Does an apparel manufacturer's use of purchased garments and cloth as design samples create tax even when most samples are later sold?

Plain-English summary

A women's-apparel manufacturer bought other companies' garments without tax and kept them for several months as design samples. About 95% were later sold at half price in bargain sales; the remaining 5% were reportedly destroyed, apparently after being taken apart as patterns.

The Board concluded that using those garments to design the manufacturer's own products was taxable use under section 6244. Later sales did not erase that use, and the gross receipts from those subsequent retail sales were also subject to sales tax.

Cloth samples used for designing were similarly taxable even though most were later made into garments for sale and the rest sold as remnants. The memorandum recognized a narrow historical exception for qualifying apparel models imported under bond before August 31, 1963, under former Tariff Act section 308; imports on or after that date were taxable like domestic samples.

What this means for you

Apparel manufacturers and designers

Using another company's garment or fabric as a model, pattern, or design aid is different from merely displaying that item to sell it. The design function created taxable use here.

Clothing retailers

Selling the sample later can create a separate taxable retail sale without undoing the manufacturer's earlier use-tax liability.

Import and tax professionals

The import exception discussed was tied to a repealed federal provision and a pre-August 31, 1963 entry date. It is historical, not a current import rule.

Common questions

Q: Did later sale of 95% of the garments prevent use tax?
A: No. The manufacturer had already used them to design its own products.

Q: Was sales tax also due when the samples were later sold?
A: Yes. The memorandum applied use tax to the design use and sales tax to gross receipts from later retail sales.

Q: How were cloth samples treated?
A: They were taxable because they were bought for the manufacturer's design use, even when later made into sold garments or sold as remnants.

Q: What was the historical imported-sample exception?
A: Qualifying articles imported under former Tariff Act section 308 before August 31, 1963 could avoid state use tax if all federal requirements were met.

Citations and references

• California Revenue and Taxation Code § 6244
• Former Tariff Act of 1930 § 308, 19 U.S.C. § 1308 (repealed in 1962 with the effective date described in the memorandum)
• McGoldrick v. Gulf Oil Corp., 309 U.S. 414 (1940)
• San Francisco Auditing's September 2 memorandum and current audit — year and separate memorandum or audit records not supplied in the official PDF
• Domestic and bonded-import purchase, customs, reexport, pattern, destruction, bargain-sale, garment-production, and remnant-sale records — facts stated or assumed; records not reproduced in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 210.0480
• Original supporting opinion: 210.0480 PDF

Original ruling text

State of California

Memorandum

To:

San Francisco – Auditing (BHT)

From:

Tax Counsel (PM) - Headquarters

Board of Equalization

210.0480

Date:

October 14, 1964

This is in reply to your memorandum of September 2 requesting an opinion on the application of tax to certain purchases of REDACTED TEXT, a manufacturer of women’s apparel. The facts and our conclusions are set forth below. 1.

Style Samples Purchased in the U.S.

REDACTED TEXT buys many garments of other manufacturers to use as style samples. Such garments have been purchased ex tax from manufacturers in the United States. They are normally kept on hand for several months for use in designing. When they have served their purpose, approximately 95 percent are sold in REDACTED TEXT special Saturday bargain sales for about half of the original price. The remaining 5 percent are said to be destroyed, presumably when they are taken apart to serve as patterns. It is clear, we believe, that REDACTED TEXT is liable for use tax on the cost of the style samples, as well as for sales tax on the gross receipts from the subsequent sales. The garments are used to aid the company in designing its own products. This is a use other than retention, demonstration or display while holding the garments for resale. Accordingly, the use is taxable under section 6244. 2.

Style Samples Purchased Abroad

During the current audit period, certain style samples were purchased abroad and placed under customs bond. Subsequently, these garments were reexported. It is assumed that they were used in the same manner as garments purchased in this country, i.e., that they were used as models or patterns for garments manufactured by REDACTED TEXT. The taxability of these items is controlled in part by section 308 of the Tariff Act of 1930 (19 U.S.C.A. 1308). This section, which was repealed in 1962, provided for the importation of certain articles without payment of duty, under bond for exportation within one year. Included within the listed articles were “(m)odels of women’s apparel imported by manufacturers for use solely as models in their own establishment, and not for sale.” The repeal was effective with

San Francisco - Auditing

-2-

October 14, 1964
210.0480

respect to articles entered, or withdrawn from warehouse, for consumption on or after August 31, 1963. In McGoldrick v. Gulf Oil Corp., 309 U.S. 414, the court held that the imposition of a state tax on the sale of articles exempt from duty under section 309 of the Tariff Act was an infringement of the Congressional regulation of commerce. The same would appear to be true of a state tax on the use of articles exempt from duty under section 308. Accordingly, it is our opinion that REDACTED TEXT is not liable for use tax on the cost of garments imported prior to August 31, 1963, assuming it met all of the statutory requirements. The use of garments imported on or after August 31, 1963, however, is taxable to the same extent as the use of garments purchased from domestic manufacturers. 3.

Cloth Samples

REDACTED TEXT purchases samples of cloth which are also used for designing purposes. These samples are usually large enough to make one or more garments. It has been stated that most of the samples are, in fact, made into garments and that the garments are sold. Samples not made into garments are sold as remnants. Again, it appears that REDACTED TEXT purchases the subject property for its own use rather than for the purpose of resale. Accordingly, the tax is applicable. PM:fb

210.0480 redacted