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State & Local Tax Bulletin
(Volume 1, Number 4, September 1995)

Failure to Comply with Common Carrier
Exemption Requirements Does Not
Preclude Qualifying for the Sale for
Export Exemption from California Sales Tax

By Jeff Vesely, a tax partner in the San Francisco office of Pillsbury Winthrop Shaw Pittman LLP and Richard Nielsen, of counsel in the San Francisco office.

This information is only of a general nature, intended simply as background material, omits many details and special rules and cannot be regarded as legal or tax advice.

In a recent case handled by this firm, the California State Board of Equalization ("Board") rebuffed the staff's attempt to find a litigation vehicle to challenge the 1992 California Court of Appeal decision in McDonnell Douglas Corporation v. SBE, 10 Cal. App. 4th 1413 (1992). In Beck Electric Supply Company, the Board held that Beck's sales to American President Lines ("APL"), a common carrier, qualified as exempt sales in foreign commerce or sales for export, notwithstanding the parties' alleged failure to comply literally with the bill of lading requirements of California Revenue and Taxation Code ("RTC") § 6385 and Regulation 1621(c).[fn. 1] In rejecting the staff's argument that unsigned and improperly completed bills of lading doomed Beck's case, the Board instead focused on the evidence, which overwhelmingly indicated that the goods in issue had entered the export stream at the time of their sale to APL.


Beck sells electrical parts for ships and industrial equipment. During the subject period, Beck sold parts and equipment to American President Lines ("APL") located in Oakland, California, for delivery to and use by certain of APL's foreign locations.

Typically, an APL foreign location would send a requisition to the APL Purchasing Department in Oakland, California. The requisition specified Beck as a vendor and that the goods were to be delivered to the foreign location. The APL Purchasing Department assigned a "Tax Exempt- Export" code to the purchase (Tax Code 2) and faxed the requisition to Beck with a cover letter. The APL Purchasing Department within a few days created a purchase order which was forwarded to Beck. The purchase order had a purchase order number that specifically referred to the foreign destination. A common carrier exemption certificate was also forwarded by APL to Beck along with the purchase order. The language on the face of the exemption certificate specified that APL was the common carrier that would transport the goods.

Beck matched the purchase order with the requisition it received earlier. It packed the order and affixed a packing slip. The packing slip showed APL's purchase order number with reference to the foreign location. The packing slip contained a designation indicating that the property was being shipped to the APL warehouse but ultimately destined for a specific foreign location. Beck shipped the goods to APL's Oakland warehouse by its own truck.

When APL received the order at the Oakland warehouse, the warehouse prepared a receiving ticket for the goods. The receiving ticket continued to show the foreign destination. Also, upon receipt of the goods, the warehouse prepared a proforma invoice for APL's internal use. While it was not the invoice that Beck ultimately submitted to APL, it documented that the goods were to be exported to a foreign destination. The shipper was identified in the exemption certificate as described above. At this point, the ship, voyage number, and departure date were specified. The time the goods spent at APL's warehouse was minimal.

Further, upon receipt of the goods at the warehouse, an export declaration and bill of lading were prepared. These documents also indicated that the goods were to be exported. On the export declaration, the ultimate consignee was shown to be APL's foreign location. The bill of lading, in addition to showing the ship, voyage and departure date, also listed the specific goods relating to the pertinent purchase order among the items to be exported. According to the terms and conditions of the APL purchase order, title passed to APL at its warehouse.

At the APL warehouse, the goods delivered by Beck were packed into a wooden crate. The crated goods were then moved to APL's freight station at the port and there put into containers. Since a container is usually too large for just one export order, the warehouse loaded several export orders into one container, and each of those orders was reflected on the bill of lading.

Beck's Sales to APL Which Were Designated for Export Qualified for Exemption from Sales Tax Under the Import/Export Clause of the United States Constitution.

APL and Beck argued that the Import/Export Clause of the U.S. Constitution prohibited taxation of the above-described transactions and relied upon the recent decision in McDonnell Douglas.

McDonnell Douglas

In McDonnell Douglas, aircraft parts were sold by McDonnell Douglas to Aeromexico which received the parts at McDonnell Douglas' Long Beach, California plant, and shipped them by U.S. common carriers to the U.S.-Mexican border where a forwarding agent processed them through U.S. and Mexican customs. After a 48-hour customs delay, the parts were loaded onto Mexican common carriers and shipped to Mexico City. McDonnell Douglas contended that the parts were in the export stream when they left its Long Beach plant whereas the Board contended that exportation did not begin until the parts crossed the border. The Court rejected the Board's contention.

The Court also dismissed the Board's argument concerning strict construction of exemptions, etc. and observed that such construction would fail to give exports the liberal protection that they hitherto have received (Spalding & Bros. v. Edwards, 262 U.S. 66, 70 (1923)). The Court relied upon an array of old precedent—Empresa Siderurgica v. Merced Co., 337 U.S. 154 (1949), Gough Industries v. SBE, 51 Cal. 2d 746 (1959), and Richfield Oil Corp. v. SBE, 329 U.S. 64 (1946)—and applied the principles therein to the facts in McDonnell Douglas. It concluded that at the time the tax was sought to be imposed, the goods had entered the export stream. In other words, a continuous export journey had begun when the goods were delivered to Aeromexico in Long Beach.

