How were hostess services valued when a direct seller exchanged catalog premiums for classes or sales parties without another valuation agreement?

Plain-English summary

A direct seller gave merchandise premiums to hostesses who conducted classes or sales parties. Its brochure assigned each premium a dollar value, generally equal to the same product's customer-catalog retail price, and the parties had no other valuation agreement.

The Board treated the hostess services as consideration for a retail sale. Without a different express agreement, the catalog value represented the parties' negotiated monetary value for those services and therefore measured taxable gross receipts.

Related-source note

Annotation 295.0325 separately publishes the same May 6, 1986 analysis with company-specific redaction, a separate control number, the correct continuation-header year, and a closing invitation absent from this copy. This PDF's second-page header says May 6, 2986, while its formal memorandum date and the live annotation say May 6, 1986.

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 295.0325: https://cdtfa.ca.gov/lawguides/annotations/295-0325.pdf — same May 6, 1986 analysis with company-specific redaction, a separate identifier and control number, the correct continuation-header year, and a closing invitation absent from 295.0330; directly fetched and checked this session
• Official Annotation 295.0330's no-other-agreement, stated catalog value, negotiated service value, gross-receipts conclusion, and May 6, 1986 date — annotation omits the internal-request provenance, attached-but-absent brochure, customer-price comparison, commission and direct-cost facts, section 6012 and case authority, continuation-header year conflict, source wording forms, parallel 295.0325 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/295-0330.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Torrance – Auditing (RLR)

From:

Headquarters – Legal (RLD)

Subject:

[A]

295.0330

Date:

May 6, 1986

This is in reply to your March 18, 1986 memorandum regarding the proper measure of tax for sales of premiums by [A] in exchange for classes or sales parties provided by hostesses. You provided the following explanation:
[A]’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 [A] in the form of 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, 2986
295.0330

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 [A] to the hostess. As you noted, the premium catalog which [A] 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 [A]’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.

RLD:sr