What use tax is owed on equipment bought from a related company that charged no tax, and how is the exposure estimated?

Why an intercompany purchase is a taxable purchase

California imposes its use tax on "the storage, use, or other consumption in this state of tangible personal property purchased from any retailer" for use in California, measured by "the sales price of the property" (Rev. and Tax. Code section 6201). "Every person storing, using, or otherwise consuming in this state tangible personal property purchased from a retailer is liable for the tax," and that liability "is not extinguished until the tax has been paid to this state" (section 6202(a)). Texas imposes its use tax on a taxable item "purchased from a retailer for storage, use, or other consumption in this state" (Tex. Tax Code section 151.101(a)), and the user's liability "continues until the tax is paid to the state" unless the user paid it to a retailer engaged in business in Texas and received a purchaser's receipt (section 151.102). Washington levies its tax "for the privilege of using within this state as a consumer" (RCW 82.12.020(1)), and the tax "is owed at the time the tangible personal property is first put to use in this state" (Wash. Admin. Code 458-20-178(5)(a)).

Common ownership does not turn a sale into something else. Each company is a separate person, and a transfer of title for consideration between two of them is a sale: Texas defines "sale" or "purchase" to include "a transfer of title or possession of tangible personal property" for consideration (Tex. Tax Code section 151.005(1)). A related seller with no presence where the equipment goes ordinarily charges no tax, so the purchaser's use tax is the only tax in the transaction.

California and Texas tax purchases "from a retailer," which invites the argument that a sister company selling only to its affiliates is not one. Both states meet it with a presumption. In California, property "shipped or brought to this State by the purchaser was purchased from a retailer" for use in the state (Rev. and Tax. Code section 6246). In Texas, property "shipped or brought into this state by a purchaser is presumed, in the absence of evidence to the contrary, to have been purchased from a retailer for storage, use, or consumption in this state" (Tex. Tax Code section 151.105(a)).

The occasional sale exemptions do not reach a recurring intercompany supply. California's definition excludes a sale that is "one of a series of sales sufficient in number, scope, and character" to require a seller's permit (Rev. and Tax. Code section 6006.5(a)), and the Department's regulation states that "a person who makes three or more sales for substantial amounts in a period of 12 months is required to hold a seller's permit regardless of whether the sales are at retail or are for resale" (Cal. Code Regs., tit. 18, section 1595(a)(1)). Texas limits the first branch of its exemption to "one or two sales of taxable items ... at retail during a 12-month period by a person who does not habitually engage" in retail selling (Tex. Tax Code section 151.304(b)(1)). Both states also exempt a transfer of "all or substantially all" of the property used in an activity when the real or ultimate ownership afterward is substantially similar (Rev. and Tax. Code section 6006.5(b); Tex. Tax Code section 151.304(b)(3)). That branch protects the move of a whole operation into a commonly owned entity. It does not cover a parent shipping a subsidiary new machines year after year.

Washington's statute does not depend on a purchase from a retailer. Its measure rules expressly reach property "acquired by lease or by gift or ... extracted, produced, or manufactured by the person using the same" (RCW 82.12.010(7)(a)), so the identity of the seller matters to the measure, not to whether tax is owed.

What the tax is measured on

The starting measure in all three states is the price the buyer paid, which for a related-party purchase is the intercompany invoice or the transfer price booked between the companies. The states then diverge on four questions.

The first is whether the intercompany price stands. Washington's statute provides that where an article "is sold under conditions wherein the purchase price does not represent the true value thereof," the value is determined "as nearly as possible according to the retail selling price at place of use of similar products of like quality and character" (RCW 82.12.010(7)(a)). The Department's rule adds that "[a]n arm's length sale generally involves a transaction negotiated by unrelated parties, each acting in his or her own self-interest," and that where sales documents, accounting entries and reported values conflict, "the department often looks to the person's accounting records as an indication of the minimum value of capitalized property" (Wash. Admin. Code 458-20-178(4)(b)). An intercompany price set below cost for income tax or customs reasons is therefore exposed in Washington, and the capitalized cost in the asset register becomes the likely floor. Texas measures the tax by the "total amount for which a taxable item is sold," without deduction for the seller's cost or for "the transportation or installation of tangible personal property" (Tex. Tax Code section 151.007(a)); that section contains no counterpart to Washington's true-value rule.

The second is customs duty. Washington's measure "also includes, in addition to the purchase price, the amount of any tariff or duty paid with respect to the importation of the article used" (RCW 82.12.010(7)(a); Wash. Admin. Code 458-20-178(4)(d)). California turns the question on who imported the goods: "If the importer of record is a consignee and the consignee is the buyer, such duties are excludable from the sales price subject to use tax," while duties included in the price where the seller is the importer of record are taxable (Cal. Code Regs., tit. 18, section 1617(c)). The customs entry, not the intercompany invoice, shows which side was the importer of record.

The third is delivery. In Washington, "the 'value of the article used' also includes delivery charges" made by the seller (Wash. Admin. Code 458-20-178(4)(a)), and in Texas the sales price is figured without deduction for transportation (Tex. Tax Code section 151.007(a)). Freight the buyer arranges and pays to a third-party carrier is a separate question in each state and is documented separately.