The Court also dispensed with the more recent U.S. Supreme Court cases of Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976), and Washington Rev. Dept. v. Stevedoring Assn., 435 U.S. 734 (1978), on the basis that the tax in McDonnell Douglas was being assessed on exported goods and not on related services and the export exemption still applies to goods in the export stream.

Finally, the McDonnell Douglas Court observed that because Aeromexico's clear plan to ship the parts to Mexico City for its own use was carried to completion without interruption, other than for unavoidable delays incidental to their journey, the sale fell directly within the Import/Export Clause.

Similarly, in Beck, APL intended to use the goods overseas; its plan to ship said goods overseas was clearly documented from the beginning; and in fact said goods were shipped overseas uninterrupted other than for delays incidental to their journey.

In Beck, the intention of both Beck and APL that the goods were to be exported was consistently indicated by all the documents prepared by the entities:

  1. the requisition order;
  2. the fax cover letter;
  3. the purchase order;
  4. the exemption certificate;
  5. Beck's packing slip;
  6. APL's receiving ticket;
  7. APL's proforma invoice;
  8. Beck's invoice;
  9. the export declaration; and
  10. the bill of lading.

As the Board discovered, the result in McDonnell Douglas could not be distinguished factually from Beck. The goods in Beck were delivered by Beck into the export stream when title passed to APL. Delivery to APL commenced the movement of the goods abroad. The documentation, beginning with the initial requisition order, indicated that much more than a mere intent to ship abroad existed. Rather, the certainty of the foreign destination was always clear. Finally, the evidence was uncontradicted that the goods were never diverted from the export stream.

In McDonnell Douglas, the Board argued and the trial court held that the goods were not in the export stream when they left Long Beach because they were being shipped to a collection point at San Ysidro, California, where McDonnell Douglas employees assisted in processing the goods. In the trial court's view the exportation process did not start until the goods left San Ysidro. The Court of Appeal disagreed and found said facts not controlling. The Court of Appeal observed that Aeromexico had no use for the parts at the border, and never attempted to divert them. All the parts were in fact delivered to Aeromexico's Mexico City maintenance facility.

Similarly, the Board's staff in Beck relied upon the apparent collection of goods by APL at its Oakland warehouse and the processing of said goods by the APL employees as the basis for its conclusion that the goods had not yet entered the exportation process. However, the staff's position ignored the fact that APL's employees, though employees of an instate purchaser, were actually acting in the capacity of employees of a common carrier. Further, the staff's position ignored the fact that the goods were merely being collected at the warehouse for containerization which was obviously incidental to their journey overseas.

The staff also relied heavily upon the alleged deficiencies in the bills of lading. APL and Beck argued that even if the documentation relating to the statutory common carrier exemption was deficient, it should have had no bearing on whether the goods were in the export stream when sold. The taxpayers contended that all the facts and documentation complied with and satisfied the requirements contained in Regulation 1620(a)(3)(C) and (D) which deals with exports. The property was shipped by the seller, Beck, through a common carrier, APL, to a foreign country. The property was intended for a foreign destination; was irrevocably committed to the exportation process at the time of sale; and was actually delivered to the foreign country prior to any use of the property. The property was delivered by Beck to APL at which time the property began its continuous route or journey to the foreign country by means of a carrier. Proof of exemption was supported by bills of lading as well as other documentary evidence of export obtained and retained by Beck.

APL and Beck pointed out that Regulation 1620(a)(3)(D) does not contain provisions similar to those present in Regulation 1621(c) (Sales to Common Carriers) regarding satisfaction of certain completeness requirements to establish an allegedly valid bill of lading. It was argued that the absence of similar requirements under Regulation 1620(a)(3)(D) or any cross-reference to Regulation 1621(c) was strong evidence that those requirements are not controlling for purposes of the sale for export exemption.

Richfield Oil

Another key case which was discussed at length by the parties in Beck was Richfield Oil Corp. v. SBE, a 1946 U.S. Supreme Court decision which appears to be gaining renewed vitality after McDonnell Douglas.

In Richfield, the Board contended that tax was due because the delivery of oil to the purchaser in California which resulted in the passage of title occurred prior to the commencement of exportation. The Supreme Court noted that the Board conceded that the result would be different if the oil had been delivered to a common carrier because it would have then been placed in the hands of an instrumentality whose sole purpose is to export goods, thus indelibly characterizing the process as a part of exportation. However, the Court dismissed the argument that delivery to a common carrier is required to start the process of exportation. The Court held that delivery into the hold of a ship owned by the purchaser which was committed to take the goods across the sea sufficed to qualify the sale as an exempt export.

