Was an apparel manufacturer's use of ex-tax yardage to make style samples taxable when the garments were shown to buyers and later sold?

Plain-English summary

A women's-apparel manufacturer bought yardage without tax and incorporated it into style-sample garments. It showed those garments to buyers from major retail chains, who selected styles to order, and eventually sold every sample through company outlets specializing in seconds.

The Board concluded that this was nontaxable demonstration or display of goods held for sale. The important question was not whether the garments were labeled “samples” or were ultimately sold; it was whether some other intervening use occurred before resale.

Here, the garments were used solely to demonstrate the styles while being held in the regular course of business. The memorandum contrasted an earlier example where sample garments were also used to make patterns and obtain orders for production by other fabricators—uses that went beyond demonstration and display.

What this means for you

Apparel manufacturers

Track the same sample garment from production through buyer presentations and final sale. The result depended on the absence of any additional production or internal use.

Fashion wholesalers and retailers

Calling an item a sample does not decide tax treatment, and eventual resale alone does not cure a taxable intervening use. The actual activities involving the item control.

Accountants and tax professionals

Separate samples used only to solicit orders from garments used as pattern-making or production tools. The memorandum treated those fact patterns differently.

Common questions

Q: Did incorporating yardage into a sample garment create taxable use?
A: No. The manufacturer bought the yardage to make the resale article itself, and the completed garment was used only for demonstration or display.

Q: Did eventual retail sale by itself establish nontaxability?
A: No. The memorandum says the decisive issue is whether an intervening use went beyond retention, demonstration, or display.

Q: Why was the earlier pattern-making example taxable?
A: Those garments were used to prepare patterns and obtain orders for processing by other fabricators before their later sale.

Q: Where were the style samples ultimately sold?
A: Through the manufacturer's own retail outlets specializing in seconds.

Citations and references

• California Revenue and Taxation Code § 6094
• Sales and Use Tax Annotations 435.1440 (January 13, 1967) and 280.1080
• Inglewood Auditing's May 13, 1977 memorandum and current audit — facts quoted; separate memorandum and audit records not reproduced in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 210.0470
• Original supporting opinion: 210.0470 PDF

Original ruling text

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum

To:

Inglewood – Auditing (ECM)

From:

Headquarters – Legal (MHH)

Subject:

REDACTED TEXT, Inc.

210.0470
Date:

July 1, 1977

Your memorandum of May 13, 1977 states that you are now auditing the above firm, which is a manufacturer and distributor of women’s apparel. Our opinion is sought, based on these facts: “The taxpayer purchases yardage goods, ex-tax, specifically for use in the designing and production of style samples. These samples are shown to buyers from major retail chains who order from the selection. All samples produced are eventually sold through the taxpayer’s own retail outlets, which specialize in seconds. Our question is whether this procedure constitutes a use other than demonstration or display of goods held for sale in the regular course of business.” The question of how samples should be treated has previously been considered by the Board’s staff. The main criterion in determining whether imposition of the use tax is proper is neither the labeling of the items as “samples” nor the fact that sample items are ultimately sold at retail. The main criterion is whether there has been an intervening use “other than retention, demonstration, and display while holding it for sale in the regular course of business” (Revenue and Taxation Code Section 6094). Annotation 435.1440, 1/13/67, involved fabrication labor on “sample” garments, which was held to be taxable. The taxpayer made garments from customer-furnished yardage. Customer used the garments as samples for the purpose of preparing patterns from them and for obtaining orders to be processed by fabricators other than taxpayer. Customer ultimately sold the samples to its employees. The use after fabrication and before resale was a use going beyond mere demonstration or display. Thus, neither the fact that the garments were called “samples,” nor the fact that there was an ultimate retail sale of the samples by the customer, warranted a conclusion that the utilization made of the samples constituted “use for demonstration and display.”

Inglewood – Auditing (ECM)

-2-

July 1, 1977
210.0470

Annotation 280.1080 involved a situation similar to the one you pose. Yardage was purchased, manufactured into sample coats, and the coats were used as sample coats by the manufacturer in his own business. There was no intervening use which could be characterized as something other than “retention, display, or demonstration.” Thus, it was a nontaxable use. Likewise, in the case before us, the purpose of taxpayer’s ex-tax purchase was to utilize the yardage by incorporating it into the manufactured article - - the samples. The samples were then used solely for demonstration or display while holding them in the regular course of the taxpayer’s business. Such use was nontaxable within the meaning of the references cited above.

MHH:jw

210.0470 redacted