The fourth is credit for tax paid elsewhere, which matters when the equipment bore a foreign consumption tax before export. Washington's credit runs to retail sales or use tax paid to another state, the District of Columbia, "and any foreign country or political subdivision thereof" (RCW 82.12.035), but the Department's rule states that the credit "is not available for other types of taxes such as, but not limited to, value-added taxes (VATs)" (Wash. Admin. Code 458-20-178(8)(b)). California's credit covers retail sales or use tax "imposed with respect to that property by any other state, political subdivision thereof, or the District of Columbia" (Rev. and Tax. Code section 6406), and its text does not mention a foreign country. Texas allows a credit for "any similar tax paid by the taxpayer in another state" if that state "provides a similar credit for a taxpayer of this state" (Tex. Tax Code section 151.303(c)). On those texts, a foreign value added tax does not reduce the use tax in any of the three states, and in Washington even a creditable tax counts only with documentation of the payment (Wash. Admin. Code 458-20-178(8)).

Exemptions come before any of this arithmetic. Each state has a manufacturing exemption with its own conditions: California's partial exemption for qualifying manufacturing and research equipment, which does not apply to county, city or district taxes (Rev. and Tax. Code section 6377.1(d)(1)); Texas's exemption for property "directly used or consumed in or during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale" that causes a physical or chemical change (Tex. Tax Code section 151.318(a)(2)); and Washington's exemption for "machinery and equipment used directly in a manufacturing operation or research and development operation" (RCW 82.12.02565(1)). Qualifying equipment leaves the population before the rate is applied, documented asset by asset, because an exemption claimed in a disclosure is reviewable like any other.

How far back the exposure runs

The lookback sets the size of the population. California's general period for a deficiency determination is three years after the last day of the month following the quarter, "except in the case of fraud, intent to evade this part or authorized rules and regulations, or failure to make a return," and "[i]n the case of failure to make a return," eight years (Rev. and Tax. Code section 6487(a)). A seller's permit holder that filed its returns but omitted the use tax ordinarily stands on the three-year period; a purchaser that filed nothing faces eight.

Washington allows no assessment "more than four years after the close of the tax year," except "against a taxpayer who has not registered as required by this chapter," on "a showing of fraud or of misrepresentation of a material fact," or under a written waiver (RCW 82.32.050(4)). A company already registered for business and occupation tax is inside the four-year limit for its unreported use tax; an unregistered one is not, and the Department's program page states that a business it finds through ordinary enforcement may face "a 'look back' period of seven years plus the current year."

Texas requires records to be kept for "at least four years," longer while any tax remains open to assessment (Tex. Tax Code section 111.0041). No Texas tax may be assessed more than four years after it became due, but that limit does not apply if no report for the tax was filed, if a report was filed to evade the tax, or if the tax due exceeds the tax reported by at least 25 percent (Tex. Tax Code sections 111.201, 111.205). A purchaser that filed no return, or whose omitted use tax is that large, remains open until it comes forward.

Building the estimate when the invoices are incomplete

The common failure is starting from accounts payable. Intercompany equipment often never passes through payables: it is booked through a due-to account, netted against other intercompany balances, or recorded when the asset is placed in service. The sound sequence starts from the records that capture every addition.

The first record is the fixed-asset register, which lists each capitalized addition with a cost, an in-service date and, in most systems, a location. Its cost figures are the measure Washington's rule treats as the likely minimum, and its dates and locations place each asset in a state, a period and a local rate jurisdiction. Depreciation schedules and business personal property filings, which report cost by location to the county or appraisal district, serve as cross-checks on completeness.

The second is the intercompany record: the due-to and due-from ledgers, intercompany invoices, the agreements that set transfer prices, and the settlement entries. These tie each register addition to a seller, and they separate related-party additions from third-party ones.

The third, for equipment brought in from abroad, is the customs record. The entry summary is filed on CBP Form 7501 for merchandise formally entered for consumption (19 C.F.R. section 142.11(a)), and the entries identify the shipment, the date it entered the country, the value declared and the duty paid, along with the importer of record that California's duty rule turns on. Where an intercompany invoice is missing, the entry and the matching register addition usually reconstruct it.

The population then divides by source. Related-party purchases with no tax charged go in at 100 percent: there is nothing to sample, because no related seller collected tax on any of them. The CDTFA Audit Manual describes the same treatment from the auditor's side, examining "specific customers, vendors, accounts, known errors, etc., on an actual basis" in a stratum that is not projected, while favoring stratified random sampling where full review is impractical (CDTFA Audit Manual, chapter 13 (March 2023)). Third-party purchases are where a sample earns its place: invoices from vendors registered in the state usually show tax, and invoices from remote vendors may or may not. A sample of those invoices, stratified by vendor and dollar size, produces an error rate that is projected to the third-party population.

