for deferred expenses shall be in writing and shall be addressed to the Franchise Tax Board, P.O. Box 1468, Sacramento, CA 95812-1468. The application shall include the name and address of the taxpayer, shall be signed by a principal officer of the corporation or its duly authorized representative, and shall be filed not later than the end of the first income year in which the different method or different amortization period is to be used. The application shall set forth the following information with regard to the research or experimental expenditures which are being treated under Section 24366 as deferred expenses: 
(i) Total amount of research or experimental expenditures attributable to each project; 
(ii) Amortization period applicable to each project; and 
(iii) Unamortized expenditures attributable to each project at the beginning of the income year in which the application is filed. 
In addition, the application shall set forth the length of the new period or periods proposed, or the new method of treatment proposed, the reasons for the proposed change, and such information as will identify the project or projects to which the expenditures affected by the change relate. If permission is granted to make the change, the taxpayer shall attach a copy of the letter granting the permission to its tax return for the first income year in which the different method or period is to be effective. 
(3) Example. The application of this regulation is illustrated by the following example:
EXAMPLE.
N Corporation is engaged in the business of manufacturing chemical products. On January 1, 1961, work is begun on a special research project. N Corporation elects, pursuant to Section 24366, to defer the expenditures relating to the special project and to amortize the expenditures over a period of 72 months beginning with the month in which benefits from the expenditures are first realized. On January 1, 1961, N Corporation also purchased for $57,600 a building having a remaining useful life of 12 years as of the date of purchase and no salvage value at the end of the period. Fifty percent of the building's facilities are to be used in connection with the special research project. During 1961, N Corporation pays or incurs the following expenditures relating to the special research project:

Salaries	 $15,000
Heat, light and power	 700
Drawings	 2,000
Models	 6,500
Laboratory materials	 8,000
Attorney's fees	 1,400
Depreciation on building attributable to project (50 percent of $4,800
	allowable depreciation)	    2,400
Total research and development expenditures	 $36,000

The above expenditures result in a process which is marketable but not patentable and which has no determinable useful life. N Corporation first realizes benefits from the process in January 1962. N Corporation is entitled to deduct the amount of

View Graphic

24366 in computing net income for 1962. 
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Sections 24365-24368, Revenue and Taxation Code. 
HISTORY

1. New section filed 1-6-69; effective thirtieth day thereafter (Register 69, No. 2). 
2. Change without regulatory effect pursuant to Section 100, Title 1, California Code of Regulations filed 12-8-89 (Register 90, No. 3). 

*This regulation is substantially the same as Section 26 CFR 1.174-4.
§24368.1. *  Election to Amortize Trademark and Trade Name Expenditures.
History

(a) In General.
(1) Section 24368.1 provides that a taxpayer may elect to treat any trademark or trade name expenditure (defined in Section 24368.1(b) and subsection (b) of this regulation) paid or incurred during an income year beginning after December 31, 1960, as a deferred expense. Any expenditure so treated shall be allowed as a deduction ratably over the number of continuous months (not less than 60) selected by the taxpayer, beginning with the first month of the income year in which the expenditure is paid or incurred. The term “paid or incurred,” as used in Section 24368.1 and this regulation, is to be construed according to the method of accounting used by the taxpayer in computing net income. See Section 23033. An election under Section 24368.1 is irrevocable insofar as it applies to a particular trademark or trade name expenditure, but separate elections may be made with respect to other trademark or trade name expenditures. See paragraph (3) of this subsection. See also subsection (c) of this regulation for time and manner of making election.
(2) The number of continuous months selected by the taxpayer may be equal to or greater, but not less, than 60, but in any event the deduction must begin with the first month of the income year in which the expenditure is paid or incurred. The number of months selected by the taxpayer at the time it makes the election may not be subsequently changed but shall be adhered to in computing net income for the income year for which the election is made and all subsequent income years.
(3) Section 24368.1 permits an election by the taxpayer for each separate trademark or trade name expenditure. Thus, a taxpayer who has several trademark or trade name expenditures in an income year may elect under Section 24368.1 with respect to some of such expenditures and not elect with respect to the other expenditures. Also, a taxpayer may choose different amortization periods for different trademark or trade name expenditures with respect to which it has made the election under Section 24368.1.
(4) All trademark and trade name expenditures are properly chargeable to capital account for purposes of Section 24916(a), relating to adjustments to basis of property, whether or not they are to be amortized under Section 24368.1. However, the trademark and trade name expenditures with respect to which the taxpayer has made an election under Section 24368.1 must be kept in a separate account in the taxpayer's books and records. See subsection (c) of this regulation. See also Section 24916(h) and Reg. 24916(d) for adjustments to basis of property for amounts allowed as deductions under Section 24368.1 and this regulation.
(b) Trademark and Trade Name Expenditures Defined. 
(1) The term “trademark and trade name expenditures,” as used in Section 24368.1 and this regulation means any expenditure which--
(A) Is directly connected with the acquisition, protection, expansion, registration (federal, state, or foreign), or defense of a trademark or trade name;
(B) Is chargeable to capital account; and
(C) Is not part of the consideration or purchase price paid for a trademark, trade name, or a business (including goodwill) already in existence. An expenditure which fails to meet one or more of these tests is not a trademark or trade name expenditure for purpose of Section 24368.1 and this regulation. Amounts paid in connection with the acquisition of an existing trademark or trade name may not be amortized under Section 24368.1 even though such amounts may be paid to protect or expand a previously owned trademark or trade name through purchase of a competitive trademark. Similarly, the provisions of Section 24368.1 and this regulation are not applicable to expenditures paid or incurred for an agreement to discontinue the use of a trademark or trade name (if the effect of the agreement is the purchase of a trademark or trade name) nor to expenditures paid or incurred in acquiring franchises or rights to the use of a trademark or trade name. Generally, Section 24368.1 will apply to expenditures such as legal fees and other costs in connection with the acquisition of a certificate of registration of a trademark from the United States or other government, artists' fees and similar expenses connected with the design of a distinctive mark for a product or service, litigation expenses connected with infringement proceedings, and costs in connection with the preparation and filing of an application for renewal of registration and continued use of a trademark.
(2) Expenditures for a trademark or trade name which has a determinable useful life and which would otherwise be depreciable under Sections 24349 to 24354, inclusive, must be deferred and amortized under Section 24368.1 if an election under Section 24368.1 is made with respect to such expenditures.
(3) The following examples illustrate the application of Section 24368.1:
EXAMPLE (1).
X Corporation engages an artist to design a distinctive trademark for its product. At the same time it retains an attorney to prepare the papers necessary for registration of this trademark with the Federal Government. The fees of both the artist and the attorney may be amortized under Section 24368.1 over a period of not less than 60 continuous months.
EXAMPLE (2).
Y Corporation wishes to expand the market served by its product. It acquires a competing firm in a neighboring state. The contract of sale provides for a purchase price of $250,000 of which $225,000 shall constitute payment for physical assets and $25,000 for the trademark and goodwill. No part of the purchase price may be amortized under Section 24368.1.
EXAMPLE (3).
M Corporation brings suit against N Corporation for infringement of M's trademark. The costs of this litigation may be amortized under Section 24368.1.
(c) Time and Manner of Making Election.
(1) A taxpayer who elects to defer and amortize any trademark or trade name expenditure paid or incurred during an income year beginning after December 31, 1960, shall, within the time prescribed by law (including extensions thereof) for filing its tax return for that year, attach to its tax return a statement signifying its election under Section 24368.1 and setting forth the following:
(A) Name and address of the taxpayer, and the income year involved;
(B) An identification of the character and amount of each expenditure to which the election applies and the number of continuous months (not less than 60) during which the expenditures are to be ratably deducted; and
(C) A declaration by the taxpayer that it will make an accounting segregation on its books and records of the trademark and trade name expenditures for which the election has been made, sufficient to permit an identification of the character and amount of each such expenditure and the amortization period selected for each expenditure.
(2) The provisions of paragraph (1) of this subsection shall apply to tax returns and statements required to be filed after December 31, 1960.
HISTORY

1. New section filed 1-6-69; effective thirtieth day thereafter (Register 69, No. 2).

*This regulation is substantially the same as Section 26 CFR 1.177-1.
§24369(a). *  Soil and Water Conservation Expenditures.
History

In General. Under Section 24369, a taxpayer engaged in farming may deduct its soil or water conservation expenditures which do not give rise to a deduction for depreciation and which are not otherwise deductible.
Section 24369 permits a deduction of soil and water conservation expenditures without limitation as to amount. This differs from Federal law, which limits such expenses to 25 percent of the taxpayer's gross income from farming. Also, since such expenses are fully deductible, there can be no excess carried over and deducted in succeeding income years. If a taxpayer does not adopt this method, such expenditures increase the basis of the property to which they relate.
HISTORY

1. New Reg. 24369(a) filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).

*Except for the deletion of the percentage limitations this regulation is substantially the same as Section 26 CFR 1.175-1.
§24369(b). Definition of Soil and Water Conservation Expenditures.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New Reg. 24369(b) filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24369(c). Definition of “The Business of Farming.”
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New Reg. 24369(c) filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24369(d). Definition of “Land Used in Farming.”
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New Reg. 24369(d) filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24369(e). Adoption or Change in Method.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New Reg. 24369(e) filed 12-14-64; effective thirtieth day thereafter (Register 64, No. 25).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24377(a). *  Expenditures by Farmers for Fertilizer, Etc.
History

(1) In General. A taxpayer engaged in the business of farming may elect, for any income year beginning after December 31, 1960, to treat as deductible expenses those expenditures otherwise chargeable to capital account which are paid or incurred by it during the income year for the purchase or acquisition of fertilizer, lime, ground limestone, marl, or other materials to enrich, neutralize, or condition land used in farming, and those expenditures otherwise chargeable to capital account paid or incurred for the application of such items and materials to such land. No election is required to be made for those expenditures which are not capital in nature. Section 24377, Reg. 24377(b), and this regulation are not applicable to those expenses which are deductible under Section 24343 and the regulations thereunder or which are subject to the method described in Section 24369.
(2) Land Used in Farming. For purposes of Section 24377(a) and of subsection (1) of this regulation, the term “land used in farming” means land used (before or simultaneously with the expenditures described in such section and such subsection) by the taxpayer or its tenant for the production of crops, fruits, or other agricultural products or for the sustenance of livestock. See Section 24377(b). Expenditures for the initial preparation of land never previously used for farming purposes by the taxpayer or its tenant (although chargeable to capital account) are not subject to the election. The principles stated in Regs. 24369(c) and 24369(d) are equally applicable under this regulation in determining whether the taxpayer is engaged in the business of farming and whether the land is used in farming.
HISTORY

1. New section filed 1-6-69; effective thirtieth day thereafter (Register 69, No. 2).

*This regulation is substantially the same as Section 26 CFR 1.180-2.
§24377(b). *  Time and Manner of Making Election and Revocation.
History

(1) Election. The claiming of a deduction on the taxpayer's return for an amount to which Section 24377 applies for amounts (otherwise chargeable to capital account) expended for fertilizer, lime, etc., shall constitute an election under Section 24377 and subsection (1) of Reg. 24377(a). Such election shall be effective only for the income year for which the deduction is claimed.
(2) Revocation. Once the election is made for any income year such election may not be revoked without the consent of the Franchise Tax Board. Such requests for consent shall be in writing and signed by the taxpayer or its authorized representative and shall set forth--
(A) The name and address of the taxpayer;
(B) The income year to which the revocation of the election is to apply;
(C) The amount of expenditures paid or incurred during the income year or portions thereof (where applicable), previously taken as a deduction on the return in respect of which the revocation of the election is to be applicable; and
(D) The reasons for the request to revoke the election.
HISTORY

1. New section filed 1-6-69; effective thirtieth day thereafter (Register 69, No. 2). 

*This regulation is substantially the same as Section 26 CFR 1.180-2.
Article 2. Special Deductions
§24401. Allowance of Special Deductions.
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24402. Dividends, Extent Deductible.

Taxpayers are permitted a deduction, under Section 24402, for dividends received which were declared from income included in the measure of the tax of the declaring corporation under this part.
EXAMPLE (1).
The A Corporation receives dividends from B Corporation, whose entire income is also subject to tax under this part and has no other earnings not taxable under this part. A is allowed a deduction for all such dividends received from B.
EXAMPLE (2).
The A Corporation receives dividends from B Corporation, which is not subject to tax in California. None of the dividends received from B are deductible.
EXAMPLE (3).
The A Corporation receives dividends from B Corporation, whose income is subject to allocation because its activities are carried on within and without the State. B's allocation percentage is 50 percent. The percentage of the dividends received by A which are deductible is determined by formula. The variance from 50 percent will be affected by the extent of nonunitary and nontaxable income.
§24404. Cooperative Associations.
Note     •     History

Cooperative associations are not exempt from tax under this part, but are permitted a deduction for all income arising from business done for or with members, and for or with nonmembers when done on a nonprofit basis.
Thus, all cooperatives are subject to tax on or measured by income derived from business done with nonmembers on a profit basis but not less than the minimum tax. It is immaterial that the income derived from nonmember business is incidental to the primary activity of the taxpayer.
For special deductions allowed farmer's cooperative associations, see Legal Ruling 389 (CCH Paragraph 205-320; P-H Paragraph 13,640). 
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24504, Revenue and Taxation Code.
HISTORY

1. Renumbering and amendment of Section 24404-24405 to Section 24404 filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24405. Cooperative or Mutual Associations Not Principally Engaged in Selling Tangible Personal Property.
Note     •     History

Effective September 7, 1955, cooperative or mutual associations are not permitted a deduction under Section 24405 if their income is principally derived from the sale in the regular course of business of tangible personal property other than agricultural products. Thus, if a cooperative or mutual association is organized and operated for the purpose of selling to its members furniture, household appliances, ice, or other similar products none of its income may be deducted under this section. Water sold for domestic purposes is tangible personal property, but if used for irrigation purposes it is not such property. Therefore, if the primary purpose of a mutual water company is to furnish water to its members for domestic purposes no deduction for income derived from such sales is allowed under Section 24404. However, if the primary purpose of a mutual water company is to furnish water for irrigation purposes and incidental income is derived from furnishing water for domestic purposes to members the income derived from such incidental sales may be deducted. Effective for income years beginning after December 31, 1956, regardless of the purpose for which it is used, water is not considered as being tangible personal property.
For the purpose of Section 24404 electricity is not tangible personal property.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24505, Revenue and Taxation Code.
HISTORY

1. New section filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37). For prior history of former Section 24404-24405, see Register 71, No. 2.
§24407-24409. *  Election to Amortize Organizational Expenditures.
Note     •     History

(a) In General.
(1) Section 24407 provides that a bank or corporation may elect for any income year beginning after December 31, 1960, to treat its organizational expenditures, as defined in Section 24408 and in subsection (b) of this regulation, as deferred expenses. A bank or corporation which exercises such election must, at the time it makes the election, select a period of not less than 60 months, beginning with the month in which it began business, over which it will amortize its organizational expenditures. The period selected by the bank or corporation may be equal to or greater, but not less, than 60 months, but in any event it must begin with the month in which the corporation began business. The organizational expenditures of the bank or corporation which are treated as deferred expenses under the provisions of Section 24407 and this regulation shall then be allowed as a deduction in computing net income ratably over the period selected by the taxpayer. The period selected by the taxpayer in making its election may not be subsequently changed but shall be adhered to in computing net income for the income year for which the election is made and all subsequent income years.
(2) If a bank or corporation exercises the election provided in Section 24407, such election shall apply to all of its expenditures which are organizational expenditures within the meaning of Section 24408 and subsection (b) of this regulation. The election shall apply, however, only with respect to expenditures incurred before the end of the income year in which the bank or corporation begins business (without regard to whether the bank or corporation files its returns on the accrual or cash method of accounting or whether the expenditures are paid in the income year in which they are incurred), and if such expenditures are paid or incurred on or after June 23, 1961.
(3) The deduction allowed under Section 24407 must be spread over a period beginning with the month in which the bank or corporation begins business. The determination of the date the bank or corporation begins business presents a question of fact which must be determined in each case in light of all the circumstances of the particular case. The words “begins business,” however, do not have the same meaning as “in existence.” Ordinarily, a bank or corporation begins business when it starts the business operations for which it was organized; a bank or corporation comes into existence on the date of its incorporation. Mere organizational activities, such as the obtaining of the corporate charter, are not alone sufficient to show the beginning of business. If the activities of the bank or corporation have advanced to the extent necessary to establish the nature of its business operations, however, it will be deemed to have begun business. For example, the acquisition of operating assets which are necessary to the type of business contemplated may constitute the beginning of business.
(b) Organizational Expenditures Defined.
(1) Section 24408 defines the term “organization expenditures.” Such expenditures for purposes of Section 24408 and this regulation, are those expenditures which are directly incident to the creation of the bank or corporation. An expenditure, in order to qualify as an organizational expenditure, must be (i) incident to the creation of the bank or corporation, (ii) chargeable to the capital account of the bank or corporation, and (iii) of a character which, if expended incident to the creation of a bank or corporation having a limited life, would be amortizable over such life. An expenditure which fails to meet each of these three tests may not be considered an organizational expenditure for purposes of Section 24407 and this regulation.
(2) The following are examples of organizational expenditures within the meaning of Section 24408 and this regulation: legal services incident to the organization of the bank or corporation, such as drafting the corporate charter, by-laws, minutes of organizational meetings, terms of original stock certificates, and the like; necessary accounting services; expenses of temporary directors and of organizational meetings of directors or stockholders; and fees paid to State of incorporation.
(3) The following expenditures are not organizational expenditures within the meaning of Section 24408 and this regulation:
(A) Expenditures connected with issuing or selling shares of stock or other securities, such as commissions, professional fees, and printing costs. This is so even where the particular issues of stock to which the expenditures relate is for a fixed term of years;
(B) Expenditures connected with the transfer of assets to a bank or corporation.
(4) Expenditures connected with the reorganization of a bank or corporation, unless directly incident to the creation of a bank or corporation, are not organizational expenditures within the meaning of Section 24408 and this regulation.
(c) Time and Manner of Making Election. The election provided by Section 24407 and subsection (a) of this regulation shall be made in a statement attached to the taxpayer's return for the income year in which it begins business. Such income year must be one which begins after December 31, 1960. The return and statement must be filed not later than the date prescribed by law for filing the return (including any extensions of time) for the income year in which the taxpayer begins business. The statement shall set forth the description and amount of the expenditures involved, the date such expenditures were incurred, the month in which the bank or corporation began business, and the number of months (not less than 60 and beginning with the month in which the taxpayer began business) over which such expenditures are to be deducted ratably.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 12-22-69; effective thirtieth day thereafter (Register 69, No. 52).

*This regulation is substantially the same as Section 26 CFR 1.248-1.
§24411. Deduction for Certain Dividends.
Note     •     History

(a) Allowance of deduction. Revenue and Taxation Code section 24411, allows taxpayers that have elected to compute their income derived from or attributable to sources within California pursuant to Article 1.5 of Chapter 17 of the Corporation Tax Law a deduction with respect to qualifying dividends. In general, the deduction is an amount equal to 75 percent of such qualifying dividends. However, a deduction in an amount equal to 100 percent is allowed with respect to such qualifying dividends derived from specified construction projects.
(b) Definitions.
(1) Qualifying dividends. 
(A) “Qualifying dividends” are those dividends received by any member of the water's-edge group from a corporation, the average of whose property, payroll and sales factors within the United States is less than 20 percent and of which more than 50 percent of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by the water's-edge group at the time the dividend is received. The dividend payor need not be in a unitary relationship with the recipient of the dividend or any other member of the water's-edge group. A dividend received from a member of the water's-edge group may be a qualifying dividend when it is treated as being paid out of earnings which were not included in a combined report with those of the recipient. Qualifying dividends shall be classified as business or nonbusiness income pursuant to the rules established in regulations adopted pursuant to Part 11 of the Revenue and Taxation Code. (See Cal. Code Regs., tit. 18, §25120, sub. (c), and applicable administrative and judicial decisions.)
(B) For purposes of the definition of “qualifying dividends” in Revenue and Taxation Code section 24411, subdivision (a), the term “corporation” shall include banks for taxable years beginning on or after January 1, 1998.
(C) Qualifying dividends do not include amounts deemed to be dividends pursuant to Internal Revenue Code sections 78, 951 et seq., and 1248, or otherwise, unless there is a distribution, actual or constructive, or a provision in the Revenue and Taxation Code requiring that a dividend be deemed to have been received.
(2) United States. For purposes of this section the “United States” means the 50 states of the United States and the District of Columbia.
(3) Water's-edge group. “Water's-edge group,” for purposes of the calculations required by Revenue and Taxation Code section 24411, means all banks, corporations or other entities whose income and apportionment factors are considered pursuant to Revenue and Taxation Code section 25110 in computing the income of the individual taxpayer for the current taxable year which is derived from or attributable to sources within this state.
(c) Computation of amount allowable.
(1) In general. The amount of the deduction allowable is equal to 100 percent of the qualifying dividends described in Revenue and Taxation Code section 24411, subdivision (c), and 75 percent of other qualifying dividends not otherwise allowed as a deduction or eliminated from income.
(2) Dividends deductible under other sections. In no event shall a deduction be allowed with respect to a dividend for which a deduction has otherwise been allowed (e.g., Revenue and Taxation Code sections 24402 or 24410) or which has been eliminated from income (e.g., Revenue and Taxation Code section 25106). (See subsection (e) below.)
(d) Dividends derived from construction projects.
(1) General. A deduction in the amount of 100 percent shall be allowed for qualifying dividends derived from construction projects, the locations of which are not subject to the control of the taxpayer. If the payor of the dividend has earnings and profits derived from both construction projects and other activities, the dividend shall be treated as paid from construction projects as described in subsection (d)(5) of this regulation.
(2) Construction project. “Construction project” for purposes of Revenue and Taxation Code section 24411, subdivision (c), means an activity undertaken for an entity, including a governmental entity, which is not affiliated with the water's-edge group, the majority of the cost of performance of which is attributable to an addition to real property or to an alteration of land or any improvement thereto as those terms are defined in the Revenue and Taxation Code and the regulations adopted pursuant thereto.
(A) A “construction project” does not include the operation, rental, leasing or depletion of real property, land or any improvement thereto.
Example: An oil company drills a successful oil well in a foreign country and produces oil. Dividends arising from the production of oil are not derived from a construction project.
(B) For purposes of this subsection (2), an entity is affiliated if it is a member of a commonly controlled group of which a member of the water's-edge group is also a member. (See  Cal. Code Regs., tit. 18, §25110, sub. (b)(2).)
(3) Location not subject to taxpayer's control. A “location is not subject to the taxpayer's control” when the majority of the construction, measured by costs of performance, must be performed at the site in the foreign location because of the nature and character of the project, not because of the terms of the contract.
(4) Examples:
(A) A construction project is undertaken to build a dam. The location is not subject to the taxpayer's control because the dam must be built at a specific site.
(B) A construction project is undertaken to build a skyscraper. The location is not subject to the taxpayer's control because the skyscraper must be built at a specific site.
(C) A construction project is undertaken for the erection of pre-fabricated buildings. The majority of the cost involves pre-fabrication of the components, not their assembly and erection. The components can be pre-fabricated anywhere. The location of the project is under the control of the taxpayer.
(D) An engineering firm designs an oil refinery. The project does not qualify for a deduction under Revenue and Taxation Code section 24411, subdivision (c), because (1) it does not involve construction, and (2) the activity can be conducted anywhere.
(5) Determination of dividends attributable to construction projects the location of which is not subject to the taxpayer's control. For purposes of determining whether dividends are attributable to construction projects the location of which is not subject to the taxpayer's control, dividends shall be considered to be paid out of the current year's earnings and profits to the extent thereof and from the most recently accumulated earnings and profits, by year, thereafter. For any year in which the dividend payor has earnings and profits from activities other than construction projects the location of which is not subject to the taxpayer's control, the dividend shall be attributed to construction projects the location of which is not subject to the taxpayer's control in the ratio which the total earnings and profits from construction projects the location of which is not subject to the taxpayer's control bears to the total earnings and profits for the year. For purposes of applying such ratio, earnings and profits attributable to any particular construction project or other activity of the payor of the dividend shall include all costs and expenses directly attributable to such project or activity as well as an allocable portion of the total other costs and expenses of the payor which are not attributable to a particular project or activity. The total of such other costs and expenses will be allocated among all of the projects and activities of the payor on the basis of their relative gross receipts, or on any other reasonable basis which the payor uses to apportion or allocate such expenses. Following the allocation of all costs and expenses of the payor, any deficit in earnings and profits for any project or activity will be ignored in calculating the ratio referred to above.
Example: Following the allocation of all costs and expenses, the payor has total earnings and profits of $150, comprised of earnings and profits of $100 each from projects A and B and a deficit of $50 for activity C. Of the total earnings and profits of $150, $75 will be attributable to A and $75 to B. No earnings and profits will be attributable to C.
(e) Classification of distributions.
(1) Ordering. For purposes of determining the application of Revenue and Taxation Code sections 24402, 24410, 24411 and 25106, dividends shall be considered to be paid out of the current year's earnings and profits to the extent thereof and from the most recently accumulated earnings and profits by year thereafter.
(2) Partially included entities. In the case of an affiliated corporation, a portion of whose net income and apportionment factors are included in a combined report by reference to Revenue and Taxation Code section 25110, subdivision (a)(4) or (6), which pays dividends to other members of the taxpayer's water's-edge group, the following rules shall apply:
(A) Dividends shall be considered to be paid out of current earnings and profits to the extent thereof and from the most recently accumulated earnings and profits thereafter.
(B) Dividends which are considered paid out of earnings and profits of a year in which a portion of the dividend-paying entity's income and factors were considered in determining the amount of income derived from or attributable to California sources of another entity shall be considered subject to the provisions of Revenue and Taxation Code section 25106, to the extent paid out of the earnings and profits attributable to income included in the combined report.
(3) Subpart F income. For purposes of Revenue and Taxation Code section 25110, a portion of the income and apportionment factors of an entity with Subpart F income, as defined in the Internal Revenue Code, is included in the combined report used to determine the income of the water's-edge group derived from or attributable to sources within this state. For purposes of the Internal Revenue Code, Subpart F income is treated as a deemed dividend to the owner of the corporation. This is different from the treatment provided for in Revenue and Taxation Code section 25110. As a consequence, the rules established in the Internal Revenue Code and the regulations adopted pursuant thereto with regard to the classification of distributions from an entity with Subpart F income have no application for purposes of the Corporation Tax Law. The classification of a distribution for an entity that has Subpart F income shall follow the rules set forth in subsections (e)(1) and (2) of this regulation.
(4) Examples:
Example 1: Corporation A files a water's-edge election which allows it to exclude Corporation C, a foreign incorporated unitary subsidiary with none of its property, payroll, and sales factors within the United States. Corporation C has current earnings and profits of $100 and retained earnings and profits of $100 all earned during years when C was included in the combined report filed by A.
C declares a dividend of $100. The entire payment is subject to the provisions of Revenue and Taxation Code section 24411.
C declares a dividend of $150. The dividend is deemed to be paid first out of the current year's earnings and profits of $100. The remaining $50 is paid from accumulated earnings and profits earned in years when C was included in the combined report filed by A.
A portion of the payment, $100, is subject to the provisions of Revenue and Taxation Code section 24411. The remaining $50 is subject to the provisions of Revenue and Taxation Code section 25106 and is eliminated from A's income.
Example 2: A has filed a water's-edge election effective January 1, 1988, which would allow it to exclude corporation F except for the fact F has Subpart F income that causes F to be a partially included controlled foreign corporation. The partial inclusion ratio equals Subpart F income of the controlled foreign corporation divided by current earnings and profits. Corporation F has a partial inclusion ratio of 66.67% and total earnings and profits of $150 in 1988. Therefore, $100 represents earnings and profits attributable to income ($150 earnings and profits x 66.7% inclusion ratio = $100) included in the combined report required pursuant to Revenue and Taxation Code section 25110. In 1989 F has a partial inclusion ratio of 50% and total earnings and profits of $100. Therefore, $50 represents earnings and profits attributable to income ($100 earnings and profits x 50% inclusion ratio = $50) included in the combined report required pursuant to Revenue and Taxation Code section 25110.
F declares a dividend of $75 in 1989. $37.50 of the dividend for 1989 is treated as having been paid from the $50 of earnings and profits attributable to income included in the combined report in 1989, and $37.50 is treated as having been paid from the other $50 of earnings and profits attributable to income that was not included in the combined report in 1989.
A has dividend income of $37.50 which is subject to the provisions of Revenue and Taxation Code section 25106 and is therefore eliminated from income and $37.50 of dividends subject to the provisions of Revenue and Taxation Code section 24411.
Example 3: Assume the same facts as in Example 2, except that F declares a dividend of $200 in 1989. $50 of the dividend is treated as having been paid from the $50 of earnings and profits attributable to income included in the combined report in 1989, and $50 of the dividend is treated as having been paid from the other earnings and profits that were attributable to income that was not included in the combined report in 1989. The remaining $100 is treated as having been paid from 1988 earnings. $66.67 of the dividend is treated as being paid from earnings and profits attributable to income included in the combined report in 1988 and the remaining $33.33 is from earnings and profits attributable to income that was not included in the combined report in 1988.
A has dividend income of $116.67 ($50 (1989) + $66.67 (1988)) which is subject to the provisions of Revenue and Taxation Code section 25106 and is therefore eliminated from income. A's remaining $83.33 ($50 (1989) + $33.33 (1988)) of dividend income is subject to the provisions of Revenue and Taxation Code section 24411.
Example 4: Corporation A files a water's-edge election which allows it to include Corporation P, a foreign incorporated unitary subsidiary with less than 20 percent of the average of its property, payroll and sales factors within the United States only to the extent of its United States income and factors. Corporation P has current earnings and profits of $100 of which $10 represents earnings and profits attributable to income included in the water's-edge combined report pursuant to Revenue and Taxation Code section 25110, subdivision (a)(4).
P declares a dividend of $50. Of such amount $5 is subject to elimination under Revenue and Taxation Code section 25106, and $45 is subject to the provisions of Revenue and Taxation Code section 24411.
(f) This regulation applies to taxable years beginning on or after January 1, 1996, except as otherwise specifically provided.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 24411, Revenue and Taxation Code.
HISTORY

1. New section filed 1-3-89; operative 1-3-89 (Register 89, No. 4).
2. Editorial correction of subsections (e)(2)(B) and (i)(4) Examples 2 and 3 (Register 91, No. 32).
3. Amendment of subsections (b)(2)-(3), (b)(5)-(6), (b)(9), (c)(1), (c)(2)(A), (c)(4)-(5), (d)(1)-(4), (e)(4), and (f)-(g), new subsections (b)(2)(B), (h)(1)(C) Example, and (h)(5), and repealer of subsection (b)(3)(D) filed 11-3-92; operative 12-3-92 (Register 92, No. 45).
4. Change without regulatory effect amending section and Note filed 3-13-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 11).
5. Editorial correction adding inadvertently omitted subsection (b) designator (Register 2003, No. 6).
6. Change without regulatory effect amending subsection (f) filed 4-9-2003 pursuant to section 100, title 1, California Code of Regulations (Register 2003, No. 15).
Article 3. Items Not Deductible
§24421. General Rule for Disallowance of Deductions. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19). For history of Article 3, see Register 69, No. 2.
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24422(a). Capital Expenditures in General. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24422(b). Examples of Capital Expenditures. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24422(c). Election to Deduct or Capitalize Certain Expenditures. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24423.  *  Intangible Drilling and Development Costs in the Case of Oil and Gas Wells.
Note     •     History

For rules relating to the option to deduct as expenses intangible drilling and development costs in the case of oil and gas wells, see Reg. 2431(d).
NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 12-22-69; effective thirtieth day thereafter (Register 69, No. 52).

*This regulation is substantially the same as Section 26 CFR 1.263(c)-1.
§24424(a). Premiums on Life Insurance Taken out in a Trade or Business. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24424(b). Single Premium Life Insurance, Endowment, or Annuity Contracts. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24424(c). Other Life Insurance, Endowment, or Annuity Contracts. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24425. Expenses Relating to Tax-Exempt Income. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24426(a). ** Taxes and Carrying Charges Chargeable to Capital Account and Treated As Capital Items.
Note     •     History

(1) In General. In accordance with Section 24426, items enumerated in subsection (2)(A) of this regulation may be capitalized at the election of the taxpayer. Thus, taxes and carrying charges with respect to property of the type described in this regulation are chargeable to capital account at the election of the taxpayer, notwithstanding that they are otherwise expressly deductible under provisions of Article 1 of Chapter 7. No deduction is allowable for any items so treated.
(2) Taxes and Carrying Charges. 
(A) The taxpayer may elect, as provided in subsection (3) of this regulation, to treat the items enumerated in this paragraph which are otherwise expressly deductible under the provisions of Article 1 of Chapter 7 as chargeable to capital accounts as a component of original cost or other basis, for the purposes of Section 24912, or as an adjustment to basis, for the purposes of Section 24916. The items thus chargeable to capital account are--
(i) In the case of unimproved and unproductive real property: Annual taxes, interest on a mortgage, and other carrying charges.
(ii) In the case of real property, whether improved or unimproved and whether productive or unproductive:
(I) Interest on a loan (but not theoretical interest of a taxpayer using its own funds),
(II) Taxes of the owner of such real property measured by compensation paid to its employees.
(III) Taxes of such owner imposed on the purchase of materials, or on the storage, use, or other consumption of materials, and
(IV) Other necessary expenditures paid or incurred for the development of the real property or for the construction of an improvement or additional improvement to such real property, up to the time the development or to such real property, up to the time the development or construction work has been completed. The development or construction work with respect to which such items are incurred may relate to unimproved and unproductive real estate whether the construction work will make the property productive of income subject to tax (as in the case of a factory) or not (as in the case of a personal residence), or may relate to property already improved or productive (as in the case of a plant addition or improvement, such as the construction of another floor on a factory or the installation of insulation therein).
(iii) In the case of personal property:
(I) Taxes of an employer measured by compensation for services rendered in transporting machinery or other fixed assets to the plant or installing them therein.
(II) Interest on a loan to purchase such property or to pay for transporting or installing the same and
(III) Taxes of the owner thereof imposed on the purchase of such property or on the storage, use, or other purchase of such property in the state which is purchased for storage, use or other consumption in that state paid or incurred up to the date of installation or the date when such property is first put into use by the taxpayer, whichever date is later.
(iv) Any other taxes and carrying charges with respect to property, otherwise deductible, which in the opinion of the Franchise Tax Board are, under sound accounting principles, chargeable to capital account.
(B) The sole effect of Section 24426 is to permit the items enumerated in paragraph (A) of this subsection to be chargeable to capital account notwithstanding that such items are otherwise expressly deductible under the provisions of these part. An item not otherwise deductible may not be capitalized under Section 24426.
(C) In the absence of a provision in this regulation for treating a given item as a capital item, this regulation has no effect on the treatment otherwise accorded such item. Thus, items which are otherwise deductible are deductible notwithstanding the provisions of these regulation, and items which are otherwise treated as capital items are to be so treated.
Similarly, an item not otherwise deductible is not made deductible by this regulation. Nor is the absence of a provision in this regulation for treating a given item as a capital item to be construed as withdrawing or modifying the right now given to the taxpayer under any other provisions of Article 1 of Chapter 7, or of the regulations thereunder, to elect to capitalize or to deduct a given item.
(3) Election to Charge Taxes and Carrying Charges to Capital Account.
(A) If for any income year there are two or more items of the type described in subsection (2) (A) of this regulation, which relate to the same project to which the election is applicable, the taxpayer may elect to capitalize any one or more of such items even though it does not elect to capitalize the remaining items or to capitalize items of the same type relating to other projects. However, if expenditures for several items of the some type are incurred with respect to a single project, the election to capitalize must, if exercised, be exercised as to all items of that type. For purposes of this regulation, a “project” means, in the case of items described in subsection (2) (A) (ii) of this regulation, a particular development of, or construction of an improvement to, real property, and in the case of items described in subsection (2) (A) (iii) of this regulation, the transportation and installation of machinery or other fixed assets.
(B) (i) An election with respect to an item described in subsection (2) (A) (i) of this regulation is effective only for the year for which it is made.
(ii) An election with respect to an item described in-
(I) Subsection (2) (A) (ii) of this regulation is effective until the development or construction work described in that subparagraph has been completed;
(II) Subsection (2) (A) (iii) of this regulation is effective until the later of either the date of installation of the property described in that subparagraph, or the date when such property is first put into use by the taxpayer;
(III) Subsection (2)(A)(iv) of this regulation is effective as determined by the Franchise Tax Board. Thus, an item chargeable to capital account under this regulation must continue to be capitalized for the entire period described in this subparagraph applicable to such election although such period may consist of more than one income year.
(C) If the taxpayer elects to capitalize an item or items under this regulation, such election shall be exercised by filing with the original return for the year for which the election is made a statement indicating the item or items (whether with respect to the same project or to different projects) which the taxpayer elects to treat as chargeable to capital account. Elections filed for income years beginning before January 1, 1955, and for income years ending before June 6, 1955, under Section 24201(d)(2) of the Bank and Corporation Tax Law of 1954, and the regulations thereunder, shall have the same effect as if they were filed under this regulation.
(4) The following examples are illustrative of the application of the provisions of this regulation:
EXAMPLE (1).
In 1956 and 1957 taxpayer A pays annual taxes and interest on a mortgage on a piece of real property. During 1956, the property is vacant and unproductive, but throughout 1957 A operates the property as a parking lot. A may capitalize the taxes and mortgage interest paid in 1956, but not the taxes and mortgage interest paid in 1957.
EXAMPLE (2).
In February 1957, taxpayer B began the erection of an office building for itself. B in 1957, in connection with the erection of the building, paid $6,000 social security taxes, which in its 1957 return it elected to capitalize. B must continue to capitalize the social security taxes paid in connection with the erection of the building until its completion.
EXAMPLE (3).
Assume the same facts as in example (2) except that in November 1957, B also begins to build a hotel. In 1957 B pays $3,000 social security taxes in connection with the erection of the hotel. B's election to capitalize the social security taxes paid in erecting the office building started in February 1957 does not bind it to capitalize the social security taxes paid in erecting the hotel; it may deduct the $3,000 social security taxes paid in erecting the hotel.
EXAMPLE (4).
In 1957, M Corporation began the erection of a building for itself, which will take three years to complete. M Corporation in 1957 paid $4,000 social security taxes and $8,000 interest on a building loan in connection with this building. M Corporation may elect to capitalize the social security taxes although it deducts the interest charges.
EXAMPLE (5).
Taxpayer C purchases machinery in 1957 for use in its factory. It pays social security taxes on the labor for transportation and installation of the machinery, as well as interest on a loan to obtain funds to pay for the machinery and for transportation and installation costs. C may capitalize either the social security taxes or the interest, or both, up to the date of installation or until the machinery is first put into use by it, whichever date is later.
(5) Allocation. If any tax or carrying charge with respect to property is in part a type of item described in subsection (2) of this regulation and in part a type of item or items with respect to which no election to treat as a capital item is given, a reasonable proportion of such tax or carrying charge, determined in the light of all the facts and circumstances in each case, shall be allocated to each item. The rule of this subsection may be illustrated by the following example:
EXAMPLE.
N Corporation, the owner of a factory in New York on which a new addition is under construction, in 1957 pays its general manager, B, a salary of $10,000 and also pays a New York State unemployment insurance tax of $81 on B's salary. B spends nine-tenths of his time in the general business of the firm and the remaining one-tenth in supervising the construction work. N Corporation treats as expenses $9,000 of B's salary, and charges the remaining $1,000 to capital account. N Corporation may elect to capitalize $8.10 of the $81 New York State unemployment insurance tax paid in 1957 since such tax is deductible under Section 24345.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 12-22-69; effective thirtieth day thereafter (Register 69, No. 52).

*This regulation is substantially the same as Section 26 CFR 1.266-1.
§24427. Deductions Disallowed. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 7).
§24428. Relationships. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24429. Constructive Ownership of Stock. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24430. Amount of Gain Where Loss Previously Disallowed. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 5-5-72; effective thirtieth day thereafter (Register 72, No. 19).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24431-24433(a). Meaning and Use of Terms. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New Article 3 (§24431-24433(a), 24431-24433(b), 24431-24433(c), 24431-24433(d), 24431-24433(e)) filed 1-6-69; effective thirtieth day thereafter (Register 69, No. 2).
2. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24431-24433(b). Purpose and Scope of Sections 24431, 24432 and 24433. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24431-24433(c). Instances in Which Section 24431 Disallows a Deduction or Other Allowance. Instances of Disallowance. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24431-24433(d). Power of Franchise Tax Board to Allocate Deduction or Allowance in Part. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24431-24433(e). Presumption in Case of Disproportionate Purchase Price. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 9-3-82; effective thirtieth day thereafter (Register 82, No. 37).
§24436. Illegal Activities--Denial of Deductions.
History

Any taxpayer who engages in any illegal activities as defined in Chapters 9, 10 and 10.5 of Title IX of Part 1 of the Penal Code shall be denied all deductions from gross income attributable to such activities. Illegal activities include, but are not limited to the following:
(a) Conducting a lottery, preparing a lottery, selling or disposing of lottery tickets, aiding the conduct of a lottery, keeping a lottery office, insuring or offering to insure lottery tickets, letting or permitting the use of a building or vessel for lottery purposes, dealing, playing or carrying on or conducting any game of faro, monte, roulette, lansquenet, rouge-et-noir, rondo, tan, fan-tan, stud-horse poker, seven-and-a-half, twenty-one, hokey-pokey, or any banking or percentage game, possession or maintenance of any slot or card machine, contrivance, appliance or mechanical device, upon the result of action of which money or other valuable thing is staked or hazarded, any card dice, or any dice having more than six faces or bases each, upon the result of action of which money or any other valuable thing is staked or hazarded, knowingly permitting any of the above games to be played, conducted or dealt in any house owned or rented by any taxpayer.
(b) Pool-selling or book-making; stake-holding or registering of bets or wagers upon the result of any trial or contest of skill, speed or power of man or beast or permitting the use of any controlled property for any of the purposes above mentioned; laying, making, offering or accepting any bet or bets upon the result of a contest of skill, speed or power of endurance of man or beast.
(c) Touting or attempting or conspiring to commit touting.
The same rule applies in respect of any deduction attributable to any other business activity which is connected or associated with, or tends to promote or further any illegal activities. Every business activity which is carried on by any taxpayer, or by another under its direction or control, on the same premises where the illegal activities are conducted, tends to promote or further such illegal activities.
The same rule further applies to every business activity carried on by any taxpayer or by another under its direction or control, on the premises other than where the illegal activities are conducted and which tends to promote or further such illegal activities.
On and after May 3, 1951, all deductions from gross income attributable to such illegal activities shall be denied.
HISTORY

1. Renumbered from Reg. 24203 in Subchapter 3 (Register 71, No. 2).
Subchapter 8. Corporate Distributions and Adjustments [Repealed]
HISTORY

1. Change without regulatory effect repealing subchapter 8 (articles 1 and 2, sections 24451-24497(d)) filed 9-30-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 40). For prior history, see Register 79, No. 7, Register 82, No. 49, Register 87, No. 15, Register 88, No. 40 and Register 97, No. 35. 
Subchapter 9. Corporate Liquidations [Repealed]
HISTORY

1. Change without regulatory effect repealing subchapter 9 (articles 1 and 2, sections 24501-24519) filed 8-12-2003 pursuant to section 100, title 1, California Code of Regulations (Register 2003, No. 33). For prior history, see Register 82, No. 49, Register 88, No. 11 and Register 88, No. 40. 
Subchapter 10. Corporate Organizations and Reorganizations [Repealed]
HISTORY

1. Change without regulatory effect repealing subchapter 10 (article 1, section 24561) filed 8-25-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 35).
Subchapter 11. Insolvency Reorganizations [Repealed]
HISTORY

1. Repealer of subchapter 11 (sections 24571-24574(a)--24576-24577(c)) filed 11-30-82; operative 12-30-82 (Register 82, No. 49).
Subchapter 12. Pension Plan [Repealed]
HISTORY

1. Repealer of subchapter 12 (article 1, sections 24601-24611(a)--24612) filed 11-30-82; operative 12-30-82 (Register 82 No. 49). 
Subchapter 13. Accounting Periods and Methods of Accounting
Article 1. Accounting Periods
§24631(a). Period for Computation of Net Income. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New Group 13, Article 1 (§24631(a), 24631(b) and 24636) filed 3-31-70; effective thirtieth day thereafter (Register 70, No. 14).
2. Repealer filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
§24631(b). Election of Year Consisting of 52-53 Weeks. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 3-31-70; effective thirtieth day thereafter (Register 70, No. 14).
2. Repealer filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
§24636. * Computation of Tax for Short Period on Change of Annual Accounting Period.
History

(a) General Rule. 
(1) If a return is made for a short period, the net income for the short period shall be placed on an annual basis by multiplying such income by 12 and dividing the result by the number of months in the short period. Unless Section 24636 (b) and subsection (b) of this regulation apply, the tax for the short period shall be the same part of the tax computed on the annual basis as the number of months in the short period is of 12 months.
(2) If a return is made for a short period of more than 6 days, but less than 359 days, resulting from a change from or to a 52-53 week income year, the net income for the short period shall be annualized and the tax computed on a daily basis, as provided in Section 24631 (f) (2) (B) (iii) and subsection (3) (E) of Reg. 24631 (b).
(3) In the case of the offset provided for in Article 3 of Chapter 2, the Franchise Tax Board shall compute the amount of tax on the income placed on an annual basis, and shall allow the offset provided for from such tax. The tax due under Section 24636, which shall not be subject to offset, shall be such part of the tax, less the offset allowed, computed on such annual basis as the number of months in the short period of 12 months.
(4) The provisions of subsection (a) (3) may be illustrated by the following example:
EXAMPLE.
The X Financial Corporation makes a return for the one--month period ending September 30, 1969, because of a change in annual accounting period permitted under Section 24633. Income and expenses for the short period are as follows:

Gross operating income	 $133,900
Business expenses	 130,000
Net income from operations	 $3,900
Net income for short period before annualizing	 $3,900
Net income annualized ($3,900 x 12)	 $46,800
Tax on annual basis: $46,800 at 11 percent	 $5,148
Financial corporation offset (Section 23184)	   348
Net tax	 $4,800
Tax for one-month period ($4,800 x 1/12) 	 $400
(b) Exception: Computation based on 12-month period. 
(1) A taxpayer whose tax would otherwise be computed under Section 24636 (a) (or Section 24631 (f) (2) (B) (iii) on the case of certain changes from or to a 52-53-week income year) for the short period resulting from a change of annual accounting period may apply to the Franchise Tax Board to have its tax computed under the provisions of Section 24636(b) and this subsection. If such application is made, as provided in paragraph (4) of the subsection, and if the taxpayer establishes the amount of its net income for the 12-month period described in paragraph (2) of this subsection, then the tax for the short period shall be the greater of the following--
(A) An amount which bears the same ratio to the tax computed on the net income which the taxpayer has established for the 12-month period as the net income computed on the basis of the short period bears to the net income for such 12-month period; or
(B) The tax computed on the net income for the short period without placing the net income on an annual basis. 
However, if the tax computed under Section 24636(b) and this subsection is not less than the tax for the short period computed under Section 24636(a) (or Section 24631(f)(2)(B)(iii) in the case of certain changes from or to a 52-53 week income year), then Section 24636(b) and this subsection do not supply.
(2) The term “12-month period” referred to in paragraph (1) of this subsection means the 12-month period beginning on the first day of the short period, However, if the taxpayer is not in existence at the end of such 12-month period, or if the taxpayer is a corporation which has disposed of substantially all of its assets before the end of such 12-month period, the term “12-month period” means the 12-month period ending at the close of the last day of the short period. For the purposes of the preceding sentence, a corporation which has ceased business and distributed so much of the assets used in its business that it cannot resume its customary operations with the remaining assets, will be considered to have disposed of substantially all of its assets, In the case of a change from a 52-53-week income year, the term “12-month period” means the period were an actual annual accounting period of 52 or 53 weeks (depending on the taxpayer's 52-52-week income year) beginning on the first day of the short period.
(3)(A) The net income for the 12-month period is computed under the some provisions of law as are applicable to the short period and is computed as if the 12-month period were an actual annual accounting period of the taxpayer. All items which fall in such 12--month period must be included even it they are extraordinary in amount or of an unusual nature. If the taxpayer is a member of a partnership, its net income for the 12-month period shall include its distributive share of partnership income for any taxable year of the partnership ending within or with such 12-month period, but no amount shall be included with respect to a taxable year of the partnership ending before or after such 12-month period. If any other item partially applicable to such 12-month period can be determined only at the end of an income year which includes only part of the 12-month period, the taxpayer, subject to review by the Franchise Tax Board, shall apportion such item to the 12-month period in such manner as will most clearly reflect income for the 12-month period.
(B) In the case of a taxpayer permitted or required to use inventories, the cost of goods sold during a part of the 12-month period included in an income year shall be considered, unless a more exact determination is available, as such part of the cost of goods sold during the entire income year as the gross receipts from sales for the entire income year as the gross receipts from sales for such part of the 12-month period as of the gross receipts from sales for the entire income year. For example, the 12-month period of a corporation engaged in the sale of merchandise, which has a short period from January 1, 1968, to September 30, 1968, is the calendar year 1968. The cost of goods sold during the three-month period, October 1, 1968, to December 31, 1968, is the calendar year 1968. The three-month period, October 1, 1968, to December 1, 1968, is part of the taxpayer's income year ending September 30, 1969. The cost of goods sold during the three-month period, October 1, 1968, to December 31, 1968, is such part of the cost of goods sold during the entire fiscal year ending September 30, 1969, as the gross receipts from sales for such three-month period are of the gross receipts from sales for the entire fiscal year.
(C) The Franchise Tax Board may, in granting permission to a taxpayer to change its annual accounting period, require, as a condition to permitting the change, that the taxpayer must take a closing inventory upon the last day of the 12-month period if it wishes to obtain the benefits of Section 24636(b). Such closing inventory will be used only for the purposes of Section 24636(b), and the taxpayer will not be required to use such inventory in computing the net income year in which such inventory is taken.
(4) (A) A taxpayer who wishes to compute its tax for a short period resulting from a change of annual accounting period under Section 24636(b) must make an application therefor. Except as provided in (B) of this paragraph, the taxpayer shall first file its return for the short period and compute its tax under Section 24636(a). The application for the benefits of Section 24636(b) shall subsequently be made in the form of a claim for credit or refund. The claim shall set forth the computation of the net income and the tax thereon for the 12-month period and must be filed not later than the time (including extensions) prescribed for filing the return for the taxpayer's first income year which ends on or after the day which is 12 months after the beginning of the short period. For example, assume that a taxpayer changes its annual accounting period from the calendar year to a fiscal year ending September 30, and files a return for the short period from January 1, 1968, to September 30, 1968. Its application for the benefits of Section 24636(b) must be filed not later than the time prescribed for filing its return for its first income year which ends on or after the last day of December 1968, the twelfth month after the beginning of he short period. Thus, the taxpayer must file its application not later than the time prescribed for filing the return for its fiscal year ending September 30, 1969. If it obtains an extension of time for filing the return for such fiscal year, it may file its application during the period of such extension. If the Franchise Tax Board determines that the taxpayer has established the amount of its net income for the 12-month period, any excess of the tax paid for the short period over the tax computed under Section 24636(b) will be credited or refunded to the taxpayer in the same manner as in the case of an overpayment.
(B) If at the time the return for the short period is filed, the taxpayer is able to determine that the 12-month period ending with the close of the short period (see Section 24636(b) and subsection (b)(2) of this regulation) will be used in the computations under Section 24636(b), then the tax on the return for the short period may be determined under the provision of Section 24636(b). In such case, a return covering the 12-month period shall be attached to the return for the short period as a part thereof, and the return and attachment will then be considered as an application for the benefits of Section 24636(b). 

________
*Compare Section 26 CFR 1.443-1(b).
HISTORY

1. New section filed 3-31-70; effective thirtieth day thereafter (Register 70, No. 14).
Article 2. Methods of Accounting [Repealed]
HISTORY

1. Change without regulatory effect repealing article 2 (section 24651) pursuant to section 100, title 1, California Code of Regulations (Register 87 No. 15). 
Article 3. Year of Inclusion
§24661(a). General Rule for Income Year of Inclusion. [Repealed]
Note     •     History

NOTE

Authority cited for Article 3: Section 26422, Revenue and Taxation Code.
HISTORY

1. New Article 3 (§24661(a), 24661(b), 24661(c), 24661(d), 24674, 24676(a), 24676(b), 24676(c), 24676(d), 24676(e), 24676(f)) filed 3-31-70; effective thirtieth day thereafter (Register 70, No. 14).
2. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
§24661(b). Constructive Receipt of Income. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
§24661(c). Long-Term Contracts. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
§24661(d). Accounting for Redemption of Trading Stamps and Coupons. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 2-21-79; effective thirtieth day thereafter (Register 79, No. 7).
§24667-24673.5(a). Installment Method of Reporting Income. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Sections 24667, 24668, 24669, 24670, 24673.2 and 24673.5, Revenue and Taxation Code. 
HISTORY

1. New Section filed 7-13-73; effective thirtieth day thereafter (Register 73, No. 28). 
2. Change without regulatory effect repealing Section 24667-24673.5(a) pursuant to Section 100, Title 1, California Code of Regulations filed 12-8-89 (Register 90, No. 3).
§24667-24673.5(b). Special Rules Applicable to Dealers in Personal Property. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 7-13-73; effective thirtieth day thereafter (Register 73, No. 28). 
2. Change without regulatory effect repealing Section 24667-24673.5(b)pursuant to Section 100, Title 1, California Code of Regulations (Register 90, No. 3). 
§24667-24673.5(c). Special Rules Applicable to Casual Sales or Casual Dispositions of Personal Property. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect repealing Sections 24667-24673.5(c) pursuant to Section 100, Title 1, California Code of Regulations filed 12-8-89 (Register 90, No. 3).
§24667-24673.5(d). Sale of Real Property Involving Deferred Periodic Payments. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Sections 24667, 24668, 24669, 24670, 24673 and 24673.5, Revenue and Taxation Code. 
HISTORY

1. New section filed 7-13-73; effective thirtieth day thereafter (Register73, No. 28). 
2. Change without regulatory effect repealing Section 24667-24673.5(d) pursuant to Section 100, Title 1, California Code of Regulations (Register 90, No. 3). 
§24667-24673.5(f). Deferred Payment Sale of Real Property Not on Installment Method. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Sections 24667, 24668, 24669, 24670, 24673 and 24673.5, Revenue and Taxation Code. 
HISTORY

1. New section filed 7-13-73; effective thirtieth day thereafter (Register73, No. 28). 
2. Change without regulatory effect repealing Section 24667-24673.5(d) pursuant to Section 100, Title 1, California Code of Regulations (Register 90, No. 3). 
§24667-24673.5(h). Requirements for Adoption of or Change to Installment Method. [Repealed]
History

HISTORY

1. New section filed 7-13-73; effective thirtieth day thereafter (Register 73, No. 28). 
2. Change without regulatory effect repealing Section 24667-24673.5(h) pursuant to Section 100, Title 1, California Code of Regulations filed 12-8-89 (Register 90, No. 3). 
§24674. *  Obligations Issued at Discount.

(a) Non-Interest-Bearing Obligations Issued at Discount.
(1) Election to Include Increase in Income Currently.
If a taxpayer owns a noninterest-bearing obligation issued at a discount and redeemable for fixed amounts increasing at stated intervals, and if the increase, if any, in redemption price of such obligation during the income year (as described in paragraph (2) of this subsection) does not constitute income for such year under the method of accounting used in computing its net income, then the taxpayer may, at its election, treat the increase as constituting income for the income year in which such increase occurs. If the election is not made, the taxpayer shall treat the increase as constituting income for the income year in which the obligation is redeemed or disposed of, or finally matures, whichever is earlier. Any such election must be made in the taxpayer's return and may be made for any income year. If an election is made with respect to any such obligation described in this paragraph, it shall apply also to all other obligations of the type described owned by the taxpayer at the beginning of the first income year to which the election applies, and to those thereafter acquired by it, and shall be binding for the income year for which the return is filed and for all subsequent income years, unless the Franchise Tax Board permits the taxpayer to change to a different method of reporting income from such obligations. See Section 24651(e) and subsection (e) of Reg. 24651, relating to requirement respecting a change of accounting method. Although the election once made is binding upon the taxpayer, it does not apply to a transferee of the taxpayer.
(2) Amount of Increase in Case of Non-Interest-bearing Obligations. In any case in which an election is made under Section 24674,the amount which accrues in any income year to which the election applies is measured by the actual increase in the redemption price occurring in that year. This amount does not accrue ratably between the dates on which the redemption price changes. For example, if two dates on which the redemption price increases (February 1 and August 1) fall within an income year and if the redemption price increases in the amount of 50 cents on each such date, the amount accruing in that year would be $1.00 ($0.50 on February 1 and $0.50 on August 1). If the taxpayer owns a non-interest-bearing obligation of the character described in paragraph (1) of this subsection acquired prior to the first income year to which its election applies, it must also include in gross income for such first income year the increase in the redemption price of such obligation occurring between the date of acquisition of the obligation and the first day of such first income year.
(b) Short--Term Obligations Issued on a Discount Basis. In the case of obligations of the United States or any of its possessions, or of a state or territory, or any political subdivision thereof, or of the District of Columbia, issued on a discount basis and payable without interest at a fixed maturity date not exceeding one year from the date of issue, the amount of discount at which such obligation originally sold does not accrue until the date on which such obligation is redeemed, sold, or otherwise disposed of. This rule applies regardless of the method of accounting used by the taxpayer.

* This regulation is based on Section 26 CFR 1.454-1.
§24676(a). Treatment of Prepaid Subscription Income. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24676, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect repealing Section 24676(a) filed 9-19-88 (Register 88, No. 40).
§24676(b). Scope of Election Under Section 24676. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24676, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect repealing Section 24676(b) filed 9-19-88 (Register 88, No. 40).
§24676(c). Method of Allocation. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24676, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect repealing Section 24676(c) filed 9-19-88 (Register 88, No. 40).
§24676(d). Cessation of Taxpayer's Liability. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24676, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect repealing Section 24676(d) filed 9-19-88 (Register 88, No. 40).
§24676(e). Definitions and Other Rules. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24676, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect repealing Section 24676(e) filed 9-19-88 (Register 88, No. 40).
§24676(f). Time and Manner of Making Election. [Repealed]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 24676, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect repealing Section 24676(f) filed 9-19-88 (Register 88, No. 40).
Article 4. Year of Deduction [Repealed]
HISTORY

1. Change without regulatory effect repealing article 4 (sections 24681-24684(b)) filed 9-19-88 pursuant to section 100, title 1, California Code of Regulations (Register 88, No. 40).
Article 5. Inventories [Repealed]
HISTORY

1. Change without regulatory effect repealing article 5 (sections 24701(a)--24721-24724(f)) filed 9-30-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 40). For prior history, see Register 82, No. 49 and Register 88, No. 40. 
Subchapter 14. Natural Resources [Repealed]
HISTORY

1. Change without regulatory effect repealing subchapter 14 (sections 24831(a)--24837(e)) filed 9-30-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 40). For prior history, see Register 82, No. 49. 
Subchapter 15. Gain or Loss on Disposition of Property
Article 1. Computation of Gain or Loss [Repealed]
HISTORY

1. Repealer of article 1 (sections 24901(a)-24915) filed 11-30-82; effective 12-30-82 (Register 82, No. 49). For prior history, see Register 61, No. 9 and Register 73, No. 4.
Article 2. Basis for Computation of Gain or Loss [Repealed]
HISTORY

1. Repealer of article 2 (sections 24916(a)-24919) filed 11-30-82; effective 12-30-82 (Register 82, No. 49). For prior history, see Register 69, No. 52.
Article 3. Nontaxable Exchanges [Repealed]
HISTORY

1. Repealer of article 3 (sections 24941(a)-24951) filed 7-5-83; effective 8-4-83 (Register 83, No. 28). For prior history, see Register 82, No. 49.
Article 4. Special Rule for Basis
§24961. *  Basis of Property Acquired During Affiliation.
History

The basis of property acquired by a corporation during a period of affiliation from a corporation with which it was affiliated shall be the same as it would be in the hands of the corporation from which acquired. This rule is applicable if the basis of the property is material in determining tax liability for any year, whether a separate return or a consolidated return is made in respect of such year. For the purpose of this regulation, the term “period of affiliation” means the period during which such corporations were affiliated (determined in accordance with the law applicable thereto), but does not include any income year beginning on or after January 1, 1935, unless a consolidated return was made.
EXAMPLE.
The X Corporation, the Y Corporation, and the Z Corporation were affiliated for the income year 1920. During that year the X Corporation transferred assets to the Y Corporation for $120,000 cash, and the Y Corporation in turn transferred the assets during the same year to the Z Corporation for $130,000 cash. The assets were acquired by the X Corporation in 1916 at a cost of $100,000. The basis of the assets in the hands of the Z Corporation is $100,000.
The basis of property acquired by a corporation during any period, in the income year 1929 or any subsequent income year, in respect of which a consolidated return was made or was required under Reg. 23361-23364a, or subsequent regulations relating to consolidated returns, shall be determined in accordance with such regulations. The basis in the case of property held by a corporation during any period, in the income year 1929 or any subsequent income year, in respect of which a consolidated return is made or is required under Reg. 23361-23364a, or subsequent regulations relating to consolidated returns, shall be adjusted in respect of any items relating to such period in accordance with such regulations.
The basis of property after a consolidated return period shall be the same as immediately prior to the close of such period.
This regulation applies to all members of an affiliated group, which filed consolidated returns for income years prior to January 1, 1935. After that date, only affiliated railroads meeting the requirements of Section 23361 have the privilege of filing a consolidated report. Section 24961 does not apply to corporations filing a consolidated report under Section 25104.

* This regulation is the same as Title 18, California Administrative Code, Chapter 3, Subchapter 3, Section 25071i.
§24962(a). Basis of Property Established by Revenue Act of 1932. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
§24962(b). Basis of Property Established by Revenue Act of 1934. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
§24962(d). Basis of Stock Rights Acquired Before January 1, 1955. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
§24963. Property Acquired Before March 1, 1913. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
§24965. Certain Stock of Federal National Mortgage Association. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 12-22-69; effective thirtieth day thereafter (Register 69, No. 52).
2. Repealer filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
§24971(a). Gain from Sale or Exchange to Effectuate Policies of Federal Communications Commission. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
§24971(b). Nature and Effect of Election. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
§24971(c). Reduction of Basis of Property Pursuant to Election Under Section 24971. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
§24971(d). Manner of Election. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
§24981-24988. Distributions Pursuant to Order of the Federal Securities Exchange Commission. [Repealed]
Note     •     History

NOTE

Authority and reference cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. Repealer filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
Article 5. Wash Sales of Stock or Securities [Repealed]
HISTORY

1. Repealer of article 5 (sections 24998(a)-24998(b)) filed 11-30-82; effective 12-30-82 (Register 82, No. 49).
Article 6. Distributions Pursuant to Bank Holding Company Act of 1956 [Repealed]
HISTORY

1. Repealer of article 6 (sections 24999(a)-24999.1(c)) filed 11-30-82; effective 12-30-82 (Register 82, No. 49).
Subchapter 16. War Loss Recoveries [Repealed]
HISTORY

1. Change without regulatory effect repealing subchapter 16 (sections 25001-25011) filed 5-30-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 22). For prior history, see Register 82, No. 49.
Subchapter 17. Allocation of Income
Article 1. General Provisions
§25101. *  Allocation of Income.
Note     •     History

(a) Apportionment and Allocation of Income in General. When a taxpayer has income from sources within the state as well as income from sources outside this state, the division of income and the resulting determination of the portion of the taxpayer's entire net income which has its source in this state shall be determined pursuant to the allocation and apportionment provisions set forth in sections 25120 to 25139, inclusive. When the business, whether carried on by a single corporation or by a group of affiliated corporations, conducted both within and without California is unitary in nature, the portion of the business income from that unitary business which is “derived from or attributable to sources within this State” must be determined by formula apportionment. In such cases, the first step is to determine which portion of the taxpayer's entire net income constitutes “business income” and which portion constitutes “nonbusiness income.” The various items of nonbusiness income are then directly allocated to specific states pursuant to the provisions of sections 25124 to 25127, inclusive. The business income of the taxpayer is divided between the states in which the business is conducted pursuant to the property, payroll and sales apportionment factors she forth in sections 25128 to 25136, inclusive. The sum of (1) the items of nonbusiness income directly allocated to this state, plus (2) the amount of business income attributable to this state by the apportionment formula constitutes the amount of the taxpayer's entire net income which is subject to tax.
The taxpayer shall be consistent in classifying income as business or nonbusiness income in filing return or reports to all states to which the taxpayer reports under the Uniform Division of Income for Tax Purposes Act. In the event the taxpayer is not consistent in its reporting it shall disclose in its return to the state the nature and extent of the inconsistency.
The word “apportionment” generally refers to the division of business income between states by the use of a formula containing apportionment factors, and the word “allocation” generally refers to the assignment of nonbusiness income to a particular state.
(b) Sea Transportation. A taxpayer engaged in sea transportation service may derive income partly from sources within and partly from sources without the State. In determining the income subject to tax, the following formula allocation shall be employed.
Receipts Factor. 
The sales or gross receipts of a taxpayer from sea transportation shall include all receipts derived from carrying cargo, i.e., passengers, freight, mail, etc., and the receipts incidental thereto. The sales or gross receipts will be assigned to this State in the proportion that the number of voyage days the ship spent within this State during the tax period bears to the total number of days of voyages of the ship during the tax period.
Income from activities incidental to the transportation service, such as income from restaurants, locker rentals, etc., shall be assigned to the state or country in which the activity is carried on.
Payroll Factor. The payroll factor is a fraction, the denominator of which includes all compensation paid to officers and employees, including ocean-going personnel, such as wages, salaries, commissions and bonuses. The numerator of this factor shall include all compensation paid to officers and employees, other than ocean-going personnel to the extent that services of such officers and employees are performed for the taxpayer within this State; and, so much of the compensation of ocean-going personnel as is determined by applying a ratio of the number of voyage days which the ship was within this State bears to the total number of days of voyages of the ship during the tax period.
Property Factor. The property factor is a fraction, the denominator of which shall include all real and tangible personal property, including ships, owned by the taxpayer and used in the unitary business. The numerator of this factor shall include all real and personal property owned by the taxpayer and used in the unitary business, except ships, to the extent such assets are located in the State; and, so much of the value of ships used in the unitary business as is determined by applying a ratio of the number of voyage days which the ship was within this State bears to the total number of days of voyages of the ship during the tax period.
As used in this regulation the terms “voyage days” and “days of voyages of the ship” mean the days, or parts of days, that a ship is in operation for the purpose of transporting cargo, i.e., freight, mail, passengers, etc. The days that a ship is in operation include all sailing days, even though a ship is returning empty or is enroute to a port of call to load passengers or cargo, all days in port while loading and unloading, and all days that the ship is laid up for ordinary repairs, refueling, or provisioning. A ship is not in operation when out of service or during the time that is laid up for extended repairs, overhaul, modification or is in drydrock.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25101, Revenue and Taxation Code.
HISTORY

1. New section filed 5-19-58; effective thirtieth day thereafter (Register 58, No. 9).
2. Amendment filed 8-6-62; effective thirtieth day thereafter (Register 62, No. 16).
3. Amendment filed 5-28-71; effective thirtieth day thereafter (Register 71, No. 22).
4. Change without regulatory effect repealing section (Register 87, No. 15).
5. Reinstatement of subsection (b) which was inadvertently repealed by order in Register 87, No. 15, filed 11-20-90 (Register 91, No. 2).
6. Change without regulatory effect adding new subsection (a) designator, amendment of subsection (b), repealer of subsection (b)(1), and amendment of subsection (b)(2) and Note filed 9-11-95 pursuant to section 100, title 1, California Code of Regulations (Register 95, No. 37).

