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(3) Planting, cultivating, caring for, or cutting of trees that is incidental to the farming operations of the farm on which it is performed or incidental to the farming operations of the owner, tenant, or operator of the farm, or in connection with the preparation (other than milling) of trees for market that is incidental to these farming operations. These operations include the felling of trees and cutting them into logs or firewood but do not include sawing logs into lumber, chipping, or other milling operations. Operations of the prescribed character will be considered incidental to farming operations only if they are of a minor nature in comparison with the total farming operations involved. Therefore, a tree farmer or timber grower may not claim a refund under Revenue and Taxation Code Section 60502 with respect to diesel fuel used in connection with the trade or business of tree farming or timber growing.
(4) Operation, management, conservation, improvement, or maintenance of the farm and its tools and equipment. The activities included are those which contribute in any way to the conduct of the farm as such, as distinguished from any other enterprise in which the owner, tenant, or operator may be engaged. Examples of included operations are clearing land, repairing fences and farm buildings, building terraces or irrigation ditches, cleaning tools or farm machinery, and painting farm buildings. Since the diesel fuel must be used by the owner, tenant, or operator of the farm to which the operations relate, diesel fuel used by an organization which contracts with a farmer to renovate his farm properties is not used for farming purposes. Diesel fuel used in a lawn mower for maintaining a lawn is not used for farming purposes.
(e) Diesel fuel used in connection with the following operations which may occur on a farm will not be considered to be used for farming purposes:
(1) Canning, freezing, packaging, or processing operations. Thus, for example, although diesel fuel used on a farm in connection with the production or harvesting of maple sap or oleoresin from a living tree is considered to be used for farming purposes under paragraph (d)(1) above, diesel fuel used in the processing of maple sap into maple syrup or maple sugar or used in the processing of oleoresin into gum spirits of turpentine or gum resin is not used for farming purposes, even though these processing operations are conducted on a farm.
(2) Processing operations which change a commodity from its raw or natural state, or operations performed with respect to a commodity after its character has been changed from its raw or natural state by a processing operation. For example, diesel fuel used for the extraction of juices from fruits or vegetables is used in a processing operation which changes the character of the fruits or vegetables from their raw or natural state and will not be considered to be used for "farming purposes."
(f) The diesel fuel tax does not apply to diesel fuel used in the operation of an implement of husbandry, truck or farm tractor which does not require registration under the Vehicle Code, which is used on a farm for farming purposes and which only incidentally is operated upon a highway in moving between farms or parts of farms which are in close proximity. For purposes of this subdivision, "incidentally operated" does not include the use of agricultural vehicles for the transportation of persons or property upon the highways in an operation which requires registration of the vehicle under the Vehicle Code.

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


s 1432. Other Nontaxable Uses of Diesel Fuel in a Motor Vehicle.
(a) Power Take-Off Equipment.
(1) A person may claim a refund for tax paid on diesel fuel used to operate power take-off equipment. Power take-off equipment is generally defined to be an accessory which is mounted onto a transmission allowing power to be transferred outside the transmission to a shaft or driveline. The accessory is usually either a small gearbox with an external shaft, or a short shaft with a driveline yoke assembly for attaching an external driveline. The vehicle's transmission must be specially designed for a power take-off.
(2) Power take-off equipment may be found, for example, on boom trucks (block boom), bulk feed trucks, car carriers or trucks with hydraulic winches, carpet cleaning vans, cement mixers, distribution trucks (hot asphalt), dump trailers, dump trucks, fire trucks, leaf trucks, lime spreaders, line trucks (digger/derrick), aerial lift trucks, milk tank trucks, mobile cranes, pneumatic tank trucks, refrigeration trucks, salt spreaders (dump with spreader), sanitation trucks, seeder trucks, semi-wreckers, service trucks with jackhammers, pneumatic drills, sewer cleaning trucks (sewer jet, sewer vactor), snow plows, spray trucks, sweeper trucks, tank trucks, tank transports and wreckers.
(b) Off-Highway Use.
(1) A person may claim a refund for tax paid on diesel fuel used off the highway. "Off the highway" includes private property, a way or place permanently or temporarily closed to public use for the purpose of vehicular travel, or any way or place used for vehicular travel which is not a highway as defined in Regulation 1411.
(2) If the diesel fuel is used in the operation of construction equipment which is exempt from registration under the Vehicle Code, the user must establish to the satisfaction of the Board that the diesel fuel is used in the operation of the construction equipment while operated within the confines or limits of a construction project and only incidentally operated on the highway within such confines or limits.
(3) As used in subdivision (2), "incidentally operated" does not include the use of special construction equipment for the transportation of persons or property upon the highways in an operation which requires registration of the vehicle under the Vehicle Code.
(c) Refunds. Persons who acquire diesel fuel tax paid and subsequently use the diesel fuel in power take-off equipment or off the highway are entitled to a refund of the diesel fuel tax paid for that fuel. Persons claiming a refund may use any method to calculate the amount of refund, including computing a percentage of the fuel used for nontaxable purposes. It is the responsibility of the person claiming the refund to document and support the amount claimed.
(d) Idle Time. Diesel fuel consumed in motor vehicles on the highway is subject to the diesel fuel tax whether the motor vehicle is moving or idling, and no refunds will be allowed for diesel fuel tax paid on diesel fuel which is used to idle a vehicle on the highway. If the vehicle is idling on the highway while power take-off equipment is in use, a refund will be allowed for the diesel fuel tax paid on that portion of the diesel fuel which is used to operate the power take-off equipment; however, no refund will be allowed for the diesel fuel tax paid on that portion of the diesel fuel which is used for idling.