In Beck, the staff conceded that Richfield was good law, but attempted to limit its reach to situations where the goods are delivered directly into the hold of the purchaser's ship, not to the purchaser's warehouse, a few hundred yards away. The Board rejected the staff's restrictive reading of Richfield.

In rejecting the staff's reading of Richfield, the Board was struck by the fact that from the moment APL's order was placed with Beck for the property to the time the property was actually shipped by APL, all the documentation connected with the transaction showed the certainty of exportation. In dismissing the staff's argument that because a "theoretical possibility" existed that APL might change its mind and use the property in California, the sale for export exemption would not apply, the Board focused upon the fact that the goods were never diverted by APL from the exportation process. The United States Supreme Court in Spalding[fn. 2] was faced with a similar argument and in rejecting it, held that theoretical possibilities may be disregarded.


Another important case whose facts were closely aligned with Beck was Gough. In Gough, the California Supreme Court phrased the question to be decided as: Had a continuous export journey begun at, or prior to, the time the goods were delivered to the packer? It concluded in the affirmative. The export journey began when Gough delivered the goods to the truck carrier at its plant. The Court observed that, similar to Beck, all contract documents specified the exportation, and all steps in the transportation were carried out without deviation. The Court found that the agreement of sale contemplated shipment of the goods for export (seller in U.S. to buyer in a foreign country); from the beginning of the transaction the goods were committed to go directly to the foreign country; the movement of the goods had actually started when the tax was sought to be imposed; and the journey was continuous and unbroken by any action or delay taken for a purpose independent of the transportation of the goods. The Court held that it was immaterial that the goods were shipped to the packer and there packed for ocean travel, such being incidental and necessary for the safe transportation of the goods. The Court distinguished other cases such as Empresa, where the movement of the goods in those cases had not started when the tax was imposed.

In Beck, the taxpayers argued that APL was wearing two hats and was performing functions in California as a common carrier concerning the property in question. The taxpayers pointed out that since RTC § 6385 exempts from tax certain sales to common carriers who are also the purchasers of said goods, certainly APL's purchaser status should not negate an export sale, particularly under the liberal protection afforded by the Import/Export Clause.

In Beck, it was shown by the taxpayers that as in Gough, the handling of the property by APL under its common carrier hat was incidental to and necessary for the transportation of the goods. Any delay between receipt of the goods by APL and their shipment overseas was solely for the purpose of filling containers with other property to be exported. It was argued that the commencement of exportation of the property started either when Beck placed the property in its trucks for delivery to APL or, at the latest, when Beck delivered the property to APL in Oakland. In either case the sale occurred while the goods were in the export stream.

Rice Growers Not Controlling

In Beck, the staff also relied on Rice Growers' Association of California v. Yolo County, 17 Cal. App. 3d 227 (1971), a property tax case, as authority for negating the exemption under the Import/Export Clause due to the delivery to APL's warehouse of goods prior to their shipment overseas. The staff's reliance was shown to be misplaced on a number of grounds.

Rice Growers involved the property taxation of six categories of rice, all delivered to a warehouse at the Port of Sacramento and stored in bins belonging to the port authority awaiting ocean transportation in a vessel to be designated by the purchaser. Negotiable bills of lading were to be issued by the ocean carrier for all of the categories of rice, and payment was to be made by all purchasers upon delivery of such documents. The terms of all sales were f.o.b. Sacramento. Title had not passed to the buyer and would not pass until the ships were loaded and the carrier's bills of lading were delivered to the seller, which then became the basis of payment.

The Court of Appeal held that the rice became an export when it was loaded into the ship carrying it to the foreign country. The rice had not reached the status of export by reason of storage at the port. The seller still had control until bills of lading were issued to the carriers upon the loading of the ship and delivered to the purchasers.

In Beck, unlike Rice Growers, once the property was delivered to APL's warehouse, title to the property passed to APL. All control over the property was henceforth in the hands of APL, not Beck. Unlike Rice Growers, the delivery to APL was not for purposes of storage. Rather it marked the commencement of a continuous journey to a foreign destination.


In view of the evidence which was presented in Beck, the Board properly concluded that the requirements for exemption as a sale for export were satisfied. While the exemption provided for in RTC § 6385 and Regulation 1621 may not have been literally complied with, this should not restrict the protection afforded by the Import/Export Clause. Unfortunately, the Board's decision, which is not published, is not precedential. Thus, taxpayers should be aware that the Board's staff is following McDonnell Douglas reluctantly and appears interested in finding a suitable litigation vehicle to challenge the Court of Appeal's holding.


  1. Title 18 California Code of Regulations § 1621(c). [return to text]

  2. In Spalding, the baseball bat case, a foreign company arranged through a commission house to acquire baseball bats and balls from a U.S. manufacturer. Title to the property passed to the commission house when the manufacturer delivered the property to an exporting carrier who thereafter performed further acts prior to the property being transported overseas. The Court also held it did not matter that further acts were to be done before the goods would get to sea as long as they were only the regular steps to the contemplated result. [return to text]

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