 *Except for subsections (b), (e), and (f), this regulation is substantially the same as title 18, California Code of Regulations, chapter 3, subchapter 3, section 24301. (Note supplied by Franchise Tax Board.)
§25101.3. Air Transportation Companies -- Property Factor for Allocation and Apportionment of Income.
Note     •     History

(a) The calculation of the “time” and “arrivals and departures” elements of the property factor formula for aircraft operated by members of a unitary group that are engaged in a unitary business of providing air transportation is made by grouping certificated aircraft by model, as defined in subsection (c) of this regulation. A separate allocation ratio is computed for each aircraft model that established a taxable situs within the state during the taxable year. Aircraft models that have not established a taxable situs within the state will not have property assigned to California for the year. Each allocation ratio is then applied to the total value of the carrier's aircraft of each model to which the allocation ratio applies, excluding those models that have not established a tax situs within the state.
(b) The allocation ratio is the amount computed pursuant to subdivisions (a), (b), (c), and (d) of Revenue and Taxation Code section 25101.3.
(c) A “model” of aircraft is defined as all aircraft that can be assigned to a group utilizing the following rules:
(1) All aircraft are grouped with other aircraft of the same manufacturer model, as determined by the manufacturer's designation system.
(2) If a taxpayer operates more than one series of an aircraft model, all series of that aircraft model are assigned to a single model group based on the aircraft manufacturer's designation system.
(3) If a taxpayer operates an aircraft that is part of an aircraft model series or version that is designated by the aircraft manufacturer for freight transportation, this aircraft is assigned to a model group separate from the group of aircraft of the same model that the aircraft manufacturer designates for passenger transportation.
(4) If a taxpayer operates an aircraft that can be configured either for freight transportation or passenger transportation, the aircraft is assigned to a group based on the aircraft model and the aircraft configuration.
(d) The following examples of aircraft model groupings, provided for illustrative purposes only and not intended to identify all series of aircraft models:
(1) Boeing 737 model grouping includes series 737-300, 737-500 and 737-700.
(2) Boeing 767 model grouping includes series 767-300 and 767-300ER.
(3) The Airbus S.A.S. aircraft designation system assigns aircraft models by families. The A310 family includes models A300 and A310. The A320 family includes models A318, A319, A320 and A321.
(4) Airbus A300F4-600R, a freight aircraft, is assigned to a group separate from Airbus A300-600, a passenger aircraft.
(5) Cessna 208 model grouping includes series Cessna 208A and Cessna 208B.
(6) Boeing MD-11F, a freight aircraft, is assigned to a separate group from Boeing MD-11, a passenger or freight aircraft, if the Boeing MD-11 is configured for passenger transportation. A Boeing MD-11F and Boeing MD-11 are assigned to the same model group if the Boeing MD-11 is configured for freight transportation.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25101.3, Revenue and Taxation Code.
HISTORY

1. New section filed 3-18-2010; operative 4-19-2010 (Register 2010, No. 12).
§25106.5-0. Table of Contents.
History

Regulation Sections 25106.5 through 25106.5-11
§25106.5
(a) Combined Reporting, In General 
(b) Definitions 
(1) Combined Report 
(2) Combined Reporting Method 
(3) Combined Reporting Group 
(4) Business Income 
(5) Combined Report Business Income 
(6) Total Group Combined Report Business Income 
(7) Nonbusiness Income 
(8) Apportionment 
(9) Taxpayer Member's California Apportionment Percentage (Reserved) 
(10) Member 
(11) Taxpayer Member 
(12) Principal Member 
(A) Corporations Described 
(B) Election to Designate Principal Member 
(C) Inconsistent Principal Member 
(13) Group Return 
(14) Key Corporation 
(15) Fiscalization 
(16) California Source Carryover Item 
(17) Income 
(18) Total Separate Net Income 
(19) Corporation 
(c) Steps In Determining California Source Income From the Business Income of a Combined Reporting Group 
(1) Determination of Separate Net Income
(A) Intercompany Transactions 
(B) Capital, etc., Gains and Losses
(C) Net Operating Loss Deductions
(2) Accounting Methods and Elections
(3) Adjustment for Nonbusiness Income, etc.
(4) Assignment of Expenses to Business and Nonbusiness Income (Reserved)
(5) Fiscalization to Principal Member's Year
(6) Alignment of Business Income to Principal Member's Accounting Period
(7) Apportionment of Combined Income, In General
(A) Double or Single Weighted Sales Factor
(B) Taxpayer Member's Property, Payroll, and Sales Factors
(C) Taxpayer Member's California Apportionment Percentage
(D) California Source Apportioned Combined Report Business Income
(8) Fiscalization to Taxpayer Member's Income Year
(d) Steps In Determining A Taxpayer Member's Income From Sources Within This State, for Imposition of Tax 
(1) Total California Business Income
(A) California Combined Report Business Income
(B) California Combined Report Business Income, Other Groups
(C) Income from Business Wholly Conducted in California
(2) Other California Source Items
(A) California Source Carryover Items
(B) California Capital, etc., Income
(C) California Source Nonbusiness Income
(3) California Source Net Operating Loss Deduction
(4) Adjustment for Charitable Contributions (Reserved)
(5) Taxpayer Member's California Source Income
(e) California Source Net Operating Loss
(f) Tax on Taxpayer Member's California Source Income
(g) Years to Which this Regulation Applies 
§25106.5-1 Intercompany Transactions
(a) In General 
(1) Purpose 
(2) Conformity to Treasury Regulation Section 1.1502-13 
(3) Timing Rules as a Method of Accounting 
(4) Other Law 
(A) Non-Applicability of IRC Section 304 
(B) Non-Applicability of IRC Section 163(e)(5) 
(C) Non-Applicability of IRC Section 1031 
(5) Sourcing 
(A) Sales Factor 
(B) Property Factor 
(6) Overview 
(b) Definitions 
(1) Intercompany Transactions 
(A) In General 
(B) Exceptions 
(2) Combined Reporting Group 
(A) Income and Apportionment Factors 
(B) Affiliated Corporation 
(3) Intercompany Items 
(A) In General 
(B) Related Costs or Expenses 
(C) Amounts Not Yet Recognized or Incurred 
(4) Corresponding Items 
(5) Recomputed Corresponding Items 
(6) Treatment as a Separate Entity 
(7) Divisions of a Single Corporation 
(8) Deferred Intercompany Stock Account 
(9) Attributes 
(c) Matching Rule 
(1) Redetermination of Separate Entity Attributes 
(2) Examples 
(d) Acceleration Rule 
(1) Additional Circumstances 
(A) Conversion to Nonbusiness Use 
(B) Cross Reference 
(2) Circumstances Not Known by End of Year 
(3) Examples 
(e) Simplifying Rules 
(1) General Conformity 
(2) Election to Treat Intercompany Transactions on a Separate Entity Basis 
(A) Federal Election Made 
(B) Separate Entity Treatment Elected Under Other Rules 
(C) How to Make California Election; Accounting Method 
(D) Exceptions 
(f) Stock of Members 
(1) General Conformity 
(A) Exceptions for Distributee Member 
(B) Deferred Intercompany Stock Account 
(2) Examples 
(g) Obligations of Members 
(1) In General 
(2) Example 
(h) Anti-Avoidance Rules 
(i) Reserved 
(j) Miscellaneous Operating Rules 
(1) Subgroups 
(A) Change in Combined Reporting Group 
(B) Election 
(C) Examples 
(2) Entering and Leaving the State 
(A) Intercompany Transactions 
(B) Election 
(C) Examples 
(3) Partially Included Water's-Edge Corporations 
(A) Coordination with Section 25110(a)(4) 
(B) Coordination with Section 25110(a)(6) 
(C) Separate Entity Election 
(D) Examples 
(4) Earnings and Profits 
(5) Foreign Country Operations 
(6) Reserved 
(7) Non-Disclosure of DISA Balance 
(8) Recordkeeping 
(k) Effective Date
§25106.5-2. Capital, Section 1231 of the Internal Revenue Code, and Involuntary Conversion Gains and Losses 
(a) Gains Or Losses From The Sale Or Exchange Of Capital, etc., Assets 
(b) Classification as Business or Nonbusiness Income 
(c) Assignment to Principal Member's Year; Apportionment 
(d) Netting of Apportioned and Allocated Income from Capital, etc., Assets 
(e) Application of Section 1231 Gains 
(f) Application of California Source Income from Capital, etc., Assets 
(g) Capital Loss Carryforward 
(h) Years to Which This Regulation Applies 
§25106.5-3 Accounting Methods and Elections 
(a) Accounting Methods and Elections, In General 
(1) Consistency of Member's Income Between Combined Reports 
(2) Effect of the Election 
(b) Allowance of Late Elections Under an Audit Examination, In General 
(1) Effect of a U.S. Election 
(2) Time for Making a Late Election 
(3) Protective Elections 
(4) Effect on Subsequent Years 
(5) Effect of a California Election by a Taxpayer 
(c) Years to Which This Regulation Applies 
§25106.5-4. Fiscalization 
(a) Fiscalization, In General 
(b) Interim Closing Method 
(1) Income Data from Actual Books and Records 
(2) Apportionment Data from Actual Books and Records 
(3) Combination with Principal Member 
(c) Pro Rata Method 
(1) Election to Use Pro Rata Method 
(2) Property Factor Under Pro Rata Method 
(3) Combination with Principal Member 
(4) Estimation and Amended Returns 
(d) Fiscalization to Taxpayer Member's Income Year 
(e) Years to Which This Regulation Applies 
§25106.5-5. Interest Offset 
§25106.5-6 California Source Carryover Items (Reserved) 
§25106.5-7 Charitable Contributions (Reserved) 
§25106.5-8 Alternative Minimum Tax (Reserved) 
§25106.5-9. Partial Combined Reporting Periods 
(a) Partial Combined Reporting Period, In General 
(b) Partial Combination if Short-Period Return Not Required 
(c) Election to Use Principal Member's Accounting Period 
(1) Principal and Full Year Member's Income and Apportionment Data 
(2) Partial Period Member's Income and Apportionment Data 
(3) Computation of Short-Period Combined Income Under Principal Member's Accounting Period 
(4) Assignment to Taxpayer Member's Income Year; Application of Taxpayer Member's Other California Source Income 
(d) Years to Which This Regulation Applies 
§25106.5-10 Foreign Combination (Renumbered from Original §25106-3) 
(a) In General 
(1) Unitary Business 
(2) Translation Method for Determining Income 
(3) General Application of UDITPA Regulations 
(b) Determination of Income 
(1) Steps for Computing Unitary Income 
(A) Profit and Loss Computed in Local Currency 
(B) Adjustments to Reflect U.S. Accounting 
(C) Adjustments to Reflect California Revenue and Taxation Code 
(D) Currency Translation to Parent's Currency 
(E) Identification of Business and Nonbusiness Income 
(F) Allocation of Nonbusiness Income 
(G) Combination of Business Income 
(H) California Source Income in Dollars; Computation of Tax 
(2) Combined Reporting from Consolidated Profit and Loss Statements 
(A) Adjustments to Consolidated Profit and Loss Statements 
(B) Identification of Business and Nonbusiness Income 
(C) Allocation of Nonbusiness Income 
(D) Combination of Business Income 
(E) California Source Income in Dollars; Computation of Tax 
(3) Special Rules
(A) Adjustments to Reflect U.S. Accounting 
(B) Tax Accounting Adjustments 
(C) Requirements of Materiality 
(4) Currency Translations 
(A) Depreciation, Depletion, Amortization 
(B) Other Items 
(c) Computation of Factors 
(1) Property Factor
(A) Fixed Assets 
(B) Rental Property 
(C) Inventories 
(D) Financial Corporations 
(E) Computation in Currency of the Parent 
(2) Payroll and Receipts Factors 
(A) Currency Translation 
(B) Effect of Substantial Fluctuation in Currency Values 
(C) Computation in Currency of the Parent 
(d) Exchange Rates 
(1) Determination of Exchange Rates 
(2) Substantial Fluxuation, Defined 
(e) Application of Regulation 
(1) Reasonable Approximations 
(2) Advance Determination 
§25106.5-11 Group Returns (Reserved) 
HISTORY

1. New section filed 7-13-99; operative 8-12-99 (Register 99, No. 29).
2. Amendment filed 11-1-2000; operative 12-1-2000 (Register 2000, No. 44).
3. Amendment filed 12-28-2000; operative 1-1-2001 pursuant to Government Code section 11343.4(d) (Register 2000, No. 52). 
4. Change without regulatory effect amending subsection (c)(1)(A) filed 3-11-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 11).
§25106.5. 
Note     •     History

(See Cal. Code Regs., tit. 18, §25106.5-0 for the table of contents for this section, and all other regulations adopted under Rev. and Tax. Code, §25106.5.) 
(a) Combined Reporting. In General. Each taxpayer whose income and apportionment factor data are permitted or required to be included in a combined report shall report income in the manner provided by this regulation, and, to the extent applicable, other regulations adopted under Section 25106.5 of the Revenue and Taxation Code. 
(b) Definitions. Unless otherwise indicated, the following definitions shall apply to all regulations adopted under Section 25106.5 of the Revenue and Taxation Code. 
(1) Combined Report. “Combined report” refers to the schedules which are attached to the tax return, required to be filed by Section 18601 of the Revenue and Taxation Code, of one or more taxpayer members, which reports the taxpayer member's income from sources within this state under the combined reporting method. 
(2) Combined Reporting Method. “Combined reporting method” refers to the method under which the total combined report business income of all members of the combined reporting group is apportioned to California, to determine each taxpayer member's combined report business income from California sources. 
(3) Combined Reporting Group. “Combined reporting group” refers to those corporations with business income that is permitted or required to be included in a particular combined report under Sections 25101, 25101.15, 25102, or 25104 of the Revenue and Taxation Code, limited, if applicable, by application of Section 23801(c) of the Revenue and Taxation Code, or the effects of a water's edge election under Section 25110 of the Revenue and Taxation Code, or any other provision of law which precludes income and apportionment data of an entity from being included in a combined report. A combined reporting group also refers to those S Corporations whose income is required to be included in a combined report under Section 23801(d) of the Revenue and Taxation Code. 
(4) Business Income. “Business income” is as defined under Section 25120(a) of the Revenue and Taxation Code. 
(5) Combined Report Business Income. “Combined report business income” is the business income of a member of a combined reporting group permitted or required to be included in the combined report of the group. 
(6) Total Group Combined Report Business Income. “Total group combined report business income” is the sum or net of all combined report business income of all members of the combined reporting group. 
(7) Nonbusiness Income. “Nonbusiness income” is the income of a member of the combined reporting group which is subject to allocation under Sections 25123 through 25127 of the Revenue and Taxation Code. 
(8) Apportionment. “Apportionment” is the means by which total group combined report business income is sourced to this state under Sections 25128 through 25137 and Section 25141 of the Revenue and Taxation Code. 
(9) Taxpayer Member's California Apportionment Percentage. “Taxpayer member's California apportionment percentage” refers to the fraction, determined under Section 25128 of the Revenue and Taxation Code, used to apportion the total group combined report business income to a taxpayer member in this state.
(10) Member. “Member” is a single corporation in a combined reporting group. The term includes both taxpayer members and all other corporations included in the combined reporting group. 
(11) Taxpayer Member. “Taxpayer member” is a corporation which is a member of a combined reporting group which is required to file a tax return in this state. 
(12) Principal Member. “Principal member” is the member of the combined reporting group whose accounting period is used as a reference period for all members of the combined reporting group to aggregate and apportion combined report business income of the group. A principal member need not be a taxpayer member. 
(A) Corporations Described. Once a principal member has been determined under this subsection (b)(12), that member shall remain the principal member for all succeeding periods that it is a member of the combined reporting group, except as permitted by the Franchise Tax Board. Except as otherwise provided, the “principal member” is the corporation first described below: 
1. The parent corporation which is a member of the combined reporting group. A “parent corporation” is a corporation which is a parent corporation to all members of the combined reporting group, within the meaning of Revenue and Taxation Code section 25105, subdivision (b)(1). 
2. If the group does not have a parent corporation which is a member of the combined reporting group, as so defined, the “principal member” is a corporation which is a lower tier parent to all members of the combined report. A “lower tier parent” is the first corporation, down the chain of corporations, which is a member of the combined reporting group and which would have constituted a “parent corporation” to all members of the combined group if all corporations which own or constructively own that corporation under Section 25105(b)(1) of the Revenue and Taxation Code were disregarded. 
3. If the group does not have a “lower tier parent” corporation which is a member of the combined reporting group, the “principal member” is the taxpayer member of the combined reporting group expected to have, on a recurring basis, the largest amount, by value, of real and tangible personal property in the state. The value of real and tangible personal property shall be determined pursuant to the property factor provisions of Sections 25129 through 25131 of the Revenue and Taxation Code and the regulations thereunder. 
(B) Election to Designate Principal Member. Notwithstanding the provisions of preceding subsection (A) of this subsection (b)(12), in the first income year in which a combined report is required, the taxpayer members of the combined reporting group may elect to treat any other member of the combined reporting group as the “principal member,” so long as consistently treated as such for the year of the election and thereafter. Thereafter, the taxpayer members may change their principal member only with consent of the Franchise Tax Board. 
(C) Inconsistent Principal Member. In the event that members of a combined reporting group have filed with inconsistent principal members (including cases where two or more groups of corporations erroneously filed as distinct combined reporting groups) the determination of the appropriate principal member shall be in accordance with the provisions of subsection (A) of this subsection (b)(12), unless, in the discretion of the Franchise Tax Board, selection of another principal member would result in a lesser compliance burden for the taxpayer members. 
(13) Group Return. “Group return” is that return filed on behalf of eligible electing taxpayer members of a combined reporting group included on the electing key corporation's Schedule R-7 of Schedule R filed in conjunction with its California Form 100. 
(14) Key Corporation. “Key corporation” is the taxpayer member which files a group return described by subsection (b)(13) of this regulation on behalf of the electing taxpayer members of the combined reporting group as agent and surety for the electing members. 
(15) Fiscalization. “Fiscalization” is the process under which a member of a combined reporting group aligns the income and apportionment data from its accounting period to the accounting period of the principal member. 
(16) California Source Carryover Item. “California source carryover item” refers to an item of income or loss allocated or apportioned in an earlier year, required to be taken into account as California source income during the income year, other than a net operating loss. 
(17) Income. Unless the context otherwise requires, the term “income” includes loss. 
(18) Total Separate Net Income. Except as otherwise provided, “ total separate net income” is the total net income from all sources of a member of a combined reporting group from its separate books of account as determined under the Revenue and Taxation Code, before allocation and apportionment. 
(19) Corporation. “Corporation,” as used in this regulation and other regulations under Section 25106.5 of the Revenue and Taxation Code, is any of the entities described as a corporation in Section 23038 of the Revenue and Taxation Code, including banks. In the application of Section 25102 of the Revenue and Taxation Code, the term “corporation” also includes “persons” as the term is used in that section. 
(c) Steps in determining California source income or loss from the business income of a combined reporting group. Members of a combined reporting group shall compute their income from California sources in the following steps, in the order indicated.
(1) Determination of Separate Net Income. Except as otherwise provided by this regulation or other regulations adopted under Section 25106.5 of the Revenue and Taxation Code, each member of a combined reporting group must identify its total separate net income for the period beginning and ending with the accounting period of the principal member of the combined reporting group. Items of income and expense should be presented in columnar form for each member. Except as otherwise provided by this regulation or other regulations under Section 25106.5 of the Revenue and Taxation Code, total separate net income shall be determined by the Revenue and Taxation Code, subject to the following modifications:
(A) Intercompany Transactions. (See Cal. Code Regs., tit. 18, §25106.5-1.)
(B) Capital, etc., Gains and Losses. Capital, Section 1231 (Internal Revenue Code), and involuntary conversion gains and losses shall not be taken into account. Such gains and losses are apportioned and allocated as determined under California Code of Regulations, title 18, section 25106.5-2.
(C) Net Operating Loss Deductions. Net operating loss deductions shall not be taken into account. The net operating loss deduction of a taxpayer member is allowed as a deduction only against the California source income (i.e., after apportionment and allocation) of the taxpayer member of the group (see subsection (e) of this regulation).
(2) Accounting Methods and Elections. Except as otherwise provided by this regulation or other regulations under Section 25106.5 of the Revenue and Taxation Code, the taxpayer members of the combined reporting group may elect to determine the net income of a member of the group under accounting methods and other elections as authorized by Division 2, Part 11 of the Revenue and Taxation Code, independently of the net income of other members of the combined reporting group. See Section 25106.5-3 of Title 18 of the California Code of Regulations.
(3) Adjustment for Nonbusiness Income, etc. The resulting total separate income of each member of the combined reporting group is then adjusted to remove income items attributable to the member's nonbusiness income, and any items of business income which do not constitute combined report business income of the group.
(4) Assignment of Expenses to Business and Nonbusiness Income. (Reserved).
(5) Fiscalization to Principal Member's Year. If the accounting period of the principal member and one or more of the other members of the combined reporting group do not begin and end on the same dates, adjustments must be made to fiscalize the other members' combined report business income and apportionment data in order to assign an appropriate amount of those values to the accounting period of the principal member. See California Code of Regulations, title 18, section 25106.5-4.
(6) Alignment of Business Income to Principal Member's Accounting Period. The combined report business income of all members aligned to the accounting period of the principal member is then aggregated, resulting in total group combined report business income.
(7) Apportionment of Combined Income, In General. Total group combined report business income for the accounting period of the principal member is multiplied by the California apportionment percentage of each of the taxpayer members of the group, determined under Section 25128 of the Revenue and Taxation Code, to arrive at each taxpayer member's California source combined report business income. That percentage is determined as follows:
(A) Double or Single Weighted Sales Factor. For most taxpayer members, the total group combined report business income is multiplied by the taxpayer member's California apportionment percentage consisting of the sum of the taxpayer member's California property factor, the payroll factor, and twice the sales factor, with that sum divided by four. However, if a combined reporting group has more than 50% of its gross business receipts from a qualified business activity, as defined in Section 25128 of the Revenue and Taxation Code and the regulations thereunder, the taxpayer member's California apportionment percentage consists of the sum of the taxpayer member's California property factor, payroll factor and sales factor, with that sum divided by three. In the determination of whether a single or double-weighted sales factor applies, the gross business receipts of the combined reporting group shall be determined on the basis of gross business receipts of the accounting period of the principal member, using the applicable fiscalization method provided in subsection (c)(5) of this regulation.
(B) Taxpayer Member's Property, Payroll, and Sales Factors. In the application of subsection (c)(7) of this regulation, except as modified under Section 25137 of the Revenue and Taxation Code:
1. The taxpayer member's California property factor is a fraction, the numerator of which is that member's California property, and the denominator of which is the total property of the group everywhere. Property values are determined in accordance with Sections 25130 and 25131 of the Revenue and Taxation Code,
(2) The taxpayer member's California payroll factor is a fraction, the numerator of which is that member's California payroll, determined under Section 25133 of the Revenue and Taxation Code, and the denominator of which is the total payroll of the group everywhere.
3. The taxpayer member's California sales factor is a fraction, the numerator of which that member's California sales, determined under Sections 25134-25136 of the Revenue and Taxation Code, and the denominator of which is the total sales of the group everywhere. In the application of Section 25135 of the Revenue and Taxation Code, the term “taxpayer” refers to the specific member of the group which transferred title to tangible personal property to the purchaser. Thus, if a member of the combined reporting group sells goods shipped to a purchaser in California, and that member is not taxable in that state, the sale is not assigned to California, even if another member of the combined reporting group is taxable in that state. Likewise, if a taxpayer member sells goods to a purchaser in another state which are shipped from California, and that member is not taxable in the other state, the sale is a California sale, even if another member of the combined reporting group is taxable in the other state. Except as otherwise provided, in the application of Section 25136 and sales factor provisions in Section 25137 (and the regulations respectively thereunder), for purposes of determining values in the numerator of the sales factor, the term “taxpayer” refers to the specific member of the group which was entitled to receive the proceeds of the sale.
(C) Taxpayer Member's California Apportionment Percentage. The taxpayer member's California apportionment percentage is the sum of that member's California payroll, property, and a double-weighted sales factor (or a single-weighted sales factor, if applicable), with that sum divided by either four or three, as determined under Section 25128 of the Revenue and Taxation Code and the regulations thereunder.
(D) California Source Apportioned Combined Report Business Income. Finally, each taxpayer member multiplies the group's total combined report business income by its respective taxpayer member's California apportionment percentage to arrive at the taxpayer member's California source apportioned income.
(8) Fiscalization to Taxpayer Member's Income Year. If applicable, California source combined report business income of a taxpayer member, determined under subsection (c)(7) of this regulation, is then proportionately assigned to the applicable portion of that member's income year, based on the number of months falling within the common accounting period of the principal member. The resulting income from such portions is then aggregated (or netted) together for the member's income year to determine that member's business income from California sources attributable to the combined reporting group. (See Cal. Code Regs., tit. 18, §25106.5-4.)
(d) Steps in determining a taxpayer member's income from sources within this state, for purposes of imposition of tax. The California source income of a taxpayer member of a combined reporting group subject to the imposition of the income or franchise tax is determined as follows:
(1) Total California Business Income. To each taxpayer member's California source combined report business income, determined under subsection (c) of this regulation, is added (or netted) any other California source business income--
(A) Determined by apportionment of combined report business income of another combined reporting group of which the taxpayer is a member,
(B) From apportionment of income from a distinct business income activity conducted within and without the state wholly by the taxpayer member, or
(C) From a trade or business conducted wholly by the taxpayer member entirely within the state, if any.
(2) Other California Source Items. The amount determined under the preceding subsection (d)(1) is increased by or decreased by any--
(A) California source carryover items as defined in subsection (a)(16) of this regulation.
(B) California source income from the sale or exchange of capital or Section 1231 assets, and from involuntary conversions (see Section 25106.5-2 of Title 18 of the California Code of Regulations) and,
(C) California source nonbusiness income.
(3) California Source Net Operating Loss Deduction. The value determined under subsection (d)(2) of this regulation is reduced by the member's California source net operating loss carryforward deduction (see subsection (e) of this regulation).
(4) Adjustment of Charitable Contributions. (Reserved).
(5) Taxpayer Member's California Source Income. The final resulting value is the taxpayer member's California source income.
(e) California Source Net Operating Loss. If the final resulting value of subsection (d)(5) of this regulation is a loss for a taxpayer member, that taxpayer member has a California source net operating loss (CSNOL). The CSNOL is subject to the net operating loss limitations and carryforward provisions of Sections 24416, 24416.1, 24416.2, 24416.3 and 25108 of the Revenue and Taxation Code. If applicable, the CSNOL must be recomputed to apply the Water's-Edge limitation of Section 24416(c) of the Revenue and Taxation Code. CSNOL, as adjusted, is applied as a deduction in a subsequent year only when the taxpayer has California source positive net income, whether or not the taxpayer is a member of a combined reporting group in the subsequent year (see subsection (d)(3) of this regulation). A CSNOL incurred by one member of a combined reporting group cannot be used to reduce the income of any other member in a subsequent income year. Whether the CSNOL resulted from an apportioned business loss or an allocated nonbusiness loss, or a combination of both, the CSNOL is a deduction against positive California source income in a subsequent year, regardless of the composition of that income as apportioned, allocated or wholly within California.
(f) Tax on Taxpayer Member's California Source Income. The taxpayer member's positive California source income, as determined under subsection (d), is multiplied by the applicable tax rate for the income year. The minimum franchise tax imposed by Section 23153 of the Revenue and Taxation Code is then applied, if applicable. The resulting amount is the taxpayer member's regular tax, within the meaning of Section 23455(c) of the Revenue and Taxation Code.
(g) Years to Which this Regulation Applies. Except for subsection (c)(7) (and references to that subsection in other subsections of this regulation), this regulation shall apply to income years open to adjustment under applicable statutes of limitation. Except for taxpayers which are members of a combined reporting group required to fiscalize their income, subsection (c)(7) shall apply to income years beginning on or after April 22, 1999. For taxpayers which are members of a combined reporting group required to fiscalize the income of its members to the accounting period of the principal member, subsection (c)(7) shall apply to principal member accounting periods beginning on or after April 22, 1999. Combined reporting groups required to fiscalize the income of its members for income years beginning April 22, 1999, may not designate a new principal member with a substantial purpose of avoiding application of subsection (c)(7).
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25106.5, Revenue and Taxation Code. 
HISTORY

1. New section filed 7-13-99; operative 8-12-99 (Register 99, No. 29).
2. Amendment filed 11-1-2000; operative 12-1-2000 (Register 2000, No. 44).
3. Change without regulatory effect amending first paragraph and subsections (b)(12)(A)1., (b)(12)(C), (c)(1)(A)-(B), (c)(5), (c)(8) and (d)(2)(A) filed 3-11-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 11).
§25106.5-1. Intercompany Transactions.
Note     •     History

(a) In general. 
(1) Purpose. This regulation provides rules for taking into account items of income, gain, deduction, and loss of members of a combined reporting group from intercompany transactions. The purpose of this regulation is to provide rules for reporting intercompany transactions in order to clearly reflect the taxable income (and tax liability) of the taxpayer members that is allocated or apportioned to California. The general rule is one of deferring gains or losses from intercompany transactions in order to produce the effect of transactions between divisions of a single corporation. 
(2) Conformity to Treasury Regulation section 1.1502-13. Intercompany transactions. Except as otherwise provided, this regulation incorporates Treasury Regulation section 1.1502-13, as amended through March 17, 1997, to the extent possible consistent with combined reporting principles to enable ease of administration and compliance. This regulation does not restate all the provisions of the federal regulation in full, a copy of which can be obtained by going to the department's website at www.ftb.ca.gov or by mailing the request to the following address: California Franchise Tax Board, Legal Branch, Attn: Chief Counsel, P.O. Box 1720, Rancho Cordova, CA 95741-1720), but the methodology of the federal regulation shall apply except as otherwise provided in this regulation. Exceptions will arise due to the differences between the composition of the federal consolidated group and the combined reporting group, the requirements of California's allocation and apportionment provisions, jurisdictional limitations, and treatment of members of a combined reporting group as separate entities for many purposes under the Revenue and Taxation Code. Further exceptions will arise in those instances when Treasury Regulation section 1.1502-13 incorporates by reference provisions of the Internal Revenue Code to which California has not conformed. Unless explicitly provided otherwise, conformity to Treasury Regulation section 1.1502-13 in no way implies conformity to any other regulation under section 1502 of the Internal Revenue Code. 
(3) Timing rules as a method of accounting. This regulation applies the provisions of Treasury Regulation section 1.1502-13(a)(3), except for the reference to Treasury Regulation section 1.1502-17. The rules shall apply to all members of the combined reporting group. 
(4) Other Law. Other applicable law (including nonstatutory authorities) shall apply in addition to the rules of this regulation to the extent that this regulation does not exclude such application. 
(A) Non-applicability of section 304 of the Internal Revenue Code. As provided in Treasury Regulation section 1.1502-80, section 304 of the Internal Revenue Code, to which California conforms pursuant to section 24451 of the Revenue and Taxation Code, does not apply to any acquisition of stock of a corporation in an intercompany transaction occurring on or after the effective date of this regulation. 
(B) Non-applicability of section 163(e)(5) of the Internal Revenue Code. As provided in Treasury Regulation section 1.1502-80, section 163(e)(5) of the Internal Revenue Code, to which California conforms pursuant to section 24344 of the Revenue and Taxation Code, does not apply to any intercompany obligation (within the meaning of subsection (g) of this regulation) issued in an income year beginning on or after the effective date of this regulation. 
(C) Non-applicability of section 1031 of the Internal Revenue Code. As provided in Treasury Regulation section 1.1502-80, section 1031 of the Internal Revenue Code, to which California conforms pursuant to section 24941 of the Revenue and Taxation Code, does not apply to any intercompany transaction occurring in income years beginning on or after the effective date of this regulation. 
(D) Non-applicability of Title 18, California Code of Regulations, section 25110(e). To the extent that the provisions of Regulation section 25110(e) are not consistent with the provisions of this regulation, this regulation will be controlling and Title 18, California Code of Regulations, section 25110(e) shall not be applicable. 
(5) Sourcing. In the income year that intercompany items are taken into account, their source shall be determined as if the selling member (S) and the buying member (B) are divisions of a single corporation. Therefore, such intercompany items are treated as current apportionable business income and apportioned to California in accordance with sections 25120-25141 of the Revenue and Taxation Code. California law does not conform to the federal sourcing rules provided or referenced in Treasury Regulation section 1.1502-13. 
(A) Sales Factor. 
1. Sales attributable to intercompany items are not included in S's sales factor either in the year of the transaction or in the year(s) in which such intercompany items are taken into account. 
2. Gross receipts from the sale generating B's corresponding item will be included in B's sales factor in the year of the sale if otherwise included under section 25134 of the Revenue and Taxation Code, unless such gross receipts are excluded under Title 18, California Code of Regulations, section 25137. 
3. Deemed sales under Treasury Regulation section 1.1502-13(d)(1)(ii) will be disregarded for purposes of the sales factor. 
(B) Property Factor. 
1. On the date of the intercompany transaction, the property transferred from S to B will be included in B's property factor at the original cost (within the meaning of section 25106.5 of the Revenue and Taxation Code) to S. 
2. Intercompany rent expense is not included in the property factor. 
3. Intercompany obligations otherwise includable under Title 18, California Code of Regulations, sections 25137-4.2 or 25137-10 shall not be included in the property factor. 
4. If S's intercompany item is accelerated as a result of S or B no longer being members of the same combined reporting group, the value of B's property acquired from S in an intercompany transaction will be adjusted immediately after the acceleration event to reflect B's original cost (the purchase price paid by B to S). 
5. Subsections (a)(5)(B)1. through 4. above shall apply regardless of whether an election is made under subsection (e)(2) of this regulation to treat an intercompany transaction on a separate entity basis. 
(6) Overview. The principal rules of this regulation that implement single entity treatment are the matching rule of subsection (c) and the acceleration rule of subsection (d). Under the matching rule, Seller (S) and Buyer (B) are generally treated as divisions of a single corporation for purposes of taking into account their items from intercompany transactions. The acceleration rule provides rules for taking the items into account if the effect of treating S and B as divisions cannot be achieved (for example, if S or B leave the combined reporting group or if the asset transferred in the intercompany transaction is converted to nonbusiness use). Intercompany items will be treated as current apportionable business income for the year(s) in which the item is taken into account. Subsection (b) of this regulation provides definitions used in the application of this regulation. Subsection (e) of this regulation provides simplifying rules for certain transactions. Subsections (f) and (g) of this regulation provide additional rules for stock and obligations of members. Subsections (h) and (j) of this regulation provide anti-avoidance rules and miscellaneous operating rules. Subsection (i) of this regulation is reserved for future use. 
(b) Definitions. For purposes of this regulation: 
(1) Intercompany transactions. 
(A) Except as provided in subsection (b)(1)(B), the term “intercompany transaction” means a transaction between corporations which are members of the same combined reporting group immediately after such transaction. “S” is the member transferring property or providing services, and “B” is the member receiving the property or services. Intercompany transactions include, but are not limited to --
1. S's sale of property (or other transfer, such as an exchange or contribution) to B; 
2. S's performance of services for B, and B's payment or accrual of its expenditures for S's performance; 
3. S's licensing of technology, rental of property, or loan of money to B, and B's payment or accrual of its expenditures; and 
4. S's distribution to B with respect to S stock. 
(B) The term intercompany transaction does not include transactions which produce nonbusiness income or loss to the selling member or income attributable to a separate business activity of the selling member. The term intercompany transaction also does not apply when the asset transferred in the transaction is acquired for the buyer's nonbusiness use or for the use of a separate business activity of the buyer. For purposes of this regulation, such transactions shall be considered as if between corporations that are not members of a combined reporting group. 
(2) “Combined reporting group” has the same meaning as defined in Title 18, California Code of Regulations, section 25106.5(b)(3). For purposes of this regulation, the members of the combined reporting group include: 
(A) Both S and B, when the income and apportionment factors of those corporations are properly included in the same combined report for the income year of the intercompany transaction; and 
(B) Any affiliated corporation (or portion thereof) whose income and apportionment factors are properly included in the same combined report in combination with the income and apportionment factors of S and B for that income year. 
(3) Intercompany items. 
(A) In general. S's income, gain, deduction, and loss from an intercompany transaction are its intercompany items. For example, S's gain from the sale of property to B is an intercompany gain. An item is an intercompany item whether it arises directly or indirectly from an intercompany transaction. 
(B) Related costs or expenses. S's costs or expenses related to an intercompany transaction are included in determining its intercompany items. 
(C) Amounts not yet recognized or incurred. S's intercompany items include amounts from an intercompany transaction that are not yet taken into account in computing its net income under its separate entity method of accounting. 
(4) Corresponding items. B's income, gain, deduction, and loss from an intercompany transaction, or from property acquired in an intercompany transaction, are its corresponding items. If B buys property from S and sells it to a nonmember, B's gain or loss from the sale to the nonmember is a corresponding gain or loss. An item is a corresponding item whether it is directly or indirectly from an intercompany transaction (or from property acquired in an intercompany transaction). 
(5) Recomputed corresponding items. The recomputed corresponding item is the corresponding item that B would take into account if S and B were divisions of a single corporation and the intercompany transaction was between those divisions. For example, if S sells property with a $70 basis to B for $100, and B later sells the property to a nonmember for $90, B's corresponding item is its $10 loss, and the recomputed corresponding item is $20 of gain (determined by comparing the $90 sales price with the $70 basis the property would have had if S and B were divisions of a single corporation). 
(6) Treatment as a separate entity. Treatment as a separate entity means treatment without application of the rules of this regulation (other than the rules in subsection (a)(4)), but with the application of the other combined reporting regulations (as promulgated under the authority of section 25106.5 of the Revenue and Taxation Code). “Treatment as a separate entity” does not operate to prevent the income or loss taken into account under applicable rules for separate entity treatment from being properly characterized as combined report business income of the combined reporting group. 
(7) Divisions of a single corporation. When S and B are treated as divisions of a single corporation for purposes of this regulation, such divisional treatment applies only to the unitary, apportionable trade or business operations included in the combined report. For example, neither nonbusiness income of S or B, nor income from activities of S or B that are excluded from a water's-edge combined report, will be considered for purposes of treating S and B as divisions of a single corporation. 
(8) Deferred Intercompany Stock Account (”DISA”). DISA is the accounting mechanism that a distributee corporation, which is a member of the combined reporting group, will use to report and track non-dividend distributions in excess of its adjusted basis in the stock of the distributing subsidiary corporation, which is a member of the same combined reporting group, until this intercompany item is required to be taken into account pursuant to this regulation. The balance of each DISA account must be disclosed annually on the taxpayer's return. 
(9) Attributes. The attributes of an intercompany item or corresponding item are all of the item's characteristics, except amount, location, and timing, necessary to determine the item's effect on taxable income (and tax liability). For purposes of this regulation, “location” does not refer to geographical location, but instead refers to location within the combined reporting group, i.e., which member of the combined reporting group realizes the item. 
(c) Matching rule. S shall take its intercompany items into account in any year where there is a difference between B's corresponding item and the recomputed corresponding item. The separate entity attributes of S's intercompany items and B's corresponding items are redetermined to the extent necessary to produce the same effect on total group combined report business income as if S and B were divisions of a single corporation, and the intercompany transaction was a transaction between divisions. Unless otherwise provided, this regulation applies the matching rule provisions of Treasury Regulation section 1.1502-13(c). Exceptions will arise due to the reasons stated in subsection (a)(2) of this regulation. 
(1) Redetermination of separate entity attributes does not apply to the sourcing of the combined report business income. Sourcing of income is described in subsection (a)(5) of this regulation. 
(2) Examples: For purposes of the examples in this regulation, unless otherwise stated, P, S and B are members of a combined reporting group. P owns all of the stock of S and B. Y is a person (as defined by section 19 of the Revenue and Taxation Code) unrelated to any member of the combined reporting group. The income year of all persons is the calendar year. 
Example 1: Intercompany sale of land followed by sale to a nonmember. 
(Refer to Treas. Reg. § 1.1502-13(c)(7)(ii), example 1.) 
Facts. S holds land with a basis of $70 for use in the trade or business of the combined reporting group. On January 1 of Year 1, S sells the land to B for $100. B also holds the land for use in the trade or business of the combined reporting group. On July 1 of Year 3, B sells the land to Y for $110. 
Definitions. S's sale of the land to B is an intercompany transaction. S's $30 gain from the sale to B is its intercompany item, and B's $10 gain from its sale to Y is its corresponding item. The total gain of $40 is the recomputed corresponding item. 
Timing. Under the matching rule, S takes its intercompany item into account in the income year(s) in which there is a difference between B's corresponding item and the recomputed corresponding item. If S and B were unitary divisions of a single corporation and the intercompany sale was a transfer between the divisions, B would succeed to S's $70 basis in the land and would have a $40 gain from the sale to Y in Year 3, instead of a $10 gain. Consequently, S takes no gain into account in Years 1 and 2, and takes the entire $30 gain into account in Year 3, to reflect the $30 difference in that year between the $10 gain B takes into account and the $40 recomputed gain (the recomputed corresponding item). In accordance with subsection (j)(4) of this regulation, the earnings and profits of S will not reflect S's $30 gain until the gain is taken into account in Year 3. 
Apportionment. As would be the case if S and B were unitary divisions of a single corporation and the intercompany sale was a transfer between the divisions, that transfer will not be reflected in the sales factor in Year 1. In Year 3, the $110 gross receipts from B's sale of the land to Y will be included in B's sales factor unless the receipts are excluded pursuant to Title 18, California Code of Regulations, section 25137. The land is attributable to B after the intercompany sale, and it will be reflected in B's property factor at S's $70 original cost basis until it is sold outside the combined reporting group in Year 3. This is the result that would have occurred had the intercompany transaction been a transfer between unitary divisions. Both S's $30 gain and B's $10 gain will be treated as current apportionable business income in Year 3. 
Example 2: Intercompany sale of depreciable property. 
(Refer to Treas. Reg. § 1.1502-13(c)(7)(ii), example 4.) 
Facts. On January 1 of Year 1, S buys property with a 10-year useful life for $100 and begins to depreciate it under the straightline method. On January 1 of Year 3, S sells the property to B for $130. B determines that the useful life of the property is 10 years from the date of B's acquisition, and also uses the straightline method. Both S and B used the property in their unitary trade or business. 
Depreciation through Year 3; intercompany gain. S claims $10 of depreciation for each of Years 1 and 2 and has an $80 basis at the time of the sale to B. Thus, S has a $50 intercompany gain from its sale to B ($130 sales price - $80 adjusted basis). For Year 3, B has $13 of depreciation with respect to its $130 basis. 
Timing. If S and B were divisions of a single entity, that entity would modify its useful life of the property based upon the same change in facts and circumstances that caused B to determine that the useful life would exceed the original 10 year period. Therefore, the recomputed depreciation for Years 3 through 12 would be $8 per year ($80 remaining basis/redetermined 10-year life). S's $50 gain is taken into account to reflect the difference for each income year between B's $13 depreciation (B's corresponding item) and the $8 recomputed depreciation. Thus, S takes $5 of gain into account in each of Years 3 through 12. 
Apportionment. As would be the case if the intercompany sale was a transfer between unitary divisions of a single corporation, the transfer will not be reflected in the sales factor. The property will be included in B's property factor at S's $100 original cost basis regardless of the subsequent depreciation or intercompany gain taken into account. In each year, S's intercompany gain and B's depreciation deduction will be included in the computation of combined report business income and apportioned using the current apportionment percentage for that year. 
Example 3: Intercompany sale followed by installment sale. 
(Refer to Treas. Reg. § 1.1502-13(c)(7)(ii), example 5.) 
Facts. S holds land with a basis of $70 for use in the trade or business of the combined reporting group. On January 1 of Year 1, S sells the land to B for $100. B also holds the land for use in the trade or business of the combined reporting group. On July 1 of Year 3, B sells the land to Y in exchange for Y's $110 note. The note provides for 24 monthly interest payments beginning August 1 of Year 3, and for principal payments of $55 in Year 4 and $55 in Year 5. The California apportionment percentage for the combined reporting group was 10% in Year 3, 90% in Year 4, and 93% in Year 5. The amount of the installment note is substantial in relation to the business activities of the combined reporting group. Therefore, because the deferral of gain recognition under the installment sale provisions should not substantially change the ultimate amount of income apportioned to California, application of section 25137 of the Revenue and Taxation Code requires that the installment income be apportioned using the apportionment percentage from the year in which the installment sale occurred. 
Timing and attributes. Under section 453 of the Internal Revenue Code and section 24667 of the Revenue and Taxation Code, B's corresponding items are its $5 gain in Year 4, and its $5 gain in Year 5. B's recomputed gain, computed as if the intercompany sale were a transfer between unitary divisions, would be $20 in Year 4 and $20 in Year 5. Thus, S takes $15 of intercompany gain into account in each of Years 4 and 5 to reflect the difference between B's $5 corresponding gain and $20 recomputed gain. B's interest income on the installment note is not a corresponding item, and is taken into account when accrued in Years 3 through 5. 
Apportionment. As would be the case if the intercompany sale was a transfer between divisions, there will be no effect on the sales factor in Year 1, and the $110 gross receipts from the sale to Y will be included in B's sales factor in Year 3 (assuming that the receipts were not excluded pursuant to Title 18, California Code of Regulations, section 25137). Because the installment sale income is being apportioned to California using the apportionment percentage from the year of the sale to Y under section 25137 of the Revenue and Taxation Code, both S's $15 intercompany gain and B's $5 corresponding gain for each of Years 4 and 5 will be apportioned to California using the 10% apportionment percentage from Year 3. The property will be included in B's property factor at S's $70 cost basis until it is sold to Y in Year 3. B's interest income accrued in Years 3, 4 and 5 is current period income and will be apportioned using the current apportionment percentages for those years (10%, 90% and 93%, respectively). 
Example 4: Intercompany sale of installment obligation. 
(Refer to Treas. Reg. § 1.1502-13(c)(7)(ii), example 6.) 
Facts. S holds land with a basis of $70. On January 1 of Year 1, S sells the land to Y in exchange for Y's $100 note, and S reports its gain on the installment method under section 453 of the Internal Revenue Code. Y's note bears interest at a market rate of interest in excess of the applicable federal rate, and provides for principal payments of $50 in Year 5 and $50 in Year 6. On July 1 of Year 3, S sells Y's note to B for $100, resulting in a $30 gain from S's prior sale of the land to Y. Both S's and B's income would be considered business income under section 25120(a) of the Revenue and Taxation Code. The California apportionment percentage for the combined reporting group was 8% in Year 1, 15% in Year 3, and 90% in Years 5 and 6. The amount of the installment note is substantial in relation to the business activities of the combined reporting group. Therefore, because the deferral of gain recognition under the installment sale provisions should not substantially change the ultimate amount of income apportioned to California, application of section 25137 of the Revenue and Taxation Code requires that the installment income be apportioned using the apportionment percentage from the year in which the installment sale occurred. 
Timing and attributes. S's sale of Y's note to B is an intercompany transaction, and S's $30 gain is an intercompany gain. S takes $15 of the gain into account in each of Years 5 and 6 to reflect the difference between B's $0 corresponding gain and B's $15 recomputed gain. S's gain continues to be treated as its gain from the sale to Y, and the deferred tax liability of each taxpayer member remains subject to the interest charge under section 453A(c) of the Internal Revenue Code (as modified by section 24667 of the Revenue and Taxation Code). 
Apportionment. The $100 gross receipts from the sale of the land to Y will be included in S's sales factor in Year 1. When S's gain is taken into account in Years 5 and 6, application of section 25137 of the Revenue and Taxation Code requires that it be apportioned to California using the 8% apportionment percentage from Year 1. This is the same result that would have occurred had the intercompany sale of the installment note been a transfer between unitary divisions. 
Worthlessness. Assume that Y's note becomes worthless on December 1 of Year 3 and B has a $100 loss on a separate entity basis (a $100 corresponding loss). S takes its $30 gain into account in Year 3 to reflect the difference between B's $100 corresponding loss and B's $70 recomputed loss. On a separate entity basis, S's $30 gain would be an installment gain. However, there would be no net installment income if S and B were divisions of a single corporation. Therefore, when the separate entity attributes of S's intercompany items and B's corresponding items are redetermined under Treasury Regulation section 1.1502-13(c)(1)(i) to produce the same effect as if S and B were divisions of a single corporation, both S's $30 gain and B's $100 loss will be apportioned to California using the 15% apportionment percentage from Year 3. 
Example 5: Performance of services by a member for a member. 
(Refer to Treas. Reg. § 1.1502-13(c)(7)(ii), example 7.) 
Facts. S is a driller of water wells. B operates a ranch and requires water to maintain its cattle. During Year 1, B pays S $100 to drill an artesian well on B's ranch, and S incurs $80 of expenses related to drilling the well. B capitalizes its $100 cost for the well, and takes into account $10 of depreciation deductions in each of Years 2 through 11. If S and B were divisions of a single corporation, the $80 costs incurred in drilling the well would be capitalized and the depreciation deduction would be $8 in each of Years 2 through 11. 
Timing. S has intercompany income of $20 ($100 receipts less $80 expenses). In each of Years 2 through 11, S takes $2 of its intercompany income into account to reflect the annual difference between B's $10 corresponding depreciation deduction and the $8 recomputed depreciation deduction. 
Apportionment. As would be the case if the services were performed between unitary divisions of a single corporation, the transaction will not be reflected in the sales factor. If S's expenses related to drilling the well included payroll expenses, those expenses would be included in the payroll factor in Year 1. When the well is placed in service, it will be included in B's property factor at its capitalized cost to S of $80. In each year, S's $2 intercompany income and B's $10 depreciation deduction will be included in current apportionable business income for that year. 
Example 6: Intercompany rental of property. 
(Refer to Treas. Reg. § 1.1502-13(c)(7)(ii), example 8.) 
B operates a ranch that requires grazing land for cattle. S owns land adjoining B's ranch. On January 1 of Year 1, S leases grazing rights for one year to B for $100. S takes its $100 rental income into account in Year 1 to reflect the $100 difference between B's $100 corresponding rental deduction and the $0 recomputed rental deduction. To achieve the effect of the rental transaction occurring between unitary divisions of a single corporation, the intercompany rental income will not be included in S's sales factor. The land will continue to be included in S's property factor at its original cost, and B's property factor will not reflect B's rent expense related to the land. 
Example 7: Source of income subject to section 863 of the Internal Revenue Code. 
(Refer to Treas. Reg. § 1.1502-13(c)(7)(ii), example 14.) 
Facts. S manufactures inventory in the United States, and recognizes $75 of income on sales to B in Year 1. B resells the inventory in Country F and recognizes $25 of income on sales to Y, also in Year 1. 
Timing. Under the matching rule, S's $75 intercompany income and B's $25 corresponding income are taken into account in Year 1. 
Apportionment. California law does not conform to the federal sourcing rules under section 863 of the Internal Revenue Code except for purposes of determining the extent to which a corporation's income and apportionment factors are included in a combined report under section 25110(a)(5) of the Revenue and Taxation Code. Furthermore, subsection (c)(1) of this regulation provides that the redetermination of attributes described in Treasury Regulation section 1.1502-13(c)(1)(i) does not apply to the sourcing of California combined report business income. In order to achieve the results that would occur if S and B were divisions of a single corporation, B's receipts from its sales to Y will be reflected in B's sales factor in Year 1. Both S's $75 intercompany income and B's $25 corresponding item will be treated as current apportionable business income in Year 1. 
(d) Acceleration Rule. S's intercompany items and B's corresponding items are taken into account to the extent they cannot be taken into account to produce the effect of treating S and B as divisions of a single corporation. For example, except as provided in subsection (d)(1)(B) of this regulation, such effect cannot be produced if S and B are no longer in the same combined reporting group. Unless otherwise provided, this regulation applies the acceleration rule provisions of Treasury Regulation section 1.1502-13(d). Exceptions will arise due to the reasons stated in subsection (a)(2) of this regulation. 
(1) Additional circumstances which will cause the acceleration rule to be applied include: 
(A) the asset which was transferred in the intercompany transaction is converted to nonbusiness use, or 
(B) see subsection (j)(3) of this regulation for additional acceleration rules applicable for corporations partially included in a water's-edge combined reporting group. 
(2) Circumstances not known by end of year. In the event that circumstances which would cause the acceleration rule to be triggered during an income year are not known or have not occurred in time for the taxpayer members to file an accurate return, it may be necessary to make an estimate based on available information and amend the return at a later date. 
(3) Examples. The acceleration rule of subsection (d) of this regulation is illustrated by the following examples. 
Example 1: Becoming a nonmember. 
(Refer to Treas. Reg. § 1.1502-13(d)(3), example 1.) 
Facts. S owns land with a basis of $70, which it uses in the trade or business of the combined reporting group. On January 1 of Year 1, S sells the land to B for $100. B also uses the land for unitary business purposes. On July 1 of Year 3, P sells 60% of S's stock to Y and, as a result, S becomes a nonmember of the combined reporting group. 
Matching rule. Under the matching rule, none of S's $30 intercompany gain is taken into account in Years 1 through 3 because there is no difference between B's $0 gain or loss taken into account and the recomputed gain or loss. 
Acceleration of S's intercompany items. Once the stock of S is sold, S is no longer a member of the combined reporting group and the effect of treating the unitary operations of S and B as divisions of a single corporation cannot be produced. Therefore, under the acceleration rule of subsection (d) of this regulation, S's $30 gain is taken into account in Year 3 immediately before S becomes a nonmember. 
California does not conform to the stock basis adjustments required for federal purposes by Treasury Regulation section 1.1502-32. P's basis in S's stock will be P's original cost, increased by any capital contributions and decreased by any returns of capital. 
Apportionment. The intercompany sale is not reflected in the sales factor in Year 1. In Year 3, P's receipts from the sale of S stock may be included in the sales factor if not otherwise excluded under section 25137 of the Revenue and Taxation Code and the regulations thereunder. The land will be included in B's property factor at S's $70 original cost until S's intercompany gain is accelerated. Immediately after S's gain is taken into account, the $70 value of the land in B's property factor will be stepped up to reflect B's $100 cost. S's intercompany gain will be treated as current apportionable business income in Year 3. 
Example 2: Conversion to nonbusiness use. 
Facts. S owns land with a basis of $70 which it holds for use in the trade or business of the combined reporting group. On January 1 of Year 1, S sells the land to B for $100. B also uses the land in its trade or business. On July 1 of Year 3, B converts the land to a nonbusiness use. 
Acceleration of S's intercompany items. Because the effect of treating the unitary operations of S and B as divisions of a single corporation cannot be achieved once the land is removed from the unitary trade or business, the acceleration rule causes S to take its $30 gain into account immediately before the conversion to nonbusiness use takes place. 
Apportionment. If the land had been transferred between divisions of a single corporation and then converted to nonbusiness use, those transactions would have no effect on the sales factor. Thus, neither the intercompany sale in Year 1 nor the acceleration of S's intercompany gain in Year 3 will be reflected in the sales factor. The land will be included in B's property factor at S's $70 original cost until it is converted to nonbusiness use, at which time it will be removed from the property factor. S's accelerated intercompany gain will be treated as current apportionable business income in Year 3. 
(e) Simplifying Rules. 
(1) Unless otherwise provided, this regulation applies the simplifying rules of Treasury Regulation section 1.1502-13(e). Differences may occur due to non-conformity with federal treatment, such as the treatment of bad debt reserves. However, to the extent bad debt reserves are allowed under the Revenue and Taxation Code, Treasury Regulation section 1.1502-13(e)(2) is applicable. 
(2) Election to treat intercompany transactions on a separate entity basis. 
(A) If members of the combined reporting group make a federal election to treat intercompany transactions on a separate entity basis under Treasury Regulation section 1.1502-13(e)(3), the taxpayer members will be treated as having made a similar election for California purposes, unless an election to the contrary is made for California purposes. A separate California election must be made by the taxpayer members to prevent the federal election from applying for California purposes. A taxpayer which is qualified to request federal consent to treat intercompany transactions on a separate entity basis under Treasury Regulation section 1.1502-13(e)(3), but does not so request or is not granted consent by the Internal Revenue Service, may not elect such treatment for California purposes. 
(B) If the members of the combined reporting group properly report transactions on a separate entity basis for federal or foreign national tax purposes and subsection (e)(2)(A) of this regulation does not apply, the taxpayer members may elect to treat those transactions on a separate entity basis for California purposes. The election may be made for all items, or for items from a class or classes of transactions. For example, intercompany sales of inventory to a controlled foreign corporation included in a water's-edge combined reporting group pursuant to section 25110(a)(6) of the Revenue and Taxation Code may be considered a class of transactions for which a separate state election may be made. 
(C) Elections described by subsection (e)(2) of this regulation are made by reporting the intercompany transactions in the manner required by the election on a timely filed original tax return (not an amended return) for the first year to which the election is to apply. An election under this subsection shall be treated as an accounting method, and shall be effective for all intercompany transactions occurring in the year to which the election is first applied, and for each year thereafter. 
(D) An election made under subsection (e)(2) of this regulation does not apply for purposes of taking into account: 
1. losses and deductions deferred under section 267(f) of the Internal Revenue Code, or
2. items from intercompany transactions with respect to stock or obligations of members. 
(f) Stock of Members. 
(1) Unless otherwise provided, this regulation applies the provisions of Treasury Regulation section 1.1502-13(f) relating to stock of members; however, the provisions of subsection (f)(6) of that section shall not apply. 
(A) Exception for distributee member. Treasury Regulation section 1.1502-13(f)(2)(ii) shall not apply to exclude intercompany distributions from the gross income of the distributee member. Intercompany dividend distributions described by section 301(c)(1) of the Internal Revenue Code are included in the income of the distributee member unless subject to elimination or deduction under other applicable law, including sections 25106 or 24402 of the Revenue and Taxation Code. The treatment of intercompany distributions described by section 301(c)(3) of the Internal Revenue Code is provided by subsection (f)(1)(B) of this regulation. 
(B) Deferred intercompany stock account (DISA). That portion of an intercompany distribution which exceeds California earnings and profits and P's basis in S's stock (the portion of a distribution described by section 301(c)(3) of the Internal Revenue Code) will create a DISA. In this subsection, P is treated like the Buyer (B) for purposes of calculating corresponding and recomputed items. 
The DISA will be treated as deferred income. To the extent of a sale, liquidation or any other disposition of shares of the stock, the balance of the DISA with respect to such shares will be taken into account as income or gain to P even if S and P remain members of the same combined reporting group. The disposition shall be treated as a sale or exchange for purposes of determining the character of the DISA income or gain. The DISA is held by the distributee. 
1. A disposition of all the shares shall be deemed to have occurred if either S or P becomes a non-member of the combined reporting group or if the stock of S becomes worthless. 
2. Because P's DISA is deferred income and not negative basis, the DISA is taken into account upon liquidation, including complete liquidation into the parent. The deferred income restored as a result of the liquidation will be taken into account ratably over 60 months unless the taxpayer elects to take the income into account in full in the year of liquidation. For example, if S liquidates and the exchange of P's S stock is subject to section 332 of the Internal Revenue Code (section 24451 of the Revenue and Taxation Code), P's DISA income taken into account under subsection (f)(1)(B) of this regulation is recognized over 60 months, unless an election is made to recognize the deferred income in the year of liquidation. Nonrecognition or deferral shall not apply to DISA income or gain taken into account as a result of an event described in subsection (f)(1)(B)1. of this regulation. 
3. If P transfers the stock of S to another member of the combined reporting group, P's DISA income will be an intercompany item and deferred under the rules of this regulation. 
4. If, on the effective date of this regulation, a closing agreement has been executed with the Franchise Tax Board to defer income from distributions described under section 301(c)(3) of the Internal Revenue Code, then such income shall be included in the DISA of the distributee member to the extent that it has not already been taken into account in the income of the distributee member. Thereafter, the balance of the DISA account shall be taken into account under the rules of this regulation. 
5. If P receives an intercompany distribution described by section 301(c)(3) of the Internal Revenue Code in an income year beginning prior to the effective date of this regulation, the taxpayer may request a closing agreement under section 19441 of the Revenue and Taxation Code that will allow the gain from the distribution to be deferred in a manner consistent with the provisions of subsection (f)(1)(B) of this regulation. The request shall be mailed within one year after the effective date of this regulation and within the applicable statutes of limitations on deficiency assessments or refund claims for the year of the distribution. The request shall describe the parties to the transaction, including federal identification numbers, the nature of the distribution, the timing and amounts of the income involved, and any other relevant facts. Requests shall be mailed to the following address: California Franchise Tax Board, Legal Branch, Attn: Chief Counsel, P.O. Box 1720, Rancho Cordova, CA 95741-1720. 
(2) Examples. The application of this section to intercompany transactions with respect to stock of members is illustrated by the following examples. 
Example 1: Dividend exclusion and property distribution. 
(Refer to Treas. Reg. § 1.1502-13(f)(7), example 1.) 
Facts. S owns land that is used in the trade or business of the combined reporting group with a $70 basis and $100 value. On January 1 of Year 1, P's basis in S's stock is $100, and S has accumulated earnings and profits of $500 from prior years' combined reports of S and P. 
During Year 1, S declares and makes a dividend distribution of the land to P. P also uses the land in the unitary business. Under section 311(b) of the Internal Revenue Code, S has a $30 gain. Under section 301(d) of the Internal Revenue Code, P's basis in the land is $100. (California law generally conforms to Internal Revenue Code sections 301-385 under section 24451 of the Revenue and Taxation Code.) On July 1 of Year 3, P sells the land to Y for $110. 
Dividend treatment. S's distribution of the land is an intercompany distribution to P in the amount of $100. Because the distribution is paid out of earnings and profits of S, which have been included in a combined report of S and P, it will be eliminated from P's income pursuant to section 25106 of the Revenue and Taxation Code. The payment of the dividend has no effect on P's basis in the stock of S. 
Matching rule. Under the matching rule (treating P as the buying member and S as the selling member), S takes its $30 intercompany gain into account in Year 3 to reflect the $30 difference between P's $10 corresponding gain ($110-$100 basis in the land) and the $40 recomputed gain ($110-$70 basis that the land would have had if S and P were divisions). 
Apportionment. The intercompany distribution is not reflected in the sales factor in Year 1. In Year 3, unless otherwise excluded, the $110 gross receipts from P's sale of the land will be included in P's sales factor. After the distribution in Year 1, the land will be included in P's property factor at S's $70 original cost basis. Both S's $30 gain and P's $10 gain relative to the distributed land will be treated as current apportionable business income in Year 3. 
Example 2: Dividends paid from pre-unitary earnings and profits. 
Facts. The facts are the same as in Example 1 except that S's earnings and profits from prior combined reports of S and P is only $10. S also has $490 of earnings and profits that arose in years before a unitary relationship existed between S and P. 
Dividend treatment. Because only $10 of S's distribution was paid from earnings and profits attributable to business income included in a combined report of S and P, only $10 is eliminated under section 25106 of the Revenue and Taxation Code. The remaining $90 of the dividend will be taken into account by P in Year 1, subject to any applicable deductions under sections 24402 or 24411 of the Revenue and Taxation Code. 
Matching rule. P's corresponding item is not its dividend income, but its income, gain, deduction or loss from the property acquired in the intercompany distribution. Therefore, none of S's intercompany gain will be taken into account in Year 1. As in Example 1, S will take its $30 intercompany gain into account in Year 3 to reflect the $30 difference between P's $10 corresponding gain and the $40 recomputed gain. 
Apportionment. The apportionment results are the same as in Example 1, except that to the extent that the Year 1 dividend is not eliminated under section 25106 or deducted under sections 24402 or 24411 of the Revenue and Taxation Code, P's dividend income will be treated as current apportionable business income in Year 1. The intercompany distribution is not included in the sales factor in Year 1. 
Example 3: Deferred intercompany stock accounts. 
(Refer to Treas. Reg. § 1.1502-13(f)(7), example 2.) 
Facts. S owns all of T's stock with a $10 basis and $100 value. S has substantial earnings and profits which are attributable to business income included in a combined report of S, T and P. T has $10 of accumulated earnings and profits, all of which are attributable to business income included in a combined report of S, T and P. On January 1 of Year 1, S declares and distributes a dividend of all of the T stock to P. Under section 311(b) of the Internal Revenue Code, S has a $90 gain. Under section 301(d) of the Internal Revenue Code, P's basis in the T stock is $100. During Year 3, T borrows $90 from an unrelated party and declares and makes a $90 distribution to P to which section 301 of the Internal Revenue Code applies. During Year 6, T has $5 of current earnings which is attributable to business income included in the combined report of S, T and P. On December 1 of Year 9, T issues additional stock to Y and, as a result, T becomes a nonmember. 
Dividend elimination. P's $100 of dividend income from S's distribution of the T stock, and its $10 dividend income from T's $90 distribution, are eliminated from income under section 25106 of the Revenue and Taxation Code. 
Matching and acceleration rules. P has no deferred intercompany stock account (DISA) with respect to T stock because T's $90 distribution did not exceed T's $10 of earnings and profits and $100 stock basis. Therefore, P's corresponding item in Year 9 when T becomes a nonmember is $0. Treating S and P as divisions of a single corporation, the T stock would continue to have a $10 basis after the distribution from S to P. T's $90 distribution in Year 3 would first reduce T's $10 earnings and profits to zero, then reduce the $10 recomputed basis in T stock to zero and create a $70 recomputed DISA. T's $5 of earnings in Year 6 does not affect the amount of the DISA. Because the recomputed DISA would be taken into account upon T becoming a nonmember in Year 9, P will have a $70 recomputed corresponding item. Under the matching rule, S takes $70 of its intercompany gain into account in Year 9 to reflect the difference between P's $0 corresponding gain and the $70 recomputed gain. S's remaining $20 of gain will be taken into account under the matching and acceleration rules based on subsequent events (for example, under the matching rule if P subsequently sells its T stock, or under the acceleration rule if S becomes a nonmember or if the stock of T becomes a nonbusiness asset.) 
Apportionment. Neither the distributions in Years 1 and 3, nor T becoming a nonmember in Year 9, have any effect on the sales factor. S's $70 intercompany gain will be treated as current apportionable business income in Year 9. 
Example 4: Deferred intercompany stock accounts, reverse sequence. 
(Refer to Treas. Reg. § 1.1502-13(f)(7), example 2(d).) 
Facts. The facts are the same as in Example 3, except that T borrows the $90 and makes its $90 distribution to S before S distributes T's stock to P. To the extent of T's $10 earnings and profits, T's distribution to S is a dividend and is eliminated under section 25106 of the Revenue and Taxation Code. The remaining distribution reduces S's $10 basis in T stock to $0, and creates a $70 DISA. The fair market value of T's stock after T incurs the $90 debt and distributes the proceeds is $10. Under section 311(b) of the Internal Revenue Code and the provisions of this regulation, S has an $80 gain from the distribution of T stock to P ($10 value less $0 basis, plus $70 DISA recaptured). Under section 301(d) of the Internal Revenue Code, P's initial basis in the T stock is the $10 fair market value of the stock. T's $5 of earnings in Year 6 has no effect on P's basis in the T stock. 
Matching and acceleration rule. P's corresponding item in Year 9, when T becomes a nonmember, is $0. Treating S and P as divisions of a single corporation, the T stock would continue to have a $0 basis after the distribution from S to P, and a $70 balance would remain in the DISA. When T becomes a nonmember in Year 9, P must include the amount of its DISA in recomputed income, and therefore has a $70 recomputed corresponding item. Under the matching rule, S takes $70 of its intercompany gain into account in Year 9 to reflect the difference between P's $0 corresponding gain and the $70 recomputed gain. S's remaining $10 of gain will be taken into account under the matching and acceleration rules based on subsequent events. 
Apportionment. Neither the distributions in Year 1 nor T becoming a nonmember in Year 9 have any effect on the sales factor. S's $70 intercompany gain taken into account in Year 9 is treated as current apportionable business income in Year 9. 
Example 5: Partial stock sale. 
(Refer to Treas. Reg. § 1.1502-13(f)(7), example 2(e).) 
Facts. The facts are the same as in Example 3, except that P sells 10% of T's stock to Y on December 1 of Year 9 for $1.50 (rather than T issuing additional stock and becoming a nonmember). T's $90 distribution to P in Year 3 reduced T's $10 of earnings and profits to $0, then reduced P's $100 basis in T stock to $20. Under the matching rule, S takes $9 of its gain into account in Year 9 to reflect the difference between P's $.50 loss taken into account ($1.50 sale proceeds minus $2 basis) and the $8.50 recomputed gain ($1.50 sales proceeds minus $0 basis plus $7 recomputed DISA). 
Apportionment. If not excluded pursuant to Title 18, California Code of Regulations, section 25137, the $1.50 gross receipts from P's sale of the T stock to Y is included in P's sales factor in Year 9. Both S's $9 gain and P's $.50 loss are treated as current apportionable business income in Year 9. 
Example 6: Loss, rather than cash distribution. 
(Refer to Treas. Reg. § 1.1502-13(f)(7), example 2(f).) 
Facts. The facts are the same as in Example 3, except that T retains the loan proceeds and incurs a $90 operating loss in Year 3. The loss results in an earnings and profits deficit of $80 for T, but has no effect on P's basis in T's stock. Therefore, no DISA is created. T's $5 of earnings in Year 6 reduces its earnings and profits deficit to $75, but also has no effect on the stock basis. Because there is no DISA balance to take into account when T becomes a nonmember in Year 9, P's corresponding item and the recomputed item are both $0. Consequently, S's entire $90 intercompany gain continues to be deferred pending subsequent events. 
Example 7: Intercompany reorganization. 
(Refer to Treas. Reg. § 1.1502-13(f)(7), example 3.) 
Facts. P forms S and B by contributing $200 to the capital of each. During Years 1 through 4, S and B each accumulate earnings and profits of $50, which is attributable to business income included in the combined reports of S, B and P. On January 1 of Year 5, the fair market value of S's assets and its stock is $500, and S merges into B in a tax-free reorganization. Pursuant to the plan of reorganization, P receives new B stock with a fair market value of $350 and $150 cash. 
Treatment as a distribution under section 301 of the Internal Revenue Code. Under Treasury Regulation section 1.1502-13(f)(3), P is treated as receiving additional B stock with a fair market value of $500. Under section 358 of the Internal Revenue Code, P's basis of the additional B stock is $200 (P's basis in the relinquished S stock). Immediately after the merger, $150 of the stock received is treated as redeemed, and the redemption is treated under section 302(d) of the Internal Revenue Code as a distribution to which section 301 applies. Under section 381(c)(2) of the Internal Revenue Code, B is treated as receiving S's $50 of earnings and profits in addition to its own $50 of earnings and profits. Therefore, $100 of the deemed distribution is treated as a dividend and is eliminated from income under section 25106 of the Revenue and Taxation Code. The remaining $50 of the distribution reduces P's basis in the B stock from $400 to $350. 
Apportionment. The reorganization has no effect on the sales factor. After the reorganization, S's property will be reflected in B's property factor at S's original cost. 
(g) Obligations of members. 
(1) Unless otherwise provided, this regulation will follow Treasury Regulation section 1.1502-13(g) relating to the obligations of members. 
(2) Example: The application of this section to obligations of members is illustrated by the following example. 
Example: Interest on intercompany debt. 
(Refer to Treas. Reg. § 1.1502-13(g)(5), Example 1.) 
Facts. On January 1 of Year 1, B borrows $100 from S in return for B's note providing for $10 of interest annually at the end of each year, and repayment of $100 at the end of Year 5. Under their separate entity methods of accounting, B accrues a $10 interest deduction annually, and S accrues $10 of interest income annually. 
Matching rule. Under subsection (g)(1) of this regulation, the accrual of interest on B's note is an intercompany transaction. Under the matching rule, S takes its $10 of income into account in each of Years 1 through 5 to reflect the $10 difference between B's $10 of interest expense taken into account and the $0 recomputed expense. 
Interest offset. Neither S's intercompany interest income nor B's corresponding interest expense are taken into account for purposes of determining the interest offset or foreign investment interest offset under section 24344 of the Revenue and Taxation Code. 
Apportionment. S's interest income is not included in the sales factor in any of Years 1 through 5. The intercompany loan is excluded from S's property factor, even if S is required to include loan balances in its property factor under Title 18, California Code of Regulations, section 25137. 
(h) Anti-avoidance rules. If a transaction is engaged in or structured with the principal purpose of avoiding the purposes of this regulation (including, for example, avoiding treatment as an intercompany transaction, or manipulating the sourcing of income or the occurrence of acceleration events), adjustments may be made to carry out the purposes of this regulation. 
(i) (Reserved.) 
(j) Miscellaneous operating rules. 
Except as otherwise provided, this regulation applies the provisions of Treasury Regulation section 1.1502-13(j) relating to miscellaneous operating rules; in addition, the provisions of subsections (j)(5), (j)(6), and (j)(7) of Treasury Regulation section 1.1502-13 shall not apply. 
(1) Subgroups. 
(A) If a change occurs in the composition of the combined reporting group, but both S and B either remain members of the same combined reporting group or leave the combined reporting group together and remain unitary with each other, such a change alone will not cause S's intercompany items to be taken into account under the acceleration rule contained in subsection (d) of this regulation. 
(B) If the event which causes the combined reporting group to change as described in subsection (j)(1)(A) of this regulation also causes S's intercompany items to be taken into account in a federal consolidated return, then S may make an irrevocable election to take those intercompany items into account in the same period for California purposes. The election is made by reporting the income, gain, deduction or loss on a timely filed original tax return. If this election is not made, then S and B must maintain sufficient records to track the intercompany gain or loss which has been taken into account for federal purposes but which remains deferred for state purposes. 
(C) Examples. The application of subsection (j)(1) can be illustrated by the following examples. 
Example 1: S and B sold. 
P is the principal corporation in a combined reporting group in which S and B are members. P sells S and B to Y, an unrelated entity. S and B remain unitary after the sale. The sale of S and B does not cause S's intercompany items to be taken into account under the acceleration rule. Therefore S's intercompany items will remain deferred until subsequent events cause those intercompany items to be taken into account under either the matching rule or the acceleration rule. However, if the sale of S and B caused S's intercompany items to be taken into account in the federal consolidated return, the taxpayer may elect the same treatment under subsection (j)(1)(B) of this regulation by taking the intercompany items into account on its timely filed original California return. 
Example 2: S and B excluded by water's-edge election. 
Assume the same facts as in example 1, but instead of selling S and B to Y, the taxpayer members of the combined reporting group make a water's-edge election. S and B are foreign corporations and are wholly excluded from the water's-edge combined report as a result of the election. Because S and B left the combined reporting group together as a result of the water's-edge election, the water's-edge election will not cause S's intercompany items to be taken into account under the acceleration rule if S and B are still unitary immediately after the election. 
(2) Recognition of income from intercompany transactions occurring prior to entering the state. 
(A) Intercompany transactions as defined in subsection (b)(1) of this regulation shall include those transactions which occur prior to any member becoming taxable in this state if S and B would have been members of the same combined reporting group had any unitary member been taxable in this state in the year of the transaction. 
(B) To the extent that intercompany transactions would have qualified for an election to be treated on a separate entity basis under subsection (e)(2) of this regulation but for the fact that no member of the combined reporting group was a California taxpayer in the year in which such an election would have been required to be made, a retroactive election under subsection (e)(2) of this regulation will be deemed made. The deemed election shall apply to all intercompany transactions described by subsection (j)(2). 
(C) Examples. The application of this regulation to transactions occurring prior to entering the state can be illustrated by the following examples. 
Example 1: Sale outside of group after member enters the state. 
Facts. S and B are members of a unitary group which conduct all of their business activity in the U.S. Both are members of a federal consolidated return group. In Year 1, when no member of the group is a California taxpayer, S sells land with a basis of $100 to B for $110. S's $10 gain is treated as a deferred intercompany item in S and B's consolidated return. The land is used in the unitary business. In Year 2, a member of the unitary group becomes taxable in California. Prior to the member becoming taxable in this state, no event occurred which would have caused the intercompany item to be taken into account. In Year 3, B sells the land to Y for $130. 
Matching rule. S's sale of the land to B is an intercompany transaction, and S's $10 gain is its intercompany item. S takes its intercompany gain into account in Year 3 to reflect the $10 difference between B's corresponding item of $20 from the sale to Y, and the recomputed corresponding item of $30 ($130-$100). This is the same result that would have occurred if S and B were unitary divisions of a single corporation and the transaction had been a transfer between divisions prior to the corporation becoming taxable within this state. 
Apportionment. The land is included in B's property factor at S's $100 original cost basis. In Year 3, the $130 gross receipts from B's sale to Y, unless otherwise excluded by California Code of Regulations section 25137, will be included in B's sales factor. S's gain will be treated as current apportionable business income in Year 3. 
Example 2. Retroactive election under subsection (e)(2). 
Facts. The facts are the same as in Example 1, except that S and B do not file a consolidated federal return. The Year 1 intercompany transaction between S and B is reported as a $10 gain on S's separate return for federal purposes. An election to treat intercompany transactions between S and B on a separate entity basis could have been made if any member of the unitary group was a California taxpayer in the year of the transaction. Therefore, a retroactive election is deemed made under this subsection in Year 3, which is the year that S's intercompany item would otherwise be taken into account. 
Example 3. S leaves the combined reporting group after a member enters the state. 
Facts. The facts are the same as in Example 1, except that instead of B selling the land, the stock of S is sold in Year 3 and S becomes a nonmember of the combined reporting group. 
Acceleration rule. Once the stock of S is sold, the effect of treating the unitary operations of S and B as divisions of a single corporation cannot be achieved. Therefore, under the acceleration rule of subsection (d) of this regulation, S's $10 gain is taken into account in Year 3 immediately before S becomes a nonmember. 
Apportionment. The land will be included in B's property factor at S's $100 original cost basis until S's intercompany gain is accelerated. Immediately after S's gain is taken into account, the $100 value of the land in B's property factor will be increased to reflect B's $110 cost. S's intercompany gain will be treated as current apportionable business income in Year 3. 
(3) Partially included water's-edge corporations. 
(A) Coordination with section 25110(a)(4) of the Revenue and Taxation Code. 
1. If S is a corporation partially included in a water's-edge combined reporting group pursuant to section 25110(a)(4) of the Revenue and Taxation Code, and S enters into a transaction with another member of the water's-edge combined reporting group, the transaction is an intercompany transaction if the resulting income, gain, deduction or loss would, but for the provisions of this regulation, be included as apportionable business income in the water's-edge combined report under section 25110 of the Revenue and Taxation Code. 
2. Except as provided in subsection (j)(3)(A)3. of this regulation, intercompany transactions include transactions where B is a corporation partially included in the combined reporting group immediately after such transaction pursuant to section 25110(a)(4) of the Revenue and Taxation Code, but only to the extent that the object of the intercompany transaction gives rise to income, gain, deduction or loss which would be included as apportionable business income in the water's-edge combined report under section 25110 of the Revenue and Taxation Code. 
3. The sale, exchange or other transfer of stock of an affiliated corporation (as defined by section 25110(b)(1) of Title 18 of the California Code of Regulations) to a corporation partially included in the combined reporting group pursuant to section 25110(a)(4) of the Revenue and Taxation Code will not be treated as an intercompany transaction unless the stock is considered to be a United States real property interest as defined in section 897(c) of the Internal Revenue Code. 
4. Where either S or B was partially included in a water's-edge combined reporting group pursuant to section 25110(a)(4) of the Revenue and Taxation Code, the intercompany item will be taken into account under the acceleration rule immediately before any income year in which either S or B has no includable income pursuant to section 25110(a)(4) of the Revenue and Taxation Code and is therefore excluded from the water's-edge combined reporting group. If, for any year, the includable income of S or B pursuant to section 25110(a)(4) of the Revenue and Taxation Code is insubstantial, the staff of the Franchise Tax Board may permit or require the intercompany item to be taken into account under the acceleration rule immediately before such year. 
5. Where B is partially included in a water's-edge combined reporting group pursuant to section 25110(a)(4) of the Revenue and Taxation Code, the acceleration rule will apply to take an intercompany item into account to the extent the object of the intercompany transaction ceases to give rise to income, gain, loss, or deductions which would be included as apportionable business income in the water's-edge combined report under section 25110 of the Revenue and Taxation Code. For example, if intangible property gives rise to income includible in the water's-edge combined report under section 25110 of the Revenue and Taxation Code while held by B, but a disposition of such property results in foreign-source gain or loss under sections 861 through 865 of the Internal Revenue Code which is not included in the water's-edge combined report, then the disposition will trigger application of the acceleration rule to take into account S's intercompany items with respect to such property. 
6. Where a sale, exchange or other transfer of stock to a corporation included in the water's-edge combined reporting group pursuant to section 25110(a)(4) of the Revenue and Taxation Code has been treated as an intercompany transaction under subsection (j)(3)(A)3. of this regulation, the acceleration rule will apply to take into account intercompany items arising from that intercompany transaction if the stock ceases to be a United States real property interest as defined in section 897(c) of the Internal Revenue Code. 
(B) Coordination with section 25110(a)(6) of the Revenue and Taxation Code. 
1. Definition. For purposes of subsection (j)(3) of this regulation, the term “partial inclusion ratio” shall refer to the ratio described in section 25110(a)(6) of the Revenue and Taxation Code, and the regulations thereunder, for determining the includable amount of income and apportionment factors for a partially included corporation described in section 25110(a)(6) of the Revenue and Taxation Code. 
2. A transaction between a corporation included in a water's-edge combined reporting group pursuant to section 25110(a)(6) of the Revenue and Taxation Code and another member of the combined reporting group will be an intercompany transaction to the extent of that corporation's section 25110(a)(6) partial inclusion ratio (as provided by section 25110(a)(6) of the Revenue and Taxation Code) for the income year. 
3. If both S and B are corporations included in a water's-edge combined reporting group pursuant to section 25110(a)(6) of the Revenue and Taxation Code, the partial inclusion ratios of both S and B must be applied to determine the portion of the transaction that will be treated as an intercompany transaction. 
4. Where either S or B is included in a water's-edge combined reporting group pursuant to section 25110(a)(6) of the Revenue and Taxation Code, the intercompany item will be taken into account under the acceleration rule immediately before the first income year in which the partial inclusion ratio for either S or B is an amount equal to or lower than 50% of its partial inclusion ratio for the year of the intercompany transaction. Regardless of whether the ratio decreases 50% or more below the intercompany transaction year partial inclusion ratio, the acceleration rule will apply to take the intercompany item into account if the partial inclusion ratio is less than 10%. 
5. If subsection (j)(3)(B)4. of this regulation applies, then, as an alternative to the application of the acceleration rule provided by that subsection, the taxpayer may elect to have the acceleration rule apply to take into account only a proportionate share of the intercompany item relative to the amount of the decrease in the partial inclusion ratio. If further decreases in the partial inclusion ratio occur in subsequent years, additional portions of the intercompany item shall be taken into account under the acceleration rule in proportion to such decreases. However, if in any income year the partial inclusion ratio is below 10%, any remaining intercompany items shall be taken into account and the election provided by this subsection shall not apply. The election shall be made by reporting the proportionate share of the intercompany item on a timely filed original tax return for the first year in which the partial inclusion ratio decreases 50% or more below the intercompany transaction year partial inclusion ratio. As a condition of this election, the taxpayer must maintain books and records sufficient to identify the amounts of intercompany items, the annual partial inclusion ratios, and the application of this provision to the intercompany items. 
6. Where both S and B are included in a water's-edge combined reporting group pursuant to section 25110(a)(6) of the Revenue and Taxation Code, and the partial inclusion ratios of both S and B decrease 50% or more below their respective intercompany transaction year partial inclusion ratios, the acceleration methodology of subsection (j)(3)(B)5. of this regulation shall be applied in proportion to the greater of either (1) the amount of decrease attributable to S or (2) the amount of decrease attributable to B. 
(C) Separate entity election for transactions with partially included entities. See subsection (e)(2)(B) of this regulation for application of the election to treat transactions on a separate entity basis with respect to transactions with partially included entities. 
(D) Examples. The application of this regulation to partially included entities in a water's-edge combined report is illustrated by the following examples. 
Example 1: Intercompany sale of land by an entity included pursuant to section 25110(a)(4) of the Revenue and Taxation Code. 
Facts. S is a foreign corporation with U.S. branches that are included in a water's-edge combined reporting group pursuant to section 25110(a)(4) of the Revenue and Taxation Code. S has a basis of $70 in land which it uses in its U.S. trade or business operations. On January 1 of Year 1, S sells the land to domestic corporation B for $100. On July 1 of Year 3, B sells the land to Y for $110. 
Matching rule. But for the provisions of this regulation, S's $30 gain from the sale to B would be treated as U.S. source income and included in the water's-edge combined report under section 25110 of the Revenue and Taxation Code. However, the transaction is an intercompany transaction and S's $30 gain is an intercompany item. S takes its intercompany item into account under the matching rule in Year 3 to reflect the $30 difference for the year between B's corresponding item of $10 and the recomputed corresponding item of $40. 
Apportionment. To produce the result that would occur if S and B were unitary divisions of a single corporation, the intercompany sale of land will not be reflected in the sales factor in Year 1. In Year 3, unless otherwise excluded, the $110 gross receipts from B's sale will be included in B's sales factor. The land is attributable to B after the sale, and it will be reflected in B's property factor at S's $70 original cost basis until it is sold outside the water's-edge combined reporting group in Year 3. Both S's $30 gain and B's $10 gain will be treated as current apportionable business income in Year 3. 
Example 2: Intercompany transaction where buyer is an entity included pursuant to section 25110(a)(4) of the Revenue and Taxation Code. 
Facts. B is a foreign corporation with a U.S. branch which is included in a water's-edge combined reporting group pursuant to section 25110(a)(4) of the Revenue and Taxation Code. In Year 1, domestic corporation S incurs expenses of $300 to provide engineering services to B in connection with the renovation of B's U.S. facility. B capitalizes the $500 fee which it pays to S for the services and computes depreciation on that basis. If S and B were divisions of a single corporation, only the $300 in expenses would be capitalized, which would result in smaller depreciation deductions. 
Matching Rule. Because the engineering services are attributable to a facility used in the operation of U.S. business activities which give rise to income, gain, deduction or loss included in the combined report under section 25110 of the Revenue and Taxation Code, the performance of those services is treated as an intercompany transaction. S has intercompany income of $200 ($500 receipts less $300 expenses). S's intercompany income will be taken into account in subsequent years based upon the difference between B's corresponding depreciation (based on a $500 basis) and the depreciation recomputed as though S and B were divisions of a single corporation (based on a $300 basis). 
Apportionment. As would be the case if the services were performed between unitary divisions of a single corporation, the transaction will not be reflected in the sales factor. If S's expenses with respect to the engineering services include payroll expenses, those expenses would be included in S's payroll factor in Year 1. When the renovated facility is placed into service in the unitary business, the $300 capitalized cost of the engineering services will be included in B's property factor. In each subsequent year, S's intercompany income taken into account and B's corresponding depreciation deduction will be treated as current apportionable business income for that year. 
Example 3: Transaction not related to U.S. activities. 
Facts. Assume the same facts as in Example 2, except that the engineering services relate to the construction of a plant in Brazil. 
Matching rule. Although B is partially included in the water's-edge combined reporting group under section 25110(a)(4) of the Revenue and Taxation Code, the engineering services do not relate to an asset which will give rise to income, gain, deduction or loss which will be included in the water's-edge combined report under section 25110 of the Revenue and Taxation Code. Therefore, the performance of services is not treated as an intercompany transaction. S's income of $500 and expenses of $300 are taken into account in Year 1. 
Apportionment. Gross receipts of $500 are included in S's sales factor. 
Example 3a: Transaction allocated between U.S. activities and foreign activities. 
Facts. Assume the same facts as in Example 2, except that the engineering services relate to the construction of two plants, one in the U.S. and one in Brazil. S's expenses with respect to the engineering services are allocated 55% to the U.S. activities under the rules in Treasury Regulation section 1.861. Therefore, 55% of the transaction will be treated as an intercompany transaction. 
Matching Rule. S has intercompany income of $110 ($500 receipts less $300 expenses, multiplied by 55%). S's intercompany income will be taken into account in subsequent years based upon the difference between B's corresponding depreciation deduction and the depreciation deduction recomputed as though S and B were divisions of a single corporation. 
Apportionment. Because 45% of the transaction is not treated as an intercompany transaction, S's $90 of non-intercompany income ([$500-$300] x 45%) will be treated as current apportionable business income in Year 1. Likewise, receipts from engineering services of $225 ($500 x 45%) will be included in S's sales factor in Year 1. The capitalized cost of the engineering services allocated to the U.S. plant is $165 ($300 total cost x 55%). When the U.S. plant is placed into service in the unitary business, the $165 capitalized cost will be included in B's property factor. In each subsequent year, S's intercompany income taken into account and B's corresponding depreciation deduction will be treated as current apportionable business income for that year. 
Example 4: Asset ceases to give rise to U.S. source income. 
Facts. Assume the same facts as in Example 2, except that the engineering services relate to the design of specialized equipment which is placed in service in B's U.S. facility by the end of Year 1. On December 31 of Year 4, the equipment is shipped to Germany for use in another plant owned and operated by B. 
Matching rule. S has intercompany income of $200 (see computations in Example 2), a portion of which is taken into account in Years 2 through 4 to reflect the difference between B's corresponding depreciation deduction and the depreciation recomputed as though S and B were divisions of a single corporation. 
Acceleration rule. In Year 4, the equipment ceases to give rise to income, gain, loss or deductions included in the water's-edge combined report under section 25110 of the Revenue and Taxation Code. Under the acceleration rule and subsection (j)(3)(A)5. of this regulation, S's remaining intercompany income is taken into account in Year 4. 
Apportionment. The apportionment results of the transactions in Years 1 through 4 are the same as in Example 2. Because no gross receipts related to the transaction are generated in Year 4, the accelerated income is not reflected in the sales factor. 
Example 5. Both Seller and Buyer partially included under section 25110(a)(4) of the Revenue and Taxation Code. 
S and B are both foreign corporations with U.S. branches that are included in a water's-edge combined reporting group pursuant to section 25110(a)(4) of the Revenue and Taxation Code. S sells equipment which it uses in its U.S. trade or business operations to B for a gain. Thereafter, the equipment is used in B's U.S. trade or business operations. Except for the provisions of this regulation, S's gain from the sale of equipment would be treated as U.S. source income and included in the water's-edge combined report under section 25110 of the Revenue and Taxation Code. B's use of the equipment gives rise to income, gain, deduction or loss which will be included in the water's-edge combined report under section 25110 of the Revenue and Taxation Code. Therefore, because the requirements of subsections (j)(3)(A)1. and 2. of this regulation are both satisfied, S's sale of the equipment to B is treated as an intercompany transaction and subject to the rules of this regulation. 
Example 6. Seller excluded from the water's-edge combined reporting group. 
Facts. S is a foreign corporation which owns 100% of the stock of affiliated domestic corporations B and RP. RP is a United States Real Property Holding Corporation as defined in section 897(c) of the Internal Revenue Code. In Year 1, S has no income from U.S. activities, and is excluded from the water's-edge combined reporting group of B and RP. 
In Year 2, S sells its stock in RP to B for a gain of $1,000. Because S's sale of RP is treated as a disposition of a United States real property interest as defined by section 897 of the Internal Revenue Code, S's income and apportionment factors attributable to that sale would, but for the provisions of this regulation, be included in the water's-edge combined report in Year 2. Therefore, the transaction is treated as an intercompany transaction. S's intercompany item is its $1,000 gain. 
In Year 3, S has no income from U.S. activities, and is again excluded from the water's-edge combined reporting group of B and RP. 
Acceleration Rule. The effect of treating the operations of S and B as divisions of a single corporation cannot be achieved once S is excluded from the water's-edge combined reporting group. Therefore, under the acceleration rule, S's $1,000 intercompany gain is taken into account in Year 2 (immediately before the income year in which S is excluded from the combined reporting group). 
Apportionment. Neither the intercompany sale of RP stock nor the acceleration of the intercompany gain is reflected in the sales factor in Year 2. S's accelerated gain will be treated as current apportionable business income in Year 2. 
Example 7: Seller included under section 25110(a)(6) of the Revenue and Taxation Code. 
Facts. Corporation S is a controlled foreign corporation as defined in section 957 of the Internal Revenue Code, and is included in the water's-edge combined reporting group under section 25110(a)(6) of the Revenue and Taxation Code to the extent of its partial inclusion ratio. In Year 1, S sells land with a basis of $500 to domestic corporation B for $600. S's partial inclusion ratio for Year 1 is 66%. In Year 5, when S's partial inclusion ratio is 75%, B sells the land to Y for $650. At no time in Years 2 through 4 did S's partial inclusion ratio fall to 33% or lower (50% of the Year 1 ratio; see subsection (j)(3)(B)4. of this regulation). 
Matching rule. $66 of S's $100 gain is an intercompany item and is deferred ($100 x 66%). The remaining $34 of S's gain is not included in the water's-edge combined report. In Year 5, B has a corresponding gain of $50 ($650-$600). For purposes of calculating the recomputed gain, S's original cost of $500 is increased by the amount of S's $34 non-intercompany gain. Therefore, the recomputed gain would be $116 ($650-$534). S's $66 intercompany gain is taken into account in the water's-edge combined report in Year 5 to reflect the $66 difference between B's $50 corresponding gain and the $116 recomputed gain. 
Apportionment. Gross receipts of $396 from S's sale to B are included in the water's-edge combined report ($600 x 66%). If S and B were divisions of a single corporation, the transaction would not be reflected in the sales factor. Therefore, the $396 intercompany gross receipts shall be eliminated from S's sales factor under subsection (a)(5)(A) of this regulation. For purposes of B's property factor, the land will be reflected at S's cost basis under subsection (a)(5)(B)1. of this regulation, adjusted by any gain or loss recognized by S as a result of the non-intercompany portion of the transaction. The net value assigned to the land in B's property factor will be $534 ($500 cost basis to S + $34 non-intercompany gain). 
Example 8: Buyer included under section 25110(a)(6) of the Revenue and Taxation Code. 
Facts. On December 31 of Year 1, domestic corporation S sells land with a basis of $500 to corporation B for $600. Corporation B is a controlled foreign corporation as defined in section 957 of the Internal Revenue Code, and is included in the water's-edge combined reporting group under section 25110(a)(6) of the Revenue and Taxation Code to the extent of its partial inclusion ratio. B's partial inclusion ratio for Year 1 is 66%. On December 31 of Year 5, when B's partial inclusion ratio is 75%, B sells the land to Y for $650. At no time in Years 2 through 4 did B's partial inclusion ratio fall to 33% or lower (50% of the Year 1 ratio). 
Matching rule. $66 of S's $100 gain ($100 x 66%) is an intercompany item and is deferred. S's remaining $34 gain is taken into account currently in Year 1. In Year 5, B has a corresponding gain of $50 ($650-$600). For purposes of calculating the recomputed gain, S's original cost of $500 is increased by the amount of the $34 non-intercompany gain taken into account by S. Therefore, the recomputed gain would be $116 ($650-$534). S's $66 intercompany gain is taken into account in the water's-edge combined report in Year 5 to reflect the $66 difference between B's $50 corresponding gain and the $116 recomputed gain. 
Apportionment. Unless otherwise excluded, S's sales factor in Year 1 will reflect gross receipts of $204 from the non-intercompany portion of the sale to B. The remaining $396 ($600 sales price x 66%) will be eliminated from S's sales factor under subsection (a)(5)(A) of this regulation. The valuation of the land for purposes of B's property factor is S's cost basis adjusted by any gain or loss recognized by S as a result of the non-intercompany portion of the transaction. The net value assigned to the land will be $534 ($500 cost basis to S + $34 non-intercompany gain). The $534 valuation will be included in B's property factor to the extent of B's partial inclusion ratio for that year. For example, if B's partial inclusion ratio was 50% in Year 2, the land would be reflected in B's property factor for Year 2 at $267 ($534 x 50%). In Year 5, unless otherwise excluded, $487.50 gross receipts from B's sale of the land to Y will be reflected in B's sales factor ($650 sales price to Y x 75% Year 5 partial inclusion ratio). 
Example 9: Both Seller and Buyer included under section 25110(a)(6) of the Revenue and Taxation Code. 
Facts. Assume the same facts as in Example 8, except that S is also a controlled foreign corporation as defined in section 957 of the Internal Revenue Code, and is included in the water's-edge combined reporting group under section 25110(a)(6) of the Revenue and Taxation Code to the extent of its partial inclusion ratio. S's partial inclusion ratio for Year 1 is 80%. On December 31 of Year 5, when S's partial inclusion ratio is 60%, B sells the land to Y for $650. At no time in Years 2 through 4 did S's partial inclusion ratio fall to 40% or lower (50% of S's 80% Year 1 ratio). 
Matching rule. $52.80 of S's $100 gain ($100 x S's 80% Year 1 ratio x B's 66% Year 1 ratio) is an intercompany item and is deferred. Of S's remaining $47.20 non-intercompany gain, $27.20 is currently taken into account in Year 1 ($100 total gain x S's 80% Year 1 ratio = $80 of total gain includable in water's-edge combined report; less $52.80 deferred intercompany portion); $20 of non-intercompany gain is not included in the water's-edge combined report. In Year 5, B has a corresponding gain of $50 ($650-$600). For purposes of calculating the recomputed gain, S's original cost of $500 is increased by the amount of S's $47.20 non-intercompany gain. Therefore, the recomputed gain would be $102.80 ($650 sales price - $547.20 recomputed basis). S's $52.80 intercompany gain is taken into account in the water's-edge combined report in Year 5 to reflect the $52.80 difference between B's $50 corresponding gain and the $102.80 recomputed gain. 
Apportionment. Gross receipts of $480 from S's sale to B ($600 x S's 80% Year 1 ratio) are included in the water's-edge combined report. Of that amount, $316.80 ($480 x B's 66% Year 1 ratio) is attributable to the intercompany transaction and will be eliminated from S's sales factor under subsection (a)(5)(A) of this regulation. Unless otherwise excluded, S's sales factor will continue to reflect the remaining gross receipts of $163.20. In Year 5, unless otherwise excluded, $487.50 gross receipts from B's sale of the land to Y ($650 x B's 75% Year 5 ratio) will be reflected in B's sales factor. 
The valuation of the land for purposes of B's property factor is S's cost basis in the land adjusted by any gain or loss recognized by S as a result of the non-intercompany portion of the transaction. The net value assigned to the land will be $547.20 ($500 cost basis to S + $47.20 non-intercompany gain). The $547.20 valuation will be included in B's property factor to the extent of B's partial inclusion ratio for that year. For example, if B's partial inclusion ratio was 50% in Year 2, the land would be reflected in B's property factor for Year 2 at $273.60 ($547.20 x 50%). 
Example 10: Intercompany transaction between Seller included under section 25110(a)(4) and Buyer included under section 25110(a)(6) of the Revenue and Taxation Code. 
Facts. S is a foreign corporation with a U.S. branch which is included in the water's-edge combined reporting group under section 25110(a)(4) of the Revenue and Taxation Code. B is a controlled foreign corporation as defined in section 957 of the Internal Revenue Code, and is included in the water's-edge combined reporting group under section 25110(a)(6) of the Revenue and Taxation Code to the extent of its partial inclusion ratio. In Year 1, S sells land with a basis of $800 which it used in its U.S. trade or business activities to B for $1,000. B's partial inclusion ratio in Year 1 is 60%. In Year 4, when B's partial inclusion ratio is 65%, B sells the land to Y for $1,100. At no time in Years 2 or 3 did B's partial inclusion ratio fall to 30% or lower (50% of B's 60% Year 1 ratio). 
Matching rule. Except for the provisions of this regulation, S's $200 gain from the sale to B would be treated as U.S. source income and included in the water's-edge combined report; therefore, the requirements of subsection (j)(3)(A)1. of this regulation are satisfied. $120 of S's gain ($200 total gain x B's 60% partial inclusion ratio) is an intercompany item and is deferred. S's remaining $80 non-intercompany gain is taken into account in the water's-edge combined report in Year 1. In Year 4, B has a corresponding gain of $100 ($1,100-$1,000). For purposes of calculating the recomputed gain, S's original cost of $800 is increased by the amount of the $80 non-intercompany gain taken into account by S. Therefore, the recomputed gain would be $220 ($1,100 sales price - $880 recomputed basis). S's $120 intercompany gain is taken into account in the water's-edge combined report in Year 4 to reflect the $120 difference between B's $100 corresponding gain and the $220 recomputed gain. 
Apportionment. Unless otherwise excluded, S's sales factor in Year 1 will reflect gross receipts of $400 from the non-intercompany portion of the sale to B. The remaining $600 ($1,000 sale price x 60%) will be eliminated from S's sales factor under subsection (a)(5)(A) of this regulation. The valuation of the land for purposes of B's property factor is S's cost basis adjusted by any gain or loss recognized by S as a result of the non-intercompany portion of the transaction. The net value assigned to the land will be $880 ($800 cost basis to S + $80 non-intercompany gain). The $880 valuation will be included in B's property factor to the extent of B's partial inclusion ratio for that year. For example, if B's partial inclusion ratio was 55% in Year 2, the land would be reflected in B's property factor for Year 2 at $484 ($880 x 55%). In Year 4, unless otherwise excluded, $715 gross receipts from B's sale of the land to Y ($1,100 sales price to Y x B's 65% Year 4 partial inclusion ratio) will be reflected in B's sales factor. 
Example 11: Depreciable asset sold to buyer partially included under section 25110(a)(6) of the Revenue and Taxation Code. 
Facts. On January 1 of Year 1, domestic corporation S buys equipment with a 10-year useful life for $100 and begins to depreciate it using the straightline method. On January 1 of Year 6, S sells the equipment to B for $60. B is a controlled foreign corporation partially included in the combined reporting group under section 25110(a)(6) of the Revenue and Taxation Code. B's partial inclusion ratio is 40% in Year 6. B determines that the useful life of the equipment is 5 years from the date it was acquired by B. 
Depreciation through Year 5, intercompany gain in Year 6. S claims $10 of depreciation for each of Years 1 through 5, and has a $50 basis at the time of the sale to B. Thus, S has a $10 gain from its $60 sale to B in Year 6. $4 of S's gain is an intercompany gain ($10 gain x B's 40% partial inclusion ratio) and is deferred. S's remaining $6 non-intercompany gain is taken into account currently in Year 6. 
Matching rule. In each of Years 6 through 10, B's corresponding item is its $12 depreciation deduction ($60 basis / 5-year life). If S and B were divisions of a single corporation, the recomputed depreciation deduction would be the $10 annual depreciation for Years 6 through 10 based on S's $100 basis, plus an additional $1.20 of depreciation attributable to the $6 increase in basis resulting from S's non-intercompany gain ($6 non-intercompany gain / 5-year remaining life). Thus, in each of Years 6 through 10, S will take $.80 of its intercompany gain into account to reflect the difference between B's $12 corresponding depreciation and the $11.20 recomputed depreciation. 
Apportionment. Unless otherwise excluded, S's sales factor in Year 6 will reflect gross receipts of $36 from the non-intercompany portion of the sale to B. The remaining $24 ($60 x B's 40% partial inclusion ratio) will be eliminated from S's sales factor under subsection (a)(5)(A) of this regulation. The valuation of the equipment for purposes of B's property factor is S's cost basis of $100. (Because S's $10 total gain from the sale to B does not exceed the depreciation already deducted by S with respect to the equipment, the basis is not adjusted by the non-intercompany gain. If the total gain had exceeded the amount of depreciation already deducted by S, then the valuation of the property in B's property factor would be increased by the 60% non-intercompany portion of the excess gain.) The $100 valuation will be included in B's property factor in each year to the extent of B's partial inclusion ratio for that year. For example, the equipment would be reflected in B's property factor in Year 6 at $60 ($100 x 60%). In each of Years 6 through 10, S's $.80 intercompany gain will be treated as current apportionable business income. B's $12 depreciation deduction will be included in combined report business income in each year to the extent of B's partial inclusion ratio for that year. For example, $7.20 of B's depreciation deduction would be included in combined report business income in Year 6 ($12 depreciation deduction x 60% partial inclusion ratio). 
Example 12: Decreasing partial inclusion ratio. 
Facts. Assume the same facts as in Example 8, except that B does not sell the land to Y in Year 5. In Year 6, B's partial inclusion ratio is 25%, a 62% decrease from B's Year 1 ratio of 66% (41% difference between 66% Year 1 ratio and 25% Year 6 ratio, divided by 66% Year 1 ratio, equals 62%). 
Acceleration rule. Under subsection (j)(3)(B)4. of this regulation, the acceleration rule will apply to take S's intercompany gain of $66 into account in Year 5 (immediately before the income year in which B's partial inclusion ratio falls below the 50% threshold). 
Example 13: Election made under subsection (j)(3)(B)5. of this regulation. 
Facts. Assume the same facts as in Example 12, except that the taxpayer elects under subsection (j)(3)(B)5. of this regulation to have the acceleration rule apply to take into account only a proportionate share of the intercompany item. B's partial inclusion ratio is 33% in Year 7, 16% in Year 8, and 8% in Year 9. 
Acceleration rule. In Year 6, $40.92 of S's intercompany gain would be taken into account ($66 intercompany gain multiplied by the 62% proportionate decrease between B's 66% Year 1 ratio and B's 25% Year 6 ratio). B's partial inclusion ratio rose in Year 7; but the Year 8 partial inclusion ratio represented a new low point. At 16%, the Year 8 partial inclusion ratio was 76% below the Year 1 ratio of 66% (50% difference between 66% Year 1 ratio and 16% Year 8 ratio, divided by 66% Year 1 ratio, equals 76%). Accordingly, $9.24 of S's intercompany gain would be taken into account in Year 8 ($66 intercompany gain x 14% incremental difference between 76% decrease and the 62% decrease that was previously recognized). In Year 9, B's partial inclusion ratio fell below the 10% floor, so S's remaining intercompany gain of $15.84 is taken into account. 
(4) Earnings and profits. The timing rules of this regulation apply to the calculation of California earnings and profits. Therefore, the California earnings and profits of S will not reflect S's intercompany items until those items are taken into account under this regulation. 
(5) Foreign country operations. To the extent that foreign country operations are included in the combined report, and the corporations engaging in those operations are not required to report intercompany transactions under a similar deferral method for federal income tax purposes or any other purposes, then intercompany transactions involving those foreign operations may be reported using the method used for consolidated financial reporting purposes if that method reasonably reflects income and approximates the result that would be obtained from use of the rules in this regulation. However, adjustments may be permitted or required for any transaction or series of transactions for which the financial reporting method does not produce a result which reasonably approximates the results that would have been obtained under this regulation. 
(6) (Reserved for pass-through entity rules.) 
(7) If the taxpayer fails to disclose its DISA balance on its annual tax return, the staff of the Franchise Tax Board may, in its discretion, require the amounts in the undisclosed DISA accounts to be taken into account in part or in whole in any year of such failure. 
(8) Recordkeeping. Intercompany and corresponding items shall be reflected on permanent books and records (including work papers). See also Title 18, California Code of Regulations, section 19141.6. 
(k) Effective date. This regulation applies to intercompany transactions occurring on or after January 1, 2001. 
NOTE

