How much of a lump-sum birthday delivery by a costumed singer with balloons was taxable?

Plain-English summary

A business sent a costumed performer to deliver balloons and sing for birthdays or other occasions. Customers paid lump sums, but the quantity and type of balloons affected the price, and each performance included at least six balloons.

The Board treated the transaction as both a taxable sale of balloons and a nontaxable theatrical service. The balloons were not merely incidental, while the song or routine was sufficiently distinct that it was not simply a service part of the balloon sale.

Because the invoices did not separately state the two components, an allocation was necessary. The taxpayer had reported roughly one-third as taxable, and audit staff considered that a reasonable marked-up balloon price, so the memorandum accepted one-third of total charges as the taxable measure.

Citations and references

• California Revenue and Taxation Code sections 6011(b)(1) and 6012(b)(1) (as cited)
• California Sales and Use Tax Regulation 1501 (as cited)
• California Sales and Use Tax Annotation 330.2310 (as cited)
• Hawley v. Johnson (1943) 58 Cal.App.2d 232 (as cited)
• San Francisco Audit's Mar. 7, 1986 memorandum and telephone conversation concerning the redacted taxpayers — quoted facts and additional invoice facts supplied; memorandum, attachments, call notes, audit file, and taxpayer submissions not reproduced in the official PDF
• Work orders, lump-sum charges by balloon type, added delivery/writing/weekend amounts, invoices showing at least six balloons, quantity-and-type pricing, and taxpayer's approximately one-third taxable reporting — record descriptions supplied; work orders, invoices, contracts, customer agreements, balloon costs, markup records, returns, and computations not reproduced in the official PDF
• Official Annotation 295.0035.200's costumed balloon delivery, song, hybrid theatrical-service/balloon-sale treatment, and reasonable-allocation summary, dated Apr. 28, 1986 — annotation omits the six-balloon minimum, quantity-and-type pricing, extra charges, approximately one-third reporting, and one-third conclusion and supplies no additional transaction record
• Possible later audit adjustment, assessment, payment, refund claim, appeal, or other agency action — not 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/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-0035-200.pdf

Original ruling text

State of California

Memorandum

To:

San Francisco – Audit (JES)

From:

Teresa Armstrong

Subject:

SR -- XX XXXXXX
M--- & J--- S--dba The B--- L---

Board of Equalization

295.0035.200

April 28, 1986

This memorandum is in response to your memo of March 7, 1986, requesting a legal opinion as to the application of sales or use tax to the business activities engaged in by the above referenced taxpayers. The facts, as provided in your memorandum, are as follows: “Customers who order costume deliveries are seeking a novel way to celebrate a birthday, aniversary, or other special event. Taxpayer sends a person dressed in some type of costume, who delivers the balloons and sings ‘Happy Birthday’ or some other requested song. “Work orders generally show lump-sum amounts for balloons of each type; it is often not possible to determine how many balloons were used. Some jobs involve only one type of balloon and show only one lump-sum amount, while others use two types of balloons and show two amounts. In some cases, additional amounts are added for delivery, writing, or weekend jobs. In all cases, however, customer is quoted a lump-sum amount. “While the costume and singing could be considered a service in connection with the sale of the balloons, we cannot envision a customer ordering balloons alone in the same way one might order flowers. Clearly, the object of the transaction in the customer’s mind is the clown singing ‘Happy Birthday’ - - the balloons would appear to be secondary. “Taxpayer has reported an amount equal to roughly one-third of the total costume delivery charges as taxabil; this would approximate a reasonable marked-up selling price for the balloons, alone.”

San Francisco – Audit (JES)

-2-

April 28, 1986
295.0035.200

You also stated in our telephone conversation that the taxpayer’s invoices indicate that at least six balloons are given with each performance or costume delivery and that the charge to the customer is directly affected by the quantity and type of balloons delivered. Typically, services that are rendered as part of a sale or purchase are included in the gross receipts or sales price of the tangible personal property (see Rev. & Tax. Code §§6012(b)(1) and (6011(b)(1). However, as pointed out in your memorandum, when the true object of the contract is a service, charges for such activities are not subject to either sales or use tax (see Regulation 1501). The Board has taken the position in the past that where a single business transaction is comprised of both a sale or purchase of tangible personal property and the providing of a service, only the charges for the saqle of the tangible personal property will be subject to tax (see Business Taxes Law Guide Annotation 330.2310). The business activities engaged in by this particular taxpayer appear to comprise a hybrid of both a nontaxable service and a taxable sale of tangible personal property, as explained below. Tax is imposed upon retail sales of tangible personal property when such property is more than merely incidental to the rendering of the service (Reg. 1501). The quantity of balloons delivered by the taxpayer indicates that the balloons are not merely incidental to the performance of the service. The quantity and type of balloons delivered dictating the price charged the customer strongly indicates that one of the primary purposes of the transaction with the B--- L--- is the sale of the balloons. Accordingly, tax will apply to the sale of the balloons. On the other hand, the singing of a song or other theatrical performance does not involve the transfer of title or possession of tangible personal property, and therefore, is a service which is not subject to tax. The service of performing a song or dance routine is so unique as to not be considered a service which is rendered as simply a part of the sale of the balloons. It is conceivable that a customer could obtain the services of the taxpayer to simply perform a song for a special occasion. This clearly would be a service which would not be subject to tax. Hence, we conclude that the charges for the costume delivery and performance are not subject to tax. Where a business transaction comprises botha nontaxable service and a taxable sale of tangible personal property, a separate allocation of the charges is appropriate (see Business Taxes Law Guide Annotation 330.2310). Where the taxpayer and their customers have agreed upon a reasonable allocation of the charges between the taxable sale of balloons and the nontaxable service, the measure of tax upon the sale of balloons will be based upon such allocation (see Hawley v. Johnson (1943) 58 Cal.App.2d 232). However, where the contract between the taxpayer and her customers does not separately state charges for the service and the sale of the balloons, the Board may make the proper allocation in order to apply tax to the portion of the charges which represent the sale of the balloons. In this particular instance, the taxpayer has reported approximately one-third of the total charges as gross receipts subject to

San Francisco – Audit (JES)

-3-

April 28, 1986
295.0035.200

tax. You state in your mmeo that this amount appears to be a reasonable marked-up price for the balloons. Accordingly, the appropriate measure of tax in this particular case is one-third of the total charges. If you have any questions regarding the enclosed information, please contact us again.

TA:ba

295.0035.200.doc