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


s 1433. Refund of Tax on Diesel Fuel Lost in the Course of Handling, Transportation, or Storage.
(a) The Board will refund the tax paid on diesel fuel which is lost in the course of handling, transportation or storage provided that:
(1) The tax-paid diesel fuel was lost under circumstances beyond the claimant's control such as fire, flood, accidental spillage or leakage, or natural catastrophe; or
(2) The tax-paid diesel fuel was lost through the accidental conversion of undyed diesel fuel to dyed diesel fuel; or
(3) The tax-paid diesel fuel was lost through the intentional conversion of undyed diesel fuel to dyed diesel fuel in the ordinary course of handling (such as purging hoses).
(b) Tax-paid diesel fuel will qualify as lost under subsections (a)(2) or (3) above only if the fuel that was converted from undyed fuel to dyed fuel is sold as dyed diesel fuel.
(c) No refund will be made based on losses of diesel fuel which occur due to evaporation or shrinkage.
(d) A person who loses fuel in the course of handling, transportation or storage may file a claim for refund with the Board pursuant to Revenue and Taxation Code Sections 60501 through 60512 in order to obtain a refund of the diesel fuel tax paid on the lost fuel.

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


s 1434. Sales of Diesel Fuel to the United States and its Agencies and Instrumentalities.
(a) In General. The diesel fuel tax does not apply to the sale of diesel fuel to the United States and its agencies and instrumentalities. Examples of the United States and its agencies and instrumentalities include, but are not limited to, the American Red Cross, U.S. Postal Service, branches of the armed services, military exchanges, and agencies such as the USDA Forest Service and the Department of Housing and Urban Development.
(b) Sales of Ex-Tax Diesel Fuel. A supplier licensed under the Diesel Fuel Tax Law that makes sales of ex-tax diesel fuel to the United States and its agencies and instrumentalities, may claim an exemption on its diesel fuel tax return.
(c) Sales of Tax-Paid Diesel Fuel.
(1) A supplier licensed under the Diesel Fuel Tax Law that makes sales of tax-paid diesel fuel to the United States and its agencies and instrumentalities may claim a credit on its diesel fuel tax return. The tax-paid fuel may be sold in bulk or through any company-owned retail service station.
(2) A person licensed as an ultimate vendor under the Diesel Fuel Tax Law who makes a sale of tax-paid fuel to the United States and its agencies and instrumentalities may claim a refund on its diesel fuel tax claim for refund referenced in subdivision (d).
(3) A diesel fuel seller not required to be licensed under the Diesel Fuel Tax Law, including, but not limited to, a wholesaler, access card issuer or service station operator may file a claim for refund of tax on its sales of tax-paid diesel fuel to the United States and its agencies and instrumentalities as to those gallons of diesel fuel it sells ex-tax to the United States and its agencies and instrumentalities. The claim for refund may only be filed by the person that owned the tax-paid diesel fuel and directly sold the tax-paid diesel fuel to the United States and its agencies and instrumentalities.
"Access card issuer" means a person that issues to a customer an access card or code or similar access device which entitles the customer to obtain fuel owned by the access card issuer at participating fuel dispensing sites. As used in this regulation "fuel owned by the access card issuer" means fuel owned by the access card issuer at its own fuel dispensing site or fuel purchased by the access card issuer from an operator of a fuel dispensing site at the time that the fuel is dispensed to the United States and its agencies and instrumentalities.
(d) Contents of Claim for Refund. A claim for refund filed by a diesel fuel seller who is not an ultimate vendor shall contain the information required by Revenue and Taxation Code s 60501(b). A claim for refund filed by an ultimate vendor shall contain the information required by Revenue and Taxation Code s 60502(c).
(e) Documentation for Bulk Transactions. Any person claiming an exemption, credit, or refund for bulk sales of diesel fuel to the United States and its agencies and instrumentalities, must retain supporting documentation. Documentation may include, but is not limited to:
(1) A copy of the United States government purchase order or order documentation authorizing the purchase of the diesel fuel.
(2) A copy of the billing invoice or other documents identifying the United States and its agencies and instrumentalities as the purchaser of the diesel fuel, the invoice billing date, the invoice billing number, the number of diesel fuel gallons sold to the United States and its agencies and instrumentalities and a clear indication that no diesel fuel tax reimbursement was collected from the United States and its agencies and instrumentalities.
(3) Documentation showing that the diesel fuel in question was acquired ex-tax by a licensed supplier claiming the exemption.
(4) Documentation showing that the diesel fuel in question was acquired tax-paid by a person claiming the credit or refund.
(f) Documentation for Non-Bulk Transactions. Any person claiming a credit or filing a claim for refund on retail sales of tax-paid fuel sold in non-bulk quantities, including credit card sales to the United States and its agencies and instrumentalities, must retain supporting documentation. Documentation may include, but is not limited to:
(1) A copy of the billing invoice or other documentation identifying the United States and its agencies and instrumentalities as the purchaser of the diesel fuel, the invoice billing date, the invoice billing number, the number of diesel fuel gallons sold to the United States and its agencies and instrumentalities and a clear indication that no diesel fuel tax reimbursement was collected from the United States and its agencies and instrumentalities.
(2) Documentation showing that the diesel fuel in question was acquired tax-paid by a person claiming the credit or refund.
(3) A copy of the credit card receipt or listing of credit card transactions provided by the card processor, identifying the United States and its agencies and instrumentalities as the purchaser of the diesel fuel, the date of the transaction, the record number of the receipt, and the number of diesel fuel gallons sold to the purchaser.
(4) A copy of the charge back of the tax to the retailer by the credit card processor.

