Was a $199 lump-sum fee for weight-loss counseling, classes, reference materials, and audio and video tapes taxable?

Plain-English summary

A weight-loss-center operator charged customers a one-time fee of $19 to $79 for counseling, lifestyle classes, and reference materials. It proposed replacing that fee with a single $199 charge that also included audio and video tapes costing the business about $20 in total. Food was purchased separately.

The business argued that the tapes merely reinforced the counseling and were incidental to its services. Staff counsel instead focused on the pricing facts supplied: the only identified difference between the existing and proposed programs was the added tapes, while the fee increased by at least 150 percent.

On that record, staff counsel concluded that a substantial portion of the proposed fee was attributable to tangible personal property and treated the entire $199 lump-sum charge as taxable gross receipts from a retail sale.

Staff counsel noted missing facts, including whether customers had to pay the fee to buy food and what the tapes sold for to the public. It invited the business to submit the current and proposed agreements, a specific comparison, and the retail prices of the property if counsel's understanding was incomplete.

What this means

• Bundling counseling and physical media into one price did not make the full charge nontaxable.
• The size and apparent cause of the price increase drove the stated conclusion.
• The result was expressly open to reconsideration if fuller contract and pricing facts showed that staff counsel's understanding was wrong.

Citations and references

• The supporting opinion cites no numbered statute, regulation, case, or prior ruling.
• Oct. 27, 1993 letter asking about a proposed $199 lump-sum weight-loss program — question and facts supplied; letter and supporting materials not reproduced in the official PDF
• Existing $19-to-$79 promotional fee and proposed $199 fee, separate food sales, separately sold audio tapes, unavailable video-tape sales, and approximate $9 audio-tape and $11 video-tape acquisition costs — facts supplied; customer agreements, program comparisons, invoices, sales records, retail prices, promotional materials, and tax records not reproduced in the official PDF
• Whether food could be bought without paying the membership fee and the public retail prices of the audio and video tapes — expressly identified as missing facts
• Current and proposed membership agreements, detailed comparison, and retail prices for supplied tangible personal property — expressly requested if the business sought reconsideration; no later submission supplied in the official PDF
• Official Annotation 295.0373's weight-loss services, separate food sales, existing and proposed fees, tape availability and costs, substantial-property attribution, entire-fee conclusion, and Jan. 12, 1994 date — annotation omits the Oct. 27 request provenance, taxpayer's incidental-service contention, missing food-purchase and retail-price facts, reconsideration invitation and requested records, absence of numbered legal authority, printed “audio and visual tapes” source wording, and later outcome and supplies no additional agreement or transaction record
• Possible implemented fee change, agreement, enrollment, food or tape sale, invoice, return filing, audit, assessment, renewed opinion request, refund claim, appeal, or other later 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/295-0373.pdf

Original ruling text

295.0373

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-2608

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

January 12, 1994

GRAY DAVIS
Controller, Sacramento
────────
BURTON W. OLIVER
Executive Director

Ms. J--- L. P--Senior Manager
--- --XXX --- --- Drive
--- ---, CA XXXXX
Dear Ms. P---:
Re:

J--- C---, International

This is in response to your letter dated October 27, 1993, in which you ask the tax consequences of a lump sum contract which includes services and tangible personal property. J--- C--- is engaged in operating and franchising weight loss centers and provides customers with individual counseling, lifestyle classes and extensive reference materials on weight loss and weight maintenance. The food is purchased separately and sales tax is paid on the sale of taxable food products. A one-time fee is presently charged to customers, varying from $19 to $79 depending on whether there is a new customer promotional program in effect. "J--- C--- is considering changing its fee structure to a single, lump sum amount which will entitle customers to individual counseling lifestyle classes, extensive reference materials, audio tapes and video tapes. The proposed lump sum fee for the services and tapes is $199.00. Currently, the audio tapes are sold separately and the video tapes are not offered for sale by the Centres. J--- C---'s cost to acquire the tapes is approximately $9 for the audio tapes and $11 for the video tapes." You ask if the lump sum fee of $199 is taxable. You contend it is not subject to California sales or use tax because J--- C--- is rendering services (weight loss services) and is not selling the audio and video tapes. You take the position that the tapes are tools which can be

Ms. J--- L. P--Senior Manager

-2-

January 12, 1994
295.0373

J--- C---, International

used to reinforce the training and counseling but that they are incidental because all materials included on the tapes is presented in the individual counseling session and lifestyle classes. You have not stated whether the food J--- C--- sells can be purchased if a person does not pay the membership fee. In addition, you have not told us how much the general public is paying for the audio and video tapes. You stated that the membership fee is presently between $19 and $79 and that J--- C--- is going to increase the price to $199, for a minimum increase of 150 percent. It appears from your letter the only difference between the existing program, for a one-time fee of $19 to $79, and the new program, for a one-time fee of $199, is that the customer will receive additional tangible personal property (audio and visual tapes). Based on this fact, the substantial portion of the proposed fee is attributable to the transfer of tangible personal property, and we conclude that the entire fee is subject to tax as gross receipts from the retail sale of tangible personal property. In light of this conclusion, it is not necessary for us to consider the implications, if applicable, of J--- C---'s requiring customers to pay the membership fee in order to purchase the meals sold by J--- C---. If our understanding of the facts is incorrect feel free to write again. If you do write again, please provide us with copies of the current, and proposed membership agreements. Also, please explain with specificity the difference between the two agreements and state the retail selling price of any tangible personal property which is provided. Sincerely,

Rachel M. Aragon
Staff Counsel
RMA:jlh