Were point-based merchandise awards to a corporation's salespeople and distributors taxable sales?

Plain-English summary

A corporation awarded points to California salespeople and distributors based on their results. Recipients selected catalog merchandise, sent points to an out-of-state fulfillment company, and received goods directly; the fulfillment company billed the corporation per point redeemed.

The recommendation treated the services that produced the points as consideration for the merchandise. It classified the corporation as seller and the fulfillment company as its selection-and-delivery agent. Because the parties had no agreed cash value, the source used what the corporation paid the fulfillment company as the selling-price measure. Even if interstate shipment avoided sales tax, it said recipients owed use tax and the corporation had to collect it under historical Ruling 74.

The source separately removed an exempt sale paid from the United States Treasury and substantially reduced audit estimates for out-of-state branch sales. It recommended denying the petitions on the incentive merchandise but applying those adjustments, which would generate a refund because the determination had already been paid.

The PDF's first page prints the impossible date "March 221, 1957." Its continuation page gives March 21, 1957, which this page uses as the source date.

Citations and references

• Historical California Sales and Use Tax Ruling 74 — cited and characterized; copy identified as enclosed but not reproduced in the official PDF
• Petitions for redetermination, prize plan, fulfillment-company arrangement, points schedule, catalog, redemption orders, direct deliveries, per-point billing, and California recipients — facts supplied; petitions, contracts, schedule, catalog, points ledgers, orders, invoices, shipping and delivery records, recipient use, and collection records not reproduced in the official PDF
• Audit Schedule 1A-1; $1,334 eight-typewriter U.S. sale; $537 four-typewriter bank sale; and reductions from $8,009.60 to $537 and $3,879.92 to zero — amounts and adjustments supplied; working papers, invoices, Treasury payment and title evidence, branch records, calculations, and redetermination not reproduced in the official PDF
• Full payment of the determination and stated refund to be received in due course — status supplied; payment proof, refund amount, computation, claim, warrant, and receipt not reproduced in the official PDF
• Official Annotation 280.0760's point awards, services consideration, sale, no-agreed-value, corporation-cost measure, and amendment marker 2001-3 — annotation omits the use-tax-collection, audit-adjustment, full-payment, and anticipated-refund issues and supplies no amendment or final record
• Possible later redetermination, use-tax collection, refund issuance, audit action, payment, appeal, or other final outcome — not supplied in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 280.0760
• Original supporting opinion: 280.0760 PDF

Original ruling text

280.0760

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
March 221, 1957

R--- M--- Corporation
--- Avenue
--- ---, New York
Attention:

Mr. H. C. S--Manager, Tax Division

OHB XX XXXXXX

Gentlemen:
We have reviewed your petitions for redetermination in which you contend that the tax does not apply on prizes furnished to your California salesmen and distributors. The prize plan is conducted under an arrangement with C---, M--- & Co. of ---, Ohio Under the plan, salesmen and distributors are awarded points. A catalog is furnished to the salesmen and distributors. The catalog lists many items of merchandise with a point value shown for each item. The person who has received prize points makes his own selection of merchandise and sends an order to C---, M--- in ---, together with the necessary number of points for the particular item of merchandise he has selected. C---, M--- delivers the merchandise direct to the salesman or distributor. C---, M--- bills you at a given amount per point redeemed. The number of points awarded is based on a schedule established by you and which gives effect to the results achieved by the salesmen and distributors. Thus, the number of points awarded bears a close and direct relationship to the value of services performed. It appears to us that the use of points is solely an expeditious method of getting the merchandise into the hands of the salesmen or distributors and of giving them a choice of which merchandise they desire. It is our opinion that there is an exchange of merchandise for services and therefore the transfer of merchandise to a salesman or distributor constitutes a sale because it is a transfer of title to tangible personal property for a consideration. Since it is our conclusion that you are selling the merchandise to the salesmen and distributors and using C---, M--- as your agent for effecting selection and delivery, the only remaining problem is to determine the measure of tax. Inasmuch as there is no agreed monetary valuation between you and the salesmen and distributors, it appears to us that the most satisfactory method for determining the selling price of the merchandise is to use the amount which you pay C---, M--- for that merchandise. Even assuming that the interstate shipment would make the merchandise exempt from sales tax, the salesmen and distributors would be subject to use tax. Pursuant to Ruling 74, copy enclosed, you would be required to collect this use tax.

R--- M--- Corp.

-2-

March 21, 1957
280.0760

Upon further review of the audit working papers, we note that in Schedule 1A-1 there was included as taxable a sale of eight typewriters in the amount of $1,334.00 to the United States Property and Fiscal Office, California, for --- --- Air National Guard Base. We understand that in transactions of this type the price is paid out of the United States Treasury and that the United States retains title but allows the California National Guard to use the equipment without charge. Therefore, this is a sale to the United States and not taxable. The sale to the United States was used to determine a percentage of understatement on sales by out-of-state branches. By removing this sale from the test period only one other taxable sale from an out-of-state branch during the test period was not reported, namely, a sale of four typewriters for
$537 to the F--- L--- Bank, ---. We will consider this $537 sale to be a nonrecurring item and will not use it to establish a percentage of error. This will result in the measure of tax for out-of-state branch taxable sales under account No. OS X XXXX being reduced from $8009.60 to $537 and the measure of tax for the same item under account No. OS X XXXXX being reduced from $3,879.92 to zero. It will be our recommendation that your petitions be denied as to the merchandise delivered to salesmen and distributors. Upon redetermination, effect will be given to the adjustments noted above. Inasmuch as you have paid the amount of the determination in full, a refund will be in order and will be received by you in due course. Very truly yours,

Bill Holden
Associate Tax Counsel

BH:tl
cc:

New York