Authority cited: Sections 19503 and 25106.5, Revenue and Taxation Code. Reference: Section 25106.5-1, Revenue and Taxation Code.
HISTORY

1. New section filed 12-28-2000; operative 1-1-2001 pursuant to Government Code section 11343.4(d) (Register 2000, No. 52). 
§25106.5-2. Capital, Section 1231 of the Internal Revenue Code, and Involuntary Conversion Gains and Losses.
Note     •     History

(a) Gains or losses from the sale or exchange of a capital asset (or gains or losses treated as capital gains or losses under Subchapter P of Chapter 1 of Subtitle A of the Internal Revenue Code (hereafter also described as capital gains and losses)), property described by Section 1231(a)(3) of the Internal Revenue Code (Section 1231 property), or property subject to an involuntary conversion shall be removed from the total separate net income of each member of a combined reporting group and shall be apportioned and allocated as provided in this regulation. Any remaining combined report business income shall be apportioned to the taxpayer members without regard to gains or losses described by this subsection. However, the effect of removal of such gains and losses from the total separate net income of the members shall not by itself have an effect upon the apportionment factors of the group or any of its members. 
Example: Assume a member of a combined reporting group sells property that gives rise to a capital gain which constitutes a “sale” within the meaning of section 25120(e) of the Revenue and Taxation Code. That sale will be reflected in the sales factor (unless otherwise excluded by operation of Section 25137), notwithstanding the fact that the capital gains are subject to the special rules prescribed by this regulation. 
(b) Before any netting of gains and losses from the sale or exchange of assets in the classes of long or short term capital assets, Section 1231 property, or property subject to an involuntary conversion, such gains and losses are classified as business income or loss, or nonbusiness income or loss, as the case may be. 
(c) Each member's combined report business income resulting from gains and losses from the sale or exchange of capital assets, Section 1231 property, and involuntary conversions are then assigned to the accounting period of the principal member in accordance with the procedures of Section 25106.5-4(a) through (c) of the California Code of Regulations. All of the members' business gains and losses in each class are aggregated and then apportioned, before netting of gain or loss between classes, to each taxpayer member using the apportionment factors applicable to the rest of the members' combined report business income, to arrive at the taxpayer member's California source gain or loss, for the respective class of income or loss. The resulting California source gain or loss for each respective class is then adjusted to align such income to the income year of the taxpayer member to which it relates in accordance with the procedures of Section 25106.5-4(d) of the California Code of Regulations. 
(d) Nonbusiness gains and losses from the sale or exchange of capital assets, Section 1231 property, and involuntary conversions which are allocated to California, and business gains and losses from such transactions which are apportioned to California (including business gains and losses from other combined reporting groups, if any), are then netted by each taxpayer member using the rules of Sections 1231 and 1222 of the Internal Revenue Code, without regard to any of the taxpayer member's gains or losses from the sale or exchange of capital assets, Section 1231 property, and involuntary conversions which are sourced to another state.
(e) Any California source net Section 1231 gain of a member produced in the application of the preceding subsection (d) shall be treated as California source ordinary income to the extent that the taxpayer member had California source Section 1231 losses in preceding income years, in accordance with the provisions of Section 1231(c) of the Internal Revenue Code. 
(f) Any resulting California source income (or loss, if the loss is not subject to the limitations of Section 1211 of the Internal Revenue Code) of a taxpayer member produced by the application of the preceding subsections of this regulation shall then be applied to all other California source income or loss of that member. 
(g) Capital Loss Carryforward. Any resulting California source net capital loss, which is required to be carried forward under the rules of Section 1212, Internal Revenue Code, as modified by Section 24990.5, Revenue and Taxation Code, shall be treated by the taxpayer member as a California source short-term capital loss for the applicable member's income year of the carryover.
(h) This regulation shall apply to all income years open to adjustment under applicable statutes of limitation. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25106.5, Revenue and Taxation Code.
HISTORY

1. New section filed 7-13-99; operative 8-12-99 (Register 99, No. 29).
2. Amendment of subsections (a), (d) and (g) filed 11-1-2000; operative 12-1-2000 (Register 2000, No. 44).
§25106.5-3. Accounting Methods and Elections.
Note     •     History

(a) Except as otherwise provided by this regulation or other regulations under Section 25106.5 of the Revenue and Taxation Code, the taxpayer members of a combined reporting group may elect to determine the total separate net income of each member of the group under accounting methods and other elections as authorized by Division 2, Part 11 of the Revenue and Taxation Code, independently of the total separate net income of other members of the combined reporting group. 
(1) Once an accounting method or other election is made for each member, that member's net income must be consistently treated in all combined reports which characterize that income as combined report business income. In the event that the taxpayer members do not file in a consistent manner, the Franchise Tax Board may, in its discretion, resolve the inconsistency as it deems necessary or appropriate, taking into account the totality of facts and circumstances relating to the applicable accounting methods or elections. 
Example: Corporations A, B, and C are members of a combined reporting group. Corporations A and B are taxpayer members of the group. Corporations A and B do not elect to file a group return. In the combined report which Corporation A attaches to its return, Corporation A computes Corporation C's income by electing to expense research and development expenditures. However, in the combined report which Corporation B attaches to its return, Corporation B computes Corporation C's income by electing to capitalize research and development expenditures. Because Corporations A and B did not determine Corporation C's income consistently, in an audit examination, the Franchise Tax Board may resolve the consistency in any manner which it deems appropriate, taking into account the totality of facts and circumstances of the election. 
(2) Once an accounting method or election is applied to income included in a combined report, the election is irrevocable (unless expressly revocable under the applicable provisions of Division 2, Part 11 of the Revenue and Taxation Code). If, under the provisions of Division 2, Part 11, an accounting method or election must continue to be applied in a subsequent tax period, the accounting method or election made in the tax period of the election shall apply to the net income of that member in such subsequent period. This subsection shall also apply with respect to that member if it joins another combined reporting group or later becomes a taxpayer which is not a member of a combined reporting group. 
(b) In the event of an audit examination (represented by a notice of additional tax proposed to be assessed, a notice of proposed overpayment, notice of action on a claim for refund, or a letter from the tax auditor regarding a computational effect which does not result in a current year adjustment (e.g., a computation of net operating loss carryover)) which determines that a corporation, which is not itself a California taxpayer, was erroneously excluded from the combined reporting group, the taxpayer members of the combined reporting group may elect to determine the net income of that corporation under accounting methods and other elections as authorized by Division 2, Part 11 of the Revenue and Taxation Code, whether or not such accounting methods or other elections are otherwise required to be made on a timely filed return. For an election under this subsection to be effective, all taxpayer members must agree to the same accounting method or other election for the erroneously excluded entity. 
(1) The election described in subsection (b) of this regulation cannot be made if the erroneously excluded entity was obligated to file a U.S. income tax return, and made an election on its U.S. return with respect to the available election or accounting method. In such case, the federal election or accounting method shall apply. 
(2) Time for making a subsection (b) election. An election or a selection of an accounting method under subsection (b) of this regulation should ordinarily be made during the course of the audit examination, so that the results of that election can be reflected in the applicable notice relating to the examination. However, except for claims for refund, the election or accounting method authorized under this subsection must be made no later than 60 days after the date of the applicable notice, and such election or accounting method must be clearly specified. The Franchise Tax Board may extend such 60-day period for good cause, not to exceed 180 days. In the case of a claim for refund which includes an erroneously excluded entity in the combined reporting group, a request for a subsection (b) election must be included in the claim itself or presented before issuance of the notice of action on the claim. Information to substantiate the effect of the election or accounting method shall be provided within a reasonable time after the election under this subsection is made. 
(3) Elections made under subsection (b) of this regulation may be made on a protective basis, contingent upon a final determination that the excluded member was properly included in the combined reporting group, and do not operate as a concession that the inclusion of the corporation in the combined reporting group was correct. In the event of a protective election, substantiation of the effect of the election may be deferred until the final determination is made whether the excluded member was properly included in the combined reporting group. However, the members of the combined reporting group (as determined) must retain all records to substantiate the effect of the election, under Section 19141.6 of the Revenue and Taxation Code and the regulations thereunder, and assumes the effects described therein associated with failure to retain the appropriate records.
(4) An election under subsection (b) of this regulation shall only be invoked for the first set of income years under examination, in the first year for which the erroneously excluded member's accounting method or election is applicable. 
Example: Taxpayer was under a single audit examination for income years 1992, 1993, and 1994. In the course of the examination, the auditor proposed to include Corporation A, a nontaxpayer, in the combined reporting group. Had Corporation A been originally included in the combined reporting group, the taxpayer would have been able to make an election to expense research and development costs on behalf of Corporation A. The first year in which such eligible costs were incurred was 1993. The taxpayer did not contest the inclusion of Corporation A in the combined reporting group, and did not invoke this subsection to elect to expense such costs. The taxpayer was reexamined for income years 1995, 1996, and 1997, and the auditor again proposed to include Corporation A in the combined reporting group. The taxpayer cannot invoke this section to expense research and development costs for 1995-1997, and may only apply for permission to change that method on a timely basis for a current income year. 
(5) In the event that an audit examination determines that a California taxpayer, which had previously filed a California return, was erroneously excluded from the combined reporting group, the accounting methods and elections reflected in the return of that taxpayer shall continue to apply. 
(c) This regulation shall apply to income years open to adjustment under applicable statutes of limitation. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25106.5, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect renumbering former section 25137-6 to section 25106.5-3 and amending subsection (e)(1) and Note filed 2-14-95 pursuant to section 100, title 1, California Code of Regulations; operative 3-13-95 (Register 95, No. 7).
2. Renumbering of former section 25106.5-3 to new section 25106.5-10 and new section filed 7-13-99; operative 8-12-99 (Register 99, No. 29).
§25106.5-4. Fiscalization.
Note     •     History

(a) If the accounting period of a principal member and one of the other members of a combined reporting group do not begin and end on the same dates, adjustments must be made to the other members' combined report business income and apportionment data to assign an appropriate amount of those values to the accounting period of the principal member in order for total group combined report business income to be apportioned. Each member of the group should generally use combined report business income and apportionment data from its books of account earned during the accounting period of the principal member. This will require an interim closing of the books for members whose normal accounting period differs from the principal member. However, a pro rata method of converting income to the principal member's accounting period will be accepted as long as the method does not produce a material misstatement of income apportioned to this state. Unless otherwise permitted or required by the Franchise Tax Board, the treatment of both the income and the apportionment data of any particular member must use the same method. If one method was used to account for a member's income and apportionment data in the combined report for the principal member's preceding accounting period and another method will be used in the combined report for the principal member's next accounting period, adjustments to income and apportionment data of the member shall be made to prevent income and apportionment data from being omitted or duplicated. 
(b) Interim closing method. 
(1) The combined report business income and expense of a member of the combined reporting group is determined by reference to the sum (or net) of such income from the actual books and records (determined under the Revenue and Taxation Code) of that member for each of the partial accounting periods of the member shared with the principal member. For example, if the principal member has an accounting period ending on December 31, 1997, and another member has an accounting period ended March 31, 1998, the other member determines its income from its actual books and records for the partial accounting periods beginning January 1, 1997 and ending March 31, 1997, and from April 1, 1997 and ending December 31, 1997. 
(2) The apportionment data (property, payroll, and sales in California, and everywhere) shall also be determined by reference to the member's books and records, as provided in Sections 25129-25137 of the Revenue and Taxation Code and the regulations thereunder, for the appropriate partial accounting year. Under the interim method, the property factor computation should reflect the actual, not prorated, property owned and rented during the principal member's accounting period. 
Example 1. If the principal member has an accounting period ending on December 31, 1997, and another member has an accounting period ended March 31, 1998, and monthly weighted averaging of the property factor is not required under Section 25131, Revenue and Taxation Code, the other member will determine its total property and its California property on the dates of January 1, 1997 and December 31, 1997 from its actual books and records. 
Example 2. Assume the same facts as Example 1, except monthly weighted averaging is required. In that case, the actual monthly California property and total property values of the member required to fiscalize to accounting period of the principal member will be determined for each of the twelve months during the 1997 calendar year from that member's actual books and records. 
(3) Interim combined report business income and apportionment data from the respective partial periods is then combined with the income and apportionment data of the accounting period of the principal member, along with business income and apportionment data of other members of the combined reporting group for the same period, using, if applicable, the methods prescribed in this regulation. 
(c) Pro rata method. 
(1) At the election of the members of a combined reporting group, fiscalization of combined report business income of one or more members of the group to the accounting period of the principal member may be determined by use of a pro rata method. However, the election is not available if that method produces a material misstatement of income. Under the pro rata method, the apportionment data and combined report business income from the member's adjusted separate books of account (i.e., adjusted to reflect the determination of income under the Revenue and Taxation Code) is assigned to the respective portion of the principal member's accounting period based on the ratio of months in common with that member. For example, if the principal member's accounting period ends on December 31, 1997, a member whose income year ends on March 31 will reflect 3/12ths of its adjusted separate combined report business income and its payroll and sales for its income year ended March 31, 1997 in the December 31, 1997 accounting period of the principal member. That member will then reflect 9/12ths of its adjusted separate combined report business income and its payroll and sales for its income year ended March 31, 1998 in the December 31, 1997 accounting period of the principal member. 
(2) For members utilizing the pro rata method, if the property factor is not required to be determined on a monthly weighted averaging method described by Section 25131 of the Revenue and Taxation Code, the property factor data used for a member using that method will be the pro rata portion of the member's property numerator and denominator values for its respective separate accounting periods, reflecting beginning and ending average property values for those separate accounting periods. 
Example. Assume that the principal member's accounting period ends on December 31, 1997, and another taxpayer member's income year ends on March 31. That member is required to fiscalize its income to the accounting period of the principal member. The fiscalizing member determines its California beginning and ending property, and its total beginning and ending property, to determine its California and total property for the period ended March 31, 1997. That member then makes a comparable determination for the period ended March 31, 1998. The fiscalizing member will apply 3/12ths of the California property and total property for the March 31, 1997 income year and 9/12ths of the California property and total property for the March 31, 1998 income year to the principal member's December 31, 1997 accounting period for computation of the property factor for the combined reporting group. 
(3) The combined report business income and apportionment data from the respective partial periods is then combined with the income and apportionment data of the accounting period of the principal member, along with business income and apportionment data of other members of the combined reporting group for the same period, using, if applicable, the methods prescribed in this regulation. The combined business income is then apportioned to each of the taxpayer members of the group. 
(4) In the event that the pro rata method requires the determination of income and apportionment data of a corporation whose accounting period has not yet closed, and the information cannot be obtained in time for the other members to file an accurate return, the income and apportionment data for that period shall be estimated based on available information. If the use of actual income and apportionment data results in a material change in the tax liabilities of the taxpayer members of the group, the taxpayer members must file an amended return to reflect the change. 
(d) After the combined reporting group's income is apportioned to California, California source combined report business income of a taxpayer member is then proportionately assigned to the applicable portion of that member's income year, based on the number of months falling within the common accounting period of the principal member. For example, if the principal member's accounting period year ends on December 31, 1997, a taxpayer member whose income year ends on March 31 will reflect 3/12ths of its share of apportioned income from the principal member's December 31, 1997 accounting period in its income year ended March 31, 1997, and 9/12ths of its share of such income in its income year ended March 31, 1998. The resulting income from such segments is then aggregated (or netted) together for the member's income year to determine that member's business income from California sources attributable to the combined reporting group. 
(e) This regulation shall apply to income years open to adjustment under applicable statutes of limitation. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25106.5, Revenue and Taxation Code.
HISTORY

1. New section filed 7-13-99; operative 8-12-99 (Register 99, No. 29).
§25106.5-5. Interest Offset.
Note     •     History

Nothing in the regulations promulgated under this section shall be applied in a manner as to supersede final judicial interpretations regarding the application of the interest offset (Section 24344(b) of the Revenue and Taxation Code) with respect to members of a combined reporting group. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25106.5, Revenue and Taxation Code.
HISTORY

1. New section filed 7-13-99; operative 8-12-99 (Register 99, No. 29).
§25106.5-6. California Source Carryover Items.
Note

(Reserved)
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25106.5, Revenue and Taxation Code.
§25106.5-7. Charitable Contributions.
Note

(Reserved)
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25106.5, Revenue and Taxation Code. 
§25106.5-8. Alternative Minimum Tax.
Note

(Reserved)
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25106.5, Revenue and Taxation Code.
§25106.5-9. Partial Combined Reporting Periods.
Note     •     History

(a) If a member of a combined reporting group is not a member of the combined reporting group during the entire accounting period of the principal member (e.g., because of lack of unity of ownership under Section 25105, Revenue and Taxation Code, or termination of a unitary relationship), modified combined reporting procedures apply as provided herein. Business income and apportionment data of a member is included in the combined report of the remaining members only for the period (or partial period) for which all of the members are in the combined reporting group. Thus, if a member of a combined reporting group enters or leaves the group at a time during the middle of the accounting period of the principal member, a separate combined report determination is required to be made only for the partial period of combination. The partial period combination is made using the same combined reporting procedures for a 12 month period, except that income, payroll, property and sales data will reflect only the amounts applicable to the partial period. A pro rata method may be used to determine each member's income and apportionment data for the partial period, unless it results in a material misstatement of income. If so, the interim closing method must be used. (See Section 25106.5-4 of the California Code of Regulations for a description of the pro rata and interim closing methods.) Establishment or termination of a combined reporting relationship will not, by itself, cause a short period filing requirement. However, in many cases, the effect of leaving or entering an affiliated group of corporations cause a short period filing requirement under other provisions of law, independently of this regulation. 
Example 1: Corporations A, B, and C are members of a combined reporting group. Corporation A is the principal member, and has a calendar accounting period. On May 1, Corporation A acquires Corporation D. Because of substantial preexisting business relationships, Corporation D immediately becomes a member of the combined reporting group on that date. Only Corporations B and C are taxpayer members. As provided in this subsection, two combined report calculations are required. The first combined report calculation includes the combined report business income and apportionment data of Corporations A, B, and C from January 1 through April 30. The combined report business income for that period is then apportioned to taxpayer members B and C, for the period January 1 through April 30. The second combined report calculation includes the combined report business income and apportionment data of Corporations A, B, C, and D from May 1 through December 31. The combined report business income for that period is then apportioned to taxpayer members B and C for the period May 1 through December 31. 
(b) If a taxpayer member's income year does not begin and end on the same dates as the partial period combination (e.g., a short-period return is not required), the taxpayer member's California source income earned during that portion of the income year before and after the partial period combination is aggregated (or netted) with the taxpayer member's California source combined report income from the partial period combination. On occasion, the California source income so described will include income from two or more partial period combinations. 
Example 2: Corporation P owns all of the stock of Corporation S for the 12 month period ended December 31, 1998. Corporations P and S are unitary and are obligated to file a combined report for the entire period. Corporation P acquires 51% of the stock possessing voting power of Corporation A on March 7, 1998. The acquisition does not compel the filing of a short period return by Corporation A. All of the Corporations have a calendar accounting period. Corporation A becomes unitary with Corporations P and S on July 1, 1998 and is obligated to file a combined report with Corporations P and S for the partial period beginning on July 1, 1998. The income and apportionment data of Corporation A for the period prior to July 1, 1998 cannot be included in a combined report with Corporations P and S. Under the rule prescribed by subsections (a) and (b) of this regulation, two separate partial period combined report calculations are required. One is for the P-S group for the partial period ended June 30, 1998, and the other is for the P-S-A group for the partial period from July 1, 1998 to December 31, 1998. Assume that Corporation P's California source combined report income is $250,000 for the partial period ended June 30, 1998 and is ($60,000) for the partial period ended December 31, 1998. Corporation P's California source combined reporting income for its income year ended December 31, 1998 is $190,000. Assume that Corporation A has California source income from its unaffiliated and nonunitary partial period (or from another combined reporting group, if applicable) of $50,000 and California source combined reporting income of ($30,000) for the combined report partial period after it joined the combined reporting group. Corporation A's California source income for its income year ended December 31, 1998 is $20,000. 
(c) In lieu of partial period combination method described by subsection (a), the taxpayer members of the commonly controlled group may elect to utilize the method provided in this subsection. The election must be consistently used by all taxpayer members. The election may not be utilized if the results of that method, compared with the provisions of subsection (a) of this regulation, results in a material misstatement of the taxpayer member's California source income. Under the method described in this subsection, the partial period combined reporting income of a member, which is not in a combined reporting relationship with the principal member for the entire accounting period of the principal member, is considered to be reflected by the relative weighting of the apportionment data of the partial period member to the apportionment data of the rest of the combined reporting group for the accounting period of the principal member. The method applies as follows: 
(1) The principal member's income and apportionment data are determined for its entire accounting period (usually a 12 month period). All other members which were members of the combined reporting group during the entire period of the principal member also include their income and apportionment data for that period, using fiscalization methods, if appropriate. 
(2) Members who were not members of the combined reporting group for the entire accounting period of the principal member include in the combined report only their income for the partial period during which they were a member. Normally this income will be determined by an interim closing of the member's books of account (determined in accordance with the Revenue and Taxation Code). Similarly, the apportionment data of that member is included only for that same partial period. 
(3) Property factor data for the partial period member (both California property and total property) must be adjusted to reflect the fact that the property was not utilized in the combined reporting group for the entire period of the principal member. For example, if the partial period member was in the combined reporting group for only 7 months of the 12 month accounting period of the principal member, and monthly weighted averaging is not required under Section 25131 of the Revenue and Taxation Code, only 7/12's of the member's average California and total property for the period are reflected in the combined report. 
(4) Apportionment is then computed using the amounts included in subsections (c)(1) through (3) of this regulation, as if the partial period members were members for the entire accounting period of the principal member. The amounts apportioned to the individual taxpayer members then reflects the member's California source combined reporting income for the partial period. That member then aggregates (or nets) California source combined reporting income with its California source income from other activity to compute income subject to taxation for the entire income year. 
Example 3: Assume the same facts as provided in Example 1, except that the members of the group elect to report under subsection (c) of this regulation. Under that election, Corporation A, B, and C determine their income and apportionment data for the entire 12 months of the calendar year. Corporation D determines its income and apportionment data for the period May 1-December 31. However, because Corporation D was not a member of the combined reporting group for the entire calendar year, the average of its beginning and ending property factor values for the combined reporting period must be multiplied by 8/12ths to reflect a weighted average value of that property in the principal member's accounting period. If monthly weighted average property values are required under Section 25131 of the Revenue and Taxation Code and the regulations thereunder, the average monthly property values for the months that Corporation D was a member of the combined reporting group are totaled and divided by 12, to determine the weighted average of Corporation D's property in the property factor. The California source combined report income of Corporations B and C are then determined as if Corporation D's income and apportionment data were entirely earned in the principal member's accounting period. 
Example 4. Assume the same facts as Example 3, except that Corporation D is a calendar year California taxpayer, and its addition to the combined reporting group did not cause a short period filing requirement. Corporation D's California source combined report income, determined under this subsection, would be treated as earned for the period May 1 through December 31. That California source income would be aggregated (or netted) with its other California source income for the entire calendar year, as provided in subsection (b) of this regulation. 
(d) This regulation shall apply to income years open to adjustment under applicable statutes of limitation. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25106.5, Revenue and Taxation Code.
HISTORY

1. New section filed 7-13-99; operative 8-12-99 (Register 99, No. 29).
§25106.5-10. 
Note     •     History

(a) In General. 
(1) Unitary Business. A taxpayer is engaged in a unitary business (or a single business within the meaning of Reg. 25120(b)) when its activities within the state contribute to or are dependent upon its activities without the state. A unitary business exists when there is unity of ownership, unity of operation and unity of use. 
(2) Translation Method for Determining Income. The translation method to be used for determining income shall be the “profit and loss method” as set forth in this regulation. This method excludes unrealized exchange rate gain or loss resulting from the restatement of assets or liabilities, while taking into account exchange gains or losses attributable to income transactions. 
(3) General Applicability of UDITPA Regulations. The general regulations for UDITPA, Regs. 25120--25139, inclusive, shall be applicable except as otherwise provided in this regulation. 
(b) Determination of Income. 
(1) The income of a unitary business with operations in foreign countries shall be computed in the following manner: 
(A) A profit and loss statement shall be prepared for each foreign branch or corporation in the currency in which the books of account of the branch or corporation are regularly maintained. 
(B) Adjustments shall be made to the profit and loss statement to conform it to the accounting principles generally accepted in the United States for the preparation of such statements except as modified by this regulation. 
(C) Adjustments shall be made to the profit and loss statement to conform it to the tax accounting standards required under Division 2, Part 11 of the Revenue and Taxation Code. 
(D) The profit and loss statement of each branch or corporation, whether U.S. or foreign, shall be translated into the currency in which the parent company maintains its books and records in accordance with subsection (b)(4). 
(E) Business and nonbusiness income as determined under California law shall be identified and segregated. For general definition, rules and examples for determining business and nonbusiness income, see Regulation 25120. 
(F) Nonbusiness income shall be allocated to a specific state pursuant to the provisions of Sections 25124 to 25127, inclusive of Division 2, Part 11 of the Revenue and Taxation Code. 
(G) Business income shall be included in the combined report prepared for the unitary business and shall be apportioned on the basis of the appropriate formula for the business. 
(H) Income from California sources shall be expressed in dollars in accordance with subsection (b)(4) and the taxes computed accordingly. 
(2) In lieu of the procedures set forth in subsection (b)(1) and subject to the determination of the Franchise Tax Board that it reasonably reflects income, a unitary business with operations in a foreign country may determine its income on the basis of the consolidated profit and loss statement prepared for the related corporations of which the unitary business is a member which is prepared for filing with the Securities and Exchange Commission. If the business is not required to file with the Securities and Exchange Commission, the consolidated profit and loss statement prepared for reporting to shareholders and subject to review by an independent auditor may be used. 
(A) Adjustments shall be made, if necessary to: 
1. conform to the accounting principles generally accepted in the United States for the preparation of such statements, except as modified by this regulation; 
2. conform to the tax accounting standards as required under Division 2, Part 11 of the California Revenue and Taxation Code; and 
3. eliminate unrealized gain and losses resulting from the restatement or revaluation of assets or liabilities to reflect changes or fluctuations in currency values. 
(B) Business and nonbusiness income as determined under California law shall be identified and segregated. For definitions, rules and examples for determining business and nonbusiness income, see generally Regulation 25120. 
(C) Nonbusiness income shall be allocated to specific states pursuant to the provisions of Sections 25124 to 25127, inclusive of the Revenue and Taxation Code. 
(D) Business income shall be included in the combined report prepared for each unitary business and will be apportioned on the basis of the appropriate formula for each business. 
(E) Income from California sources shall be expressed in dollars in accordance with subsection (b)(4) and the taxes computed accordingly. 
(3) For purposes of subsections (b)(1)(B), (b)(1)(C), and (b)(2)(A), the following rules shall apply: 
(A) Accounting adjustments to be made to conform profit and loss statements to those utilized in the United States--
1. Include but are not limited to the following: 
a. Clear reflection of income. Any accounting practice designed for purposes other than the clear reflection on a current basis of income and expense for the taxable year shall not be given effect. For example, an adjustment shall be required where an allocation is made to an arbitrary reserve out of current income.
b. Physical assets, depreciation, etc. All physical assets, including inventory when reflected at cost, shall be taken into account at historical cost computed either for individual assets or groups of similar assets. The historical cost of such an asset shall not reflect any appreciation or depreciation in its value or in the relative value of the currency in which its cost was incurred. Depreciation, depletion, and amortization allowances shall be based on the historical cost of the underlying asset, and no effect shall be given to any such allowance determined on the basis of a factor other than historical cost.
c. Valuation of assets and liabilities. Any accounting practice which results in the systematic undervaluation of assets or overvaluation of liabilities shall not be given effect, even though expressly permitted or required under foreign law, except to the extent allowable under subsection (b)(3)(B). For example, an adjustment shall be required where inventory is written down below market value. 
d. Income equalization. Income and expense shall be taken into account without regard to equalization over more than one accounting period; and any equalization reserve or similar provision affecting income or expense shall not be given effect, even though expressly permitted or required under foreign law. 
2. Currency gains or losses on closed transaction are includible, but no adjustments shall be made, or otherwise reflected, for unrealized gains or losses resulting from the restatement or revaluation of assets or liabilities to reflect changes or fluctuations in currency values. A closed transaction is one where any foreign exchange position taken by a corporation has been terminated by exchanging the foreign currency for the currency in which the individual corporation maintains its books and records and normally conducts its business affairs. In the case of a borrowing in a foreign currency, the transaction shall not be deemed closed until repayment is made. 
(B) The tax accounting adjustments to be made shall include, but are not limited to, the following: 
1. Accounting methods. The method of accounting shall reflect the provisions of Section 24651 of the Revenue and Taxation Code and the regulations thereunder. 
2. Inventories. Inventories shall be taken into account in accordance with the provisions of Sections 24701 through 24706 of the Revenue and Taxation Code and the regulations thereunder, except Regulation 24702--24706(b)(5). 
3. Depreciation, depletion, and amortization. Depreciation, depletion, and amortization are to be computed in accordance with California law. 
4. Elections. 
a. Elections required to be made for purposes of determining income under Division 2, Part 11 of the Revenue and Taxation Code of all California reporting entities shall be made in accordance with applicable provisions of such law and the regulations adopted pursuant thereto. 
b. Elections required to be made for purposes of determining income under Division 2, Part 11 of the Revenue and Taxation Code for entities which are not subject to taxation by California but are required to be included in the combined report for the unitary business shall be made by agreement of all entities required to report to California in accordance with applicable provisions of such law and the regulations adopted pursuant thereto. If agreement cannot be reached, see California Code of Regulations Section 25106.5-3. 
(C) No adjustment shall be required under subsections (b)(3)(A) and (b)(3)(B) unless it is material. Whether an adjustment is material depends upon the facts and circumstances of the particular case, including the amount of the adjustment, its size relative to the general level of the corporation's total assets and annual profit or loss, the consistency with which the practice has been applied, and whether the item to which the adjustment relates is of a recurring or a nonrecurring nature. 
(4) For purposes of determining income, necessary translations shall be made at the following exchange rates: 
(A) Depreciation, depletion, or amortization shall be translated at the appropriate exchange rate for the translation period in which the historical cost of the underlying asset was incurred. 
(B) All other items shall be translated at either the end-of-year exchange rate or at the simple average exchange rate for the translation period. Income repatriated during the year shall be translated at the exchange rate at date of repatriation. It is presumed that the translation rate used in preparing the consolidated profit and loss statement for financial reporting purposes is proper absent a showing that some other method is appropriate. 
A change from end-of-year rates or average rates may not be made without the permission of and on such conditions as the Franchise Tax Board may prescribe. 
(c) Computation of Factors. In computing the formula factors, the following rules shall apply: 
(1) Property Factor. 
(A) Fixed assets shall be valued at original cost as defined in Reg. 25130(a) and translated at the exchange rate as of the date of acquisition. 
(B) Rented property, capitalized at eight times its annual rental rate, shall be translated at the simple average of the beginning and end-of-year exchange rate. 
(C) Inventories shall be valued at original cost and shall be translated at the exchange rate as of the date of acquisition. 
(D) For purposes of calculating the property factor of financial corporations, financial assets are translated at the year-end rate and are defined as assets reflecting a fixed amount of currency, such as cash on hand, bank deposits, and loans and accounts receivable. Securities held, or reasonably expected to be held, for less than six months shall be translated at year-end rates. If a security is held, or reasonably expected to be held, for more than six months, it shall be translated at the appropriate exchange rate for the translation period in which the historical cost of the asset is determined. 
(E) The property factor shall be computed in the currency of the parent company unless the taxpayer requests and the Franchise Tax Board determines that computing the factor in dollars or any other currency fairly reflects the taxpayer's activities in California. 
(2) Payroll and Receipts Factors. 
(A) Translation shall be made at the simple average of the beginning and end-of-year exchange rates unless there is a substantial fluctuation, as described in subsection (d)(2). 
(B) Where the value of the foreign currency does fluctuate substantially, as described in subsection (d)(2), the exchange rate appropriate to that period shall be either (1) a simple average of the month-end rates, or (2) a weighted average taking into account the volume of transactions (reflected by the amount being translated) for the calendar months ending with or within that period. 
(C) In computing the payroll and receipts factors, translation shall be made into the parent company's currency in order to properly determine the percentage factor to be used unless the taxpayer requests and the Franchise Tax Board determines that computing the factors in dollars or any other currency fairly reflects the taxpayer's activities in California. 
(d) Exchange Rates. 
(1) For purposes of preparing combined reports, exchange rates may be derived from any source which is demonstrated to the satisfaction of the Franchise Tax Board to reflect actual transactions conducted in a free market and involving representative amounts. In the absence of such demonstration, the exchange rates taken into account in computation of the earnings and profits of the foreign corporation shall be determined by reference to the free market rate set forth in the pertinent monthly issues of International Financial Statistics or successor publications of the International Monetary Fund. 
(2) In general, the extent of fluctuation is substantial if the closing rate for any calendar month ending within the period varies by more than 10 percent from the closing rate for any preceding calendar month ending within the period. 
(e) Application of Regulation. 
(1) In computing the income and any of the factors required for a combined report, the Franchise Tax Board shall consider the effort and expense required to obtain the necessary information. In appropriate cases, such as when the necessary data cannot be developed from financial records maintained in the regular course of business, the Franchise Tax Board shall accept reasonable approximations. 
(2) A taxpayer may request an advance determination under subsections (b)(2), (b)(3)(C), (c)(1), (d)(1) or any other provision of this regulation by submitting a determination request to the Legal Branch of the Franchise Tax Board. Such a determination shall be made on an individual basis and shall be limited to the particular facts or circumstances set forth in the determination request. The facts and circumstances upon which a determination is made remain subject to review. Failure to request or to obtain a favorable advance determination will not preclude consideration of requested variances in subsequent proceedings. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25106.5, Revenue and Taxation Code.
HISTORY

1. Renumbering of former section 25106.5-3 to new section 25106.5-10 filed 7-13-99; operative 8-12-99 (Register 99, No. 29).
§25106.5-11. Election to File a Group Return.
Note     •     History

(a) General. Every taxpayer subject to the California Corporation Tax Law is required to file its own tax return, including taxpayers that are members of a combined reporting group. Taxpayers subject to the California Corporation Tax Law that are members of a combined reporting group are required to attach a combined report to their tax returns. Notwithstanding these requirements, taxpayers subject to the California Corporation Tax Law that are members of a combined reporting group that includes another taxpayer that is also subject to the California Corporation Tax Law may annually elect to be included in a “group return” as provided for in this regulation. (See Regulation section 25106.5, subsections (b)(1), (3) and (13)).
(b) Requirements.
(1) In order to be eligible to make the election provided under this section, the electing key corporation must meet the definition of a “key corporation” as defined in Regulation section 25106.5, subsection (b)(14) in addition to meeting the following requirements, by either being:
(A) the parent corporation of the combined reporting group as defined in Regulation section 25106.5(b)(12)(A)(1), or
(B) if the parent corporation of the combined reporting group is not a taxpayer member, the taxpayer member with the largest California property factor numerator, and
(C) the key corporation's powers, rights and privileges must not be forfeited or suspended by the California Secretary of State and it must not have a petition with the United States Bankruptcy Court pending on the last day of the taxable year.
(2) A “taxpayer member” (see Regulation section 25106.5, subsection (b)(11)) is a corporation that:
(A) is required to file a return in this state under Revenue and Taxation Code section 18601,
(B) is a member of a combined reporting group, which includes the key corporation,
(C) has the same taxable year as the key corporation or has a taxable year wholly within the key corporation's taxable year, and
(D) has the same statutory return filing due date as the key corporation for the taxable year.
(c) Manner for Making the Election. An election to file a group return is made by the key corporation filing a California Form 100, Schedule R-7 of Schedule R, which identifies the name, California corporate number (if one has been assigned and provided to the taxpayer), federal employer identification number and total self-assessed tax liability of the affiliated taxpayer members of a combined reporting group that are intended to be included in the group return.
(d) Consequences of Making an Election.
(1) The election is binding on all the taxpayer members and the key corporation for all matters for the taxable year of the election.
(2) The key corporation shall file the group return. The group return satisfies the requirement for filing a California Form 100 for each taxpayer member listed on the key corporation's Schedule R-7.
(A) By signing the California Form 100, an officer of the key corporation is attesting that he has the legal authority to bind the key corporation to all of its duties.
(B) Failure of a taxpayer member to file its own return shall be deemed to be an acknowledgement that the officer of the key corporation possesses the authority to fulfill the taxpayer member's return filing obligation.
(C) A taxpayer member asserting that it is not properly included in a group return must independently satisfy its obligation to file a return.
(3) The key corporation is a surety for each taxpayer member for payments owed under the California Corporation Tax Law.
(4) The key corporation is an agent for each taxpayer member.
(5) Extensions for filing tax returns or waivers to extend the statute of limitations for issuing Notices of Proposed Assessments shall be executed by the key corporation and shall be effective for all taxpayer members.
(6) All notices regarding the liability of a taxpayer member may be sent to the key corporation and additional amounts due with respect to any taxpayer member may be assessed and billed to the key corporation and it shall be liable for payment of such amounts. Any refund or credit due to a taxpayer member may be made to the key corporation.
(7) If some or all of the corporations included in the election to file a group return are subsequently determined not to be members of the combined reporting group of the key corporation, then the key corporation and the electing taxpayer members shall be deemed to agree that any subsequent adjustment for any and all members included in the original group return may still be billed to or paid by the key corporation in the case of assessments and refunded to the key corporation in the case of overpayments.
(e) Duration of election to file group return. The election to file a group return for all matters for the taxable year of the election will remain in effect until 30 days following the receipt by the Franchise Tax Board of a written notice of termination of the election by any of the taxpayer members. The taxpayer member that is terminating the election must also notify the previously designated key corporation that the election is being terminated. The termination will only be applied prospectively. If the key corporation is terminating the election it must notify all of the taxpayer members. If an employee, agent or representative of the Franchise Tax Board is conducting an examination of a single group return at the time when any of the taxpayer members or a key corporation sends a written notice of termination to the Franchise Tax Board, the terminating taxpayer member or terminating key corporation must provide the employee, agent or representative of the Franchise Tax Board that is conducting the examination with a copy of the written notification of termination of the election.
(f) Failure or Inability of Key Corporation to Perform Its Duties. If the key corporation does not fulfill its obligation to pay any tax liability or to act on behalf of the taxpayer members, or if its powers, rights and privileges are forfeited or suspended at any time with respect to that taxable year, each taxpayer member may be independently assessed or billed for its own tax liability. In that event, each taxpayer member will be credited with taxes previously paid in accordance with the taxpayer member's self-assessed tax liability as indicated in the return data as filed. In the event that the self-assessed liabilities of the taxpayer members cannot be derived from the return data as filed, the individual liabilities of the each of the respective members may be determined by the Franchise Tax Board from data obtained during audit or supplied by the taxpayer members, using the best available information. If insufficient information is available to determine individual liabilities, the Franchise Tax Board, may, in its discretion, credit taxes paid in a manner that is reasonable under the circumstances.
(g) Curing an Invalid Election.
(1) In the event that a taxpayer fails to satisfy one or more of the conditions of this regulation, the Franchise Tax Board may, at the request of the taxpayer and at its own discretion, treat the election as being valid.
(2) In lieu of disallowing an election, the Franchise Tax Board may, at its own discretion, allow the taxpayer members to designate another taxpayer member in substitution for the key corporation originally designated in the election.
(h) Application. This regulation will only be applied prospectively from the effective date of the regulation.
NOTE

Authority cited: Sections 19503 and 25106.5, Revenue and Taxation Code. Reference: Section 25106.5, Revenue and Taxation Code.
HISTORY

1. New section filed 12-9-2005; operative 1-8-2005 (Register 2005, No. 49).
2. Change without regulatory effect amending subsection (a) filed 7-20-2011 pursuant to section 100, title 1, California Code of Regulations (Register 2011, No. 29).
§25110. Water's-Edge Group.
Note     •     History

(a) General. Revenue and Taxation Code section 25110 allows qualified taxpayers to elect, subject to the provisions of Revenue and Taxation Code section 25111, to account for and determine their income derived from or attributable to California sources by considering only the income and apportionment factors of those entities specified in Revenue and Taxation Code section 25110, subdivision (a). The election may be made by a single corporation engaged in one or several businesses or by a group of affiliated corporations.
(b) Definitions.
(1) Corporation. Unless otherwise specified, a “corporation” is defined by Revenue and Taxation Code section 23038.
(2) Affiliated corporation. Effective for taxable years beginning on or after January 1, 1995, an “affiliated corporation” is a corporation that is a member of a commonly controlled group as defined by Revenue and Taxation Code section 25105.
(3) Business income. “Business income” is defined by Revenue and Taxation Code section 25120, subdivision (a), and the regulations adopted pursuant thereto. Business income is subject to apportionment by formula among California and the other jurisdictions where the taxpayer has a taxable presence.
(4) Nonbusiness income. “Nonbusiness income” is defined by Revenue and Taxation Code section 25120, subdivision (d), and the regulations adopted pursuant thereto. Nonbusiness income is allocated to a specific jurisdiction.
(5) Unitary business. A “unitary business” consists of those activities required to be included in a combined report pursuant to Revenue and Taxation Code section 25101 and the cases decided thereunder by the United States Supreme Court, the courts of this State, and the California State Board of Equalization. Activities constitute a “unitary business” if unity of ownership, unity of operation, and unity of use are present, or if the activities carried on within the state contribute to or are dependent upon the activities carried on without the state, or if there is a flow of value between the activities. California Code of Regulations, title 18, section 25120, subsection (b), sets forth certain indicia and standards for determining whether activities constitute a single trade or business and are therefore unitary.
(6) Water's-Edge Group. “Water's-edge group” means all corporations or other entities whose income and apportionment factors are considered pursuant to Revenue and Taxation Code Section 25110 in computing the income of the individual taxpayer for the current taxable year which is derived from or attributable to sources within this state.
(c) Qualified taxpayer.
(1) In general. A taxpayer is qualified to make the election provided by Revenue and Taxation Code section 25110 if it meets two conditions. First, it must consent to the taking of depositions at the time and place most reasonably convenient to all parties from certain key individuals and to the acceptance of subpoenas duces tecum requiring the reasonable production of certain documents. Second, it must agree that dividends received by all members of the water's-edge group from certain entities shall be deemed to be functionally related and presumed to be business income. (See subsection (c)(3) of this regulation.)
(2) Depositions and subpoenas duces tecum.
(A) Consent.
1. Time of making consent. The consent to the taking of depositions and acceptance of subpoenas duces tecum shall be made at the time of the filing of the tax return upon which the water's-edge election is made.
2. Period of consent. The consent shall continue in force with respect to any individual year until the taxpayer's liability for that year is finally determined and cannot be adjusted. The consent made with the water's-edge election shall be in force with respect to all years covered by that election and for which the taxpayer is required to file pursuant to Revenue and Taxation Code section 25110. The consent shall not apply with respect to taxable years for which no election was in effect.
3. Effect of consent. The granting of the consent is intended to foreclose issues of service or jurisdiction. It does not otherwise waive any defenses a taxpayer might have.
4. Information to which consent applies. The consent shall apply only to the providing of information, whether by deposition or subpoena duces tecum, necessary to review or to adjust income or deductions in a manner authorized under section 482 or Subchapter N of Chapter 1 of Subtitle A, Internal Revenue Code, together with the regulations adopted pursuant thereto, and for the conduct of an investigation with respect to any unitary business in which the taxpayer may be involved.
(B) Use of depositions and subpoenas duces tecum. The consent to the taking of depositions and acceptance of subpoenas duces tecum applies during an audit and an administrative review, including both consideration by the Franchise Tax Board and the Board of Equalization, of a taxpayer's liability under the Corporation Tax Law as well as judicial proceedings. The consent provided pursuant to Revenue and Taxation Code  section 25110 is in addition to, and in no way shall expand or restrict, except as to service and jurisdiction, any rights of the taxpayer or the Franchise Tax Board which arise under the Code of Civil Procedure.
(C) Individuals subject to being deposed.
1. In general. The consent to the taking of depositions shall apply to the key employees or officers of a domestic corporation.
2. Domestic corporation. A domestic corporation is a corporation either incorporated within the United States or a corporation with an office in the United States. A corporation which has only its United States source income and apportionment factors included in a combined report pursuant to Revenue and Taxation Code section 25110, subdivisions (a)(4) and (7), shall only be considered a domestic corporation to the extent of such activities.
3. Key employee or officer. A key employee or officer is one who would be designated by the corporation at the time the request is made as among the three most knowledgeable individuals in response to a discovery request in a court proceeding, e.g., a manager, supervisor, vice president, director, etc., of a corporate or divisional department or function. The individual does not have to be located within the United States. An individual who maintains his or her office in the United States, whose activities are directed from the United States or who directs the activities of an office in the United States, may be a key domestic corporate individual. A former employee or officer may be designated; however, if such an individual will not appear to be deposed, a current employee of the taxpayer or an affiliate must subsequently be designated.
4. Time and location of deposition. The time and location at which a deposition is to be taken shall normally be subject to the agreement of the parties. If no agreement can be reached, the time and place to be designated must be the time and place most reasonably convenient to all parties including the individual to be deposed, the entities taxable in California, the employees of the Franchise Tax Board and counsel for the Franchise Tax Board. If the individual to be deposed is a resident of, or his or her headquarters is in, the United States, his or her place of residence or headquarters shall normally be the most reasonably convenient location. If the individual to be deposed is not a resident of, and his or her headquarters are not located in, the United States, the North American headquarters of the water's-edge group shall normally be a reasonably convenient location. A reasonably convenient time for such depositions shall normally occur on or before the 60th day after the mailing of the notice of deposition.
5. Review of reasonableness. Whether the time and location for a deposition is reasonable shall be subject to review at the time an action is brought to enforce or quash the notice. The determination of reasonableness is to be made by the authority from whom the request for enforcement is made.
(D) Production of documents.
1. Reasonable production. The consent to the acceptance of subpoena duces tecum shall apply only with regard to the reasonable production of documents. Documents which may reasonably be required to be produced include those under the direct or indirect control of the person subject to the subpoena duces tecum and which are relevant or material to the determination of the tax. Objections to production of documents may be made on the grounds of privilege, unreasonable burden, or lack of specificity in the description of the documents sought. The fact that documents are without the United States does not establish that their production is unreasonable. In those circumstances where it can be established that the requested documents have been moved without the United States and it appears that such documents have been removed, retained or stored outside the United States with an intent to avoid production, or it can be established that documents without the United States are normally maintained in the United States for any period of time even though subsequently destroyed in the course of normal document retention policies, it shall be presumed production is reasonable.
2. Review of reasonableness. Whether a request to produce documents in response to a subpoena duces tecum is reasonable shall be subject to review at the time an action is brought to enforce or quash the request. The determination of reasonableness is to be made by the authority from whom the request for enforcement is made.
3. Indirect control. Documents are under the indirect control of a person when they are under the direct control of an individual who is beneath the person in a chain of command.
(3) Dividends. The agreement that certain dividends are functionally related and are presumed to be business income applies to all dividends received by any entity whose income and apportionment factors are considered pursuant to Revenue and Taxation Code section 25110. Dividends received from an entity whose income and apportionment factors would have been considered but for an election made pursuant to Revenue and Taxation Code section 25110 would normally be the type of dividends which are subject to the agreement. Other dividends might also be subject to the agreement. There is no negative inference to be drawn as to the classification of dividends as business or nonbusiness income as a result of the fact that they are not received from a payor described in of Revenue and Taxation Code section 25110, subdivisions (b)(2)(B)(i) and (ii).
To be subject to the agreement the dividends must be received from either:
(A) a corporation, more than 50 percent of whose voting stock is owned directly or indirectly by entities whose income and apportionment factors are considered pursuant to Revenue and Taxation Code section 25110, which is engaged in the same general line of business, or
(B) a corporation which:
1. is a significant source of supply to or a significant purchaser of the output of the entities whose income and apportionment factors are considered pursuant to Revenue and Taxation Code section 25110, or
2. sells a significant portion of its output or obtains a significant part of its raw materials or input from an entity or entities whose income and apportionment factors are considered pursuant to Revenue and Taxation Code section 25110.
3. There is no requirement that more than 50 percent of the voting stock of the dividend payor be owned by entities whose income and apportionment factors are considered pursuant to Revenue and Taxation Code section 25110.
(C) For purposes of this paragraph the following definitions shall apply:
1. “Significant” means an amount equal to fifteen percent (15%) or more. The test of significance shall be applied to the purchases or sales of individual corporations and not to the water's-edge group.
2. “Source of supply” and “input” refer to the purchase of raw materials or semi-finished products for manufacturing or tangible property for resale. Amounts shall be considered cumulatively and not by category.
3. “Output” refers to the tangible property produced or sold or the service provided. Amounts shall be considered cumulatively and not by category.
4. Same “general line of business” shall have the same meaning as that provided in California Code of Regulations, title 18, section 25120, subsection (b)(1).
(d) Application.
(1) Affected entities. A taxpayer electing under Revenue and Taxation Code section 25110, subdivision (a), must include all entities enumerated in that subdivision and must exclude all those not described in that subdivision in the combined report utilized to compute its income derived from or attributable to sources within California. If an entity is described in any of the paragraphs of Revenue and Taxation Code section 25110, subdivision (a), it must be included even though it is not described in any other paragraph, or is described as excluded by any paragraph.
(A) Unitary requirement. Entities described in Revenue and Taxation Code section 25110, subdivisions (a)(1) through (a)(6) are all subject to the requirements of Revenue and Taxation Code section 25110, subdivision (a)(7)(A), that a unitary business relationship exists which is sufficient to require inclusion in a combined report under Revenue and Taxation Code section 25101 and the cases decided thereunder by the United States Supreme Court, the courts of this state, and the State Board of Equalization.
(B) Unitary relationship. The existence of a unitary business relationship shall be determined by reference to the relationship which exists among all affiliated corporations, not just those entities whose income and apportionment factors are required to be considered pursuant to Revenue and Taxation Code section 25110.
EXAMPLE 1. Taxpayer A is affiliated with and conducts a unitary business with B, C, D, E and F. B, C and D are incorporated in the United States. E and F are incorporated outside the United States, have no “Subpart F income,” and have no apportionment factors within the United States. If A elects the provisions of Revenue and Taxation Code section 25110, the combined report used to compute its income derived from or attributable to sources within California shall include the income and factors of B, C and D, as well as its own, and shall exclude the income and factors of E and F.
EXAMPLE 2. Taxpayer A is engaged in a unitary business with affiliate entities B, C, D, F and P. B, C and D are incorporated in the United States. F is incorporated in a foreign country, has no Subpart F income, and has no factors in the United States. P has made an election pursuant to Internal Revenue Code sections 931 through 936. All of P's payroll is in Puerto Rico, 10% of its property (inventory) is in the United States and 90% is in Puerto Rico. All of P's sales are assigned to the United States and are made to third parties. The average of P's factor in the United States is 36 2/3% (0%+ 10% + 100%/3). If A elects pursuant to Revenue and Taxation Code section 25110, the combined report used to compute its income derived from or attributable to sources within California shall include the income and factors of A, B, C, D and P. F's income and factors shall be excluded.
P shall have its income and factors included in the combined report used to compute A's income assigned to or attributable to sources within California under the requirement of Revenue and Taxation Code section 25110, subdivision (a)(2), even though it would be otherwise excluded by the provisions of Revenue and Taxation Code section 25110, subdivision (a)(3).
(2) Entities included. The following entities are includable in the water's-edge group:
(A) DISC and FSC.
1. A domestic international sales corporation (DISC) as specifically described in Internal Revenue Code section 992. In general, a DISC is a corporation incorporated under the laws of any state of the United States whose principal function is to facilitate federal tax deferral of income from export sales.
2. A foreign sales corporation (FSC) as specifically described in Internal Revenue Code section 922. In general, a FSC is organized under the laws of qualified foreign countries to make export sales. A corporation which has filed an election to be treated as a FSC but does not qualify shall not be included.
(B) Twenty percent or more.
1. In general. Any corporation whether organized in the United States or a foreign country, if the average of its property, payroll and sales factors within the United States is 20 percent or more.  For purposes of subsection (d)(2)(B) of this regulation, the term corporation does not include a bank.
2. Absence of factor(s). For purposes of computing the average of its factors within the United States, if an individual corporation does not on a worldwide basis have one or more of the factors of property, payroll or sales, that factor shall be disregarded in computing the average of its factors within the United States.
EXAMPLE: Taxpayer A is affiliated with and conducts a unitary business with F, an entity incorporated outside the United States. F has no payroll either within or without the United States. Therefore, for purposes of determining if F has 20% or more of its factors within the United States, it looks only to the average of its property and sales factors and no weight is given to a payroll factor.
3. U.S. factors. For purposes of computing its total property, payroll or sales factors within the United States, an individual corporation shall sum the percentage calculated for each factor under the rules of each of the individual states as set forth herein. Throwback sales are to be included in calculating the sales factor to the extent required under the applicable law subject to the provisions of subsections (d)(2)(B)3.d. and e. of this regulation.
a. States with taxes. For those states which assess a tax on, according to or measured by income and in which the corporation has a factor located in the state within the meaning of the law and regulations of that state, the corporation shall compute the percentage for each such factor under the rules of that state without regard to whether or not it files a return with the state or is taxable under the laws of the state.
b. States without taxes or factors. If a corporation has property, payroll or sales assignable to a state which does not impose a tax on, according to or measured by income or which assigns income on the basis of an apportionment formula which does not utilize each of such factors, the amount assignable to a state of any factor not used by such state shall be determined pursuant to the rules set forth in Article 2 of this Chapter 17,  Revenue and Taxation Code, and the regulations adopted pursuant thereto.
c. Non-uniform states. In those circumstances where property, payroll or sales are not defined in a substantially uniform manner by the individual states, the taxpayer may elect to compute the property, payroll or sales assignable to any individual state pursuant to the rules set forth in Article 2 of Chapter 17, Revenue and Taxation Code, and the regulations adopted pursuant thereto.
d. Sales to affiliates. In computing the sales factor, sales made by the corporation to a member of the water's-edge group of which it is an affiliate shall not be taken into account in computing either the numerator or denominator of the sales factor for such corporation.
e. No item of property, payroll or sales shall be assigned in total to more than one state. The taxpayer shall determine to which of several states an item shall be assigned.
(C) U.S. incorporated. Any corporation, regardless of the location of its property, payroll and sales, more than 50 percent of whose stock is controlled, directly or indirectly, by the same interests and which is incorporated in the United States, except for a corporation making an election pursuant to Internal Revenue Code sections 931 to 936.
(D) Export trade. An export trade corporation as defined in Internal Revenue Code section 971. In general, an export trade corporation is a corporation organized in a foreign country, whose combined voting stock and total value of stock is more than 50 percent owned by United States shareholders, and which derives 90 percent or more of its gross income from without the United States of which 75 percent or more is from export trade.
(E) Subpart F. Any controlled foreign corporation as defined in Internal Revenue Code section 957, which has Subpart F income. In general, a controlled foreign corporation is one organized in a foreign country, whose stock is owned more than 50 percent by United States shareholders.
1. Subpart F income. Subpart F income is defined in Internal Revenue Code section 952. In general, Subpart F income consists of foreign base company income which is income arising from the manufacture or the sales of goods and services outside the country in which the corporation is organized. There are numerous other types of Subpart F income described in Internal Revenue Code section 952 et seq. Each and every such item of income is Subpart F income for purposes of this subsection. In determining Subpart F income for a given year the limitation and recharacterization provisions of of Internal Revenue Code section 952(c) shall not apply. Subpart F income does not include income defined in Internal Revenue Code section 956.
2. Amount included. The includable amount of the income and apportionment factors of such entity shall be determined by multiplying the total income and each numerator and each denominator of each apportionment factor of such entity by a fraction, the numerator of which is the total Subpart F income of such entity for the year and the denominator of which is the earnings and profits as defined in Internal Revenue Code section 964 for such year. If there are no earnings and profits for the current year, none of the income and factors of the entity shall be included. The fraction so determined shall not exceed one and shall not be less than zero.
3. Special rules. In determining whether a corporation has Subpart F income for purposes of this section, the limitation and exclusions provided for in Internal Revenue Code section 954(b) shall apply.
EXAMPLE: Corporation CFC, a controlled foreign corporation, has foreign base company income of $5,000 and total gross income of $110,000. Corporation CFC does not have Subpart F income because under Internal Revenue Code section 954(b) it is treated as having no Subpart F income when such income is less than 5% of its total income.
4. Calculation. For purposes of computing the fraction under subsection 2., above, Subpart F income and earnings and profits include both business and nonbusiness income as defined under Revenue and Taxation Code section 25120. The fraction so computed shall apply for purposes of determining the total income to be included in the combined report and all of the components of total income. Thus, the fraction applies to determine the net business income subject to apportionment by formula, the nonbusiness income subject to allocation, the interest expense subject to the foreign investment interest offset under, Revenue and Taxation Code section 24344, and all other items of income or expense which may be needed to be included in computations in the combined report. Application of the fraction shall not result in changing the character of any item of income or expense from business to nonbusiness or from nonbusiness to business.
EXAMPLE: Corporation F has a ratio of Subpart F income to earnings and profits of one-fourth “1/4”. Both Subpart F income and earnings and profits include business and nonbusiness income. Corporation F has total income of $1,600, including net business income of $1,000 and nonbusiness dividends of $600 allocable to its domicile in a foreign country. Net business income includes a deduction for interest expense of $200. Corporation F has no interest income. Amounts includable in the water's-edge combined report for Corporation F are computed as follows:
Business income subject to apportionment, $1,000 x 1/4 = $250.
Nonbusiness dividends allocable outside California, $600 x 1/4 = $150.
Interest expense, $200 x 1/4 = $50.
(F) Other entities. Any foreign organized corporation not described in subsections (d)(2)(A) through (D) of this regulation, shall have its United States located apportionment factors and income included in the combined report.
1. United States income for taxable years beginning on or after January 1, 1992.
a. Effectively connected income. The United States income of such a corporation includes that income which is effectively connected, or treated as effectively connected under the provisions of the Internal Revenue Code, with a United States trade or business if such income is considered business income under Revenue and Taxation Code section 25120 and the regulations thereunder. The source of such United States income shall be determined in accordance with the sourcing rules of the Internal Revenue Code such as those set forth in sections 861 through 865 and subsections (g) and (h) of section 897, and the regulations adopted pursuant thereto. Foreign source income which is considered effectively connected to a United States trade or business pursuant to Internal Revenue Code section 864(c)(4)(B), and thereby subject to federal income tax, is deemed derived from or attributable to sources within the United States and is included in the combined report. Provisions of United States treaties to the extent they limit the application of effectively connected provisions of the Internal Revenue Code shall not be followed. Income excluded from United States federal income tax pursuant to the provisions of Internal Revenue Code section 883 shall be excluded from income in the combined report of an electing group for purposes of Revenue and Taxation Code section 25110.
b. Not effectively connected income. The United States income of such a corporation does not include income which is not effectively connected or treated as not effectively connected under the provisions of the Internal Revenue Code, with a United States trade or business regardless or whether or not it is treated as United States source income pursuant to the Internal Revenue Code, unless such income arises from a contract or agreement a principal purpose of which was the avoidance of federal income tax or California franchise or income tax. Nothing herein shall preclude the Franchise Tax Board, to the extent otherwise authorized, from making adjustments in accordance with the provisions of Revenue and Taxation Code section 25114 to related party transactions to reflect arms's length terms.
c. Nonbusiness Income. The United States income of such a corporation does not include income which is considered nonbusiness income under Revenue and Taxation Code section 25120 and the regulations thereunder regardless of whether or not it is treated as United States source income pursuant to the Internal Revenue Code.
2. United States income for taxable years beginning before January 1, 1992.
a. Effectively connected. The United States income of such a corporation includes only that income which is effectively connected, or treated as effectively connected, under the provisions of the Internal Revenue Code, with a United States trade or business. The source of such United States income shall be determined in accordance with the sourcing rules of the Internal Revenue Code such as those set forth in sections 861 through 865 and subsections (g) and (h) of section 897, and the regulations adopted pursuant thereto. Foreign source income which is considered effectively connected to a United States trade or business pursuant to Internal Revenue Code section 864(c)(4)(B), and thereby subject to federal income tax, is deemed derived from or attributable to sources within the United States and is included in the combined report. Provisions of United States treaties to the extent they limit the application of effectively connected provisions of the Internal Revenue Code shall be followed. Income excluded from United States federal income tax pursuant to the provisions of Internal Revenue Code section 883 shall also be excluded from income in the combined report of an electing group for purposes of Revenue and Taxation Code section 25110.
b. Not effectively connected. The United States income of such or corporation does not include income which is not effectively connected or treated as effectively connected with a United States trade or business regardless of whether or not it is treated as United States source income pursuant to the Internal Revenue Code.
3. Deductions. Deductions attributable to United States income that is effectively connected, or treated as effectively connected, with a United States trade or business as described in subsections (d)(2)(F)1.a. and (d)(2)(F)2.a. of this regulation, shall be determined by the allocation and apportionment rules set forth in Treasury Regulation sections 1861-8, 1.861-8T (other than interest expense), and 1.882-5 (interest expense).
4. California taxable income. The net income included in the combined report shall be determined pursuant to the Revenue and Taxation Code.
5. Taxable. For purposes of this subparagraph a United States trade or business consists of activities sufficient to make the corporation taxable in a state as defined in Revenue and Taxation Code section 25122 and the regulations adopted pursuant thereto. A corporation may be taxable in a state regardless of whether or not it is considered to have a permanent establishment in the United States pursuant to a treaty entered into between the United States and the country in which the corporation is organized or has its principal place of business.
EXAMPLE 1.: Corporation F, an organized foreign corporation, has less than 20% of the average of its property, payroll and sales factors within the United States. F has U.S. source income of ($100,000) including an ACRS depreciation deduction of $200,000. F's U.S. source income determined under California rules is $25,000 because California does not follow the ACRS depreciation system and allowable California depreciation is only $75,000. The amount of $25,000 shall be included in the combined report required under Revenue and Taxation Code section 25110.
EXAMPLE 2. Corporation F, a foreign corporation with a business office in the U.S., is engaged in the business of licensing patents, some of which it has either purchased or developed in the U.S. Licenses for the use of the U.S. developed patents outside the U.S. are negotiated by F's U.S. office. The royalties received from such foreign licenses is foreign source income considered effectively connected income attributable to F's business office in the U.S. and shall be included in the combined report required under Revenue and Taxation Code section 25110.
EXAMPLE 3. Corporation F, a foreign corporation, has a branch office in California where it sells to customers located in the United States various products which are manufactured by that corporation in a foreign country. The corporation has U.S. gross sales of $1,000,000 and a cost of goods sold to the U.S. branch of $700,000. (Determined pursuant to Internal Revenue Code section 863, and the regulations adopted thereunder.) Excess funds generated by F's U.S. business activities are invested in publicly traded securities issued by domestic corporations. F plans to use these excess funds to expand its U.S. facilities within the next three years. In the current year, the branch office derives from U.S. sources dividend income in the amount of $200,000 on these securities, and incurs expenses of $50,000 in managing the investment portfolio. For federal purposes, the dividends received from the investment in the securities is considered effectively connected with the conduct of its U.S. trade or business. (Treasury Regulations section 1.864-4(c)(2)(iii)(B).) The dividends are considered U.S. source income for purposes of Revenue and Taxation Code section 25110, subdivision (a)(4).
For California purposes, $450,000 (gross receipts of $1,200,000 less expenses of $750,000) shall be included in the combined report required under Revenue and Taxation Code section 25110.
EXAMPLE 4. Corporation S is a corporation, domiciled in and organized under the laws of a foreign country, which is engaged in the operation of aircraft or a ship or ships and which has less than twenty percent of the average of its factors within the United States. The income of S, which is described in Internal Revenue Code section 883 and is therefore excluded from United States taxation, and the apportionment factors attributable thereto shall not be included in the combined report required under Revenue and Taxation Code section 25110.
6. U.S. apportionment factors. The United States located apportionment factors of a corporation for purposes of this subparagraph and paragraph (3) of this subsection shall be determined pursuant to Revenue and Taxation Code section 25120 et seq. and the regulations adopted pursuant thereto except that the terms property owned or rented and used during the taxable year, compensation paid during the taxable year, sales of the taxpayer during the taxable year, and other terms defining the numerator and denominator of any factor shall be construed on a basis consistent with the determination of its United States located income.
(G) Choice of E or F. The United States income and apportionment factors of a foreign corporation which is not an electing taxpayer and which could be included in a combined report pursuant to both subsections (d)(2)(E) and (F) of this regulation shall be determined under subsection (d)(2)(F) and not under subsection (d)(2)(E) of this regulation.
(3) Non-described entities. Any corporation which is a taxpayer which has made a water's-edge election and which is not described in subsections (d)(2)(A) through  (d)(2)(D) of this regulation shall determine its income derived from or attributable to sources within California on the basis of its United States located apportionment factors and income and the income and apportionment factors of the other entities included in the water's-edge group of which it is a member. (For a definition of factors within the United States see clause (ii) of subparagraph (G) of paragraph (2) of this subsection.)
(e) Intercompany accounts. California Code of Regulations, title 18, section 25106.5-1, shall apply to intercompany transactions that occur in taxable years beginning on or after January 1, 2001. Prior versions of this regulation shall apply to intercompany transactions occurring in taxable years beginning before January 1, 2001.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25110, Revenue and Taxation Code.
HISTORY

