Were baby-formula bottles with attached collars, discs, and nipples exempt when sold under the described return offer?

Plain-English summary

The Board's tax counsel treated the described baby-formula package as exempt food sold in a nonreturnable container. No part of the sales receipts was taxable, whether or not the hospital resold the formula.

The taxpayer could not claim a $1.20 deduction for every six-pack sold. Tax counsel instead said the taxpayer should receive credit for tax it had reported on its purchase price for the containers because it bought them for resale as nonreturnable containers.

Offering parents $1.20 if they returned a container did not make it returnable on these facts. The memorandum emphasized that no separate deposit account was maintained and the amount was not separately stated.

Common questions

Did the hospital's resale of the formula change the package result?

No. The memorandum said no part of the receipts was taxable whether or not the hospital resold the formula.

Could the taxpayer deduct $1.20 for every six-pack?

No. Tax counsel said that deduction should be disallowed.

Why was the container still treated as nonreturnable?

The return offer alone was insufficient because there was no separate deposit account and the amount was not separately stated.

Citations and references

• California Sales and Use Tax Law (applied generally in the memorandum)
• San Francisco Auditing's December 2, 1963 memorandum — account facts and staff representations described; memorandum not reproduced in the official PDF
• Redacted taxpayer's baby-formula sales in bottles with collars, discs, and nipples, including hospital resale and the $1.20 parent return offer — transactions and terms described; underlying formula records, packaging, agreements, invoices, hospital records, return offer, and customer-return records not reproduced in the official PDF
• Taxpayer's claimed $1.20 six-pack deduction, tax reported on the containers' purchase price, and absence of a separate deposit account or separately stated amount — reporting and account facts described; returns, schedules, purchase records, deposit ledger, and audit workpapers not reproduced in the official PDF
• Possible audit determination, container-tax credit, assessment, refund claim, appeal, or later transaction outcome after the memorandum — no follow-up or final outcome supplied in the official PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/245-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/245-0060.pdf

Original ruling text

State of California

245.0060

Board of Equalization
Legal Division

Memorandum
To

: San Francisco – Auditing (LC:CFL)

From

: Tax Counsel (EHS) - Headquarters

Date :

Subject : [B]

December 9, 1963

Account -- - XXXXXX

XXXX --- ----- ---

Upon review of the situation described in your memo of December 2, 1963, we are of the opinion that the sale of the baby formulas in the bottles to which are attached the collars, discs, and nipples, constitutes the sale of an exempt food item in a non-returnable container. We believe, accordingly, that no portion of the receipts from the sale are taxable whether or not the hospital resells the formula, but it is not in order, as we view it, for the taxpayer to claim a deduction of $1.20 for each six pack sold. This should be disallowed, but he should be given credit for the tax reported on the purchase price of the containers. The containers are, as we see the picture, purchased for resale as non-returnable containers. The fact that $1.20 is offered to the parents of the baby upon the return of the container does not seem to us a sufficient basis to regard the container as returnable, particularly, as you state no separate account is maintained for deposits, and also because the amount is not separately stated.

E. H. Stetson

EHS:fb