When did a manufacturer's below-cost transfer of advertising materials count as a resale rather than its own taxable consumption?

Plain-English summary

A tax official asked how to treat national manufacturers that bought advertising materials and transferred them to dealers for less than cost.

Tax counsel drew a factual line. An in-state gift made the manufacturer liable for use tax on its purchase price, and a merely nominal dealer charge still left the manufacturer as consumer. But a substantial bona fide sales price established a resale, even below cost, so tax applied only to the retail price.

A fictitious price created solely to avoid tax could be disregarded as a sham. The memorandum did not adopt a policy of taxing the difference between cost and a legitimate below-cost price merely because the manufacturer also benefited from the advertising.

Citations and references

• The official memorandum cites no statute, regulation, case, or prior ruling by number.
• April 27, 1951 memorandum asking about below-cost transfers by national manufacturers and April 9 memorandum formulating the prior treatment — both referenced; neither copy nor supporting material reproduced in the official PDF
• Unidentified company account, advertising-material purchases, dealer transfers, prices, and in-state gift or sale facts — account referenced; purchase records, dealer agreements, invoices, price and cost evidence, gifts, payments, and tax records not reproduced in the official PDF
• Official Annotation 295.0660's manufacturer, advertising materials, below-cost dealer sales, in-state gift, nominal and substantial prices, consumer and reseller treatment, fictitious-price sham, bona fide transaction, gross-receipts measure, and May 21, 1951 date — annotation omits the prior-memorandum provenance, policy-versus-statutory discussion, unidentified company account and records, absence of a numerical threshold and numbered legal authority, and later outcome and supplies no additional transaction record
• Possible gift or dealer sale, price determination, return filing, audit adjustment, 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/295-0660.pdf

Original ruling text

STATE BOARD OF EQUALIZATION
OFFICE CORRESPONDENCE

295.0660
Place:
Date:
To:

Mr. William R. Thomson

From:

E. H. Stetson

Re:

The --- Company
XXX --- --- Street
--- --- XX

Sacramento
May 21, 1951

Now:
SZ --- XX-XXXXXX
Account No. X-XXXX
With reference to your memo of April 27, we did give consideration in formulating our memo of April 9 to the fact that national manufacturers frequently purchase advertising material and sell it to their dealers at less than cost. You state that inasmuch as a national advertiser and manufacturer receives some benefit from the advertising itself, it would seem that the combined incidence of the tax should amount to the cost of the advertising materials. While there may be justification for such an application of the tax from and economic or policy standpoint, we do not think tha the present language in the Sales and Use Tax Law authorizes such an application of the tax. If the manufacturer gives away the advertising material then, provided the gift takes place in the State, he is liable for use tax upon the purchase price to him of that material. If he makes but a nominal charge to his dealers for it, we would still feel able to state that he was the consumer of it rather than the reseller thereof. We do not, however, believe that where there is in fact a substantial sales price we are warranted in disregarding the fact, which we believe must be conceded, that there was a resale of the material. If there was such a resale, then under the definitions in the statute the property was purchased for resale and the tax applies only to the retail price. As we pointed out, if a fictitious retail price were charged solely to avoid tax, we could ignore that price as a sham. If, on the other hand, the transaction is bona fide, we do not believe that under the statute we can find any “incidence” of the tax other than that contemplated by law, i.e., the gross receipts from the retail sale of the tangible personal property.

EHS:ph