1. New section filed 1-3-89; operative 1-3-89 (Register 89, No. 4).
2. Editorial correction of printing error in subsection (d) (Register 91, No. 32).
3. Amendment of subsections (a), (c)(2)(C)(iii)-(iv), (d)(1)-(3) and (e)(2)(A), new subsections (b)(5), (d)(2)(C)(ii) and renumbering, (d)(2)(C)(iii)(V), (d)(2)(G)(ii)-(d)(2)(G)(ii)(II) and renumbering, repealer of subsection (d)(2)(G)(V) and renumbering filed 11-3-92; operative 12-3-92 (Register 92, No. 45).
4. Change without regulatory effect amending subsection (a) and Note filed 6-16-94 pursuant to section 100, title 1,  California Code of Regulations (Register 94, No. 24).
5. Change without regulatory effect amending section filed 4-3-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 14).
6. Amendment of subsections (d)(2)(F)1.-2. and (d)(2)(F)3. filed 1-23-2007; operative 2-22-2007 (Register 2007, No. 4).
§25111. Water's-Edge Election.
Note     •     History

(a) General. This regulation shall be applicable to election contracts entered into for taxable years beginning on or after January 1, 1994 and before January 1, 2003. To the extent that a taxpayer would have been required to file on a water's-edge basis in its first taxable year beginning on or after January 1, 2003, pursuant to a water's-edge election made in a prior year under Revenue and Taxation Code section 25111 and this regulation, the terms of this regulation no longer apply and that election shall be deemed to have been made under the terms of Revenue and Taxation Code section 25113. However, the commencement date of the election made in a prior year under Revenue and Taxation Code section 25111 and this regulation shall continue to be treated as the commencement date of the water's-edge election period for purposes of applying the provisions of Revenue and Taxation Code section 25113.
(1) The election. In order to make the water's-edge election permitted by Revenue and Taxation Code section 25110, a taxpayer must enter into a contract with the Franchise Tax Board. The contract must be for an 84-month period. 
(2) Validity of Election. The election contract shall be considered valid so long as there has been substantial performance of the requirements for entering into the contract.
(A) For purposes of this subsection “substantial performance” means that although there may have been noncompliance with one or more procedural or statutory requirements for making the election, the tax was computed consistent with a water's-edge election and there exists additional objective evidence to support the conclusion that an election was intended.
1. For purposes of this section objective evidence includes, but is not limited to:
a. One or more of the following substantially completed forms (or their successors) were attached to the original return: 100-WE, 1115, 1116, 2411, 2416, 2424, or 2426, or
b. A Form 1117 request to terminate an election which sets forth the expiration date of the contract from which the first year of intended election can be determined, was filed before January 1, 1997; or
c. A statement was attached to the original return indicating a water's-edge election was being made.
2. There may exist other evidence sufficient to support the conclusion that an election was intended, which may include checking a water's-edge box on the return.
(B) In the absence of a common parent election, whether or not there has been substantial performance of the procedural and statutory requirements for entering into a contract shall be determined with reference to the actions of the entire water's-edge group, as defined in subsection (b)(1). Substantial performance by every member of the water's-edge group shall constitute substantial performance by the entire water's-edge group. It is not necessary for every member of the group to substantially perform for an election to be valid.
(3) Termination. 
(A) A taxpayer may request and the Franchise Tax Board shall terminate the election if the taxpayer is acquired by a larger nonelecting entity as described in subsection (i)(2)(A) of this regulation. The Franchise Tax Board may also in its discretion grant the taxpayer permission to terminate the election in other circumstances.
(B) For taxable years ending on or before January 31, 1997, if the water's-edge election of a corporation is affected by the amendments to this regulation effective October 31, 1998,
1. if prior to the effective date of such amendments the corporation was acquired by a non-electing, non-affiliated entity, and
2. if subsequent to the acquisition but prior to the effective date of such amendments, the acquired taxpayer filed its returns as if no water's-edge election were in place, the acquired taxpayer shall be deemed to have requested and been granted a termination of the water's-edge election as of the time of acquisition. Any termination resulting from the operation of this subsection (a)(3)(B) shall not be subject to the provisions of subsection (j) of this regulation.
(4) Ability to re-elect. The fact that a taxpayer has filed a notice of nonrenewal, or has terminated an election, or has been granted a change of election, shall not affect its ability to make an election subsequently.
(b) Definitions.
(1) Water's-edge group. Water's-edge group for purposes of Revenue and Taxation Code section 25111 means all corporations or other entities whose income and apportionment factors are considered pursuant to Revenue and Taxation Code section 25110 in computing the income of the individual taxpayer for the current taxable year which is derived from or attributable to sources within this state.
(2) Anniversary date. The anniversary date of the contract shall be the later of the original due date of the return or the due date of the return as extended. The anniversary date is established at the time the taxpayer enters into the contract and is on the same date for each subsequent year the election is in effect.
(c) Election by common parent. Election by the common parent of a controlled group which files a consolidated federal return pursuant to Internal Revenue Code section 1501, or the common parent wherever domiciled or organized, shall constitute an election by all members of the commonly controlled group which are part of the water's-edge group, notwithstanding any prior or subsequent filing by any member of the commonly controlled water's-edge group for the taxable year for which the election is being made (taking into account the provisions of subsection (g) of this regulation). The common parent may effect a common parent election whether or not the common parent is a taxpayer obligated to file a return in this state or will be a member of the water's-edge group for which the election is made. In such cases, the common parent election must be made on an original return filed by a member of the water's-edge group required to file under this part. Effective for taxable years beginning on or after January 1, 1995, a commonly controlled group is defined by Revenue and Taxation Code section 25105.
EXAMPLE: 1. Parent, a calendar year taxpayer, makes a common parent water's-edge election and includes Subsidiary A, also a calendar year taxpayer, as a member of the water's-edge group.
A. Parent, a California taxpayer, files a single group return on a combined basis for all members of the water's-edge group and includes the income and apportionment factors (both numerators and denominators) of A. A files a separate return and does not elect. A is deemed to have elected.
B. Parent, a California taxpayer, files its own return on a combined basis including the income and factors of A (denominators only) and other members of the water's-edge group. A files a separate return and does not elect. A is deemed to have elected.
C. Parent is not a California taxpayer but makes a common parent election which B, a member of the water's-edge group, includes with its return filed on a water's-edge basis. A files a separate return and does not elect. A is deemed to have elected.
D. Parent is not a California taxpayer. No common parent election has been filed by any California taxpayer which is a member of the water's-edge group prior to the due date (taking extensions into account) for filing a return. After the due date (taking extensions into account), a delinquent original California return is filed with a common parent election by a member of a commonly controlled group. Unless the corporation filing the return has a requirement to file a return with California and is a member of the water's-edge group, there is no valid election.
EXAMPLE 2. Same as 1 but Parent and A have different fiscal years. P's taxable year ends 3/31 and A's taxable year ends 12/31. P files its 3/31/98 taxable year return on 1/15/99 on a combined basis which includes A. A files its 12/31/98 return on 10/15/99 on a separate company basis and does not elect. A is deemed to have elected. A's and P's election begins 1/1/98 in accordance with the provisions of subsection (g) of this regulation.
(d) Election, those affected.
(1) In general. The contract, to be effective, must be entered into by all corporations required to file under this part which are part of the water's-edge group, or by the common parent electing in accordance with the provisions of subsection (c) of this regulation. A taxpayer or group of affiliated taxpayers, which is engaged in more than one unitary business, may make a water's-edge election with respect to one or more of the businesses, but it need not elect for all of its businesses.
EXAMPLE: Taxpayers A and B are members of an affiliated group which includes C, D, E and F, all incorporated in the United States, and G, H and I, all incorporated outside of the United States. G, H and I have no factors in the United States, are not eligible to be included in a federal consolidated return, and have no Subpart F income. A, C, D and G are engaged in one unitary business. B, E, F, H and I are engaged in a separate unitary business. Either A or B may elect to file on a water's-edge basis pursuant to Revenue and Taxation Code section 25110. It is not necessary for both A and B to make a water's-edge election.
(2) Changes in affiliation. Except as provided in Revenue and Taxation Code section 25111, subdivision (b), taxpayers will be bound by any valid contract they entered into, or are deemed to have entered into, for the entire term of the contract. Taxpayer will, for example, be bound by the election in the following situations:
(A) Subsequently taxable. A member of the water's-edge group which becomes subject to tax under this part subsequent to the election, or, subsequent to the election, is determined to have been subject to tax at the time of the election, shall be deemed to have elected.
(B) Subsequently determined to be a member of the water's-edge group. Except as provided in of Revenue and Taxation Code section 25111, subdivision (b), if an affiliated corporation which is a non-electing taxpayer is subsequently proved to be a member of the water's-edge group pursuant to a Franchise Tax Board audit determination, such affiliate shall be deemed to have made a water's-edge election effective as of the date of the election of the other members of the water's-edge group. A Franchise Tax Board audit determination shall be evidenced by the issuance of a notice of deficiency proposed to be assessed or a notice of tax change.
(C) Subsequently becoming a member of the water's-edge group. Except as provided in of Revenue and Taxation Code section 25111, subdivision (b), a corporation subject to tax under this part which becomes a member of an electing water's-edge group subsequent to an election having been made by the group shall be deemed to have elected, and shall be bound by, the election and the contract made by the group for the remaining term of the contract. In the event that such corporation becomes a member of an electing water's-edge group for part of a year, then such corporation shall be considered a water's-edge electing taxpayer only with respect to such part of a year and not for the entire year.
EXAMPLE: A elects to file its returns in accordance with Revenue and Taxation Code section 25110 for a period of 84 months beginning in 1994 and ending in 2000. B makes no election under Revenue and Taxation Code section 25110 and files its returns for years through 1997 pursuant to Revenue and Taxation Code section 25101. In 1998 A and B become engaged in a unitary business. For 1998 through 2000, B is deemed to have elected and shall be subject to the terms of A's election and contract.
(D) Reorganizations. Subject to the provisions of Revenue and Taxation Code section 25111, subdivision (b), a reorganization under sections of the Revenue and Taxation Code and Internal Revenue Code section 368 involving a water's-edge taxpayer will not cause a termination of the water's-edge election. In the case of an acquisitive reorganization, the water's-edge election is a tax attribute which will carry over to the acquiring corporation. Thus, for example, if a water's-edge taxpayer which is a party to a reorganization merges or liquidates into an acquiring corporation as a result of the reorganization, the water's-edge election will carry over and be binding upon the acquiring corporation. Each member of the acquiring group which is subject to tax under this part and which is, or subsequently becomes, unitary with the acquired water's-edge taxpayer or its successor shall be deemed to have elected and shall be bound by the acquired corporation's water's-edge election.
The carryover water's-edge election will not be binding on nonunitary activities of the acquiring corporation or its affiliates.
EXAMPLE: Corporation A, a calendar year taxpayer, elects to file its returns on a water's-edge basis for a period of 84 months beginning January 1, 1994. Corporation B, an unrelated calendar year taxpayer, has never made an election and files its California returns on a worldwide basis. On July 1, 1996, Corporation A is acquired by Corporation C, a unitary affiliate of Corporation B, in a statutory merger qualifying under Internal Revenue Code section 368(a)(1)(A). Corporation C was not itself a California taxpayer prior to acquiring Corporation A. The merged operations of former Corporation A became unitary with the pre-merger operations of surviving Corporation C, and therefore with Corporation B, effective January 1, 1997.
Corporation A's water's-edge election carries over to Corporation C. For the period July 1, 1996, through December 31, 1996, Corporation C will compute the taxable income attributable to the nonunitary merged activities of Corporation A on a water's-edge basis. Corporation B will compute its taxable income on a worldwide basis, including the pre-merger operations of surviving Corporation C, but not including the operations of Corporation C which were acquired by merger with Corporation A. (Since Corporation C was not a taxpayer prior to acquiring Corporation A, it does not have a California filing requirement with respect to the business operated by Corporation C before the merger.) Effective January 1, 1997, both Corporation B and Corporation C will be required to compute their income on a water's-edge basis.
(E) Liquidations. A water's-edge election is a tax attribute which will carry over and be binding upon the distributee(s) of property in a complete liquidation of a water's-edge taxpayer to which Internal Revenue Code section 332 applies. However, for purposes of this subsection, the definition of “owner of stock” as set forth in of Internal Revenue Code section 332(b)(1) shall not apply. Rather, the owner of stock shall be defined as any corporation which is related to the liquidating corporation because of either of the following:
1. It owns directly or indirectly more than 50 percent of the voting stock of the liquidating corporation.
2. More than 50 percent of voting stock of both it and the liquidating corporation is owned or controlled directly or indirectly by any bank or person (as defined in Internal Revenue Code section 7701(a)(1)).
The carryover water's-edge election will not be binding on nonunitary activities of the distributee corporation(s) or its affiliates.
(F) Transfer to controlled entity. If an electing taxpayer transfers property to a corporation in a transaction to which Internal Revenue Code section 351 applies, the water's-edge election will be binding upon the transferee of the property. The carryover water's-edge election will not affect nonunitary activities of the transferee corporation.
(G) Subsequently disaffiliated. Except as provided in Revenue and Taxation Code section 25111, subdivision (b), where a corporation ceases to be a member of the water's-edge group, the election shall continue in force until the term has expired. A failure to file a notice of nonrenewal shall result in the renewal of the existing contract. For ability to terminate election, see subsection (i) of this regulation.
(e) Time of making the contract. The contract must be entered into at the time the original return for the year is filed and must be signed by an officer of the electing corporation. In the case of an election by the common parent of a controlled group, the contract must be signed by an officer of the common parent. For purposes of this section:
(1) The original return is the last return filed on or before the due date (taking extensions into account) regardless of the form on which it is filed or however it may be denominated, or, if no return is filed by that date, the first return filed after such date. The contract may not be entered into through an amended return filed after the due date (taking extensions into account) of the original return.
(2) Timely filings which only supplement a previously filed return, or correct mathematical or other errors, shall be considered as incorporating the previously filed return, to the extent not inconsistent, and shall be treated as the original return for purposes of making a water's-edge election if they contain objective evidence of substantial performance as provided in subsection (a)(2) of this regulation. Any filing described in this subsection (e) of this regulation which clearly reflects an intent to withdraw an election made on previously filed return shall be treated as an original return.
EXAMPLE 1: T is a calendar year taxpayer which obtains a seven-month extension of time to file its return.
A. T files its original return on October 15 of the year. The contract shall be entered into on October 15.
B. T files its original return on May 15 of the year. The contract shall be treated as entered into on October 15.
C. T files a return on May 15 and files a second return on October 15. T's original return was filed on October 15. The election must be made by that time. If T's May 15th filing makes a water's-edge election, and the election is withdrawn in the October 15th filing, the election made on May 15th has no effect. If T's May 15th filing did not make a water's-edge election, and a water's-edge election is made on the October 15th filing, T has made a water's-edge election.
EXAMPLE 2. T, a calendar year taxpayer, files a return on February 15. T's return is treated as being filed on March 15, and March 15 is the date the contract is considered to have been entered into. Any return filed after March 15 (the due date of the return) will be considered an amended return.
EXAMPLE 3. T, a calendar year taxpayer, has a due date for its return of March 15. It files a return on February 15 and files a second return on March 10. The return filed on March 10 is treated as the original return for the year. The election to file on a water's-edge basis must be made on the March 10 filing to be effective. If T's February 15 filing makes a water's-edge election and the March 10 filing does not make an election, the election made on the February 15 return has no effect. If T's February 15th filing did not make a water's-edge election, and a water's-edge election is made on the March 10th filing, T has made a water's-edge election.
(f) Length of contract. At the time the contract is entered into, the taxpayer must agree to file on a water's-edge basis for an 84-month  period. If a change in accounting periods is made which results in a short period tax year, it shall not shorten the period covered by the contract.
(g) Effect of different fiscal years. In the case of taxpayers which are on different fiscal years, each member of the water's-edge group shall make the election upon its original return for the taxable year for which the election is being made. The election shall become effective as of the beginning of the taxable year of the last member of the water's-edge group to file its return and election. The 84-month election period for each member of the water's-edge group will run from the date that the election becomes effective, i.e., the beginning of the taxable year of the last member of the water's-edge group to elect.
Each taxpayer in the group shall calculate its tax on a worldwide basis for that portion of the year between the beginning of its taxable year and the beginning of the taxable year of the last member of the group to make the election, and on a water's-edge basis for the remainder of the taxable year.
EXAMPLE: Corporation A and Corporation B are California taxpayers engaged in a unitary business and wish to make a water's-edge election. Corporation A's taxable year ends December 31 and Corporation B's taxable year ends March 31. A files an election for its taxable year ended December 31, 1994, on its return filed on October 15, 1995. B files an election for its taxable year ended March 31, 1995, on its return filed on January 15, 1996.
Corporation A's 84-month election period begins April 1, 1994, the beginning of the taxable year of the last member of the group to elect. Corporation A will file its return for the taxable year ending December 31, 1994, apportioning its income to California on a worldwide basis for the period from January 1, 1994, through March 31, 1994, and on a water's-edge basis for the period from April 1, 1994, through December 31, 1994. Corporation B will file its return for the taxable year ending March 31, 1995, apportioning its income to California on a water's-edge basis for its entire taxable year.
(h) Renewal.
(1) Automatic. Once a contract is entered into, it shall automatically renew on its anniversary date unless a notice of nonrenewal is filed with the Franchise Tax Board. Such renewal shall extend the 84-month period of the contract for an additional 12 months. Except as provided in Revenue and Taxation Code section 25111.1, a contract shall always be in effect 84 months from the beginning of the taxable year covered by the most recent anniversary date absent a notice of nonrenewal.
EXAMPLE: T, a calendar year taxpayer, makes a water's-edge election and enters into an 84-month contract with its return filed March 15, 1995. The contract covers the taxable years 1994 through 2000. No timely notice of nonrenewal is received prior to the time T files its return for the taxable year 1995 on March 15, 1996. The contract is automatically renewed and extends the election through the taxable year 2001.
(2) Notice of nonrenewal.
(A) In general. A taxpayer may file a notice of nonrenewal at any time within the contract period. A taxpayer may file a notice of nonrenewal at the same time it makes the election. In order to be effective to terminate the automatic renewal provisions, the notice must be delivered to the Franchise Tax Board at least 90 days prior to the anniversary date. Delivery may be made in person or by mail. In the case of a mailed notice, the date of the postmark shall constitute the date of delivery. For a notice of nonrenewal to be effective, it must be entered into or be consented to by all taxpayers which are members of the water's-edge group. A notice of nonrenewal may be filed by the common parent of a controlled group for all California taxpayers.
If a member of the water's-edge group is deemed to have made an election pursuant to the provisions of subsection (d)(2)(A) or (B) of this regulation, such member shall also be deemed to have entered into any notice of nonrenewal filed by the other members of the water's-edge group.
EXAMPLE 1: T, a calendar year taxpayer, makes a water's-edge election and enters into an 84-month contract with its return filed March 15, 1995.
A. T files a notice of nonrenewal on March 15, 1995. The contract shall be in effect for the taxable years 1994 through 2000. For taxable years 2001 and thereafter, T shall file under Revenue and Taxation Code section 25101, unless a new contract is entered into prior to or with the return filed for the taxable year 2001. 
B. T files a notice of nonrenewal on February 15, 1996. The original contract was in effect for the taxable years 1994 through 2000. T's notice of nonrenewal is not timely to prevent the automatic renewal as of March 15, 1996. The contract shall be extended for one year and shall include the taxable year 2001. The notice of nonrenewal shall be effective for taxable years 2002 and thereafter.
EXAMPLE 2. T, a calendar year taxpayer, makes a water's-edge election and enters into an 84-month contract with its return filed May 15, 1995. T had an extension to file its return until October 15, 1995. T files a notice of nonrenewal on July 1, 1996. Since the notice of nonrenewal was filed at least 90 days prior to the anniversary date of October 15, 1996, the contract shall be in effect for taxable years 1994 through 2000.
(B) Effect on election. Serving a notice of nonrenewal shall not terminate the taxpayer's obligation to file pursuant to Revenue and Taxation Code section 25110 until the 84-month period has expired.
(i) Termination of election.
(1) In general. A taxpayer may terminate the election if:
(A) it is acquired directly or indirectly by an unaffiliated non-electing entity which, with those of its affiliates which are included in its combined report, is larger in terms of equity capital than is the taxpayer,
(B) the Franchise Tax Board grants permission.
(2) Acquisition by larger entity.
(A) In general. A taxpayer which is acquired by a larger, unaffiliated entity may request, and the Franchise Tax Board shall allow, the termination of an election effective for the taxable year immediately succeeding the taxable year in which it is acquired, directly or indirectly, by a larger entity. The request must be made no later than the due date of the return (including extensions) for taxable year immediately succeeding the year of acquisition.
(B) For purposes of Revenue and Taxation Code section 25111, subdivision (b)(1), “taxpayer” means the individual corporation with a requirement to file under this part. It does not mean the water's-edge group or all the members of the water's-edge group which are required to file under this part.
(C) Acquisition. A taxpayer is acquired if it, or any entity or entities which own a majority of its voting stock, has a quantity of its voting stock purchased by another entity sufficient to give such entity control of over 50 percent of such stock sufficient so that it may control the affairs of the purchased entity.
(D) The relative size of the taxpayer and the acquiring entity shall be determined by a comparison of their equity capital. For purposes of this provision equity capital includes issued stock of any class, paid in capital, and retained earnings or earned surplus, as set forth on the balance sheet of such entity for the immediately preceding year-end accounting period.
(3) Request for termination of election.
(A) In general. A taxpayer may request permission of the Franchise Tax Board to terminate its election pursuant to Revenue and Taxation Code section 25111, subdivision (b)(2), at any time.
(B) Conditions for granting. The request shall be granted only if the taxpayer demonstrates to the satisfaction of the Board that the requirement to file returns under Revenue and Taxation Code section 25110 rather than under Revenue and Taxation Code section 25101 for the unexpired term of the contract shall result in a significant disadvantage to the taxpayer, and that such disadvantage is the consequence of an extraordinary and significant event which could not have been reasonably anticipated at the time the original election was made.
1. Extraordinary and significant event. For purposes of this subsection an extraordinary and significant event includes but is not limited to:
a. Changes in ownership or affiliation. The acquisition of the taxpayer directly or indirectly by a new owner, the acquisition by the taxpayer or its affiliates of new subsidiaries, or a reorganization or sale or other action resulting in a disaffiliation of the taxpayer from some or all of its affiliates. Changes in ownership or affiliation undertaken for tax avoidance purposes or for purposes of avoiding the water's-edge contract do not constitute an extraordinary or significant event. A request for termination of election made by reason of a change in ownership or affiliation must be made no later than the due date (including extensions) of the return for the taxable year immediately succeeding the taxable year in which the change in ownership or affiliation occurred.
2. Significant disadvantage. A significant disadvantage includes but is not limited to a material difference, which is unfavorable to the taxpayer, between California tax liabilities, computed pursuant to Revenue and Taxation Code sections 25110 and 25101 over the remaining life of the election. Such material difference must be shown in respect of the aggregate tax liabilities of all members of the water's-edge group subject to tax in California. Such material difference must be demonstrated by reasonable estimates which take into account all currently and readily available pertinent information. The taxpayer must demonstrate that the significant disadvantage is the result of the particular extraordinary and significant event giving rise to the request.
(4) Effective date. Except as otherwise provided, any request granted by the Franchise Tax Board pursuant to subsection (i)(3) of this regulation shall be effective for the taxable year immediately succeeding the taxable year in which the qualifying event occurred. If requested by the taxpayer, the Franchise Tax Board may grant the request effective for some later taxable year. Requests may not be retroactive.
(5) Form and procedures.
(A) Form. A request to terminate an election must be made in writing and it must include a statement of the reason for the request. The request must be mailed to the Franchise Tax Board under separate cover. Requests included in a tax return or enclosed with other correspondence not related to the request to terminate will not constitute adequate notification of a request to terminate the election and will be treated as if not filed.
1. A request made pursuant to Revenue and Taxation Code section 25111, subdivision (b)(1), must include a statement of the facts which demonstrate that the conditions of subsection (i)(2) of this regulation have been satisfied.
2. A request made pursuant to Revenue and Taxation Code section 25111, subdivision (b)(2), must include a statement as to why the requirements of subsection (i)(3)(B) of this regulation are satisfied. It must include an accounting of the gains and losses described in subsections (j)(4) and (5) of this regulation.
(B) Withdrawal. The taxpayer may withdraw its request at any time prior to the Franchise Tax Board's granting permission.
(C) Franchise Tax Board review. In considering a request, the Franchise Tax Board may examine books and records with respect to gains and losses covered by subsections (j)(4) and (5) of this regulation, earnings and profits of affiliated corporations, the nature of the event giving rise to the request, the consequences of such event, and such other relevant matters.
(D) Time of action. Within 90 days of receipt of a request to terminate the election, the Franchise Tax Board shall either act on such request or advise the taxpayer what additional information is needed to consider the request. Following receipt of all such additional information, the Franchise Tax Board shall act on the request within 90 days.
1. If in the case of a request pursuant to Revenue and Taxation Code section 25111, subdivisions (b)(2), the Franchise Tax Board takes no action or requests no additional information, the request is deemed disallowed on the expiration of the 90 days. The taxpayer may grant the Franchise Tax Board additional time to consider the request.
2. If in the case of a request pursuant to Revenue and Taxation Code section 25111, subdivision (b)(1), the Franchise Tax Board takes no action or requests no additional information, the taxpayer shall be deemed to have met the requirements for termination on the expiration of the 90 days.
(j) Conditions of termination of election. If the Franchise Tax Board grants a request to terminate an election pursuant to Revenue and Taxation Code section 25111, subdivision (b)(2), the following conditions shall be imposed as necessary to prevent the avoidance of tax or clearly reflect income for the period the election was, or was purported to be, in effect.
(1) Dividends. Dividends received during the remaining period of the contract from affiliated corporations not described in Revenue and Taxation Code section 25110 shall be considered to have been paid first out of earnings and profits not included in a combined report of a unitary business for purposes of Revenue and Taxation Code section 25106. To the extent dividends exceed such earnings and profits, they may be considered to be subject to Revenue and Taxation Code section 25106.
(2) Gains. Gain on distribution with respect to stock which are not dividends or from the sale or other disposition of assets received during the remaining period of the contract from affiliated corporations not described in Revenue and Taxation Code section 25110 shall not be deferred or eliminated.
(3) Losses. Loss from the sale or worthlessness of stock or from the sale or other disposition of assets of an affiliated corporation not described in Revenue and Taxation Code section 25110 during the remaining period of the contract shall be allowed only to the extent of income or gain recognized by reason of subsections (j)(1) or (j)(2) of this regulation unless such loss would have been recognized on the return filed under Revenue and Taxation Code section 25110.
(4) Gain on water's-edge affiliates. Gain on the disposition of stock of an affiliated corporation which was included in a combined report prior to the election under Revenue and Taxation Code section 25110, or on the disposition of assets of such affiliate, and which was excluded from the combined report by reason of Revenue and Taxation Code section 25110, shall be included in income in the first return filed after the termination of the election.
(5) Losses on water's-edge affiliates. Loss on the disposition of stock of an affiliated corporation which was included in a combined report prior to the election under Revenue and Taxation Code section 25110, or on the disposition of assets of such affiliate, and which was excluded from the combined report by reason of Revenue and Taxation Code section 25110, shall be included in income in the first return filed after permission is granted to the extent that gain is included under subsection (j)(4) of this regulation.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25111, Revenue and Taxation Code.
HISTORY

1. New section filed 1-3-89; operative 1-3-89 (Register 89, No. 4).
2. Amendment filed 11-3-92; operative 12-3-92 (Register 92, No. 45).
3. Change without regulatory effect amending subsections (a), (a)(1) and (2), (f), (h)(1), (h)(2)(B) and Note filed 6-16-94 pursuant to section 100,  title 1,  California Code of Regulations (Register 94, No. 24).
4. Amendment filed 10-1-98; operative 10-31-98 (Register 98, No. 40).
5. Change without regulatory effect repealing section filed 3-12-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 11).
6. Change without regulatory effect renumbering former section 25111-1 to section 25111, including amendment of section heading and section, filed 4-2-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 14).
7. Amendment of subsection (a) filed 4-6-2009; operative 5-6-2009 (Register 2009, No. 15).
§25111-1. Water's-Edge Election and Changes for Income Years Beginning Prior to January 1, 1994. [Repealed]
Note     •     History

NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25111, Revenue and Taxation Code.
HISTORY

1. Change without regulatory effect adding new section filed 6-16-94 pursuant to section 100, title 1, California Code of Regulations (Register 94, No. 24).
2. Amendment filed 10-1-98; operative 10-31-98 (Register 98, No. 40).
3. Change without regulatory effect renumbering former section 25111-1 to section 25111 filed 4-2-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 14).
§25111.1. Rescission of Existing Water's-Edge Elections. [Repealed]
Note     •     History

NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25111.1, Revenue and Taxation Code.
HISTORY

1. New section filed 9-20-95; operative 10-20-95 (Register 95, No. 38).
2. Change without regulatory effect repealing section filed 3-12-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 11).
§25112. Penalties for Failure to Supply Information or Documents.
Note     •     History

(a) Penalty for failure to furnish information.
(1) In general. If a corporation making a water's-edge election under Revenue and Taxation Code section 25110 fails to furnish any information described in Revenue and Taxation Code section 25112, subdivision (b), within 60 days of a written request by an auditor or attorney of the Franchise Tax Board, such corporation shall pay a penalty of $1,000 for each taxable year with respect to which such information is not timely furnished. Additional monetary penalties of up to $24,000, for a total penalty of $25,000, may be assessed if the failure to furnish information continues.
(2) Basis for assessing penalty.
(A) Taxable year. The penalty is assessed with respect to each taxable year for which the request is made. A single request for information may apply to several years and a failure to furnish information in response to such request may give rise to a penalty for each taxable year covered by the request. Requests may be made for information for more than one taxable year during a calendar year or twelve-month period. A failure to furnish information may give rise to a penalty for each taxable year in spite of the fact that penalties are assessed for two or more taxable years during a calendar year or twelve-month period.
(B) Failure to furnish. The penalty is assessed for a failure to furnish information, not for each failure to furnish information nor for each item of information or document not furnished. The penalty applies to each individual corporation required to file under the Corporation Tax Law to which the written request is directed. Filing Schedule R-7, Election to File a Single Return, shall not relieve each of the entities upon whose behalf such election is filed from liability for such penalty.
(C) Substantial nature. The failure to supply information must be of a substantial nature which may be demonstrated either by the potential significance or the quantity of the item or items not supplied.
(3) Notice. The corporation must be informed in the written request for information that it is subject to the penalty provided for in Revenue and Taxation Code section 25112, subdivision (a), before the penalty may be assessed. A corporation shall normally only be advised that it may be subject to the penalty provided for in Revenue and Taxation Code section 25112, subdivision (a), if it has previously failed to provide the information requested, whether specifically or generally. The notice shall set forth the basis upon which prior responses have been unsatisfactory.
(4) Increase in penalty for continued failure after notification. If a failure described in subsection (a)(1) of this regulation continues for more than 90 days after the date on which a bureau director or a supervising counsel mails notice of such failure to the reporting corporation, that corporation shall pay a penalty of $1,000, in addition to the penalty imposed by Revenue and Taxation Code section 25112, subdivision (a), and subsection (a)(1) of this regulation, for each 30-day period (or fraction thereof) during which such failure continues after such 90-day period has expired. The additional penalty imposed by Revenue and Taxation Code section 25112, subdivision (c), and described in this paragraph shall be limited to a maximum of $24,000 for the failure for each taxable year.
(5) Reasonable cause.
(A) Time. For purposes of Revenue and Taxation Code section 25112, subdivision (a), the time prescribed for furnishing information under subsection (a)(1) of this regulation, and the beginning of the 90-day period after mailing of notice by the bureau director or supervising counsel under subsection (a)(4) of this regulation, shall be treated as being not earlier than the last day on which reasonable cause existed for failure to furnish the information. Absent a showing by the taxpayer, it shall be presumed that reasonable cause did not exist for failure to submit the requested information as of the date of the request provided for in subsection (a).
(B) Tolling. The sixty-day and ninety-day time periods shall be tolled during the period of time for which the question of reasonable cause is under review.
(C) Showing. To show that reasonable cause existed for failure to furnish information as required by Revenue and Taxation Code section 25112, the reporting corporation must make an affirmative showing of all facts alleged as reasonable cause for such failure in a written statement containing a declaration that it is made under the penalties of perjury. The statement must be filed with the bureau director or supervising counsel who signed the notice of failure. Such bureau director or supervising counsel shall determine whether the failure to furnish information was due to reasonable cause, and if so, the period of time for which such reasonable cause existed. The taxpayer shall be notified of the determination.
(D) Destruction or retention. Destruction of a document, or failure to maintain information, if occurring in the normal course of business, is reasonable cause for failure to furnish information for purposes of penalties asserted under Revenue and Taxation Code section 25112, subdivisions (a) and (c), unless the document or information is otherwise required to be maintained by Article 1.5 of Chapter 17 of the Corporation Tax Law.
(E) Location. Location of a document or information in a foreign country may provide reasonable cause for not supplying the document or information for a period of time not to exceed 90 days.
(6) Other penalties. The information required by Revenue and Taxation Code section 25112, subdivision (b), and which may be requested under Revenue and Taxation Code section 25112 must be furnished even though it may not ultimately affect the amount of any tax due under the Corporation Tax Law. For criminal penalties for failure to file a return and filing a false or fraudulent return, see Revenue and Taxation Code sections 19706, 19701 and 19705.
(7) Manner of assessing.
(A) Initial penalty. The penalty provided for in Revenue and Taxation Code section 25112, subdivision (a), shall be assessed in a manner similar to the assessment of additional tax and all rights, duties and remedies shall apply.
(B) Additional amounts. The additional penalties provided for in Revenue and Taxation Code section 25112, subdivision (c), shall be assessed in a manner similar to the assessment of additional tax except that a notice need not be issued until the full penalty has accrued, or 45 days after the failure to submit has been cured. The protest and pursuit of other remedies provided with respect to the penalty provided for in Revenue and Taxation Code section 25112, subdivision (a), shall not stay the accruing and assessment of penalties pursuant to subdivision (c) of such section. If it is ultimately determined that the penalty provided for in Revenue and Taxation Code section 25112, subdivision (a), should not be assessed, any penalty asserted under Revenue and Taxation Code section 25112, subdivision (c), shall be withdrawn and refunded, if paid, with interest as otherwise required by law.
(b) Exclusion of the documentation for failure to substantially comply with a formal document request.
(1) In general. The superior courts of the State of California for the counties of Los Angeles, Sacramento or San Diego, or for the City and County of San Francisco may, upon motion by the Franchise Tax Board, issue an order prohibiting the introduction by the taxpayer of documentation requested in a formal document request if the taxpayer fails to substantially comply with such formal document request within 90 days of the receipt of such request. The 90-day period is tolled during the pendency of any court proceeding reviewing such request. This sanction is in addition to any other sanction or penalties which might be applied or sought by the Franchise Tax Board. The sanction of nonadmissibility does not arise if the taxpayer establishes that the failure to provide the documentation as requested by the Franchise Tax Board is due to reasonable cause.
(2) Description.
(A) In general. A formal document request is not routine to the beginning of an audit or administrative review, but is to be made after normal request procedures have been unsuccessful in obtaining documentation in the course of an audit. Normal request procedures include those which are similar to those which would subject a taxpayer in noncompliance to the penalty prescribed by Revenue and Taxation Code section 25112, subdivision (a), and must be made in writing. It is not necessary, however, that the penalties otherwise provided by Revenue and Taxation Code section 25112 or any other section of the Revenue and Taxation Code be imposed for the requirement of a normal request procedure to be satisfied.
(B) Form. A formal document request shall:
1. be mailed by registered or certified mail to the taxpayer at its last known address,
2. set forth the time and place for the production of the documentation,
3. set forth a statement of the reason the documentation previously produced (if any) is not sufficient,
4. provide a description of the documentation being sought,
5. set forth the consequences to the taxpayer of the failure to produce the documentation, and
6. shall be signed by the Assistant Executive Officer, Compliance or the Chief Counsel of the Franchise Tax Board.
A formal document request may also include a requirement that an English translation of the foreign documents be supplied if it exists.
(3) Substantial compliance. Whether a taxpayer has substantially complied with a formal document request shall depend upon all the facts and circumstances. For instance, if the Franchise Tax Board presents a taxpayer with a formal document request for 10 items and the taxpayer produces 9 of them but fails (without reasonable cause) to produce one requested document that appears to be significant, the Franchise Tax Board may request that all or any number of the documents be excluded. A court may decide that there has not been substantial compliance and exclude all or any portion of the documents. Such an exclusion might occur if the documents produced by the taxpayer were all favorable to or tended to support its position while the one which was not produced might damage or undermine that position. However, when the Board issues formal document requests in the course of an audit, and when, for example, the taxpayer fails to comply with one particular request for only one document, the taxpayer's timely satisfaction of other requests is one factor (but not the only factor) to be considered in determining whether overall compliance has been substantial. If overall compliance in such a situation has been substantial, the document requested but not supplied could be admissible.
(4) Reasonable cause.
(A) In general. In determining whether there was reasonable cause for failure to produce, a court may take into account, among other grounds, whether the request is reasonable in scope, whether the requested documents or copies thereof are available within the United States, and the reasonableness of the requested place of production within the United States.
(B) Foreign laws. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the requested documentation is not reasonable cause unless the Superior Court, after in camera review of the documentation, finds it to be.
(C) Minority status. A determination of whether ownership of less than a majority of the voting stock of an entity which has custody of a document is reasonable cause shall depend upon the facts and circumstances of the case.
(D) Delays. Reasonable cause may excuse delay in production. For example, translation of documents into English pursuant to a request by the Franchise Tax Board may reasonably cause a delay in production of such documents.
(E) Not currently existing. The fact that a document is not otherwise required to be maintained, has not been maintained, or has been destroyed shall not prevent a court from issuing an order providing for the exclusion of a later discovered copy of such document.
(F) Copies. The reasonableness of a demand for the production of the originals of foreign documents rather than copies may be resolved in judicial proceedings to quash the request. If the foreign country makes it impossible to remove the original documents requested not because of secrecy laws but, for example, because of its tax laws or laws as to the rights of creditors, true copies may be sufficient.
(5) Judicial proceedings.
(A) Motion to quash. A judicial proceeding to quash the request may be commenced within 90 days of the mailing of the request. Grounds for an action to quash would include contentions that all or part of the requested documentation is irrelevant to the pertinent tax issue, the place of production is unreasonable, or reasonable cause exists for failure to produce or for delay in production. The reasonableness of requesting documents rather than copies, when, for example, foreign laws prevent their removal, could also be raised in a motion to quash. During the pendency of the action, the 90-day period for compliance with the request is suspended. Moreover, the Franchise Tax Board or the court may extend the period. In any proceeding to quash, the Franchise Tax Board may seek to compel compliance with the request. An order compelling compliance may be issued by the court subject to normal and appropriate conditions.
(B) Motion to prohibit introduction of documents. After the expiration of the 90-day period, the Franchise Tax Board may bring a motion to prohibit introduction of the requested documents in any subsequent judicial or administrative proceeding. The motion may be granted provided the documents requested are likely to be relevant and material and are calculated to serve a legitimate purpose for which the investigation is conducted and the taxpayer's failure to substantially comply is not due to reasonable cause as defined in subsection (b)(4) of this regulation.
(C) Venue. An action to quash or seeking a prohibition on the introduction of documents shall be brought in the superior courts of the State of California for the counties of Los Angeles, Sacramento or San Diego, or for the City and County of San Francisco. An order denying a motion to quash or granting a prohibition on the introduction of documents shall be deemed a final order which may be appealed.
(D) Burden of proof. In any proceeding, the Franchise Tax Board has the burden of showing relevance and materiality of the requested records. In addition, the Franchise Tax Board must show that the audit or administrative inquiry is being or was conducted pursuant to a legitimate purpose, that the information sought is not already within its possession, and that the administrative steps required herein have been followed.
(E) Time to comply. The taxpayer generally has 90 days from the day of mailing to comply with a formal document request. However, the Franchise Tax Board or a court having jurisdiction over a motion to quash the request may extend the period. The court may extend the period in response to a motion to quash or in response to a motion to extend the period that is not part of a motion to quash. For example, a court could find that a taxpayer had reasonable cause for failure to produce an item within 90 days and set a later date for production.
(F) Limitation on use. A court may impose limitations upon the use of any documents produced, including limitations to protect the confidentiality of the documents if necessary.
(c) Suspension of period of limitations. The suspension of the 90-day time period provided for in Revenue and Taxation Code section 25112 of any period of limitation otherwise provided for in the Administration of Franchise and Income Tax Laws, Revenue and Taxation Code section 19031 et seq., by operation of Revenue and Taxation Code section 25112 shall result in a complete suspension of that time period. The time period shall not commence to run again until the suspension is terminated.
EXAMPLE 1:
A formal document request is served on April 30, 1996. The taxpayer brings a motion to quash on June 14, 1996, 45 days into the 90-day period. The 90-day period is suspended. The motion is ruled upon and the ruling is final and nonappealable on December 31, 1996. The 90-day period commences running again on January 1, 1997, and shall expire 45 days later on February 14, 1997.
EXAMPLE 2:
Same facts as Example 1. In addition, the last day for mailing a notice of additional tax proposed to be assessed as prescribed by Revenue and Taxation Code section 19057 is September 15, 1998. The running of the statute of limitations is suspended from June 15, 1997 to December 31, 1997, and the last day for mailing a notice is extended by this six and one-half months' period. The last day for mailing a notice is April 1, 1999.
(d) Make information available and identify individuals. For taxable years beginning on or after January 1, 1994, an otherwise qualified taxpayer shall be subject to the penalties provided for in Revenue and Taxation Code section 25112 if it willfully fails for the period described in subsection (e) hereof to do any of the following:
(1) Income attribution. Retain and make available, upon request, documents and information which are necessary to audit issues concerning the attribution of income between the United States and foreign jurisdictions. Documents and information include questionnaires completed and submitted to the Internal Revenue Service or any state of the United States. The attribution of income is normally examined under Internal Revenue Code sections 482, 861, 863, 902, and 904, and Subpart F of the Internal Revenue Code.
(2) Identify individuals. Identify, upon request, principal officers or employees of the affiliated group who have substantial knowledge of and access to information as of the date of the request on the allocation of costs and profits and the establishment of prices for goods and services. The principal officers and employees would normally be the individuals who would be listed as the three most knowledgeable in response to an interrogatory posed in a suit for refund. The individual does not have to be located within the United States. A former employee or officer may be designated, however, if such an individual will not appear to be deposed, a current employee of the taxpayer or an affiliate must subsequently be designated.
(3) Rulings, etc. Retain and make available all documents and correspondence submitted to or obtained from the Internal Revenue Service or the tax agencies of foreign countries or territories and from competent authority pertaining to requests for rulings, rulings, settlements and competing jurisdictional claims involving assignment of income to the United States. The documents which must be retained and made available are only those ordinarily available to a corporation whose income and factors are included in the combined report required pursuant to the water's-edge election. The documents described include, but are not limited to, ruling requests, rulings on reorganizations involving foreign branch incorporation, and the determination of foreign tax liability, including reports issued by foreign tax administrators. An English translation shall be furnished if available.
(4) Foreign transactions. Retain and make available any forms filed with the Internal Revenue Service to comply with Internal Revenue Code sections 6038, 6038A, 6038B, 6038C and 6041. The forms required as of January 1, 1988 are Internal Revenue Service Forms 851, 926, 5471, Worksheets A and B to Form 5471, 5471 Schedule M and 5472.
(5) Domestic transactions. Upon request, prepare and make available information similar to that required of foreign corporations under Internal Revenue Code sections 6038, 6038A, 6038B, 6038C and 6041 for each corporation incorporated within the United States which has 50 percent or more of its stock owned or controlled directly or indirectly by a corporation whose income or factors are required to be included in the combined report prepared pursuant to Revenue and Taxation Code section 25110. The consolidating workpapers used to prepare consolidated financial statements for reporting to shareholders shall normally satisfy this requirement.
(6) State returns. Retain and make available upon request all state (including the District of Columbia) tax returns filed by each corporation whose income or factors are required to be included in the combined report prepared pursuant to Revenue and Taxation Code section 25110. 
(7) Information requests. Comply with reasonable requests for information necessary to determine or verify net income and apportionment factors or the geographic source of income under the Internal Revenue Code. Requests for information may be made during an audit or during an administrative review of a notice of proposed assessment or a claim for refund as well as a suit for refund.
(e) Period of retention. The material required to be retained pursuant to Revenue and Taxation Code section 25112, subdivision (b), need be retained only for the period of time during which the taxpayer's franchise or income tax liability may be adjusted. The period of adjustment includes periods during which an appeal is pending before the State Board of Equalization or a lawsuit is pending, as well as the normal period of limitation, including waivers, for assessing additional tax or filing a claim for refund.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25112, Revenue and Taxation Code.
HISTORY

1. New section filed 1-3-89; operative 1-3-89 (Register 89, No. 4).
2. Change without regulatory effect amending subsections (a)(1), (a)(2)(B), (a)(4), (a)(4)(D), (a)(6), (a)(7)(B), (c) and Note and new subsections (d)-(e) filed 6-16-94 pursuant to section 100, title 1, California Code of Regulations (Register 94, No. 24). 
3. Change without regulatory effect amending section filed 3-19-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 12).
§25113. Water's-Edge Election.
Note     •     History

(a) This regulation shall be applicable to taxable years beginning on or after January 1, 2008.
(b) Definitions. For purposes of Revenue and Taxation Code section 25113 and this regulation, the following definitions are applicable:
(1) Water's-edge group. The water's-edge group means all banks, corporations or other entities whose income and apportionment factors are considered pursuant to Revenue and Taxation Code section 25110 in computing the income of the individual taxpayer for the current taxable year which is derived from or attributable to sources within this state.
(2) Original return. The original return is the last return filed on or before the due date (taking extensions into account) regardless of the form on which it is filed or however it may be denominated. A return filed after the due date (taking extensions into account) regardless of the form on which it is filed or however it may be denominated may be an original return, if no other return has been filed, but it would not be a timely filed, original return.
(3) Timely filed. A timely filed return is one filed on or before the due date (taking extensions into account).
(4) Commencement date. The commencement date of a water's-edge election is the first day of the period for which the election is made. Subsection (c)(6) of this regulation provides rules for taxpayers that have a valid election for taxable years beginning before January 1, 2003.
(5) Net book value. Net book value is equal to an asset's original cost minus depreciation, depletion and amortization. Book value means the amount which an asset is carried on a balance sheet. Depreciation means the systematic write off of the cost of a tangible asset over the asset's useful life. Depletion means the systematic write off of the cost of harvesting or mining a natural resource. Amortization means the systematic write off of the cost of an intangible asset over the asset's useful life. Book value, depreciation, depletion and amortization will be reflected using United States Generally Accepted Accounting Principles (US GAAP). If any member of a component unitary group does not maintain its books on US GAAP, the Franchise Tax Board may allow an alternative method of valuation of that member's business assets. 
(6) Parent Corporation. A parent corporation of the taxpayer is a corporation that owns or constructively owns stock possessing more than 50 percent of the voting power of the taxpayer as determined under Revenue and Taxation Code section 25105, subdivisions (e) and (f).
(7) Unitary affiliate group. Unitary affiliate group is all of those corporations that would constitute a unitary group if a water's-edge election were not made. 
(8) New unitary affiliate group. New unitary affiliate group is a unitary affiliate group that is created by a new affiliation of two or more corporations, or by the addition of one or more new members to an existing unitary affiliate group.
(9) Component unitary group. Component unitary group is that portion of a group of corporations that have become members of a new unitary affiliate group that were members of their own respective unitary affiliate group prior to entering the new unitary affiliate group, disregarding any corporations that did not become part of the new unitary group.
(10) Business assets. Business assets are assets, including intangible assets, other than stock of a member of the unitary affiliate group, which are used in the conduct of the business of the unitary affiliate group or would produce business income to the unitary affiliate group, if an election were not in place, if the assets were sold. 
Business assets are valued at net book value as of the date that electing taxpayers and non-electing taxpayers or non-taxpayers become members of a new unitary affiliate group. A copy of the taxpayer's valuation of the business assets shall be attached to the return for which the valuation is required by Revenue and Taxation Code section 25113. The Franchise Tax Board may, in its sole discretion, allow an alternative valuation date if it determines that an alternative date would be more appropriate.
(11) Taxpayer. Taxpayer means the individual corporation with a requirement to file under this part. It does not mean the water's-edge group or all the members of the water's-edge group that are required to file under this part.
(12) Good cause. Good cause shall have the same meaning as specified in Treasury Regulation section 1.1502-75(c).
(13) Common parent election. A common parent election may be made by a parent corporation that is an electing taxpayer or by an officer or other authorized agent of either a parent corporation of a non-electing taxpayer or another corporation with authority to bind a non-electing taxpayer to an election. Either subsection (c)(2)(A)1. or 2. of this regulation would constitute a common parent election.
(c) Electing water's-edge.
(1) To make the water's-edge election permitted by Revenue and Taxation Code section 25110, a taxpayer must make an election on a timely filed, original return for the year of the election. The election must be made by every member of the self-assessed combined reporting group that is subject to taxation under this part. The initial election must be for an 84-month period. A water's-edge election shall remain in effect until terminated.
(2) An election made on a group return of a self-assessed combined reporting group is an election by each taxpayer member included in that group return. No election will have been made if a taxpayer member of the combined reporting group files a separate return in which no election is made and subsection (c)(2)(A) does not apply.
(A) A taxpayer that fails to make an election on its own timely filed, original return shall be deemed to have elected if any of the following apply:
1. It has a parent corporation that is an electing taxpayer that included the income and apportionment factors of the non-electing taxpayer in the self-assessed combined reporting group reflected in the electing parent's timely filed, original return, including a group return.
2. The income and apportionment factors of the non-electing taxpayer are reflected in the self-assessed combined reporting group of a timely filed, original return of an electing taxpayer, and the notification of election filed by the electing taxpayer pursuant to Revenue and Taxation Code section 25113, subdivision (a)(2) is signed by an officer or other authorized agent of either a parent corporation of the non-electing taxpayer or another corporation with authority to bind the non-electing taxpayer to an election.
EXAMPLE: 1. Corporation P, a California taxpayer and a calendar year taxpayer, has a subsidiary, Corporation A, who is also a California taxpayer and calendar year taxpayer.
A. Corporation P makes a common parent water's-edge election and includes its subsidiary Corporation A in the combined report used to determine its California income. Corporation A files a separate return using a worldwide combined report that includes Corporation P. Corporation A is deemed to have elected.
B. Corporation P, a California taxpayer, timely files a single group return on a combined basis for all members of the water's-edge group and includes the income and apportionment factors (both numerators and denominators) of Corporation A. Corporation A files a separate return and files on a worldwide basis. Corporation A is deemed to have elected.
EXAMPLE: 2. Corporation P has subsidiaries, Corporations A, B and C. Corporations A and C are California taxpayers, Corporations P and B are not. 
A. Corporation B's President has a power of attorney for every member of Corporation P's commonly controlled group, including Corporation A. Corporation C timely files its own return on a combined basis including the income and factors of Corporation A and other members of the water's-edge group. Corporation B's President signs a common parent election that lists all taxpayer members of Corporation P's commonly controlled group as making a water's-edge election. Corporation A files a separate return on a worldwide basis. Corporation A is deemed to have elected.
B. Corporation P's Chief Executive Officer signs the notification of election and indicates that it is making a common parent election which Corporation B, a taxpayer member of the water's-edge group, includes with its timely filed, original return filed on a water's-edge basis. Corporation A files a separate return on a worldwide basis. Corporation A is deemed to have elected.
EXAMPLE: 3. Corporation P is not a California taxpayer, but it has subsidiaries A, B and C that are taxpayers and are part of its unitary business. No common parent election has been filed prior to the due date (taking extensions into account) for filing a return. After the due date (taking extensions into account), a delinquent original California return is filed with a common parent election by Corporation P, stating that it now believes it had nexus in California. Because the election was not made on a timely filed, original return, there is no valid election.
EXAMPLE: 4. Corporation P, the parent corporation and a calendar year taxpayer, makes a common parent water's-edge election and includes its subsidiary, Corporation A, also a calendar year taxpayer, as a member of the water's-edge group. Corporation P and Corporation A have different fiscal years. Corporation P's taxable year ends March 31 and Corporation A's taxable year ends December 31. Corporation P files its March 31, 2008 taxable year return on January 15, 2009 on a combined basis, which includes Corporation A. Corporation A files its December 31, 2008 return on October 15, 2009 on a separate company worldwide basis. Corporation A is deemed to have elected. Corporation A's and Corporation P's election commencement date is determined in accordance with the provisions of subsection (g) of this regulation.
3. If a corporation that is a member of a combined reporting group is not itself subject to taxation under Part 11 in the year for which the water's-edge election is made, but subsequently becomes subject to taxation under Part 11, that corporation shall be deemed to have elected with the other taxpayer members of the combined reporting group.
4. A corporation that is a non-electing taxpayer and is subsequently proved to be a member of the water's-edge group pursuant to a Franchise Tax Board audit determination shall be deemed to have elected if the value of the total business assets of the electing taxpayers is greater than those of the non-electing taxpayers.
For purposes of applying the business asset test of this subsection, the term “business assets” shall have the same meaning as Revenue and Taxation Code section 25113, subdivision (c)(6)(A), except that the business assets of other members of the unitary affiliate group that are not taxpayers shall not be taken into account. 
EXAMPLE: Corporation P is a foreign corporation that is not a California taxpayer. It has subsidiaries Corporation A and Corporation B that are California taxpayers and Corporation C that is not a California taxpayer. Corporations P, A, B and C are all on a calendar year basis. Corporation A makes a water's-edge election on its timely filed return for Year 3 reporting that it is unitary with Corporations P and C but does not include Corporation P in a combined report because of the water's-edge election. Corporation A files a combined report that includes Corporation C for Year 1, Year 2, Year 3 and Year 4. No common parent election was filed. Corporation B files a separate tax return as a non-electing taxpayer for Year 1, Year 2, Year 3 and Year 4. Upon Franchise Tax Board audit, Corporation B is determined to be a member of the unitary group that includes Corporations A, P, and C in each year for Year 1, Year 2, Year 3 and Year 4. In Year 3, the year of Corporation A's water's-edge election, Corporation A's business assets are $500 million and Corporation B's business assets are $250 million. Corporation B is deemed to have elected, because Corporation A's business assets are greater than Corporation B's business assets. Corporations P and C's business assets are not taken into account in performing the business assets test.
(B) A taxpayer that is engaged in more than one apportioning trade or business as defined in Revenue and Taxation Code section 25128, subdivision (d)(6), may make a separate election for each apportioning trade or business.  
(3) Validity of Election. The election shall be considered valid if the following are satisfied:  
(A) The tax is computed in a manner that is consistent with a water's-edge election, and  
(B) The taxpayer files its return on a form 100W (S Corporations file a form 100S) and attaches a form 100-WE. 
(C) In place of subsection (c)(3)(B), the Franchise Tax Board may consider other objective evidence of the making of a water's-edge election, such as: 
1. A statement attached to the timely filed, original return indicating a water's-edge election is being made, or
2. The taxpayer's timely filed, original return includes one or more substantially completed forms associated with a water's-edge combined report, such as FTB form 1115, 2416, 2424, or their successors.
(4) Time of making the election.
(A) The election must be made on a timely filed, original return.
(B) Timely filings which only supplement a previously filed return, or correct mathematical or other errors, shall be considered as incorporating the previously filed return, to the extent not inconsistent, and shall be treated as the original return for purposes of making a water's-edge election if they contain objective evidence that supports the conclusion that a water's-edge election was intended as provided in subsection (c) of this regulation. Any filing described in subsection (c) of this regulation that clearly reflects an intent to withdraw an election made on a previously filed return shall be treated as an original return.
EXAMPLE 1: Corporation A is a calendar year taxpayer. Its return is due March 15. But if it files its return on or before October 15, an extension is automatically granted to October 15. If it fails to file a return by October 15, no extension exists. Under the paperless extension process, the return is timely if it is filed on or before October 15.
a. Corporation A files its original return on October 15 of the year. The original return is timely filed, and any water's-edge election contained therein shall be effective for the year for which the return is filed. 
b. Corporation A files its original return on May 15 of the year. The original return is timely filed, and any water's-edge election contained therein shall be effective for the year for which the return is filed. 
c. Corporation A files a return on May 15 and files a second return on October 15. Corporation A's original return was filed on October 15. The water's-edge election must be made by that time. If Corporation A's May 15th filing makes a water's-edge election, and the election is withdrawn in the October 15th filing, the election made on May 15th has no effect. If Corporation A's May 15th filing did not make a water's-edge election, but a water's-edge election is made on the October 15th filing, Corporation A has made a water's-edge election. 
EXAMPLE 2: Corporation B, a calendar year taxpayer, files a return on February 15. Corporation B's return is treated as being filed on March 15, and March 15 is the date the election is considered to have been made. Any return filed after March 15 (the due date of the return) will be considered an amended return.  
EXAMPLE 3: Corporation C, a calendar year taxpayer, has a due date for its return of March 15. It files a return on February 15 and files a second return on March 10. The return filed on March 10 is treated as the original return for the year. The election to file on a water's-edge basis must be made on the March 10 filing to be effective. If Corporation C's February 15 filing makes a water's-edge election and the March 10 filing does not make an election, the election made on the February 15 return has no effect. If Corporation C's February 15th filing did not make a water's-edge election, and a water's-edge election is made on the March 10th filing, Corporation C has made a water's-edge election. 
(5) A copy of the original election should be attached to all subsequent returns filed during the election period.
(6) Corporations that have a valid election for taxable years beginning before January 1, 2003, and are required to file on a water's-edge basis for taxable years beginning on or after January 1, 2003 due to that election, will continue to file on a water's-edge basis and will be deemed to have elected under Revenue and Taxation Code section 25113 for taxable years beginning on or after January 1, 2003. The commencement date, as elected under Revenue and Taxation Code section 25111, remains in effect. 
EXAMPLE 1: Corporation A, a calendar year taxpayer, elected to file on a water's-edge basis starting January 1, 2000. For taxable years beginning on or after January 1, 2003, Corporation A must continue to file on a water's-edge basis and is deemed to have elected under the new statute. Under Revenue and Taxation Code section 25111, subdivision (a), a taxpayer would always have an 84-month contract on its anniversary date unless it filed a notice of nonrenewal. Although Corporation A originally entered into a water's-edge contract commencing on January 1, 2000, an additional year would have been added to the contract each year unless a notice of nonrenewal was filed pursuant to Revenue and Taxation Code section 25111. The election commencement date for purposes of Revenue and Taxation Code section 25113 is January 1, 2002.
For the year beginning January 1, 2009, and each year thereafter, Corporation A may file on a water's-edge basis without being subject to a new 84-month election period or may terminate its election by filing on a worldwide basis. 
EXAMPLE 2: Corporation B, a calendar year taxpayer, made a water's-edge election beginning January 1, 1994, and filed a notice of nonrenewal to end the contract on December 31, 2001. Corporation B did not file a new contract for the taxable year ended on December 31, 2002, but continued to file on a water's-edge basis on a timely filed, original return that contained other objective evidence of an intended water's-edge election. Corporation B has a new water's-edge election with a commencement date of January 1, 2002. Corporation B may not terminate its water's-edge election for any year prior to the expiration of the 84-month period without the Franchise Tax Board's consent as provided under Revenue and Taxation Code section 25113, subdivision (c)(9). It could terminate without the Franchise Tax Board's consent only after the 84-month period that ends December 31, 2008.
Corporation B's election, entered into for the 1994 taxable year, ended on December 31, 2001, because the filing of the notice of nonrenewal prevented automatic annual renewal of the contract. However, for the taxable year ended December 31, 2002, Corporation B had a valid new water's-edge contract, because there was substantial performance of the requirements for entering into a water's-edge contract. Therefore, Corporation B had a new water's-edge contract with a commencement date of January 1, 2002. As a consequence, under Revenue and Taxation Code section 25111, subdivision (f), and section 25113, subdivision (f), Corporation B's commencement date of the election is January 1, 2002. Because Corporation B's election will not have been in existence for 84 months until after December 31, 2008, it must obtain the Franchise Tax Board's consent to terminate the election before then.
EXAMPLE 3: Corporation C elected to file on a water's-edge basis beginning April 1, 1995, for its fiscal year ended March 31, 1996. Corporation C filed a notice of nonrenewal to end the contract on March 31, 2003. For the taxable year ended March 31, 2004, Corporation C filed on a worldwide basis. Corporation C may make a water's-edge election without the Franchise Tax Board's consent for a taxable year that begins within the 84-month period after March 31, 2003.
Corporation C's election contract under Revenue and Taxation Code section 25111 ended on March 31, 2003, due to the previously filed notice of nonrenewal. Revenue and Taxation Code section 25113 is operative with respect to Corporation C for its taxable years beginning on or after April 1, 2003. Therefore, Corporation C could have made an election under Revenue and Taxation Code section 25113, but it chose to file its return for the taxable year ended March 31, 2004, on a worldwide basis.
The filing on a worldwide basis for the year ended March 31, 2004, did not constitute a “termination” of a water's-edge election under Revenue and Taxation Code section 25113, because Corporation C had not made a water's-edge election for any taxable year beginning on or after January 1, 2003. For taxable years beginning after March 31, 2003, Corporation C may either file on a worldwide basis or it may make a water's-edge election under Revenue and Taxation Code section 25113 without requesting the Franchise Tax Board's consent to “re-elect.”
EXAMPLE 4: Corporation D elected to file on a water's-edge basis beginning April 1, 1996, for its fiscal year ended March 31, 1997. Corporation D filed a notice of nonrenewal to end the contract on March 31, 2004. For the taxable year ended March 31, 2005, Corporation D filed on a worldwide basis. Corporation D effectively terminated its water's-edge election pursuant to Revenue and Taxation Code section 25113, subdivision (c)(9), when it filed on a worldwide basis for the taxable year ended March 31, 2005. Corporation D's filing of the notice of nonrenewal under section 25111 has no effect because it caused the water's-edge contract to end on a date that falls within a taxable year that begins on or after January 1, 2003. Corporation D would not be able to make another election without the Franchise Tax Board's consent until 84 months have passed from March 31, 2004. 
EXAMPLE 5: Corporation E elected to file on a water's-edge basis beginning January 1, 1994, and filed a notice of nonrenewal to end the contract on December 31, 2006. Corporation E must request the Franchise Tax Board's consent to terminate the election prior to December 31, 2006. 
Under Revenue and Taxation Code section 25111, subdivisions (d) and (e), Corporation E's existing election remains in effect for the “balance of the period remaining since the original election or the last renewal of the election” unless it serves written notice of nonrenewal at least 90 days prior to the annual renewal date. Under Revenue and Taxation Code section 25111, subdivision (a), a taxpayer would always have an 84-month contract on its anniversary date, unless it filed a notice of nonrenewal. Although Corporation E originally entered into a water's-edge contract commencing on January 1, 1994, an additional year would have been added to the contract each year until a notice of nonrenewal was filed. In order to terminate its contract for years after December 31, 2006, Corporation E would have had to complete a contract period of 84 months on December 31, 2006. As of January 1, 2003, Corporation E is deemed to have elected under Revenue and Taxation Code section 25113, with a commencement date of January 1, 2000, 84 months prior to December 31, 2006. 
Under Revenue and Taxation Code section 25113, subdivision (f), the commencement date of the election made in a prior year under Revenue and Taxation Code section 25111 is treated as the commencement date for purposes of applying Revenue and Taxation Code section 25113. Because Corporation E's election would not have been in effect for longer than 84 months, it may not terminate the election as permitted under Revenue and Taxation Code section 25113, subdivision (c)(9), by timely filing an original tax return on form FTB 100 on a worldwide basis until after December 31, 2006. In order to terminate the election prior to December 31, 2006, the taxpayer must request and receive consent from the Franchise Tax Board under Revenue and Taxation Code section 25113, subdivision (c)(10). 
(d) Termination. 
(1) A water's-edge election may be terminated after the expiration of the initial 84-month period. This termination does not require Franchise Tax Board consent.
(A) The termination shall be made on a timely filed, original return computed on a worldwide basis for the first year in which the water's-edge election is to be terminated.
(B) The termination shall be made by every taxpayer that is a member of the water's-edge group.
(C) The termination shall be effective if the termination is made in the same manner as the election provided under Revenue and Taxation Code section 25113, subdivisions (a) and (b).
(D) Written notification of termination shall be made on a form prescribed by the Franchise Tax Board. The Franchise Tax Board may accept other objective evidence of termination of the water's-edge election such as: 
1. A timely filed, original return computed on a worldwide basis using form FTB 100 rather than form FTB 100W, or
2. A statement attached to the timely filed, original return indicating a water's-edge election is being terminated.
(2) The Franchise Tax Board may consent to terminate a water's-edge election prior to the expiration of the 84-month period if a request is made demonstrating good cause. 
(A) A request to terminate a water's-edge election shall be made on a form prescribed by the Franchise Tax Board and be filed no later than the 120th day prior to the due date of the return for which the termination would be effective, including extensions. The request shall be filed separate from any tax return and shall be mailed to the address listed in the form instructions for the notification of termination form prescribed by the Franchise Tax Board. The request shall include information and documentation of the basis for requesting termination.
(B) If the Franchise Tax Board takes no action or requests no additional information within 90 days of the filing of the request to terminate the water's-edge election, the request shall be deemed to be disallowed. 
(C) If the request is granted, the Franchise Tax Board will send a notification of the termination. The termination will be effective for the taxable year in which good cause occurred. Thereafter, the taxpayer will be required to file on a worldwide basis for at least 84 months before making another water's-edge election.
(D) A request to terminate a water's-edge election in order to permit the state to contract with an expatriate corporation, or its subsidiary, pursuant to paragraph (2) of subdivision (b) of Section 10286 of the Public Contract Code, shall be made on a form prescribed by the Franchise Tax Board. The request shall be filed separate from any tax return and shall be mailed to the address listed in the form instructions for the form for requesting permission to terminate prescribed by the Franchise Tax Board.
1. A request to terminate a water's-edge election under Revenue and Taxation Code section 25113, subsection (c)(10)(B), shall be made on a form prescribed by the Franchise Tax Board and be filed no later than the 120th day prior to the due date of the return for which the termination would be effective, including extensions. All members of the water's-edge group must make the request. Such request shall also include source documentation to support the request. 
2. A water's-edge election terminated pursuant to this subsection shall be effective for the year in which the expatriate corporation, or its subsidiary, enters into the contract with the state.
3. The Franchise Tax Board shall consent to a properly filed and documented request to terminate pursuant to Revenue and Taxation Code section 25113, subsection (c)(10)(B).
(E) The taxpayer may withdraw its request at any time prior to the Franchise Tax Board granting permission.
(3) The water's-edge election shall be automatically terminated in certain instances. Written notification of termination shall be made by every taxpayer that is a member of the water's-edge group on a form prescribed by the Franchise Tax Board.
(A) If an electing taxpayer and a non-electing taxpayer become members of a new unitary affiliate group and the value of the total business assets of the non-electing taxpayer (and affiliates, if any) is greater than those of the electing taxpayer (and affiliates, if any), the election shall be automatically terminated. 
(B) If an electing taxpayer and a non-electing taxpayer become members of a new unitary affiliate group during the taxable year, the electing taxpayer (and affiliates, if any) shall compute its tax liability on a water's-edge basis until the termination. The electing taxpayer (and affiliates, if any) shall compute its tax liability for the remaining portion of the taxable year after the termination as part of the non-electing taxpayer's unitary affiliate group. The non-electing taxpayer (and affiliates, if any) shall compute its tax liability on a worldwide basis for the entire year. 
(e) Re-election.  
(1) A water's-edge election remains in effect until terminated. If a taxpayer terminates its water's-edge election and returns to filing on a worldwide basis, then another water's-edge election may not be made for any taxable year that begins within the 84-month period following the last day of the election period that was terminated. However, the Franchise Tax Board may waive the application of this rule for good cause.
(2) A request to re-elect water's-edge shall be made on a form prescribed by the Franchise Tax Board and be filed no later than the 90th day prior to the due date of the return for which the re-election would be effective, including extensions. The request shall be filed separate from any tax return and shall be mailed to the address listed in the form instructions for the form for requesting re-election prescribed by the Franchise Tax Board. The request shall include information and documentation of the basis for requesting re-election.
a. If the Franchise Tax Board takes no action or requests no additional information within 60 days of the filing of the request to re-elect water's-edge, the request shall be deemed to be disallowed.
b. If the Franchise Tax Board approves the request for re-election, the taxpayers must then make a water's-edge election as provided in subsection (c). Such election will be effective for the taxable year in which good cause occurred. Consent given by the Franchise Tax Board will not be retroactive.
c. The taxpayer may withdraw its request at any time prior to the Franchise Tax Board granting permission.
(3) Consent for re-election is not required if the election was terminated under Revenue and Taxation Code section 25113, subdivisions (c)(2), (4), and (5). In this case, taxpayers may simply make an election as provided in Revenue and Taxation Code section 25113, subdivisions (a) and (b).
(4) Consent for re-election is not required if the 84-month period following the last day of an election period that was terminated has passed. Taxpayers may simply make an election as provided in Revenue and Taxation Code section 25113, subdivisions (a) and (b).
(f) Election, those affected.
(1) In general. The water's-edge election, to be effective, must be made by all corporations required to file under this part that are part of the water's-edge group. A taxpayer or a group of affiliated taxpayers that is engaged in more than one unitary business may make a water's-edge election with respect to one or more of the businesses, but it need not elect for all of its businesses. 
EXAMPLE: Corporations A and B are members of an affiliated group which includes Corporations C, D, E and F, all incorporated in the United States, and Corporations G, H and I, all incorporated outside of the United States. Corporations A and B are taxpayers, but are not engaged in the same unitary business. Corporations G, H and I have no factors in the United States, no United States source income, and have no Subpart F income. Corporations A, C, D and G are engaged in one unitary business. Corporations B, E, F, H and I are engaged in a separate unitary business. Either Corporation A or B may elect to file on a water's-edge basis pursuant to Revenue and Taxation Code section 25110. It is not necessary for both Corporations A and B to make a water's-edge election. 
(2) In general, the water's-edge filing status of a combined reporting group that has changes in affiliation will depend upon the status of the taxpayer (and affiliates, if any) with the greater value of total business assets. 
(A) If one or more electing taxpayer members of a combined reporting group for any reason leave the group, the water's-edge election remains in effect as to the departing taxpayer members and any remaining taxpayer members. 
(B) If electing taxpayers with different election commencement dates become members of a new group, the election commencement date of the new group shall be the commencement date of the taxpayer (and affiliates, if any) whose total business assets are the largest. 
(C) If an electing taxpayer and a non-electing taxpayer or a non-taxpayer become members of a new unitary group, the non-electing taxpayer shall be deemed to have elected if the value of the total business assets of the electing taxpayer (and affiliates, if any) is greater than those of the non-electing taxpayer or non-taxpayer (and affiliates, if any.) Otherwise, the election shall automatically be terminated at the time the electing members become part of the combined report. 
(D) If two non-electing taxpayers with different termination dates become members of a new group, the termination date, together with any associated restrictions on re-election of the taxpayer (and affiliates, if any) whose total business assets are the largest shall be the termination date of the new group. 
EXAMPLE 1: Corporation A, an electing taxpayer, and its unitary subsidiaries are acquired by Corporation B, a non-taxpayer and its non-taxpayer unitary subsidiaries, that have the larger total value of business assets than those of Corporation A's group and become instantly unitary. The new unitary group will file on a worldwide basis as of the date of combination because Corporation B's group has the larger total value of business assets than Corporation A's group and the water's-edge election is terminated. However, if the new group wants to file on a water's-edge basis, the taxpayer members may re-elect without Franchise Tax Board consent for the year in which the election was terminated or any year thereafter, with a new commencement date for the 84-month election period. If the re-election is for the year in which the group becomes properly combined, the commencement date will be the date of combination.
EXAMPLE 2: Corporation B, a non-electing taxpayer, and its unitary subsidiaries are acquired by Corporation A, an electing taxpayer and its unitary subsidiaries, that has the larger total value of business assets than those of Corporation B's group. In the year the entire group is properly combined, the group will file on a water's-edge basis because Corporation A's group has the larger total value of business assets than Corporation B's group. The start date of the deemed election is the commencement date of Corporation A's election. 
EXAMPLE 3: Corporation A and its unitary subsidiaries' election has been terminated and the group becomes a member of Corporation B's unitary group that includes one or more non-electing taxpayers that have no restrictions upon their ability to elect. The total value of business assets of Corporation A and its unitary subsidiaries is larger than that of Corporation B's group. All members of the new Corporation B group that includes Corporation A will be restricted from making a new election for the period of time for which Corporation A is restricted. 
EXAMPLE 4: Same facts as EXAMPLE 3, except that Corporation B's taxpayer members have no restrictions upon their ability to elect and have the larger total value of business assets. In this situation, none of the taxpayer members of the new Corporation B group that includes Corporation A will be subject to any restrictions on making a new water's-edge election. 
(g) Effect of different fiscal years. In the case of taxpayers that are on different fiscal years, each member of the water's-edge group shall make the election upon its timely filed, original return for the taxable year for which the election is being made. The election shall become effective as of the beginning of the taxable year of the member of the water's-edge group that files its return and election and has the latest taxable year end. The 84-month election period for each member of the water's-edge group will run from the date that the election becomes effective, i.e., the beginning of the taxable year of the last member of the water's-edge group to elect.
Each taxpayer in the group shall calculate its tax on a worldwide basis for that portion of the year between the beginning of its taxable year and the beginning of the taxable year of the last member of the group to make the election, and on a water's-edge basis for the remainder of the taxable year.
EXAMPLE: Corporations A and B are California taxpayers engaged in a unitary business and wish to make a water's-edge election. Corporation A's taxable year ends December 31 and Corporation B's taxable year ends March 31. Corporation A files an election for its taxable year ended December 31, 2007, on its return filed on October 15, 2008. Corporation B files an election for its taxable year ended March 31, 2008, on its return filed on January 15, 2009.
Corporation A's 84-month election period begins April 1, 2007, the beginning of the taxable year of the last member of the group to elect. Corporation A will file its return for the taxable year ending December 31, 2007, apportioning its income to California on a worldwide basis for the period from January 1, 2007, through March 31, 2007, and on a water's-edge basis for the period from April 1, 2007, through December 31, 2007. Corporation B will file its return for the taxable year ending March 31, 2008, apportioning its income to California on a water's-edge basis for its entire taxable year.
NOTE

Authority cited: Sections 19503 and 25113(e), Revenue and Taxation Code. Reference: Section 25113, Revenue and Taxation Code.  
HISTORY

1. New section filed 4-6-2009; operative 5-6-2009 (Register 2009, No. 15).
§25114. Presumptions Arising from Federal Audits.
Note     •     History

