What amount was taxable when hostesses earned merchandise with stated catalog values by conducting classes or sales parties?

Plain-English summary

Hostesses earned merchandise for conducting classes or sales parties. The seller's brochure gave each premium a dollar value, and most items were also available to customers at the same catalog price. There was no other agreement valuing the hostess services.

Because the seller received services rather than cash, the Board needed a monetary value for gross receipts. It accepted the listed premium values as the parties' freely negotiated value of the hostess services and used those amounts as the taxable measure.

Related-source note

Annotation 295.0330 separately publishes the same May 6, 1986 analysis in a redacted copy.

Citations and references

• California Revenue and Taxation Code section 6012 (as cited)
• Hawley v. Johnson, 55 Cal.App.2d 232 (as cited in the source)
• Torrance Auditing's Mar. 18, 1986 memorandum and attached premium brochure asking how to measure tax on premiums exchanged for hostess classes or sales parties — question and brochure contents quoted; memorandum, attachment, audit record, taxpayer identity beyond redaction, and complete program materials not reproduced in the official PDF
• Premium categories, pictured merchandise and stated values, customer-catalog retail prices, absence of another service-value agreement, average 35-percent sales commission, approximately 15-percent direct costs, and hostess classes or parties — facts supplied; brochures, catalogs, agreements, representative records, orders, commission and cost records, premium transfers, returns, and tax computations not reproduced in the official PDF
• Separately indexed official supporting opinion for Annotation 295.0330: https://cdtfa.ca.gov/lawguides/annotations/295-0330.pdf — same May 6, 1986 analysis with separate redaction style and identifier, directly fetched and checked this session
• Official Annotation 295.0325's brochure, premium values, catalog comparison, no-other-agreement, 35-percent commission, hostess-service valuation, and gross-receipts summary, dated May 6, 1986 — annotation omits the internal-request provenance, attached-but-absent brochure, approximately 15-percent direct costs, section 6012 and case authority, printed case-citation and source wording forms, parallel 295.0330 source, missing records, and later outcome and supplies no additional audit or transaction record
• Possible later audit determination, premium-program change, hostess class or party, service agreement, premium transfer, order, commission or cost payment, return filing, assessment, 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/295-0325.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Torrance – Auditing (RLR)

From:

Headquarters – Legal (RLD)

Subject:

C--- C---

295.0325

Date:

May 6, 1986

SR -- XX-XXXXXX

This is in reply to your March 18, 1986 memorandum regarding the proper measure of tax for sales of premiums by C--- C--- in exchange for classes or sales parties provided by hostesses. You provided the following explanation: “C--- C---’s brochure (attached) pictorializes to the hostess the merchandise that can be earned under the various premium awarding categories. Each item of merchandise has a dollar value printed under its picture. The majority of the premiums are also available for purchase through the customer catalogue at the same amount as the premium is valued to the hostess. There is no other written or oral agreement between the parties regarding the valuation of the premium. As we understand, the sales representative earns an average 35% commission on all orders taken and that the direct costs (direct labor, materials, overhead) of all items given to the hostess is approximately 15% of the stated value.” As you know, the sales tax is measured by the gross receipts of the sale. “Gross receipts” is defined at section 6012, Revenue and Taxation Code, as the total amount of the sale price of the retail sales of retailers, valued in money, whether received in money or otherwise. Here, of course, the sale price is received by C--- C--- in the form or services performed by the hostess, and we must value the services in money. Although the case Hawley v. Johnson, 55 Cal.App.2d 232, involves the valuation, for sales tax purposes, of property traded in on property sold at retail, we believe the case provides guidance in determining the value of the services in this case. In Hawley, the court held that, where parties by bonafide agreement valued a trade-in vehicle in money, the parties fixed the measure of tax at that amount. The court went on to state that , “To make market value rather than agreed value the measure would create almost insuperable administrative difficulties, since the taxing power would be compelled in every transaction to look behind the agreed value and ascertain the actual market value of the property traded in. In the give and take of the market place the value arrived at by the free negotiation of the parties may safely be relied upon to furnish a reasonable measure of the value in money of property traded in.”

Torrance – Auditing (RLR)

-2-

May 6, 1986
295.0325

In this case, of course, the measure of tax is the value of the services performed by the hostess in exchange for the various items sold by the C--- C--- to the hostess. As you noted, the premium catalog which C--- C--- provides to prospective hostesses lists the various premiums available to the hostess for giving classes, and the catalog designates a dollar value for each premium. The catalog value generally equates to C--- C---’s retail selling price of the product. Absent any express agreement as to the value of the services provided by the hostess, we believe that the stated values of the premiums represent the value of the services as arrived by the free negotiation of the parties, and the Board should be able to rely upon the value as the gross receipts of the sales of the premiums. We hope this answers your question; however, if you need further information, feel free to write again.

RLD:sr