Note: Authority cited: Section 60601, Revenue and Taxation Code. Reference: Sections 60100, 60501, 60502 and 60508, Revenue and Taxation Code.


s 1435. Tax Paid Twice on Diesel Fuel.
(a) A supplier who removes diesel fuel from a terminal rack on which a prior tax was paid to the state may either file a claim for refund with the Board or in lieu of a refund take a credit on its tax return.
(b) Conditions to Allow a Credit on a Tax Return.
The credit will be allowed only if:
(1) A tax imposed on the diesel fuel by Revenue and Taxation Code Sections 60051 and 60052 was paid to the state by reporting the gallons on a tax return and was not credited or refunded (the "first tax" or "first taxpayer");
(2) After imposition of the first tax, another tax was imposed on the diesel fuel by Revenue and Taxation Code Sections 60051 and 60052 and was paid to the state by reporting the gallons on a tax return (the "second tax" or "second taxpayer");
(3) The person that paid the second tax to the state claims a credit on a tax return filed within three months after the close of the calendar month in which the second tax was reported to the state;
(4) The person that paid the first tax to the State has met the reporting requirements of paragraph (c) of this section; and
(5) A copy of the first taxpayer's report and any copies of statements of subsequent seller must be retained for inspection by the Board with the tax return on which the credit is claimed.
(c) Reporting Requirements.
(1) Reporting by persons paying the first tax.
Except as provided in paragraph (c)(2) of this section, the person that paid the first tax under Revenue and Taxation Code Section 60051 and 60052 (the first taxpayer) must file a report that is in substantially the same form as the model report provided in Exhibit A and contains all information necessary to complete such model report (the first taxpayer's report). A first taxpayer's report must be retained for inspection by the Board with the tax return on which the first tax was paid or reported.
(2) Optional reporting for certain taxable events.
Paragraph (c)(1) does not apply with respect to a tax imposed under Revenue and Taxation Code Section 60051 (removal at a terminal rack), Revenue and Taxation Code Section 60052(b)(2) (nonbulk entries into the state), or Revenue and Taxation Code Section 60052(d) (removals or sales by blenders). However, if the person liable for the tax expects that another tax will be imposed under Revenue and Taxation Code Sections 60051 and 60052 with respect to the fuel, that person should file a first taxpayer's report.
(3) Information provided to subsequent owners, etc.
(A) By Person Required to File First Taxpayer's Report.
A first taxpayer required to file a first taxpayer's report under paragraph (c)(1) of this section must give a copy of the report to:
1. The person to whom the first taxpayer sells the diesel fuel within the bulk transfer/terminal system; or
2. The owner of the diesel fuel immediately before the imposition of the first tax, if the first taxpayer is not the owner at that time.
(B) By Person Filing Optional First Taxpayer's Report.
A first taxpayer filing a first taxpayer's report under paragraph (c)(2) of this section should give a copy of the report to:
1. The person to whom the first taxpayer sells the diesel fuel; or
2. The owner of the diesel fuel immediately before the imposition of the first tax, if the first taxpayer is not the owner at that time.
(C) By Person Receiving First Taxpayer's Report.
1. Bulk Transfer/Terminal System Transaction
A person that receives a copy of the first taxpayer's report and subsequently sells the diesel fuel within the bulk transfer/terminal system must give the copy and a statement that satisfies the requirements of paragraph (c)(3)(D) of this section to the buyer.
2. Rack and Below Rack Transaction
A person that receives a copy of the first taxpayer's report and subsequently sells the diesel fuel outside the bulk transfer/terminal system should give the copy and a statement that satisfies the requirements of paragraph (c)(3)(D) of this section to the buyer, if that person expects that another tax will be imposed under Revenue and Taxation Code Sections 60051 and 60052 with respect to the diesel fuel.
(D) Form of Statement.
A statement satisfies the requirements of this paragraph (c)(3)(D) if it is provided at the bottom or on the back of the copy of the first taxpayer' s report (or in an attached document). This statement must contain all information necessary to complete the model statement provided in Exhibit B but need not be in the same format.
(E) Sale to Multiple Buyers.
If the first taxpayer's report relates to diesel fuel divided among more than one buyer, multiple copies of the first taxpayer's report must be made at the stage that the diesel fuel is divided and each buyer must be given a copy of the report.
(d) Claim for Refund.
If the supplier fails to take a credit on a tax return filed within three months after the close of the calendar month in which the second tax was imposed, the supplier may only file a claim for refund with the Board to recover the tax.
Each claim for a refund must contain the following information with respect to the fuel covered by the claim:
(1) The information required in Revenue and Taxation Code Section 60501.
(2) Volume and type of diesel fuel.
(3) Date on which the claimant incurred the tax liability to which this claim relates (the second tax).
(4) Amount of second tax that claimant paid or reported to the state and the tax return on which it was paid or reported.
(5) A statement that claimant has not separately stated on the sales invoice reimbursement for both the first tax and the second tax or has not included in the sales price of the diesel fuel reimbursement for both the first tax and the second tax. The second taxpayer can only receive reimbursement for one tax from the customer.
(6) A copy of the first taxpayer's report that relates to the diesel fuel covered by the claim.
(7) If the diesel fuel covered by the claim was bought other than from the first taxpayer, a copy of the statement of subsequent seller that the claimant received with respect to that diesel fuel.
EXHIBIT A

