As you are probably aware, sellers are required to obtain valid resale cards from purchasers to support their exempt sales. One of the five essential elements of a resale card is the seller's permit number held by the purchaser. The regulation states that if the purchaser makes no sales in this state and therefore has no California permit, a notation to that effect in lieu of a sellers permit number is acceptable.

Beware

But, what if the out of state purchaser has the California seller deliver the property directly to his in state customer, is the seller still off the hook as making an exempt sale for resale? By definition, sales tax applies to retail sales not otherwise exempt. The definition of a retail sale is a sale for any purpose other than resale in the regular course of business.

It would appear therefore, that since the California seller is making a valid sale for resale and the sale would be exempt. Think again. Section 6007 (which changed effective January 1, 1993) states that the California seller, is deemed to be the retailer since he delivered the property in the state.

This subject was discussed in detail in the July, 1993 sales tax column but, it may not have been clear how Section 6007 can over-ride Regulation 1668 (Resales).

In two recent audits by the State Board of Equalization, the auditors have searched and found these type of transactions. Evidently, they are being more aggressive in looking for these situations.

In the event that the California party which took delivery of the merchandise is also going to resale it, a resale card from them would satisfy the requirement under Regulation 1668 as well as over-ride Section 6007 and therefore be exempt.

Other Audit matters

Other issues in recent audits relative to resales are taxable purchase orders and inventory withdrawals. If a buyer issues a purchase order that simply says "not taxable" is not sufficient since the required phrase is "for resale." Conversely, if a purchase order states "taxable," that sale is taxable notwithstanding the fact that an otherwise valid resale card is on file. In other words, the double standard is a taxable purchase order supersedes a resale card but a purchase order marked "not taxable" carries no weight.

Inventory Withdrawals

If an item is purchased for resale and subsequently withdrawn from inventory for research and development purposes or for any other use, it will be subject to tax on the purchase price. This amount should be reported on line two of the sales tax return.