(a) Examinations.
(1) In general. The Franchise Tax Board shall examine the tax returns of all taxpayers that have made an election pursuant to Revenue and Taxation Code section 25110. In those cases in which such review or inspection reveals that there may be potential noncompliance with arm's-length standards involving the transfer of goods, services or intangibles, or the lending of money between those entities whose income and apportionment factors are required to be considered pursuant to Revenue and Taxation Code section 25110 and other affiliated corporations, an examination of such transactions may be conducted unless the taxpayer has been, or is currently, under examination by the Internal Revenue Service with respect to the same year on the same issue.
(2) Principles under which a transfer pricing examination is to be conducted. The Franchise Tax Board shall use the principles and procedures followed by the Internal Revenue Service in conducting examinations under Internal Revenue Code section 482 to prevent the evasion of taxes or to clearly reflect the income of two or more organizations, trades, or businesses.
(b) Presumptions regarding examinations by the Internal Revenue Service.
(1) Examinations. With respect to those taxpayers which have been subject to an examination by the Internal Revenue Service involving the application of Internal Revenue Code section 482, it shall be presumed that:
(A) if a final adjustment was made under the authority of Internal Revenue Code section 482, it is correct and that no further adjustment is required for the issue or transaction adjusted,
(B) if no adjustments have been made or proposed under the authority of Internal Revenue Code section 482, none are necessary.
(2) Overcoming presumption. The presumptions set forth in paragraph (1) may be overcome by either the Franchise Tax Board or the taxpayer by a showing that:
(A) an adjustment or a failure to make an adjustment was erroneous,
(B) the result of any possible adjustment would produce a minimal federal tax change because of correlative or offsetting adjustments, including the operation of net operating losses, the federal foreign tax credit or the shifting of income or deductions between years, or
(C) substantially the same result was obtained under other sections of the Internal Revenue Code.
EXAMPLE:
T, a U.S. incorporated entity, has had operating losses of $1,000,000 for each of the five preceding years, 1-5, giving rise to a $5,000,000 net operating loss carry forward. In year 6, a possible pricing adjustment was considered between T and its foreign subsidiary F. The adjustment would increase T's income by $1,000,000. For years 7, 8 and 9 T has operating losses of $500,000 a year. There are no pricing adjustments between T and F which could affect their federal income tax liability for such years. The Internal Revenue Service makes no adjustment with regard to year 6. There is no presumption attached to the failure to make an adjustment because no federal revenue change would occur.
(3) Lack of examination. No presumption of correctness arises with respect to any transaction which has not been subject to an examination by the Internal Revenue Service pursuant to Internal Revenue Code section 482.
(4) Internal Revenue Service examination For purposes of this section, a transfer pricing examination of a transaction or issue by the Internal Revenue Service requires a referral to an International Examiner and his/her direct participation in the examination of the taxpayer as documented by notice that the examination was being conducted pursuant to Internal Revenue Code section 482 with respect to such transaction or issue.
(c) Use of federal regulations. Effective as of January 1, 1988, in making distributions, apportionments, and allocations pursuant to Revenue and Taxation Code section 25114, the Franchise Tax Board shall follow the rules, regulations and procedures of the Internal Revenue Service in conducting examinations under Internal Revenue Code section 482 as described in the regulations to such section applicable to the taxable year being examined.
(d) Definitions. For purposes of this section, the following definitions are applicable:
(1) Examine. To examine is to review or inspect a tax return, which may or may not include an audit of the return.
(2) Examination. An examination is an audit for a tax return including a desk audit as well as a field audit.
(e) The amendments made to this regulation shall apply to examinations commenced by the Franchise Tax Board on or after January 1, 2008. An examination will be considered commenced when a taxpayer is first contacted by the Franchise Tax Board concerning any examination with respect to the taxpayer's return.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25114, Revenue and Taxation Code.
HISTORY

1. New section filed 1-3-89; operative 1-3-89 (Register 89, No. 4).
2. Change without regulatory effect amending section and Note filed 4-2-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 14).
3. Editorial correction of subsection (c) (Register 2003, No. 33).
4. Amendment of subsections (a)(1)-(b)(1)(A), (b)(2)(B) and (b)(3)-(c) and new subsections (d)-(e) filed 5-21-2009; operative 6-20-2009 (Register 2009, No. 21).
§25115. Election Fee. [Repealed]
Note     •     History

NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25115, Revenue and Taxation Code.
HISTORY

1. New section filed 1-3-89; operative 1-3-89 (Register 89, No. 4).
2. Amendment of subsections (a)(1), (a)(3)-(4), (a)(5)(A)-(B), (b)(4)-(5), (c)(1)(A), (c)(4)(A)-(B), (d)(1)(A)-(B), (d)(2)(A)(ii), (d)(2)(B)(ii), (d)(2)(C), (d)(2)(C)(ii), (d)(2)(E), (d)(2)(G), (e)(1), (f)(1)(B) and (h)(1)-(3), new subsections (d)(2)(H), (d)(3)(A)(ii) and (f)(3)-(4), repealer of subsection (d)(2)(A)(iii) filed 11-3-92; operative 12-3-92 (Register 92, No. 45).
3. Change without regulatory effect amending subsections (a)(1), (a)(5), (b)(4), (c)(4)(A) and Note and new subsection (j) filed 6-16-94 pursuant to section 100,  title 1, California Code of Regulations (Register 94, No. 24). 
4. Change without regulatory effect repealing section filed 2-28-2002 pursuant to section 100, title 1, California Code of Regulations (Register 2002, No. 9).
Article 2. Uniform Division of Income for Tax Purposes Act
HISTORY

1. Change without regulatory effect repealing Article 2 (sections 25120-25139)  (Register 87, No. 15).
Article 2.5. Uniform Division of Income for Tax Purposes Act
§25120. Definition of Business and Nonbusiness Income.
Note     •     History

(a) Business and Nonbusiness Income Defined. Section 25120 defines “business income” as income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations. In essence, all income which arises from the conduct of trade or business operations of a taxpayer is business income. For purposes of administration of Sections 25120 to 25139 inclusive, the income of the taxpayer is business income unless clearly classifiable as nonbusiness income.
Nonbusiness income means all income other than business income.
The classification of income by the labels occasionally used, such as manufacturing income, compensation for services, sales income, interest, dividends, rents, royalties, gains, operating income, nonoperating income, etc., is of no aid in determining whether income is business or nonbusiness income. Income of any type or class and from any source is business income if it arises from transactions and activity occurring in the regular course of a trade or business. Accordingly, the critical element in determining whether income is “business income” or “nonbusiness income” is the identification of the transactions and activity which are the elements of a particular trade or business. In general all transactions and activities of the taxpayer which are dependent upon or contribute to the operations of the taxpayer's economic enterprise as a whole constitute the taxpayer's trade or business and will be transactions and activity arising in the regular course of, and will constitute integral parts of, a trade or business. (See Regulation 25120(c) for more specific examples of the classification of income as business or nonbusiness income; see Regulation 25120(b) for further explanation of what constitutes a trade or business.)
(b) Two or More Businesses of a Single Taxpayer. A taxpayer may have more than one “trade or business.” In such cases, it is necessary to determine the business income attributable to each separate trade or business. The income of each business is then apportioned by an apportionment formula which takes into consideration the instate and outstate factors which relate to the trade or business the income of which is being apportioned.
EXAMPLE:
The taxpayer is a conglomerate with three operating divisions. One division is engaged in manufacturing aerospace items for the federal government. Another division is engaged in growing tobacco products. The third division produces and distributed motion pictures for theaters and television. Each division operates independently; there is no strong central management. Each division operates in this state as well as in other states. In this case, it is fair to conclude that the taxpayer is engaged in three separate “trades of businesses.” Accordingly, the amount of business income attributable to the taxpayer's trade or business activities in this state is determined by applying an appropriate apportionment formula to the business income of each business.
The determination of whether the activities of the taxpayer constitute a single trade or business or more than one trade or business will turn on the facts in each case. In general, the activities of the taxpayer will be considered a single business if there is evidence to indicate that the segments under consideration are integrated with, dependent upon or contribute to each other and the operations of the taxpayer as a whole. The following factors are considered to be good indicia of a single trade of business, and the presence of any of these factors creates a strong presumption that the activities of the taxpayer constitute a single trade of business:
(1) Same type of business: A taxpayer is generally engaged in a single trade or business when all of its activities are in the same general line. For example, a taxpayer which operates a chain of retail grocery stores will almost always be engaged in a single trade or business.
(2) Steps in a vertical process: A taxpayer is almost always engaged in a single trade or business when its various divisions or segments are engaged in different steps in a large, vertically structured enterprise. For example, a taxpayer which explores for and mines copper ores; concentrates, smelts and refines the copper ores; and fabricates the refined copper into consumer products is engaged in a single trade or business, regardless of the fact that the various steps in the process are operated substantially independently of each other with only general supervision from the taxpayer's executive offices.
(3) Strong centralized management: A taxpayer which might otherwise be considered as engaged in more than one trade or business is properly considered as engaged in one trade or business when there is a strong central management, coupled with the existence of centralized departments for such functions as financing, advertising, research, or purchasing, Thus, some conglomerates may properly be considered as engaged in only one trade or business when the central executive officers are normally involved in the operations of the various divisions and there are centralized offices which perform for the divisions the normal matters which a truly independent business would perform for itself, such as accounting, personnel, insurance, legal, purchasing, advertising, or financing.
(c) Business and Nonbusiness Income; Application of Definitions. The following are rules and examples for determining whether particular income is business or nonbusiness income. (The examples used throughout these regulations are illustrative only and do not purport to set forth all pertinent facts.)
(1) Rents from real and tangible personal property: Rental income from real and tangible property is business income if the property with respect to which the rental income was received is used in the taxpayer's trade or business or is incidental thereto and therefore is includible in the property factor under Regulations 25129 to 25131 inclusive.
EXAMPLE (A):
The taxpayer operates a multistate car rental business. The income from car rentals is business income.
EXAMPLE (B):
The taxpayer is engaged in the heavy construction business in which it uses equipment such as cranes, tractors, and earth-moving vehicles. The taxpayer makes short-term leases of the equipment when particular pieces of equipments are not needed on any particular projects. The rental income is business income.
EXAMPLE (C):
The taxpayer operates a multistate chain of men's clothing stores. The taxpayer purchases a five-story office building for use in connection with this trade or business. It uses the street floor as one of its retail stores and the second and third floors for its general corporate headquarters. The remaining two floors are leased to others. The rental of the two floors is incidental to the operation of the taxpayer's trade or business. The rental income is business income.
EXAMPLE (D):
The taxpayer operates a multistate chain of grocery stores. It purchases as an investment an office building in another state with surplus funds and leases the entire building to others. The net rental income is not business income of the grocery store's trade or business. Therefore, the net rental income is nonbusiness income.
EXAMPLE (E):
The taxpayer operates a multistate chain of men's clothing stores. The taxpayer invests in a 20-story office building and uses the street floor as one of its retail stores and the second floor for its general corporate headquarters. The remaining 18 floors are leased to others. The rental of the eighteen floors is not incidental to but rather is separate from the operation of the taxpayer's trade or business. Therefore the net rental income is nonbusiness income.
EXAMPLE (F):
The taxpayer constructed a plant for use in its multistate manufacturing business and 20 years later the plant was closed and put up for sale. The plant was rented for a temporary period from the time it was closed by the taxpayer until it was sold 18 months later. The rental income is business income and the gain on the sale of the plant in business income.
EXAMPLE (G):
The taxpayer operates a multistate chain of grocery stores. It owned an office building which it occupied as its corporate headquarters. Because of inadequate space, the taxpayer acquired a new and larger building elsewhere for its corporate headquarters. The old building was rented to an investment company under a five-year lease. Upon expiration of the lease, the taxpayer sold the building at a gain (or loss). The net rental income received over the lease period is nonbusiness income and the gain (or loss) on the sale of the building is nonbusiness income.
(2) Gains or losses from sales of assets. Gain or loss from the sale, exchange or other disposition of real or tangible or intangible personal property constitutes business income if the property while owned by the taxpayer was used in the taxpayer's trade or business. However, if such property was utilized for the production of nonbusiness income or otherwise was removed from the property factor before its sale, exchange or other disposition, the gain or loss will constitute nonbusiness income. (See Regulations 25129 to 25131, inclusive.)
EXAMPLE (A):
In conducting its multistate manufacturing business, the taxpayer systematically replaces automobiles, machines, and other equipment used in the business. The gains or losses resulting from those sales constitute business income.
EXAMPLE (B):
The taxpayer constructed a plant for use in its multistate manufacturing business and 20 years later sold the property at a gain while it was in operation by the taxpayer. The gain is business income.
EXAMPLE (C):
Same as (B) except that the plant was closed and put up for sale but was not in fact sold until a buyer was found 18 months later. The gain is business income.
EXAMPLE (D):
Same as (B) except that the plant was rented while being held for sale. The rental income is business income and the gain on the sale of the plant is business income.
EXAMPLE (E):
The taxpayer operates a multistate chain of grocery stores. It owned an office building which it occupied as its corporate headquarters. Because of inadequate space, the taxpayer acquired a new and larger building elsewhere for its corporate headquarters. The old building was rented to an unrelated investment company under a five-year lease. Upon expiration of the lease, the taxpayer sold the building at a gain (or loss). The gain (or loss) on the sale is nonbusiness income and the rental income received over the lease period is nonbusiness income.
(3) Interest. Interest income is business income where the intangible with respect to which the interest was received arises out of or was created in the regular course of the taxpayer's trade or business operations or where the purpose for acquiring and holding the intangible is related to or incidental to such trade or business operations.
EXAMPLE (A):
The taxpayer operates a multistate chain of department stores, selling for cash and on credit. Service charges, interest, or time-price differentials and the like are received with respect to installment sales and revolving charge accounts. These amounts are business income.
EXAMPLE (B):
The taxpayer conducts a multistate manufacturing business. During the year the taxpayer receives a federal income tax refund and collects a judgment against a debtor of the business. Both the tax refund and the judgment bore interest. The interest income is business income.
EXAMPLE (C):
The taxpayer is engaged in a multistate manufacturing and wholesaling business. In connection with that business, the taxpayer maintains special accounts to cover such items as workmen's compensation claims, rain and storm damage, machinery replacement, etc. The monies in those accounts are invested at interest. Similarly, the taxpayer temporarily invests funds intended for payment of federal, state and local tax obligations. The interest income is business income.
EXAMPLE (D):
The taxpayer is engaged in a multistate money order and traveler's checks business. In addition to the fees received in connection with the sale of the money orders and traveler's checks, the taxpayer earns interest income by the investment of the funds pending their redemption. The interest income is business income.
EXAMPLE (E):
The taxpayer is engaged in a multistate manufacturing and selling business. The taxpayer usually has working capital and extra cash totaling $200,000 which it regularly invests in short-term interest bearing securities. The interest income is business income.
EXAMPLE (F):
In January the taxpayer sold all the stock of a subsidiary for $20,000,000. The funds are placed in an interest-bearing account pending a decision by management as to how the funds are to be utilized. The interest income is nonbusiness income.
(4) Dividends. Dividends are business income where the stock with respect to which the dividends are received arises out of or was acquired in the regular course of the taxpayer's trade or business operations or where the purpose for acquiring and holding the stock is related to or incidental to such trade or business operations.
EXAMPLE (A):
The taxpayer operates a multistate chain of stock brokerage houses. During the year the taxpayer receives dividends on stock it owns. The dividends are business income.
EXAMPLE (B):
The taxpayer is engaged in a multistate manufacturing and wholesaling business. In connection with that business the taxpayer maintains special accounts to cover such items as workmen's compensation claims, etc. A portion of the monies in those accounts is invested in interest-bearing bonds. The remainder is invested in various common stocks listed on national stock exchanges. Both the interest income and any dividends are business income.
EXAMPLE (C):
The taxpayer and several unrelated corporations own all of the stock of a corporation whose business operations consist solely of acquiring and processing materials for delivery to the corporate owners. The taxpayer acquired the stock in order to obtain a source of  supply of  materials used in its manufacturing business. The dividends are business income.
EXAMPLE (D):
The taxpayer is engaged in a multistate heavy construction business. Much of its construction work is performed for agencies of the federal government and various state governments. Under state and federal laws applicable to contracts for these agencies, a contractor must have adequate bonding capacity, as measured by the ratio of its current assets (cash and marketable securities) to current liabilities. In order to maintain an adequate bonding capacity the taxpayer holds various stocks and interest-bearing securities. Both the interest income and any dividends received are business income.
EXAMPLE (E):
The taxpayer receives dividends from the stock of its subsidiary or affiliate which acts as the marketing agency for products manufactured by the taxpayer. The dividends are business income.
EXAMPLE (F):
The taxpayer is engaged in a multistate glass manufacturing business. It also holds a portfolio of stock and interest-bearing securities, the acquisition and holding of which are unrelated to the manufacturing business. The dividends and interest income received are nonbusiness income.
(5) Patent and copyright royalties. Patent and copyright royalties are business income where the patent or copyright with respect to which the royalties were received arises out of or was created in the regular course of the taxpayer's trade or business operations or where the purpose for acquiring and holding the patent or copyright is related to or incidental to such trade or business operations.
EXAMPLE (A):
The taxpayer is engaged in the multistate business of manufacturing and selling industrial chemicals. In connection with that business the taxpayer obtained patents on certain of its products. The taxpayer licensed the production of the chemicals in foreign countries, in return for which the taxpayer receives royalties. The royalties received by the taxpayer are business income.
EXAMPLE (B):
The taxpayer is engaged in the music publishing business and holds copyrights on numerous songs. The taxpayer acquires the assets of a smaller publishing company,including music copyrights. These acquired copyrights are thereafter used by the taxpayer in its business. Any royalties received on these copyrights are business income.
EXAMPLE (C):
Same as Example (B), except that the acquired company also held the patent on a type of phonograph needle. The taxpayer does not manufacture or sell phonographs or phonograph equipment. Any royalties received on the patent would be nonbusiness income.
(d) Proration of Deductions. In most cases an allowable deduction of a taxpayer will be applicable only to the business income arising from a particular trade or business or to a particular item of nonbusiness income. In some cases an allowable deduction may be applicable to the business incomes of more than one trade or business and/or to several items of nonbusiness income. In such cases the deduction shall be prorated among such trades or businesses and such items of nonbusiness income in a manner which fairly distributes the deduction among the classes of income to which it is applicable.
In filing returns with this state, if the taxpayer departs from or modifies the manner of prorating any such deduction used in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification.
If the returns or reports filed by a taxpayer with all states to which the taxpayer reports under the Uniform Division of Income for Tax Purposes Act are not uniform in the application or proration of any deduction, the taxpayer shall disclose in its return to this state the nature and extent of the variance.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 25120, Revenue and Taxation Code.
HISTORY

1. New Article 2.5 (Sections 25120-25122, 25128-25137, 25139) filed 6-29-73; effective thirtieth day thereafter (Register 73, No. 26).
2. Amendment of subsection (c) (4) filed 9-10-87; operative 10-10-87 (Register 87, No. 37). Deleted subsection (c) (4), which incorporated by reference the text of subsection (c) (4) of Section 25120 of Article 2 (as added in Register 71, No. 22).
3. Editorial correction of subsection (b) (Register 95, No. 23).
§25121. Application of the Uniform Division of Income for Tax Purposes Act.

(a) Definitions.
(1) “Taxpayer.” The word “taxpayer” as used in these regulations is the same as defined in Section 23037 and the regulations thereunder.
(2) “;Apportionment” refers to the division of business income between states by the use of a formula containing apportionment factors.
(3) “Allocation” refers to the assignment of nonbusiness income to a particular state.
(4) “Business activity” refers to the transactions and activity occurring in the regular course of a particular trade or business of a taxpayer.
(b) Application of the Uniform Division of Income for Tax Purposes Act. Apportionment. If the business activity in respect to any trade or business of a taxpayer occurs both within and without this state, and if by reason of such business activity the taxpayer is taxable in another state, the portion of the net income (or net loss) arising from such trade or business which is derived from sources within this state shall be determined by apportionment in accordance with these regulations.
(c) Application of the Uniform Division of Income for Tax Purposes Act: Combined Report. If a particular trade or business is carried on by a taxpayer and one or more affiliated corporations, nothing in the Uniform Division of Income for Tax Purposes Act or in these regulations shall preclude the use of a “combined report” whereby the entire business income of such trade or business is apportioned in accordance with these regulations.
(d) Application of the Uniform Division of Income for Tax Purposes Act. Allocation. Any taxpayer subject to the taxing jurisdiction of this state shall allocate all of its nonbusiness income or loss within or without this state in accordance with these regulations.
(e) Consistency and Uniformity in Reporting. In filing returns with this state, if the taxpayer departs from or modifies the manner in which income has been classified as business income or nonbusiness income in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification.
If the returns or reports filed by a taxpayer for all states to which the taxpayer reports under the Uniform Division of Income for Tax Purposes Act are not uniform in the classification of income as business or nonbusiness income, the taxpayer shall disclose in its return to this state the nature and extent of the variance.
§25122. When Taxpayer Is Taxable in Another State.

(a) Taxable in Another State. In General. Under Section 25121, the taxpayer is subject to the allocation and apportionment of its income if it has income from business activity that is taxable both within and without this state. A taxpayer's income from business activity is taxable without this state if such taxpayer, by reason of such business activity (i.e., the transactions and activity occurring in the regular course of a particular trade or business), is taxable in another state within the meaning of Section 25122. A taxpayer is taxable within another state if it meets either one of two tests: (1) If by reason of business activity in another state the taxpayer is subject to one of the types of taxes specified in Section 25122(a), namely: A net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax; or (2) If by reason of such business activity another state has jurisdiction to subject the taxpayer to a net income tax, regardless of whether or not the state imposes such a tax on the taxpayer.
A taxpayer is not taxable in another state with respect to a particular trade or business merely because the taxpayer conducts activities in such other state pertaining to the production of nonbusiness income or business activities relating to a separate trade or business.
(b) Taxable in Another State. When a taxpayer is “subject to” a tax under Section 25122.
(1) A taxpayer is “subject to” one of the taxes specified in Section 25122(a) if it carries on business activity in such state and such state imposes such tax thereon. Any taxpayer which asserts that it is subject to one of the taxes specified in Section 25122(a) in another state, shall furnish to the Franchise Tax Board upon its request evidence to support such assertion. The Franchise Tax Board may request that such evidence include proof that the taxpayer has filed the requisite tax return in such other state and has paid any taxes imposed under the law of such other state; the taxpayer's failure to produce such proof may be taken into account in determining whether the taxpayer in fact is subject to one of the taxes specified in Section 25122(a) in such other state.
If the taxpayer voluntarily files and pays one or more of such taxes when not required to do so by the laws of that state or pays a minimal fee for qualification, organization or for the privilege of doing business in that state, but
(A) does not actually engage in business activity in that state, or
(B) does actually engage in some business activity, not sufficient for nexus, and the minimum tax bears no relation to the taxpayer`s business activity within such state, the taxpayer is not “subject to” one of the taxes specified within the meaning of Section 25122(a).
EXAMPLE:
State A has a corporation franchise tax measured by net income, for the privilege of doing business in that state. Corporation X files a return and pays the $50 minimum tax, although it carries on no business activity in State A. Corporation X is not “taxable” in State A.
(2) The concept of taxability in another state is based upon the premise that every state in which the taxpayer is engaged in business activity may impose an income tax even though every state does not do so. In states which do not, other types of taxes may be imposed as a substitute for an income tax. Therefore, only those taxes enumerated in Section 25122(a) which may be considered as basically revenue raising rather than regulatory measures shall be considered in determining whether the taxpayer is “subject to” one of the taxes specified in Section 25122(a) in another state.
EXAMPLE (A):
State A requires all nonresident corporations which qualify or register in State A to pay to the Secretary of State an annual license fee or tax for the privilege of doing business in the state regardless of whether the privilege is in fact exercised. The amount paid is determined according to the total authorized capital stock of the corporation; the rates are progressively higher by bracketed amounts. The statute sets a minimum fee of $50 and a maximum fee of $500. Failure to pay the tax bars a corporation from utilizing the state courts for enforcement of its rights. State A also imposes a corporation income tax. Nonresident Corporation X is qualified in State A and pays the required fee to the Secretary of State but does not carry on any business activity in State A (although it may utilize the courts of State A). Corporation X is not “taxable” in State A.
EXAMPLE (B):
Same facts as Example (A) except that Corporation X is subject to and pays the corporation income tax. Payment is prima facie evidence that Corporation X is “subject to” the net income tax of State A and is “taxable” in State A.
EXAMPLE (C):
State B requires all nonresident corporations qualified or registered in State B to pay to the Secretary of State an annual permit fee or tax for doing business in the state. The base of the fee or tax is the sum of (i) outstanding capital stock, and (ii) surplus and undivided profits. The fee or tax base attributable to State B is determined by a three factor apportionment formula. Nonresident Corporation X which operates a plant in State B, pays the required fee or tax to the Secretary of State. Corporation X is “taxable” in State B.
EXAMPLE (D):
State A has a corporation franchise tax measured by net income for the privilege of doing business in that state. Corporation X files a return based upon its business activity in the state but the amount of computed liability is less than the minimum tax. Corporation X pays the minimum tax. Corporation X is subject to State A's corporation franchise tax.
(c) Taxable in Another State. When a State has jurisdiction to Subject a Taxpayer to a Net Income Tax. The second test, that of Section 25122(b), applies if the taxpayer's business activity is sufficient to give the state jurisdiction to impose a net income tax by reason of such business activity under the Constitution and statutes of the United States. Jurisdiction to tax is not present where the state is prohibited from imposing the tax by reason of the provisions of Public Law 86-272, 15 U.S.C.A. §§ 381-385. In the case of any “state” as defined in Section 25120(f), other than a state of the United States or political subdivision of such state, the determination of whether such “state” has jurisdiction to subject the taxpayer to a net income tax shall be made as though the jurisdictional standards applicable to a state of the United States applied in that ”state.” If jurisdiction is otherwise present, such “state” is not considered as without jurisdiction by reason of the provisions of a treaty between that state and the United States.
EXAMPLE:
Corporation X is actively engaged in manufacturing farm equipment in State A and in foreign country B. Both State A and foreign country B impose a net income tax but foreign country B exempts corporations engaged in manufacturing farm equipment. Corporation X is subject to the jurisdiction of State A and foreign country B.
§25128. Apportionment of Business Income.
Note     •     History

(a) In General. All business income of each apportioning trade or business of the taxpayer shall be apportioned to this state by use of the formula set forth in section 25128 of the Revenue and Taxation Code. Section 25128, subdivision (a), of the Revenue and Taxation Code provides that the apportionment formula is a fraction, the numerator of which is the property factor plus the payroll factor plus twice the sales factor, and the denominator of which is four. Section 25128, subdivision (b), of the Revenue and Taxation Code, however, provides exceptions to the rule in subdivision (a) of that section for taxpayers who derive more than 50 percent of their “gross business receipts” (as defined in section 25128, subdivision (d)(1), of the Revenue and Taxation Code) from conducting a qualified business activity (as defined in subdivisions (c) and (d)(2)-(5) of section 25128 of the Revenue and Taxation Code and these regulations thereunder). Such taxpayers must use an apportionment formula which is a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three.
(b) Definitions.
(1) The term “qualified business activity” is defined in subdivisions (c) and (d) of Revenue and Taxation Code section 25128. In general, it means an agricultural business activity, an extractive business activity, a savings and loan activity, or a banking or financial business activity.
(2) Except as otherwise provided under section 25128 of the Revenue and Taxation Code, the term “gross receipts” as used in this regulation means “sales” as defined in subdivision (e) of Revenue and Taxation Code section 25120 and in the regulations under section 25134 of the Revenue and Taxation Code.
(3) The term “gross business receipts” is defined in subdivision (d)(1) of section 25128 of the Revenue and Taxation Code. Except as otherwise provided in that subdivision, the term means gross receipts as defined in subsection (b)(2) of this regulation, whether or not the receipts are excluded from the sales factor by operation of section 25137 of the Revenue and Taxation Code.
(c) Combined Reports.
Section 25128, subdivision (d)(8), of the Revenue and Taxation Code generally provides that if the income and apportionment factors of two or more banks, savings associations, or corporations are required to be included in a combined report under section 25101 of the Revenue and Taxation Code, limited (if applicable), by a water's-edge election under section 25110 of the Revenue and Taxation Code, the more-than-50-percent gross business receipts test is determined with respect to the gross business receipts of the entire apportioning trade or business of the combined reporting group. If, after application of that test, the gross business receipts attributable to qualified business activity are not more than 50 percent of all gross business receipts of the group, then all members of the group must apportion their income using the double-weighted sales factor provided by subdivision (a) of section 25128 of the Revenue and Taxation Code, even if an individual member, considered alone, would have qualified for a single-weighted sales factor.
Example: Corporation A is the parent of Corporations B and C. Corporations A and B are engaged in the manufacture and sale of ocean-going oil tankers and oil pipe, respectively. Corporation C owns a small oil refinery. Corporations A, B, and C are members of a unitary group required to file a combined report in California. The gross business receipts in all states for Corporations A and B are $880 million and $440 million, respectively. Under the provisions of section 25128 of the Revenue and Taxation Code and this regulation, none of those gross receipts are from a qualified business activity. Corporation C's gross business receipts from a qualified business activity (oil refining) in all states are $320 million, and its other business receipts are $80 million. The total gross business receipts of the combined group are $1.720 billion, of which only 18.6 percent constitutes gross business receipts from qualified business activity. The combined business income of the group is subject to apportionment using a double-weighted sales factor, despite the fact that more than 50 percent of Corporation C's gross business receipts is from an extractive trade or business.
(d) Vertically Integrated Companies.
(1) Section 25128, subdivision (b), of the Revenue and Taxation Code provides that a taxpayer must use a three-factor formula if it has more than 50 percent of its “gross business receipts” from conducting one or more qualified business activities. For purposes of this 50-percent test, subdivision (d)(1) of section 25128 of the Revenue and Taxation Code provides that gross business receipts do not include gross receipts from sales or other transactions (hereinafter referred to as intercompany sales) within an apportioning trade or business between members of a group of corporations whose income and apportionment factors are required to be included in a combined report under section 25101 of the Revenue and Taxation Code, limited, if applicable, by section 25110 of the Revenue and Taxation Code.
(2) Because section 25128, subdivision (d)(1), of the Revenue and Taxation Code expressly excludes intercompany sales, only sales to parties outside the apportioning trade or business are considered in determining the numerator and denominator of the over-50-percent gross receipts test of Revenue and Taxation Code section 25128, subdivision (b), and only such gross receipts from sales to parties outside the apportioning trade or business are used to determine whether a receipt is from a qualified business activity. Therefore, in a vertically integrated operation, only the products sold to those outside of the apportioning trade or business will be considered in determining whether the apportioning trade or business is engaged in a qualified business activity.
Example 1: A parent company produces crude oil, a combined unitary subsidiary which is part of the apportioning trade or business refines some of the oil into gasoline, another combined unitary subsidiary makes petrochemicals from naphtha obtained from its unitary affiliate's refining operations, and another combined unitary subsidiary uses the petrochemicals to make plastics. The apportioning trade or business sells gasoline and plastics to third parties. Only the products sold to parties outside of the combined unitary group are considered in determining whether this group is engaged in a qualified business activity under section 25128 of the Revenue and Taxation Code. In this example, the only products sold to third parties are gasoline and plastics. Therefore, the intercompany sales of naphtha and petrochemicals are not considered in determining whether the group is engaged in a qualified business activity. Receipts from the sale of gasoline constitute gross business receipts from a qualified business activity (extractive business activity) under section 25128 of the Revenue and Taxation Code and the regulations thereunder. Receipts from the sale of plastics, however, are not gross business receipts from a qualified business activity. (See Regulation section 25128-1 for determining whether an activity is a qualified extractive business activity.)
Example 2: The business activity of an apportioning trade or business is the sale of soup to third parties. However, an entity in the combined apportioning trade or business grows vegetables, which it provides to other entities in the combined apportioning trade or business in order to make the soup. Only the activities which lead to receipts from sales to parties outside of the combined apportioning trade or business will be considered in determining whether the apportioning trade or business is engaged in an agricultural business activity. Because only the sale of soup results in gross business receipts as defined in this regulation, the sale of soup is considered to be the business activity of the apportioning trade or business. The making and sale of soup is not an agricultural business activity under the definition set forth in Revenue and Taxation Code section 25128, subdivision (d)(2), and these regulations because it does not directly involve the production of agricultural products; therefore, the apportioning trade or business does not qualify to use a single-weighted sales factor. The fact that other companies in the combined unitary group were engaged in agricultural production and provided commodities within the combined group to be made into the final product is not taken into account, because any agricultural receipts derived by these other companies are from intercompany sales as defined in subsection (d)(1) of this regulation and, therefore, are not from sales to parties outside the apportioning trade or business. (See Regulation section 25128-2 for determining whether an activity is a qualified agricultural business activity.)
Example 3: An apportioning trade or business operates a winery, which grows all of the grapes used in its wine. The business does not sell any grapes to third parties; all of its third party receipts come from the sale of wine. The winery does not qualify as an agricultural business activity because making and selling wine is not the direct production of an agricultural commodity. Only the product sold to third parties, wine, is considered in making this determination. (See Regulation section 25128-2 for determining whether an activity is a qualified agricultural business activity.)
Example 4: Company A and Company B are engaged in a unitary business. A makes a water's-edge election and, as a result, B is not included in A's combined report. A produces grapes which it sells to B. B in turn processes the grapes into wine and sells the wine to unrelated customers. A is engaged in a qualified business activity, and A's sales of grapes are considered to be gross business receipts from a qualified business activity because its sales are made to an entity outside of the combined apportioning trade or business of A. Sales by A and B are not intercompany sales because B is not part of A's combined report group. (See Regulation section 25128-2 for determining whether an activity is a qualified agricultural business activity.)
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25128, Revenue and Taxation Code.
HISTORY

1. Repealer and new section filed 7-7-99; operative 8-6-99 (Register 99, No. 28).
§25128-1. Extractive Business Activity.
Note     •     History

(a) Subdivision (c) of section 25128 of the Revenue and Taxation Code provides that “extractive business activity” is a “qualified business activity.” This regulation defines an “extractive business activity” and what constitutes gross business receipts from such activity.
(b) Subdivision (d)(3) of section 25128 of the Revenue and Taxation Code defines extractive business activity as “activities relating to the production, refining, or processing of oil, natural gas, or mineral ore.” In order to qualify as an extractive business, the apportioning trade or business need not conduct all of these activities.
(c) Production. For purposes of subdivision (d)(3) of section 25128 of the Revenue and Taxation Code, “production” means the location, extraction, and initial processing of oil, natural gas, or mineral ore (“crude substance”). “Extraction” means to remove a crude substance from the place where it naturally occurs (e.g., a surface mine, an underground mine, a well, oil shale or oil sand). Extraction of naturally occurring minerals is “mining.”
(1) Production of “metallic” and “nonmetallic” minerals, as defined in subsection (f) of this regulation, includes exploration, extraction, and all other activities customarily performed at the mine site or as part of the mining activity. Examples of mineral production include: development of mineral properties; preparation of the site; quarrying; well operations; milling (e.g., crushing, screening, washing, and flotation); leaching; precipitation; sintering; ore dressing (e.g., crushing, grinding, gravity concentration, and froth flotation); amalgamation; cyanidation; production of bullion; production of metallic mercury by furnacing or retorting; production of dimension stone, or crushed or broken stone (including boulder, ganister, grits and riprap); production of slabs or rough cuts of stone; and grinding and pulverizing of crude borax.
(2) Production of “coal,” as defined in subsection (f)(3) of this regulation, includes exploration, extraction, and all other activities customarily performed at the mine site or as part of the mining activity. Examples of coal production include: development of surface mines; auger mining, strip mining, culm bank mining, and other surface mining; development of underground mines; production from underground mines; cleaning, crushing, screening or sizing; and production of hydrocarbon liquids and the gasification, liquefaction, and pyrolysis of coal.
(3) Production of oil or natural gas includes exploration, extraction, and all other activities customarily performed at the site of extraction or as part of the extraction activity. Examples of oil and natural gas production include: drilling and equipping wells; secondary and tertiary recovery; oil and gas well operation and maintenance; purification and dewatering of the oil, natural gas, or hydrocarbon liquids; operation of field gathering lines for crude oil and natural gas; and production of hydrocarbon liquids (e.g., butane, propane, and natural gasoline).
(d) Refining. For purposes of subdivision (d)(3) of section 25128 of the Revenue and Taxation Code, “refining” is the separation, purification, or conversion of a crude substance into valuable products by an apportioning trade or business in a refinery.
(1) Petroleum Refining.
(A) Examples of refined products produced in a petroleum refinery include gasoline, diesel fuels, jet fuels, kerosene, distillate fuel oils, residual fuel oils, lubricants, alkylates, aromatic chemicals, olefins, asphalt, mineral jelly, natural mineral oils, natural mineral waxes, naphtha, naphthenic acids, partly refined oils sold for rerunning, lubricating and illuminating oils and fuels, paraffin wax, petrolatums, bitumen, road oils, solvents, and tar or residuum.
(B) Examples of petroleum refining include dewatering and desulferization, fractionation or straight distillation, redistillation of unfinished petroleum derivatives, cracking and blending.
(2) Other Refining.
(A) Examples of refined products produced in refineries other than petroleum refineries include, but are not limited to, coke, hot metal, pig iron, silvery pig iron, primary smelting copper, primary refining copper, blister copper, copper blocks, copper ingots and refinery bars, copper pigs, copper slabs, aluminum, aluminum ingots and primary production shapes, extrusion ingot, aluminum pigs and aluminum slabs.
(B) Other refining also includes:
(1) Calcining, polishing, pulverizing, and blending;
(2) Smelting ferrous and nonferrous metals such as lead-based antifriction bearing metals, antimony, babbitt metal, beryllium metal, bismuth, zinc blocks, cadmium, chromium, cobalt, columbium, germanium, gold, nonferrous metal ingots, iridium, primary lead pigs, primary lead blocks, primary lead ingots, primary lead refinery shapes, lead, magnesium, nickel, platinum group metals, precious metal, rhenium, selenium, silicon, silver, slabs (nonferrous metals),  speltzer (zinc), tantalum, tellurium, tin base alloys, tin, titanium metal sponge and granules, zinc dust, and zirconium metal sponge and granules; and
(3) Applying thermal action or other treatment affecting chemical change to natural, raw, or crude minerals. Examples of these processes include burning of carbonate rock to produce lime; heating gypsum to produce calcined gypsum or plaster of paris; heating clays to reduce water or crystallization; sawing to finish rough cut blocks of stone; sand finishing, buffing, or otherwise smoothing blocks of stone; burning bricks; expansion or popping of perlite; exfoliation of vermiculite; heat treatment of garnet; and heating shale, clay or slate to produce lightweight aggregates.
(e) Processing. For purposes of subdivision (d)(3) of Revenue and Taxation Code section 25128, “processing” means activities intended to create valuable products from a crude substance which has not already been refined within the meaning of this regulation. Examples of processing include grading and sorting.
(f) Mineral Ore. Naturally occurring minerals include: 
(1) Metallic minerals, consisting of: 
(A) Iron ores and manganiferous ores valued chiefly for their iron contents. Examples of these minerals include brown ore, hematite, iron agglomerate and pellet, blocked iron, limonite, magnetite, siderite, and taconite. 
(B) Copper ores. Examples of these minerals include chalococite, chalcopyrite, and cuprite.
(C) Lead ores, zinc ores, or lead-zinc ores. Examples of these minerals include blende, calamine, cerrusite, galena, smithsonite, sphalerite, willemite, zinc-blende (sphalerite), and zincite. 
(D) Gold ores.
(E) Silver ores. 
(F) Ferroalloy ores, except vanadium. Examples of these minerals include chromite, chromium ore, cobalt ore, columbite, ferberite, huebnerite, manganese ore, maganite, molybdenite, molybdenum ore, molybdite, nickel ore, ipsilomelane, pyrolusite, rhodochrosite, scheelite, tantalite, tantalum ore, tungsten ore wolframite, and wulfenite.
(G) Uranium-radium-vanadium ores. Examples of these minerals include carnotite, pitchblende, radium ore, roscoelite (vanadium hydromica), tyuyamunite, and uraninite (pitchblende).
(H) Miscellaneous metal ores, not elsewhere classified. Examples of these minerals include aluminum ore, antimony ore, bastnasite ore, bauxite, beryl, beryllium ore, cerium ore, cinnabar, ilmenite, iridium ore, mercury ore, microlite, monazite, osmium ore, palladium ore, platinum group ore, quicksilver (mercury) ore, rare-earth's ore, rhodium ore, ruthenium ore, rutile, thorium ore, tin ore, titaniferous-magnetite, titanium ore, and zirconium ore. 
(2) Nonmetallic minerals, consisting of: 
(A) Argillite, basalt, bluestone, calcareous tufa, diabase, diorite, dolomite, dolomitic marble, flagstone mining, gabbro, gneiss, granite, greenstone, limestone, marble, mica schist, onyx marble, quartzite, rubble mining, sandstone, serpentine, slate, syenite (except nepheline), trap rock, travertine, verdé antique, and volcanic rock. 
(B) Sand and gravel including common sand, construction sand, pebble, abrasive sand, blast sand, enamel sand, filtration sand, foundry sand, glass sand, grinding sand, industrial sand, and molding sand.
(C) Clays, ceramic and refractory minerals. Examples of these minerals include clays, nepheline syenite, shale, ball clay, china clay, kaolin, paper clay, rubber clay, slip clay, alusite, aplite, bentonite, brucite, burley, cornwall stone, cyanite, diaspore, dumortierite, feldspar; fire clay; flint clay, fuller's earth, kyanite, magnesite, olivine (nongem), pegmatite (feldspar), pinite; plastic fire clay, sillimanite, stoneware clay, and topaz (nongem).
(D) Natural potassium, sodium, or boron compounds, alum, borate compounds, borax, boron mineral, colemanite, glauber's salt, kernite, potash, potassium compounds, probertite, saltines (except common salt), soda ash, sodium compounds (except common salt), trona, and ulexite. 
(E) Phosphate rock, including apatite.
(F) Chemical or fertilizer mineral raw materials, including alunite, amblygonite, arsenic mineral, barite, barium ore, brimstone, celestite, fluorite, fluorspar, guano, lepidolite, lithium mineral, marcasite, mineral pigment, ocher, pyrites, pyrrhotite, rock salt, common salt, sienna, spodumene, strontianite, strontium mineral, sulfur (native), and umber.
(G) Miscellaneous nonmetallic minerals including agate, alabaster, amethyst, asbestos, asphalt (native), asphalt rock, bitumens (native), calcite, catlinitie, corundum, cryolite, diamond, diatomaceous earth, diatomite, emery, garnet gem stone, gilsonite grahamite, graphite, greensand, gypsite, gypsum, Iceland spar optical grade calcite), jade, meerschaum, mica, muscovite, natural abrasives, ozokerite, peat humus, peat, perlite, phlogopite, pipestone, pozzolana, precious stones, pumice, pumicite, pyrophyllite quartz crystal, reed peat, ruby, sapphire, scoria, sedge peat, selenite, semiprecious stones, shell, steatite, talc, tripoli, turquoise, vermiculite, volcanic ash, wurtzlite, bituminous limestone, bituminous sandstone, burrstone fill dirt pits, grindstone, millstone, oilstone, pulpstone, rubbing stone, scythestone, sharpening stone, and soapstone. 
(3) Coal, consisting of bituminous coal, lignite and anthracite.
(g) Extractive business activity also includes the addition of non-extractive material to a product whose production, refining, or processing is otherwise defined as an extractive business activity in this regulation, if the non-extractive material is incidental to, and does not affect the basic character of, the product to which it is added. For purposes of this subsection, the non-extractive material shall be considered to be incidental to and as not affecting the basic character of the product to which it is added if it consists of 10 percent or less of that product. In any case, the non-extractive material shall be considered to be incidental to and as not affecting the basic character of the product to which it is added if it is added in order to meet the requirements of a governmental mandate and consists of 30 percent or less of that product.
Example 1: Company X refines oil into gasoline, adds several additives amounting to 10 percent of the gasoline, and sells the enhanced gasoline. The gross receipts from the sale of the enhanced gasoline are from an extractive business activity because the additives are incidental to, and do not affect the basic character of, the gasoline.
Example 2: Company Y mines raw iron ore, smelts the ore, and adds 2.25 percent of carbon to make steel. Company Y's gross receipts from the sale of this steel constitute receipts from a qualified extractive business activity, because the additive (carbon) consists of 10 percent or less of the steel, and the refining of iron ore is defined as an extractive business activity. It makes no difference whether the carbon is self produced or purchased.
(h) Gross business receipts from extractive business activity.
(1) Except as provided in paragraphs (3) and (4) of this subsection, only gross receipts derived by an apportioning trade or business from the sale of products created through its performance of one or more of the activities described in subsections (c)-(g), inclusive, of this regulation shall be considered to be gross business receipts from a qualified extractive business activity for purposes of Revenue and Taxation Code section 25128. If an apportioning trade or business performs any services, including any activities described in this regulation, for others on a contract or fee basis, the gross receipts from those service activities are not gross business receipts from qualified extractive business activity for purposes of section 25128.
Example 1: Company B purchases gasoline from an unrelated petroleum refiner. The gross receipts from Company B's sale of such gasoline to a third party do not constitute gross business receipts from an extractive business activity, because the gasoline was not created by Company B's own performance of a qualified extractive business activity as defined in subsections (c)-(g), inclusive, of this regulation.
Example 2: The business of an apportioning trade or business is drilling oil and gas wells for others on a contract or fee basis. The gross receipts from the sale of such drilling services are not gross receipts from the conduct of an extractive business activity for purposes of Revenue and Taxation Code section 25128.
Example 3: A combined apportioning trade or business is engaged in a business which involves exploration for and extraction of crude oil, purchase of crude oil from third parties, and refining the crude oil, both self produced and purchased, into gasoline, which the business sells to third parties. In its records, the business classifies revenue into three categories: production, refining, and marketing. The marketing category includes receipts from the products the business sells to third parties, including the gasoline it has refined. The receipts from the sales of gasoline, which are included in marketing revenues, are receipts from qualified extractive business activity because the refining of crude oil into gasoline is a qualified business activity conducted by the apportioning trade or business regardless of whether the crude oil was self produced or purchased from third parties.
(2) If an apportioning trade or business sells products purchased from third parties as well as products created in the course of conducting its qualifying extractive business activity, tracing will generally be required to determine which portion of the receipts is from its qualified extractive business activity and which portion is not. In some cases, tracing may be difficult because records are not available and cannot reasonably be obtained. In such cases, reasonable estimates will be acceptable. Direct tracing is not required if 5 percent or less of the purchases included in the cost of goods sold of the apportioning trade or business is refined products purchased from unrelated third parties. Gross receipts from the sale of these purchased products will be considered extractive business receipts.
(3) Exchanges. Exchanges are an exception to the requirement that the product sold must be derived from the apportioning trade or business's qualified extractive business activity as set forth in subsection (h)(1) of this regulation. If products from an extractive business activity are exchanged for similar products owned by parties outside of the apportioning trade or business, the subsequent sale of the products received in the exchange shall be treated as arising from the apportioning trade or business's qualified extractive business activity to the extent the exchange itself has not previously been reflected in the calculation of the business's qualified extractive business activity.
Example: Company S refines oil and markets gasoline in California and Washington. Company B, an unrelated party, refines oil in Washington and markets gasoline in Oregon and Washington. S needs more gasoline for its Washington customers than it has available at its Washington storage facilities. B needs more gasoline to sell in its Oregon market. B exchanges some of its gasoline in Washington for some of S's gasoline in California, which B then sells in its Oregon market. Title to B's Washington gasoline transfers to S at the time of the exchange and title to S's California gasoline transfers to B at the same time. The exchange is of substantially identical gasoline. Although S has not refined the gasoline obtained from B, S's subsequent sale of such gasoline to parties outside of its apportioning trade or business is considered to be a sale of product from S's extractive business activity because it was exchanged for gasoline which was refined by S. This is also true of B's subsequent sales of the gasoline obtained from S to parties outside of its apportioning trade or business.
(4) Temporary interruptions in supply. If an apportioning trade or business experiences a temporary interruption in its normal supply of crude substances or in its ability to supply the established requirements of its customers for crude substances or refined products normally sold by the apportioning trade or business, the gross receipts from the resale to its customers of crude substances or refined products purchased from others solely because of the interruption will be treated as receipts from qualified extractive business activity. For purposes of this paragraph, an interruption in supply will not be treated as “temporary” after the last day of the first full income year following the occurrence of the event which caused the interruption.
Example: Company F operates oil refineries in both California and Washington. It sells gasoline and other refined products produced by these refineries to customers throughout the U.S., and it files its California franchise tax returns on the basis of an income year ending on December 31. On March 3, 1995, a fire disabled the company's Washington refinery, forcing Company F to purchase refined products from other refiners in order to continue supplying the established requirements of its customers. The gross receipts from Company F's resale to its customers of the products purchased from the other refiners will be treated as gross receipts from a qualified extractive business activity during the period March 3, 1995, through December 31, 1996.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25128, Revenue and Taxation Code.
HISTORY

1. New section filed 7-7-99; operative 8-6-99 (Register 99, No. 28).
2. Change without regulatory effect amending subsections (c)(1)-(2), redesignating former subsections (d)-(d)(3) as new subsections (f)-(f)(3), relettering subsections and amending subsection (h)(4) filed 2-29-2008 pursuant to section 100, title 1, California Code of Regulations (Register 2008, No. 9).
§25128-2. Agricultural Business Activity.
Note     •     History

(a) In general. Revenue and Taxation Code section 25128, subdivision (c), defines “qualified business activity” and includes “agricultural business activity” in that term. This regulation defines “agricultural business activity” and what constitutes gross business receipts from such activity.
(b) Definitions.
(1) Section 25128, subdivision (d)(2), of the Revenue and Taxation Code sets forth the statutory definition of “agricultural business activity.” In general, the term applies only to taxpayers engaged in “the business of farming” as defined in Treasury Regulation section 1.175-3 and includes only activities encompassed within “the business of farming” as so defined.
(2) For purposes of Revenue and Taxation Code section 25128, subdivision (d)(2), and this regulation, the term “farm” is used in its ordinary and accepted sense, and generally means land used for the production of crops, fruits, or other agricultural products or for the sustenance of livestock or poultry. The term “livestock” includes cattle, hogs, horses, mules, donkeys, sheep, goats, and captive fur-bearing animals. The term “poultry” includes chickens, turkeys, geese, ducks, emus, ostriches, and pigeons. Thus, a farm includes livestock, dairy, poultry, fish, fruit, fur-bearing animal, and truck farms, plantations, ranches, nurseries, ranges, orchards, feed yards for fattening cattle, and greenhouses and other similar structures used primarily for the raising of agricultural or horticultural commodities. Greenhouses and other similar structures that are used primarily for purposes other than the raising of agricultural or horticultural commodities do not constitute farms, as, for example, structures that are used primarily for the display, storage, fabrication, or sale of wreaths, corsages, and bouquets. A fish farm is an area where fish are grown or raised, as opposed to merely caught or harvested.
(3) Wherever the definition of agricultural business activity in this regulation refers to the production of a product, the term “production” means planting, growing, breeding, raising or fattening one's own agricultural commodity. Production includes processing activities which are normally incident to the growing, raising, planting, breeding, or fattening of agricultural products. For example, assume an apportioning trade or business is in the business of growing and selling fruits and vegetables. When the fruits and vegetables are ready to be harvested, the business picks, washes, inspects, and packages the fruits and vegetables for sale. Such activities are normally incident to the raising of these crops by farmers. The receipts from the sale of these fruits and vegetables are gross business receipts from a qualified agricultural business activity. The term production does not include the processing of agricultural products beyond those activities which are normally incident to the production of such products according to industry practice.
Example 1: The processing of grain that a company has grown and harvested in order to produce flour, breads, cereals, and other similar food products, and the sale of the processed products do not constitute agricultural business activity.
Example 2: The processing of grapes into wine, regardless of the source of the grapes, and the sale of such wine do not constitute agricultural business activity.
Example 3: The processing of nuts by shelling and the sale of such processed nuts do not constitute agricultural business activity.
Example 4: A farmer raises cattle, slaughters the cattle, and sells the carcasses. Slaughtering cattle and the sale of their carcasses do not constitute agricultural business activity.
(c) Unless otherwise provided in this regulation, the following activities constitute agricultural business activity:
(1) The production of crops, plants, vines and trees (excluding forestry operations or the growing of timber). This category also includes the operation of sod farms and cranberry bogs; the production of mushrooms, bulbs, flower seeds, and vegetable seeds; and the production of hydroponic crops. Specific activities in this category include the following:
(A) The production of wheat; rice; field corn for grain or seed; sweet corn; popcorn; soybeans; and other cash grains, including production of dry field and seed peas and beans, safflowers, sunflowers, barley, buckwheat, cowpea, flaxseed, lentil, milo, mustard seed, oat, rye, and sorghum.
(B) The production of field crops, including cotton, cottonseed, tobacco, sugarcane, sugarbeets, potato, alfalfa, broomcorn, clover, grass seed, hay, hop, mint, peanut, sweet potato, timothy, yam, other roots, and tubers.
(C) The production of vegetables and melons, including asparagus, bean, beet, bok choy, broccoli, cabbage, cantaloupe, cauliflower, celery, cucumber, English pea, green lima bean, green pea, lettuce, market gardens, onion, pepper, romaine, snap bean, squash, tomato, and watermelon. This category also includes truck farms.
(D) The production of fruits and tree nuts, including berry crops, such as blackberry, blueberry, cranberry, currant, dewberry, loganberry, raspberry, and strawberry; grapes; tree nuts, including almond, filbert, macadamia, pecan, pistachio, and walnut; citrus fruits, including grapefruit, lemon, lime, orange, and tangerine; deciduous tree fruits, including apple, apricot, cherry, nectarine, peach, pear, persimmon, plum, pomegranate, prune, and quince; avocado; banana; coffee; date; fig; kiwi; olive; pineapple; plantain; and tropical fruits.
(E) The production of ornamental plants and other nursery products, such as bulbs, florist's greens, flowers, shrubbery, flower and vegetable seeds, and plants and sod. These products may be grown under cover or outdoors.
(F) The production of food crops grown under cover, such as mushrooms, bean sprouts, fruits, greenhouse crops, hydroponic crops, mushroom spawn, rhubarb, seaweed, tomatoes, truffles, and vegetables grown under cover.
(2) The keeping, grazing, or feeding of livestock for the sale of livestock or livestock products. Businesses engaged in these activities include farms, ranches, dairies, certain feedlots as specified in subparagraph (A) of this paragraph, egg production facilities, poultry hatcheries, and apiaries. Livestock includes cattle, hogs, sheep, goats, poultry (including emus and ostriches), horses, rabbits, bees, pets, fish in captivity, and fur-bearing animals in captivity. “Livestock products” means products which come directly from the livestock without processing, such as serums. Activities included in this general category include the following:
(A) The fattening of beef cattle in a confined area for a period of at least 30 days. Business activities which consist of feeding beef cattle for periods of less than 30 days, in connection with their transport, are not included.
(B) The production or feeding of beef cattle, such as beef cattle farms, cattle raising farms, and cattle ranches.
(C) The production or feeding of hogs.
(D) The production of sheep, lambs, goats, goats' milk, wool, and mohair. This includes the fattening of lambs in a confined area (in feedlots) for a period of at least 30 days. The feeding of lambs for periods of less than 30 days, in connection with their transport, is not included.
(3) The production of cows' milk and other dairy products and in raising dairy heifer replacements.
(4) The production of poultry and eggs. This category includes the following:
(A) The production of chickens for slaughter, including Cornish hens.
(B) The production of turkeys and turkey eggs.
(C) Operating poultry hatcheries.
(D) The production of poultry and eggs, not elsewhere included, on duck farms, emu farms, ostrich farms, egg (from other than chicken or turkey) farms, geese farms, pheasant farms, pigeon farms, quail farms, and squab farms.
(5) The production of animal specialities. This includes the production of the following:
(A) Fur and fur-bearing animals and rabbits, including chinchilla, fox, game, and mink;
(B) Horses and other equines, including burros, donkeys, mules, and ponies;
(C) Finfish and shellfish, such as crustaceans and mollusks, within a confined space and under controlled feeding, sanitation, and harvesting procedures, such as on catfish farms, fish farms, goldfish farms, minnow farms, tropical aquarium fish farms, and trout farms; and
(D) Other animal specialties, (including the products thereof), such as pets, bees, worms, and laboratory animals.
(6) Under section 25128, subdivision (d)(2), of the Revenue and Taxation Code, the following are also included in the definition of agricultural business activity:
(A) Cultivating the soil, or raising or harvesting any agricultural or horticultural commodity;
(B) Raising, shearing, feeding, caring for, training, or management of animals on a farm; and
(C) Handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant, or operator of the farm regularly produces more than one-half of the commodity handled, dried, packed, graded, or stored.
The more-than-one-half test set forth in this subsection (C) and in section 25128, subdivision (d)(2), of the Revenue and Taxation Code applies only to service receipts from outside the apportioning trade or business and does not apply to the apportioning trade or business's self-produced agricultural products. For example, if a farming corporation stores both its own and other corporations' agricultural products on its farm premises, and it self-produces over 50 percent of the agricultural products stored there, then the entire proceeds received from the third parties (outside of the apportioning trade or business) for providing storage services would be included as gross business receipts from an agricultural business activity. However, if the farmer self-produces less than 50 percent of the products stored, the receipts from services to third parties will not qualify as gross business receipts from an agricultural business activity. The amounts received from the sales of the self-produced agricultural products which had been stored by the farmer on its farm would still qualify as gross business receipts from an agricultural business activity.
(d) Businesses which are not engaged in agricultural business activity.
Trades or businesses engaged in performing services for others on a contract or fee basis are not engaged in an agricultural business activity for purposes of section 25128 of the Revenue and Taxation Code unless they are engaged in the business of farming as defined in Treasury Regulation section 1.175-3.
Example: A is a company whose business is soil preparation. A contracts with B, a farming corporation, to provide soil preparation services on B's farmland. A breaks the land, plows, fertilizes, prepares the seed bed and performs other related services for improving the soil for crop planting. B pays A a fee for the soil preparation services it performs. A has no interest in the land or in the crops. A is not engaged in a qualified agricultural business activity. B, however, is engaged in a qualified agricultural business activity.
(e) Gross business receipts from agricultural business activity.
(1) Only gross receipts derived by an apportioning trade or business from agricultural business activity as defined in this regulation shall be considered to be gross business receipts from a qualified agricultural business activity for purposes of section 25128 of the Revenue and Taxation Code. Except as provided in paragraph (3) of this subsection, gross receipts from sales of produce which were not produced by the apportioning trade or business are not gross business receipts from agricultural business activity.
Example: If X, a farming corporation, purchases peaches from an unrelated farming business which has produced the peaches, the resale of those peaches by X will not give rise to gross business receipts from an agricultural business activity. X did not produce the peaches; therefore, the sales were not derived from a qualified agricultural business activity, as defined in section 25128 of the Revenue and Taxation Code and this regulation, conducted by X.
(2) If an apportioning trade or business sells products produced from its qualifying agricultural business activity and also sells products purchased from another party, tracing will generally be required to determine which portion of the total receipts is from its qualified agricultural business activity and which portion is not. In some cases, tracing may be difficult because records are not available and cannot reasonably be obtained. In such cases, reasonable estimates will be acceptable.
(3) Exchanges. Exchanges are an exception to the requirement that the product sold must be derived from the apportioning trade or business's own qualified agricultural business activity as set forth in subsection (e)(1) of this regulation. If products produced by an apportioning trade or business's qualified agricultural business activity are exchanged for similar products owned by parties outside of the apportioning trade or business, the subsequent sale of the products received in the exchange shall be treated as arising from the apportioning trade or business's qualified agricultural business activity to the extent the exchange itself has not previously been reflected in the calculation of the business's qualified agricultural business activity.
(f) Cooperatives.
(1) Agricultural associations organized and operated on a cooperative or mutual basis (as set forth in section 24404 of the Revenue and Taxation Code) are not engaged in a qualified agricultural business activity because the association itself, which is a separate entity from its members, does not conduct an agricultural business activity as defined in section 25128 of the Revenue and Taxation Code and this regulation.
(2) Gross receipts from sales to cooperatives of products produced in the conduct of a qualifying agricultural business activity by an apportioning trade or business constitute gross business receipts from a qualified business activity. Example: If a farming corporation sells artichokes it has grown to a non-unitary cooperative, the gross receipts from the sales of the artichokes are gross business receipts from a qualified business activity.
(g) Patronage Dividends. For purposes of determining gross business receipts from an agricultural business activity, patronage dividends (as defined in section 24404 or section 24273.5 of the Revenue and Taxation Code) from agricultural cooperatives shall not be included in the producer's receipts as gross business receipts from an agricultural business activity.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25128, Revenue and Taxation Code.
HISTORY

1. New section filed 7-7-99; operative 8-6-99 (Register 99, No. 28).
§25128.5. Single-Sales Factor Formula Election.
Note     •     History

(a) Definitions. For purposes of this regulation, the following definitions are applicable:
(1) Affiliated corporations. “Affiliated corporations” are corporations related by common ownership.
(2) Apportioning trade or business. “Apportioning trade or business” means a distinct trade or business whose business income is required to be apportioned because it has income derived from sources within this state and from sources outside this state. An apportioning trade or business can be conducted in many forms, including, but not limited to, the following:
(A) A corporation. 
(B) A corporation that is a member of a combined reporting group. 
(C) A division of a corporation engaged in a separate trade or business not unitary with the other trades or businesses of the corporation. 
(D) A partnership to the extent owned by a corporate partner that is not unitary with the partnership, whether the corporation stands alone or is a member of a combined reporting group.
(E) A partnership to the extent owned by a partner who is an individual who is not a resident of California.
(F) A sole proprietorship that is operated by an individual who is not a resident of California.
(3) Apportionment. “Apportionment” is the means by which the total business income of an apportioning trade or business is assigned to this state under Revenue and Taxation Code sections 25128 through 25137 and section 25141.

(4) 	Banking or financial business activity. “Banking or financial business activity” means activities attributable to dealings in money or moneyed capital in substantial competition with the business of national banks.

(5) 	Business assets. “Business assets” are assets, including intangible assets, other than stock of a member of the combined reporting group, which are used in the conduct of the business of the combined reporting group or would produce business income to the combined reporting group if the assets were sold. 
Business assets are valued at net book value as of the date that electing taxpayers and non-electing taxpayers or non-taxpayers become members of a new combined reporting group. A copy of the taxpayer's valuation of the business assets must be made available when required by the Franchise Tax Board. The Franchise Tax Board may, in its sole discretion, allow an alternative valuation date if it determines that an alternative date would be more appropriate. 

(6) 	Business asset test. The “business asset test” is the mechanism of comparing business assets to determine if members of a combined reporting group are required to use the standard formula under Revenue and Taxation Code section 25128 or the single-sales factor formula under Revenue and Taxation Code section 25128.5 and this regulation. 
(7) Combined reporting group. A “combined reporting group” is as defined by California Code of Regulations section 25106.5, subsection (b)(3). 
(8) Commencement date. The “commencement date” of a single-sales factor formula election is the first day of the period for which the election is made.
(9) Common Ownership. “Common ownership” exists if:
(A) A parent corporation owns stock possessing more than 50 percent of the voting power of at least one corporation, and, if applicable,
(B) Stock cumulatively representing more than 50 percent of the voting power of each of the corporations, except the parent, is owned by the parent, one or more corporations described in subparagraph (A), or one or more other corporations that satisfy the conditions of this subparagraph.
(10) Corporation. References to “corporation” include a Subchapter S corporation, any other incorporated entity, or any entity defined or treated as a corporation pursuant to Revenue and Taxation Code sections 23038 or 23038.5. 

	(11) Disregarded Entity. A “disregarded entity” is an entity described in California Code of Regulations section 23038(b)-2, subsection (a). 
(12) Good cause. “Good cause” shall have the same meaning as specified in Treasury Regulation section 1.1502-75(c).

	(13) Gross business receipts. “Gross business receipts” is as defined by Revenue and Taxation Code section 25128, subdivision (d)(1). 

	(14) Group Return. A “group return” is as defined by California Code of Regulations section 25106.5, subsection (b)(13).
(15) Limited liability company. A “limited liability company” is as defined at Revenue and Taxation Code section 17941, subdivision (d).
(16) Member. “Member” is as defined by California Code of Regulations section 25106.5, subsection (b)(10).
(17) Net book value. “Net book value” is equal to an asset's original cost minus depreciation, depletion and amortization. Book value means the amount which an asset is carried on a balance sheet. Depreciation means the systematic write off of the cost of a tangible asset over the asset's useful life. Depletion means the systematic write off of the cost of harvesting or mining a natural resource. Amortization means the systematic write off of the cost of an intangible asset over the asset's useful life. Book value, depreciation, depletion and amortization will be reflected using United States Generally Accepted Accounting Principles (US GAAP). If any member of a combined reporting group does not maintain its books using US GAAP, the Franchise Tax Board may allow an alternative method of valuation of that member's business assets. 
(18) New combined reporting group. A “new combined reporting group” is a combined reporting group that is created by a new affiliation of two or more corporations, or by the addition of one or more new members to an existing combined reporting group.
(19) Nonresident. A “nonresident” is as defined in California Code of Regulations section 17014. 
(20) Original return. The “original return” is the last return filed on or before the due date (taking extensions into account) regardless of the form on which it is filed or however it may be denominated. A return filed after the due date (taking extensions into account) regardless of the form on which it is filed or however it may be denominated may be an original return, if no other return has been filed, but it would not be a timely filed, original return.
(21) Partnership. A “partnership” is as defined in Revenue and Taxation Code section 17008 and includes entities treated as partnerships as set forth in California Code of Regulations section 23038(b)-3.
(22) Qualified business activities. “Qualified business activities” are as defined in Revenue and Taxation Code section 25128, subdivision (c).
(23) Qualified Subchapter S subsidiary: A “qualified Subchapter S subsidiary” is as defined in Internal Revenue Code section 1361, subsection (b)(3), as incorporated by Revenue and Taxation Code section 23800 and as modified by Revenue and Taxation Code section 23800.5.
(24) Resident. A “resident” is as defined in Revenue and Taxation Code section 17014, subdivision (a), and California Code of Regulations section 17014, subsection (a).
(25) S corporation. An “S corporation” is as defined in Internal Revenue Code sections 1361 and 1362, as modified by Revenue and Taxation Code sections 23800.5 and 23801.
(26) Sole Proprietorship. A “sole proprietorship” is an unincorporated trade or business that is operated by one individual.
(27) Standard formula. The “standard formula” is the three-factor method of apportionment as defined by Revenue and Taxation Code section 25128 and California Code of Regulations section 25128. 
(28) Taxpayer. “Taxpayer” means an individual, corporation, or partnership with a requirement to file a California franchise or income tax return. 
(29) Taxpayer member. “Taxpayer member” is as defined by California Code of Regulations section 25106.5, subsection (b)(11).
(30) Timely filed. A “timely filed” return is one filed on or before the due date (taking extensions into account). 
(31) Unitary. One corporation or partnership is “unitary” with another corporation or partnership if they are engaged in a unitary business.
(32) Unitary business. A “unitary business” consists of those activities required to be included in a combined report pursuant to Revenue and Taxation Code section 25101 and the published cases decided thereunder by the United States Supreme Court, the courts of this State, and the California State Board of Equalization. Activities constitute a “unitary business” if unity of ownership, unity of operation, and unity of use are present, or if the activities carried on within the state contribute to or are dependent upon the activities carried on without the state. California Code of Regulations section 25120, subsection (b), sets forth certain indicia and standards for determining whether activities constitute a single trade or business and are therefore unitary. 
(b) Electing the Single-Sales Factor Formula. 
(1) To make a single-sales factor formula election permitted by Revenue and Taxation Code section 25128.5, a taxpayer must make an election on a timely filed, original return for the year of the election. For an election to be effective for purposes of apportioning the business income of a combined reporting group, each taxpayer member of the combined reporting group that is subject to taxation under Part 11 of the Revenue and Taxation Code must make the election.
Example: Corporation P, a calendar year California taxpayer, has a subsidiary, Corporation A, which is also a calendar year California taxpayer. Corporation P and Corporation A are members of the same combined reporting group. On its separate timely filed return, Corporation P makes a single-sales factor formula election. Conversely, on its separate timely filed return, Corporation A does not make a single-sales factor formula election. As a result, neither Corporation P nor Corporation A are deemed to have made a single-sales factor formula election. 
(2) An election made on a group return is an election by each taxpayer member included in that group return. However, the election made on the group return will not have any effect if a taxpayer member of the combined reporting group files a separate return in which no election is made, unless subsection (b)(4)(B) applies.
(3) An apportioning trade or business that includes one or more qualified business activities may make the single-sales factor election provided the apportioning trade or business does not derive more than 50 percent of its gross business receipts from qualified business activities.
Example 1: Corporation A is a bank or financial corporation. Corporations B and C are general corporations. Corporation A, B, and C are members of the same combined reporting group, Group X. Group X receives less than 50 percent of its gross business receipts from qualified banking and financial activities. Accordingly, Corporation A may make the single-sales factor formula election along with Group X.
Example 2: Same facts as Example 1, except that Group X receives more than 50 percent of its gross business receipts from qualified banking and financial activities. Corporation A must apportion pursuant to Revenue and Taxation Code section 25128, subdivision (b), and is precluded from making a single-sales factor formula election. Group X may not make the single-sales factor formula election.
Example 3: Partnership P conducts an apportioning trade or business and is owned 65 percent by Corporation W and 35 percent by Corporation T. Partnership P derives less than 50 percent of its gross business receipts from an extractive business activity. Partnership P, Corporation T, and Corporation W are not unitary with each other. As a result, Corporation W and Corporation T may not independently decide whether to make a single-sales factor method election for their distributive share items of income from the nonunitary Partnership P. However, Partnership P may use the single-sales factor formula to determine California source income for Corporation W and Corporation T on Part B of schedule R-1 of form 565 using the Partnership P factor(s) because Partnership P's separate apportioning trade or business derives less than 50 percent of its gross business receipts from qualified business activities. 
Example 4: Same facts as Example 1, except that general corporations B and C are unitary partners in Partnership F that conducts banking and financial activity as a part of the combined reporting group, Group X. The distributive share of gross business receipts from Partnership F combined with the business receipts from Corporation A cause Group X to have more than 50 percent of its gross business receipts from qualified business activities. Group X may not make the single-sales factor formula election.
(4) Deemed Single-Sales Factor Formula or Standard Formula Elections and Non-Elections.