First Taxpayer's Report

1. First Taxpayer's Board of Equalization supplier account number __________ __________
2. __________ __________ First Taxpayer's name, address, and employer identification number
3. __________ __________ Name, address, and employer identification number of the buyer of the diesel fuel subject to tax
4. __________ __________ Date and location of removal, entry, or sale and document number
5. Volume and type of diesel fuel removed, entered, or sold __________ __________
6. Check type of taxable event:
___ Removal from refinery
___ Entry into United States or state
___ Bulk transfer from terminal by unregistered position holder
___ Bulk transfer not received at an approved terminal
___ Sale within the bulk transfer/terminal system
___ Removal at the terminal rack
___ Removal or sale by the blender
7. __________ __________ Amount of Federal excise tax paid and State motor vehicle fuel tax paid on account of the removal, entry, or sale
8. Location of IRS service center where this report is filed __________ __________and State reporting period of payment __________ __________
The undersigned taxpayer (the "Taxpayer") has not received, and will not claim, a credit with respect to, or a refund of, the tax on the diesel fuel to which this form relates.
Under penalties of perjury, the Taxpayer declares that Taxpayer has examined this statement, including any accompanying schedules and statements, and, to the best of Taxpayer's knowledge and belief, they are true, correct and complete.
__________
Signature and date signed
__________
Printed or typed name of person signing this report
__________
Title
EXHIBIT B

Statement of Subsequent Seller

1. __________ __________ Board of Equalization supplier account number or prepaid sales tax account number
2. __________ __________ Name, address, and employer identification number of seller in subsequent sale
3. __________ __________ Name, address, and employer identification number of buyer in subsequent sale
4. __________ __________ Date and location of subsequent sale and document number
5. __________ __________ Volume and type of diesel fuel sold
The undersigned seller (the "Seller") has received the copy of the first taxpayer's report provided with this statement in connection with Seller's purchase of the diesel fuel described in this statement.
Under penalties of perjury, Seller declares that Seller has examined this statement, including any accompanying schedules and statements, and, to the best of Seller's knowledge and belief, they are true, correct and complete.
__________
Signature and date signed
__________
Printed or typed name of person signing this statement
__________
Title

Note: Authority cited: Section 60601, Revenue and Taxation Code. Reference: Sections 60051, 60052, 60501, 60507, 60508.4 and 60521.5, Revenue and Taxation Code.


