Were all suits furnished through a 50-week club taxable, including weekly prize suits, and what measured the merchant's receipts?

Plain-English summary

A merchant organized a suit club through a service or fraternal organization. Members paid weekly for 50 weeks and then received a suit. A weekly drawing also awarded a suit; the winner could stop paying or continue and receive another suit at the end of the term.

Tax counsel concluded that the merchant made taxable retail sales of every suit, including those furnished to drawing winners. The merchant's tax measure was the amount of member payments it received after the sponsoring organization's percentage was removed.

Although seller commissions normally could not be deducted, the opinion treated the sponsor's share on these facts as contributions from its members rather than commission income belonging to the merchant.

Citations and references

• The official letter cites no statute, regulation, case, or prior ruling by number.
• Communication from the Board's Vallejo office reporting that the requester desired a suit-club taxability opinion — date, author, form, contents beyond the response's recap, and copy not provided in the official PDF
• Board's stated understanding of a merchant-organized fifty-week club, weekly drawing, optional continued payments, and sponsoring organization's percentage — club rules, agreements, payment amount, percentage, drawing and suit records, and member records not reproduced in the official PDF
• Official Annotation 295.0720's merchant, fraternal-organization members, fifty-week payments, weekly winner, optional continued payments and second suit, sponsor percentage, taxable suit sales, nondeductible commission rule, member-contribution treatment, merchant-receipt measure, and April 18, 1952 date — annotation omits the Vallejo-office provenance, redacted requester, hypothetical or unverified posture, missing records, absence of numbered authority, reliance status, and later outcome and supplies no additional transaction record

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/295-0720.pdf

Original ruling text

295.0720

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

April 18, 1952

--- --- ----- --- ----- --- --Attention:

Mr. --- ---

Gentlemen:
We have been informed by our Vallejo office that you desire an opinion concerning the taxability of suit clubs. As we understand it, a merchant will organize a suit club in a service or fraternal organization. Such members as desire to join pay a specified amount each week for fifty weeks. At the end of the fifty weeks, the member is entitled to a suit. Each week a name is drawn and the lucky name wins a suit. The winner may then discontinue making the weekly payments or may continue them and at the end of the fifty weeks will receive another suit. The service or fraternal organization receives a percentage of the receipts with the balance going to the merchant furnishing the suit. It is our opinion that the merchant is making taxable retail sales of all suits including those furnished to the weekly winner. The sales tax is a tax on the seller. The seller normally reimburses himself for the amount of the tax by adding such amount to the sales price. The tax is measured by the amount received by the seller. In this case, the amount received by the merchant is the amount paid in by the members less the percentage going to the service or fraternal organization. Normally a seller may not deduct from the measure of the sales tax labor or service costs or salesmen’s commissions connected with the sale. However, it is our opinion that the amount going to the sponsoring organization should be considered as a contribution to the organization by its members rather than as a commission on sales. Very truly yours,

E. H. Stetson
Tax Counsel