Did California sales tax apply when an employee redeemed performance-contest points for cash instead of merchandise?

Plain-English summary

An office manager earned contest points for meeting performance objectives and could redeem them for merchandise or cash. The manager chose cash, but the program administrator invoiced sales-tax reimbursement on the cash amount.

Tax counsel said merchandise redemption would have been taxable, with the tax measure based on what the company paid for the distributed goods. Because the employee instead exercised the available cash option, no tangible personal property was sold and sales tax did not apply.

Citations and references

• The official letter cites no statute or regulation by number.
• August 21, 1969 letter asking whether sales tax reimbursement applied when employee contest points were redeemed for cash — request not reproduced in the official PDF
• Enclosed incentive-program agreement allowing accumulated points to be redeemed for merchandise or cash — agreement date, parties' complete identities, complete terms, and copy not included in the official PDF
• Other pertinent documents enclosed with the August 21 letter — document identities, dates, and copies not included in the official PDF
• Invoice including sales tax reimbursement on the cash amount payable for redeemed points — date, issuer, recipient, amount, and copy not provided in the official PDF
• Prior Board ruling treating merchandise distributed under employee point-award plans as taxable sales — date, identifier, facts, and copy not provided in the official PDF
• September 8, 1969 tax-counsel response — no taxpayer reply, invoice correction, refund, audit, assessment, agency adoption, appeal, or later outcome supplied
• Official Annotation 295.1040's merchandise-redemption, cash-option, exercised-option, and September 8, 1969 conclusions — annotation omits the redacted parties, August 21 request, January-March points, agreement, other enclosed documents, invoice, prior ruling, underlying amounts, later outcome, and reliance status and supplies no additional proceeding 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/295-1040.pdf

Original ruling text

295.1040

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

September 8, 1969

RE:
Dear
Your letter dated August 21, 1969 addressed to the State Board of Equalization has been referred to me for reply. We understand that as the office manage of --- you were enrolled as a member in the --- Council of Business Managers, an activity "directed toward total fulfillment of the fundamental duties and responsibilities" of a --- business manager. Pursuant to this program, you were awarded contest points on the basis of your accomplishment of certain performance objectives. Under an agreement with the ---, accumulated points were redeemable in merchandise or in cash. You have enclosed a copy of that agreement and other pertinent documents in your letter. After receiving points in the months of January, February and March in 1969, you forwarded them to --- and requested that it redeem them in cash rather than in merchandise. However, in billing --- for the amounts which you were to receive, as per the agreement, --- included sales tax reimbursement on its invoice. You ask whether invoicing sales tax reimbursement measured by cash to be received is proper under these circumstances. We have previously ruled that where employees of a company are awarded points redeemable in merchandise pursuant to plans such as this, transfers of merchandise to the employees constitute sales, and the measure of tax is the amounts paid by the company for the merchandise which is distributed. Thus, had you redeemed your points for merchandise, tax would have applied. As previously mentioned, however, under the terms of the --- agreement, you had an option to redeem your points for cash, and you exercised that option. Under these circumstances we would agree with you that tax would not apply. Thus, --- would not be liable for sales tax on cash distributed by it, and --would not be responsible for payment of sales tax reimbursement to ---. Very truly yours

J. Kenneth McManigal
Tax Counsel
JKM:ph bc: