Could a clothing manufacturer's salesmen buy sample garments for resale when they demonstrated them and later sold them to retailers?

Plain-English summary

A clothing manufacturer's salesmen bought sample garments from the company, demonstrated them, and later sold them to retailers for resale. The Board concluded that the manufacturer's transfers to the salesmen could qualify as sales for resale because the merchandise remained held for sale and had no use beyond demonstration and display.

Relief was not automatic. The manufacturer had to collect and organize sales documents proving transfer to retailers, list the original purchase prices for audit verification, and obtain an affidavit from each salesman stating that no other use occurred before resale. A reaudit would determine the credit.

The Board also planned to approve the salesmen as the manufacturer's agents under section 6014. As a result, the manufacturer would be treated as the retailer for their California sales and would remain responsible for sales tax on those retail transactions.

What this means for you

Clothing manufacturers

Maintain a chain of evidence from the manufacturer's sample transfer through the salesman's demonstration to the retailer's purchase for resale.

Sales representatives

Personal or other use can defeat the resale analysis. The letter required formal affidavits limiting use to demonstration and display.

Accountants and tax professionals

Separate the upstream resale credit from tax on the downstream retail sale. The manufacturer could receive a credit and still owe tax as retailer through its agents.

Common questions

Q: Were all sample transfers to salesmen automatically exempt?
A: No. The conclusion depended on proof of later retailer resale and no intervening use beyond demonstration and display.

Q: What records did the Board require?
A: Sales documents showing transfer to a retailer, original purchase-price listings, and affidavits from the salesmen.

Q: Who would verify the adjustment?
A: The out-of-state auditing office would conduct a reaudit after the manufacturer assembled the evidence.

Q: Who owed tax on the salesmen's California retail sales?
A: The manufacturer, once the salesmen were approved and treated as its agents under section 6014.

Citations and references

• California Revenue and Taxation Code § 6014
• Petition for redetermination and Sacramento preliminary hearing — source first says August 14 and later August 10; year redacted and separate petition or hearing record not reproduced
• Approved Hearing Officer Report dated January 9 of a redacted year, two listed copies, and attached audit workpapers — attachments not included in the official PDF
• Sales documents, purchase-price lists, and salesmen's affidavits — required for prospective reaudit; records and any resulting reaudit not supplied in the official PDF
• Copy to the Out-of-State District Administrator — copy recipient listed; no separate transmittal record supplied in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 210.0068
• Original supporting opinion: 210.0068 PDF

Original ruling text

210.0068

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

January 15, 1963

W--- S--- Manufacturing Company
XXXX S. E. --- Drive
--- X, --Attention:

Mr. M--- S. A--Assistant Treasurer

Gentlemen:
This is to advise you of our conclusions and recommendations on the petition for Redetermination of sales and use tax for which a preliminary hearing was held in Sacramento on August 14, 19XX. We have concluded that the clothing samples purchased from your firm by its salesmen and which were subsequently sold to retailers for sale at retail may be exempted as a sale for resale. This conclusion is based upon the finding that the merchandise was held for sale, was subsequently sold to retailers for sale at retail by the salesmen, and that no use other than demonstration and display was made of the merchandise while holding it for sale. 1. Your firm is to obtain from the salesmen and organize for audit examination sales documents or other advice sufficient to show that the samples were subsequently transferred to a retailer for sale at retail. 2. The purchase price of these sales are to be listed for audit verification since these amounts will be the basis of any credit. 3. In addition, each of the salesmen is to execute and have available for examination an affidavit in proper form declaring that no other use of the merchandise has been made other than demonstration and display prior to resale. When you have accumulated this information and are prepared for reaudit, you may communicate directly with Out-of-State District – Auditing, Post Office Box 1799, Sacramento, California. This office will arrange then to conduct a reaudit of your account which will be the

W--- S--- Manufacturing Company
Account Number -- - - - XXXXX

-2-

January 15, 1963
210.0068

basis for any adjustment of the tax. Further action on the original audit determination will be withheld for a reasonable time until we hear from you. We are taking appropriate action to obtain board approval for these salesmen to be regarded as the agents of your firm as provided by section 6014 of the Revenue and Taxation Code. When this approval is obtained, your firm will be regarded as a retailer for sales made by these salesmen in California and will be responsible for the sales tax on the retail sales made by these salesmen. It was our understanding at the preliminary hearing that you are in agreement with this action. After a review of our conclusions and the action we have recommended be taken, if you have any questions please feel free to write us.

Very truly yours,

W. E. Burkett
Associate Tax Counsel

WEB:dm

cc:

Out-of-State – District Administrator
Attached are two copies of the Report of Hearing Officer dated January 9, 19XX which has been approved. This hearing was held in Sacramento on August 10, 19XX.

Also attached are the audit work papers.