In its December 20, 2022, decision in The Matter of the Appeal of Olympus America Inc., the California Office of Tax Appeals (OTA) ordered Olympus America, a New York-based medical device company, to pay over $7.34 million in use tax and penalties on parts stored in California and used to repair medical equipment under optional warranty contracts for out-of-state customers.
The OTA held that Olympus America was the purchaser of the parts and used them in California and as such, use tax applied. The decision followed a California Department of Tax and Fee Administration (CDTFA) notice of determination assessing use tax liability for an audit — the third California audit for the company — of the period from April 1, 2008, through September 30, 2011.
Olympus America distributes, sells and repairs medical devices and it offers optional warranty contracts that include repairs free of charge when selling products. To complete the repairs, Olympus America purchases parts from a related company in Tokyo and stores the parts and performs the repairs in California.
The company had argued that optional repairs for out-of-state customers were not taxable because the repaired equipment is used outside of California.
However, the OTA disagreed, citing California Code of Regulations Title 18, Section 1655, which says use tax applies to the sale of items to the person obligated under an optional warranty contract to furnish parts and materials and perform the labor as the consumer of the materials and the parts.
Negligence penalty appeal rejected
The OTA also rejected Olympus America’s argument that the negligence penalty should not apply, as the company relied on written advice it received from the department during prior audits when the department taxed only parts used for repairs for the company’s California customers and not those for out-of-state customers.
The OTA found that “there is no evidence that CDTFA gave written advice as to the taxability of non-California customer contracts and there are no express statements by CDTFA indicating that non-California customer repairs were nontaxable.”
The OTA further noted that Olympus America’s repeated failure to report purchases of parts for use tax purposes for in-state customers and its disregard of the CDTFA’s advice during prior audits was evidence that the company was also negligent in reporting the purchase of parts for out-of-state customers.
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This article was co-authored by Jake Bergman, a consultant in Wipfli’s tax specialty practice.