	(A) Corporations that are non-electing taxpayers that are subsequently found to be members of a combined reporting group as the result of a Franchise Tax Board audit determination (represented by a notice of additional tax proposed to be assessed, a notice of proposed overpayment, notice of action on a claim for refund, or a letter from the tax auditor regarding a computational effect which does not result in a current year adjustment [e.g., a computation of net operating loss carryover]) shall be deemed to have elected the single-sales factor formula if the value of the total business assets of the electing taxpayer(s) is greater than those of the non-electing taxpayer(s). The commencement date of the deemed single-sales factor formula election shall be the same as the commencement date of the electing taxpayers. If the value of total business assets of the electing taxpayers does not exceed the value of total business assets of the non-electing taxpayers, the single-sales factor formula election of each electing taxpayer is terminated as of the date the non-electing taxpayers are, pursuant to the audit determination, properly included in the same combined reporting group as the electing taxpayers. Non-electing taxpayers may not be deemed to have made a single-sales factor formula election if the Franchise Tax Board audit determination is withdrawn or otherwise overturned. For purposes of applying this paragraph, the business assets of other members of the combined reporting group that are not taxpayers shall not be taken into account.
Example 1: Corporation P is not a California taxpayer. It has two subsidiaries, Corporation A and Corporation B, that are California taxpayers, and another subsidiary, Corporation C, that is not a California taxpayer. Corporations P, A, and C are members of the same combined reporting group. Corporation A makes a single-sales factor formula election on its timely filed return which reflects the apportionment factors and income of Corporations P and C. Corporation B files a separate tax return as a standard formula non-electing taxpayer. Upon Franchise Tax Board audit, Corporation B is determined to be a member of the combined reporting group that includes Corporations A, P, and C. In the year of Corporation A's single-sales factor formula election, Corporation A's business assets are $500 million and Corporation B's business assets are $250 million. Based on the business asset test, Corporation B is deemed to have elected the single-sales factor formula, because Corporation A's business assets are greater than Corporation B's business assets. Corporations P and C's business assets are not taken into account in performing the business assets test, since neither P nor C are California taxpayers. 
Example 2: Corporations A, B, and C are taxpayer members of the same combined reporting group. The original timely-filed group return for 2011 that was filed on behalf of each of them includes a single-sales factor election. Corporation D, which is owned by Corporation A, was not considered to be a member of Corporation A, B, and C's combined reporting group for 2011. Corporation D filed its own 2011 California tax return, which did not include a single-sales factor election. During an audit conducted in 2014, the FTB determined that Corporation D was a member of Corporation A, B, and C's combined reporting group for 2011. During 2011, Corporation D's business assets were greater than Corporation A, B, and C's combined business assets. Consequently, the single-sales factor election that was initially made on behalf of Corporations A, B, and C for 2011 is disregarded. For purposes of determining any proposed assessments relating to 2011 for Corporations A, B, and C, the FTB will recalculate the combined reporting group's business income using the standard formula.
(B) If a taxpayer member of a combined reporting group files a separate return based on the standard formula, while other taxpayer members of the combined reporting group included in a group return file based on the single-sales factor formula, the business asset test will determine which method must be used for all taxpayer members of the combined reporting group. 
Example 1: Corporations A, B, C, and D are California taxpayer members of a combined reporting group. Corporations A, B, and C file a group return using the single-sales factor formula. Conversely, Corporation D files a separate return using the standard formula. Pursuant to the business asset test, because the business assets of the electing Corporations A, B, and C are greater than the business assets of the non-electing Corporation D, Corporation D is deemed to have elected the single-sales factor formula.
Example 2: Same facts as Example 1, except that the business assets of Corporation D are greater than the combined business assets of Corporations A, B, and C. There is no single-sales factor formula election for Corporations A, B and C.
(C) When taxpayer members of a combined reporting group file separate returns because their relative tax years end on different dates and some taxpayer members have elected the single-sales factor formula, while others have not, for purposes of conducting the business asset test, the business assets for the electing and non-electing taxpayers will be compared for each common six-month period that occurs after January 1, 2011. Thereafter, the business assets test will be applied to the same common six-month period. The Franchise Tax Board may, in its sole discretion, allow an alternative method if it determines an alternative method would be more appropriate.
Example: Corporations A, B, C, and D are California taxpayer members of a combined reporting group. Corporations A, B, and C are calendar year taxpayers and are included in a group return. Their return filed for taxable year ending December 31, 2011 uses the single-sales factor formula. Conversely, Corporation D has a fiscal year end on June 30th. The return Corporation D files for the year end of June 30, 2012 uses the standard formula. The first common six-month period for taxable years beginning on or after January 1, 2011 for all of the taxpayers begins on July 1, 2011, and ends on December 31, 2011. The business assets for the last six months of 2011 for electing Corporations A, B, and C are compared to the business assets of non-electing Corporation D for the same time period. If the business assets of electing Corporations A, B, and C are greater than the business assets of non-electing Corporation D for the common six-month period; then Corporation D is deemed to have elected the single-sales factor formula for apportionment. Conversely, if the business assets of non-electing Corporation D are greater than the business assets of Corporations A, B, and C for the common six-month period, there is no single-sales factor formula election for Corporations A, B, or C. For all taxable years thereafter, the business assets test will be based on a comparison of the business assets for the first six-month period of Corporation D's fiscal year. 
(5) Election following forced de-combination.
A taxpayer that is subsequently found to not be a member of the combined reporting group pursuant to a Franchise Tax Board audit determination (represented by a notice of additional tax proposed to be assessed, a notice of proposed overpayment, notice of action on a claim for refund, or a letter from the tax auditor regarding a computational effect which does not result in a current year adjustment [e.g., a computation of net operating loss carryover]) may elect to use the single-sales factor formula on an amended return that will be treated as an original return for the purpose of the single-sales factor formula election. The election should ordinarily be made during the course of the audit examination so that the results of that election can be reflected in the applicable notices related to the examination. Except for claims for refund, this election after de-combination must be made no later than 60 days after the date of the applicable notice. This election may be made for each taxable year beginning with the year of de-combination through 60 days after the date of the applicable notice. The Franchise Tax Board may extend such 60-day period for good cause, not to exceed 180 days. In the case of a claim for refund for the entity that was erroneously included in the combined reporting group, a request for the single-sales factor formula election must be made in the claim itself or presented before issuance of the notice of action on the claim. Information to substantiate the effect of the election shall be provided to the Franchise Tax Board within a reasonable time after an election under this subsection is made. 
Example 1: Corporations A, B, and C are included in a group return for calendar Years 1 through 6 that includes a single-sales factor formula election. On June 15 of Year 7 the Franchise Tax Board makes an audit determination that Corporation C was erroneously included in the combined report for every year. Corporation C must make the single-sales factor formula election for any of the Years 1 through 6 by August 15 of Year 7. Thereafter, Corporation C may make the single-sales factor formula election on its timely filed original returns.
Example 2: Same facts as Example 1, except that Corporation C files amended returns using the single-sales factor formula for Years 1 through 6 on December 26 of Year 7. There is no valid single-sales factor election for Years 1 through 6 because the election was made more than 180 days after the audit determination on June 15 of Year 7.
Example 3: Same facts as Example 1, except that Corporation C files amended returns using the single-sales factor formula for Years 1 through 6 on September 10 of Year 7. There is a valid single-sales factor election for Years 1 through 6 provided Corporation C successfully shows good cause for electing more than 60 days after the audit determination of June 15 of Year 7.
Example 4: Partnership X operates an apportioning trade or business during Years 1 through 5 and is owned 25 percent by Corporation A and 75 percent by Corporation B. Corporation B determines that it is unitary with Partnership X and properly makes a single-sales factor formula election on Part B of schedule R-1 on its timely filed original forms 100 for Years 1 through 4. Corporation A determines that its apportioning trade or business is not unitary with Partnership X. Partnership X determines the California source income of Corporation A using the single-sales factor formula as properly indicated on Part B of schedule R-1 of forms 565 for Years 1 through 4. Corporation A makes no election for its separate apportioning trade or business and uses the standard three-factor formula for Years 1 through 4. During Year 6, the Franchise Tax Board audits Corporation B for Years 1 and 2 and determines that it was not unitary with Partnership X during Years 1 and 2, with a determination dated July 15 of Year 6. Corporation B and Partnership X may file amended returns for Years 1 through 4 by no later than September 13 (60 days from the date of audit determination) of Year 6 to determine Corporation B's California source income from Partnership X using the single-sales factor formula and Partnership X's factors. Corporation B must file forms 100X and Partnership X must file amended information returns and indicate that it is determining the California source income of Corporation B using the single-sales factor formula on Part B of schedule R-1 of forms 565. Partnership X may file its information return for Year 5 by the extended due date of October 15 of Year 6 and may use the single-sales factor formula to determine the California source income of Corporation B on a timely filed original Part B of schedule R-1 of form 565 for that year.
(6) A taxpayer that is engaged in more than one apportioning trade or business may make a separate election for each apportioning trade or business. 
Example 1: Corporations A and B are taxpayers and are affiliated with each other, and are also affiliated with non-taxpayer Corporations C, D, E, F, G, H, and I. Corporations A, C, D, and G are engaged in one apportioning trade or business and form a combined reporting group, Group X. Corporations B, E, F, H, and I are engaged in another separate apportioning trade or business and form a combined reporting group, Group Y. Since both Corporations A and B are members of a combined reporting group that includes at least one California taxpayer, each may independently elect to file on a single-sales factor formula basis for purposes of apportioning business income of their respective combined reporting groups. It is not necessary for both Corporations A and B to make the same election, even though they are members of the same group of affiliated corporations. Corporation A, filing a group return for Group X, may make a single-sales factor formula election for Group X. Corporation B, filing a group return for Group Y, is not required to make a single-sales factor formula election.
Example 2: Corporation W is a taxpayer that owns 50 percent of two separate apportioning trade or businesses, Partnership J and Partnership K, but is not unitary with either partnership. Partnership J determines the California source income of Corporation W using the single-sales factor method on a timely filed original return on Part B of schedule R-1 of form 565. Partnership K makes no election and uses the standard three-factor formula to determine the California source income of Corporation W. Corporation W makes no election and apportions its business income from its separate apportioning trade or business using the standard three-factor formula. 
Example 3: Corporation P is a taxpayer that is the single owner of three limited liability companies, Q, R, and S that are each disregarded entities for tax purposes and operate three distinct apportioning trade or businesses. P, Q, R and S are not unitary with one another. Q and R determine the California source income of Corporation P using the single-sales factor formula on timely filed original information returns on Part B of schedule R-1 of form 568. S makes no election and determines the California source income of Corporation P using the standard three-factor formula on Part A of schedule R-1 of form 568. Corporation P makes no election and apportions its business income from its separate apportioning trade or business using the standard three-factor formula on Part A of schedule R-1 of form 100.
Example 4: Same facts as Example 3, except that Corporation P and the disregarded limited liability companies Q, R, and S are unitary. The combined reporting group includes Corporation P (Q, R, and S), Corporation A, and Corporation B filing a group return for Group P. Group P makes a single-sales factor formula election on its timely filed original group return. Since Q, R, and S are disregarded entities operating as divisions of Corporation P and are unitary with each other and Corporations P, A, and B, the income and factors of Q, R, and S are added to those of Corporations P, A, and B, and the single-sales factor formula is used to apportion the income of Group P.
Example 5: Corporation T has elected to be an S corporation. It wholly owns Corporations U, V, and W, each of which satisfies the requirements to be a qualified Subchapter S subsidiary and, pursuant to an election by T, are treated as disregarded entities. T is unitary with W, while T, U and V are not unitary with one another and each operates a separate apportioning trade or businesses. U and V determine the California source income of Corporation T using the single-sales factor formula on a timely filed original return, form 100S filed by Corporation T, with the election indicated on Part B of schedule R-1 attached to schedule QS. Corporation T makes no single-sales factor formula election. Because W is unitary with T and T made no election, W may not determine Corporation T's California source income using the single-sales factor formula. Corporation T does the following: (1) apportions the business income from its separate apportioning trade or business using the standard three-factor formula, (2) adds the income and factors of unitary W to its own income and factors, and (3) adds the California source income from the separate apportioning trade or business of U and V as determined using the single-sales factor formula with U and V's sales factors.
(7) Validity of Election. An election under this regulation will be considered valid if the following conditions are satisfied:
(A) The tax is computed in a manner consistent with the single-sales factor formula election, and
(B) A written notification of election is filed with the return on Part B of schedule R-1 attached to form 100 (S Corporations file a form 100S, and water's-edge corporations file a form 100W), form 565 (for nonunitary partnerships), form 568 (for nonunitary limited liability companies), schedule QS (for nonunitary qualified Subchapter S subsidiaries), form 540 (for individuals), or form 540NR (for nonresident individuals). 
(8) Time for making the election.
(A) The election must be made on a timely filed, original return. 
Example: Corporation P is not a California taxpayer, but it has three subsidiaries, Corporations A, B, and C that are taxpayers and are part of its unitary business. No single-sales factor formula election is filed prior to the due date (taking extensions into account) for filing a return. After the due date (taking extensions into account), a delinquent original California return is filed with a single-sales factor formula election by Corporation P, stating that it now believes it had nexus in California. Because the election was not made on a timely filed, original return, there is no valid election. 
(B) Timely filings which only supplement a previously filed return, or correct mathematical or other errors, shall be considered as incorporating the previously filed return, to the extent not inconsistent, and shall be treated as the original return for purposes of making a single-sales factor formula election. Any timely filings that clearly reflect an intent to withdraw an election made on a previously filed return shall be treated as an original return.
Example 1: Corporation A is a calendar year taxpayer. Its return is due March 15. But if it files its return on or before October 15, an extension is automatically granted to October 15. If it fails to file a return by October 15, no extension exists. Under the paperless extension process, the return is timely if it is filed on or before October 15.
Corporation A files its original return on October 15 of the year. The original return is timely filed, and any single-sales factor formula election contained therein shall be effective for the year for which the return is filed. 
Example 2: Same facts as Example 1 except that Corporation A files its original return on May 15 of the year. The original return is timely filed, and any single-sales factor formula election contained therein shall be effective for the year for which the return is filed.
Example 3: Same facts as Example 2 except that Corporation A files a second return on October 15. Under this regulation, Corporation A's original return was filed on October 15. The single-sales factor formula election must be made by that time. If Corporation A's May 15th filing makes a single-sales factor formula election, and the election is withdrawn in the October 15th filing, the election made on May 15th has no effect. If Corporation A's May 15th filing makes a single-sales factor formula election and the October 15th filing is silent as to the single-sales factor formula election but the calculation of the tax due on the return is consistent with making a single-sales factor formula election, then the single-sales factor formula election made in the May 15th filing is incorporated into the October 15th filing, which will be considered as the original return. If Corporation A's May 15th filing does not make a single-sales factor formula election, but a single-sales factor formula election is made on the October 15th filing, Corporation A has made a single-sales factor formula election and the October 15th filing is the original return. 
Example 4: Corporation B, a calendar year taxpayer, files a return on February 15. Corporation B's return is treated as being filed on March 15, which is the date the election is considered to have been made. Any return filed after March 15 (the due date of the return) will be considered an amended return. 
Example 5: Corporation C, a calendar year taxpayer, has a due date for its return of March 15. It files a return on February 15 and files a second return on March 10. The return filed on March 10 is treated as the original return for the year. The election to file on a single-sales factor formula basis must be made on the March 10 filing to be effective. If Corporation C's February 15 filing makes a single-sales factor formula election and the March 10 filing uses the standard formula and does not make an election, the election made on the February 15 return has no effect. If Corporation C's February 15th filing did not make a single-sales factor formula election and a single-sales factor formula election is made on the March 10th filing, Corporation C has made a single-sales factor formula election. 
(c) Miscellaneous Provisions. 
(1) Partnerships to the extent owned by corporations. Corporations that elect single-sales factor formula apportionment must use the single-sales factor formula for distributive share items of income and factors from unitary partnerships. A partnership may make a single-sales factor formula election on Part B of schedule R-1 of form 565 or form 568 to determine California source income for its nonunitary partners.
Example 1: Partnership Y is owned 50 percent by Corporation A, which is a member of a combined reporting group, Group A, and 50 percent by Corporation B, which is a member of a combined reporting group, Group B. Partnership Y is unitary with Group A but not with Group B. If Group A makes a single-sales factor formula election, it must use the same single-sales factor formula for its distributive share items of income and factors from Partnership Y, adding 50 percent of the sales factor numerator and denominator of Partnership Y to those of Group A and adding 50 percent of total business income of Partnership Y to that of Group A. Partnership Y may make a single-sales factor formula election or may choose to not elect and remain on the three-factor formula to determine the California source income for Corporation B. 
Example 2: A limited liability company M has three owners and has made no election for its classification for tax purposes so by default M is treated as a partnership. Each of the three owners of M operate an apportioning trade or business in addition to that operated by M. M is owned 25 percent by Corporation A, 25 percent by Corporation B, and 50 percent by Corporation C. M is unitary with Corporation C, but not with Corporations A or B. If Corporation C makes a single-sales factor formula election, it must use the same single-sales factor formula for its distributive share items of income and factors from M, adding 50 percent of the sales factor numerator and denominator of M to its own and adding 50 percent of total business income to its own total business income. M may make a single-sales factor method election to determine the California source income for Corporations A or B. Corporations A and B may independently make single-sales factor formula elections for their own separate apportioning trades or businesses that do not include M.
Example 3: Partnership X operates an apportioning trade or business and is owned 40 percent by a limited liability company (R) taxed as a partnership and 60 percent by a limited liability company (T) that has elected to be taxed as a corporation. All three business entities X, R, and T, are unitary. R is owned 5 percent by nonunitary Corporation A, 85 percent by unitary Corporation B, and 10 percent by nonunitary limited liability company S taxed as a partnership. The combined reporting group of X, R, T, and Corporation B is Group Y. The distributive shares of income and factors from X flows through to R and T. To determine the California source income for the 5 percent distributive share items of income for nonunitary Corporation A, the single-sales factor formula may be used at the R level by R on Part B of schedule R-1 of form 568 using R's factors. The single-sales factor formula may also be used by unitary Corporation B which may elect to use the single-sales factor formula on Part B of schedule R-1 of form 100 if the same election is made by all members of Group Y. Corporation B would add to its own income and factors, its 85 percent distributive share of income and factors from R (which would include R's 40 percent distributive share of income and factors from X) and the combined factors and income would be used on Corporation B's schedule R-1 of form 100 or Group Y's group return. To determine the California source income for the 10 percent distributive share items of income for nonunitary S, the single-sales factor formula may be used at the R level on Part B of schedule R-1 of form 568 using R's factors.
(2) Nonresidents.

(A) 	Sole Proprietorships. A nonresident individual who is a sole proprietor of a business that engages in activities partly within and partly without the state, as provided in California Code of Regulations section 17951-4, subsection (c)(2), may determine California source income using the single-sales factor formula.
Example 1: Beth Johnson is a nonresident and is the single owner of a sole proprietorship that operates an apportioning trade or business engaged in activities within and without California. Beth Johnson may use the single-sales factor formula on Part B of schedule R-1 for purposes of sourcing her income from the sole proprietorship. 
Example 2: John Smith is a nonresident and is the single owner of a limited liability company that operates an apportioning trade or business engaged in activities within and without California. The limited liability company is treated as a disregarded entity for tax purposes. John Smith may make the single-sales factor formula election on Part B of schedule R-1 of form 568 for purposes of sourcing the limited liability company's income.
(B) Partnerships to the extent owned by individuals. A nonresident individual who is a partner in a partnership that engages in activities partly within and partly without the state may determine California source income, as provided in California Code of Regulations section 17951-4, subsection (d)(1), using the single-sales factor formula on Part B of schedule R-1 of form 565, but if the partnership does elect to use the single factor formula, the partnership must use the single-sales factor formula to determine California source income for all nonunitary nonresident partners.
Example: Janet Jones and Bruce Johnson are nonresidents and are partners in an apportioning trade or business that operates as Partnership X. Each of the partners owns 50 percent of the partnership. Partnership X may elect to use the single-sales factor formula on Part B of schedule R-1 of form 565 to determine the California source income of the partners, but if Partnership X uses the single-sales factor formula, it must do so for both Janet Jones and for Bruce Johnson.
(3) Changes in affiliation. Elections are made at the end of each taxable year when changes in affiliation are known. When a corporation is acquired by a combined reporting group and becomes unitary mid-year, the taxpayer members of the combined reporting group have the option of electing to use the single-sales factor formula at the end of that taxable year. The income and factors of the acquired entity are not included in the combined report for the portion of the year before acquisition, and the acquired entity must file a return reflecting its income from California sources and has the option of making its own election for that time period, consistent with this regulation. When a combined reporting group sells a corporation, at the end of the year the taxpayer members of the combined reporting group have the option of making a single-sales factor formula election for the group. The combined reporting group does not include the income and factors of the divested entity for the time period after the sale. The divested entity must file its own tax return for the portion of the year after the sale and has the option to make its own single-sales factor formula election for that portion of the year.
Example 1: Corporation X and its unitary subsidiaries are members of a combined reporting group, Group W, which files on a calendar year basis. Corporation X is a member of Group W from January 1 to June 15 of Year 1. The group return filed by Group W includes Corporation X's income and factors for January 1 through June 14 of Year 1. Group W's taxpayers do not elect to use the single-sales factor formula. Corporation X may make its own single-sales factor formula election for the period starting June 15 through December 31 of Year 1. 
Example 2: Corporation A and its unitary subsidiaries B and C are calendar year taxpayers and members of a combined reporting group, Group R. Corporation A acquires Corporation X on June 15 of Year 1. For Year 1, a group return is filed on behalf of the members of Group R with a single-sales factor formula election. The single-sales factor formula election applies to Corporation X for June 15 through December 31 of Year 1. 
(d) This regulation shall be applicable to taxable years beginning on or after January 1, 2011.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference cited: Sections 25113 and 25128.5, Revenue and Taxation Code.
HISTORY

1. New section filed 9-22-2011; operative 10-22-2011 (Register 2011, No. 38).
2. Change without regulatory effect amending subsection (b)(2) filed 7-10-2012 pursuant to section 100, title 1, California Code of Regulations (Register 2012, No. 28).
§25129. Property Factor.

(a) Property Factor. In General. The property factor of the apportionment formula for each trade or business of the taxpayer shall include all real and tangible personal property owned or rented by the taxpayer and used during the income year in the regular course of such trade or business. The term “real and tangible personal property” includes land, buildings, machinery, stocks of goods, equipment, and other real and tangible personal property but does not include coin or currency.
Property used in connection with the production of nonbusiness income shall be excluded from the property factor. Property used both in the regular course of taxpayer's trade or business and in the production of nonbusiness income shall be included in the factor only to the extent the property is used in the regular course of taxpayer's trade or business. The method of determining that portion of the value to be included in the factor will depend upon the facts of each case.
The property factor shall reflect the average value of property includible in the factor. See Regulation 25131.
(b) Property Factor. Property Used for the Production of Business Income. Property shall be included in the property factor if it is actually used or is available for or capable of being used during the income year in the regular course of trade or business of the taxpayer. Property held as reserved or standby facilities or property held as a reserve source of materials shall be included in the factor. For example, a plant temporarily idle or raw material reserves not currently being processed are includible in the factor. Property or equipment under construction during the income year (except inventoriable goods in the process) shall be excluded from the factor until such property is actually used in the regular course of the trade or business of the taxpayer. If the property is partially used in the regular course of the trade or business of the taxpayer while under construction, the value of the property to the extent used shall be included in the property factor. Property used in the regular course of the trade or business of the taxpayer shall remain in the property factor until its permanent withdrawal is established by an indentifiable event such as its conversion to the production of nonbusiness income, its sale, or the lapse of an extended period of time (normally, five years) during which the property is held for sale.
EXAMPLE (A):
Taxpayer closed its manufacturing plant in State X and held such property for sale. The property remained vacant until its sale one year later. The value of the manufacturing plant is included in the property factor until the plant is sold.
EXAMPLE (B):
Same as above except that the property was rented until the plant was sold. The plant is included in the property factor until the plant is sold.
EXAMPLE (C):
Taxpayer closed its manufacturing plant and leased the building under a five-year lease. The plant is included in the property factor until the commencement of the lease.
EXAMPLE (D):
The taxpayer operates a chain of retail grocery stores. Taxpayer closed Store A, which was then remodeled into three small retail stores such as a dress shop, dry cleaning, and barber shop, which were leased to unrelated parties. The property is removed from the property factor on the date the remodeling of Store A commenced.
(c) Property Factor. Consistency if Reporting. In filing returns with this state, if the taxpayer departs from or modifies the manner of valuing property, or of excluding or including property in the property factor, used in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification.
If the returns or reports filed by the taxpayer with all states to which the taxpayer reports under the Uniform Division of Income for Tax Purposes Act are not uniform in the valuation of property and in the exclusion or inclusion of property in the property factor , the taxpayer shall disclose in its return to this state the nature and extent of the variance.
(d) Property Factor. Numerator. The numerator of the property factor shall include the average value of the real and tangible personal property owned and rented by the taxpayer and used in this state during the income year in the regular course of the trade or business of the taxpayer. Property in transit between locations of the taxpayer to which it belongs shall be considered to be at the destination for purposes of the property factor. Property in transit between a buyer and seller which is included by a taxpayer in the denominator of its property factor in accordance with its regular accounting practices shall be included in the numerator according to the state of destination. The value of mobile or movable property such as construction equipment, trucks or leased electronic equipment which are located within and without this state during the income year shall be determined for purposes of the numerator of the factor on the basis of the total time within the state during the income year. An automobile assigned to a traveling employee shall be included in the numerator of the factor or in the numerator of the state in which the automobile is licensed.
§25130. Property Factor. Valuation of Owned and Rented Property.
Note     •     History

(a) Property Factor. Valuation of Owned Property.
(1) Property owned by the taxpayer shall be valued at its original cost. As a general rule “original cost” is deemed to be the basis of the property for federal income tax purposes (prior to any federal adjustments) at the time of acquisition by the taxpayer and adjusted by subsequent capital additions or improvements thereto and partial disposition thereof, by reason of sale, exchange, abandonment, etc. However, for taxable income years beginning on or after January 1, 1990, capitalized intangible drilling and development costs shall be included in the property factor whether or not they have been expensed for either federal or state tax purposes.
EXAMPLE (1): The taxpayer acquired a factory building in this state at a cost of $500,000 and 18 months later expended $100,000 for major remodeling of the building. Taxpayer files its return for the current income year on the calendar year basis. Depreciation deduction in the amount of $22,000 was claimed on the building for its return for the current income year. The value of the building includible in the numerator and denominator of the property factor is $600,000 as the depreciation deduction is not taken into account in determining the value of the building for purposes of the factor.
EXAMPLE (2): During the current income year, X Corporation merges into Y Corporation in a tax-free reorganization under the Internal Revenue Code. At the time of the merger, X Corporation owns a factory which X built five year earlier at a cost of $1,000,000. X has been depreciating the factory at the rate of two percent per year, and its basis in X's hands at the time of the merger is $900,000. Since the property is acquired by Y in a transaction in which, under the Internal Revenue Code, its basis in Y's hands is the same as its basis in X's, Y includes the property in Y's property factor at X's original cost, without adjustment for depreciation, i.e., $1,000,000.
EXAMPLE (3): Corporation Y acquires the assets of Corporation X in a liquidation by which Y is entitled to use its stock cost as the basis of the X assets under Internal Revenue Code section 334(b)(2) (i.e. stock possessing 80 percent control is purchased and liquidated within two years). Under these circumstances, Y's cost of the assets is the purchase price of the X stock, prorated over the X assets.
If original cost of property is unascertainable, the property is included in the factor at its fair market value as of the date of acquisition by the taxpayer.
(2) Inventory of stock of goods shall be included in the factor in accordance with the valuation method used for federal income tax purposes.
(3) Property acquired by gift or inheritance shall be included in the factor at its basis for determining depreciation for federal income tax purposes.
(b) Property Factor. Valuation of Rented Property.
(1) Property rented by the taxpayer is valued at eight times its net annual rental rate. The net annual rental rate for any item of rented property is the annual rental rate paid by the taxpayer for such property, less the aggregate annual subrental rates paid by subtenants of the taxpayer. (See Cal. Code Regs., tit. 18, § 25137, sub. (a), for special rules where the use of such net annual rental rate produces a negative or clearly inaccurate value or where property is used by the taxpayer at no charge or rented at a nominal rental rate.)
Subrents are not deducted when the subrents constitute business income because the property which produces the subrents is used in the regular course of a trade or business of the taxpayer when it is producing such income. Accordingly there is no reduction in its value.
EXAMPLE (1): The taxpayer receives subrents from a bakery concession in a food market operated by the taxpayer. Since the subrents are business income they are not deducted from rent paid by the taxpayer for the food market.
EXAMPLE (2): The taxpayer rents a 5-story office building primarily for use in its multistate business, uses three floors for its offices and subleases two floors to various other businesses and persons such as professional people, shops and the like. The rental of the two floors is incidental to the operation of the taxpayer's trade or business. Since the subrents are business income they are not deducted from the rent paid by the taxpayer.
EXAMPLE (3): The taxpayer rents a 20-story office building and uses the lower two stories for its general corporation headquarters. The remaining 18 floors are subleased to others. The rental of the 18 floors is not incidental to but rather is separate from the operation of the taxpayer's trade or business. Since the subrents are nonbusiness income they are to be deducted from the rent paid by the taxpayer.
(2) “Annual rental rate” is the amount paid as rental for property for a 12-month period (i.e., the amount of the annual rent). Where the property is rented for less than a 12-month period, the rent paid for the actual period of rental shall constitute the “annual rental rate” for the tax period. However,where a taxpayer has rented property for a term of 12 or more months and the current tax period covers a period of less than 12 months (due, for example, to a reorganization or change of accounting period), the rent paid for the short tax period shall be annualized. If the rental term is for less than 12 months, the rent shall not be annualized beyond its term. Rent shall not be annualized because of the uncertain duration when the rental term is on a month to month basis.
EXAMPLE (1): Taxpayer A which ordinarily files its returns based on a calendar year is merged into Taxpayer B on April 30. The net rent paid under a lease with 5 years remaining is $2,500 a month. The rent for the tax period January 1 to April 30 is $10,000. After the rent is annualized the net rent is $30,000 ($2,500 ´ 12).
EXAMPLE (2): Same facts as in Example (1) except that the lease would have terminated on August 31. In this case the annualized net rent is $20,000 ($2,500 ´ 8).
(3) “Annual rent” is the actual sum of money or other consideration payable,directly or indirectly, by the taxpayer or for its benefit for the use of the property and includes:
(A) Any amount payable for the use of real or tangible personal property, or any part thereof, whether designated as a fixed sum of money or as a percentage of sales, profits or otherwise.
EXAMPLE: A taxpayer, pursuant to the terms of a lease, pays a lessor $1,000 per month as a base rental and at the end of the year pays the lessor 1 percent of its gross sales of $400,000. The annual rent is $16,000 ($12,000 plus 1 percent of $400,000 or $4,000).
(B) Any amount payable as additional rent or in lieu of rents, such as interest, taxes, insurance, repairs of any other items which are required to be paid by the terms of the lease or other arrangement, not including amounts paid as service charges, such as utilities, janitor services, etc. If a payment includes rent and other charges unsegregated, the amount of rent shall be determined by consideration of the relative values of the rent and the other items.
EXAMPLE (1): A taxpayer, pursuant to the terms of a lease, pays the lessor $12,000 a year rent plus taxes in the amount of $2,000 and interest on a mortgage in the amount of $1,000. The annual rent is $15,000.
EXAMPLE (2): A taxpayer stores part of its inventory in a public warehouse. The total charge for the year was $1,000 of which $700 was for the use of storage space and $300 for inventory insurance, handling and shipping charges, and C.O.D. collections. The annual rent is $700.
(4) “Annual rent” does not include incidental day-to-day expenses such as hotel or motel accommodations, daily rental of automobiles, etc.
(5) Leasehold improvements shall, for the purposes of the property factor, be treated as property owned by the taxpayer regardless of whether the taxpayer is entitled to remove the improvements or the improvements revert to the lessor upon expiration of the lease. Hence, the original cost of leasehold improvements shall be included in the factor. (See Cal. Code Regs., tit. 18, § 25137, sub. (b)(1)(C).) 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25130, Revenue and Taxation Code.
HISTORY

1. Repealer of footnote limiting application, amendment of subsections (a)(1)and (b)(3), and new subsection (b)(4) filed 10-2-89; operative 11-1-89 (Register 89, No. 43). 
2. Amendment of subsection (a)(1) filed 1-3-90 as an emergency; operative 1-3-90 (Register 90, No. 3). A Certificate of Compliance must be transmitted to OAL within 120 days or emergency language will be repealed by operation of law on 5-3-90.
3. Certificate of Compliance as to 1-3-90 order transmitted to OAL 3-19-90 and filed 4-18-90 (Register 90, No. 18).
4. Amendment of section and Note filed 1-28-2005; operative 2-27-2005 (Register 2005, No. 4).
§25131. Property Factor. Averaging Property Values.

As a general rule the average value of property owned by the taxpayer shall be determined by averaging the values at the beginning and ending of the income year. However, the Franchise Tax Board may require or allow averaging by monthly values if such method of averaging is required to properly reflect the average value of the taxpayer's property for the tax period.
Averaging by monthly values will generally be applied if substantial fluctuations in the values of the property exist during the income year or where property is acquired after the beginning of the income year or disposed of before the end of the income year.
EXAMPLE:
The monthly value of the taxpayer's property was as follows:

				Total
January	$2,000	July	$15,000
February	2,000	August	17,000
March	3,000	September	23,000
April	3,500	October	25,000
May	4,500	November	13,000
June	10,000	December	  2,000
	$25,000		$95,000	$120,000
The average value of the taxpayer's property includible in the property factor for the income year is determined as follows:

$120,000 ¸ 12 = $10,000
Averaging with respect to rented property is achieved automatically by the method of determining the net annual rental rate of such property as set forth in Reg. 25130(b).
§25132. Payroll Factor.

(a) Payroll Factor. In General.
(1) The payroll factor of the apportionment formula for each trade or business of the taxpayer shall include the total amount paid by the taxpayer in the regular course of its trade or business for compensation during the income year.
(2) The total amount “paid” to employees is determined upon the basis of the taxpayer's accounting method. If the taxpayer has adopted the accrual method of accounting, all compensation properly accrued shall be deemed to have been paid. Notwithstanding the taxpayer's method of accounting, at the election fo the taxpayer, compensation paid to employees may be included in the payroll factor by used of the cash methods if the taxpayer is required to report such compensation under such method for unemployment compensation purposes.
The compensation of any employee on account of activities which are connected with the production of nonbusiness income shall be excluded from the factor.
EXAMPLE (A):
The taxpayer uses some of its employees in the construction of a storage building which, upon completion, is used in the regular course of taxpayer's trade or business. The wages paid to those employees are treated as a capital expenditure by the taxpayer. The amount of such wages is included in the payroll factor.
EXAMPLE (B):
The taxpayer owns various securities which it holds as an investment separate and apart from its trade or business. The management of the taxpayer's investment portfolio is the only duty on Mr. X, an employee. The salary paid to Mr. X is excluded from the payroll factor.
(3) The term “compensation” means wages, salaries, commissions and any other form of remuneration paid to employees for personal services. Payments made to an independent contractor or any other person not properly classifiable as an employee are excluded. Only amounts paid directly to employees are included in the payroll factor. Amounts considered paid directly include the value of board, rent, housing, lodging, and other benefits or services furnished to employees by the taxpayer in return for personal services provided that such amounts constitute income to the recipient under the Federal Internal Revenue Code. In the case of employees not subject to the Federal Internal Revenue Code, e.g., those employed in foreign countries, the determination of whether such benefits or services would constitute income to the employees shall be made as though such employees were subject to the Federal Internal Revenue Code.
(4) The term “employee” means (A) any officer of a corporation, or (B) and individual who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status if an employee. Generally, a person will be considered to be an employee if he is included by the taxpayer as an employee for purposes of the payroll taxes imposed by the Federal Insurance Contributions Act; except that, since certain individuals are included within the term “employees” in the Federal Insurance Contributions Act who would not be employees under the usual common-law rules, it may be established that a person who is included as an employee for purposes of  the Federal Insurance Contributions Act is not an employee for purposes of this regulation.
(5) In filing returns with this state, if the taxpayer departs from or modifies the treatment of compensation paid used in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification.
If the returns or reports filed by the taxpayer with all states to which the taxpayer reports under the Uniform Division if Income for Tax Purposes Act are not uniform in the treatment of compensation paid, the taxpayer shall disclose in its return to this state the nature and extent of the variance.
(b) Payroll Factor. Denominator. The denominator of the payroll factor is the total compensation paid everywhere during the income year. Accordingly, compensation paid to employees whose services are performed entirely in a state where the taxpayer is immune from taxation, for example, by Public Law 86-272, are included in the denominator of the payroll factor.
EXAMPLE:
A taxpayer has employees in its state of legal domicile (State A) and is taxable in State B. In addition the taxpayer has other employees whose services are performed entirely in State C where the taxpayer is immune from taxation by Public Law 86-272. As to these latter employees, the compensation will be assigned to State C where their services are performed (i.e., included in the denominator--but not the numerator--of the payroll factor) even though that taxpayer is not taxable in State C.
(c) Payroll Factor. Numerator. The numerator of the payroll factor is the total amount paid in this state during the income year by the taxpayer for compensation. The tests in Section 25133 to be applied in determining whether compensation is paid in this state are derived from the Model Unemployments Compensation Act. Accordingly, if compensation paid to employees is included in the payroll factor by use of the cash method of accounting of if the taxpayer is required to report such compensation under such methods for unemployment compensation purposes, it shall be presumed that the total wages reported by the taxpayer to this state for unemployment compensation purposes constitutes compensation paid in this state except for compensation excluded under paragraphs (2) and (4) of subsection (a). The presumption may be overcome by satisfactory evidence that an employee's compensation is not properly reportable to this state for unemployment compensation purposes.
§25133. Payroll Factor. Compensation Paid in This State.

Compensation is paid in this state if any one of the following tests, applied consecutively, are met:
(1) The employee's service is performed entirely within the state.
(2) The employee's service is performed both within and without the state, but the service performed without the state is incidental to the employee's service within the state. The word “incidental” means any service which is temporary or transitory in nature, or which is rendered in connection with an isolated transaction.
(3) If the employee's services are performed both within and without this state, the employee's compensation will be attributed to this state:
(A) if the employee's base of operations is in this state; or
(B) if there is no base of operations in any state in which some part of the service is performed, but the place from which the service is directed or controlled is in this state; or
(C) if the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed but the employee's residence is in this state.
The term “base of operations” is the place of more or less permanent nature from which the employee starts his work and to which he customarily returns in order to receive instructions from the taxpayer or communications from his customers or other persons or to replenish stock or other materials, repair equipment, or perform any other functions necessary to the exercise of his trade or profession at some other point or points. The term “place from which the service is directed or controlled” refers to the place from which the power to direct or control is exercised by the taxpayer.
§25134. Sales Factor.
History

(a) Sales Factor. In General.
(1) Section 25120(e) defines the term “sales” to mean all gross receipts of the taxpayer not allocates under sections 24124 to 25127, inclusive. Thus, for the purposes of the sales factor of the apportionment formula for each trade or business of the taxpayer, the term “sales” means all gross receipts derived by the taxpayer from transactions and activity in the regular course of such trade or business. The following are rules for determining “sales” in various situations:
(A) In the case of a taxpayer engaged in manufacturing and selling or purchasing and reselling goods or products, “sales” includes all gross receipts from the sales of such goods or products (or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the income year) held be the taxpayer primarily for sale to customers in the ordinary course of its trade or business. Gross receipts for this purpose means gross sales, less returns and allowances and includes all interest income, service charges, carrying charges, or time-price differential charges incidental to such sales. Federal and state excise taxes (including sales taxes) shall be included as part of such receipts if such taxes are passed on to the buyer or included as part of the selling price of the product.
(B) In the case of cost plus fixed fee contracts, such as the operation of a government-owned plant for a fee, “sales” includes the entire reimbursed cost, plus the fee.
(C) In the case of a taxpayer engaged in providing services, such as the operation of an advertising agency, or the performance of equipment service contracts, research and development contracts, “sales” includes the gross receipts from the performance of such services including fees, commissions, and similar items.
(D) In the case of a taxpayer engaged in renting real or tangible property, “sales” includes the gross receipts from the rental, lease, or licensing the use of the property.
(E) In the case of a taxpayer engaged in the sale, assignment, or licensing of intangible personal property such are patents and copyrights, “sales” includes the gross receipts therefrom.
(F) If a taxpayer derives receipts from the sale of equipment used in its business, such receipts constitute “sales.” For example, a truck express company owns a fleet of trucks and sells its trucks under a regular replacement program. The gross receipts from the sales of the trucks are included in the sales factor.
(2) In some cases certain gross receipts should be disregarded in determining the sales factor in order that the apportionment formula will operate fairly to apportion to this state the income of the taxpayer's trade or business. See Regulation 25137(c).
(3) In filing returns with this state, if the taxpayer departs from or modifies the basis for excluding or including gross receipts in the sales factor used in returns for prior years, the taxpayer shall disclose in the return for the current year the nature and extent of the modification.
If the returns or reports filed by the taxpayer with all states to which the taxpayer reports under the Uniform Division of Income for Tax Purposes Act are not uniform in the inclusion or exclusion of gross receipts, the taxpayer shall disclose in its return to this state the nature and extent of the variance.
(b) Sales Factor: Denominator. The denominator of the sales factor shall include the total gross receipts derived by the taxpayer from transactions and activity in the regular course of its trade or business, except receipts excluded under Regulation 25137(c).
(c) Sales Factor: Numerator. The numerator of the sales factor shall include gross receipts attributable to this state and derived by the taxpayer from transactions and activity in the regular course of its trade or business. All interest income, service charges, carrying charges, or time-price differential charges incidental to such gross receipts shall be included regardless of the place where the accounting records are maintained or the location of the contract or other evidence of indebtedness.
HISTORY

1. Editorial correction of printing error restoring omitted text in subsection (a)(1)(A) (Register 91, No. 32).
§25135. Sales Factor. Sales of Tangible Personal Property.

(a) Sales Factor: Sales of Tangible Personal Property in this State.
(1) Gross receipts from sales of tangible personal property (except sales to the United States Government; see subsection (b) of this regulation) are in this state:
(A) if the property is delivered or shipped to a purchaser within this state regardless of the f.o.b. point or other conditions of sale; or
(B) if the property is shipped form an office, store, warehouse, factory, or other place of storage in this state and the taxpayer is not taxable in the state of the purchaser.
(2) Property shall be deemed to be delivered or shipped to a purchaser within this state if the recipient is located in this state, even though the property is ordered from outside this state.
EXAMPLE:
The taxpayer, with inventory in State A, sold $100,000 of its products to a purchaser having branch stores in several states including this state. The order for the purchase was placed by the purchaser's central purchasing department located in State B. $25,000 of the purchase order was shipped directly to purchaser's branch store in this state, The branch store in this state is the “purchaser within this state” with respect to $25,000 of the taxpayer's sales.
(3) Property is delivered or shipped to a purchaser within this state if the shipment terminates in this state, even though the property is subsequently transferred by the purchaser to another state.
EXAMPLE:
The taxpayer makes a sale to a purchaser who maintains a central warehouse in this state at which all merchandise purchases are received. The purchaser reships the goods to its branch stores in other states for sale. All of the taxpayer's products shipped to the purchaser's warehouse in this state is property “delivered or shipped to a purchaser within this state.”
(4) The term “purchaser within this state” shall include the ultimate recipient of the property if the taxpayer in this state, at the designation of the purchaser, delivers to or has the property shipped to the ultimate recipient within this state.
EXAMPLE:
A taxpayer in this state sold merchandise to a purchaser in State A. Taxpayer directed the manufacturer or supplier of the merchandise in State B to ship the merchandise to the purchaser's customer in this state pursuant to purchaser's instructions. The sale by the taxpayer is in this state.
(5) When property being shipped by a seller from the state of origin to a consignee in another state is diverted while enroute to a purchaser in this state, the sales are in this state.
EXAMPLE:
The taxpayer, a produce grower in State A, begins shipment of perishable produce to the purchaser's place of business in State B. While enroute the produce is diverted to the purchaser's place of business in this state in which state the taxpayer is subject to tax. The sale by the taxpayer is attributed to this state.
(6) If the taxpayer is not taxable in the state of the purchaser, the sale is attributed to this state if the property is shipped from an office, store, warehouse, factory or other place of storage in this state.
EXAMPLE:
The taxpayer has its head office and factory in State A. It maintains a branch office and inventory in this state. Taxpayer's only activity in State B is the solicitation of orders by a resident salesman. All orders by the State B salesman are sent to the branch office in this state for approval and are filled by shipment from the inventory in this state. Since taxpayer is immune under Public Law 86-272 from tax in State B, all sales of merchandise to purchasers in State B are attributed to this state, the state from which the merchandise was shipped.
(7) If a taxpayer whose salesman operates from an office located in this state makes a sale to a purchaser in another state in which the taxpayer is not taxable and the property is shipped directly by a third party to the purchaser, the following rules apply:
(A) If the taxpayer is taxable in the state from which the third party ships the property, then the sale is in such state.
(B) If the taxpayer is not taxable in the state from which the property is shipped, then the sale is in this state.
EXAMPLE:
The taxpayer in this state sold merchandise to a purchaser in State A. Taxpayer is not taxable in State A. Upon direction of the taxpayer, the merchandise was shipped directly to the purchaser by the manufacturer in State B. If the taxpayer is taxable in State B, the sale is in State B. If the taxpayer is not taxable in State B, the sale is in this state.
(b) Sales Factor: Sales of Tangible Personal Property to United States Government in this State. Gross receipts from sales of tangible personal property to the United States Government are in this state if the property is shipped from an office, store, warehouse, factory, or other place of storage in this state. For the purposes of this regulation, only sales for which the United States Government makes direct payment to the seller pursuant to the terms of a contract constitute  sales to the United States Government. Thus, as a general rule, sales by a subcontractor to the prime contractor, the party to the contract with the United States Government, do not constitute sales to the United States Government.
EXAMPLE (A):
A taxpayer contracts with General Services Administration to deliver X number of trucks  which were paid for by the United States Government. The sale is a sale to the United States Government.
EXAMPLE (B):
The taxpayer as a subcontractor to a prime contractor with the National Aeronautics and Space Administration contracts to build a component of a rocket for $1,000,000. The sale by the subcontractor to the prime contractor is not a sale to the United States Government.
§25136. Sales Factor. Sales Other Than Sales of Tangible Personal Property in This State.
Note     •     History

(a) In General. Section 25136 provides for the inclusion in the numerator of the sales factor of gross receipts from transactions other than sales of tangible personal property (including transactions with the United States Government); under this section gross receipts are attributed to this state if the income-producing activity which gave rise to the receipts is performed wholly within this state. Also gross receipts are attributed to this state if, with respect to a particular item of income, the income-producing activity is performed within and without this state but the greater proportion of the income-producing activity is performed in this state, based on costs of performance.
(b) Income-Producing Activity: Defined. The term “income-producing activity” applies to each separate item of income and means the transactions and activity engaged in by the taxpayer in the regular course of its trade or business for the ultimate purpose of producing that item of income. Such activity includes transactions and activities performed on behalf of a taxpayer, such as those conducted on its behalf by an independent contractor. Accordingly, income-producing activity includes but is not limited to the following:
(1) The rendering of personal services by employees or by an agent or independent contractor acting on behalf of the taxpayer or the utilization of tangible and intangible property by the taxpayer or by an agent or independent contractor acting on behalf of the taxpayer in performing a service.
(2) The sale, rental, leasing, licensing or other use of real property.
(3) The rental, leasing, licensing or other use of tangible personal property.
(4) The sale, licensing or other use of intangible personal property.
The mere holding of intangible personal property is not, of itself, an income producing activity.
(c) Costs of Performance: Defined. The term “costs of performance” means direct costs determined in a manner consistent with generally accepted accounting principles and in accordance with accepted conditions or practices in the trade or business of the taxpayer incurred to perform the income-producing activity which gives rise to the particular item of income. Included in the taxpayer's costs of performance are taxpayer's payments to an agent or independent contractor for the performance of personal services and utilization of tangible and intangible property which give rise to the particular item of income.
EXAMPLE:
The taxpayer contracts with a customer to perform a service for $1,000,000 in this state and State B. The taxpayer's own costs of performance for this service are $500,000 for both this state and State B. For this state, the taxpayer also hires a subcontractor to perform the service at a cost of $100,000 in this state. Both taxpayer's own costs of performance of $500,000 in both this state and State A and the $100,000 paid by the taxpayer to the subcontractor of the taxpayer and will be taken into account in assigning the costs of performance to a state and ultimately the $1,000,000 receipt to the sales factor numerator.
(d) Application.
(1) In General. Receipts (other than from sales of tangible personal property) in respect to a particular income-producing activity are in this state if:
(A) the income-producing activity is performed wholly within this state; or
(B) the income-producing activity is performed both in and outside this state and a greater proportion of the income-producing activity is performed in this state than in any other state, based on costs of performance.
(2) Special Rules. The following are special rules for determining when receipts from the income-producing activities described below are in this state:
(A) Gross receipts from the sale, lease, rental or licensing of real property are in this state if the real property is located in this state.
(B) Gross receipts from the rental, lease or licensing of tangible personal property are in this state if the property is located in this state. The rental, lease, licensing or other use of tangible personal property in this state is a separate income-producing activity from the rental, lease, licensing or other use of the same property while located in another state; consequently, if property is within and without this state during the rental, lease or licensing period, gross receipts attributable to this state shall be measured by the ratio which the time the property was physically present or was used in this state bears to the total time or use of the property everywhere during such period.
EXAMPLE:
Taxpayer is the owner of 10 railroad cars. During the year, the total of the days each railroad car was present in this state was 50 days. The receipts attributable to the use of each of the railroad cars in this state are a separate item of income and shall be determined as follows:

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(C) Gross receipts for the performance of personal services are attributable to this state to the extent such services are performed in this state. If services relating to a single item of income are performed partly within and partly without this state, the gross receipts for the performance of such services shall be attributable to this state only if a greater portion of the services were performed in this state, based on costs of performance. Usually where services are performed partly within and partly without this state the services performed in each state will constitute a separate income-producing activity; in such cases, the gross receipts from the performance of services attributable to this state shall be measured by the ratio which the time spent in performing such services in this state bears to the total time spent in performing such services everywhere. Time spent in performing services includes the amount of time expended in the performance of a contract or other obligation which gives rise to such gross receipts. Personal services not directly connected with the performance of the contract or other obligation, as for example, time expended in negotiating the contract,is excluded from the computations.
EXAMPLE (i):
Taxpayer, a road show, gave theatrical performances at various locations in State X and in this state during the tax period. All gross receipts from performances given in this state are attributed to this state.
EXAMPLE (ii):
The taxpayer, a public opinion survey corporation, conducted a poll by its employees in State X and in this state for a sum of $9,000.The project required 600 person hours to obtain the basic data and prepare the survey report. Two hundred of the 600 person hours were expended in this state. The receipts attributable to this state are $3,000.

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(3) Services on Behalf of Taxpayer. An income-producing activity performed on behalf of a taxpayer by an agent or independent contractor is attributed to a state if such income-producing activity is in such state.
(A) Such income-producing activity is in a state if the taxpayer can reasonably determine at the time of filing its return that all of the income-producing activity is actually performed in such state by the agent or independent contractor. 
EXAMPLE: 
The taxpayer, a satellite TV provider, contracts with its customer, an owner of apartment buildings, to provide and install satellite dishes for $1,000,000 in this state. The taxpayer then subcontracts with and pays agent or independent contractor X to install the satellite dishes in this state for $750,000. The taxpayer can reasonably determine at the time of filing its return that its cost of performance is in this state because that is the only location where installation services were performed. The taxpayer's cost of performance of $750,000 paid to X will be assigned to this state pursuant to subsection (d)(3)(A) for purposes of assigning the $1,000,000 receipt to the numerator of the sales factor.
(B) If the income-producing activity occurs in more than one state, subsection (d)(3)(A) does not apply. The income-producing activity is in a state to the extent that the contract between the taxpayer and the agent or independent contractor or the taxpayer's records indicate it is to be performed in such state and the portion of the taxpayer's payment to the agent or independent contractor associated with the performance in such state is determinable under the contract.
EXAMPLE:
The taxpayer, a satellite TV provider, contracts with its customer, an owner of apartment buildings, to provide and install satellite dishes for $1,000,000 in this state and States A and B on an as needed basis. The taxpayer then subcontracts with and pays agent or independent contractor X to install the satellite dishes in this state and States A and B for $200 per installation. The taxpayer's records show that X installed 1,000 satellite dishes each in this state and State A and 1,750 satellite dishes in State B. The taxpayer can reasonably determine at the time of filing its return the costs of performing installation services in each state because the taxpayer's records indicate the number of installations in each state and the taxpayer's contract with X indicate the cost of each installation. The taxpayer's cost of performance is $200,000 in both this State and State A and is $350,000 in State B. The taxpayer's greater cost of performance is $350,000 in State B ($200 x 1,750) and will be assigned to State B pursuant to subsection (d)(3)((B) for purposes of assigning the $1,000,000 receipt to the numerator of the sales factor. 
(C) If the location of the income-producing activity cannot be assigned pursuant to subsection (d)(3)(A) or (B), the income-producing activity is in a state to the extent the contract between the taxpayer and the taxpayer's customer or the taxpayer's records indicate it is to be performed in such state and the portion of the taxpayer's payment to the agent or independent contractor associated with the performance in such state is determinable under the contract.
EXAMPLE:
The taxpayer, a satellite TV provider, contracts with its customer, an owner of apartment buildings, to provide and install satellite dishes for $1,000,000 in this state and States A and B on an as needed basis. The taxpayer then subcontracts with and pays agent or independent contractor X to install the satellite dishes in this state and States A and B for $200 per installation. The taxpayer's records show that X installed 1,000 satellite dishes each in this state and State A and 1,750 satellite dishes in State B. The contract between the taxpayer and X does not indicate the taxpayer's costs associated with X's installation of the satellite dishes in each state. However, the taxpayer's contract with its customer indicates that the activity will take place in this state and States A and B, and the taxpayer's records indicate the number of installations in each state. Accordingly, the taxpayer can reasonably determine at the time of filing its return the costs of performing installation services in each state. The taxpayer's cost of performance is $200,000 in both this State and State A and is $350,000 in State B. The taxpayer's greater cost of performance of $350,000 will be assigned to State B pursuant to subsection (d)(3)(C) for purposes of assigning the $1,000,000 receipt to the numerator of the sales factor. 
(D) If the location of the income-producing activity cannot be assigned pursuant to subsections (d)(3)(A), (B), or (C), the income-producing activity is in a state if the domicile of the taxpayer's customer is in that state. If the taxpayer's customer is not an individual, “domicile” means commercial domicile.
EXAMPLE:
The taxpayer, a satellite TV provider, contracts with its customer, an owner of apartment buildings that is domiciled in State A, to provide and install satellite dishes for $1,000,000 in this state and States A and B. The taxpayer subcontracts with and pays X to install the satellite dishes in this state and States A and B for $750,000. The contract between the taxpayer and X and the contract between the taxpayer and its customer do not indicate the taxpayer's costs associated with X's installation of the satellite dishes in each state. The $750,000 cost of X's performance of its contractual duties will be assigned to State A pursuant to subsection (d)(3)(D) for purposes of assigning the $1,000,000 receipt to the sales factor numerator. 
(E) If the location of the income-producing activity cannot be assigned pursuant to subsections (d)(3)(A), (B), or (C), or the customer's domicile cannot be determined, or such income-producing activity is in a state in which the taxpayer is not taxable, such income-producing activity shall be disregarded in determining the taxpayer's income-producing activity.
EXAMPLE: 
The taxpayer, a satellite TV provider, contracts with its customer, an owner of apartment buildings, to provide and install satellite dishes in this state and States A and B for $1,000,000. The taxpayer contracts with X to install the satellite dishes in this state and States A and B for $750,000. The contract between the taxpayer and X and the contract between the taxpayer and its customer do not indicate the taxpayer's costs associated with X's installation of the satellite dishes in each state. The customer's domicile is not determinable. The $750,000 cost of performance paid to X will not be taken into account pursuant to subsection (d)(3)(E) for purposes of assigning the $1,000,000 to the numerator of the sales factor. 
(e) The amendments to this regulation filed with the Secretary of State on June 17, 2010 are applicable to taxable years beginning on or after January 1, 2008.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25136, Revenue and Taxation Code.
HISTORY

1. Amendment of section and new Note filed 6-17-2010; operative 7-17-2010 (Register 2010, No. 25).
§25136-2. Sales Factor. Sales Other than Sales of Tangible Personal Property in this State.
Note     •     History

(a) In General. Sales other than those described under Revenue and Taxation Code Sections 25135 and 25136, subdivision (a), are in this state if the taxpayer's market for the sales is in this state. 
(b) General Definitions.
(1) “Benefit of a service is received” means the location where the taxpayer's customer has either directly or indirectly received value from delivery of that service. 
Examples:
(A) Real Estate Development Corp with its commercial domicile in State A is developing a tract of land in this state. Real Estate Development Corp contracts with Surveying Corp from State B to survey the tract of land in this state. Regardless of where the survey work is conducted, where the plats are drawn, or where the plats are delivered, the recipient of the service, Real Estate Development Corp, received all of the benefit of the service in this state.
(B) Builder Corp with its commercial domicile in State A is building an office complex in this state. Builder Corp contracts with Engineering Corp from State B to oversee construction of the buildings on the site. Engineering Corp performs some of its service in this state at the building site and additional service in State B. Because all of Engineering Corp's services were related to a construction project in this state, the recipient of the services, Builder Corp, received all of the benefit of the service in this state.
(C) General Corp with its commercial domicile in State A contracts with Computer Software Corp from State B to develop and install custom computer software for General Corp. The software will be used by General Corp in a business office in this state and in a business office in State A. The software development occurs in State B. The recipient of the service, General Corp, received the benefit of the service in both State A and in this state.
(D) Apartment Corp owns 100 apartments in this state and 400 apartments in State A, and contracts with Pest Control Corp for pest control services for all the apartments. The benefit of the service is received in both State A and in this state.
(2) “Cannot be determined” means that the taxpayer's records or the records of the taxpayer's customer which are available to the taxpayer do not indicate the location where the benefit of the service was received or where the intangible property was used. 
(3) “Complete transfer of all property rights” means a transfer of all property rights associated with the ownership of intangible property, as distinguished from a licensing of intangible property where the licensor retains some ownership rights in connection with the intangible property licensed to a buyer. A complete transfer does not require that a seller has sold all of its stock in a corporation or all of its interest in a pass-through entity; rather, it merely means that the seller retains no property rights in the stock or other interest that has been sold. For example, a seller who owns one hundred (100) percent of the stock of a corporation and sells sixty (60) percent of its ownership interest in the corporation, retaining no property rights in the stock sold, has engaged in a complete transfer of all property rights with regard to the 60% of the stock that was sold. The sixty (60) percent ownership interest sold is subject to assignment under subsections (d)(1)(A)1.a. and b.
(4) “Intangible property” includes, but is not limited to, patents, copyrights, trademarks, service marks, trade names, licenses, plans, specifications, blueprints, processes, techniques, formulas, designs, layouts, patterns, drawings, manuals, trade secrets, stock, contract rights including broadcasting rights, and other similar intangible assets. 
(A) A “marketing intangible” includes, but is not limited to, the license of a copyright, service mark, trademark, or trade name where the value lies predominantly in the marketing of the intangible property in connection with goods, services or other items.
(B) A “non-marketing and manufacturing intangible” includes, but is not limited to, the license of a patent, a copyright, or trade secret to be used in a manufacturing or other non-marketing process, where the value of the intangible property lies predominately in its use in such process. 
(C) A “mixed intangible” includes, but is not limited to, the license of a patent, a copyright, service mark, trademark, trade name, or trade secrets where the value lies both in the marketing of goods, services or other items as described in subparagraph (A) and in the manufacturing process or other non-marketing purpose as described in subparagraph (B). 
(5) “Reasonably approximated” means that, considering all sources of information other than the terms of the contract and the taxpayer's books and records kept in the normal course of business, the location of the market for the benefit of the services or the location of the use of the intangible property is determined in a manner that is consistent with the activities of the customer to the extent such information is available to the taxpayer. Reasonable approximation shall be limited to the jurisdictions or geographic areas where the customer or purchaser, at the time of purchase, will receive the benefit of the services or use of the intangible property, to the extent such information is available to the taxpayer. If population is a reasonable approximation, the population used shall be the U.S. population as determined by the most recent U.S. census data. If it can be shown by the taxpayer that the benefit of the service is being substantially received or intangible property is being materially used outside the U.S., then the populations of those other countries where the benefit of the service is being substantially received or the intangible property is being materially used shall be added to the U.S. population. Information that is specific in nature is preferred over information that is general in nature.
(6) “Service” means a commodity consisting of activities engaged in by a person for another person for consideration. The term “service” does not include activities performed by a person who is not in a regular trade or business offering its services to the public, and does not include services rendered to another member of the taxpayer's combined reporting group as defined in Regulation section 25106.5(b)(3). 
(7) “The use of intangible property in this state” means the location where the intangible property is employed by the taxpayer's customer or licensee. In the case of the complete transfer of all property rights in stock of a corporation or interest in a pass-through entity, the location of the use of the stock of the corporation or interest in the pass-through entity is the location of the use of the underlying assets of the corporation or pass-through entity.
(8) “To the extent” means that if the customer of a service receives the benefit of a service or uses the intangible property in more than one state, the gross receipts from the performance of the service or the sale of intangible property are included in the numerator of the sales factor according to the portion of the benefit of the services received and/or the use of the intangible property in this state.
(c) Sales from services are assigned to this state to the extent the customer of the taxpayer receives the benefit of the service in this state. 
(1) In the case where an individual is the taxpayer's customer, receipt of the benefit of the service shall be determined as follows: 
(A) The location of the benefit of the service shall be presumed to be received in this state if the billing address of the taxpayer's customer, as determined at the end of the taxable year, is in this state. If the taxpayer uses the customer's billing address as the method of assigning the sales to this state, the Franchise Tax Board will accept this method of assignment. This presumption may be overcome by the taxpayer by showing, based on a preponderance of the evidence, that either the contract between the taxpayer and the taxpayer's customer, or other books and records of the taxpayer kept in the normal course of business, provide the extent to which the benefit of the service is received at a location (or locations) in this state. If the taxpayer believes it has overcome the presumption and uses an alternative method based on either the contract between the taxpayer and the taxpayer's customer or other books and records of the taxpayer kept in the normal course of business, the Franchise Tax Board may examine the taxpayer's alternative method to determine if the billing address presumption has been overcome and, if so, whether the taxpayer's alternate method of assignment reasonably reflects where the benefit of the service was received by the taxpayer's customers. 

(B) 	If the presumption in (c)(1)(A) is overcome by the taxpayer, and an alternative method cannot be determined by reference to the contract between the taxpayer and its customer or the taxpayer's books and records kept in the normal course of business, then the location where the benefit of the services is received by the customer shall be reasonably approximated.
(C) Examples.
1. Benefit of the Service -- Individuals, subsection (c)(1)(A). Phone Corp provides interstate communications and wireless services to individuals in this state and other states for a monthly fee. The vast majority of consumers of mobile services receive the benefit of the services at many locations. As a result, a customer's billing address is not reflective of the location where the benefit of the services is received by the customer. Phone Corp has operating equipment and facilities used to provide communications services (“net plant facilities”) located in geographical areas where customers utilize its services, based on market size and demand. Phone Corp's books and records, kept in the normal course of the business, identify the net plant facilities used in providing the communications services to Phone Corp's customers. Because Phone Corp's books and records show where the benefit of the services is actually received, the presumption of billing address is overcome. Receipts from interstate communications and wireless services will be attributable to this state based upon the ratio of California net plant facilities over total net plant facilities used to provide those services using a consistent methodology of valuing the property, for example, net book basis of the assets that is determined from Phone Corp's books and records. 
2. Benefit of the Service -- Individual, subsection (c)(1)(A). Travel Support Corp located in this state provides travel information services to its customers, who are individuals located throughout the United States, through a call center located in this state. The contract between Travel Support Corp and its customers provides that for a fee per call, the customer can call Travel Support Corp for information regarding hotels, restaurants and other travel related information. Travel Support Corp's books and records maintained in the regular course of business indicate that fifteen (15) percent of its customers have billing addresses in this state. However, Travel Support Corp's books and records indicate that only seven (7) percent of the calls handled by the call center originate from this state. Because Travel Support Corp's books and records show where the benefit of the services is actually received, the billing address presumption is overcome and the books and records of the taxpayer may be used to assign seven (7) percent of the gross receipts from the support services provided by the call center to this state.
3. Benefit of the Service -- Individual, subsection (c)(1)(A). Same facts as Example 2 except the contract between Travel Support Corp and its customers provides for a set monthly fee, regardless of whether the customer actually calls for travel support. The fact that only seven (7) percent of the calls originate from this state does not overcome the presumption that the benefit of the services is received at the billing address. This is because the charges are not based on a per call basis but rather a flat monthly fee.
4. Benefit of the Service -- Individual, subsection (c)(1)(B). Satellite Music Corp has a contract with Car Dealer Corp to provide satellite music service to Car Dealer Corp's retail customers who buy Make and Model X car. Car Dealer Corp's customers pre-pay for a two (2) year service plan to receive satellite music at a discounted rate as part of the purchase price of the Make and Model X car. While Satellite Music Corp requires an email address for Car Dealer Corp's customers who receive the benefit of this service, Satellite Music Corp does not have access to information as to the billing address or physical location of Car Dealer Corp's customers. Satellite Music Corp may reasonably approximate the location where Car Dealer Corp's customers receive the benefit of its satellite music service by a ratio of the number of Car Dealer Corp locations that offer the two (2) year service plan with Satellite Music Corp to its customers in this state to the number of Car Dealer Corp locations that offer the two (2) year service plan with Satellite Music Corp to its customers located everywhere.
(2) In the case where a corporation or other business entity is the taxpayer's customer, receipt of the benefit of the service shall be determined as follows: 
(A) The location of the benefit of the service shall be presumed to be received in this state to the extent the contract between the taxpayer and the taxpayer's customer or the taxpayer's books and records kept in the normal course of business, notwithstanding the billing address of the taxpayer's customer, indicate the benefit of the service is in this state. This presumption may be overcome by the taxpayer or the Franchise Tax Board by showing, based on a preponderance of the evidence, that the location (or locations) indicated by the contract or the taxpayer's books and records was not the actual location where the benefit of the service was received.
(B) If neither the contract nor the taxpayer's books and records provide the location where the benefit of the service is received, or the presumption in subparagraph (A) is overcome, then the location (or locations) where the benefit is received shall be reasonably approximated. 
(C) If the location where the benefit of the service is received cannot be determined under subparagraph (A) or reasonably approximated under subparagraph (B), then the location where the benefit of the service is received shall be presumed to be in this state if the location from which the taxpayer's customer placed the order for the service is in this state. 
(D) If the location where the benefit of the service is received cannot be determined pursuant to subparagraphs (A), (B), or (C), then the benefit of the service shall be in this state if the taxpayer's customer's billing address is in this state.
(E) Examples.
1. Benefit of the Service -- Business Entity, subsection (c)(2)(A). Payroll Services Corp contracts with Customer Corp to provide all payroll services. Customer Corp is commercially domiciled in this state and has employees in a number of other states. The contract between Payroll Services Corp and Customer Corp does not specify where the service will be used by Customer Corp. Payroll Services Corp's books and records indicate the number of employees of Customer Corp in each state where Customer Corp conducts its business. Payroll Services Corp shall assign its receipts from its contract with Customer Corp by determining the ratio of employees of Customer Corp in this state compared to all employees of Customer Corp and assign that percentage of the receipts from Customer Corp to this state. 
2. Benefit of the Service -- Business Entity, subsection (c)(2)(A). Law Corp located in State C has a Client Corp that has manufacturing plants in this state and State B. Law Corp handles a major litigation matter for Client Corp concerning a manufacturing plant owned by its client in this state. All gross receipts from Law Corp's services related to the litigation are attributable to this state because Law Corp's books and records kept in the normal course of business indicate that the services relate to Client Corp's operations in this state.
3. Benefit of the Service -- Business Entity, subsection (c)(2)(A). Audit Corp is located in this state and provides accounting, attest, consulting, and tax services for Client Corp. The contract between Audit Corp and Client Corp provides that Audit Corp is to audit Client Corp for taxable year ended 20XX. Client Corp's books and records kept in the normal course of business, as well as Client Corp's internal controls and assets, are located in States A, B and this state. As a result, Audit Corp's staff will perform the audit activities in States A, B and this state. Audit Corp's business books and records track hours worked by location where its employees performed their service. Audit Corp's receipts are attributable to this state and States A and B according to the taxpayer's books and records which indicate time spent in each state by each staff member.

4. 	Benefit of the Service -- Business Entity, subsection (c)(2)(A). Web Corp provides internet content to its viewers and receives revenue from providing advertising services to other businesses. Web Corp's contracts with other businesses do not indicate the location (or locations) where the benefit of the service is received. The advertisements are shown via the website to Web Corp viewers and the fee collected is determined by reference to the number of times the advertisement is viewed and/or clicked on by viewers of the website. If Web Corp, through its books and records kept in the normal course of business, can determine the location from which the advertisement is viewed and/or clicked on by viewers of the website, then gross receipts from the advertising will be assigned to this state by a ratio of the number of viewings and/or clicks of the advertisement in this state to the total number of viewings and/or clicks on the advertisement. 
5. Benefit of the Service -- Business Entity, subsection (c)(2)(B). Same facts as Example 4 except Web Corp cannot determine the location from which the advertisement is viewed and/or clicked on through its books and records, so Web Corp shall reasonably approximate the location of the receipt of the benefit by assigning its gross receipts from advertising by a ratio of the number of its viewers in this state to the number of its viewers everywhere. 
6. Benefit of the Service -- Business Entity, subsection (c)(2)(C). For a flat fee, Painting Corp contracts with Western Corp to paint Western Corp's various sized, shaped and surfaced buildings located in this state and four (4) other states. The contract does not break down the cost of the painting per building or per state. Painting Corp's books and records kept in the normal course of business indicate the location of the buildings that are to be painted but do not provide any method for determining the extent that the benefit of the service is received in this state, i.e. the size, shape, or surface of each building, or the materials used for each building to be painted. In addition, there is no method for reasonably approximating the location(s) where the benefit of the service was received. Since neither the contract nor Painting Corp's books and records indicate how much of the fee is attributable to this state and there is no method of reasonably approximating the location of where the benefit of the service is received, the sale will be assigned to this state if the order for the service was placed from this state.
7. Benefit of the Service -- Business Entity, subsection (c)(2)(D). Same facts as Example 6 except the sale cannot be assigned under subsection (c)(2)(C), so that the sale shall be assigned to this state if Western Corp's billing address is in this state.
(d) Sales from intangible property are assigned to this state to the extent the property is used in this state. 
(1) In the case of the complete transfer of all property rights (as defined in subsection (b)(3)) in intangible property (as defined in subsection (b)(4)) for a jurisdiction or jurisdictions, the location of the use of the intangible property shall be determined as follows:
(A) The location of the use of the intangible property shall be presumed to be in this state to the extent that the contract between the taxpayer and the purchaser, or the taxpayer's books and records kept in the normal course of business, indicate that the intangible property is used in this state at the time of the sale. This may include books and records providing the extent that the intangible property is used in this state by the taxpayer for the most recent twelve (12) month taxable year prior to the time of the sale of the intangible property. This presumption may be overcome by the taxpayer or the Franchise Tax Board by showing, based on a preponderance of the evidence, that the actual location of the use of the intangible property by the purchaser at the time of purchase is not consistent with the terms of the contract or the taxpayer's books and records. 

1. 	Where the sale of intangible property is the sale of shares of stock in a corporation or the sale of an ownership interest in a pass-through entity, other than sales of marketable securities, the following rules apply:
a. In the event that fifty (50) % or more of the amount of the assets of the corporation or pass-through entity sold, determined on the date of the sale and using the original cost basis of those assets, consist of real and/or tangible personal property, the sale of the stock or ownership interest will be assigned by averaging the payroll and property factors of the corporation or pass-through entity in this state for the most recent twelve (12) month taxable year prior to the time of the sale to the extent indicated by the taxpayer's books and records kept in the normal course of business. If, however, the sale occurs more than six (6) months into the current taxable year, then the average of the current taxable year's payroll and property factors shall be used.
b. In the event that more than fifty (50) % of the amount of the assets of the corporation or pass-through entity sold, determined on the date of the sale and using the original costs basis of those assets, consist of intangible property, the sale of the stock or ownership interest will be assigned by using the sales factor of the corporation or pass-through entity in this state for the most recent twelve (12) month taxable year prior to the time of the sale to the extent indicated by the taxpayer's books and records. If, however, the sale occurs more than six (6) months into the current taxable year, then the current taxable year's sales factor shall be used.
(B) If the extent of the use of the intangible property in this state cannot be determined under subparagraph (A) or the presumption under subparagraph (A) is overcome, the location where the intangible property is used shall be reasonably approximated. 
(C) If the extent of the use of the intangible property in this state cannot be determined pursuant to subparagraphs (A) or (B), then the gross receipts shall be assigned to this state if the billing address of the purchaser is in this state.
(D) Examples.
1. Intangible Property -- Complete Transfer, Sale of Stock in a Corporation or Ownership Interest in a Pass-through Entity, subsection (d)(1)(A)1.a. Parent Corp sells all of the of stock of Subsidiary Corp. At the time of sale, the predominant value (over 50%) of Subsidiary Corp's assets consists of tangible personal property and Subsidiary Corp had locations in this state and three (3) other states. Taxpayer's books and records indicate Subsidiary Corp had payroll and property in this state of 15% and 25%, respectively, in its twelve (12) month taxable year preceding the sale. In assigning the receipt from the sale of Subsidiary Corp. Taxpayer may average the property and payroll percentages and assign 20% of the receipt from the sale to this state.
2. Intangible Property -- Complete Transfer, Sale of Stock in a Corporation or Ownership Interest in a Pass-through Entity, subsection (d)(1)(A)1.b. Parent Corp sells an interest in Target Entity. At the time of the sale, the predominant value (over 50%) of Target Entity's assets consists of intangible property. Target Entity's books and records indicate that 30% of Target Entity's sales were assigned to California during the most recent full tax period preceding the sale. Parent Corp may assign 30% of the receipt from the sale of the interest in Target Entity to this state.
3. Intangible Property -- Complete Transfer, subsection (d)(1)(B). R&D Corp sells a patent to Manu Corp that will be used by Manu Corp to manufacture products for sale in the United States. The contract between R&D Corp and Manu Corp indicates that Manu Corp will have the exclusive rights to the patent for exploitation in the United States. At the time of the purchase, R&D Corp knows that Manu Corp has three factories that will use the patented process in manufacturing, one of which is located in this state. In the absence of specific information as to the amount of manufacturing Manu Corp does at each of the three locations, R&D Corp may reasonably approximate the location of the use by assigning the receipts from the sale equally among the three states where Manu Corp has manufacturing plants, assigning 33% of the sale to this state. 
4. Intangible Property -- Complete Transfer, subsection (d)(1)(C). Same facts as Example 3, except R&D Corp has no information regarding Manu Corp's activities. R&D Corp shall assign the receipt to the billing address of Manu Corp.
(2) In the case of the licensing, leasing, rental or other use of intangible property as defined in subsection (b)(4), not including sales of intangible property provided for in paragraph (1), the location of the use of the intangible property in this state shall be determined as follows: 
(A) Marketing Intangible.
1. Where a license is granted for the right to use intangible property in connection with the sale, lease, license, or other marketing of goods, services, or other items, the royalties or other licensing fees paid by the licensee for such right(s) are attributable to this state to the extent that the fees are attributable to the sale or other provision of goods, services, or other items purchased or otherwise acquired by the ultimate customers in this state. The contract between the taxpayer and the licensee of the intangible property or the taxpayer's books and records kept in the normal course of business shall be presumed to provide a method for determination of the ultimate customers in this state for the purchase of goods, services, or other items in connection with the use of the intangible property. This presumption may be overcome by the taxpayer or the Franchise Tax Board by showing, based on a preponderance of the evidence, that the ultimate customers in this state are not determinable under the contract or the taxpayer's books and records. 
2. If the location of the use of the intangible property is not determinable under subparagraph 1 or the presumption under subparagraph 1 is overcome, the location of the use of the intangible property shall be reasonably approximated. To determine the customer's or licensee's use of marketing intangibles in this state, factors that may be considered include the number of licensed sites in each state, the volume of property manufactured, produced or sold pursuant to the arrangement at locations in this state, or other data that reflects the relative usage of the intangible property in this state. 
3. Where the license of a marketing intangible property is for the right to use the intangible property in connection with sales or other transfers at wholesale rather than directly to retail customers, the taxpayer may be unable to develop information regarding the location of the ultimate use of the intangible property. If this is the case, then the taxpayer may attribute the receipt to this state based solely upon the percentage of this state's population as compared with the total population of the geographic area in which the licensee uses the intangible property to market its goods, services or other items. The population used shall be the U.S. population, unless it can be shown by the taxpayer that the intangible property is being used materially in other parts of the world. If the taxpayer can show that the intangible property is being used materially in other parts of the world, then only the populations of those other countries where the intangible is being materially used shall be added to the U.S. population. 
(B) Non-marketing and manufacturing intangibles. 
1. Where a license is granted for the right to use intangible property other than in connection with the sale, lease, license, or other marketing of goods, services, or other items, the licensing fees paid by the licensee for such right(s) are attributable to this state to the extent that the use for which the fees are paid takes place in this state. The terms of the contract between the taxpayer and the licensee of the intangible property or the taxpayer's books and records kept in the normal course of business shall be presumed to provide a method for determination of the extent of the use of the intangible property in this state. This presumption may be overcome by the taxpayer or the Franchise Tax Board by showing, based on a preponderance of the evidence, that the extent of the use for which the fees are paid are not determinable under the contract or the taxpayer's books and records.
2. If the location of the use of the intangible property cannot be determined under subparagraph 1 or the presumption in subparagraph 1 is overcome, then the location of the use of the intangible property shall be reasonably approximated. 
3. If the location of the use of the intangible property for which the fees are paid cannot be determined under subparagraphs 1 or 2, it shall be presumed that the use of the intangible property takes place in this state if the licensee's billing address is in this state. 
(C) Mixed intangibles. 

1. 	Where a license of intangible property includes both a license of a marketing intangible and a license of a non-marketing or manufacturing intangible, and the fees to be paid in each instance are separately stated in the licensing contract, the Franchise Tax Board will accept such separate statement for purposes of this section if it is reasonable. If the Franchise Tax Board determines that the separate statement is not reasonable, then the Franchise Tax Board may assign the fees using a reasonable method that accurately reflects the licensing of a marketing intangible and the licensing of a non-marketing or manufacturing intangible.
2. Where the fees to be paid in each instance are not separately stated in the contract, it shall be presumed that the licensing fees are paid entirely for the license of a marketing intangible except to the extent that the taxpayer or the Franchise Tax Board can reasonably establish otherwise. This presumption may be overcome, by a preponderance of the evidence, by the taxpayer or the Franchise Tax Board, that the licensing fees are paid for both the licensing of a marketing intangible and the licensing of a non-marketing or manufacturing intangible, and the extent to which the fees represent the marketing intangible and the non-marketing or manufacturing intangible.
(D) Examples. 
1. Intangible Property -- Marketing Intangible, subsection (d)(2)(A)1. Crayon Corp and Dealer Corp enter into a license agreement whereby Dealer Corp as licensee is permitted to use trademarks that are owned by Crayon Corp in connection with Dealer Corp's sale of certain products to retail customers. Under the contract, Dealer Corp is required to pay Crayon Corp a licensing fee that is a fixed percentage of the total volume of monthly sales made by Dealer Corp of products using the Crayon Corp trademarks. Under the agreement, Dealer Corp is permitted to sell the products at multiple store locations, including store locations that are both within and without this state. The licensing fees that are paid by Dealer Corp are broken out on a per-store basis. The licensing fees paid to Crayon Corp by Dealer Corp represent fees from the licensing of a marketing intangible and the fees that are derived from the individual sales at stores in this state constitute sales in this state. 
2. Intangible Property -- Marketing Intangible, subsection (d)(2)(A)2. Moniker Corp enters into a license agreement with Sports Corp where Sports Corp is granted the right to use trademarks owned by Moniker Corp to brand sports equipment that is to be manufactured by Sports Corp or an unrelated entity, and to sell the manufactured product to unrelated companies that make retail sales in a specified geographic region. Although the trademarks in question will be affixed to the tangible property to be manufactured, the license agreement confers a license of a marketing intangible. Neither the contract between the taxpayer and the licensee nor the taxpayer's books and records provide a method for determination of this state's customers of equipment manufactured with Moniker Corp's trademarks. The component of the licensing fee that constitutes sales of Moniker Corp in this state is reasonably approximated by multiplying the amount of the fee by the percentage of this state's population over the total population in the specified geographic region in which the retail sales are made. 
3. Intangible Property -- Marketing Intangible, Wholesale, subsection (d)(2)(A)3. Cartoon Corp enters into a license agreement with Wholesale Corp where Wholesale Corp is granted the right to use Cartoon Corp's cartoon characters in the design and manufacture of tee shirts and sweatshirts which will be sold to various retailers who will in turn sell them to members of the public. Cartoon Corp is unable to develop information regarding the location of the ultimate customer of the products designed and manufactured in connection with Cartoon Corp's cartoon characters. Cartoon Corp shall assign the licensing fee by multiplying the fee by the percentage of this state's population over the total population in the geographic area in which Cartoon Corp markets its goods, services or other items. 
4. Intangible Property -- Non-marketing and Manufacturing Intangible, subsection (d)(2)(B)1. Formula Corp and Appliance Corp enter into a license agreement whereby Appliance Corp is permitted to use a patent owned by Formula Corp to manufacture and sell appliances at stores owned by Appliance Corp within a certain geographic region. The license agreement specifies that Appliance Corp is to pay Formula Corp a royalty equal to a fixed percentage of the gross receipts from the products sold. The contract does not specify any other fees. The appliances are manufactured and sold in this state and several other states. Given these facts, it is presumed that the licensing fees are paid for the license of a manufacturing intangible. Since Formula Corp can demonstrate the percentage of manufacturing by Appliance Corp that takes place in this state using the patent, that percentage of the total licensing fee paid to Formula Corp under the contract will constitute Formula Corp's sales in this state. 
5. Intangible Property -- Non-marketing and Manufacturing Intangible, subsection (d)(2)(B)2. Mechanical Corp enters into a license agreement with Spa Corp where Spa Corp is granted the right to use the patents owned by Mechanical Corp to manufacture mechanically operated spa covers for spas that Spa Corp manufactures. Neither the terms of the contract nor the taxpayer's books and records indicate the extent of the use of the patent in this state. However, there is public information that Spa Corp has three manufacturing locations in this state and an additional six manufacturing locations in various other states. Mechanical Corp may reasonably approximate the location of the use of the intangible property and assign 33% of the licensing fees to this state.
6. Intangible Property -- Non-marketing and Manufacturing Intangible, subsection (d)(2)(B)3. Same facts as Example 5 except that Spa Corp is a small, privately held manufacturing corporation that has no publicly available information as to its manufacturing locations, Mechanical Corp shall assign all of the licensing fees to this state if Spa Corp's billing address is in this state.
7. Intangible Property -- Mixed Intangible, subsection (d)(2)(C)1. Axel Corp enters into a two-year license agreement with Biker Corp in which Biker Corp is granted the right to produce motor scooters using patented technology owned by Axel Corp, and also to sell such scooters by marketing the fact that the scooters were manufactured using the special technology. The scooters are manufactured outside this state, but the taxpayer is granted the right to sell the scooters in a geographic area in which this state's population constitutes 25% of the total population in the geographic area during the period in question. The license agreement specifies separate fees to be paid for the right to produce the motor scooters and for the right to sell the scooters by marketing the fact that the scooters were manufactured using the special technology. The licensing agreement constitutes both the license of a marketing intangible and the license of a non-marketing intangible. Assuming that the separately stated fees are reasonable, the Franchise Tax Board will: (1) attribute no part of the licensing fee paid for the non-marketing intangible to this state, and (2) attribute 25% of the licensing fee paid for the marketing intangible to this state. 
8. Intangible Property -- Mixed Intangible, subsection (d)(2)(C)2. Same facts as Example 7, except that the licensing agreement requires an upfront licensing fee to be paid by Biker Corp to Axel Corp but does not specify which percentage of the fee is derived from Biker Corp's right to use Axel Corp's patented technology. Unless either the taxpayer or the Franchise Tax Board reasonably establishes otherwise, it is presumed that the licensing fees are paid entirely for the license of a marketing intangible. In such cases, it will be presumed that 25% of the licensing fee constitutes sales in this state. 
(e) Sales from the sale, lease, rental, or licensing of real property are in this state if and to the extent the real property is located in this state.
(f) Sales from the rental, lease, or licensing of tangible personal property are in this state if and to the extent the tangible personal property is located in this state.
Example. Railroad Corp is the owner of ten railroad cars. During the year, the total days each railroad car was present in this state was 50 days. The receipts attributable to the use of each of the railroad cars in this state are a separate item of income and shall be determined as follows: 
(10 X 50 =) 500 X Total Receipts
(365 X 10 =) 3650              = Receipts Attributable to This State 
(g) Special Rules.
(1) In assigning sales to the sales factor numerator pursuant to Revenue and Taxation Code section 25136(b), the Franchise Tax Board shall consider the effort and expense required to obtain the necessary information, as well as the resources of the taxpayer seeking to obtain this information, and may accept a reasonable approximation when appropriate, such as when the necessary data of a smaller business cannot be reasonably developed from financial records maintained in the regular course of business. 
(A) Example. Misc Corp, a corporation located in this state, provides limited bookkeeping services to clients both within and outside this state. Some clients have several operations among various states. For the past ten (10) years, Misc Corp's only records for the sales of these services have consisted of invoices with the billing address for the client. Misc Corp's records have been consistently maintained in this manner. If the Franchise Tax Board determines that Misc Corp cannot determine, pursuant to financial records maintained in the regular course of its business, the location where the benefit of the services it performs are received under the rules in this regulation, then Misc Corp's sales of services will be assigned to this state using the billing address information maintained by the taxpayer. Misc Corp will not be required to alter its recordkeeping method for purposes of this regulation.
(2) The following special rules shall apply in determining the method of reasonable approximation of the location for the receipt of the benefit of the services or the location of the use of the intangible property:
(A) Once a taxpayer has used a reasonable approximation method to determine the location of the market for the receipt of the benefit of the services or the location of the use of the intangible property, then the taxpayer must continue to use that method in subsequent taxable years. A change to a different method of reasonable approximation may not be made without the permission of the Franchise Tax Board. Where the Franchise Tax Board has examined the reasonable approximation method and accepted it in writing, the Franchise Tax Board will continue to accept that method, absent any change of material fact such that the method no longer reasonably reflects the market for the receipt of the benefit of the services or the location of the use of the intangible property. 
(B) The method of reasonable approximation shall reasonably relate to the income of the taxpayer. For example, if the taxpayer includes in its reasonable approximation methodology countries which are identified in its contracts or its books and records maintained in the normal course of business but for which no sales are made during the taxable years at issue, then the reasonable approximation methodology being used by the taxpayer does not reasonably relate to the income of the taxpayer. 
(3) The sales factor provisions set forth in Regulation sections 25137 through 25137-14 are hereby incorporated by reference, with the following modifications for taxable years beginning on and after January 1, 2011: 

(A) 	All references to Revenue and Taxation Code section 25136 and Regulation section 25136 shall refer to Revenue and Taxation Code section 25136, subdivision (b), and Regulation section 25136-2 as they are operative beginning on and after January 1, 2011.
(B) Regulation section 25137(c)1(C) [Special Rules. Sales Factor] shall not be applicable.

