Who owed tax when dealers earned catalog premiums by purchasing resale merchandise and an out-of-state supplier shipped the premiums directly?

Plain-English summary

Dealers earned premiums according to merchandise purchased for resale. They selected a premium with their order; the sponsor approved it, an administrator ordered it, and an out-of-state supplier shipped directly to the dealer.

Tax counsel treated the sponsor as retailer of the premium. Tax applied to premiums delivered to California dealers but not those delivered outside California. Direct shipment from an out-of-state supplier did not change the California result.

Absent evidence that the sponsor received more, premium gross receipts were treated as the sponsor's cost.

What this means for you

Track the premium earner's location, sponsor cost, purchase condition, and direct-shipping proof. The administrator's markup did not make it the identified retailer here.

Citations and references

• California Sales and Use Tax Regulation 1670(c)
• S. K.'s Nov. 15, 1976 letter concerning the client's dealer-incentive program — position described; letter, recipient's request, and attachments not reproduced in the official PDF
• Dealer purchases for resale, premium catalog or brochure, special order form, client approval, administrator order, direct shipment, supplier billing, and reimbursement at cost plus 10 percent — facts recited; program terms, merchandise orders, catalog, brochure, forms, approvals, supplier orders and invoices, shipping records, reimbursements, and dealer-location records not reproduced in the official PDF
• Official Annotation 280.0356's dealer-purchase, ordering chain, direct shipment, client-retailer, California-delivery, and client-cost measure summary — annotation expresses client cost as administrator cost plus 10 percent, corrects the PDF's “large sum” to “larger sum,” and supplies no additional transaction or implementation record
• Possible later premium sale, return filing, audit, assessment, payment, refund claim, appeal, or other agency action — not supplied in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 280.0356
• Original supporting opinion: 280.0356 PDF

Original ruling text

280.0356

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
(916) 445-2641

January 6, 1978

T--- J. C--- & A--XXXXX --- -----, CA XXXXX
Attention:

Mr. T--- J. C--President

Gentlemen:
SR -- XX XXXXXX
Mr. S--- K--- has asked that we review his letter to you of November 15, 1976, in regard to the application of the California sales tax to one of your client’s dealer incentive programs. While we are basically in agreement with Mr. K---, that tax applies to premiums delivered to California dealers, we wish to clarify what we think is the proper incidence of the tax. As we understand your program, your client A--- L--- has established a dealer incentive program whereby dealers are offered various premiums based upon the amount of merchandise purchased by them for resale. Upon making a purchase a dealer selects his premium from a catalog or brochure and submits a special order form along with his merchandise order. A--- L--- notes its approval and forwards the special order form to you. You send an order to the out-of-state supplier of the premium who ships the premium directly to the dealer. The supplier bills you for the premium. You in turn obtain reimbursement from A--- L--- at your cost plus 10 percent. We think that the proper application of the tax is dictated by the principle stated in our Regulation 1670 “Gifts, Marketing Aids, Premiums, and Prizes,” paragraph (c). Although paragraph (c) appears to have been intended to apply to situations where premiums are delivered with items sold at retail, we believe that it can also be applied in this case, where the premium is delivered with an item sold for resale.

T--- J. C--- & A--SR -- XX XXXXXX

-2-

January 6, 1978
280.0356

Paragraph (c) provides:
“When a person delivers tangible personal property as a premium together with other merchandise sold, and the obtaining of the premium by the purchaser is certain and not dependent upon chance or skill, the transaction is a sale of both articles. Tax applies to the gross receipts received from the purchaser for the goods and the premium except when the premium is delivered with a food product for human consumption or other exempt item. In such case tax applies to the gross receipts from the sale of the premium, which will be regarded as the cost of the premium to the retailer, in the absence of any evidence that the retailer is receiving a larger sum. If there is no such evidence, and if the retailer has paid sales tax reimbursement to his vendors or to the state, measured by the sale price of the premiums to him, no further tax is due from him.” In the context of this case we are of the opinion that A--- L--- is the retailer of the premium items delivered to their dealers. Accordingly, tax applies with respect to its sale of premium items delivered to California dealers but not with respect to premium items delivered to out-of-state dealers. It is immaterial that the premium items delivered to California dealers may have been shipped directly to the dealers from an out-of-state supplier. As Regulation 1670 provides, tax applies to the gross receipts from the sale of the premium, which will be regarded as the cost of the premium to the retailer (A--- L---), in the absence of any evidence that the retailer (A--- L---) is receiving a large sum. Very truly yours,

Gary J. Jugum
Tax Counsel