Were separately stated postal C.O.D. fees taxable when a portrait studio prepaid the Post Office and recovered the charges from customers?

Plain-English summary

A portrait studio let customers pay the balance for photographs upon postal delivery. Postal rules required the studio to prepay the C.O.D. fee, which the Post Office later collected from the customer and returned to the studio. The studio itemized postage and the C.O.D. fee separately.

Tax counsel concluded that Regulation 1632 included the C.O.D. fee in taxable gross receipts. The fee paid for collection rather than transportation, the collection service was integral to the portrait sale when that payment method was chosen, and the studio—not the Post Office—bore the risk of customer nonpayment.

The regulatory exception did not apply because the fee was included in the invoice and was not collected and retained by the carrier. Separately stated postage could still be excluded under Regulation 1628 if its conditions were met.

Common questions

Did separately stating the C.O.D. fee make it nontaxable?

No. The studio had prepaid the collection service and recovered its cost from the customer.

When did Regulation 1632's exception apply?

When the C.O.D. fee was not included in the invoice and the carrier collected and retained it.

Was separately stated postage treated the same way?

No. Qualifying separately stated transportation charges, including postage, were excludable under Regulation 1628.

Citations and references

• California Sales and Use Tax Regulation 1632 (as cited)
• California Sales and Use Tax Regulation 1628 (as cited)
• Domestic Mail Manual sections 913.22 and 914.621 (as cited)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/155-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/155-0600.pdf

Original ruling text

155.0600
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
916-323-7711
July 14, 1983
REDACTED TEXT

Dear REDACTED TEXT:
Your May 26 letter to the Legal Section of the Board of Equalization has been referred to me for reply. You raise the following question: Is REDACTED TEXT liable for sales tax on the separately stated COD charges since it is merely complying with a Post Office regulation to prepay a fee for which it receives reimbursement which is merely an advance for the customer due to Post Office regulations? You relate that REDACTED TEXT operates photographic studios. Customers, after seeing portrait proofs, may either pay the full amount of their order in advance, or may pay a deposit in advance and pay the balance due for the portraits plus C.O.D. charges when the Post Office delivers the portraits to the customer. As you point out, postal regulation (Sections 913.22 and 914.621 of Domestic Mail Manual) require REDACTED TEXT to prepay the Post Office’s C.O.D. charges, which the Post Office then will reimburse to REDACTED TEXT when the Post Office collects the C.O.D. charges from customers. The “sales price” for the portraits does not change depending on which payment method is selected by the customer, but the postage and C.O.D. charges are additional expenses incurred by REDACTED TEXT and are separately itemized by REDACTED TEXT in each case in its billing to its customers. Sales and Use Tax Regulation 1632 (title 18, Calif. Administrative Code) requires REDACTED TEXT to pay sales tax on the C.O.D. charges. Regulation 1632 provides that: “On and after July 1, 1970, tax applies to any C.O.D. fee paid by the retailer’s customer on taxable C.O.D. fee paid by the retailer’s customer on taxable C.O.D. sales except where the C.O.D. fee is not included in the invoice and the carrier collects it from the retailers customer and retains it.” The exception provided in Regulation 1632, where the C.O.D. fee is not included in the invoice and is collected and retained by the carrier from the retailer’s customer, is not applicable under the facts you relate.

REDACTED TEXT

-2-

July 14, 1983

155.0600
The reason that Regulation 1632 includes C.O.D. charges in the measure of tax is that these charges are not transportation charges, but rather are collection charges paid to the Post Office acting in effect as a collection agent for REDACTED TEXT. While these charges are for a service, the collection service is an integral part of the sale of the portrait photographs, when the customer elects this method of payment. The risk of the customer’s nonpayment of these charges falls on REDACTED TEXT, not the Post Office, as a result of the postal regulation which requires prepayment of the charges by REDACTED TEXT. While it is true, as you state, that a customer may perceive that he is paying the Post Office for the service, in fact, REDACTED TEXT has already paid the Post Office for the service. Please note that separately stated transportation charges, including postage, are excludable from the measure of tax unde4r the conditions specified in Regulation 1628 (enclosed for your information). REDACTED TEXT should properly exclude separately stated postage from tax, regardless of which method of payment the customer selects. Very truly yours, John Abbott Tax Counsel JA:ss Enclosure