What amount was taxable when a coin buyer exercised a purchase option, and could an investor claim wholesale status with a seller's permit?

Plain-English summary

An option to buy coins was not taxable if it expired, was returned, or was cancelled without transferring the coins. Once the buyer exercised it, however, title and possession of tangible personal property passed and a taxable sale occurred.

The tax measure included both the amount originally paid for the option right and the amount paid to exercise it. In the source's example, that meant $850 plus $2, not only the $2 exercise payment.

The letter also distinguished bona fide coin dealers from ordinary investors. Buying coins for investment or pleasure was a retail purchase, and simply applying for a seller's permit did not convert the investor into a wholesale dealer.

Citations and references

• The official letter cites no statute, regulation, case, or prior ruling by number.
• Coin-trading article published in “X” and enclosed with the May 12, 1965 letter — discussed and corrected; article date, title, author, publication identity, and copy not included in the official PDF
• Recent Board letter discussing coin-purchase options and dealer treatment — described; date and copy not included in the official PDF
• Recipient's earlier letter concerning coin investment, resale, and seller's permits — described; date and copy not included in the official PDF
• The article's $850 option-price, $2 exercise-price, $852 tax measure, and $34.08 rather than eight-cent tax example — quoted and corrected; article and underlying calculation not reproduced in the official PDF
• Official Annotation 295.0380's exercised-option, title-transfer, combined-price, unexercised-option, and May 12, 1965 summary — annotation omits the unidentified article and enclosure, recent opinion-letter and recipient-letter provenance, dollar example, coin-dealer and investor analysis, seller's-permit warning, absence of numbered legal authority, missing records, and later outcome and supplies no additional option or coin-sale record
• Possible option agreement, option purchase or transfer, coin identity, exercise, cancellation or return, title or possession transfer, seller's-permit application, return filing, audit, assessment, 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/295-0380.pdf

Original ruling text

295.0380

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

May 12, 1965

Gentlemen:
An article relative to coin trading, which appeared in “X”, has been brought to my attention. Since the article deals with a subject that I discussed in my recent letter to you, I am taking the opportunity of writing you again in order to clear up any misunderstanding which the article and my letter to you could possibly cause. I am enclosing a copy of “X” for your inspection. While my letter to you indicates that the purchase and later sale of an option to purchase coins is not taxable, the "X" article assumes that the exercise of the option by its purchaser is only taxable for the price payable on the option, this is incorrect. The nontaxability of a transaction involving an option is limited to the situation in which the option is not exercised, and thus title and possession of the tangible personal property (the coins) does not pass from the buyer to the seller. Where, however, the buyer exercises the option to buy the property, rather than returning or cancelling his option to the seller, the consequent transfer of the coins is a taxable sale. More precisely to the point, the gross receipts arising from the sale are all to be included in the measure of the tax. Thus, the price paid for the option right plus the price paid to exercise the option are both included in the measure of the retailer's gross receipts from the sale. For instance, the measure of the tax in the "X" article would be $850 plus $2, or $852. Thus, the tax is
$34.08 and not merely 8 cents.
The "X" article also says that the Board considers buying and selling coins at the wholesale level a legitimate business; and this is true. Recalling your letter, however, I realized it may have created a mistaken impression on this subject. It stated that, if a buyer is in the business of selling coins, his purchase of coins for the sole purpose of selling them later, after an increase in market price, would not be a purchase at retail. It should be made clear, however, that such a buyer must already be a bona fide dealer in coins. A person whose sole purpose is investment and pleasure is not in the business of reselling coins in the regular course of business, but is purchasing coins at retail. Conversely, a bona fide dealer may purchase coins which are not immediately resaleable at a profit, and still not be considered to be purchasing them at retail.

We are of the opinion that the average "investor" is not a bona fide coin dealer purchasing stock in trade to be resold in the regular course of his business whenever a profitable opportunity occurs. Nor can the investor convert his purchases at retail to purchases at wholesale by applying for a seller's permit. We trust that you will not advise your individual investors to apply for seller's permits. If you have any further questions, now or in the future, do not hesitate to write to us. Very truly yours,

Philip R. Dougherty
Assistant Counsel
PRD:dse [lb]