s 1436. Returned Sales.
(a) When diesel fuel included in a supplier's taxable removals, entries or sales is returned to the supplier by the customer to whom it was sold and is delivered into a refinery or an approved terminal's storage tank, the supplier may either file a claim for refund with the Board or in lieu of the refund take a credit on its tax return. The credit memorandum covering the return of the diesel fuel shall identify the gallonage returned as either volumetric gallons or temperature corrected gallons based upon how the tax was originally invoiced to the customer and shall separately state the diesel fuel tax.
(b) It shall be presumed that the supplier purchased the diesel fuel that was returned as tax-paid diesel fuel if the credit memorandum includes diesel fuel tax. For the purpose of a refund or credit, it also shall be presumed that the subsequent removal of the diesel fuel from a terminal rack by the supplier that received the returned diesel fuel is made in the month that the diesel fuel was returned.
(c) Conditions to Allow a Credit on a Tax Return.
The credit will be allowed only if:
(1) The returned diesel fuel was delivered into a refinery or an approved terminal storage tank.
(2) The credit is taken on a tax return filed within three months after the close of the calendar month in which the diesel fuel is returned.
(3) The supplier prepares a first taxpayer's report (as identified in Regulation 1435) when the diesel fuel is returned.
(4) A copy of the first taxpayer's report and the credit memorandum must be retained for inspection by the Board with the tax return on which the credit is claimed.
(d) If the supplier fails to take a credit on a tax return filed within three months after the close of the calendar month in which the diesel fuel was returned, the supplier may only file a claim for refund with the Board to recover the tax. Each claim for a refund must contain the following information with respect to the diesel fuel covered by the claim:
(1) The information required in Revenue and Taxation Code Section 60501.
(2) Volume and type of diesel fuel.
(3) Date on which the claimant received the returned diesel fuel.
(4) A copy of the first taxpayer's report that relates to the diesel fuel covered by the claim.
(5) A copy of the credit memorandum that returned the diesel fuel.

Note: Authority cited: Section 60601, Revenue and Taxation Code. Reference: Sections 60025, 60501 and 60508.4, Revenue and Taxation Code.


s 1470. Records.
(a) General. A taxpayer shall maintain and make available for examination on request by the board or its authorized representatives, records in the manner set forth at California Code of Regulations, Title 18, Section 4901.
(b) Specific Applications. In addition to the record keeping requirements set forth in subdivision (a), suppliers, ultimate vendors, retail vendors, and users shall comply with the following requirements.
(1) Supplier's Records. A supplier shall maintain complete records of all rack removals, sales, imports, and exempt dispositions including exemption certificates, self-consumed diesel fuel, inventories, purchases, receipts, and tank gaugings or meter readings, of diesel and any other fuel that is required to be accounted for on the supplier's return or report. Such records include but are not limited to:
(A) Refinery Reports related to the production of diesel fuel.
(B) Inventory reconciliation by location.
(C) Storage inventory reports.
(D) List of storage locations.
(E) Tax returns from other states to support export claims.
(F) Cardlock statements.
(G) Calculations or formulas to support off-highway exempt usage.
(H) First Taxpayer Reports.
(I) Support for claimed Supplier bad debts.
(2) Ultimate Vendor's Records. An ultimate vendor shall maintain complete records of all sales, exports, or other dispositions of tax-paid diesel fuel for which a claim for refund is being made, including exemption certificates, self-consumed fuel, inventories, purchases, receipts, and tank gaugings or meter readings, of diesel fuel and any other fuel the use of which is accounted for on the ultimate vendor's claim for refund. Such records may include but are not limited to:
(A) Purchase invoices for undyed tax-paid diesel fuel.
(B) Purchase invoices for dyed ex-tax diesel fuel.
(C) Delivery tickets for diesel fuel exported.
(D) Tax returns from other states to support diesel fuel export claims.
(E) Copies of United States Government purchase orders or United States Government credit card receipts.
(F) Cardlock statements.
(G) Calculations or formulas to support off-highway exempt usage of diesel fuel.
(3) Ultimate Vendor's Sales Invoices. The ultimate vendor shall prepare a serially numbered invoice for each sale of diesel fuel. A single invoice or a single cardlock statement covering multiple deliveries of diesel fuel made during a period of time not to exceed a calendar month shall constitute an invoice for each sale. If the multiple delivery invoice or cardlock statement includes both tax-exempt deliveries with respect to which the ultimate vendor is excused from collecting the tax and deliveries upon which the tax is required to be collected, the invoice or cardlock statement shall contain or be accompanied by a statement showing separately the deliveries and gallonage upon which the tax is collected and the tax-exempt deliveries and gallonage. The invoice or cardlock statement shall be delivered to the purchaser, and a copy thereof shall be retained by the ultimate vendor.
A sales invoice or cardlock statement shall contain the following information:
(A) The name and address of the ultimate vendor.
(B) The name of the purchaser.
(C) The date of sale.
(D) The number of gallons of diesel fuel sold, the price per gallon and the total amount of the sale.
(E) The amount of the diesel fuel tax collected, however, the amount of the tax collected need not be separately stated if the invoice bears the notation that the price includes the tax.
(F) A statement that there is no evidence of dye in the undyed diesel fuel included in the invoice or cardlock statement.
(G) The dyed diesel fuel notice for dyed diesel fuel included in the invoice or cardlock statement.
(4) Receipt for Tax Paid to a Retail Vendor. The sales invoice shall upon payment by the purchaser constitute a receipt for the amount of diesel fuel tax included therein collected by the retail vendor.
The sales invoice shall contain the information in (A), (B), (C) and (D). The sales invoice or similar document shall also include the information in (E) and (F).
(A) The name and address of the retail vendor.
(B) The date of sale.
(C) The number of gallons of diesel fuel sold, the price per gallon and the total amount of the sale.
(D) The amount of the diesel fuel tax collected, however, the amount of the tax collected need not be separately stated if the invoice bears the notation that the price includes the tax.
(E) A statement that there is no evidence of dye in the undyed diesel fuel included in the invoice.
(F) The dyed diesel fuel notice for dyed diesel fuel included in the invoice.
(5) User's Records. The user shall maintain complete records of self-consumed diesel fuel, inventories, purchases, receipts, and tank gaugings or meter readings, of diesel fuel and any other fuel the use of which is subject to the diesel fuel tax. Records shall also support any calculations or formulas used to claim exempt percentages of exempt usage of diesel fuel.
(6) User's Invoices. Users of diesel fuel subject to the tax shall obtain from the retail vendor of the diesel fuel and retain in their files an invoice for each delivery of such diesel fuel into the fuel tank or tanks of each vehicle operated by them and for each delivery into their bulk storage tank or tanks. These invoices shall set forth the information specified in subsection (b)(4) of this regulation and shall be filed or identified in a systematic manner so that they may readily be traced into their purchase or expense records and into their tax returns or claims for refund to the board.
Users should keep as part of their records a detail of figures upon which are based the totals set forth on their tax returns or claims for refund to the board. When diesel fuel is placed into the fuel tank of a qualified motor vehicle, either the user or the retail vendor should indentify on the invoice the qualified motor vehicle into which the diesel fuel was placed. All individual invoices supporting charge accounts which include purchases of diesel fuel shall be retained by the user in such manner as to enable the representatives of the board to establish the identity of all the merchandise or service included in the total charge and the specific gallonage of diesel fuel purchased.

