Were carpet swatch books resale samples or marketing aids, and how did the transfer price affect the manufacturer's tax role?

Plain-English summary

Board staff found that carpet-industry materials had used “sample” for two different things. The memorandum reserved that term for area rugs or carpets held for demonstration and display and later sold to customers.

Carpet remnants bound into swatch books were instead marketing aids, which were not normally sold to consumers.

Under the proposed Regulation 1670 explanation, a manufacturer or wholesaler transferring a marketing aid for less than 50% of its purchase price was the consumer. For a manufacturer, purchase price generally meant the cost of materials incorporated into the aid. A transfer for 50% or more made the transferor a seller.

A 50%-or-more transfer was a taxable retail sale unless exempt or the purchaser would transfer the aid before use for at least 50% of its purchase price. A below-50% consumption in California produced use tax on the transferor's purchase price unless tax had already been paid.

Consumption occurred when the marketing aid was delivered to USPS or a common carrier. Thus, a California handoff for shipment out of state remained California consumption rather than an exempt interstate sale.

What this means for you

Carpet manufacturers and wholesalers

Classify actual resale rugs separately from swatch books assembled as selling tools.

Sales and sample departments

Record material cost, transfer price, delivery location, and whether the recipient will resell the aid before using it.

Accountants and tax professionals

Apply the 50% threshold to the transferor's purchase price and distinguish a retail interstate sale from California consumption followed by out-of-state shipment.

Common questions

Q: Was a swatch book a carpet sample under this guidance?

A: No. It was a marketing aid.

Q: What happened below 50% of purchase price?

A: The transferor was the consumer and could owe use tax on purchase price.

Q: What happened at 50% or more?

A: The transferor was a seller and the transaction was generally a retail sale.

Q: Did shipment out of state eliminate California use tax?

A: Not when the consumer delivered the aid to USPS or a common carrier in California.

Citations and references

• California Revenue and Taxation Code § 6396
• California Sales and Use Tax Regulation 1670
• September 1995 Board Tax Information Bulletin article, “Taxability of Carpet Samples,” discussed in the source
• June 22, 1995 Audit Evaluation and Planning memorandum and attached draft CRI industry letter — request and purpose described; memorandum, draft, attachments, and recipient correspondence not reproduced in the official PDF
• CMAW Guidelines for Effective Compliance with California Sales and Use Tax Regulations for the Carpet Industry, including inaccurate language previously approved by Board personnel — title and status supplied; booklet, language, approval, and correction record not reproduced in the official PDF
• September 1995 Tax Information Bulletin article 11 and proposed revised Marketing Aids section — article identified and revision quoted; complete issue, original article, circulation, final revision, and transmission record not reproduced in the official PDF
• Area rugs or carpets held for demonstration and later sale; remnant swatch books; material purchase price; 50-percent threshold; recipient resale; California consumption; USPS or carrier delivery; and interstate-sale alternative — rules and examples supplied; carpet and swatch-book specimens, material invoices and costs, transfer prices, contracts, recipient plans, sales, mail and carrier records, tax payments, and returns not reproduced in the official PDF
• Official Annotation 280.1096's sample-versus-marketing-aid distinction, 50-percent rules, manufacturer material-cost measure, and sales-price treatment — annotation omits the draft-guidance history, interstate sale, California mailing consumption, and tax-paid-purchase qualifications and supplies no additional implementation record
• Possible later industry-letter issuance, bulletin revision, transaction, 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 280.1096
• Original supporting opinion: 280.1096 PDF

Original ruling text

State of California

Board of Equalization
Legal Division-MIC: 82

280.1096

Memorandum

To :

Mr. Dennis Fox, Supervisor
Audit Evaluation and Planning Section, MIC:40

From :

Patricia Hart Jorgensen
Senior Staff Counsel

Date:

September 26, 1995

Subject: Industry Notice to the C--- & R--- I---

This is in response to your memorandum dated June 22, 1995, in which you requested approval of an attached draft letter to the C--- and R--- I--- (CRI), formerly known as C--- M--of the W--- (CMAW), regarding rug samples provided to out-of-state dealers. Your draft letter attempts to correct inaccurate language contained in a booklet prepared by CMAW entitled “CMAW Guidelines for Effective Compliance with California Sales and Use Tax Regulations for the Carpet Industry”. It is my understanding that the “inaccurate” language had previously been approved by Board personnel. The intent of the draft letter is to clarify the application with respect to samples and marketing aids provided to out-of-state dealers. Upon review of this matter , it has become apparent that the underlying problem is that the term “sample” has been used in reference to both: area rugs or carpets, formerly held for demonstration and display, which are subsequently sold to customers; and marketing aids which generally are composed of carpet remnants bound together to form a swatchbook. The term “sample” should be used only for the former and not the latter. This underlying confusion over the term “sample” is addressed in Article 11 of the September 1995 issue of the Board’s “Tax Information Bulletin.” It is my suggestion that a revised copy of this article entitled, “Taxability of Carpet Samples” be sent to the CRI representative. The suggested modification is to rewrite the portion of the article with the sub heading “Marketing Aids” as follows: Marketing Aids. The carpet samples discussed above are different from marketing aids, which are not normally sold to customers. For example, carpet remnants that are bound together to form swatch books are generally regarded by the Board to be marketing aids, and the rules explained in Regulation 1670 apply. Thus, a person such as a manufacturer or wholesaler is the consumer of a swatch book the person transfers for less than 50 percent of that person’s purchase price

Mr. Dennis Fox

-2-

September 26, 1995
280.1096

(for the manufacturer, the purchase price is generally the purchase price of the materials it incorporates into the marketing aid). A person is a seller of marketing aids it transfers for 50 percent or more of that person’s purchase price. When a person sells a marketing aid, that is, transfers it for 50 percent or more of purchase price, its sale is a retail sale. (The exception would be when the purchaser will in turn transfer the marketing aid prior to any use for 50 percent or more of purchase price.) That retail sale is subject to tax unless otherwise exempt (e.g., a sale qualifying as an exempt sale in interstate commerce under Revenue and Taxation Code section 6396). When a person consumes a marketing aid, that is, transfers it for less than 50 percent of purchase price, and the consumption is in California, the person owes use tax on its purchase price of the marketing aid unless the person had already paid tax or tax reimbursement on purchase price. When a person consumes a marketing aid by sending it to the recipient by U. S. Mail or by common carrier, the person consumes the marketing aid at the time and place the marketing aid is delivered to the Postal Service or common carrier for shipment to the recipient. For example, if a manufacturer delivers such a marketing aid to a common carrier in California for shipment to a person in another state, the manufacturer consumes the marketing aid in California. It is irrelevant that the marketing aid will thereafter be sent outside this state. The exemption for sales in interstate commerce does not apply because the manufacturer is consuming the marketing aid in California, not selling it in interstate commerce. If you have any further questions please feel free to contact me again.

PHJ:cl

cc:

Mr. Glenn A. Bystrom
Mr. Larry Isbell