How does California distinguish resale carpet samples from swatch-book marketing aids, and when does transferring a marketing aid trigger tax?

Plain-English summary

The memorandum separated two items that the carpet industry had both called “samples.” Area rugs or carpets held for demonstration and display and later sold to customers are samples. Carpet remnants bound together into swatch books, which are not normally sold to customers, are marketing aids governed by Regulation 1670.

For marketing aids, the price charged matters. A manufacturer or wholesaler transferring a swatch book for less than 50% of its purchase price is the consumer. A transfer for 50% or more generally makes that person a seller, and the transfer is a retail sale unless a resale or other exemption applies.

The memorandum also explained that a California manufacturer consuming a marketing aid does so where it delivers the item to the U.S. Mail or a common carrier. Handing a swatch book to a carrier in California for an out-of-state recipient therefore does not turn the transaction into an exempt interstate sale.

What this means for you

Carpet manufacturers and wholesalers

Classify full rugs or carpets intended for eventual customer sale separately from bound swatch books used to promote products. The memorandum applies different tax rules to those two categories.

Businesses charging for marketing aids

Compare the transfer price with your purchase price. For a manufacturer, the memorandum says purchase price generally means the purchase price of the materials incorporated into the marketing aid.

Businesses shipping aids out of California

An out-of-state destination does not by itself create an interstate-commerce exemption when you are the consumer. Under the stated facts, consumption occurred when the aid was delivered to the Postal Service or carrier in California.

Common questions

Q: Is every piece of carpet shown to customers a “sample” under this memorandum?
A: No. The memorandum reserves that term for area rugs or carpets held for demonstration and display and later sold. Bound carpet-remnant swatch books are marketing aids.

Q: What happens when a swatch book is transferred for less than 50% of purchase price?
A: The transferor is treated as the consumer and may owe use tax on its purchase price if consumption occurs in California and tax was not already paid.

Q: What if the transfer price is at least 50% of purchase price?
A: The transferor is treated as a seller. The retail sale is taxable unless the purchaser will resell the aid before use or another exemption applies.

Q: Does shipping a consumed marketing aid to another state qualify under section 6396?
A: Not on the facts described. The memorandum says the manufacturer consumed the aid upon delivery to the carrier in California rather than selling it in interstate commerce.

Citations and references

• California Sales and Use Tax Regulation 1670
• California Revenue and Taxation Code § 6396
• Audit Evaluation and Planning's June 22, 1995 memorandum and attached draft industry letter — separate memorandum and draft not reproduced in the official PDF
• CMAW compliance booklet and prior Board-personnel approval — described but booklet and approval record not reproduced in the official PDF
• September 1995 Tax Information Bulletin Article 11, Taxability of Carpet Samples, and proposed revision — article described and revised language quoted; complete bulletin not reproduced in the official PDF
• Copies to Glenn A. Bystrom and Larry Isbell — copy recipients listed; no separate transmittal records supplied in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 210.0485
• Original supporting opinion: 210.0485 PDF

Original ruling text

State of California

Board of Equalization
Legal Division-MIC: 82

210.0485

Memorandum

To :

Mr. Dennis Fox, Supervisor
Audit Evaluation and Planning Section, MIC:40

From :

Patricia Hart Jorgensen
Senior Staff Counsel

Date:

September 26, 1995

Subject: Industry Notice to the C--- & R--- I---

This is in response to your memorandum dated June 22, 1995, in which you requested approval of an attached draft letter to the C--- and R--- I--- (CRI), formerly known as C--- M--of the W--- (CMAW), regarding rug samples provided to out-of-state dealers. Your draft letter attempts to correct inaccurate language contained in a booklet prepared by CMAW entitled “CMAW Guidelines for Effective Compliance with California Sales and Use Tax Regulations for the Carpet Industry”. It is my understanding that the “inaccurate” language had previously been approved by Board personnel. The intent of the draft letter is to clarify the application with respect to samples and marketing aids provided to out-of-state dealers. Upon review of this matter , it has become apparent that the underlying problem is that the term “sample” has been used in reference to both: area rugs or carpets, formerly held for demonstration and display, which are subsequently sold to customers; and marketing aids which generally are composed of carpet remnants bound together to form a swatchbook. The term “sample” should be used only for the former and not the latter. This underlying confusion over the term “sample” is addressed in Article 11 of the September 1995 issue of the Board’s “Tax Information Bulletin.” It is my suggestion that a revised copy of this article entitled, “Taxability of Carpet Samples” be sent to the CRI representative. The suggested modification is to rewrite the portion of the article with the sub heading “Marketing Aids” as follows: Marketing Aids. The carpet samples discussed above are different from marketing aids, which are not normally sold to customers. For example, carpet remnants that are bound together to form swatch books are generally regarded by the Board to be marketing aids, and the rules explained in Regulation 1670 apply. Thus, a person such as a manufacturer or wholesaler is the consumer of a swatch book the person transfers for less than 50 percent of that person’s purchase price

Mr. Dennis Fox

-2-

September 26, 1995
210.0485

(for the manufacturer, the purchase price is generally the purchase price of the materials it incorporates into the marketing aid). A person is a seller of marketing aids it transfers for 50 percent or more of that person’s purchase price. When a person sells a marketing aid, that is, transfers it for 50 percent or more of purchase price, its sale is a retail sale. (The exception would be when the purchaser will in turn transfer the marketing aid prior to any use for 50 percent or more of purchase price.) That retail sale is subject to tax unless otherwise exempt (e.g., a sale qualifying as an exempt sale in interstate commerce under Revenue and Taxation Code section 6396). When a person consumes a marketing aid, that is, transfers it for less than 50 percent of purchase price, and the consumption is in California, the person owes use tax on its purchase price of the marketing aid unless the person had already paid tax or tax reimbursement on purchase price. When a person consumes a marketing aid by sending it to the recipient by U. S. Mail or by common carrier, the person consumes the marketing aid at the time and place the marketing aid is delivered to the Postal Service or common carrier for shipment to the recipient. For example, if a manufacturer delivers such a marketing aid to a common carrier in California for shipment to a person in another state, the manufacturer consumes the marketing aid in California. It is irrelevant that the marketing aid will thereafter be sent outside this state. The exemption for sales in interstate commerce does not apply because the manufacturer is consuming the marketing aid in California, not selling it in interstate commerce. If you have any further questions please feel free to contact me again.

PHJ:cl

cc:

Mr. Glenn A. Bystrom
Mr. Larry Isbell