Did the difference between cost and a bona fide below-cost price for advertising materials become an additional taxable amount?

Plain-English summary

Tax counsel reaffirmed that a bona fide sale of advertising materials below cost was measured by the actual selling price. The difference between cost and price did not become a separate taxable amount merely because the seller chose a low price.

That conclusion depended on the transaction being genuine. The Board could disregard a fictitious price created to evade tax, including a situation where the true price was concealed or paid indirectly.

The memorandum used an interstate fuel-oil transaction as an example of lawful tax-sensitive structuring, while warning that a shipment outside California solely to return the property and avoid tax likely would not be respected.

Citations and references

• The official memorandum cites no statute or regulation by number and gives no full reporter citation for its case example.
• April 3, 1951 memorandum commenting on below-cost advertising-material sales — memorandum and supporting records not reproduced in the official PDF
• Unidentified U.S. Supreme Court decision involving Standard Oil Company and Southern Pacific Company and an out-of-state fuel-oil shipment contract — parties and general holding described; full case name, date, citation, record, and copy not supplied
• Unidentified account's advertising-material transaction, cost, stated price, true consideration, payment method, business purpose, and any interstate movement — account referenced; agreement, invoices, price and cost records, payments, shipment records, and tax records not reproduced in the official PDF
• Official Annotation 295.0680's below-cost advertising-material sale, cost-price difference, tax-avoidance purpose, concealed or indirect true price, bona fide transaction, fictitious price, and April 9, 1951 date — annotation omits the April 3 request, unnamed Supreme Court precedent and interstate fuel-oil example, California-return warning, unidentified account and missing records, absence of full case and statutory citations, and later outcome and supplies no additional transaction record
• Possible below-cost sale, price or substance determination, interstate shipment, 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/295-0680.pdf

Original ruling text

STATE BOARD OF EQUALIZATION
OFFICE CORRESPONDENCE

295.0680
Place:
Date:

To:

Mr. W. E. Williams

From:

E. H. Stetson

Re:

H--- M--Attorney at Law
Suite XXX --- --- Building
--- --- XX

Sacramento
April 9, 1951

Account No. X-8349

With reference to your comments in your memo of April 3, we affirm our opinion that even though advertising material is sold for less than its cost we do not think that the difference between the cost and the selling price represents a taxable figure, unless the sold reason for selling below cost is to avoid or minimize the tax, with the true selling price being in some manner concealed or paid through some indirect method. Our position assumes, of course, that the transaction is a bona fide business transaction not designed to cheat the State by setting up a fictitious sales price. It must be recognized that there are certain legitimate means of avoiding or minimizing taxes which the Courts have recognized. For example, the Supreme Court held it was perfectly proper for the Standard Oil Company and the Southern Pacific Company to enter into a contract for the shipment of fuel oil to a point outside the State via the purchasing carrier. As long as it was necessary to get the oil to a point outside the State, there was nothing wrong in the parties using a means that would result in a nontaxable sale. Of course, if the property were intended to be brought back into the State, then the device of shipping it outside the State solely to avoid sales tax would probably not have been recognized as legitimate tax avoidance.

EHS:ph