Were forced payments added to cooperative members' hearing-aid purchases taxable even though they built working capital and could later be refunded?

Plain-English summary

A buying cooperative purchased hearing aids and supplies in volume and resold them to members. Besides an annual membership fee, members had to make an additional payment with each purchase to build the cooperative's working capital. Some of those amounts could later be returned if a member left or exceeded required participation-based minimums.

The Board concluded that the forced purchase payment remained part of taxable gross receipts. It was part of the amount the purchaser had to pay for the merchandise, and the seller's later use or return of the proceeds did not permit a deduction from sales price.

Citations and references

• California Revenue and Taxation Code section 6012 (as cited)
• Treasurer's Sept. 20, 1989 letter to the Out-of-State District Office concerning a cooperative's forced purchase payments — facts, contention, and requested finding supplied; letter, attachments, prior advice, district correspondence, and member identities not reproduced in the official PDF
• Buying-group hearing-aid and supply purchases, annual membership fee, purchase-linked working-capital payments, participation-based minimums, and departure or excess refunds — facts and contentions supplied; bylaws, membership agreements, fee schedule, supplier and member invoices, working-capital ledger, participation calculations, refund records, returns, and tax computations not reproduced in the official PDF
• Official Annotation 295.0090's annual fee, forced purchase payment, working-capital purpose, participation and departure refunds, and taxable-gross-receipts conclusion, dated Dec. 14, 1989 — annotation does not state a tax conclusion for the annual fee and omits the hearing-aid context, request provenance, source-text defects, and missing records and supplies no additional transaction record
• Possible later purchase, working-capital contribution, refund, 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/295-0090.pdf

Original ruling text

295.0090

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-5589

December 14, 1989

B--- B---, Treasurer
A--- C---, Inc.
XXX --- --- Dr., Suite X
---, Ohio XXXXX

Dear Mr. B---:

Your letter of September 20, 1989 to Mr. Dudley Stidger of our Out-of-State District Office has been referred to the legal staff for reply. As we understand it, A--- C--- [C---], Inc. is operated as a buying group. It makes large purchases of hearing aids and supplies and then sells them to its members. Participants pay an annual membership fee. With each purchase from [C---], members are required to make a forced payment to enhance working capital. You have been told that the amount subject to tax would be the total selling price including the forced payment. It is your contention that the residual forced payment element, which is always the member’s money and is returned to them should they leave
[C---] or should it exceed required minimums based on their participation, is inappropriate as a subject for taxation and you request a finding that the amount subject to tax is the price of the item paid to A--- C---, Inc. We disagree. Section 6012 of the Revenue and Taxation Code defines the term “gross receipts” to mean the total amount of the sales price without any deduction on account of any of the following: “The cost of the materials used, labor or service cost, interest paid, losses or other expense,” and provides that the total amount of the sale price includes “any services that are a part of the sale.” Under section 6012, the tax applies to the amount paid by the purchaser as the purchase price of the merchandise. It is immaterial what the seller may do with the proceeds. A retailer cannot deduct commissions or any other selling expenses or amounts paid to anyone else rendering assistance in the operation of his business. Thus, the retailer will remain accountable for the sales tax on the entire sales price, without deduction on the amount of by such items as any forced payments by your cooperative’s members. We have no authority to authorize --- --- --- --- --- ---.

Mr. B--- B---

-2-

December 14, 1989
295.0090

If you have further questions concerning this matter, please write this office again. Very truly yours,

Mary C. Armstrong
Senior Tax Counsel
MCA:wak
1737C