Was Coffee Saver exempt as coffee or a food product when most of the brewing aid stayed in the discarded grounds?

Plain-English summary

Coffee Saver was mixed with coffee grounds so that half the normal amount of coffee could brew a full pot. It contained caramel powder for color, a colloidal mineral compound, and modified food starch. Most of the product stayed with the grounds and was discarded.

The seller's brochure expressly said Coffee Saver was not coffee, a coffee extender, a blend, or a substitute. It was a brewing aid that helped extract flavor without adding another flavor. Counsel therefore concluded that it was not within the regulation's food-product listing for coffee or coffee substitutes.

The individual ingredients did not make the whole product exempt. Food coloring was excluded from food treatment; the starch stayed in the discarded grounds rather than being sold for human consumption; and the colloidal mineral compound was not listed as food. Coffee Saver was generally taxable like a coffee filter.

There was one limited resale component. When Coffee Saver was sold to a person who sold brewed coffee, the caramel coloring that entered the beverage was purchased for resale. A determinable share of receipts attributable to that caramel portion was excluded from tax. If the proportion could not be determined, the entire gross receipts were taxable.

Common questions

Did FDA treatment of the finished drink as coffee control?

No. The letter said federal coffee labeling did not decide California food-product status.

Why was the brewing aid generally taxable?

It was not coffee or a substitute, added no flavor, and mostly remained in the discarded filter and grounds.

When could part of the sale qualify as resale?

When sold to brewed-coffee sellers, the determinable portion represented by caramel coloring that entered the coffee could be treated as purchased for resale.

Citations and references

• California Revenue and Taxation Code sections 6007, 6051, 6091, and 6359 (as cited)
• California Sales and Use Tax Regulations 1602(a), 1602(a)(1)-(2), 1602(a)(4), 1602(c), and 1603 (as cited)
• Market St. Ry. Co. v. California State Board of Equalization (1953), 137 Cal. App. 2d 87, 96, 290 P.2d 201 — as printed in the official letter
• Standard Oil Co. v. State Board of Equalization (1974), 39 Cal. App. 3d 765, 769, 114 Cal. Rptr. 571
• Gordon D. Seames, Return Review, transmittal of the redacted distributor's March 15, 1991 Coffee Saver packet — transmittal, request, and packet described; none reproduced in the official PDF
• Coffee Saver brochure — product claims quoted and relied on; brochure not reproduced in the official PDF
• Redacted attorneys' April 18 and April 14, 1983 letters concluding that coffee combined with the product could be called coffee under FDA regulations — conclusions described; letters and underlying FDA provisions not reproduced in the official PDF
• Coffee Saver composition, brewing behavior, military-installation sales, anticipated non-federal sales, and caramel allocation — facts described; underlying formula, ingredient specifications, tests, labels, customer records, invoices, value schedules, and sales records not reproduced in the official PDF
• Regulation 1602 enclosure — stated as enclosed but not reproduced in the official PDF
• Possible later correspondence, product sale, audit, assessment, refund claim, appeal, or agency action after the letter — 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/245-0150.pdf

Original ruling text

245.0150

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
916-324-3828

June 6, 1991

[X]
--- ----- ---, -- XXXXX
Dear X--------------:
Mr. Gordon D. Seames, Return Review, has forwarded to me the packet regarding [S] Coffee Saver (hereinafter “the Coffee Saver”) which you recently sent him in your letter dated March 15, 1991. He has asked me to advise you as to whether or not sales of this product are exempt from sales and use tax as a food product. I.

FACTUAL BACKGROUND

As I understand it, you are a distributor of the Coffee Saver. Currently your sales are limited to military installations. I assume you are planning to market the product elsewhere to entities other than the United States. Hence the need to determine if the Coffee Saver qualifies as a food product. The brochure describes the Coffee Saver as follows: “It must be emphasized that the Coffee Saver is not a coffee extender or blend or any other coffee substitute which changes the brewed coffee to something besides coffee. It is, rather, a brewing aid whose primary function is to extract all the flavor without adding any other flavors. But it does perk up the taste by mineralizing the water. [Emphasis in original]”. The Coffee Saver is mixed with the grounds prior to brewing so that only half of the normal amount of coffee is used to brew a full pot. Its ingredients are as follows: (1) caramel powder used to restore color to the brewed coffee; (2) colloidal mineral compound to mineralize the water, to separate the coffee particles for greater surface exposure, and also to impregnate the filter to retard the brewing process; and (3) modified food starch which also separates the coffee particles for a greater surface exposure and impregnates the filter for prolonging the brewing time through extraction. The starch never passes through the filter but stays with the coffee grounds to be discarded. Most of the Coffee Saver stays in the grounds and is thrown away with them.