Note: Authority cited: Section 60601, Revenue and Taxation Code. Reference: Sections 60044, 60107, 60201, 60202, 60204, 60204.5, 60205, 60205.5, 60206, 60604, 60605 and 60606, Revenue and Taxation Code.


s 1500. Foreword.
(a) General. These regulations are issued by the State Board of Equalization pursuant to section 7051 of the Revenue and Taxation Code, to implement, interpret or make specific provisions of the California Sales and Use Tax Law and to aid in the administration and enforcement of that law, which is contained in Part 1 of Division 2 of the Revenue and Taxation Code. Also included in Subchapter 4 are regulations pertaining to the Bradley-Burns Uniform Local Sales and Use Tax Law (Part 1.5 of Division 2 of the Revenue and Taxation Code) and to local transit district transactions (sales) and use taxes (Part 1.6 of Division 2 of the Revenue and Taxation Code). The local sales and use taxes are collected by the board with state sales and use taxes but are imposed under uniform local ordinances authorized by state law.
(b) Revision. The State Board of Equalization beginning in 1969, undertook a complete revision and restructuring of the sales and use tax regulations. The series numbered as sections 1900 through 2206 have been replaced by a new series of sections numbered between 1500 and 1899. The provisions of the new codification insofar as they are substantially the same as previous rulings (regulations) relating to the same subject matter shall be construed as restatements and continuations and not a new interpretations.
(c) Use of Terms. (1) The term "tax applies" as used in these regulations in reference to a sale or to an amount included in a sale, means, unless otherwise indicated, that either:
(A) The sales tax applies, measured by the gross receipts from the sale, or
(B) The use tax applies to the storage, use, or other consumption of the property sold, measured by the sales price.
(2) When it is stated that certain persons are "retailers" of tangible personal property, it should be understood that they must comply with all requirements imposed upon retailers, including:
(A) Obtaining a seller's permit for each place of business in this state.
(B) Filing returns and paying tax.
(C) Collecting use tax when applicable and remitting the tax with returns.
(D) Keeping records and giving resale certificates.
(3) When it is stated that certain persons are "consumers" of tangible personal property under stated conditions, it should be understood that the sales to such persons are retail sales in respect to which either the sales or use tax applies and that resale certificates should not be given by such consumers in purchasing the property.
(d) Violations. Violation of any of the rules and regulations issued by the board may subject a violator to the revocation or suspension of his seller's permit. A person who engages as a seller without a permit or after a permit has been suspended is guilty of a misdemeanor.

Note: Authority cited for Sections 1500-2206: Section 7051, Revenue and Taxation Code. Reference: Sections 6006-7176, Revenue and Taxation Code.







(Also See Article 21)