(C) 	The provisions in Regulation section 25137-3 [Franchisors] that relate to the taxpayer being, or not being, taxable in a state shall not be applicable. 
(D) The provisions in Regulation section 25137-4.2 [Banks and Financials] that relate to income-producing activity and costs of performance, and throwback, shall not be applicable. 
(E) The provisions in Regulation section 25137-12 [Print Media] that relate to a taxpayer not being taxable in another state and the sale's inclusion in the sales factor numerator if the property had been shipped from this state, shall not be applicable. 
(F) The provisions in Regulation section 25137-14 that relate to the taxpayer not being taxable in a state, and assign the receipts to the location of the income-producing activity that gave rise to the receipts, shall not be applicable. 
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25136, Revenue and Taxation Code.
HISTORY

1. New section filed 2-27-2012; operative 1-1-2011 pursuant to Revenue and Taxation Code section 19503(b) (Register 2012, No. 9). 
§25137. Other Apportionment Methods.
Note     •     History

(a) Special Rules. In General. Section 25137 provides that if the allocation and apportionment provisions of the Uniform Division of Income for Tax Purposes Act do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the Franchise Tax Board may require, in respect to all or any part of the taxpayer's business activity, if reasonable:
(1) Separate accounting;
(2) The exclusion of any one or more of the factors;
(3) The inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or
(4) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income.
Section 25137 permits a departure from the allocation and apportionment provisions of the Uniform Division of Income for Tax Purposes Act only in limited and specific cases.
Section 25137 may be invoked only in specific cases where unusual fact situations (which ordinarily will be unique and nonrecurring) produce incongruous results under the apportionment and allocation provisions contained in these regulations.
In the case of certain industries such as air transportation, rail transportation, ship transportation, trucking, television, radio, motion pictures, various types of professional athletics, and so forth, the foregoing regulations in respect to the apportionment formula do not set forth appropriate procedures for determining the apportionment factors. Nothing in Section 25137 or in this Regulation shall preclude the Franchise Tax Board from establishing appropriate procedures under Sections 25129 to 25136 inclusive, for determining the apportionment factors for each such industry, but such procedures shall be applied uniformly.
(b) Special Rules. Property Factor.
(1) The following special rules for determining the net annual rental rate as provided by California Code of Regulations, title 18, section 25130, subsection (b), are established in respect to the property factor of the apportionment formula:
(A) Subrents. If the subrents taken into account in determining the net annual rental rate under Regulation 25130, subsection (b), produce a negative or clearly inaccurate value for any item of property, another method which will properly reflect the value of rented property may be required by the Franchise Tax Board or requested by the taxpayer.
In no case however shall such value be less than an amount which bears the same ratio to the annual rental rate paid by the taxpayer for such property as the fair market value of that portion of the property used by the taxpayer bears to the total fair market value of the rented property.
EXAMPLE:
The taxpayer rents a 10-story building at an annual rental rate of $1,000,000. Taxpayer occupies two stories and sublets eight stories for $1,000,000 a year. The net annual rental rate of the taxpayer must not be less than two-tenths of the taxpayer's annual rental rate for the entire year, or $200,000.
(B) Property of others in general. If property owned by others is used by the taxpayer at no charge or rented by the taxpayer for a nominal rate, the net annual rental rate for such property shall be determined on the basis of a reasonable market rental rate for such property.
(C) Natural resources. Without regard to whether the following property is also described in subsection (b)(1)(B), if a taxpayer enters upon property owned by others for the purpose of extracting natural resources such as timber, oil, gas or hard minerals, and irrespective of whether such entry or extraction is pursuant to an agreement between the holder of the interest in the property and the taxpayer (and also irrespective of whether such relationship is characterized as a profit  prendre or some other relationship), consideration actually paid by the taxpayer to the holder of the interest in the property that constitutes a sharing of current or future production or extraction of the timber, oil, gas or hard minerals from such property (irrespective of the method of payment or how such consideration is characterized, whether as a royalty, advance royalty, rental or otherwise) and consideration actually paid by the taxpayer for the right to enter the property and extract the timber, oil, gas or hard minerals (such as forest management fees, fire protection fees, reforestation or reclamation fees, road maintenance fees, etc.) for the taxable year at issue shall constitute the net annual rental rate. The net annual rental rate shall then be multiplied by eight (8) in accordance with Revenue and Taxation Code section 25130. Improvements shall not be included in the calculation of a net annual rental rate, but are separately accounted for. (See California Code of Regulations, title 18, section 25130, subsection (b)(5).)
EXAMPLE: On December 31, 2000, a taxpayer engaged in the paper products business enters into a 50-year forest management agreement with a government entity to commence January 1, 2001, that allows it to extract 100,000 cords of timber per year from forests owned by that government entity. In exchange for the right to enter the government's land and extract timber, the taxpayer agrees to pay a royalty fee of $10.00 per cord extracted, plus a $10,000 per year access fee, $10,000 fire protection fee for any fires caused by the taxpayer, and an additional reforestation fee of 10 percent of the royalty fee paid. The forest management agreement also requires the taxpayer to make $1 million worth of improvements to an existing mill facility owned by the government entity. In taxable year 2001, the taxpayer extracts 50,000 cords and does not cause any fires to occur. It also makes the $1 million in improvements to the existing mill facility. The taxpayer therefore pays the government entity the $10,000 access fee, $500,000 in royalty fees ($10.00 per cord times 50,000 cords), and an additional $50,000 for the reforestation fee (10 percent of the $500,000 royalty fee). Under these facts, the taxpayer is entitled to claim $560,000 as the net annual rental rate. The taxpayer reports $4,480,000 ($560,000 multiplied by 8) for property factor purposes for this property for taxable year 2001. In addition, the taxpayer reports the $1 million in improvements in the property factor as property owned by the taxpayer in accordance with California Code of Regulations, title 18, section 25130, subsection (b)(5), for taxable year 2001.
(D) Definitions. For purposes of subsection (b) the following definitions apply.
1. A “reasonable market rental rate” shall mean the rate at which a lessor is willing to lease and a lessee is willing to pay in an open and competitive marketplace for the property.
2. A “nominal rate” shall mean a token payment compared to a rental rate at which a lessor is willing to lease and a lessee is willing to pay in an open and competitive marketplace for the property.
3. “Agreement” shall mean contract, lease or similar arrangement for the use of property.
(c) Special Rules--Sales Factor.
(1) The following special rules are established in respect to the sales factor of the apportionment formula:
(A) Where substantial amounts of gross receipts arise from an occasional sale of a fixed asset or other property held or used in the regular course of the taxpayer's trade or business, such gross receipts shall be excluded from the sales factor. For example, gross receipts from the sale of a factory, patent, or affiliate's stock will be excluded if substantial. For purposes of this subsection, sales of assets to the same purchaser in a single year will be aggregated to determine if the combined gross receipts are substantial.
1. For purposes of this subsection, a sale is substantial if its exclusion results in a five percent or greater decrease in the sales factor denominator of the taxpayer or, if the taxpayer is part of a combined reporting group, a five percent or greater decrease in the sales factor denominator of the group as a whole.
2. For purposes of this subsection, a sale is occasional if the transaction is outside of the taxpayer's normal course of business and occurs infrequently.
(B) Insubstantial amounts of gross receipts arising from incidental or occasional transactions or activities may be excluded from the sales factor unless such exclusion would materially affect the amount of income apportioned to this state. For example, the taxpayer ordinarily may include or exclude from the sales factor gross receipts from such transactions as the sale of office furniture, business automobiles, etc.
(C) Where the income producing activity in respect to business income from intangible personal property can be readily identified, such income is included in the denominator of the sales factor and, if the income producing activity occurs in this state, in the numerator of the sales factor as well. For example, usually the income producing activity can be readily identified in respect to interest income received on deferred payments on sales of tangible property (Regulation 25134, sub. (a)(1)(A)) and income from the sale, licensing or other use of intangible personal property (Regulation 25136, sub. (b)(4)).
Where business income from intangible property cannot readily be attributed to any particular income producing activity of the taxpayer, such income cannot be assigned to the numerator of the sales factor for any state and shall be excluded from the denominator of the sales factor. For example, where business income in the form of dividends received on stock, royalties received on patents or copyrights, or interest received on bonds, debentures or government securities results from the mere holding of the intangible personal property by the taxpayer, such dividends and interest shall be excluded from the denominator of the sales factor.
(D) The numerator and denominator of the sales factor shall exclude interest and dividends from intangible assets held in connection with a treasury function of the taxpayer's unitary business as well as the gross receipts and overall net gains from the maturity, redemption, sale, exchange or other disposition of such intangible assets.
1. “Treasury function” is the pooling, management, and investment of intangible assets for the purpose of satisfying the cash flow needs of the trade or business, such as providing liquidity for a taxpayer's business cycle, providing a reserve for business contingencies, business acquisitions, etc. A treasury function includes the use of futures contracts and options contracts to hedge foreign currency fluctuations. A treasury function does not include a taxpayer's trading function that engages in futures and option transactions for the purpose of hedging price risk of the products or commodities consumed, produced, or sold by the taxpayer. A taxpayer principally engaged in the trade or business of purchasing and selling intangible assets of the type typically held in a taxpayer's treasury function, such as a registered broker-dealer, is not performing a treasury function with respect to income so produced.
2. This subsection shall not apply to entities that apportion their income under the rules of regulation 25137-4.2.
3. This subsection is applicable to taxable years beginning on or after January 1, 2007.
(d) In cases deemed appropriate by the Franchise Tax Board it may elect to hear and decide petitions filed pursuant to Section 25137 instead of having this function performed by the staff. As a condition to having such petition considered by the Board, the petitioning taxpayer shall waive in writing the confidentiality provisions of Section 19542 with respect to such petition and to any other facts which may be deemed relevant in making a determination. Consideration of said petitions by the Board shall be in open session at a regularly scheduled meeting.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25137, Revenue and Taxation Code.
HISTORY

1. New subsections (e) and (f) filed 11-15-74; effective thirtieth day thereafter (Register 74, No. 46).
2. Repealer and new subsection (e)(6)(C) filed 11-10-76; effective thirtieth day thereafter (Register 76, No. 46).
3. New subsection (g) filed 2-17-78; effective thirtieth day thereafter (Register 78, No. 7).
4. New subsections (i)-(n) filed 7-7-82; effective thirtieth day thereafter (Register 82, No. 28).
5. Editorial correction of subsections (i)-(n) filed 11-10-82 (Register 82, No. 46).
6. Editorial correction adding new subsection (d), and renumbering and amendment of former Section 25137(e)-(n) to Sections 25137-1 through 25137-7 and 25137-10 filed 3-27-85; effective upon filing pursuant to Government Code Section 11346.2(d) (Register 85, No. 13).
7. Amendment of subsection (c)(1)(A) and new subsections (c)(1)(A)1.-2. filed 1-30-2001; operative 1-1-2001 (Register 2001, No. 5).
8. Editorial correction inserting proper operative date in History 7 (Register 2001, No. 9).
9. Amendment of section and Note filed 1-28-2005; operative 2-27-2005 (Register 2005, No. 4).
10. New subsections (c)(1)(D)-(c)(1)(D)3. filed 4-29-2008; operative 5-29-2008 (Register 2008, No. 18).
§25137-1. Apportionment and Allocation of Partnership Income.
Note     •     History

(a) In General. When a taxpayer has an interest in a partnership as defined in Section 17008, Revenue and Taxation Code, the division of its distributive share of partnership items shall be determined in accordance with Chapter 10 of Part 10 of Division 2 of the Revenue and Taxation Code. The determination of the portion of such distributive share (constituting business and nonbusiness income) which has its source in this state or which is includible in the taxpayer's business income subject to apportionment, shall be made in accordance with these regulations provided that the taxpayer, or the partnership, or both, have income from sources within and without this state. The taxpayer in computing net income for its income year shall include its distributive share of partnership items referred to above for any partnership year ending within or with the taxpayer's income year. 
The first step is to determine which portion of the taxpayer's income and its distributive share of the partnership items constitute “business income” and “nonbusiness income” under Section 25120, Revenue and Taxation Code, and the regulations thereunder. The various items of nonbusiness income are then directly allocated to specific states pursuant to the provision of Section 25124 to 25127, Revenue and Taxation Code. The taxpayer's distributive share of partnership business income is apportioned by the formula set forth in subsections (f) or (g), whichever is applicable. The sum of (1) the items of nonbusiness income directly allocated to this state, plus (2) the amount of business income attributed to this state is the portion of the taxpayer's entire net income which is subject to tax.
Income arising from transactions and activity in the regular course of the partnership's trade or business constitutes business income. Thus, a corporate-partner's distributive share of partnership business income constitutes business income to the corporate-partner, but the determination of whether the partnership's activities and the activities of the corporate-partner constitutes a single trade or business or more than one trade or business turns on the facts in each case. If the partnership's activities and the taxpayer's activities constitute a unitary business under established standards, disregarding ownership requirements, the taxpayer's share of the partnership's trade or business shall be combined with the taxpayer's trade or business as constituting a single trade or business. 
EXAMPLE 1:
Corporation A's distributive share of income in partnership P is 20%. Corporation A manufactures toys which are sold in the seven western states by partnership P. Corporation A's business income for the year was $1,000,000 and partnership P's business income for the same year was $800,000. The business income of Corporation A is $1,160,000 ($1,000,000 plus20% of $800,000). 
EXAMPLE 2:
Corporation A's distributive share of income in partnership P is 90%. Partnership P manufactures toys of which approximately 30% are sold by Corporation A in the seven western states. The remainder is sold to outsiders by partnership P. In addition, Corporation A also sells other lines of toys not manufactured by partnership P. Corporation A handles all financing, management, accounting, advertising, and purchasing functions for partnership P as well as for itself. Corporation A incurred a loss of $500,000 for the year but partnership P's income was $1,000,000. The business income of Corporation A is $400,000 (90% of $1,000,000 = $900,000 less the loss of $500,000).
When the activities of the partnership and the taxpayer do not constitute a unitary business under established standards, disregarding ownership requirements, the taxpayer's share of the partnership's trade or business shall be treated as a separate trade or business of the taxpayer. In such a case the taxpayer is engaged in two trades or businesses. 
EXAMPLE:
Corporation A's distributive share of income in partnership P is 20%. Corporation A manufactures and sells toys in the seven western states. Partnership P operates farms within and without this state. Corporation A's income for the year is $1,000,000 and partnership P's income is $800,000 for the same year. Corporation A is engaged in two trades or businesses, and will be required to apportion its income of $1,000,000 from its own operations to this state on the basis of a three factor apportionment formula. Partnership P would attribute part of its business income of $800,000 to this state on the basis of its own three factor apportionment formula. Accordingly, Corporation A would report 20% of the partnership income apportioned to this state plus a portion of its income from its toy manufacturing business.
(b) Distributive Items of Nonbusiness Income. Partnership income from interest, dividends, rents, royalties or capital gains is nonbusiness income when such income does not constitute business income. The taxpayer's distributive share of such nonbusiness income shall be reported in the same manner as other nonbusiness income derived from other activities of the taxpayer (see Sections 25123 to 25127, inclusive).
(c) Business and Nonbusiness Income; Application of Definitions. The classification of income by the labels customarily given such as interest, dividends, rents, royalties, capital gains, etc., is of no aid in determining whether partnership income is business or nonbusiness income. The gain or loss recognized on the sale of property, for example, may be business income or nonbusiness income depending upon the relation to the partnership's trade or business. Rules and examples for determining whether these types of income constitute business or nonbusiness income are set forth in Regulation 25120(c) and are applicable to partnerships under this regulation.
(d) Proration of Deductions. In most cases an allowable deduction of a partnership will be applicable only to the business income arising from a particular trade or business or to a particular item of nonbusiness income. In some cases an allowable deduction may be applicable to the business incomes of more than one trade or business and/or to several items of nonbusiness income. In such cases the deduction shall be prorated among such trades or businesses and such items of nonbusiness income in a manner which fairly distributes the deduction among the classes of income to which it is applicable.
(e) Distributive Items of Expense. Any items of expense distributed to the taxpayer in accordance with Chapter 10 of Part 10 of Division 2 of the Revenue and Taxation Code, shall be taken into account in computing the taxpayer's business and nonbusiness income, to the extent allowable under the law and in accordance with these regulations as to determining their applicability to the taxpayer's business or nonbusiness income.
(f) Apportionment of Business Income--Single Trade or Business. If the partnership's activities and the taxpayer's activities constitute a unitary business under established standards, disregarding ownership requirements, the business income of such single trade or business attributable to this state shall be determined by a three factor formula consisting of property, payroll and sales of the taxpayer and its share of the partnership's factors for any partnership year ending within or with the taxpayer's income year as follows:
(1) Property Factor. In general the numerator and denominator of the property factor shall be determined as set forth in Regulations 25129 to 25131, inclusive, and 25137(b). However, the following special rules shall apply:
(A) A portion of the partnership's real and tangible personal property, both owned or rented and used during the income year in the regular course of such trade or business, to the extent of the taxpayer's interest in the partnership, shall be included in the denominator of the taxpayer's property factor. The value of such property located in this state shall also be included in the numerator of the property factor.
(B) The value of property which is rented or leased by the taxpayer to the partnership or vice versa shall, with respect to the taxpayer, be excluded from the property factor of the partnership or eliminated to the extent of the taxpayer's interest in the partnership, whatever the case may be, in order to avoid duplication. 
EXAMPLE 1:
Corporation A's interest in partnership P is 20%. Corporation A's distributive share of partnership P's income is included in business income of Corporation A to be apportioned by formula. Corporation A owns a building (original cost of $100,000) which is rented to partnership P for $12,000 per year. Corporation A must include the original cost of $100,000 for the building in its property factor. Therefore, no portion of the value of the rented property will be reflected in the property factor of Corporation A. 
EXAMPLE 2:
Same facts as in Example 1 except partnership P owns the building and rents it to Corporation A. Corporation A will include $20,000 (20% of $100,000) in its property factor because of its interest in partnership P. In addition, Corporation A will take into account $9,600 ($12,000 less 20% thereof) of rental expense into its property factor in order to give weight in the property factor to the rented building used in Corporation A's operation. Thus, the value of the building to be used in the property factor of Corporation A is $96,800 ($20,000 plus 8 x $9,600).
(2) Payroll Factor. In general the numerator and denominator of the payroll factor shall be determined as set forth in Regulations 25132 and 25133. However, the following special rules shall apply:
The partnership's payroll used to produce business income, shall be included in the denominator of the taxpayer's payroll factor to the extent of the taxpayer's interest in the partnership. The amount of any such payroll applicable to this state shall also be included in the numerator of the taxpayer's payroll factor. 
EXAMPLE 1:
Corporation A's interest in partnership P is 20% and its distributive share of partnership P's income is included in business income of Corporation A to be apportioned by formula. Corporation A's own payroll is $1,000,000 and the payroll of partnership P is $800,000. Corporation A's total payroll for purposes of the payroll factor is $1,160,000 ($1,000,000 plus 20% of $800,000).
(3) Sales Factor. In general the numerator and denominator of the sales factor shall be determined as set forth in Regulations 25134 to 25136, inclusive, and 25137(c). However, the following special rules shall apply:
(A) The partnership's sales which give rise to business income, shall be included in the denominator of the taxpayer's sales factor to the extent of the taxpayer's interest in the partnership. The amount of such sales attributable to this state shall also be included in the numerator of the taxpayer's sales factor. Intercompany sales between the partnership and the taxpayer shall be eliminated from the denominator and numerator of the taxpayer's sales factor as follows:
(i) Sales by the taxpayer to the partnership to the extent of the taxpayer's interest in the partnership.
(ii) Sales by the partnership to the taxpayer not to exceed the taxpayer's interest in all partnership sales.
(B) Notwithstanding any intercompany eliminations described in subparagraph (A) above, sales made to nonpartners shall be included in the denominator of the taxpayer's sales factor in an amount equal to such taxpayer's interest in the partnership.
(C) Application of the above rules are illustrated by the following examples: 
EXAMPLE 1:
Corporation A's interest in partnership P is 20%, and its distributive share of partnership P's income is included in business income of Corporation A to be apportioned by formula. Corporation A's sales were $20,000,000 for the year, $5,000,000 of which were made to partnership P. Partnership P made sales of $10,000,000 during the same year, none of which were to Corporation A or other partners.
The denominator of Corporation A's sales factor is $21,000,000 determined as follows:

Sales by Corporation A 		$20,000,000
Add: Corporation A's interest
  (20%) in Partnership P's sales	$2,000,000
Less: Corporation A's interest
  (20%) in Corporation A's
  sales to Partnership P	1,000,000	 1,000,000
Denominator of Sales Factor 		$21,000,00

EXAMPLE 2.
The following facts are applicable to Examples 2(a) to (c), inclusive. Corporation A's interest in partnership P is 20% and Corporation B's interest is 80%. The distributive share of partnership income is included in business income of Corporation A and Corporation B, respectively.
The sales made by Corporation A, Corporation B, and Partnership P are as follows:

Corporation A		 $20,000,000
Corporation B		 60,000,000
Partnership P:
To Corporation A	 $2,000,000
Corporation B	   8,000,000	$10,000,000

The denominator of Corporation A's sales factor is $20,000,000 determined as follows:

Sales by Corporation A 		 $20,000,000
Add: Corporation A's interest
  (20%) in Partnership P's
  sales	 $2,000,000
Less: Partnership P's Sales
  Sales by Corporation A	2,000,000	             -0-
	
Denominator of Corporation
  A's sales factor 		$20,000,000

The denominator of Corporation B's sales factor is $60,000,000 determined as follows:

Sales by Corporation B		 $60,000,000
Add: Corporation B's interest
  (80%) in Partnership P's
  sales	 $8,000,000
Less: Partnership P's sales
  to Corporation B	 8,000,000	           -0-
		60,000,000

The sales made by Corporation A, Corporation B, and Partnership P are as follows:

Corporation A		 $20,000,000
Corporation B		 60,000,000
Partnership P:
To Corporation A	 $1,000,000
To Corporation B	 9,000,000	$10,000,000

The denominator of Corporation A's sales factor is $21,000,000 determined as follows:

Sales by Corporation A		 $20,000,000
Add: Corporation A's interest
  (20%) in Partnership P's
  sales	 $2,000,000
Less: Partnership P's sales
to Corporation A	 1,000,000	  1,000,000
Denominator of Corporation A's
  sales factor		 $21,000,000

The denominator of Corporation B's sales factor is $60,000,000 determined as follows:

Sales by Corporation B 		 $60,000,000
Add: Corporation B's interest
(80%) in Partnership P's
sales	 $8,000,000
Less: Intercompany sales be-
tween Partnership P and
Corporation B* 	 8,000,000	 -0-
Denominator of Corporation B's
  sales factor		 $60,000,000

The sales made by Corporation A, Corporation B, and Partnership P are as follows:

Corporation A		 $20,000,000
Corporation B		 80,000,000
Partnership P:
To Corporation A	 $3,000,000
To Corporation B	 6,000,000
To Corporation X	 1,000,000	$10,000,000

The denominator of Corporation A's sales factor is $20,200,000 determined as follows:

Sales by Corporation A		 $20,000,000
Add: Corporation A's interest
 in Partnership P's sales
 to Nonpartner X Corporation
 (20% x $1,000,000)		 200,000
 Corporation A's interest
 in Partnership P's sales
 to Partners
 (20% x $9,000,000)	 $1,800,000
Less: Intercompany sales from
Partnership P to
Corporation A * 	 1,800,000	 -0-
Denominator of Corporation A's
sales factor 		 $20,200,000

The denominator of Corporation B's sales factor is $81,800,000 determined as follows:

Sales by Corporation B		 $80,000,000
Add: Corporation B's interest
 in Partnership P's sales
 to Nonpartners x Corporation
 (80% x $1,000,000)		 800,000
 Corporation B's interest
 in Partnership P's sales
 to Partners
 (80% x $9,000,000) 	 $7,200,000
Less: Intercompany sales from
Partnership P to
 Corporation B 	 6,000,000	1,200,000
Denominator of Corporation B's
 sales factor		 $82,000,000

* Not to exceed taxpayer's interest in Partnership P's sales
(4) Partnership Interest--Defined. A taxpayer's partnership interest for the purpose of computing the portion of the partnership's property, payroll and sales to be included in the taxpayer's property, payroll or sales factor shall be determined under Chapter 10 of Part 10 of Division 2 of the Revenue and Taxation Code, and the regulations thereunder.
(5) Common Accounting Period. If a partnership and a corporation are engaged in a unitary business and their accounting periods are different, if necessary, in order to avoid distortion, the income and factors of the partnership will be determined on the basis of the corporate partner's accounting period.
(g) Apportionment of Business Income--Two or More Trades or Businesses. When the activities of the partnership and the taxpayer do not constitute a unitary business under established standards, disregarding ownership requirements, the taxpayer's share of the partnership's trade or business shall be treated as another trade or business of the taxpayer. The determination of the amount of the partnership's business income and the taxpayer's distributive share of that income attributable to sources within this state shall be as follows:
(1) If the partnership derives business income from sources within and without this state, the amount of business income derived from sources within this state shall be determined on the basis of a three factor formula of property, payroll and sales. The factors shall be determined in accordance with the provisions of Sections 25129 to 25137, inclusive, Revenue and Taxation Code, and the regulations thereunder. After determining the amount of business income attributable to this state by the three factor formula, the taxpayer's distributive share of such business income shall be reported as business income from a separate business by the taxpayer. That income when added to the taxpayer's other business income apportioned to this state and nonbusiness income allocable to this state is the taxpayer's measure of tax for its income year. 
EXAMPLE:
Corporation A's distributive share of income in partnership P is 20%. Partnership P derives income from sources within and without this state but its business is unrelated to the business of Corporation A. Partnership P has business income of $500,000 for the year of which 40% is apportioned to this state by its three factor formula of property, payroll and sales. Corporation A shall include in its measure of tax its income received from partnership P $40,000 ($500,000 x 40% x 20%).
(2) If the partnership derives business income from sources entirely within this state, or entirely without this state, such income shall not be subject to formula apportionment. The taxpayer's distributive share of such business income attributable to this state (if any) shall be added to the taxpayer's other business income apportioned to this state plus nonbusiness income, if any, allocable to this state, the total of which is the taxpayer's measure of tax for its income year. 
EXAMPLE 1:
Corporation A's distributive share of income in Partnership P is 20%. The distributive share of P's business income is not an integral part of A's trade or business so as to be considered one business. Corporation A derives business income from sources within and without this state. Partnership P is engaged in business wholly within this state. Corporation A's business income for the year is $5,000,000 of which 50% is apportioned to this state. Partnership P has a loss on its operation for the same year of $500,000. Corporation A's measure of tax is $2,400,000 ($5,000,000 x 50% = $2,500,000 - $100,000 ($500,000 x 20%)). 
EXAMPLE 2:
Same facts as in Example 1 except Partnership P operates its business wholly outside this state. Corporation A's measure of tax is $2,500,000 ($5,000,000 x 50%) as no portion of Partnership P's loss is attributable to this state.
(h) Apportionment of Business Income--Long-Term Construction Contracts. If the partnership's activities and the taxpayer's activities constitute a unitary business under established standards, disregarding ownership requirements, so as to constitute a single trade or business and the partnership is engaged in long-term construction contracts and has elected either the percentage of completion method of accounting, or the completed contract method of accounting, the distributive share of partnership business income to be reported each year by the taxpayer shall be determined by reference to the preceding sections of this regulation where applicable and to the following subparagraphs regardless of whether the partnership's operations are carried on entirely within this state, entirely without this state, or partly within and partly without this state.
(1) Percentage of Completion Method. Under this method of accounting for long-term contracts, the amount to be included each year as business income from each contract is the amount by which the gross contract price which corresponds to the percentage of the entire contract which has been completed during the income year exceeds all expenditures made during the income year in connection with the contract. In so doing account must be taken of the material and supplies on hand at the beginning and end of the income year for use in such contract. Each corporate partner is required to report its distributive share of income as set forth in these regulations. 
EXAMPLE:
A construction partnership using the percentage of completion method of accounting for long-term contracts, entered into a long-term contract to build a structure for $9,000,000. The contract allowed three years for completion, and as of the end of the second partnership year the partnership's books of account, kept on the accrual method, disclosed the following:

	Receipts	Expenditures
End of 1st partnership year	 $2,500,000	$2,400,000
End of 2nd partnership year	4,500,000	4,100,000
Totals	 $7,000,000	$6,500,000

In computing the above expenditures, consideration was given to material and supplies on hand at the beginning and end of each year.
It was estimated that the contract was 30% completed at the end of the first year and 80% completed at the end of the second year. The amount of business income for the first partnership year is $300,000 (30% of $9,000,000 or $2,700,000 less expenditures of $2,400,000). The amount of business income for the second partnership year is $400,000 (50% of $9,000,000 or $4,500,000 less expenditures of $4,100,000). Each year the corporate-partners would report their respective distributive shares of business income from the contract.
(2) Completed Contract Method. Under this method of accounting for long-term contracts, a special computation is required to apportion the distributive share of partnership income from each completed contract (see paragraph (6) of this regulation). Accordingly, all receipts and expenditures applicable to such contracts whether complete or incomplete as of the end of the income year are excluded from other types of business income, such as interest, rents, royalties, etc., which are apportioned by the regular three factor formula of property, payroll and sales (see subsection (f) of this regulation).
(3) Property Factor. The numerator and denominator of the property factor shall be determined as set forth in subsection (f)(1) of this regulation subject to the following special rules.
(A) The taxpayer's interest in the average value of the partnership's cost (including materials and labor) of construction in progress, to the extent such costs exceed progress billings (accrued or received, depending on whether the partnership reports on the accrual or cash basis for keeping its accounts) shall be included in the denominator of the taxpayer's property factor. The value of any such property located in this state shall be included in the numerator of the taxpayer's property factor. 
EXAMPLE 1:
A partnership started a long-term construction project in this state on the first day of the partnership's year. By the end of the second partnership year its equity in the costs of production for such year is computed as follows:

		1st Year            		2nd Year          
	Beginning	Ending	Beginning	Ending
Construction Costs	 0	$1,000,000
Progress Billings	 	600,000
Balance		 $400,000	$400,000
Construction Costs--
Total from Beginning of Project			$5,000,000
Progress Billings--
Total from Beginning of Project			4,000,000
Balance End of Year				 $1,000,000
Balance Beginning of Year			400,000
Total				 $1,400,000
Average (1/2) 				 $700,000

Each corporate partner would include its respective share of $700,000 in its property factor based on its interest in the partnership.
Note: It may be necessary to use monthly averages if yearly averages do not properly reflect the average value of the partnership's equity (see Section 25131 and the regulations thereunder). 
EXAMPLE 2:
Same facts as in Example 1, except that progress billings exceeded construction costs. No value for the corporate-partner's interest in the construction project is shown in its property factor.
(B) Rent paid for the use of equipment directly attributable to a particular construction project is included in the corporate-partner's property factor at eight times the net annual rental rate to the extent of its partnership interest even though such rental expense may be included in the cost of construction.
(C) The taxpayer's interest in partnership property for property factor purposes is computed in the same manner regardless of the long-term contract method of accounting elected and is computed for each partnership year even though business income is computed separately under the completed contract method of accounting.
(4) Payroll Factor. The numerator and denominator of the payroll factor shall be determined as set forth in subsection (f)(2) of this regulation subject to the following special rules:
(A) Compensation paid employees which is attributable to a particular construction project is included in the payroll factor of the taxpayer to the extent of its partnership interest even though such compensation is included in the cost of construction.
(B) Compensation paid employees who in the aggregate perform most of their services in a state to which their employer does not report such employees for unemployment tax purposes, shall nevertheless be attributed to the state where the services are performed and shall be included in the numerator of the taxpayer's payroll factor to the extent of the taxpayer's interest in the partnership.
EXAMPLE:
A partnership engaged in a long-term contract in state X assigns several key employees to that state to supervise the project. The partnership, for unemployment tax purposes continues to report these employees to state Y where the partnership's main office is located and where the employees reside. For payroll factor purposes the compensation is included in the numerator for state X to the extent of the taxpayer's interest in the partnership.
(C) The taxpayer's interest in the partnership payroll is computed in the same manner for all long-term contract methods of accounting and is computed for each partnership year even though under the completed contract method of accounting, business income is computed separately.
(5) Sales Factor. The numerator and denominator of the sales factor shall be determined as set forth in subsection (f)(3) of this regulation subject to the following special rules:
(A) Gross receipts to the extent of the taxpayer's interest in the partnership derived from a construction contract are attributable to this state if the construction project is located in this state. If the construction project is located partly within and partly without this state, gross receipts attributable to this state are based upon the ratio which construction costs for the project in this state for the year bears to the total of such construction costs for the entire project for the year.
EXAMPLE:
A partnership contracts to build a dam on a river at a point which lies half within this state and half within state X. During the first partnership year construction costs in this state are $2,000,000. Total construction costs for the project are $3,000,000 for the year. Gross receipts (progress billings) for the year are $2,400,000. Accordingly, gross receipts of $1,600,000

View Graphic

are included in the numerator of the sales factor of the taxpayer to the extent of its partnership interest.
(B) If the percentage of completion method is used, the sales factor includes only that portion of the gross contract price which corresponds to the percentage of the entire contract which was completed during the partnership year to the extent of the taxpayer's partnership interest.
EXAMPLE:
A construction partnership which had elected the percentage of completion method of accounting entered into a long-term construction contract. At the end of its current year (the second since starting the project) it estimated that the project was 30% completed during the year. The bid price for the project was $9,000,000 and it had received $2,500,000 from progress billings as of the end of its current year. The amount of gross receipts for the current partnership year is $2,700,000 (30% of $9,000,000) regardless of whether the accrual method or the cash method for accounting for receipts and disbursements is used. The taxpayer will include a portion of such gross receipts in its sales factor to the extent of its partnership interest.
(C) If the completed contract method of accounting is used, the sales factor includes a portion of the gross receipts (progress billings) received or accrued, whichever is applicable, during the partnership year attributable to each contract to the extent of the taxpayer's partnership interest.
EXAMPLE 1:
A construction partnership which had elected the completed contract method of accounting entered into a long-term construction contract. By the end of its current year (the second since starting the project) it had billed, and accrued on its books a total of $5,000,000 of which $2,000,000 had accrued in the first year the contract was undertaken, and $3,000,000 had accrued in the current (second) year. The amount of gross receipts for the current partnership year is $3,000,000. The taxpayer will include a portion of such gross receipts in its sales factor to the extent of its partnership interest.
EXAMPLE 2:
Same facts as in Example 1 except that the partnership keeps its books on the cash basis, and as of the end of its current year had received only $2,500,000 of the $3,000,000 billed during the current year. The amount of gross receipts for the current partnership year is $2,500,000. The taxpayer will include a portion of such gross receipts in its sales factor to the extent of its partnership interest.
(D) The sales factor for each taxpayer except as noted above in subparagraphs (B) and (C), is computed in the same manner regardless of the long-term contract method of accounting elected by the partnership and is computed for each partnership year even though business income is computed separately under the completed contract method of accounting.
(6) Completed Contract Method--Special Computation. The completed contract method of accounting requires that the reporting of income (or loss) be deferred until the year the construction contract is completed and accepted. Accordingly, a separate computation is made for each such contract completed during the partnership year both within and without this state in order to determine the amount of distributive income which is attributable to sources within this state.
The amount of distributive income (or loss) from each contract which is derived from sources within this state using the completed contract method of accounting is computed as follows:
(A) In the partnership year the contract is completed the income (or loss) therefrom is computed and the taxpayer's distributive share determined.
(B) The taxpayer's distributive share of income (or loss) determined at (A) is apportioned to this state by the following method:
(i) A fraction is determined for each year the contract was in progress. The numerator is the taxpayer's partnership interest in construction costs paid or accrued each year the contract was in progress. The denominator is the total of all such construction costs for the project to the extent of the taxpayer's interest in the partnership.
(ii) Each percentage determined in (i) is multiplied by the taxpayer's apportionment formula percentage for that particular year as determined in subsection (f) and paragraphs (3), (4) and (5) above of this regulation.
(iii) The product determined at (ii) for each year the contract was in progress is totaled. The taxpayer's distributive share of income (or loss) on the contract determined at (A) is multiplied by the total percentage. The resulting income (or loss) is the amount of business income from such contract from sources within this state.
EXAMPLE:
The A corporation, engaged in long-term construction contracts, was also a partner in a construction partnership which elected to use the completed contract method of accounting for long-term contracts. The partnership was engaged in one long-term contract (Contract M in state X). During 1972 the partnership completed Contract M in state X at a profit of $900,000. The A corporation's distributive share of the profit is $300,000. The apportionment percentages of the taxpayer as determined in subsection (f) and paragraphs (3), (4) and (5) above of this regulation and the percentages of construction costs as determined in subparagraph (B) above for each year Contract M in state X was in progress are as follows:

	1970	1971	1972
Apportionment percentages
(A Corporation)	30%	20%	40%
Percentages of construction
costs of Contract M each year
to total construction costs
to the extent of A Corporation's
interest in the partnership	20%	50%	30%

The A corporation's distributive share of partnership income from Contract M attributable to this state for 1972 is $84,000 computed as follows:

		1970	1971	1972	Total
Apportionment Percentage		30%	20%	40%
Percent of Construction Costs		20%	50%	30%	100%
Product		6.00%	10.00%	12.00%	28%
28% of $300,000 = $84,000
(i) Apportionment of Business Income--Long-Term Construction Contracts. If the activities of the partnership and the taxpayer do not constitute a unitary business under established standards, disregarding ownership requirements and the partnership is engaged in long-term construction contracts reporting income therefrom under the percentage of completion or completed contract method of accounting, the taxpayer's distributive share of partnership income (or loss) attributable to this state shall be determined as follows:
(1) When the partnership is engaged in a construction project entirely within this state, the determination of its business income shall be made in accordance with the method of accounting elected by the partnership for reporting income from long-term contracts and the taxpayer's distributive share shall be reported as business income from sources within this state derived from a separate trade or business.
(2) Where the partnership is engaged in construction both within and without this state, the determination of the amount of business income therefrom attributable to the taxpayer derived from sources within this state shall be made in accordance with the method of reporting for such long-term construction contract as elected by the partnership and as set forth in Section 25137-2 applicable to corporations engaged in long-term construction contracts, as if the partnership were a corporation.
(3) Where the partnership is engaged in a construction project entirely without this state, the determination of the taxpayer's distributive share of such business income shall be made as though the taxpayer were engaged in a separate trade or business, no portion of which is carried on within this state.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 25137, Revenue and Taxation Code.
HISTORY

1. Editorial correction renumbering and amending former Section 25137(e) to Section 25137-1 filed 3-27-85; effective upon filing pursuant to Government Code Section 11346.2(d) (Register 85, No. 13). For prior history, see Registers 76, No. 46 and 74, No. 46.
§25137-2. Contractors -- Apportionment of Income, Long-Term Contracts.
Note     •     History

(a) In General. When a taxpayer elects to use the percentage of completion method of accounting, or the completed contract method of accounting for long-term contracts, as provided by Revenue and Taxation Code section 24673.2, and has income from sources both within and without this state, the amount of business income derived from sources within this state, including income from such long-term contracts, shall be determined pursuant to these regulations. In such cases, the first step is to determine which portion of the taxpayer's income constitutes “business income” and “nonbusiness income” under Revenue and Taxation Code section 25120 and the regulations thereunder. Nonbusiness income is directly allocated to specific states pursuant to the provisions of Revenue and Taxation Code sections 25124 to 25127, inclusive. The business income of the taxpayer is divided between or among the states in which the business is conducted pursuant to the property, payroll, and sales apportionment factors set forth in this regulation. The sum of (1) the items of nonbusiness income directly allocated to this state, plus (2) the amount of business income attributable to this state constitutes the amount of the taxpayer's entire net income which is subject to tax.
(b) Business and Nonbusiness Income. For definitions, rules and examples for determining business and nonbusiness income, see California Code of Regulations, title 18, section 25120.
(c) Methods of Accounting and Year of Inclusion. For general rules of accounting, definitions and methods of accounting for long-term construction contracts, see Revenue and Taxation Code sections 24651 and 24673.2 and the regulations thereunder, relating to accounting methods and long-term contracts.
(d) Apportionment of Business Income.
(1) In General. Under Revenue and Taxation Code section 25128 business income is apportioned to this state by a three or four factor formula consisting of a property factor, a payroll factor and a single or double weighted sales factor, regardless of the method of accounting for long-term contracts elected by the taxpayer. In general, Revenue and Taxation Code section 25128 provided for the use of a three-factor formula by all apportioning taxpayers for years beginning prior to January 1, 1993. For years beginning on or after January 1, 1993, that section requires most taxpayers to use a four-factor formula; however, for taxpayers in specified types of businesses, the three-factor formula continues to apply. The total of the property, payroll and sales percentages is divided by three or four, depending on whether a three or four factor formula is required, to determine the apportionment percentage. The apportionment percentage is then applied to business income to determine the amount apportioned to this state.
(2) Percentage of Completion Method. The specific rules for determining the amount of income to be included in business income when the percentage of completion method of long-term contract accounting is used are found in Treasury Regulations section 1.451-3(c) (See 26 C.F.R. §1.451-3(c)). In general, those rules provide that the amount of income from each contract to be included each year is determined by determining the percentage of the total contract completed during the taxable year and applying that percentage to the total price, and then subtracting from the resulting amount the total expenditures made during the taxable year in connection with the contract.
(3) Completed Contract Method. The specific rules for determining the amount of income to be included in business income when the completed contract method of long-term contract accounting is used are found in Treasury Regulations section 1.451-3(d) (See 26 C.F.R. §1.451-3(d)). In general, under this method of accounting business income derived from long-term contracts is reported for the taxable year in which the contract is finally completed and accepted. Therefore, a special computation that apportions the income using the apportionment percentages for the years in which the contract was performed is required to compute the amount of business income attributable to this state from each completed contract. (See subsection (e) of this regulation.) Business income from all other activities not related to long term contracts subject to the completed contract method of accounting is then apportioned to this state using the regular three or four factor apportionment formula provided by Revenue and Taxation Code section 25128. The apportionment percentages used for apportioning the income from other activities (income not attributable to completed long term contracts) is computed as provided in subsections (4), (5) and (6) of this regulation for each of the taxable years in which such other income is recognized.
(4) Property Factor. In general the numerator and denominator of the property factor shall be determined as set forth in Revenue and Taxation Code sections 25129, 25130 and 25131 and the regulations thereunder. However, the following special rules are also applicable when either the completed contract or percentage of completion method of long term contract accounting is used:
(A) The average value of the taxpayer's cost (including materials and labor) of work in progress, to the extent such costs exceed progress billings (accrued or received depending on whether the taxpayer is on the accrual or cash basis for keeping its accounts) shall be included in the denominator of the property factor. The value of any such costs attributable to projects in this state shall be included in the numerator of the property factor.
Example 1:
Taxpayer commenced building a ship in this state under a long-term contract as of the beginning of a given year. By the end of its second taxable year its equity in the costs of production to be reflected in the numerator and denominator of its property factor for such year is computed as follows:

		1st Year          		2nd Year        
	Beginning	Ending	Beginning	Ending
Project Costs 	 0	$1,000,000
Progress billings 	 	600,000
Balance 12/31-(1/1)		$400,000	$400,000
Total project costs
 from beginning of project		 	 $5,000,000
Total progress billings
 from beginning of project 			 4,000,000
Balance 12/31 				 1,000,000
Balance beginning of year 			 400,000
Total 				 $1,400,000
Average (1/2)--Value (*) 
 used in property factor 				 $700,000

(*) It may be necessary to use monthly averages if yearly averages do not properly reflect the average value of the taxpayer's equity; see Revenue and Taxation Code section 25131 and the regulations thereunder. 
Example 2:
Same facts as in Example 1, except that progress billings exceeded project costs. No value for the taxpayer's equity in the project is shown in the property factor.
(B) Rent paid for the use of equipment directly attributable to a particular project is included in the property factor at eight times the net annual rental rate even though such rental expense may be included in the cost of the project.
(C) The property factor is computed in the same manner regardless of which long-term contract method of accounting the taxpayer has elected and is computed for each taxable year even though under the completed contract method of accounting, business income is computed separately (See subsection (e) of this regulation).
(5) Payroll Factor. In general the numerator and denominator of the payroll factor shall be determined as set forth in Revenue and Taxation Code sections 25132 and 25133 and the regulations thereunder. However, the following special rules are also applicable when either the completed contract or percentage of completion method of long term contract accounting is used:
(A) Compensation paid employees which is attributable to a particular project is included in the payroll factor even though included in the cost of the project.
(B) Compensation paid to employees engaged in performing services at a project site are attributed to the state in which the services are performed. Compensation paid all other employees is governed by Revenue and Taxation Code section 25133.
Example:
A taxpayer engaged in a long-term contract in state X assigns several key employees to that state to supervise the project. The taxpayer, for unemployment tax purposes reports these employees to state Y where the main office is maintained and where the employees reside. For payroll factor purposes, such compensation is assigned to the numerator of state X.
(C) The payroll factor is computed in the same manner regardless of which long-term contract method of accounting the taxpayer has elected and is computed for each taxable year even though under the completed contract method of accounting, business income is computed separately (See subsection (e) of this regulation).
(6) Sales Factor. In general the numerator and denominator of the sales factor shall be determined as set forth in Revenue and Taxation Code sections 25134, 25135 and 25136 and the regulations thereunder. However, the following special rules are also applicable:
(A) Gross receipts derived from the performance of a contract are attributable to this state if the project is located in this state. If the project is located partly within and partly without this state, the gross receipts attributable to this state are based upon the ratio which costs for the project in this state incurred during the taxable year bears to the total of such costs for the entire project during the taxable year or any other method, such as engineering cost estimates, which will provide a reasonable apportionment.
Example 1:
A ship building project was undertaken in this state by a calendar year taxpayer, which had elected one of the long-term contract methods of accounting. The following gross receipts were derived from the contract during the three taxable years the contract was in progress.

	   1st Year 	2nd Year	3rd Year
Gross Receipts	 $1,000,000	$4,000,000	$3,000,000

The gross receipts to be reflected in both the numerator and denominator of the sales factor for each of the three years are the amounts shown. 
Example 2:
A taxpayer contracts to build a dam on a river at a point, which lies half within this state and half within state X. During the taxpayer's first taxable year construction costs in this state were $2,000,000. Total construction costs for the project during the taxable year were $3,000,000. Gross receipts for the year were $2,400,000. Accordingly, gross receipts of $1,600,000 ($1,600,000 = 66 2/3% X $2,400.000) are included in the numerator of the sales factor.
(B) If the percentage of completion method is used, the sales factor includes only that portion of the gross contract price, which corresponds to the percentage of the entire contract, which was completed during the taxable year.
Example:
A taxpayer which had elected the percentage of completion method of accounting entered into a long-term contract. At the end of its current taxable year (the first since starting the project) it estimated that the project was 30% completed. The bid price for the project was $9,000,000 and it had received $2,500,000 from progress billings as of the end of its current taxable year. The amount of gross receipts to be included in the sales factor for the current taxable year is $2,700,000 (30% of $9,000,000), regardless of whether the taxpayer uses the accrual method or the cash method for accounting for receipts and disbursements.
(C) If the completed contract method of accounting is used, the sales factor includes the portion of the gross receipts received or accrued, whichever is applicable, during the taxable year attributable to each contract.
Example 1:
A taxpayer which had elected the completed contract method of accounting entered into a long-term contract. By the end of its current taxable year (the second since starting the project) it had billed, and accrued on its books a total of $5,000,000 of which $2,000,000 had accrued in the first year the contract was undertaken, and $3,000,000 had accrued in the current (second) year. The amount of gross receipts to be included in the sales factor for the current taxable year is $3,000,000.
Example 2:
Same facts as in Example 1 except that the taxpayer keeps its books on the cash basis, and as of the end of its current taxable year had received only $2,500,000 of the $3,000,000 billed during the current year. The amount of gross receipts to be included in the sales factor for the current taxable year is $2,500,000.
(D) The sales factor, except as noted above in subparagraphs (B) and (C) of this subsection (6), is computed in the same manner regardless of which long-term contract method of accounting the taxpayer has elected and is computed for each taxable year even though under the completed contract method of accounting, business income is computed separately.
(7) Apportionment Percentage. The apportionment percentage is determined under Revenue and Taxation Code section 25128 using the property, payroll and sales factors determined as provided under subsections (4), (5) and (b) above, except that when computing the fraction described in Revenue and Taxation Code section 25128, subdivision (a), for years beginning before January 1, 1993, the payroll factor, the property factor and the sales factor shall be weighted equally and the denominator of the fraction described in Revenue and Taxation Code section 25128, subdivision (a), shall be three. That percentage is then applied to business income to establish the amount apportioned to California.
(e) Completed Contract Method--Special Computation. The completed contract method of accounting requires that the reporting of income (or loss) be deferred until the year the project is completed and accepted. Accordingly, a separate computation is made for each such contract completed during the taxable year, regardless of whether the project is located within or without this state, in order to determine the amount of income which is attributable to sources within this state. The amount of income from each contract completed during the taxable year apportioned to this state, plus other business income apportioned to this state by the applicable three or four factor formula, plus all nonbusiness income allocated to this state, is the measure of tax for the taxable year.
The amount of income (or loss) from each contract which is derived from sources within this state using the completed contract method of accounting is used, is computed as follows:
(1) In the taxable year the contract is completed, the income (or loss) therefrom is determined.
(2) The income (or loss) determined under subsection (e)(1) is apportioned to this state by the following method:
(A) A fraction expressed as a percentage is determined for each taxable year the contract was in progress. The numerator of the fraction is the amount of project costs paid or accrued each taxable year the contract was in progress and the denominator of the fraction is the total of all such costs accrued or paid for the entire project.
(B) Each percentage determined in subsection (e)(2)(A) is multiplied by the apportionment formula percentage for that particular year as determined in subsection (d)(7) of this regulation.
(C) The products determined at subsection (e)(2)(B) for each taxable year the contract was in progress are totaled. The amount of total income (or loss) from the contract determined under subsection (e)(1) is multiplied by the total percentage. The resulting income (or loss) is the amount of business income from such contract derived from sources within this state.
Example 1:
A taxpayer, not engaged in a “qualified business activity” as defined in California Code of Regulations, title 18, section 25128(b) using the completed contract method of accounting for long-term contracts is engaged in three long-term contracts; Contract L in this state, Contract M in state X and Contract N in state Y. In addition, it has other business income (less expenses) during the income year 1992 from interest, rents and short-term contracts amounting to $500,000, and nonbusiness income allocable to this state of $8,000. During 1992 it completed Contract M in state X at a profit of $900,000. Contracts L in this state and N in state Y were not completed during the income year. The apportionment percentages of the taxpayer as determined in subsection (d)(7) of this regulation and the percentages of contract costs as determined in subsection (e)(2) above for each year Contract M in state X was in progress are as follows:

	1990	1991	1992
Apportionment percentages
for this state	 30%	20%	40%
Percentage of project
costs of Contract M each
year to total project
costs--(100%)	 20%	50%	30%
The corporation's net income subject to tax in this state for 1992 is computed as follows:

 Business Income
  (excluding income from Contract M) 	 $500,000
Apportion 40% to this state 	 $200,000
Add: Income from Contract M *	 $252,000
Total business income derived
  from sources within this state	 452,000
Add: Nonbusiness income allocated
  to this state	   8,000
Net income subject to tax	 $460,000
* Income from Contract M apportioned to this state:

	1990	1991	1992	Total
Apportionment
 percentage
 for this state 	30%	20%	40%
Percent of
 project costs	 20%	 50%	  30%	100%
Product 	 6.00%	10.00%	12.00%	28%
 28% of $900,000 = $252,000.

Example 2:
Same facts as in Example 1 except that Contract L was started in 1992 in this state, the first year the taxpayer was subject to tax in this state. Contract L in this state and Contract N in state Y are incomplete in 1992. The corporation's net income subject to tax in this state for 1992 is computed as follows:

Business Income
  (excluding income from Contract M) 	 $500,000
Apportion 40% to this state	 200,000
Add: Income from Contract M *	 108,000
Total business income derived
  from sources within this state	 $308,000
Add: Nonbusiness income allocated
  to this state	    8,000
Net income subject to tax	 $316,000
* Income from Contract M apportioned to this state:

	1990	1991	1992	Total
Apportionment
 percentage
 for this state	  0	  0	 40%
Percent of
 project costs	 20%	50%	30%
Product	   0	   0	12.0%	12.0%
* 12% of $900,000 = $108,000.

Note: The percentage of 12% used to determine the income derived from sources within this state reflects the fact that the corporation was not subject to tax in this state prior to 1992.
Example 3:
Same facts as in Example 1 except that the figures relate to Contract L in this state and 1992 is the first year the corporation was taxable in another state (See Revenue and Taxation Code sections 25121 and 25122 and the regulations thereunder). Contracts M and N in states X and Y were started in 1992 and are incomplete.
The corporation's net income subject to tax in this state for 1992 is computed as follows:

Business Income 
   (excluding income from Contract L)	 $500,000
Apportion 40% to this state	 $200,000
Add: Income from Contract L*	   738,000
Total business income derived
  from sources within this state 	 $938,000
Add: Nonbusiness income allocated
  to this state	 ,   8,000
Net income subject to tax	 $946,000

* Income from Contract L apportioned to this state:

	1990	1991	1992	Total
Apportionment
 percentage
 for this state	 100%	100%	40%
Percent of
 project costs	 20%	  50%	  30%	100%
Product	 20%	 50%	 12%	 82%
82% of $900,000 = $738,000. 

(f) Dissolution, Withdrawal or Cessation of Business. Except as noted in subsection (g) below, the income of a taxpayer which has elected either the percentage of completion or the completed contract method of accounting for long-term contracts and which ceases to do business, dissolves or withdraws from this state during a taxable year shall be computed in accordance with Revenue and Taxation Code section 23151.1.
(g) Computation for Year of Withdrawal or Cessation of Business--Completed Contract Method. Use of the completed contract method of accounting for long-term contracts requires that income derived from sources within this state from incomplete contracts in progress outside this state on the date of withdrawal or cessation of business in this state be included in the measure of tax for the taxable year during which the corporation withdraws or ceases doing business in this state.
(1) The amount of income (or loss) from each such contract to be apportioned to this state by the apportionment method set forth in subsection (e)(2) of this regulation shall be determined as if the percentage of completion method of accounting were used for all such contracts on the date of withdrawal or cessation of business as set forth in subsection (g)(2), below.
(2) The amount of business income (or loss) for each such contract shall be the amount by which the gross contract price from each such contract which corresponds to the percentage of the entire contract which has been completed from the commencement thereof to the date of withdrawal or cessation of business exceeds all expenditures made during such period in connection with each such contract. In so doing,  materials and supplies on hand for use in such contract at the beginning  of such period must be added to expenditures for materials and supplies, and materials and supplies intended for use in such contract, on hand at the end of such period, and must be subtracted from such expenditures.
Example:
A contractor qualified to do business in this state had elected the completed contract method of accounting for long-term contracts. It was engaged in two long-term contracts; Contract L in this state was started in 1991 and completed at a profit of $900,000 on 12/16/93. The taxpayer withdrew on 12/31/93. Contract M in state X was started in 1992 and was incomplete on 12/31/93.
The apportionment percentages of the taxpayer as determined at subsection (d) of this regulation, and percentages of project costs as determined in subsection (e)(2) of this regulation, for each year for each contract are as follows:

	1991	1992	1993	Total
Apportionment percentage
  for the state 	 30%	20%	40%
Percentage of project costs:
Contract L, this state	 20%	50%	30%	100%
Contract M, state X	 0  	10%	25%	35%

The corporation had other business income (net of expenses) of $500,000 during 1992 and $300,000 during 1993. The gross contract price of Contract M (state X) was $1,000,000 and it was estimated to be 35% completed on 12/31/93. Total expenditures to date for Contract M (state X) were $300,000 for the period ended 12/31/93.
The measure of tax for the taxable year ended 12/31/93 (based upon measure of tax for taxable years 1992 and 1993) is computed as follows:

		Taxable Year 1993               
	Taxable Year	Taxable Year
	1992	1993
Business income	 $500,000	$300,000
Apportionment percentage for
  this state	 20%	 40%
Amount apportioned to this state	$100,000	$120,000
Add: Income from contracts:
  * L (this state)	 	252,000
  ** M (state X)	           	    6,000
Total Business Income derived
  from sources within this state	 $100,000	$378,000

* Income from Contract L apportioned to this state:

	1991	1992	1993	Total
Apportionment percentages	 30%	20%	40%
Percentage of project costs	 20%	 50%	 30%	100%
Product 	 6.0%	10.0%	12.0%	 28%
28% of $900,000 = $252,000

** Income from Contract M apportioned to this state:

	1991	1992	1993	Total
Apportionment percentages	 0	20%	40%
Percentage of project costs	  0	 10%	 25%	 35%
Product	 0	 2.0%	10.0%	 12.0%
*** 12.0% of $50,000 = $6,000.

*** Computation of apportionable income from Contract M
based on percentage of completion method:
Total Contract Price	 $1,000,000
Estimated to be 35% completed	 $350,000
Less: total expenditures to date	  300,000
 Apportionable income	  $50,000

(h) Reporting of Partnership Income. In the case of taxpayers which receive distributive shares of partnership income, see California Code of Regulations, title 18, section 25137-1.
(i) This section is applicable to taxable years beginning on or after January 1, 2003.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Sections 24673.2 and 25120-25137, Revenue and Taxation Code.
HISTORY

1. Editorial correction renumbering and amending former Section 25137(f)-(g) to Section 25137-2 filed 3-27-85; effective upon filing pursuant to Government Code Section 11346.2(d) (Register 85, No. 13). For prior history, see Registers 78, No. 7 and 74, No. 46.
2. Amendment of section heading, section and Note filed 1-21-2003; operative 2-20-2003 (Register 2003, No. 4).
§25137-3. Franchisors--Allocation and Apportionment of Income.
Note     •     History

(a) Definition. The term “business of franchising” means a trade or business which includes the granting of a license by the taxpayer (franchisor) of a trademark, trade name or service mark, to market or use a product or service under such trademark, trade name or service mark in accordance with methods and procedures prescribed by the taxpayer.
(b) Apportionment of Business Income. Apportionment Factors. The property, payroll and sales factors of the apportionment formula for franchisors shall be computed pursuant to Sections 25128 through 25137 of the Revenue and Taxation Code and the regulations adopted pursuant thereto except as provided in this regulation.
(1) Payroll Factor. For purposes of determining the numerator of the payroll factor, compensation paid to traveling employees regularly providing administrative or advisory services at the franchisee's place of business shall be determined on the basis of the ratio which the time spent in performing such services in this state bears to the total time spent in performing such services everywhere.
(2) Sales Factor. For purposes of determining the numerator of the sales factor:
(A) The following receipts shall be attributed to the state in which the franchisee's place of business is located provided the taxpayer is taxable in such state:
(i) Fees received from the franchisee for national or regional advertising placed by the franchisor.
(ii) Fees received for providing administrative or advisory services.
(iii) Fees received for site investigation, selection, and acquisition of a place of business, or potential place of business, of the franchisee, or potential franchisee.
If the taxpayer is not taxable in the state in which the franchisee's place of business is, or would have been, located, the receipts shall be attributed to the state in which the principal office of the taxpayer's employee or employees performing such services is located, except that if such services are performed by an independent contractor the receipts shall be attributed to the state of the taxpayer's commercial domicile. 
(B) Fees or royalties received for the use of the franchisor's trademark, trade name or service mark or the right to market a product or service shall be attributed to the state in which the franchisee's place of business is located if the taxpayer is taxable in such state. If the taxpayer is not taxable in the state in which the franchisee's place of business is located, the receipts shall be attributed to the state of the taxpayer's commercial domicile.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 25137, Revenue and Taxation Code.
HISTORY

1. Editorial correction renumbering and amending former Section 25137(i) to Section 25137-3 filed 3-27-85; effective upon filing pursuant to Government Code Section 11346.2(d) (Register 85, No. 13). For prior history, see Registers 82, No. 46 and 82, No. 28.
§25137-4-1. Banks and Financial Corporations--Allocation and Apportionment of Income--For Income Years Beginning Before January 1, 1996.
Note     •     History

(a) Definitions.
(1) “Receipts” for sales factor purposes means gross income including net taxable gain on disposition of assets derived from transactions and activities in the regular course of the taxpayer's trade or business which produce business income.
(2) “Participation loans” means joint loans by more than one bank to a common borrower.
(3) “Business situs” shall be the place at which intangible personal property is employed as capital; or the place where the property is located if possession and control of the property is localized in connection with the taxpayer's business so that substantial use or value attaches to the property.
(b) Business and Nonbusiness Income. All income of banks and financial corporations shall be “business income” unless the income arises from an investment or activity which is not a banking function.
(c) Apportionment of Business Income.
The property, payroll and sales factors of the apportionment formula for banks and financial corporations shall be computed pursuant to Sections 25128 through 25137 of the Revenue and Taxation Code and the regulations adopted pursuant thereto except as provided in this regulation.
(1) Property Factor.
(A) In General.
(i) Owned intangible personal property shall be included at its tax basis for federal income tax purposes. Goodwill shall not be included in the property factor.
(ii) Coin and currency shall be taken into account for property factor purposes.
(B) The numerator of the property factor shall include, in addition to items otherwise assigned thereto, the following:
(i) Coin and currency located in this state.
(ii) Intangible personal property owned and used in the business determined as follows:
(I) Assets in the nature of loans (including federal funds sold and banker's acceptances) and installment obligations shall be attributed to this state if the office of the bank or financial corporation at which the customer applied for the loan is located in this state except in cases where the loan is recognized by appropriate banking regulatory authority as being made from and as an asset of an office located in another state, in which case it shall be attributed to the state where that office is located. For purposes of this subclause, the word “applied” means initial inquiry (including customer assistance in preparing the loan application) or submission of a completed loan application, whichever occurs first in time.
(II) A participating bank's portion of a participation loan shall be attributed to this state if the office which enters into the participation is located in this state.
(III) Loans initiated through solicitation by traveling loan officers shall be attributed to this state if the office out of which such officer operates is located in this state except in cases where the loan is recognized by appropriate banking regulatory authority as being made from and as an asset of an office located in another state, in which case it shall be attributed to the state where that office is located.
(IV) Bank credit card and travel and entertainment credit card receivables shall be attributed to the state in which the credit card holder resides in the case of an individual or, if a corporation, to the state of the corporation's commercial domicile, provided the taxpayer is taxable in such state. If the taxpayer is not taxable in the state of the individual card holder's residence or commercial domicile of the corporate card holder, such receivables shall be attributed to this state if the taxpayer's commercial domicile is in this state.
(V) Investments of a bank in securities, the income from which constitutes business income, shall be attributed to its commercial domicile except that:
a. Securities used to maintain reserves against deposits to meet federal and state reserve deposit requirements shall be attributed to each state based upon the ratio that total deposits in the state bear to total deposits everywhere.
b. Securities owned by a bank but held by a state treasurer or other public official or pledged to secure public or trust funds deposited in such bank shall be attributed to the banking office at which such secured deposit is maintained.
(VI) Investments of a financial corporation in securities, the income from which constitutes business income, shall be attributed to its commercial domicile unless the securities have acquired a business situs elsewhere in which case they shall be attributed to the state of such situs.
(iii) Where the taxpayer leases tangible personal property to another the entire cost of such property shall be attributed to the state of the taxpayer's commercial domicile unless the taxpayer establishes, or the Franchise Tax Board is able to establish the location of such property in another state or states for the entire year and the taxpayer is taxable in the state or states where the property is located.
(2) Sales Factor. Numerator. The numerator of the sales factor shall include, in addition to items otherwise assignable, the following:
(A) Receipts from the lease or rental of tangible personal property shall be attributed to the state of the taxpayer's commercial domicile unless the taxpayer or the Franchise Tax Board is able to establish the location of such property in another state or states for the entire year and the taxpayer is taxable in the state or states where the property is located.
(B) Receipts from intangible personal property shall be included in the numerator as follows:
(i) Interest and other receipts from assets in the nature of loans (including federal funds sold and banker's acceptances) and installment obligations shall be attributed to this state if the office at which the customer applied for the loan is located in this state except in cases where the loan is recognized by appropriate banking regulatory authority as being made from and as an asset of an office located in another state, in which case it shall be attributed to the state where that office is located. For purposes of this clause, the word “applied” means initial inquiry (including customer assistance in preparing the loan application or submission of a completed loan application) whichever occurs first in time.
(ii) Interest income from a participating bank's portion of participation loan shall be attributed to this state if the office which enters into the participation is located in this state.
(iii) Interest income from loans solicited by traveling loan officers shall be attributed to this state if the office out of which such officer operates is located in this state except in cases where the loan is recognized by appropriate banking regulatory authority as being made from and as an asset of an office located in another state, in which case it shall be attributed to the state where that office is located.
(iv) Interest or service charges from bank, travel and entertainment credit card receivables and credit card holders' fees shall be attributed to the state in which the credit card holder resides in the case of an individual or, if a corporation, to the state of the corporation's commercial domicile, provided the taxpayer is taxable in such state. If the taxpayer is not taxable in the state of the individual card holder's residence or commercial domicile of the corporate card holder, the receipts shall be attributed to the state of the taxpayer's commercial domicile.
(v) Merchant discount income derived from bank and financial corporation credit card holder transactions with a merchant shall be attributed to the state in which the merchant is located, provided the taxpayer is taxable in such state. If the taxpayer is not taxable in the state in which the merchant is located, the merchant discount income shall be attributed to the state in which the taxpayer's commercial domicile is located.
(vi) Receipts for the performance of fiduciary services are attributable to this state if the services are principally performed in this state.
(vii) Receipts from investments of a bank in securities, the income from which constitutes business income, shall be attributed to its commercial domicile except that:
(I) Receipts from securities used to maintain reserves against deposits to meet federal and state reserve deposit requirements shall be attributed to each state based upon the ratio that total deposits in the state bear to total deposits everywhere.
(II) Receipts from securities owned by a bank but held by a state treasurer or other public official or pledged to secure public or trust funds deposited in such bank shall be attributed to the banking office at which such secured deposit is maintained.
(viii) Receipts (fees or charges) from the issuance of travelers checks and money orders shall be attributed to the state where the taxpayer's office is located that issued the travelers checks. If the travelers checks are issued by an independent representative or agent of the taxpayer, the following rules apply:
(I) If the taxpayer is taxable in the state in which the independent representative or agent issues the travelers checks or money orders, the receipts (fees or charges) shall be attributed to that state.
(II) If the taxpayer is not taxable in the state in which the independent representative or agent issues the travelers checks or money orders, the receipts (fees or charges) shall be attributed to the state of commercial domicile of the taxpayer.
(ix) Receipts from investments of a financial corporation, the income from which constitutes business income, shall be attributed to its commercial domicile unless the securities have acquired a business situs elsewhere in which case they shall be attributed to the state of such situs.
(d) This regulation applies to income years beginning on or after January 1, 1973 and beginning before January 1, 1996.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25137, Revenue and Taxation Code.
HISTORY

1. Editorial correction renumbering and amending former Section 25137(j) to Section 25137-4 filed 3-27-85; effective upon filing pursuant to Government Code Section 11346.2(d) (Register 85, No. 13). For prior history, see Registers 82, No. 46 and 82, No. 28. OK,
2. Renumbering of Section 25137-4 to 25137-4-1, amendment of section heading, new subsection (d) and amendment of Note filed 3-21-96; operative 4-20-96 (Register 96, No. 12).
§25137-4.2. Banks and Financial Corporations--Allocation and Apportionment of Income.
Note     •     History

(a) In general.
(1) Application. Except for a bank or financial corporation subject to the provisions of Regulation Section 25137-10, for income years beginning on or after January 1, 1996, a bank or financial corporation whose income is taxable both within and without this state shall allocate and apportion its net income as provided in section 25120 et seq., California Revenue and Taxation Code, and the regulations adopted pursuant thereto, except as provided herein.
(2) Apportionment. All business income shall be apportioned to this state by multiplying such income by the apportionment percentage which is determined by adding the taxpayer's receipts factor, as described in subsection (c), property factor, as described in subsection (d), and payroll factor, as described in Sections 25132 and 25133 of the Revenue and Taxation Code and the regulations adopted pursuant thereto, together and dividing the sum by three. If one of the factors is missing, the remaining factors are added and the total is divided by the number of factors present. A factor is missing if both its numerator and denominator are zero; it is not missing merely because the numerator is zero.
(3) Accounting for factors. Each factor shall be computed according to the method of accounting (cash or accrual) used by the taxpayer for the income year.
(4) Exception. If the allocation and apportionment provisions of this regulation do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for or the Franchise Tax Board may require, in respect to all or any part of the taxpayer's business activity, if reasonable:
(A) Separate accounting;
(B) The exclusion of any one or more of the factors;
(C) The inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; or
(D) The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income.
(b) Definitions. As used in this regulation, unless the context otherwise requires:
(1) “Billing address” means the location indicated in the books and records of the taxpayer on the first day of the income year (or on such later date in the income year when the customer relationship began) as the address where any notice, statement and/or bill relating to a customer's account is mailed.
(2) “Borrower or credit card holder located in this state” shall mean (A) a borrower, other than a credit card holder, that is engaged in a trade or business which maintains its commercial domicile in this state; and (B) a borrower that is not engaged in a trade or business or a credit card holder whose billing address is in this state.
(3) “Commercial domicile” means;
(A) the headquarters of the trade or business, that is, the place from which the trade or business is principally managed and directed, and
(B) if a taxpayer is organized under the laws of a foreign country, or of the Commonwealth of Puerto Rico, or any territory or possession of the United States, such taxpayer's commercial domicile shall be deemed, for the purposes of this regulation, to be the state from which such taxpayer's trade or business in the United States is principally managed and directed. It shall be presumed, subject to rebuttal, that the location from which the taxpayer's trade or business is principally managed and directed is the state of the United States to which the greatest number of its employees are regularly connected or out of which they are working, irrespective of where the services of such employees are performed, as of the last day of the income year.
(4) “Credit Card” means credit, travel or entertainment card.
(5) “Credit card issuer's reimbursement fee” means the fee a taxpayer receives from a merchant's bank because one of the persons to whom the taxpayer has issued a credit card has charged merchandise or services to the credit card.
(6) “Financial institution” includes both banks or financial corporations. “Financial corporation” is defined in Regulation Section 23183.
(7) “Loan” means any extension of credit resulting from direct negotiations between the taxpayer and its customer, and/or the purchase, in whole or in part, of such extension of credit from another person. Loans include participations, syndications, and leases treated as loans for federal income tax purposes.
Loans shall not include: properties treated as loans under Section 595 of the federal Internal Revenue Code; futures or forward contracts; options; notional principal contracts such as swaps; credit card receivables, including purchased credit card relationships; non-interest bearing balances due to depository institutions; cash items in the process of collection; federal funds sold; securities purchased under agreements to resell; assets held in a trading account; securities; interests in a Real Estate Mortgage Investment Conduit (REMIC), or other mortgage-backed or asset-backed security; and other similar items.
(8) “Merchant discount” means the fee (or negotiated discount) charged to a merchant by the taxpayer for the privilege of participating in a program whereby a credit card is accepted in payment for merchandise or services sold to the card holder.
(9) “Participation” means an extension of credit in which an undivided ownership interest is held on a pro rata basis in a single loan or pool of loans and related collateral. In a loan participation, the credit originator initially makes the loan and then subsequently resells all or a portion of it to other lenders. The participation may or may not be known to the borrower.
(10) “Person means an individual, estate, trust, partnership, corporation and any other business entity.
(11) “Principal base of operations” with respect to transportation property means the place of more or less permanent nature from which said property is regularly directed or controlled. With respect to an employee, the “base of operations” means the place of more or less permanent nature from which the employee regularly (A) starts his or her work and to which he or she customarily returns in order to receive instructions from his or her employer, or (B) communicates with his or her customers or other persons, or (C) performs any other functions necessary to the exercise of his or her trade or profession at some other point or points.
(12) “Real property owned” and “tangible personal property owned” means real and tangible personal property, respectively, (A) on which the taxpayer may claim depreciation for federal income tax purposes, or (B) property to which the taxpayer holds legal title and on which no other person may claim depreciation for federal income tax purposes (or could claim depreciation if subject to federal income tax). Real and tangible personal property do not include coin, currency, or property acquired in lieu of or pursuant to a foreclosure.
(13) “Regular place of business” means an office at which the taxpayer carries on its business in a regular and systematic manner and which is continuously maintained, occupied and used by employees of the taxpayer.
(14) “Syndication” is an extension of credit in which two or more persons fund and each person is at risk only up to a specified percentage of the total extension of credit or up to a specified dollar amount.
(15) “Transportation property” means vehicles and vessels capable of moving under their own power, such as aircraft, trains, water vessels and motor vehicles, as well as any equipment or containers attached to such property, such as rolling stock, barges, trailers or the like.
(c) Receipts factor.
(1) In general. The receipts factor shall include only those receipts described herein which give rise to business income and which are included in the computation of the apportionable income base.
(2) Special rules. The receipts factor shall include:
(A) Interest, dividends, net gains (but not less than zero) and other income from investment assets and activities and from trading assets and activities. Investment assets and activities and trading assets and activities include but are not limited to: investment securities; trading account assets; federal funds; securities  purchased and sold under agreements to resell or repurchase; options; future contracts; forward contracts; notional principal contracts such as swaps; equities; and foreign currency transactions. With respect to the investment and trading assets and activities described in subsections (B) and (C) of this subsection, the receipts factor shall include the amounts described in such subsections.
(B) The amount by which interest from federal funds sold and securities purchased under resale agreements exceeds interest expense on federal funds purchased and securities sold under repurchase agreements.
(C) The amount by which interest, dividends, gains and other income from trading assets and activities, including but not limited to assets and activities in the matched book, in the arbitrage book, and foreign currency transactions, exceed amounts paid in lieu of interest, amounts paid in lieu of dividends and losses from such assets and activities.
(D) Net gains from the sale of loans including income recorded under the coupon stripping rules of Section 1268 of the Internal Revenue Code.
(3) Numerator. The numerator of the receipts factor includes:
(A) Lease of real property. Receipts from the lease or rental of real property owned by the taxpayer if the property is located within this state or receipts from the sublease of real property if the property is located within this state.
(B) Lease of tangible property.
1. General. Except as described in subsection 2. of this subsection, receipts from the lease or rental of tangible personal property owned by the taxpayer if the property is located within this state when it is first placed in service by the lessee.
2. Transportation property. Receipts from the lease or rental of transportation property owned by the taxpayer to the extent the property is used in this state. The extent to which an aircraft will be deemed to be used in this state and the amount of receipts that is to be included in the numerator of this state's receipts factor is determined by multiplying all the receipts from the lease or rental of the aircraft by a fraction, the numerator of which is the number of landings of the aircraft in this state and the denominator of which is the total number of landings of the aircraft. If the extent of the use of any transportation property within this state cannot be determined, then the property will be deemed to be used wholly in the state in which the property has its principal base of operations. A motor vehicle will be deemed to be used wholly in the state in which it is registered.
(C) Loans secured by real property.
1. General. Interest and fees or penalties in the nature of interest from loans secured by real property if the property is located within this state. If the property is located both within this state and one or more other states, the receipts described in this subsection are included in the numerator of the receipts factor if more than fifty percent of the fair market value of the real property is located within this state. If more than fifty percent of the fair market value of the real property is not located within any one state, then the receipts described in this subsection (C) shall be included in the numerator of the receipts factor if the borrower is located in this state.
2. Secured. A loan is secured by real property if, at the time the original loan agreement was made, fifty percent or more of the aggregate value of the collateral was real property.
3. Location. The determination of whether the real property securing a loan is located within this state shall be made as of the time the original agreement was made and any and all subsequent substitutions of collateral shall be disregarded.
(D) Loans not secured by real property. Interest and fees or penalties in the nature of interest from loans not secured by real property if the borrower is located in this state.
(E) Net gains from sale of loans.
1. Real property. The amount of net gains (but not less than zero), including income recorded under the coupon stripping rules of Section 1286 of the Internal Revenue Code, from the sale of loans secured by real property included in the numerator is determined by multiplying such net gains by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (C) of this subsection (3) and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans secured by real property.
2. Other loans. The amount of net gains (but not less than zero) from the sale of loans not secured by real property included in the numerator is determined by multiplying such net gains by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (D) of this subsection (3) and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans not secured by real property.
(F) Credit card receivables. Interest and fees or penalties in the nature of interest from credit card receivables and receipts from fees charged to card holders, such as annual fees, if the billing address of the card holder is in this state.
(G) Sale of credit card receivables. Net gains (but not less than zero) from the sale of credit card receivables multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (F) of this subsection (3) and the denominator of which is the taxpayer's total amount of interest and fees or penalties in the nature of interest from credit card receivables and fees charged to card holders.
(H) Credit card issuer's reimbursement fee. All credit card issuer's reimbursement fees multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (F) of this subsection (3) and the denominator of which is the taxpayer's total amount of interest and fees or penalties in the nature of interest from credit card receivables and fees charged to card holders.
(I) Merchant discount. Receipts from merchant discount if the commercial domicile of the merchant is in this state. Such receipts shall be computed net of any card holder charge backs, but shall not be reduced by any interchange transaction fees or by any issuer's reimbursement fees paid to another for charges made by its card holders.
(J) Loan servicing fees.
1. Real property loans. Loan servicing fees derived from loans secured by real property multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (C) of this subsection (3) and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans secured by real property.
2. Other loans. Loan servicing fees derived from loans not secured by real property multiplied by a fraction, the numerator of which is the amount included in the numerator of the receipts factor pursuant to subsection (D) of this subsection (3) and the denominator of which is the total amount of interest and fees or penalties in the nature of interest from loans not secured by real property.
3. Third party servicing. In circumstances in which the taxpayer receives loan servicing fees for servicing either the secured or the unsecured loans of another, the numerator of the receipts factor shall include such fees if the borrower is located in this state.
(K) Services. Receipts from services not otherwise apportioned under this section if the service is performed in this state. If the service is performed both within and without this state, the numerator of the receipts factor includes receipts from services not otherwise apportioned under this section, if a greater proportion of the income-producing activity is performed in this state based on cost of performance. See Section 25136 of the Revenue and Taxation Code and the regulation adopted pursuant thereto.
(L) Investment assets and activities and trading assets and activities.
1. General. The numerator of the receipts factor includes interest, dividends, net gains (but not less than zero) and other income from investment assets and activities and from trading assets and activities described in subsection (2) of this subsection (c) that are attributable to this state.
a. Investment account. The amount of interest, dividends, net gains (but not less than zero) and other income from investment assets and activities in the investment account to be attributed to this state and included in the numerator is determined by multiplying all such income from such assets and activities by a fraction, the numerator of which is the average value of such assets which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the average value of all such assets.
b. Federal funds. The amount of interest from federal funds sold and purchased and from securities purchased under resale agreements and securities sold under repurchase agreements attributable to this state and included in the numerator is determined by multiplying the amount described in subsection (2)(B) of this subsection (c) from such funds and such securities by a fraction, the numerator of which is the average value of federal funds sold and securities purchased under agreements to resell which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the average value of all such funds and such securities.
c. Trading assets and activities. The amount of interest, dividends, gains and other income from trading assets and activities, including but not limited to assets and activities in the matched book, in the arbitrage book and foreign currency transactions (but excluding amounts described in subsections a. or b. of this subsection 1.) attributable to this state and included in the numerator is determined by multiplying the amount described in subsection (2)(C) of this subsection (c) by a fraction, the numerator of which is the average value of such trading assets which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the average value of all such assets.
d. Average value. For purposes of this subsection (L), average value shall be determined under the rules of Sections 25130 and 25131 of the Revenue and Taxation Code and the regulations adopted pursuant to those sections and Section 25137 of the Revenue and Taxation Code, as modified by subsection (d)(2) herein.
2. In lieu method. In lieu of using the method set forth in subsection 1. of this subsection (L), the taxpayer may elect, or the Franchise Tax Board may require in order to fairly represent the business activity of the taxpayer in this state, the use of the method set forth in this subsection 2.
a. Investment account. The amount of interest, dividends, net gains (but not less than zero) and other income from investment assets and activities in the investment account to be attributed to this state and included in the numerator is determined by multiplying all such income from such assets and activities by a fraction, the numerator of which is the gross income from such assets and activities which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the gross income from all such assets and activities.
b. Federal funds. The amount of interest from federal funds sold and purchased and from securities purchased under resale agreements and securities sold under repurchase agreements attributable to this state and included in the numerator is determined by multiplying the amount described in subsection (2)(B) of this subsection (c) from such funds and such securities by a fraction, the numerator of which is the gross income from such funds and such securities which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the gross income from all such funds and such securities.
c. Trading assets and activities. The amount of interest, dividends, gains and other income from trading assets and activities, including but not limited to assets and activities in the matched book, in the arbitrage book and foreign currency transactions (but excluding amounts described in subsections a. or b. of this subsection 2.) attributable to this state and included in the numerator is determined by multiplying the amount described in subsection (2)(C) of subsection (c) by a fraction, the numerator of which is the gross income from such trading assets and activities which are properly assigned to a regular place of business of the taxpayer within this state and the denominator of which is the gross income from all such assets and activities.
3. Use of alternatives. If the taxpayer elects or is required by the Franchise Tax Board to use the method set forth in subsection 2. of this subsection (L), it shall use this method on all subsequent returns unless the taxpayer receives prior permission from the Franchise Tax Board to use, or the Franchise Tax Board requires, a different method.
4. Proof of proper assignment. The taxpayer shall have the burden of proving that an investment asset or activity or trading asset or activity was properly assigned to a regular place of business outside of this state by demonstrating that the day-to-day decisions regarding the asset or activity occurred at a regular place of business outside the state. Where the day-to-day decisions regarding an investment asset or activity or trading asset or activity occur at more than one regular place of business and one such regular place of business is in this state and one such regular place of business is outside this state, such asset or activity shall be considered to be located at the regular place of business of the taxpayer where the investment or trading policies or guidelines with respect to the asset or activity are established. Unless the taxpayer demonstrates to the contrary, such policies and guidelines shall be presumed to be established at the commercial domicile of the taxpayer.
(M) Other receipts. The numerator of the receipts factor includes all other receipts pursuant to the rules set forth in sections 25135 and 25136 of the Revenue and Taxation Code and the regulations adopted pursuant to those sections and Section 25137 of the Revenue and Taxation Code.
(N) Throwback rule. All receipts which would be assigned under this section to a state in which the taxpayer is not taxable shall be included in the numerator of the receipts factor, if the taxpayer's commercial domicile is in this state.
(d) Property factor.
(1) General. The property factor, in addition to property included under Section 25129 of the Revenue and Taxation Code and the regulations adopted pursuant to those sections and Section 25137 of the Revenue and Taxation Code, shall include the average value of the taxpayer's loans and credit receivables located or used within and without this state during the income year.
(2) Value of other property.
(A) Loans. Loans are valued at their outstanding principal balance without regard to any reserve for bad debts. If a loan is charged-off in whole or in part for federal income tax purposes, the portion of the loan charged off is not outstanding. A specifically allocated reserve established pursuant to regulatory or financial accounting guidelines which is treated as charged-off for federal income tax purposes shall be treated as charged-off for purposes of this section.
(B) Credit card receivables. Credit card receivables are valued at their outstanding principal balance without regard to any reserve for bad debts. If a credit card receivable is charged-off in whole or in part for federal income tax purposes, the portion of the receivable charged-off is not outstanding.
(3) Numerator.
(A) Real and tangible property.
1. General. Except as described in subsection 2. of this subsection (A), real property and tangible personal property owned by or rented to the taxpayer is considered to be located within this state if it is physically located, situated or used within this state.
2. Transportation property. Transportation property is included in the numerator of the property factor to the extent that the property is used in this state. The extent an aircraft will be deemed to be used in this state and the amount of value that is to be included in the numerator of this state's property factor is determined by multiplying the average value of the aircraft by a fraction, the numerator of which is the number of landings of the aircraft in this state and the denominator of which is the total number of landings of the aircraft everywhere. If the extent of the use of any transportation property within this state cannot be determined, then the property will be deemed to be used wholly in the state in which the property has its principal base of operations. A motor vehicle will be deemed to be used wholly in the state in which it is registered.
(B) Location of loans.
1.a. A loan is considered to be located within this state if it is properly assigned to a regular place of business of the taxpayer within this state.
b. A loan is properly assigned to the regular place of business with which it has a preponderance of substantive contacts. A loan assigned by the taxpayer to a regular place of business without the state shall be presumed to have been properly assigned if--
(i) the taxpayer has assigned, in the regular course of its business, such loan on its records to a regular place of business consistent with federal or state regulatory requirements;
(ii) such assignment on its records is based upon substantive contacts of the loan to such regular place of business; and
(iii) the taxpayer uses said records reflecting assignment of loans for the filing of all state and local tax returns for which an assignment of loans to a regular place of business is required.
c. The presumption of proper assignment of a loan provided in subsection (d)(3)(B)1.b. may be rebutted upon a showing by the Franchise Tax Board, supported by a preponderance of the evidence, that the preponderance of substantive contacts regarding such loan did not occur at the regular place of business to which it was assigned on the taxpayer`s records. When such presumption has been rebutted, the loan shall then be located within this state if:
(i) the taxpayer had a regular place of business within this state at the time the loan was made, and
(ii) the taxpayer fails to show, by a preponderance of the evidence, that the preponderance of substantive contacts regarding such loan did not occur within this state.
2. In the case of a loan which is assigned by the taxpayer to a place without this state which is not a regular place of business, it shall be presumed, subject to rebuttal by the taxpayer on a showing supported by the preponderance of evidence, that the preponderance of substantive contacts regarding the loan occurred within this state if, at the time the loan was made, the taxpayer's commercial domicile as defined by section (b)(3) was within this state.
(C)1. To determine the state in which the preponderance of substantive contacts relating to a loan have occurred, the facts and circumstances regarding the loan at issue shall be reviewed on a case-by-case basis and consideration shall be given to such activities as the solicitation, investigation, negotiation, approval and administration of the loan.
2. As used in this regulation:
a. Solicitation. Solicitation is either active or passive. Active solicitation occurs when an employee of the taxpayer initiates the contact with the customer. Such activity is located at the regular place of business which the taxpayer's employee is regularly connected with or working out of, regardless of where the services of such employee were actually performed. Passive solicitation occurs when the customer initiates the contact with the taxpayer. If the customer's initial contact was not at a regular place of business of the taxpayer, the regular place of business, if any, where the passive solicitation occurred is determined by the facts in each case.
b. Investigation. Investigation is the procedure whereby employees of the taxpayer determine the credit worthiness of the customer as well as the degree of risk involved in making a particular agreement. Such activity is located at the regular place of business which the taxpayer's employees are regularly connected with or working out of, regardless of where the services of such employees were actually performed.
c. Negotiation. Negotiation is the procedure whereby employees of the taxpayer and its customer determine the terms of the agreement (e.g., the amount, duration, interest rate, frequency of repayment, currency denomination and security required). Such activity is located at the regular place of business which the taxpayer's employees are regularly connected with or working out of, regardless of where the services of such employees were actually performed.
d. Approval. Approval is the procedure whereby employees or the board of directors of the taxpayer make the final determination whether to enter into the agreement. Such activity is located at the regular place of business which the taxpayer's employees are regularly connected with or working out of, regardless of where the services of such employees were actually performed. If the board of directors makes the final determination, such activity is located at the commercial domicile of the taxpayer.
e. Administration. Administration is the process of managing the account. This process includes bookkeeping, collecting the payments, corresponding with the customer, reporting to management regarding the status of the agreement and proceeding against the borrower or the security interest if the borrower is in default. Such activity is located at the regular place of business which oversees this activity.
(D) Credit card receivables. For purposes of determining the location of credit card receivables, credit card receivables shall be treated as loans and shall be subject to the provisions of subsections (d)(3)(B) and (d)(3)(C).
(E) Period of assignment of loans. A loan that has been properly assigned to a state shall, absent any change of material fact, remain assigned to said state for the length of the original term of the loan. Thereafter, said loan may be properly assigned to another state if said loan has a preponderance of substantive contacts to a regular place of business there.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Sections 25128, 25137, Revenue and Taxation Code.
HISTORY

