Could a coin seller exclude a separately labeled interest charge when the merchandise price was fully paid at the time of sale?

Plain-English summary

A coin seller proposed an agreement under which the merchandise price would be fully paid at the time of sale, while a separately labeled interest amount could accrue on another contractual liability. Board tax counsel said this was not a sale on credit under Regulation 1641 because the seller did not transfer goods for a promise to pay their price later.

The label did not control. Counsel read the cited Peterson case as establishing that a financial cost called interest remains part of taxable receipts unless it results from a genuine credit sale or another specific exclusion applies. Because the coin price was paid in full at sale, the later amount was not excludable merely because the agreement called it interest.

The official annotation summary also describes a second customer's takeover of a contract. The complete supporting letter does not state the necessary facts or a holding on that additional transaction, so this page does not report an answer to it.

What this means for you

Sellers using deferred charges

A charge does not become excluded interest solely through contract terminology. The seller must actually extend credit for the merchandise price under the applicable rule.

Accountants and tax professionals

Trace what debt is being deferred. If the goods are paid in full at sale, a later finance-related amount may remain part of taxable receipts even when separately labeled interest.

Common questions

Q: Were the coins sold on credit?
A: No. Their price was fully paid at the time of sale.

Q: Did calling the additional amount interest exclude it?
A: No.

Q: What rule did the letter apply?
A: Regulation 1641, formerly Ruling 61(a), concerning credit-sale interest.

Q: Does the supporting letter decide the annotation's second-customer issue?
A: No. That analysis is absent from the complete letter.

Citations and references

• California Code of Regulations, title 18, § 1641
• Former California Sales and Use Tax Ruling 61(a)
• The Peterson case, as discussed in the letter without a full citation
• Requester's May 9, 1973 letter and contemplated coin agreement — separate documents not reproduced in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 200.0124
• Original supporting opinion: 200.0124 PDF

Original ruling text

200.0124

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001
TELEPHONE (916) 445-6450

June 13, 1973

REDACTED TEXT

Attention:

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Gentlemen:
This is in belated reply to your letter of May 9, 1973, discussing the "interest" problem. Necessarily, I must agree that the Peterson case does not involve the precise situation which may confront your client. But it is the only case directly concerned with the taxability of "interest" charges for sales and use tax purposes. From our point of view, the important aspect of the Peterson case is the conclusion that denominating a charge an "interest" charge will not thereby exempt it for sales and use tax purposes although the charge may relate to a financial cost of the seller of goods. As I see it, the court's opinion is that the "interest" charge did not result from the preceding lease. Consequently, the charge could only be attributable to the following sale. Because all receipts from the sale must be included in the measure of tax unless a specific exemption or exclusion is applicable, and Peterson could show no such application, the receipts must be included in the measure. Of particular interest is that Peterson could not show that the questioned interest charge was a consequence of a sale on credit and thereby excluded as explained by ruling 61 (a) (ruling 61 is now regulation 1641). In the contemplated contract, your client's coins will not be "sold on credit" as the term is used in regulation 1641. At the time of sale, the price will be fully paid. The seller is then extending no credit to its customers because it is not transferring goods in return for a promise to pay at a future time. As we see it, your client's position is that at the time the coin agreement becomes binding, the customer then assumes a liability for payment of a (maximum) amount. Assuming, arguendo, that the liability is unqualified, that the seller could call for its payment at any time, and that the "interest" accrues until it is paid, such a liability could

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2

June 13, 1973
200.0124

be considered a debt and the incremental payments for the delayed payment of the debt considered "interest" payments. But we cannot agree with the further assumption that an amount termed an "interest payment" is excludible from the measure of tax on a sale of tangible personal property when the charge is not attributable to a credit sale of the tangible personal property, notwithstanding the "interest" charge arose in a transaction which involved a sale of goods. We believe that the Peterson case is an authority for that view. Very truly yours,

Philip R. Dougherty
Tax Counsel
PRD/vs