s 1501. Service Enterprises Generally.
Persons engaged in the business of rendering service are consumers, not retailers, of the tangible personal property which they use incidentally in rendering the service. Tax, accordingly, applies to the sale of the property to them. If in addition to rendering service they regularly sell tangible personal property to consumers, they are retailers with respect to such sales and they must obtain permits, file returns and remit tax measured by such sales. If their purchases of tangible personal property are predominantly for consumption rather than for resale, they should not give resale certificates covering such purchases but should follow the procedure prescribed in the regulation governing "Tax-Paid Purchases Resold."
The basic distinction in determining whether a particular transaction involves a sale of tangible personal property or the transfer of tangible personal property incidental to the performance of a service is one of the true objects of the contract; that is, is the real object sought by the buyer the service per se or the property produced by the service. If the true object of the contract is the service per se, the transaction is not subject to tax even though some tangible personal property is transferred. For example, a firm which performs business advisory, record keeping, payroll and tax services for small businesses and furnishes forms, binders, and other property to its clients as an incident to the rendition of its services is the consumer and not the retailer of such tangible personal property. The true object of the contract between the firm and its client is the performance of a service and not the furnishing of tangible personal property. Similarly, an idea may be expressed in the form of tangible personal property and that property may be transferred for a consideration from one person to another; however, the person transferring the property may still be regarded as the consumer of the property. Thus, the transfer to a publisher of an original manuscript by the author thereof for the purpose of publication is not subject to taxation. The author is the consumer of the paper on which he has recorded the text of his creation. However, the tax would apply to the sale of mere copies of an author's works or the sale of manuscripts written by other authors where the manuscript itself is of particular value as an item of tangible personal property and the purchaser's primary interest is in the physical property. Tax would also apply to the sale of artistic expressions in the form of paintings and sculptures even though the work of art may express an original idea since the purchaser desires the tangible object itself; that is, since the true object of the contract is the work of art in its physical form.
When a transaction is regarded as a sale of tangible personal property, tax applies to the gross receipts from the furnishing thereof, without any deduction on account of the work, labor, skill, thought, time spent, or other expense of producing the property.
Examples of service enterprises and regulations pertaining thereto will be found in regulations which follow.


Note: Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006 and 6015, Revenue and Taxation Code. Advertising Agencies, Commercial Artists and Designers, see regulation 1540 (unrevised series 1902). Installers, Repairers and Reconditioners, see regulation 1546, et seq. Occasional Sale exemption, application to Service Enterprises, see regulation 1595. Tax-Paid Purchases Resold, see regulation 1701. X-ray Laboratories, see regulation 1528 (unrevised series 1933).


