Was a dealer's temporary loan of a new dictating machine to a traveling owner of an older model a nontaxable demonstration?

Plain-English summary

A dictating-machine manufacturer's policy let an owner of an older machine borrow a new model from a local dealer while traveling away from home. The dealer charged $3 for pickup and delivery, an amount said not to cover even those delivery costs.

The new machine was returned to stock and sold as new. Dealers did not intend to loan a machine more than once, although an accidental repeat loan sometimes occurred. The program's purpose was to demonstrate the new model's superiority, and some borrowers later bought one.

The Board treated these temporary loans as demonstrations rather than taxable uses and recommended removing the item from the tax measure.

What this means for you

Equipment dealers

A temporary customer loan can be a demonstration when it is structured to showcase the resale product and the same item returns to stock for sale.

Manufacturers operating dealer programs

Document the promotional purpose, limits on repeated use, handling charges, inventory return, and resulting sales.

Accountants and tax professionals

The nominal $3 charge was described as pickup and delivery reimbursement, not payment for using the machine. That fact supported the demonstration characterization.

Common questions

Q: Who received the temporary machines?
A: Owners of older audograph machines who were traveling away from home.

Q: Why did the program qualify as demonstration?
A: It placed the new model with existing owners to show its superiority and sometimes led to sales.

Q: What happened to each machine afterward?
A: It returned to stock and was sold as new.

Q: Did the $3 charge make the arrangement a rental?
A: No. The letter says it was for pickup and delivery and did not cover those costs.

Q: What adjustment was recommended?
A: Eliminate the disputed loan item from the measure of tax.

Citations and references

• Petition for redetermination — date, identifier, and separate petition not supplied in the official PDF
• Gray Manufacturing Company loan policy — described without effective date, policy form, or separate copy
• Form S-169 and Unit 4 redetermination instruction — form, resulting notice, and final Board action not supplied
• Copy to the Los Angeles Administrator — copy recipient listed; no separate transmittal record supplied

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 210.0380
• Original supporting opinion: 210.0380 PDF

Original ruling text

210.0380
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

July 13, 1959

REDACTED TEXT
Attorneys at Law
233 S. Beverly Dr.
Beverly Hills, California
RE:

REDACTED TEXT
REDACTED TEXT
Account REDACTED TEXT

Gentlemen:
We have reviewed the information presented in support of the petition for redetermination filed on behalf of the above company. We were advised that taxpayer is engaged in the business of selling and servicing dictating machines and supplies manufactured by Gray Manufacturing Company of Connecticut. According to the manufacturer’s policy an owner of an audograph machine while traveling away from home may borrow a new machine for temporary use from any local dealer. A charge of $3.00 is made for this loaning which, we were told, is a charge for pickup and delivery and does not pay the costs of the pickup and delivery. We understand that all of these new machines are returned to stock and are sold as new machines. Also, it is not intended to loan any machine more than once although in some instances by accident a machine may be loaned more than once. We understand the purpose of this policy is to put new machines into the hands of persons who own audograph machines and in this way demonstrate the superiority of the new machines over older machines. As a result of this policy, new machines are in some instances sold to customers who have used such a machine as a loaner. After a review of the facts, we think that the transactions in question are in fact demonstrations and should not be considered as being uses of the machines within the meaning of the California Sales and Use Tax Law. Accordingly, we shall recommend to the Board that this item be eliminated from the measure of tax. Notice of the Board’s action will by mailed in due course. Very truly yours,

REDACTED TEXT

-2-

July 13, 1959
210.0380

John H. Murray
Associate Tax Counsel
JHM:fb
cc:

Los Angeles – Administrator

Note to Unit 4:
Reschedule this matter for redetermination in accordance with the views expressed above and in Form S-169. Send a copy of the notice of redetermination to taxpayer’s attorney.