Did a restaurant make taxable meal sales when confidential shoppers paid normally, reported on quality, and were later reimbursed?

Plain-English summary

A restaurant operator hired individuals to act as confidential shoppers. They visited selected restaurants without alerting the staff, paid cash for their meals, submitted quality reports afterward, and were fully reimbursed by the operator.

Tax counsel concluded that the restaurants still sold meals to those individuals. Serving a meal for consideration was a sale under the cited statute, and neither the shopper's contractual report nor the later reimbursement made the operator the consumer of the food products.

The gross receipts from each meal were the ordinary prices available to other customers. The letter treated any additional payment to a shopper as consideration for the quality report, not as part of the meal price or its reimbursement.

Citations and references

• California Revenue and Taxation Code section 6006(d) (as cited)
• Representative's Nov. 10, 1976 letter concerning meal-sale status and gross receipts under a confidential-shopper quality-control program — facts and two questions supplied; letter, attachments, requester identity, client identity, and correspondence not reproduced in the official PDF
• Confidential-shopper contracts, cash meal purchases, ordinary customer prices, quality reports, full meal reimbursements, and possible additional report payments — facts, implications, and presumptions supplied; contracts, restaurant checks, receipts, reports, reimbursement records, payment records, and accounting entries not reproduced in the official PDF
• Official Annotation 295.0050's restaurant owner, contracted shoppers, meal purchases, quality reports, and full reimbursement summary, dated Nov. 24, 1976 — annotation omits the cash-payment and undisclosed-role facts, ordinary-price and additional-payment analysis, second gross-receipts question, request provenance, and missing records and supplies no additional transaction record
• Possible later shopper visit, meal reimbursement, report payment, return filing, audit, 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/295-0050.pdf

Original ruling text

295.0050

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

916-445-2705

November 24, 1976

Dear Mr.
Your letter of November 10 explains that your client operates restaurants in California. As a regular part of their quality control program, your client contracts with individuals to act as "confidential shoppers." Under this contract, the individuals eat at various clients' restaurants and pay cash for the meals eaten. The separate restaurants' personnel are not notified that the individual is purchasing the meal as a “confidential shopper." After the meal and its payment by the individual, the individual provides your client with a report of quality related matters at the restaurant so visited and in return is completely reimbursed for the-meal purchased. Your client is selling meals to the individuals operating as confidential shoppers notwithstanding the contract calling for the report. The sale of the meals result from the service of meals for a consideration, c.f., Revenue and Taxation Code Section 6006(d). Accordingly, the food products cannot be considered consumed by your client for the purposes of the Sales and Use Tax Law. The second question is the amount of gross receipts from the sale of the meal. Impliedly, the meals are sold for ordinary prices available to other customers. Presumably, additional payments to the confidential shoppers are for the report, and, conversely, the report is supplied in return for the other payments, and not for the meal or its reimbursement.

Very truly yours,

Philip R. Dougherty
Tax Counsel
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