Were user-instruction labels affixed to pay telephones exempt from sales tax?

Plain-English summary

A manufacturer sold pressure-sensitive user-instruction labels for pay telephones. California said the labels conveyed product information and could qualify for the label exemption.

The sale was exempt only when the purchaser attached the labels to telephones it would resell, so the labels traveled with and became part of the property sold. If the purchaser attached them to telephones it would use, the label sale was taxable.

The label seller needed a complete, timely exemption certificate accepted in good faith. It should not accept such a certificate for price, shipping, or advertising materials because those were not exempt labels.

Common questions

Did instructional content alone make the sale exempt?

No. The purchaser also had to resell the labeled telephone.

What if the purchaser operated the labeled telephone?

The label sale was taxable.

Was documentation required?

Yes. The seller needed a valid exemption certificate to overcome the presumption of taxability.

Citations and references

• Sections 6051 and 6091 — general tax and presumption of taxability stated
• Regulation 1589(b)(2)(A) — labels affixed to and resold with property
• Regulation 1589(c)(1) — price, shipping, and advertising items excluded
• Regulation 1667 — complete, timely, good-faith exemption certificate requirements; copy listed as enclosed but not included in the official PDF
• Business Taxes Law Guide Annotation 195.1935 (April 26, 1971) — consumer product-information function cited
• Requester's April 5, 1994 letter — label manufacture, user-instruction content, and taxability question described; separate letter not reproduced, and counsel states it omitted whether the purchaser would use or resell the telephones
• Copy to the Sacramento District Administrator — copy recipient listed; no separate transmittal record supplied in the official PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/195-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/195-1902.pdf

Original ruling text

195.1902

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

1020 N STREET, SACRAMENTO, CALIFORNIA
PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001
TELEPHONE (916) 920 - 7445

MEMBER
First District
BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

May 25, 1994

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

REDACTED TEXT
Re:

REDACTED TEXT

Dear REDACTED TEXT ,
This is in response to your letter dated April 5, 1994. You state that your company manufactures pressure sensitive labels containing user instructions which will be affixed to pay telephones. You ask whether sales of the labels are taxable. We assume that the purchaser of the label owns the phone to which the label is attached. Your letter does not state whether the person who purchases the labels will affix them to telephones that he will use or to telephones that he will resell. Revenue and Taxation Code section 6051 imposes a sales tax on all retailers measured by their gross receipts from retail sales of tangible personal property in California. All gross receipts from sales of tangible personal property are presumed subject to tax until the contrary is established. (Rev. & Tax. Code § 6091.) The exemption which may apply in your case is set out in Regulation 1589 which provides: “Tax does not apply to sales of labels or nameplates if: “(A) The purchaser affixes them to property to be sold and sells them along with and as part of such property, as, for example, sales of name-plates of manufacturers or producers which are permanently affixed to each unit of products sold, such as automobiles and machinery.” (Reg. 1589(b) (2) (A), (emphasis added).) Thus, the exemption requires that the labels be purchased by a person who will affix them to property which that person will resell and the labels will be resold as part of the property to which they are affixed. Labels within the meaning of this provision include those which are attached to containers to identify the product or the producer, describe the contents or instruct the consumer on the application or use of the product. That is, the essential function of a label within the meaning of Regulation 1589 is to convey information concerning the product. (Business Taxes Law Guide Annotation 195.1935 (4/26/71).) On the other hand, tax applies to sales of

non-labels such as price tags, shipping tags, and advertising matter used in connection with the sale of property. (Reg. 1589(c) (1).) Based on the facts, the labels about which you inquire will be affixed to telephones to provide user instructions. These labels will convey product information. If these labels are attached by your customer to telephones that your customer will resell then your sale of the labels is exempt from sales tax. If these labels are attached by your customer to telephones that your customer uses, then the sale of the labels is subject to tax as explained in the regulation. We note, however, that you should obtain an exemption certificate from the purchaser of these labels if the labels will be affixed to telephones which will be resold. This is because your sales are presumed taxable until you establish the sales tax exemption. Exemption certificates are valid only if complete, timely, and taken in good faith. They should not be accepted for labels containing price, shipping, or advertising information, since sales of these non-labels are not exempt. Regulation 1667, which explains what information must be contained in an exemption certificate and when it must be issued, is enclosed. If you have further questions, feel free to write again. Sincerely, Pat Hildebrand Staff Counsel PH:cl cc:

Sacramento District Administrator