1. New section filed 3-21-96; operative 4-20-96 (Register 96, No. 12).
§25137-5. Commercial Fishing--Allocation and Apportionment of Income.
Note     •     History

(a) Definitions.
(1) The term “business of commercial fishing” means a trade or business which utilizes a ship or ships in the taking of fish or the bringing of fish ashore for financial or pecuniary gain or profit.
(2) A “port day” is a day or part of a day spent in port or on the seas while the vessel is “in operation.” A “port day” begins at the time the ship enters an area within which a state (as defined in Section 25120(f), Revenue and Taxation Code) asserts jurisdiction, including the assertion of jurisdiction for fishing, and ends when the ship leaves such area. A “port day” does not include the time a ship is “out of service.”
(3) A ship shall be considered “in operation” while engaged in prevoyage and post-voyage activities as well as when it is searching for fish, fishing, or transporting fish. Prevoyage and post-voyage activities include, but are not limited to, loading, unloading, refueling, or provisioning the ship, or when the ship is being repaired (except for repairs in shipyards, including drydocking). A ship shall commence being “in operation” for a voyage when it is manned with full crew and the vessel is ready for a fishing voyage. It ceases to be “in operation” after a voyage when the vessel is unloaded and cleaned, including the preparation of the fish wells to a fish-carrying condition.
(4) A ship shall be “out of service” when it is not in operation. “Out of service” time includes, but is not limited to, time while a ship is idle between voyages, time for repairs in shipyards (including drydocking), and time after which a ship is seized by a foreign government and held under restraint pending disposition of charges alleging violation of such government's law. A ship is also considered out of service when it is involuntarily waiting to unload.
(b) Apportionment of Business Income. The property, payroll and sales factors of the apportionment formula for a commercial fishing business shall be computed pursuant to Sections 25128 through 25137 of the Revenue and Taxation Code and the regulations adopted pursuant thereto except as provided in this regulation.
(1) Property Factor. Numerator. A portion of the value of a ship and ship's equipment used in the business shall be attributed to this state based upon the ratio of the number of port days during which the ship was within this state to the total number of port days of the ship everywhere during the income year.
(2) Payroll Factor. Numerator. A portion of the compensation paid to ship's personnel and fishermen shall be attributed to this state based upon the ratio of the number of port days during which the ship was within the state to the total number of port days of the ship everywhere during the income year.
(3) Sales Factor. Numerator. Receipts from the sale of fish shall be attributed to this state based upon the ratio of the number of port days during which the ship was within this state to the total number of port days of the ship everywhere during the income year.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 25137, Revenue and Taxation Code.
HISTORY

1. Editorial correction renumbering and amending former Section 25137(l) to Section 25137-5 filed 3-27-85; effective upon filing pursuant to Government Code Section 11346.2(d) (Register 85, No. 13). For prior history, see Registers 82, No. 46 and 82, No. 28.
§25137-6. Combined Reports Including Foreign Country Operations. [Renumbered]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 25137, Revenue and Taxation Code.
HISTORY

1. Editorial correction renumbering and amending former Section 25137(m) to Section 25137-6 filed 3-27-85; effective upon filing pursuant to Government Code Section 11346.2 (d) (Register 85, No. 13). For prior history, see Registers 82, No. 46 and 82, No. 28.
2. Change without regulatory effect renumbering former section 25137-6 to section 25106.5-3 and amending subsection (e)(1) and Note filed 2-14-95 pursuant to section 100, title 1, California Code of Regulations; operative 3-13-95 (Register 95, No. 7).
§25137-7. Air Transportation Companies--Allocation and Apportionment of Income.
Note     •     History

(a) Definitions.
(1) The unitary business of air transportation includes the operations of scheduled airlines, supplemental airlines and air taxis. All members of a unitary group that are engaged in a unitary business of providing air transportation must apportion business income from air transportation as provided in this regulation.
(2) As used in this regulation, “certificated aircraft” means aircraft operated by an air carrier or foreign air carrier engaged in air transportation, as defined in subsections (3), (5), (10), (11), (14), (15), (22), (23), (24), (25) and (26) of 49 USC 1301, while there is in force a certificate or permit issued by the Civil Aeronautics Board of the United States, the Department of Transportation or its successor, or a certificate or permit issued by the California Public Utilities Commission, or its successor, authorizing such air carrier to engage in such transportation.
(3) As used in this regulation, “air taxis” means aircraft used by an air carrier which does not utilize aircraft whose maximum certificated takeoff weight as determined by the Federal Aviation Administration, is greater than 12,500 pounds in air transportation and which does not hold a certificate of public convenience and necessity or other economic authority issued by the Civil Aeronautics Board of the United States, the Department of Transportation, or its successor, or by the California Public Utilities Commission, or its successor.
(4) “The time in state” is the proportionate amount of time, both in the air and on the ground, that certificated aircraft have spent within the state during a representative period as compared to the total time in the representative period.
(5) “Arrivals and departures” is the number of arrivals in and departures from airports within the state of certificated aircraft during a representative period as compared to the total number of arrivals in and departures from airports both within this state and elsewhere in the representative period.
(6) “Ton-miles” means the product of a plane's tonnage and the miles traveled.
(7) “Flight personnel” means the air crew aboard an aircraft assisting in the operation of the aircraft or the welfare of passengers while in the air.
(8) “Rotables” means components or parts which are rotated between storage and operational use on aircraft.
(9) “Air time” is the elapsed time from when an aircraft, after blocks are removed from the aircraft wheels, first moves under its own power from the boarding ramp for the purposes of flight, to the time the aircraft comes to a rest after landing and blocks are placed on the aircraft wheels.
(b) Apportionment of Business Income. The property, payroll and sales factors of the apportionment formula for air transportation companies shall be computed pursuant to Sections 25128 through 25137 of the Revenue and Taxation Code and the regulations adopted pursuant thereto except as provided in this regulation.
(1) Property Factor.
(A) In General.
(i) The use of the taxpayer's owned or rented aircraft in an exchange program with another air carrier shall not constitute a rental or subrental, whichever the case may be, of such aircraft by the airline to the other participating airline. Such aircraft shall be accounted for in the property factor of the taxpayer.
(ii) Rotables, parts, and other expendables, including parts for use in contract overhaul work, shall be valued at cost.
(B) Numerator. The value of aircraft assigned to this state shall be determined pursuant to Section 25101.3, Revenue and Taxation Code.
(2) Payroll Factor--Numerator. In determining the numerator of the payroll factor, compensation paid to flight personnel shall be attributed to this state based upon the ratio that air and ground time spent in performing services in this state bears to the total air and ground time spent in performing services everywhere by model of aircraft. Air time (block to block) by model of aircraft determined for the income year shall be used in computing flight personnel compensation attributable to this state. Ground time of flight personnel shall include the time required by such personnel to perform preflight and postflight activities pursuant to current employer-employee union contracts and includes time on the ground at intermediate stops on scheduled and nonscheduled flights for loading or unloading of passengers, freight, mail or other nonemergency purposes. Air and ground time of flight personnel utilized for training purposes to maintain proficiency shall also be included for purposes of the payroll factor.
(3) Sales Factor--Numerator.
(A) In determining the numerator of the revenue factor, revenue from hauling passengers, freight, mail and excess baggage shall be attributed to this state based upon:
(i) the ratio which the air time of the taxpayer's aircraft spent in this state bears to the total air time (block to block) of such aircraft everywhere, by model of aircraft as defined in subsection (e), weighted at 80 percent; and
(ii) the ratio of arrivals and departures in this state to total arrivals and departures everywhere by model of aircraft weighted at 20 percent. Air time and arrivals and departures (excluding time and arrivals and departures for flight training purposes) by model of aircraft as defined in subsection (e), shall be used in computing revenue attributable to this state derived from hauling passengers, freight, mail, and excess baggage.
(B) If records of actual revenue by model of aircraft are not maintained, the total revenue shall be divided into passenger and freight (which shall include express, excess baggage and mail) revenue and allocated to aircraft model on the ratio of the revenue passenger ton-miles and revenue freight (which shall include express, excess baggage and mail) ton-miles of such model, respectively. Expressed as a formula the computation for each model of aircraft is:

Revenue Passenger Ton-		Total Passenger		Passenger
    Miles by Model          	 x	Revenue	=	Revenue
Total Revenue Passenger	 			by type
 Ton-Miles All Models

Revenue Freight Ton 		Total Freight		Freight
     Miles by Model      	x	Revenue	=	Revenue
Total Revenue Freight 				by Model
Ton-Miles All Models				
(c) Computation of Time Factor and Arrivals and Departures Factor.
(1) The property and revenue factors of the apportionment formula are based upon a time factor and an arrivals and departures factor. The payroll factor for flight personnel is based solely upon time. The statistics to be used in computing the time and arrivals and departures factors shall be the annual statistics of the taxpayer or statistics for representative periods.
(2) Annual statistics for the taxpayer's income year, if available, shall be used in determining the property, payroll and revenue factors of the apportionment formula. All other rules prescribed for property tax purposes for determining air and ground time and arrivals and departures shall be applicable except as otherwise provided.
(3) If annual statistics are not available, statistics for representative periods shall be used provided that permission to do so has been granted to the taxpayer by the Franchise Tax Board. In the event annual statistics are subsequently maintained on a regular basis, the taxpayer shall use such annual statistics in lieu of statistics from representative periods.
(d) Representative Period.
(1) In General.
(A) The representative periods to be used in computing the property, payroll and revenue factors shall consist of the representative periods designated by the State Board of Equalization for the current property tax assessment year and the immediately preceding or succeeding property tax assessment year, as provided for herein, unless the Franchise Tax Board determines that alternative periods should be designated as representative periods in order to fairly reflect the taxpayer's activities within California.
(B) The statistical data developed for representative periods designated by the State Board of Equalization for property tax purposes shall be used in computing the percentage of the time factor and the arrivals and departures factor. The time factor and arrivals and departures factor shall be computed separately for each model of aircraft enumerated in subsection (b).
(C) The term “current property tax assessment year” shall be the property tax assessment year for which the State Board of Equalization designates the representative period which falls within the taxpayer's current income year for California franchise tax purposes. In the case of a taxable year ending on February 28, it shall be the property tax assessment year for which the State Board of Equalization designates the representative period, the major part of which falls within the taxpayer's current income year for California franchise tax purposes. For example, if the State Board of Equalization designates February 23 through March 1 of the current calendar year as the representative period for the next property tax assessment year (beginning July 1, next), the “current property tax assessment year” shall be the property tax assessment year beginning July 1, next with respect to the income year ended February 28 of the current calendar year.
(2) Time Factor.
(A) Scheduled Carriers, Scheduled and Nonscheduled Air Taxis.
(i) Scheduled Operations, Scheduled Carriers, Scheduled and Nonscheduled Air Taxis.
(I) The representative period shall consist of the representative periods designated by the State Board of Equalization for (1) the current property tax assessment year and (2) the succeeding property tax assessment year unless the taxpayer's income year for California franchise tax purposes ends on or after February 28.
(II) If the taxpayer's fiscal year for California franchise tax purposes ends on or after February 28, the representative period shall consist of the representative periods designated by the State Board of Equalization for (1) the current property tax assessment year and (2) the preceding property tax assessment year.
(ii) Nonscheduled Operations, Scheduled Carriers and Scheduled Air Taxis.
(I) The representative period shall consist of the representative periods designated by the State Board of Equalization for (1) the current property tax assessment year and (2) the preceding property tax assessment year unless the taxpayer's income year for California franchise tax purposes ends on or after July 31.
(II) Taxpayers whose taxable year ends on or after July 31 should contact the Franchise Tax Board for instructions as to the representative period to be used.
(B) Supplemental Carriers. The representative period shall be the same as stated in subsection (d)(2)(A)(ii).
(3) Arrivals and Departures Factor.
(A) Scheduled Carriers, Scheduled and Nonscheduled Air Taxis.
(i) Carriers Reporting Departures to Civil Aeronautics Board or Department of Transportation.
(I) The representative period shall consist of the representative period designated by the State Board of Equalization for (1) the current property tax assessment year and (2) the succeeding property tax assessment year unless the taxpayer's current income year ends on or after February 28.
(II) In the case of taxpayers whose income year ends on or after February 28, the representative period shall consist of the representative period designated by the State Board of Equalization for (1) the current property tax assessment year, and (2) the preceding property tax assessment year.
(ii) Air Taxis Not Reporting Departures to Civil Aeronautics Board or Department of Transportation.
(I) The representative period for scheduled operations of air taxis and operations of nonscheduled air taxis will be the same as stated in subsection (d)(2)(A)(i).
(II) The representative period for nonscheduled operations of scheduled air taxis will be the same as stated in subsection (d)(2)(A)(ii).
(B) Supplemental Carriers.
(i) Carriers Reporting Departures to Civil Aeronautics Board or Department of Transportation. The representative period shall be the same as stated in subsection (d)(3)(A)(i).
(ii) Carriers Not Reporting Departures to Civil Aeronautics Board or Department of Transportation. The representative period shall be the same as stated in subsection (d)(2)(A)(ii).
(e) A “model” of aircraft is defined as all aircraft that can be assigned to a group utilizing the following rules:
(1) All aircraft are grouped with other aircraft of the same manufacturer model, as determined by the manufacturer's designation system.
(2) If a taxpayer operates more than one series of an aircraft model, all series of that aircraft model are assigned to a single model group based on the aircraft manufacturer's designation system.
(3) If a taxpayer operates an aircraft that is part of an aircraft model series or version that is designated by the aircraft manufacturer for freight transportation, this aircraft is assigned to a model group separate from the group of aircraft of the same model that the aircraft manufacturer designates for passenger transportation.
(4) If a taxpayer operates an aircraft that can be configured either for freight transportation or passenger transportation, the aircraft is assigned to a group based on the aircraft model and the aircraft configuration.
Examples of Aircraft Model Groupings for Illustrative Purposes:
1. Boeing 737 model grouping includes series 737-300, 737-500 and 737-700.
2. Boeing 767 model grouping includes series 767-300 and 767-300ER.
3. Cessna 208 model grouping includes series Cessna 208A and Cessna 208B.
4. The Airbus S.A.S. aircraft designation system assigns aircraft models by families. The A310 family includes models A300 and A310. The A320 family includes models A318, A319, A320 and A321.
5. Airbus A300F4-600R, a freight aircraft, is assigned to a separate group from Airbus A300-600, a passenger aircraft.
6. Boeing MD-11F, a freight aircraft, is assigned to a separate group from Boeing MD-11, a passenger or freight aircraft, if the Boeing MD-11 is configured as a passenger aircraft. The Boeing MD-11F and Boeing MD-11 are assigned to the same model group if the Boeing MD-11 is configured for freight transportation.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Sections 25101.3 and 25137, Revenue and Taxation Code.
HISTORY

1. Editorial correction renumbering and amending former Section 25137(n) to Section 25137-7 filed 3-27-85; effective upon filing pursuant to Government Code Section 11346.2(d) (Register 85, No. 13). For prior history, see Registers 82, No. 46 and 82, No. 28.
2. Amendment of subsection (a)(1), new subsection (a)(9), amendment of subsections (b)(2), (b)(3)(A)(i)-(b)(3)(B), (d)(1)(B)-(C) and (e), repealer of subsections (e)(1)-(e)(4)(F), new subsections (e)(1)-(4) and amendment of Note filed 3-18-2010; operative 4-19-2010 (Register 2010, No. 12).
§25137-8. Motion Picture and Television Film Producers and Television Networks--Apportionment of Income. [Renumbered]
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 25137, Revenue and Taxation Code.
HISTORY

1. New section filed 1-12-87; effective thirtieth day thereafter (Register 87, No. 3).
2. Renumbering of former section 25137-8 to new section 25137-8.1 filed 3-26-2012; operative 4-25-2012 (Register 2012, No. 13).
§25137-8.1. Motion Picture and Television Film Producers and Television Networks -- Apportionment of Income.
Note     •     History

(a) This regulation applies to motion picture and television film producers, producers of television commercials, and to television networks. The provisions of this regulation shall also apply to independent television stations to the extent they are members of a chain of commonly owned stations all of which operate as network affiliates or all of which are unaffiliated with a network but which operate collectively in purchasing properties for telecast or in marketing air time, or which operate as a producer. This regulation applies to taxable years beginning on and after January 1, 1982, and before January 1, 2011.
(b) Definitions.
(1) “Film” means the physical embodiment of a play, story or other literary, commercial, education or artistic work; as a motion picture, video tape, disc or other similar medium, except that it does not include news or sports films produced for telecast.
“Film” does not include video cassettes or discs intended for home viewing.
(2) Each episode of a series of films produced for television shall constitute a separate film notwithstanding that the series relates to the same principal subject and is produced during one or more television seasons.
(3) “Release date” means the date on which a film is placed in service. A film is placed in service when it is first telecast or exhibited to the primary audience for which the film was created. Thus, a motion picture theater film is placed in service when it is first publicly exhibited for entertainment purposes and an educational film is placed in service when it is first exhibited for instructional purposes. Each episode of a television series is placed in service when it is first telecast. A film is not placed in service merely because it is completed and therefore in a condition or state of readiness and availability for telecast or exhibition, or merely because it is telecast or exhibited to prospective exhibitors, sponsors, or purchasers, or it is shown in a “sneak preview” before a select audience.
(4) A “film” is deemed to be tangible personal property.
(5) “Rent” shall include license fees for the exhibition or telecast of films.
(6) “Tangible personal property” used in the business whether owned or rented, shall include but is not limited to sets, props, wardrobes, and other similar equipment.
(7) A “subscriber” to a subscription television telecaster is the individual residence or other outlet that is the ultimate recipient of the transmission.
(8) “Telecast” means the transmission of an electronic signal by radiowaves or microwaves or by wires, lines, coaxial cables, wave guides or other tangible conduits of communication.
(c) Apportionment of Business Income.
The property, payroll and sales factor of the apportionment formula for Motion Picture and Television Film Producers and Television Networks shall be computed pursuant to Sections 25128 through 25137 of the Revenue and Taxation Code and the regulation adopted pursuant thereto except as provided in this regulation.
(1) Property Factor.
(A) In General.
(i) In the case of rented studios, the net annual rental rate shall include only the amount of the basic or flat rental charge by the studio for the use of a stage and other permanent equipment such as sound recording equipment rented from other sources or from the studio not covered in the basic or flat rental charge and used for one week or longer (Even though rented on a day-to-day basis) shall be included. Lump-sum net rental payments for a period which encompasses more than a single income year shall be assigned ratably over the rental period.
(ii) The value of the films shall:
(I) be the original cost of producing the film as determined for federal income tax purposes, before any adjustment for federal credits which have not been claimed for state purposes, and
(II) include talent salaries.
(iii) The value of a film shall not be included in the property factor until its release date.
(iv) Video cassettes and discs shall be included in the property factor at their inventory cost as shown in the taxpayer's books and records.
(B) Denominator.
(i) All real property and tangible property (other than films) whether owned or rented, which is used in the business, shall be included in the denominator.
(ii) Films, other than films the cost of which is expensed for California tax purpose at the time or production, shall be included in the property factor at original cost for twelve years beginning with the release date.
(iii) Films for a topical nature including news or current event programs, sporting events or interview shows, the cost of which is expensed for California tax purposes at the time of production, shall be included in the property factor at original cost for one year beginning with the release date.
(iv) All other films, other than those included in the denominator under clause (ii) or (iii) of this subparagraph, shall be aggregated and treated as a single film property which shall be included in the property factor. Such property shall be valued at eight times the gross receipts generated during the income year from the theater distribution, network television, television syndication, cable television, subscription and the marketing of video cassettes and discs through licensing or direct selling, or similar receipts, but in no event in an amount greater than the total original cost of such aggregated film property.
(C) Numerator.
(i) If tangible personal property (other than films) is located or used in this state for part of the income year, its value shall be determined by applying the ratio which the number of days the property is located or used in this state bears to the total number of days such property was owned or rented during the income year.
(ii) The total value of films that are included in the property factor under subparagraph (B) of paragraph (1) of this subsection shall be attributed to this state in the same ratio in which the total California receipts from such films as determined in subparagraphs (A), (B) and (C) of paragraph (3) of this subsection pertaining to the sales factor bears to the total of such receipts everywhere.
(2) Payroll Factor.
(A) In General.
(i) The denominator shall include all compensation paid to employees during the income years, including talent salaries. Residual and profit participation payments constitute compensation paid to employees.
(ii) The amount paid to a corporation for providing the services of an actor or director who is an employee of such corporation or for loaning the services of an actor or director who is under contract with such corporation shall, if substantial, be included in the producer's payroll factor as if the amount paid was compensation paid to an employee of the producer.
(B) Numerator. Compensation of employees in the production of a film on location shall be attributed to the state where the services are or were performed. Compensation of all other employees shall be governed by Regulations 25132 and 25133.
(3) Sales Factor Numerator. The numerator shall include all gross receipts for the taxpayer from sources within this state including the following:
(A) Gross receipts from films in release to theaters and television stations located in this state.
(B) Gross receipts from films in release to or by a television network for network telecast shall be attributed to this state in the ratio that the audience for such network stations (owned and affiliated) located in California bears to the total audience for all such network stations (owned and affiliated) everywhere. The audience shall be determined by rate card values published annually in the Television & Cable Factbook, Vol. I, “Stations Volume,” Television Digest, Inc., Washington, D.C., if available, or by other published market surveys, or if none is available, by population data published by the U.S. Bureau of Census.
(C) Gross receipts from films in release to subscription television telecasters shall be attributed to this state in the ratio that the subscribers for such telecaster location in California bears to the total subscribers of such telecaster everywhere. If the number of subscribers cannot be determined accurately from records maintained by the taxpayer, the ratio shall be determined on the basis of the applicable year's statistics on subscribers published in Cable Vision, International Thompson Communication Inc., Denver, Colorado, if available, or by other published market surveys, or, if none is available, by population data published by the U.S. Bureau of the Census for all states in which the telecaster has subscribers.
(D) Receipts from sales and rentals of video cassettes and discs shall be included in the sales factor as provided in Regulations 25135 and 25136.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25137, Revenue and Taxation Code.
HISTORY

1. Renumbering of former section 25137-8 to new section 25137-8.1, including amendment of subsections (a) and (b)(7) and amendment of Note, filed 3-26-2012; operative 4-25-2012 (Register 2012, No. 13).
§25137-8.2. Motion Picture and Television Film Producers, Distributors, and Television Networks -- Apportionment of Income.
Note     •     History

(a) In General. When a business entity in the business of producing or distributing motion picture, film, or television programming, or television commercials, whether broadcast or telecast through the public airwaves, by cable, direct or indirect satellite transmission, or any other means of communication, either through a network (including owned and affiliated stations) or through an affiliated, unaffiliated, or independent television broadcasting station has income from sources both within and without this state, the amount of business income from sources within this state shall be determined pursuant to this regulation. This regulation does not apply to a business entity that earns receipts from the provision of cable television services.
(b) Definitions.
For purposes of this regulation only, the following definitions shall apply.
(1) “Advertising revenue” includes advertising from all sources, including but not limited to online advertisements, embedded advertisements, product placement, barter transactions, and the sale of air time used for advertising purposes.
(2) “Cable television services” means the transmission to subscribers of video programming or other programming service over a cable system.
(3) A “distributor” is a business entity that, upon completion of production, licenses a film for exhibition by a related or unrelated third party. The distributor may also develop and fund the campaign to market the film. A theater that exhibits the film is not a distributor based upon that fact. A producer may also be a distributor if it licenses its own films or those of others for exhibition. 
(4) “Film” means the physical embodiment of a play, story, or other literary, commercial, educational, or artistic work, produced for telecast, as a motion picture, video tape, disc, or any other type of format or medium. 
(A) A “film” is deemed to be tangible personal property. 
(B) “Film” does not include video cassettes or discs sold for personal use.
(C) Each episode of a series of films produced for television shall constitute a separate film notwithstanding that the series relates to the same principal subject and is produced during one or more television seasons.
(5) A “producer” is a business entity that develops and creates motion picture, television, or web-based content.
(6) “Release date” means the date on which a film is placed in service. A film is placed in service when it is first telecast or exhibited to the primary audience for which the film was created. Thus, a motion picture theater film is placed in service when it is first publicly exhibited for entertainment purposes and an educational film is placed in service when it is first exhibited for instructional purposes. Each episode of a television series is placed in service when it is first telecast. A film is not placed in service merely because it is completed and therefore in a condition or state of readiness and availability for telecast or exhibition, or merely because it is telecast or exhibited to prospective exhibitors, sponsors, or purchasers, or it is shown in a “sneak preview” before a select audience.
(7) “Rent” shall include license fees for the exhibition or telecast of films.
(8) A “subscriber” to a subscription television telecaster is the individual residence or other outlet that is the ultimate recipient of the transmission.
(9) “Tangible personal property” used in the business, whether owned or rented, shall include but is not limited to sets, props, wardrobes, and other similar equipment.
(10) “Telecast” means the transmission of an electronic signal or other signal by radiowaves or microwaves or by wires, lines, coaxial cables, wave guides, fiber optics, satellite transmissions directly or indirectly to viewers or subscribers, or by any other means of communication. 
(c) Apportionment of Business Income. The property, payroll, and sales factor of the apportionment formula for motion picture and television film producers, distributors and television networks shall be computed pursuant to Sections 25128 through 25137 of the Revenue and Taxation Code and the regulations adopted pursuant thereto except as provided in this regulation. Income from new technologies, including but not limited to video streaming and online websites, to the extent they are utilized by motion picture and television film producers, producers of television commercials and television networks to produce business income, shall be treated in a manner consistent with this regulation.
(1) Property Factor.
(A) In General.

(i) 	In the case of rented studios, the net annual rental rate shall include only the amount of the basic or flat rental charge by the studio for the use of a stage and other permanent equipment. Other equipment such as sound recording equipment rented from other sources or from the studio that is not covered in the basic or flat rental charge and used for one week or longer (even though rented on a day-to-day basis) shall be included. Lump-sum net rental payments for a period that encompasses more than a single income year shall be assigned ratably over the rental period.
(ii)  The value of the films shall:
(I) be the original cost of producing the film as determined for federal income tax purposes, before any adjustment for federal credits that have not been claimed for state purposes, and
(II) include talent salaries.
(iii) The value of a film shall not be included in the property factor until its release date.
(iv) Video cassettes and discs shall be included in the property factor at their inventory cost as shown in the taxpayer's books and records.
(B) Denominator.
(i) All real property and tangible property (other than films), whether owned or rented, that is used in the business shall be included in the denominator.
(ii) Films, other than films the cost of which is expensed for California tax purposes at the time of production, shall be included in the property factor at original cost for twelve years beginning with the release date.
(iii) Films of a topical nature including news or current event programs, sporting events or interview shows, the cost of which is expensed for California tax purposes at the time of production, shall be included in the property factor at original cost for one year beginning with the release date.
(iv) All other films, other than those included in the denominator under clause (ii) or (iii) of this subparagraph, shall be aggregated and treated as a single film property that shall be included in the property factor. Such property shall be valued at eight times the gross receipts generated during the income year from the theater distribution, network television, television syndication, cable or satellite television, subscription and the marketing of video cassettes and discs through licensing or direct selling, or similar receipts, but in no event in an amount greater than the total original cost of such aggregated film property.
(C) Numerator.
(i) If tangible property (other than films) is located or used in this state for part of the income year, its value shall be determined by applying the ratio which the number of days the property is located or used in this state bears to the total number of days such property was owned or rented during the income year.
(ii) The total value of films that are included in the property factor under subparagraph (B) of paragraph (1) of this subsection shall be attributed to this state in the same ratio that the total receipts from such films as determined in subparagraph (A) of paragraph (3) of this subsection pertaining to the sales factor bears to the total of such receipts everywhere.
(2) Payroll Factor.
(A) In General.
(i) The denominator shall include all compensation paid to employees during the income years, including talent salaries. Residual and profit participation payments constitute compensation paid to employees.
(ii) The amount paid to a corporation for providing the services of an actor or director who is an employee of such corporation or for loaning the services of an actor of director who is under contract with such corporation shall, if substantial, be included in the producer's payroll factor as if the amount paid was compensation paid to an employee of the producer.
(B) Numerator. Compensation of employees in the production of a film on location shall be attributed to the state where the services are or were performed. Compensation of all other employees shall be governed by Regulations 25132 and 25133.
(3) Sales Factor. 
(A) The numerator shall include all gross receipts derived by the taxpayer from sources within this state including, but not limited to, the following:
(i) Gross receipts, including advertising revenue, from films in release to theaters and television stations located in this state.
(ii) Gross receipts, including advertising revenue, from films in release to or by a television network for network telecast shall be attributed to this state in the ratio that the audience for such network stations (owned and affiliated) located in California bears to the total audience for all such network stations (owned and affiliated) everywhere. The audience shall be determined by rate card values published annually in the Television & Cable Factbook (http://www.warren-news.com/ factbook.htm), if available, or by other published market surveys, or if none is available, by population data published by the United States Census Bureau, provided that the source selected is consistently used from year to year for that purpose.
(iii) Gross receipts, including advertising revenue, from films in release to subscription television telecasters shall be attributed to this state in the ratio that the subscribers for such telecaster located in California bears to the total subscribers of such telecaster everywhere. If the number of subscribers cannot be determined accurately from records maintained by the taxpayer, the ratio shall be determined on the basis of the applicable year's statistics on subscribers published in Cable Vision, International Thompson Communication Inc., Denver, Colorado, if available, or by other published market surveys, or, if none is available, by population data published by the United States Census Bureau for all states in which the telecaster has subscribers, provided that the source selected is consistently used from year to year for that purpose.
(iv) Receipts from sales and rentals, licensing or other disposition of video cassettes and discs or any other format or medium intended for personal use shall be included in the numerator of the sales factor as provided in Regulations 25135 and 25136.
(d) This regulation applies to taxable years beginning on and after January 1, 2011.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25137, Revenue and Taxation Code.
HISTORY

1. New section filed 3-26-2012; operative 4-25-2012 (Register 2012, No. 13).
§25137-9. Railroads--Allocation and Apportionment of Income.
Note     •     History

(a) Apportionment of Business Income. The property, payroll and sales factors of the apportionment formula for a railroad shall be computed pursuant to Section 25128 through 25137 of the Revenue and Taxation Code and the regulations adopted pursuant thereto (in Article 2.5 of Group 17 of this subchapter) except as provided in this regulation.
(1) Property Factor
(A) Definitions
1. “Original cost” is deemed to be the basis of the property for federal income tax purposes (prior to any federal income tax adjustments except for subsequent capital additions, improvements thereto or partial dispositions); or, if the property has no such basis, the valuation of such property as currently required for Interstate Commerce Commission purposes. If the original cost of property is unascertainable under the foregoing valuation standards, the property is included in the property factor at its fair market value as of the date of acquisition by the taxpayer (Reg. 25130(a)(1)).
2. “Rent” does not include the per diem and mileage charges paid by the taxpayer for the temporary use of railroad cars owned or operated by another railroad.
3. A “locomotive-mile” is the movement of a locomotive (a self-propelled unit of equipment designed solely for moving other equipment) a distance of one mile under its own power.
4. A “car-mile” is a movement of a unit of car equipment a distance of one mile.
(B) General--Railroad cars owned and operated by other railroads and temporarily used by the taxpayer in its business and for which a per diem or mileage charge is made are not included in the property factor as rented property. Railroad cars owned and operated by the taxpayer and temporarily used by other railroads in their business and for which a per diem charge is made by the taxpayer are included in the property factor of the taxpayer.
(C) Numerator
1. In determining the numerator of the property factor, all property, except mobile or movable property such as passenger cars, freight cars, locomotives and freight containers which are located within and without this state during the income year, shall be included in the numerator of the property factor in accordance with Sections 25129-25131, California Revenue and Taxation Code, inclusive, and California Administrative Code, Title 18, Regulations Section 25129-25131, inclusive.
2. Mobile or movable property such as passenger cars, freight cars, locomotives and freight containers which are located within and without this state during the income year shall be included in the numerator of the property factor in the ratio which “locomotive-miles” and “car-miles” in the state bear to the total everywhere.
(2) Payroll Factor--Compensation paid to enginemen and trainmen or individuals engaged in similar activities, performing services on interstate trains shall be included in the numerator of the payroll factor in the ratio which the compensation required to be reported to this state for withholding tax purposes under the provisions of 49 USC 11504 bears to the total compensation required to be reported to the Internal Revenue Service.
(3) Receipts Factor
(A) General--Per diem and mileage charges which are collected by the taxpayer shall be excluded from the receipts factor.
(B) Numerator
1. The total revenue of the taxpayer in this state during the income year for the numerator of the revenue factor from hauling freight, mail and express (except mail and express handled in passenger service) shall be attributable to this state as follows:
(I) All receipts from shipments which both originate and terminate within this state; and
(II) That portion of the receipts from each movement or shipment passing through, into, or out of this state is determined by the ratio which the miles traveled by such movement or shipment on the lines of the taxpayer in this state bears to the total miles traveled by such movement or shipment on the lines of the taxpayer from point of origin to destination.
2. The total revenue of the taxpayer in this state from the transportation of passengers shall include:
(I) All receipts from the transportation of passengers (including mail and express handled in passenger service) which both originate and terminate within this state; and
(II) That portion of the receipts from the transportation of interstate passengers (including mail and express handled in passenger service) determined by the ratio which the miles traveled by such transportation on the lines of the taxpayer in this state bears to the total miles traveled in such transportation on the lines of the taxpayer from point of origin to destination.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 25137, Revenue and Taxation Code.
HISTORY

1. New section filed 6-15-87; operative 7-15-87 (Register 87, No. 25).
§25137-10. Combination of General (Non-Financial) and Financial Corporations.
Note     •     History

(a) Application.
(1) The income of a unitary business which is conducted by two or more entities, one or more of which would be classified as a bank or financial corporation and one or more of which would be classified as a general corporation for purposes of the Revenue and Taxation Code, sections 23001, et seq., whose predominant activity is other than financial activity, shall be allocated and apportioned pursuant to this regulation for income years beginning on or after January 1, 1989.
(2) A unitary business subject to this regulation normally consists of a parent corporation engaged by itself, or with or through a subsidiary or subsidiaries, in a mining, manufacturing, mercantile or service business which forms a unitary subsidiary or subsidiaries to perform financial functions which are ancillary to the parent's business.
EXAMPLES:
1. A corporation engaged in the operation of a department store establishes a unitary subsidiary to hold title to receivables arising from the extension of credit for the purchase of goods from the store. The unitary business is subject to the regulation.
2. A manufacturer of consumer products establishes a unitary subsidiary to provide financing to third-party marketers of its product and/or financing for the purchasers of such products from third parties. The unitary business is subject to the regulation.
3. A bank forms a unitary subsidiary to hold title to its headquarters buildings and branch locations. The unitary business is not subject to the regulation. 
(b) Definitions.
(1) Bank or Financial Corporation. A “bank or financial corporation” is an entity whose tax, if it were doing business in California, would be determined pursuant to Revenue and Taxation Code sections 23181 and 23183.
(2) Financial Activity. “Financial” activity is an activity involving the use of moneyed capital in activities which are in competition with and which are substantially similar to those which national banks are permitted to conduct. 
(3) General Corporation. A “general corporation” is a corporation whose tax, if it were doing business in California, would be determined pursuant to Revenue and Taxation Code section 23151. It is a corporation which is neither a bank nor a financial corporation. (See subsection (b)(1).) 
(4) Predominant Activity. An activity is predominant when its conduct gives rise to gross income which constitutes more than 50 percent of the unitary business's gross income. The classification of a business as a general or financial business will not be changed based upon an occasional year in which its gross income from financial activities does or does not exceed the 50 percent level, as the case may be. 
(5) Receivables of General Corporations Arising From Financial Activities. Receivables of general corporations arising from financial activities are receivables arising from the sale of tangible property through the extension of credit which in the normal course can give rise to the receipt, payment, or accrual of interest or its equivalent including, but not limited to, charge account sales, credit card sales, installment sales, time purchases, floor financing and financing leases. Receivables of general corporations arising from financial activities do not include other intangible property such as cash or currency, deposits, investments of capital, whether short term or long term, patents, copyrights or other similar intangibles.
EXAMPLES:
1. Goods are sold to a holder of a credit card. No interest is charged on the account if the balance is paid in full within 25 days of the billing date. Amounts unpaid at that time accrue interest at the rate of 1percent per month. Ninety percent of the cardholders pay their accounts off within 25 days of the billing date. All balances owing by the credit cardholders are receivables of a general corporation arising from a financial activity because interest may be received in the normal course. 
2. Goods are sold on terms net 30 days. No interest is charged for the thirty-day period nor on delinquencies in the normal course of business. The receivables are not a receivable of a general corporation arising from financial activity because no interest may be received in the normal course. 
(6) Retail Sale. Retail sale means a sale of tangible personal property for any purpose other than resale in the regular course of business.
(7) Transferred Receivables. Transferred receivables are receivables of general corporations arising from financial activities which are transferred, directly or indirectly, to a bank or financial corporation which is a member of the same unitary business.
(c) Presumptions.
(1) Exclusion of intangibles. Exclusion of intangibles from the apportionment formula when a bank or financial corporation is part of the unitary business gives rise to a strong presumption that the normal statutory provisions of the Uniform Division of Income for Tax Purposes Act (secs. 25120 et seq., Cal. Rev. & Tax. Code) and the regulations adopted pursuant thereto do not fairly reflect activities in this state. 
(2) Bank or Financial Corporation Taxable in a State. Without otherwise limiting taxability, a bank or financial corporation is presumed to be in an agency relationship with an affiliate and taxable in this state when: 
(A) it holds transferred receivables which arose as the result of an application for credit being made to, or the extension of credit by, the affiliate in this state, or 
(B) the affiliate makes, or receives collections upon, or in any other manner services, in this state, receivables transferred to, or of, the financial corporation. 
(d) Apportionment of Business Income. The business income of a unitary business subject to this regulation shall be apportioned pursuant to the apportionment formula as set forth in this regulation.
(1) Property factor.
(A) Denominator. The denominator of the property factor shall include:
1. the property of the general corporations required to be included pursuant to section 25129 through section 25131 and section 25137 of the Revenue and Taxation Code and the regulations adopted pursuant thereto, plus 
2. the property of the banks or financial corporations required to be included pursuant to Regulation Sections 25137-4.1(c)(1)(B) or 25137-4.2(d)(1) and (2), to be determined based upon the income year, plus
3. the receivables of the general corporations arising from financial activities to the extent not otherwise included pursuant to subsections (d)(1)(A)1. and 2.
(B) Numerator.
1. In the case of a general corporation, the numerator of the property factor shall include: 
a. property assigned to this state pursuant to sections 25129 through 25131 of the Revenue and Taxation Code, and the regulations adopted pursuant thereto, plus 
b. receivables arising from financial activities of a general corporation to the extent they arise from either a retail sale made from an outlet located in this state, whether or not owned by the taxpayer, or other than a retail sale made to a customer in this state, plus
c. if the taxpayer is not taxable in the state where the sale, whether or not made by the taxpayer, which gave rise to the extension of credit is made, receivables arising from financial activities of the general corporation if the office at which credit was first applied for is in this state. 
2. In the case of a bank or financial corporation, the numerator of the property factor shall include: 
a. the assets, other than transferred receivables, assigned to this state pursuant to Regulation Sections 25137-4.1(c)(1)(B) or 25137-4.2(d)(3), to be determined based upon the income year, plus
b. if the bank or financial corporation is taxable in this state, transferred receivables to the extent they would have been assigned to this state pursuant to subsections (d)(1)(B)1.a., b. and c., if held by a general corporation, plus 
c. if the commercial domicile of the bank or financial corporation is in this state, transferred receivables which, if held by a general corporation, would have been assigned pursuant to subsections (d)(1)(B)1.a., b. and c., to a state in which the bank or financial corporation was not taxable. 
3. If the records maintained by either the holder or by another corporation which is a member of the same unitary business of receivables of general corporations arising from financial activities or transferred receivables do not establish the location of the sale which gave rise to such receivables, then, if the holder is otherwise taxable in this state, such receivables shall be assigned to this state based upon the ratio of sales in this state of the corporation making such sales to total sales of such corporation, or any other method if established to be more reasonable.
(C) Valuation of certain property included in the property factor. Intangible personal property, coin and currency included in the property factor pursuant to subsections (d)(1)(A)2. and 3. shall, for purposes of both subsections (d)(1)(A) and (B), be valued at 20 percent of its tax basis for federal income tax purposes.
(2) Payroll factor. The payroll factor shall be computed pursuant to sections 25132 and 25133 of the Revenue and Taxation Code and the regulations adopted pursuant thereto. 
(3) Sales factor.
(A) Denominator. The denominator of the sales factor shall include the receipts required to be included pursuant to sections 25134 through 25137 of the Revenue and Taxation Code and the regulations adopted pursuant thereto.
(B) Numerator.
1. In the case of a general corporation, the numerator of the sales factor shall include:
a. the items assigned to this state pursuant to sections 25134 through 25137 of the Revenue and Taxation Code and the regulations adopted pursuant thereto, plus
b. to the extent not assigned pursuant to subsection a., amounts realized with respect to receivables of general corporations arising from financial activity assigned to this state pursuant to subsections (d)(1)(B)1.a., b. and c. 
2. In the case of a bank or financial corporation, the numerator of the sales factor shall include: 
a. receipts, other than receipts from transferred receivables, assigned to this state pursuant to Regulation Sections 25137-4.1(c)(2) or 25137-4.2(c)(3), to be determined based upon the income year, plus
b. amounts realized with respect to transferred receivables assigned to this state pursuant to subsections (d)(1)(B)2.b. and c.
(e) Exceptions.
(1) The Franchise Tax Board may permit or require the use of a method other than that provided for in this regulation if, in extraordinary circumstances, the provisions of this regulation reach an unreasonable result. 
(2) Notwithstanding the provisions of this regulation, the Franchise Tax Board may reallocate items of income, expenses or apportionment factors between entities when it is necessary to fairly reflect the activities or contributions of such entities. 
(f) Example. Two non-financial corporations, A and B, conduct a unitary business with two financial corporations, C and D. The unitary business is one in which the non-financial activities predominate. A and B each have 50 percent of the general corporations' income and factors with A being located wholly inside California and B being located wholly outside of California. C and D each have 50 percent of the financial corporations' income and factors and have no office in California. Seventy-five percent of the receivables held by D are transferred receivables arising from California sales made by A. A conducted the initial credit investigation and receives payments made to D on such accounts. 

		EVERYWHERE  ACTIVITIES		

	GENERAL  CORPORATIONS		FINANCIAL  CORPORATIONS	

BALANCE  SHEET*	12/31/88	12/31/89	12/31/88   	12/31/89		

Current Assets
 Cash	$  250,000	$  260,000	$    45,000	$    48,000		
 Marketable Securities	60,000	75,000	75,000	70,000		
 Receivables -- Customer	750,000	800,000	950,000	980,000		
 Allowance for Doubtful
  Accounts	-15,000	-16,000	-20,000	-25,000		
 Inventories	  450,000	  600,000	    0	    0		
 
Total Current Assets	1,495,000	1,719,000	1,050,000	1,073,000		

Investment in Subsidiaries	360,000	430,000	0	0		
Due from Parent	0	0	100,000	150,000		
Goodwill	100,000	100,000	0	0		
Property, Plant & Equipment	920,000	980,000	40,000	45,000		
Allowance for Depreciation	-110,000	-200,000	-6,000	-7,000		
Prepaid Expenses	    15,000	   13,000	   1,000	    2,000		

Total Assets	$2,780,000	$3,047,000	$1,185,000	$1,263,000		
 *Financial Purposes

Excerpts from Income Statement
 Sales		$3,500,000				
 Interest Income						
  Business		25,000		$290,000		
  Non-business		10,000				
  From Parent				10,000		
 Dividends						
  From Affiliates		50,000				
  Business				15,000		
  Non-business		10,000				
 Interest Expense -- to Subsidiaries		10,000				
            Other		15,000		120,000		
 Rent Expense		30,000		15,000		
 Payroll		 250,000		  95,000		
 Business Income Subject to Apportionment	$  135,000		 $  65,000		

		CALIFORNIA  ACTIVITIES		
	A		D	

BALANCE SHEET	12/31/88	12/31/89	12/31/88	12/31/89		
Current Assets
 Cash	$  125,000	$  130,000	0	0		
 Marketable Securities	30,000	37,500	0	0		
 Receivables -- Customer	375,000	400,000	356,250	367,500		
 Allowance for Doubtful
  Accounts	-7,500	-8,000	-7,500	-9,500		
 Inventories	225,000	300,000	     0	     0		

Total Current Assets	$  747,500	$  859,500	$  348,750	$  358,000		

Investment in Unconsolidated
 Subsidiaries	180,000	215,000	0	0		
Due from Parent	0	0	50,000	75,000		
Goodwill	50,000	50,000	0	0		
Property, Plant & Equipment	460,000	490,000	0	0		
Allowance for Depreciation	-55,000	-100,000	0	0		
Prepaid Expenses	   7,500	   9,000	     0	     0		
Total Assets	$1,390,000	$1,523,500	$  398,750	$  433,000		
 
Sales		$1,750,000
Interest Income				$108,750
Rent Expense		$ 15,000		0
Payroll		125,000		0

		CALCULATION OF APPORTIONMENT FACTORS AND
		INCOME ASSIGNED TO CALIFORNIA		

	GENERAL  CORPORATIONS		FINANCIAL  CORPORATIONS	

Property Factor -- 	12/31/88	12/31/89	12/31/88	12/31/89	Combined	
Denominator 
Total Assets -- per
 Balance Sheet	$2,780,000	$1,047,000	$1,185,000	$1,263,000		
Add
 Allowance for Doubtful
  Accounts	15,000	16,000	20,000	25,000		
 Allowance for Depreciation	110,000	200,000	6,000	7,000		
Deduct
 Cash	250,000	260,000	0	0		
 Marketable Securities	60,000	75,000	0	0
 Investment in Subsidiaries	360,000	430,000
 Intercompany Receivables			100,000	150,000	
 Goodwill	100,000	100,000	0	0		
 Prepaid Expenses	 15,000	   18,000	    1,000	   2,000		
  Subsection (C) Adjustment	   600,000	   640,000	   856,000	 878,4000

Totals	$1,520,000	$1,740,000	$ 254,000	$ 264,600		

Add: Beginning Balance		1,520,000		254,000		
Totals		3,260,000		518,600		

Average (1/2)		1,630,000		259,300		
Capitalized Rent
 (Rent Expense ´ 8)	     	  240,000	     	  120,000		

Total		$1,870,000		$379,300	2,249,300	

Property Factor -- Numerator		A			D			
Total California Assets --
  Balance Sheet	$1,390,000		$1,523,500	$398,750		$433,000		

Add
 Allowance for Doubtful
  Accounts	7,500	8,000	7,500	9,500		
 Allowance for Depreciation	55,000	100,000				
Deduct
 Cash	125,000	130,000				
 Marketable Securities	30,000	37,500		
 Investment in Subsidiaries	180,000	215,000
 Intercompany Receivables			50,000	75,000		
 Goodwill	50,000	50,000				
  Prepaid Expenses	   7,500	   9,000	     	     		
  Subsection (C) Adjustment	   300,000	   320,000	 285,000	 294,000

Total	$760,000	$870,000	$71,250	$73,500		

Add: Beginning Balance		760,000		71,250		
Totals		1,630,000		144,750		

Average (1/2)		815,000		72,375		
Capitalized Rent
 (Rent Expense y 8)		120,000		0		

Total		  935,000		  72,375	1,007,375	

Property Factor
(Cal. Entity Total/Combined
 Everywhere Total)	41.5685%		3.2177%		44.7862%

Payroll Factor	Generals		Financials		Combined	
Payroll Denominator	250,000		95,000		345,000	

Payroll Numerator	125,000			0			125,000	

		CALCULATION OF APPORTIONMENT FACTORS AND
		INCOME ASSIGNED TO CALIFORNIA		

	GENERAL CORPORATIONS		FINANCIAL CORPORATIONS	

Payroll Factor
(Cal. Entity Total/Combined
 Everywhere Total)	36.2319	%	   0	36.2319%

Receipts Factor
Receipts Denominator	3,525,000		290,000		3,815,000
Receipts Numerator	1,750,000		108,750		1,858,750
Receipts Factor
(Cal. Entity Total/Combined
 Everywhere Total)	45.8716	%	2.8506	%	48.7222	%

Total Ratios	123.6720	%	6.0683	%	129.7403	%
Average Ratio	 41.2240	%	 2.0228	%	 43.2468	%
Combined Business Income					200,000
Assignment to California	82,448		4,045		86,493

__________

 *Applicable as stated on the face of the regulation and exempted from the provisions of Regulation section 25139.
 **Assumes dividends are excluded from receipts factor pursuant to Regulation Section 25137(c)(1)(C).
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 25137, Revenue and Taxation Code.
HISTORY

1. New section filed 8-27-90; operative 9-26-90 (Register 90, No. 42). For prior history, see Register 87, No. 7.
2. Change without regulatory effect amending section filed 10-15-90 pursuant to section 100, title 1, California Code of Regulations (Register 91, No. 3).
3. New subsection (d)(1)(C) and amendment of Calculations of Apportionment Factors and Income Assigned to California table filed 2-21-92; operative 3-23-92 (Register 92, No. 12).
4. Change without regulatory effect amending subsections (d)(1)(A)2., (d)(1)(B)2.a. and (d)(3)(B)2.a. filed 8-1-96 pursuant to section 100, title 1, California Code of Regulations (Register 96, No. 31).
§25137-11. Allocation and Apportionment of Income of Trucking Companies.
Note     •     History

(a) In General.
(1) When a trucking company has income from sources both within and without this state, the amount of business income from sources within this state shall be determined pursuant to this regulation. In such cases, the first step is to determine what portion of the trucking company's income constitutes “business” income and what portion constitutes “nonbusiness” under Revenue and Taxation Code, Section 25120 and Title 18, California Code of Regulations, Section 25120. Nonbusiness income is directly allocable to this state pursuant to the provisions of Revenue and Taxation Code Sections 25123 through 25127, inclusive. Business income is apportioned to this state pursuant to the property, payroll and sales apportionment factors set forth in this regulation. The sum of the items of nonbusiness income directly allocated to this state plus the amount of business income attributable to this state constitutes the amount of the taxpayer's entire net income which is subject to tax in this state.
(2) When a taxpayer, or an affiliate of a taxpayer, other than a trucking company conducts trucking activities and the apportionment factors directly related to such activities are separately identified, such factor shall be assigned to the apportionment formula pursuant to subsection (c) herein.
(3) When a trucking company employs property, other than mobile property as defined herein, for the transport of goods between states, such property, and the personnel which operate or maintain it during the course of such movement, shall be assigned to the numerator of the property and payroll factors respectively pursuant to Regulations 25137-7 and 25137-9, in the circumstances of an air transport or railroad business, respectively, or Regulations 25129 and 25133 otherwise.
(4) This regulation shall be applicable to income years beginning on or after January 1, 1991.
(b) Definitions.
(1) As used in this regulation, the term “trucking company”means a motor common carrier, a motor contract carrier, or an express carrier which primarily transports tangible personal property of others by motor vehicle for compensation.
(2) “Mobile property” means all motor vehicles, including trailers, engaged directly in the movement of tangible personal property.
(3) A “mobile property mile” is the movement of a unit of mobile property a distance of one mile whether loaded or unloaded.
(4) A “unit of mobile property” includes a tractor and/or trailer or trailers which are connected together for movement.
(5) The “interstate ratio” is the ratio which the aggregate of the mobile property miles traveled in this state by units of mobile property which are located within more than a single state during the year bears to the aggregate of the total mobile property miles traveled by such property everywhere during the year.
Example:
A taxpayer has 10 units of mobile property all of which operate in more than a single state during the year. One mobile property unit travels 40 miles within this state and 60 miles out of this state for total miles of 100. The other nine units of mobile property travel a total of 50 miles each, none of which is in this state. The interstate ratio assigned to this state is

View Graphic
(c) Apportionment of business income.
(1) In general. The property factor shall be determined in accordance with Regulation Sections 25129 to 25131, inclusive, the payroll factor in accordance with Regulation Sections 25132 to 25133, and the sales factor in accordance with Regulation Sections 25134 to 25136, inclusive, except as modified by this regulation and by Regulation Section 25137.
(2) Property factor. Numerator.
(A) Mobile property, as defined in this regulation, which is located solely within this state during the income year shall be included in the numerator of the property factor.
(B) Mobile property, as defined in this regulation, which is located within more than a single state during the income year shall be included in the numerator of the property factor on the basis of the interstate ratio.
(3) Payroll factor. Numerator.
(A) Compensation paid to personnel which operate or maintain mobile property for services performed solely within this state shall be assigned to this state.
(B) Compensation paid to personnel which operate or maintain mobile property for services performed within more than a single state shall be assigned to this state on the basis of the interstate ratio.
(4) Sales factor. Numerator from freight, mail and express. The total revenue of the taxpayer attributable to this state during the income year from hauling freight, mail, and express shall be the total of:
(A) all receipts from any shipment which both originates and terminates within this state; and
(B) that portion of the receipts from movements or shipments which originate in one state and terminate in another state as determined on the basis of the interstate ratio.
(d) Records. The taxpayer shall maintain the records necessary to identify mobile property which operate in more than a single state and to enumerate by state the miles traveled by such mobile property as those terms are used in this regulation. Such records are subject to review by the Franchise Tax Board or its agents.
(e) De minimis nexus standard.
Notwithstanding any provision contained herein, this regulation shall not apply to require the apportionment of income to this state if the trucking company during the course of the income year neither:
(1) owns nor rents any real or personal property in this state, except mobile property which is operated within and without this state during the income year; nor
(2) makes any pick-ups or deliveries within this state; nor
(3) travels more than twenty-five thousand mobile property miles within this state; provided that the total mobile property miles traveled within this state during the income year does not exceed 3 percent of the total mobile property miles traveled in all states by the trucking company during that period; nor
(4) makes more than 12 trips into this state.
NOTE

Authority cited: Section 26422, Revenue and Taxation Code. Reference: Section 25137, Revenue and Taxation Code.
HISTORY

1. New section filed 12-6-91; operative 1-6-92 (Register 92, No. 9).
§25137-12. Print Media.
Note     •     History

(a) In general. Except as specifically modified by this regulation, when a taxpayer in the business of publishing, selling, licensing or distributing newspapers, magazines, periodicals, trade journals or other printed material has income from sources both within and without this state, the amount of business income from sources within this state from such business activity shall be determined pursuant to sections 25120 through 25137 of the Revenue and Taxation Code and the regulations adopted pursuant thereto.
(b) Definitions. The following definitions are applicable to the terms contained in this regulation, unless the context clearly requires otherwise.
(1) “Print or printed material” includes, without limitation, the physical embodiment or printed version of any thought or expression including, without limitation, a play, story, article, column or other literary, commercial, educational, artistic or other written or printed work. The determination of whether an item is or consists of print or printed material shall be made without regard to its content. Printed material may take the form of a book, newspaper, magazine, periodical, trade journal or any other form of printed matter and may be contained on any medium or property.
(2) “Purchaser” and “subscriber” mean the individual, residence, business or other outlet which is the ultimate or final recipient of the print or printed material. Neither of such terms shall mean or include a wholesaler or other distributor of print or printed material.
(c) Apportionment of business income -- sales factor numerator. The numerator of the sales factor shall include all gross receipts of the taxpayer from sources within this state, including, but not limited to, the following:
(1) Gross receipts derived from the sale of tangible personal property, including printed materials, delivered or shipped to a purchaser or a subscriber in this state.
(2) Except as provided in subsection (c)(3), gross receipts derived from advertising and the sale, rental or other use of the taxpayer's customer lists or any portion thereof shall be attributed to this state as determined by the taxpayer's “circulation factor” during the income year. Each publisher of printed material containing advertising shall determine a California circulation factor for each of its publications. This circulation factor shall be equal to the ratio that particular publication's in-state circulation to purchasers and subscribers bears to its total circulation to purchasers and subscribers everywhere.
The circulation factor for an individual publication shall be determined by reference to the rating statistics as reflected in such sources as Audit Bureau of Circulations or other comparable sources, provided that the source selected is consistently used from year to year for such purpose. If no sources are available or, if available, not in a form or content sufficient for such purposes, then the circulation factor shall be determined from the taxpayer's books and records.
(3) When specific items of advertisements can be shown, upon clear and convincing evidence, to have been distributed solely to a limited regional or local geographic area in which this state is located, the taxpayer may petition, or the Franchise Tax Board may require, that such receipts be attributed on the basis of a regional or local geographic area circulation factor and not be included in the calculation of the circulation factor provided by subsection (c)(2). A regional or local geographic circulation factor shall be determined for each individual publication and each regional or local geographic area and shall be based upon the ratio that the taxpayer's circulation to purchasers and subscribers located in this state of the printed material containing such specific items of advertising bears to the taxpayer's total circulation of such printed material to purchasers and subscribers located within such regional or local geographic area.
(4) In the event that the purchaser or subscriber is the United States Government or the taxpayer is not taxable in a state, the gross receipts from all sources, including the receipts from the sale of printed material, from advertising, and from the sale, rental or other use of the taxpayer's customer lists, or any portion thereof that would have been attributed by the circulation factor to the numerator of the sales factor for such state, shall be included in the numerator of the sales factor of this state if the printed material or other property is shipped from an office, store, warehouse, factory, or other place of storage or business in this state.
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25137, Revenue and Taxation Code.
HISTORY

1. New section filed 10-4-95; operative 11-3-95 (Register 95, No. 40).
§25137-14. Mutual Fund Service Providers and Asset Management Service Providers.
Note     •     History

(a) Definitions. 
As used in this section, unless the context otherwise indicates, the following terms have the following meanings: 
(1) “Administration services” include, but are not limited to, clerical, fund or shareholder accounting; participant record-keeping, transfer agency, bookkeeping, data processing, custodial, internal auditing, legal, and tax services performed for a regulated investment company. Services qualify as administration services only if the provider of such service or services during the taxable year also provides, or is affiliated with a person that provides, management or distribution services to the same regulated investment company during the same taxable year. 
(2) “Distribution services” include, but are not limited to, the services of advertising, servicing, marketing or selling shares of a regulated investment company. The services of advertising, servicing or marketing shares qualify as distribution services only when the service is performed by a person who is, or in the case of a closed-end company was, either engaged in the business of selling regulated investment company shares or affiliated with a person that is engaged in the service of selling regulated investment company shares. In the case of an open-end company, such service of selling shares must be performed pursuant to a contract entered into pursuant to 15 United States Code, Section 80a-15(b), as amended. 
(3) “Management services” include, but are not limited to, the rendering of investment advice, directly or indirectly, to a regulated investment company, making determinations as to when sales and purchases of securities are to be made on behalf of the regulated investment company or providing services related to the selling or purchasing of securities constituting assets of a regulated investment company, and related activities. Services qualify as management services only when such activity or activities are performed pursuant to a contract with the regulated investment company entered into pursuant to 15 United States Code, Section 80a-15(a), as amended, for a person that has entered into such a contract with the regulated investment company or for a person that is affiliated with a person that has entered into such a contract with a regulated investment company. 
(4) “Domicile” is defined as follows:
(A) The domicile of a shareholder of a regulated investment company is presumed to be the shareholder's mailing address on the records of the regulated investment company or the mutual fund service provider. If the regulated investment company or the mutual fund service provider has actual knowledge that the shareholder's primary residence or principal place of business is different than the shareholder's mailing address, the presumption does not control. Shareholders of record that own shares for the benefit of others are subject to the special rule contained in subsection (b)(1)(A)1 of this regulation. 
(B) The domicile of a beneficial owner of assets managed by a mutual fund service provider shall be presumed to be the beneficiary's mailing address on the records of the entity for whom the asset management services are rendered, or on the records of the mutual fund service provider. If the entity for whom the asset management services are rendered, or the mutual fund service provider, has actual knowledge that the beneficiary's primary residence or principal place of business is different than the beneficiary's mailing address, the presumption does not control. Owners of record that are not the beneficial owner are subject to the special rule contained in subsection (b)(1)(B)1 of this regulation. 
(5) “Mutual fund service provider” means any unitary business that derives income from the direct or indirect provision of management, distribution or administration services to or on behalf of a regulated investment company. 
(6) “Regulated Investment Company” means a regulated investment company as defined in Section 851 of the Internal Revenue Code. 
(7) “Asset management services” means the direct or indirect provision of management, distribution or administrative services to entities other than regulated investment companies, if those services would be management, distribution or administrative services within the meaning of subparagraphs (a)(1), (a)(2), or (a)(3) of this regulation, if provided directly or indirectly to a regulated investment company. 
(b) Apportionment of Business Income. The property, payroll and sales factors of the apportionment formula for mutual fund service providers shall be computed pursuant to Sections 25128 through 25137 of the Revenue and Taxation Code and the regulations adopted pursuant thereto, except as provided in this regulation: 
(1) Sales Factor. For purposes of determining the numerator of the sales factor: 
(A) Receipts from the direct or indirect provision of management, distribution or administration services to or on behalf of a regulated investment company are assigned by the use of a shareholder ratio. This ratio is calculated by multiplying total receipts for the taxable year from each separate regulated investment company for which the mutual fund service provider performs management, distribution or administration services by a fraction, the numerator of which is the average of the number of shares owned by the regulated investment company's shareholders domiciled in the State at the beginning of and at the end of the regulated investment company's taxable year, and the denominator of which is the average of the number of the shares owned by the regulated investment company's shareholders everywhere at the beginning of and at the end of the regulated investment company's taxable year. 
1. If the domicile of a shareholder is unknown to the mutual fund service provider because the shareholder of record is a person that holds the shares of a regulated investment company as depositor for the benefit of others, the mutual fund service provider may utilize any reasonable basis, such as the zip codes of underlying shareholders, in order to determine the proper location for the assignment of these shares. If no information is obtained such that a reasonable basis can be developed to determine the proper location for the assignment of these shares, then all of the shares held by the shareholder of record shall be disregarded in computing the shareholder ratio for the fund in issue. 
2. The regulated investment company's taxable year for computing the shareholder ratio shall be either the taxable year that ends during the taxable year of the principal member of the mutual fund service provider's combined reporting group or the taxable year of the principal member of the mutual fund service provider's combined reporting group. Once a method for computing the shareholder ratio is chosen, that methodology should be applied consistently in later years. 
(B) If a mutual fund service provider has receipts from performing asset management services, in addition to performing services for regulated investment companies, these services shall be assigned to this state if the domicile of the beneficial owner of the assets is located in this state.
1. In the case of asset management services directly or indirectly provided to a pension plan, retirement account or institutional investor, such as private banks, national and international private investors, international traders or insurance companies, receipts shall be assigned to this State to the extent the domicile of the beneficiaries of the plan, beneficiaries of the account or beneficiaries of the similar pool of assets held by the institutional investor, is in California. If the individual domiciles of the beneficiaries are not available, a mutual fund service provider may utilize any reasonable basis in order to determine the domiciles of the individual beneficiaries, including information based on zip codes or other statistical data. 
2. In the event the domicile of the beneficiaries is not or cannot be obtained, and the taxpayer cannot devise a reasonable method to approximate this information, the receipts shall be disregarded for purposes of the sales factor. 
(C) If a mutual fund service provider has non-taxpayer members that are providing management, distribution or administration services to or on behalf of a regulated investment company with shareholders in this State, or that are providing asset management services directly or indirectly for beneficiaries who are domiciled in this State, the receipts from these activities that are assigned to the numerator of the sales factor by virtue of this regulation shall be included in the numerator of the sales factor in determining the unitary group's business income apportionable to this State, even though the specific entity that performed the services in not a taxpayer in this State. 
1. In lieu of the provisions contained in Regulation section 25106.5(c)(7)(B), the taxpayer member's property, payroll and sales factors are calculated as follows: 
a. Each taxpayer member of the combined reporting group (and only the taxpayer members) determines its California property factor, payroll factor and sales factor. 
b. The taxpayer member's California property factor is a fraction, the numerator of which is the California property of that member, and the denominator of which is the total property of the group everywhere. Property values are determined in accordance with Sections 25130 and 25131 of the Revenue and Taxation Code. 
c. The taxpayer member's California payroll factor is a fraction, the numerator of which is that member's California payroll, determined under Section 25133 of the Revenue and Taxation Code, and the denominator of which is the total payroll of the group everywhere. 
d. The taxpayer member's California sales factor is a fraction, the numerator of which is the California sales of that taxpayer member, determined under sections 25133 through 25137 of the Revenue and Taxation Code and the regulations adopted pursuant thereto and as modified by this regulation, and the denominator of which is the total sales of the group everywhere. 
2. In lieu of the provisions contained in Regulation section 25106.5(c)(7)(C), the taxpayer member's California source combined report business income is then calculated as follows: 
a. First, the taxpayer's California apportionment percentage is determined. It is the sum of that member's California payroll, property, and a doubled weighted sales factor (or a single weighted sales factor, if applicable), with that sum divided by either four or three (as applicable). 
b. Next, the taxpayer member determines its intrastate apportionment percentage. That percentage is the ratio of the taxpayer member's California apportionment percentage to the sum of all of the California taxpayer members' California apportionment percentages. 
c. Finally, the taxpayer member multiplies the group's California source combined report business income by its intrastate apportionment percentage to arrive at the taxpayer member's California source combined report business income. 
(D) If the shareholder ratio calculated under section (b)(1)(A) or asset management services assigned under (b)(1)(B) of this regulation assign receipts to a state where no members of the mutual fund service provider's unitary group are taxable as defined in Section 25122, these receipts shall not be assigned to that state. Instead, these receipts shall be assigned to the location of the income producing activity that gave rise to the receipts, as determined under Revenue and Taxation Code section 25136. 
(c) This regulation is applicable to taxable years beginning on or after January 1, 2007
NOTE

Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 25137, Revenue and Taxation Code. 
HISTORY

1. New section filed 6-20-2007; operative 7-20-2007 (Register 2007, No. 25).
§25139. Title and Effective Date.

(a) Title. Sections 25120 to 25139, inclusive, may be cited as the Uniform Division of Income for Tax Purposes Act.
(b) The regulations set forth in Article 2.5 shall apply for income years beginning after December 31, 1972 and ending after the effective date of these regulations.
Subchapter 18. Renegotiations
§25201. Refunds and Abatements in Connection with Renegotiation of War Contracts.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue and Taxation Code.
HISTORY

1. New section filed 9-19-69; effective thirtieth day thereafter (Register 69, No. 38).
2. Renumbering of Section 25201-25207 to Section 25201 filed 11-30-82; effective thirtieth day thereafter (Register 82, No. 49).
3. Change without regulatory effect repealing section filed 5-21-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 21).
§25208. Readjustment for Repayments Made Pursuant to Price Redeterminations.
Note     •     History

NOTE

Authority cited: Section 26422, Revenue & Taxation Code.
HISTORY

1. New section filed 9-19-69; effective thirtieth day thereafter (Register 69, No. 38).
2. Change without regulatory effect repealing section filed 5-21-97 pursuant to section 100, title 1, California Code of Regulations (Register 97, No. 21).
Subchapter 19. Returns and Payments
HISTORY

1. Change without regulatory effect repealing subchapter 19 (articles 1 through 3, sections 25401 through 25566) filed 11-23-98 pursuant to Government Code section 11343.4(d) (Register 98, No. 48). For prior history, see Register 82, No. 49; Register 87, No. 15; Register 92, No. 31; Register 94, No. 24; Register 97, No. 22; Register 97, No. 24 and Register 97, No. 40.
Subchapter 20. Assessments
HISTORY

1. Change without regulatory effect repealing subchapter 20 (sections 25672(b) through 25761(c)) filed 11-23-98 pursuant to Government Code section 11343.4(d) (Register 98, No. 48). For prior history, see Register 78, No. 8 and Register 82, No. 49.
Subchapter 21. Interest, Additions to Tax and Penal Provisions
HISTORY

1. Change without regulatory effect repealing subchapter 21 (article 2, sections 25934.2 through 25951-25957(e)) filed 11-23-98 pursuant to Government Code section 11343.4(d) (Register 98, No. 48). For prior history, see Register 82, No. 49; Register 84, No. 22 and Register 85, No. 6.
Subchapter 22. Refunds and Credits
HISTORY

1. Change without regulatory effect repealing subchapter 22 (article 1, section 26081) filed 11-23-98 pursuant to Government Code section 11343.4(d) (Register 98, No. 48). For prior history, see Register 94, No. 45.
Subchapter 23. Collection of Tax
HISTORY

1. Change without regulatory effect repealing subchapter 23 (article 1, sections 26131-1 through 26131-5) filed 11-23-98 pursuant to Government Code section 11343.4(d) (Register 98, No. 48). For prior history, see Register 82, No. 49 and Register 86, No. 8.
Subchapter 24. Administration of Tax
HISTORY

1. Change without regulatory effect repealing subchapter 24 (article 1, sections 26422 through 26426) filed 11-23-98 pursuant to Government Code section 11343.4(d) (Register 98, No. 48). For prior history, see Register 75, No. 40 and Register 97, No. 32.