How was sales tax measured on a bread-baking kit containing exempt bread mix and a reusable clay pot worth more than 10 percent of the package's retail value?

Plain-English summary

The baking kit combined exempt bread mix with a nonfood six-inch clay pot. Decorative wrapping and imprinted paper covered the pot.

For a package containing food and nonfood merchandise, Regulation 1602(b) looked to the complete package's essential character. When nonfood merchandise represented more than 10 percent of the package's retail value, excluding the container, the seller had to segregate that merchandise and measure tax by its retail selling price.

The decorative wrapping, paper, and shipping materials were treated as containers. The reusable clay pot was nonfood merchandise, not the container for purposes of the value test.

The manufacturer said the pot represented 20 percent of total cost. Cost was not the legal measure, but counsel expected a pot with that cost share also to exceed 10 percent of the kit's retail value. The seller therefore had to segregate the pot and pay tax measured by its retail selling price.

Common questions

Was the entire kit taxable?

No. The letter required segregation and measured tax by the retail selling price of the clay pot.

Did the 20-percent cost figure directly satisfy the test?

No. The rule used retail value, but counsel inferred that the cost figure indicated the retail-value threshold would be exceeded.

What counted as the container?

The decorative wrapping, imprinted paper, and shipment packaging—not the clay pot.

Citations and references

• California Revenue and Taxation Code sections 6051, 6201, 6359, 6364, and 6401 (as cited)
• California Sales and Use Tax Regulations 1589, 1602, and 1602(b) (as cited)
• Business Taxes Law Guide Annotations 195.0040 (November 1, 1957), 195.0800 (March 8, 1950), 195.1020 (March 27, 1953), and 245.1430 (February 10, 1992) — historical guidance cited
• Redacted seller's September 18, 1995 letter asking about Flower Pot Bread Baking Kits — request described; not reproduced in the official PDF
• Attached letter from the redacted kit manufacturer stating that the clay pot represented 20% of total product cost — letter described and relied on; not reproduced in the official PDF
• Flower Pot Bread Baking Kit components, wrapping, shipping materials, cost allocation, and expected retail values — facts described; underlying kit, bread-mix formula, labels, packaging, cost records, price lists, invoices, shipping records, and value schedules not reproduced in the official PDF
• Regulations 1589 and 1602 enclosures and copy to a redacted district administrator — stated as enclosed or copied; enclosures and any follow-up not reproduced in the official PDF
• Possible later segregation, sale, return filing, audit, assessment, refund claim, appeal, or other agency action — 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/245-0315.pdf

Original ruling text

245.0315

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 324-2614
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

November 14, 1995

KATHLEEN CONNELL
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Ms. [F]
[B]
--- ----- ---, CA XXXXX
Re:

[B]
Account No. S- -- XX-XXXXXX

Dear Ms. [F]:
This is in response to your letter dated September 18, 1995 asking how tax applies to the sale of Flower Pot Bread Baking Kits (the “Baking Kits”) composed of a six-inch clay pot with a package of bread mix inside the pot. The clay pots are covered with decorative wrapping and imprinted paper. Discussion Retail sales of tangible personal property in California are subject to sales tax, measured by the gross receipts, unless the sale is specifically exempt from taxation by statute. (Rev. & Tax. Code § 6051.) When sales tax does not apply, use tax, measured by the sales price, applies to the use of tangible personal property purchased from a retailer for the storage, use, or other consumption in California, unless the use is exempt from taxation by statute. (Rev. & Tax. Code
§§ 6201, 6401.) The sale of food products for human consumption, as defined in Regulation 1602, is exempt from sales and use tax under Revenue and Taxation Code section 6359, with certain exceptions not relevant here. The Baking Kits are combination packages which contain both food product (e.g., bread mix) and nonfood product (e.g., clay pot). The application of tax to the sale of a combination package depends upon the essential character of the complete package. (Reg. 1602(b); BTLG Annot. 245.1430 (2/10/92).) If more than 10 percent of the retail value of the complete package, exclusive of the container, represents the value of the nonfood merchandise, a segregation must be made and the tax is measured by the retail sales price of such nonfood merchandise. (Id.) In your situation, the container consists of the decorative wrapping and the imprinted paper covering the clay pot, as well as any articles in which the Baking Kits are placed for

Ms. [F]

-2-

November 14, 1995
245.0315

shipment and delivery such as wrapping and packaging materials, boxes and cartons. (Rev. & Tax. Code § 6364; Reg. 1589; BTLG Annots. 195.0040 (11/1/57), 195.0800 (3/8/50), 195.1020 (3/27/53).) If the clay pot represents more than 10 percent of the retail value of the Baking Kit, exclusive of the container, a segregation must be made and the tax is measured by the retail sales price of the clay pot. However, if the clay pot represents 10 percent or less of the retail value of the Baking Kit, exclusive of the container, the sale of the Baking Kit for a lump sum price would be exempt from tax. You have attached a letter from [A] Co., the manufacturer of the Baking Kits, which states that the clay pot represents 20 percent of the total cost of the product. As discussed above, the application of tax to the sale of the Baking Kits depends upon the retail value of the clay pot, rather than the cost. However, because the cost of the clay pot represents 20 percent of the total cost of the Baking Kit, we would expect that the retail value of the clay pot represents more than 10 percent of the retail value of the Baking Kit, exclusive of the container. Therefore, a segregation must be made and the tax is measured by the retail sales price of the clay pot. For your information, I am enclosing a copy of Regulations 1589 and 1602. If you have any further questions, please write again. Sincerely,

Sophia H. Chung
Staff Counsel
SHC:rz
Enclosures:
cc:

Regs. 1589 and 1602

--- --- District Administrator - --