Was PediaSure exempt as a food product even though its label described it as a supplement for children?

Plain-English summary

PediaSure was generally a food product because it was milk-based, but that did not end the analysis. Regulation 1602 separately excluded a product labeled as a supplement unless it qualified as a complete dietary food.

The label said PediaSure could provide total nutritional support and was intended for children ages 1 to 10. Its nutritional content was slightly lower than Ensure's and would have been insufficient if the same product were labeled for adults.

For the labeled child age group, however, PediaSure provided at least the same relative nutritional value that Ensure provided for adults. Tax counsel therefore concluded that it qualified as a complete dietary food, the supplement exclusion did not apply, and its sales were exempt.

The memorandum rejected the district office's simpler reasoning that PediaSure was exempt merely because it was essentially a milk product. A product can begin within the general food definition and then be removed by a supplement exclusion.

Common questions

Was PediaSure exempt simply because it contained milk?

No. Milk content brought it within the general food definition, but supplement labeling required a separate complete-dietary-food analysis.

Would the same nutrition have qualified if labeled for adults?

No. The memorandum said PediaSure's content would have been insufficient for adults.

Why did it qualify for children?

For children ages 1 to 10, its nutritional value was at least comparable to Ensure's value for adults and matched the label's total-nutritional-support statement.

Citations and references

• California Revenue and Taxation Code section 6359(a), (b), including (b)(2), and (c) (as cited)
• California Sales and Use Tax Regulation 1602(a)(1), (a)(2), (a)(4), and (a)(5) (as cited)
• Audit Evaluation and Planning Supervisor Vic Anderson's June 25, 1999 memorandum regarding PediaSure — memorandum referenced but not reproduced in the official PDF
• Santa Rosa District office letter concluding that PediaSure was not a complete dietary food but was exempt as essentially a milk product — letter reviewed and rejected in part but not reproduced in the official PDF
• Board's prior conclusions about Ensure and products substantially identical to Ensure in labeling and content — conclusions referenced without opinion, annotation, date, product records, or analysis in the official PDF
• PediaSure and Ensure labels and nutritional evidence supporting the age-range, total-nutritional-support, and relative-content comparison — facts supplied; complete labels, formulations, ingredients, nutrition data, directions, packages, samples, tests, and expert or manufacturer records not reproduced in the official PDF
• Official Annotation 245.1633 and its source-printed 2000-2 publication marker — annotation restates the analysis; marker and publication record do not appear in the official PDF
• Possible later product sale, label or formulation change, audit disposition, 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/245-1633.pdf

Original ruling text

State of California

Board of Equalization
Legal Division-MIC: 82

Memorandum
245.1633
To :

Mr. Vic Anderson
Supervisor, Audit Evaluation
and Planning Section

From :

David H. Levine
Supervising Tax Counsel

Subject:

PediaSure

Date:

September 9, 1999

Telephone:

(916) 445-5550
CalNet 485-5550

This is in response to your memorandum dated June 25, 1999 regarding PediaSure. You are reviewing a letter written by the Santa Rosa District office which concluded that sales of PediaSure come within the exemption provided by subdivision (a) of Revenue and Taxation Code section 6359. The district concluded that the product is not a “complete dietary food” under Regulation 1602, but it nevertheless concluded that the exemption applied because PediaSure is “essentially a milk product.” The district has not properly analyzed the question presented. The section 6359 exemption applies only to sales of “food products for human consumption.” The design of the statute is to first generally define in subdivision (b) what products come within the term “food products.” Subdivision (c) then excludes certain items from the definition of food product. That is, an item may otherwise be included as a food product in subdivision (b), but then have that definition snatched away by subdivision (c). However, if we had already determined that the product was not a food product prior to reaching the subdivision (c) issue, we would never reach that issue. Similar to the statute it applies, Regulation 1602 includes in subdivisions (a)(1) and (a)(2) a number of items which are regarded as food products. Unless a product qualifies as a food product under the general rules of Regulation 1602, the analysis can be terminated: the sale of the product does not qualify for the food products exemption. If, however, the product generally qualifies as a food product, the analysis must proceed to the exclusions of Regulation 1602. Contrary to the analysis of the district, while a milk product is generally a food product, the analysis has just begun. We must then determine if that milk product is snatched from the definition of food product by subdivision (a)(4) or (a)(5) of the regulation.

Mr. Vic Anderson

-2-

September 9, 1999
245.1633

A basic quart container of milk obviously comes within subdivision (b)(2) of section 6359 and subdivision (a)(1) of Regulation 1602. Thus, when a carton of milk is simply sold as milk, it is clearly a food product for purposes of the exemption. However, if the seller labels and sells the carton of milk as a supplement within the meaning of Regulation 1602, then the carton of milk is just as clearly excluded from the otherwise applicable food product definition by subdivision (a)(5) of Regulation 1602. That the carton contains milk brings the product within subdivision (a)(2) of Regulation 1602; the labeling takes it out of the definition of food product. PediaSure comes within the general definition of food product. However, it is labeled as a supplement, and accordingly is excluded from the definition of food product unless qualifying as a complete dietary food for purposes of subdivision (a)(5) of Regulation 1602. You ask whether the label’s statement that PediaSure can be used for total nutritional support is sufficient. No, it is not; however, it is one element of the analysis. As you know, we have concluded that Ensure and products substantially identical in labeling and content to Ensure qualify as complete dietary foods under Regulation 1602. There are two essential differences between PediaSure and Ensure: the former is specifically labeled for use by children aged 1 to 10; and PediaSure has slightly less nutritional content than does Ensure. If PediaSure’s label were consistent for use by adults, we would conclude that its nutritional content is insufficient to be regarded as a complete dietary food under Regulation 1602. However, when used as labeled, PediaSure has at least the same nutritional value for children aged 1 to 10 as does Ensure for adults, which is consistent with its labeling that it can be used for “total nutritional support.” We conclude that the supplement exclusion does not apply, and that PediaSure is a food product, sales of which are exempt from tax.

DHL/cmm
cc:

Ms. Freda Orendt-Evans (MIC:92)
Mr. Larry Bergkamp (MIC:40)
Ms. Lynn Whitaker (MIC:40)