Laws, Regulations and Annotations


Business Taxes Law Guide – Revision 2023

Sales and Use Tax Memorandum Opinions

Matson Navigation Company

Cargo containers brought empty from Japan to California for subsequent use in carrying cargo did not enter the state while being used in foreign commerce. A taxable use occurred in California when they were readied and placed in standby status awaiting cargo for an outbound trip.


In the Matter of the Petition of MATSON NAVIGATION COMPANY for Redetermination of Use Tax


For Petitioner:

Hart H. Spiegel
Attorney at Law


Robert C. Livsey
Attorney at Law

For Staff:

Robert H. Anderson
Tax Counsel


This petition was filed to protest the assertion of use tax on cargo containers that were purchased in Japan and shipped empty to the State of California where they were unloaded and placed in standby condition awaiting cargo that was to be shipped from California to Japan and other Far East countries.

The issue presented by this petition is whether the cargo containers were being used in foreign commerce by reason of the fact that they were placed aboard ship, in Japan, for transportation to California, without any cargo for import to the United States.

Matson Navigation Company is a corporation and is a wholly owned subsidiary of Alexander & Baldwin. The Matson ships carry cargo imported to and exported from the United States. One of their stops is Japan where there has been an imbalance of export and import shipments. Exports from the United States exceed imports from Japan by about 25 percent so that for every 100 containers leaving California full of cargo only 75 come back with cargo. The remainder return empty.

Matson Navigation Company purchased new containers from Japanese suppliers in Japan, and because of the imbalance of trade some of the new containers were shipped to California empty. They were transported on board Matson ships, and after arriving in California they were unloaded and made available for use in exporting goods to Japan.

Counsel for the staff contends that the first use made of the new containers that were shipped, empty, to California was in California before they were actually placed in foreign commerce use.

Counsel for the petitioner contends that the containers, even though empty, were placed in the flow of commerce, and were therefore being used in foreign commerce when they were placed on board ship to be sent to California, where they were to be loaded with cargo for the return trip to Japan.

If we were to conclude, which we do not, that the new empty containers leaving Japan for the first time were, in fact, in foreign commerce use by reason of their being transported to the United States for cargo loading destined for Japan then there would be no use tax liability because of constitutional prohibition.

Counsel for Matson Navigation Company argues that the export-import of goods between the United States and Japan is like a large invisible belt constantly moving between the two countries and cargo is placed on the belt, in containers, in each country. Thus, when the new empty containers never before having been loaded with cargo, are placed on the so-called belt in Japan, they are in the flow of commerce and even though empty are being used in foreign commerce before ever entering the United States.

Sales and Use Tax Regulation 1620, subsection (b)(1) provides as follows:

"Use tax applies with respect to any property purchased for storage, use or other consumption in this state the sale of which is exempt from sales tax under this regulation, except property held or stored in this state for sale in the regular course of business or subsequent use solely outside this state, and except property purchased for use in interstate or foreign commerce, placed in use in interstate or foreign commerce prior to its entry into this state, and thereafter used continuously in interstate or foreign commerce." (Italic added.)

The containers were not instruments used in foreign commerce until they were first filled with cargo to be exported or imported as the circumstances required. The fact that the empty containers were being transported to California to make possible outbound service does not dictate the conclusion that they were instruments of commerce when they were en route to California.

The first use of the containers was in California when they were readied and placed in standby status awaiting cargo for an outbound trip to Japan. The first consumptive use in California constituted a taxable event.

The tax imposed by Revenue and Taxation Code Sections 6201 and 6202 is on the use of goods in California. The import-export clause of the Federal Constitution does not prohibit application of use tax with respect to the containers. (Sugarman v. State Board of Equalization, 51 Cal.2d 361 (1958).) Petitioner does not argue that point.

The effect of the commerce clause was considered in Southern Pacific Co. v. Gallagher, 306 U.S. 167 (1939). It was there held that use tax applied with respect to tangible personal property purchased outside of California by a railroad company, brought here by the company, and temporarily stored pending its intended installation or use as part of the interstate transportation facilities. The Court said that there was a taxable moment when the property had reached the end of its interstate transportation and had not begun to be consumed in interstate operation.

Petitioner cites Bingaman v. Golden Eagle Western Lines, Inc., 287 U.S. 626 (1936) in support of its position that the empty containers were used in foreign commerce as soon as they were placed aboard ship in Japan. The Bingaman case held that use tax could not be applied to the use of gasoline purchased and placed in the fuel tanks of buses outside the taxing state, when the buses traveled entirely in interstate commerce. The gasoline, however, is distinguishable from the empty containers that concern us here, since the gasoline was essential to the propulsion of the buses in interstate commerce and its use for that purpose commenced outside the taxing state.

Petitioner also cites the case of Atchison, Topeka and Santa Fe Railway v. State Board of Equalization, 131 Cal.App.2d 677 (1955). There, a railroad company purchased repair parts for train control equipment and brought the parts into California where they were permanently affixed on a locomotive which then traveled in interstate commerce. As in the Southern Pacific case, supra, the court found a taxable use in California before the parts were used in interstate commerce.

The point made by petitioner is that the court regarded the use of the parts in interstate commerce as commencing when they were affixed to the locomotive, even though their only operational use was over a short stretch of track in Iowa and Illinois which was equipped to operate in conjunction with the control equipment on the locomotive. Petitioner compares its empty, nonoperational containers placed aboard ship with the nonoperational parts placed on the locomotive, with respect to the question of when the use in commerce commenced. The locomotive parts, however, were permanently affixed to and became component parts of the locomotive. They were therefore as much an instrumentality of interstate commerce as the locomotive itself. The empty containers were not permanently affixed to the ship on which they were carried so as to become component parts of the ship.

In our view the empty containers placed aboard ship in Japan and brought to California were not then used in commerce any more than the railroad properties in the Southern Pacific case and the Atchison, Topeka and Santa Fe case were used in commerce when they were placed aboard trains and brought to California. The empty containers were brought here so that they could subsequently be used in carrying cargo. Since they did not enter the state while being used in foreign commerce, a taxable use occurred in California prior to the first use in foreign commerce.

For the reasons expressed in this opinion, the matter is redetermined without adjustment.

Done at Sacramento, California, this 29th day of March, 1972.

John W. Lynch, Chairman

Richard Nevins, Member

George R. Reilly, Member

William M. Bennett, Member

Attested by: W. W. Dunlop, Executive Secretary