s 1501.1. Research and Development Contracts.
(a) Definitions.
(1) Qualified Research and Development Contract. A qualified research and development contract is a contract for a service where:
a. the service provided under the contract is undertaken for the purpose of discovering information which is technological in nature, the results of which are intended to be useful in the development of a new or improved product, process, technique, or invention, and
b. the contract calls for the delivery of a report detailing information developed by the contractor or other tangible personal property incidental to the true object of the contract, as defined in Regulation 1501 (18 CCR 1501).
A qualified research and development contract shall not include a contract for research for the purpose of improving a commercial product if the improvements relate to style, taste, cosmetic or seasonal design factors. A qualified research and development contract shall also not include a contract for the design and production of a custom-made item as defined in subdivision (a)(5).
(2) Research. A planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service (product) or a new process or technique (process) or in bringing about a significant improvement to an existing product or process.
(3) Development. The translation of research findings or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.
"Development" includes the conceptual formulation, design, and testing of product alternatives, and construction of prototypes but does not include:
a. routine or periodic alterations to existing products, production lines, manufacturing processes, and other on-going operations even though those alterations may represent improvements, and
b. market research or market testing activities.
(4) Tangible Personal Property. Tangible personal property transferred in a qualified research and development contract includes, but is not limited to the following:
a. Appearance model - a non-operating model of a design that is a physical representation of the design which is used to convey the image, texture and appearance of the design.
b. Prototype model - an operating model of a design the purpose of which includes:
1. validating design concepts,
2. validating design specifications,
3. demonstrating design integrity, or
4. demonstrating manufacturability of the design.
c. Prototype or temporary tooling - tooling produced and used in the development of prototypes.
(5) Custom-Made Items. A custom-made item includes, but is not limited to the following:
a. Property the purchaser wants for its intrinsic value as an item, and for which the purchaser is not interested in the data developed in the course of the manufacture of the custom-made item.
b. Property the purchaser will use for purposes other than informational and testing purposes as defined in subdivision (a)(7).
c. Property purchased for use by the purchaser or for resale.
d. Production tooling - tooling produced and used for the manufacture of final production units.
(6) Functional Use - Use for which the property was designed which occurs after completion of the research and development. Custom-made items normally are intended for functional use and not for informational and testing use. Informational and testing use of a prototype by the contractor or its customer does not qualify as a functional use.
Examples of functional use include:
1. Use as test fixtures in manufacturing equipment.
2. Use in production tooling.
(7) Informational and Testing Use - Use by either the contractor or its customers including, but not limited to:
1. Testing for verification of a design to specifications.
2. Developing data, algorithms, ideas and/or knowledge to improve or perfect a design.
3. Determining alternative design features and implementations.
4. Validating testing of software and firmware embodied within a design.
5. Demonstrating operation of a design for approval by a customer.
6. Quality assurance and performance testing to determine limitations and failure modes of the design.
7. Determining or improving interfaces to other equipment during the design process.
8. Determining or improving the processes for manufacture of the design.
9. Testing to design failure.
10. Evaluating numerous prototypes for the acceptability of the design and the manufacturability of such design. Qualifying evaluation does not include any functional use of the property in a normal business operations capacity.
11. Testing prototypes to assure that the design works to the specifications desired.
(8) Phased Contracts. A phased contract is a contract which provides for separate phases wherein the purchaser has the specific right to terminate the contract prior to commencement of the next phase without the delivery of tangible personal property required to be delivered in any subsequent phase specified in the contract and without further obligation except for compensation for work completed or cancellation fees.
A contract for the design and manufacture of a custom-made item shall be considered a "phased contract" when:
1. the purchaser has the specific right to terminate the contract prior to or upon completion of the design phase, or
2. there are two separate contracts: one for the design service and the other for the manufacture of the custom-made item.
(b) Application of Tax.
(1) General. Persons engaged in the business of rendering services pursuant to a qualified research and development contract are consumers of tangible personal property which they use incidentally in rendering the service. Tax applies to the sale of the property to them. Tax does not apply to receipts derived from qualified research and development contracts except as provided below.
(2) Prototypes. Prototypes transferred in a qualified research and development contract for informational and testing purposes, as defined in subdivision (a)(7), are not subject to tax regardless of the fact the research contract may place a value on the prototype. Prototypes transferred are for verification that a design meets the required technical specifications of the contract. No functional use, as defined in subdivision (a)(6), of the prototypes is made. Either the sales tax or the use tax applies with respect to sales of such tangible personal property to the contractor.
Sales of additional prototypes transferred in a qualified research and development contract for purposes other than informational and testing use, where a functional use occurs, are subject to tax. This includes prototypes transferred for the purpose of testing the aesthetic features of the product by independent third parties for marketing purposes, or used for the purpose for which the property was designed. The measure of tax is the stated value for such property in the contract, or if none is stated, at the computed fair market value as determined by applying a factor of three to the cost of direct materials used in the production of the prototype.
Tax applies to the transfer of title or possession of prototype tooling, in a qualified research and development contract, for functional use as defined in subdivision (a)(6), regardless of the form of the media, even if a separate charge is not made for these properties. The measure of tax is the amount provided for in the contract for duplicate or replacement sets of the property, or if no such amount is provided, the measure of tax will be equal to fair market value as determined by applying a factor of three to the cost of direct materials used in the production of the prototype tooling.
(3) Custom-Made Items. A contract to design, develop, and manufacture a custom-made item is a contract to sell tangible personal property. Generally, custom-made items are intended for functional use and not for informational and testing use. Unless the sale of the property is a sale for resale, tax applies to the gross receipts from the sale of the property. Gross receipts includes the entire amount of the contract price, including charges related to research, design, and development activities. Tax applies to the entire contract price without regard to the fact that the research, design, and development charges may be separately stated. See subdivision (b)(4) if the contract qualifies as a phased contract.
(4) Phased Contracts. The research and development phase and the production phase of a phased contract shall remain as two separate contracts and shall be taxed as such. Items produced for functional use in the production phase of the contract shall be subject to tax unless the purchaser provides the contractor with a resale certificate or the transfer is otherwise exempt.
(5) Application to Semiconductor Industry. Production tooling, including a mask to be used in production, is a custom-made item and tax applies as outlined in subdivision (b)(3) or (b)(4) as applicable.
Pattern generation tapes, wafer probe test tapes, final test tapes, schematic diagrams for the probe board, and schematic diagrams for the final test load board are informational items, if transferred for archival or other informational purposes not involving a functional use. The contractor is the consumer of the direct materials.


Note: Authority cited: Section 7051, Revenue and Taxation Code. Reference: Sections 6006, 6009, 6010, 6011, and 6012, Revenue and Taxation Code.


s 1502. Computers, Programs, and Data Processing.
(a) In General. "Automatic data processing services" are those rendered in performing all or part of a series of data processing operations through an interacting assembly of procedures, processes, methods, personnel, and computers.
Automatic data processing services may be provided by manufacturers of computers, data processing centers, systems designers, consultants, software companies, etc. In addition, there are banks and other businesses which own or lease computers and use them primarily for their own purposes but occasionally provide services to others. Businesses rendering automatic data processing services will be referred to herein as "data processing firms."
(b) Definition of Terms.
(1) Application. The specific job performance by an automatic data processing installation. For example, data processing for a payroll may be referred to as a payroll application.
(2) Coding. The list, in computer code, of the successive computer instructions representing successive computer operations for solving a specific problem.
(3) Computer. A computer is an electronic device (including word processing equipment and testing equipment) or combination of components, which is programmable and which includes a processor (central processing unit or microprocessor), internal memory, and input and output connections. Manufacturing equipment which incorporates a computer is a computer for purposes of this regulation. However, the term does not include manufacturing equipment which operates under the control of mechanical or electronic accessories, the attachment to the equipment of which is required for the machine to operate. An electronic device otherwise qualifying as a computer remains a computer even though it may be used for information processing, data acquisition, process control or for the control of manufacturing machinery or equipment. (continued)