[X]

-2-

June 6, 1991
245.0150

You enclosed letters from attorneys [Y] and [Z] dated April 18, 1983, and April 14, 1983, respectively, both addressed to X----------. In each letter, the attorney concludes that coffee combined with [your product] could still be denominated under FDA regulations as “coffee”. Whether or not the Coffee Saver qualifies as “coffee” under FDA regulations has no bearing on whether or not it qualifies as a “food product” for the purposes of the California Sales and Use Tax Law. II.

OPINION

A.

Sales and Use Tax Generally

In California, except where specifically exempted by statute, Revenue and Taxation code Section 6051 imposes an excise tax, computed as a percentage of gross receipts, upon all retailers for the privilege of selling tangible personal property at retail in this state. (Unless otherwise stated, all statutory references are to the Revenue and Taxation Code.) “[I]t shall be presumed that all gross receipts are subject to tax until the contrary is established. The burden of proving that a sale of tangible personal property is not a sale at retail is upon the person who makes the sale …” (§ 6091.) “Exemptions from taxation must be found in the statute.” (Market St. Ry. Co. v. Cal. St. Bd. of Equal. (1953) 137 Cal.App.2d 87, 96 (290 P.2d 201.) “The taxpayer has the burden of showing that he clearly comes within the exemption.” Standard Oil Co. v. State Bd. of Equalization (1974) 39 Cal.App.3d 765, 769 (114 Cal.Rptr. 571).) B.

Food Products Exemption

Revenue and Taxation Code Section 6359, interpreted and implemented by Regulations 1602 and 1603, provides an exemption from sales and use taxes for the sales of food products for human consumption under certain circumstances. Subdivisions (1) & (2) of Regulation 1602(a) contain a list of products which, either singly or in combination, are considered “food products.” Coffee and coffee substitutes are contained in that list. (Sales and Use Tax Regulations are Board promulgations which have the force and effect of law.) C.

Tax Consequences

Your brochure states that the Coffee Saver is not a coffee substitute. Therefore, it is not included within the list of food products contained in Regulation 1602(a)(1) & (2). Furthermore, none of the individual ingredients qualify as food products. Regulation 1602(a)(4) states that food coloring is not a food product, so the caramel powder does not qualify. The modified food starch does not go into the brewed coffee but stays in the grounds to be thrown away with them. It is therefore not “sold for human consumption” within the meaning of Regulation 1602(a) and so not a food product in this context. (Reg. 1602(c)) Finally, the colloidal mineral product is not listed as a food product in the regulation.

[X]

-3-

June 6, 1991
245.0150

The brochure calls the Coffee Saver a “brewing aid”. It emphasizes that the product does not impart any flavor to the coffee but merely facilitates brewing and that most of the Coffee Saver stays in the filter. It is not added to the brewed coffee. Therefore, it is taxable in the same manner as is the filter. The food starch and the colloidal mineral product stay in the grounds and are thrown away with them. As a result, these products are consumed by the purchaser of the Coffee Saver and are not resold to the purchaser of the coffee. Because the caramel coloring does go into the coffee, the purchaser of the Coffee Saver buys that portion of the coffee Saver represented by the caramel coloring for the purpose of re-selling it to the purchaser of the coffee. Sales for resale are excluded from the definition of “retail sales” and so not subject to the sales tax. (§ 6007). Therefore, where [X] sells Coffee Saver to persons who sell brewed coffee, it, that portion of the gross receipts which represents the amount of the Coffee Saver made up by the caramel are sales for resale and so excluded from tax. If it is not possible to determine the proportion of coloring to the entire product, the entire gross receipts from the sales of the product are subject to tax. For your information, I have enclosed a copy of Regulation 1602. I hope the above discussion has answered your question. If you need anything further, please do not hesitate to write again. Sincerely,

John L. Waid
Tax Counsel
JLW:es
Encl: Regulation 1602
cc:

Mr. Gordon D. Seames, Return Review