An example shows the build. A company's register shows $5.4 million of production equipment added at one plant over the four years under review. The intercompany ledger ties $4.1 million of it to two related sellers, one abroad and one in another state; invoices exist for most of those additions, and customs entries cover the rest of the foreign purchases. The remaining $1.3 million came from unrelated vendors. The related-party measure is the full $4.1 million, less equipment documented as exempt, plus, if the plant is in Washington, the duty shown on the entries and any seller's delivery charges, with any addition invoiced below the cost the register carries raised to that cost. The unrelated stratum is sampled: if the sampled invoices show tax charged on 85 percent of the dollars, the untaxed 15 percent projects to a measure of $195,000. Each asset's measure is then multiplied by the combined state and local rate in effect at the plant's address for the period it was first used, and the result is laid out by period so that the lookback can be applied period by period.

Every agency in this group will estimate if the taxpayer does not. California's Department "shall make an estimate" for a person who fails to make a return, "based upon any information which is in the board's possession or may come in its possession," and adds "a penalty equal to 10 percent thereof" (Rev. and Tax. Code section 6511). The Texas Comptroller "may compute and determine the amount of tax to be paid" from a report or other information available (Tex. Tax Code section 111.008(a)), and may use sampling where records are voluminous or inadequate or a full audit would cost too much, after notifying the taxpayer in writing, with a sample that "must reflect as nearly as possible the normal conditions under which the business was operated" (section 111.0042(b) to (d)). Washington's Department may obtain facts "in such manner as it may deem best" and assess on them (RCW 82.32.100), and a taxpayer that has not kept its records for the required five years is "forever barred from questioning" the correctness of an assessment for those periods (RCW 82.32.070(1)). A taxpayer's own documented estimate is the defense against an agency estimate built on less.

Pricing the decision to come forward

The estimate exists to compare two numbers: the exposure if the agency finds the purchases first, and the cost under a disclosure program. The library's article on state-rate-only exposure estimates covers why the rate in that comparison is the combined local rate; the program terms supply the rest.

In Texas, the Comptroller limits a voluntary disclosure review to reports due within four years of the business's initial contact, and "[s]tatutory penalties and interest will be waived, except interest on taxes collected and not remitted" (Texas Comptroller Publication 96-576, Voluntary Disclosure Program (revised August 2026)). The business must not have been "previously contacted by the Comptroller" about the liability or have "received a notification of an audit or examination," the initial request must include "[a]n estimate of the amount owed," and the periods covered remain open to later audit within the statute of limitations.

In Washington, the program limits the lookback to "the prior four years plus the current year," and up to 39 percent in potential penalties can be waived, but interest is imposed at the statutory rate. Eligibility is narrower than the terms suggest: a business that has "an active registration with or reported taxes to the department" within the lookback does not qualify for an agreement, though it may qualify for a waiver of the 5 percent assessment penalty, and a Department enforcement contact that asks about affiliates counts as a contact with them as well (Washington Department of Revenue, Voluntary Disclosure Program). A registered company with unreported use tax on related-party equipment is therefore usually choosing between amended returns and waiting, and the program page states that amended returns can carry late payment penalties of up to 29 percent and the 5 percent assessment penalty where the tax was underpaid by at least 20 percent (see RCW 82.32.090(1), (2)).

In California, the In-State Voluntary Disclosure Program under Rev. and Tax. Code section 6487.06 limits the period to three years for a qualifying purchaser that "voluntarily files an individual use tax return" for property "purchased from a retailer outside of this state," instead of the eight years that otherwise apply to a nonfiler, and allows the Department to waive late filing and late payment penalties (CDTFA Publication 178, Voluntary Disclosure Agreement (August 2025)). The purchaser must not have previously registered with the Department, must not be "engaged in business in this state as a retailer," must not have been contacted about its failure to report the tax, and the Department must find that the failure was due to reasonable cause (section 6487.06(b)). A company that holds a seller's permit is outside the program and reports the tax on its own returns, ordinarily within the three-year period. A business without a seller's permit that makes more than $10,000 of purchases subject to use tax in a calendar year is a "qualified purchaser" required to register and file an annual use tax return under the version of section 6225 operative from January 1, 2024, through December 31, 2028 (section 6225(a), (c)(4)).

Practice notes

The first question in any related-party equipment review is where the equipment was first used and when, because that sets the state, the local rate and the open periods for each asset. The second is whether the related seller charged tax; where it did not, the purchases are counted in full from the fixed-asset register and tied to the intercompany ledger and customs entries, not sampled. The measure is the intercompany price, tested against register cost and increased by customs duty in Washington, with duty excluded in California when the buyer was the importer of record, and with no reduction for a foreign value added tax. The disclosure decision follows the estimate, not the other way around: Texas waives penalties and interest within a four-year lookback, Washington's program excludes companies already registered, and California's in-state program shortens the period to three years only for purchasers that are not California retailers. An agency contact, including one aimed at an affiliate, can close a program before the estimate is finished. G&G State Tax Group provides use tax exposure estimates, voluntary disclosure representation and audit defense for equipment bought from related companies alongside its state and local tax practice.