Was merchandise given to home-party hostesses taxable when it compensated them for demonstrating and selling the retailer's goods?

Plain-English summary

A home-party retailer rewarded hostesses with merchandise based on the value of paid and shipped party orders. The hostesses demonstrated goods, took orders, collected customers' payments, and later delivered the shipped merchandise.

The Board treated the reward goods as sales rather than free transfers. The retailer received consideration in the form of hostess services, and absent a contrary agreement those services were valued at the retail price of the merchandise received. A hostess receiving $50 of goods therefore generated $50 of taxable receipts plus applicable charges such as handling.

Because the out-of-state retailer maintained no California inventory, the letter characterized its obligation as collecting use tax rather than paying sales tax. The same source also treated handling as taxable, rejected the retailer's shipping exclusion on its facts, and stated that clothing and Bibles had no applicable exemption.

Citations and references

• California Revenue and Taxation Code sections 6011, 6012, 6051, 6201, and 6203 (as cited)
• California Civil Code section 1656.1 (as cited)
• California Sales and Use Tax Regulation 1628(a) (as cited)
• California Sales and Use Tax Annotation 557.0450 (as cited)
• October 1, 1990 request for legal advice and other materials in the redacted retailer's file — request, file materials, and attachments, if any, not reproduced in the official PDF
• Earlier written agency advice to the retailer on handling and shipping charges, described as identical to the current advice — date, author, exact advice, and copy not supplied
• Home-party orders, customer payments, $1.65 handling charge, shipping charge on parties under $125, minimum $50 hostess reward, larger bonuses, sales-tax reimbursement, and sales or use-tax reporting — orders, invoices, party and bonus terms, shipping records, agreements, returns, and payment records not reproduced in the official PDF
• December 11, 1990 tax-counsel response — no audit, assessment, refund claim, taxpayer response, agency adoption, appeal, or later outcome supplied
• Official Annotation 295.1073's section 6012(a) cross-reference, home-party services, free-merchandise valuation, contrary-agreement qualification, and December 11, 1990 date — annotation omits the October 1 request, file materials, earlier advice, amounts, sales-versus-use-tax classification, handling, shipping, clothing and Bible issues, cited authorities other than section 6012(a), underlying records, 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/295-1073.pdf

Original ruling text

295.1073
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

1020 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
TELEPHONE (916) 327-3400

CONWAY H. COLLIS
Second District, Los Angeles
ERNEST J. DRONENBURG, JR
Third District, San Diego
Paul Carpenter
Fourth District, Los Angeles

December 11, 1990

Mr. T--- C. S--H--- O--- L---, Inc.
XXXXX --- Road
---, MO XXXXX
RE:

GRAY DAVIS
Controller, Sacramento

Cindy Rambo
Executive Director

SS --- XX-XXXXXX

Dear Mr. S---:
I am writing in response to your October 1, 1990 request for legal advice regarding the application of California Sales and Use Tax to transactions of H--- O--- L---, Inc. (H---) in this state. Specifically, you have asked whether the following are subject to sales and use tax: shipping charges; handling charges; clothing items; and Bibles. The facts, based on your letter and materials in the H--- file, are as follows. H--- sells toys, gifts, fireworks and other goods though a “home party plan”. The home parties are held by a “Hostess” who demonstrates and sells the merchandise. The Hostess takes orders, collects payment, and then mails these in to the H--- home office in ---, Missouri. H--- ships the merchandise by common carrier to the Hostess who delivers it to the customers. The payments collected by the Hostess include sales tax reimbursement (based on the applicable state and local rate) and a handling charge of $1.65. H--- charges the Hostess a “shipping charge” for parties which sell under $125.00 worth of merchandise, based on the size of the order. It is unclear whether or how this charge is divided among the customers. H--- gives the Hostess a “minimum of $50.00 in hostess-free-goods for having a paid and shipped party.” Larger “bonuses” are given for larger parties. H--- expects the Hostess to pay sales tax on the “hostess-free-goods”. However, H--- reports and remits sales tax reimbursement from its other retail sales. Unless specifically excluded or exempted from taxation by statute, all gross receipts from retail sales or purchases for use within this state of tangible personal property are subject to either sales or use tax. (Rev. & Tax. Code § 6051.) Although the legal obligation to pay sales tax is on the retailer, Civil Code Section 1656.1 provides that the retailer may seek sales tax reimbursement from the purchaser.

Mr. T--- C. S---

-2-

December 11, 1990
295.1073

The use tax is imposed upon the storage, use or other consumption in this state of tangible personal property purchased from any retailer. (Rev. & Tax. Code § 6201.) The legal obligation to pay use tax is on the purchaser rather than the retailer. However, the retailer is required to collect and remit the use tax provided that the retailer is engaged in business in this state. (Rev. & Tax. Code § 6203.) HANDLING CHARGES Initially, I would like to note that H--- has been given written advice by this agency regarding the applicability of sales tax to handling and shipping charges. The advice contained in this letter is identical to that which we have previously given H---. The definition of “gross receipts” includes “any services that are a part of the sale” (Rev. & Tax. Code § 6012). The handling charge must be included in the taxable measure of gross receipts (whether or not separately stated) as it refers to a services which is part of a taxable sale. In short, there is no tax exemption for handling charges. SHIPPING CHARGES Generally, sales tax is imposed on retailers based upon the gross receipts of all retail sales of tangible personal property in California (Rev. & Tax. Code § 6051). However, Section 6011, which defines “sales price,” and Section 6012, which defines “gross receipts,” exclude separately stated charges for transportation from the measure of tax. Specifically, Revenue and Taxation Code Section 6012 provides at subsection (3)(7) as follows: “‘Gross receipts’ do not include… separately stated charges for transportation from the retailer’s place of business or other point from which shipment is made directly to the purchaser, but the exclusion shall not exceed a reasonable charge for transportation by facilities of the retailer or the cost to the retailer of transportation by other than facilities of the retailer; provided, that if the transportation is by facilities of the retailer, or the property is sold for a delivered price, this exclusion shall be applicable solely with respect to transportation which occurs after the sale of the property is made to the purchaser.” Transportation charges are regarded as separately stated only if they are separately set forth in the contract of sale or other document issued at the same time as the sale. (Sales and Use Tax Regulation 1628(a).) The charges must clearly be only for transportation. For example, if the charges are for “postage and handling,” only that part of the charge that is for postage will be excludable from the taxable gross receipts and then only if the actual amount of postage is indicated. (BTLG Annotation 557.0450. The annotations reflect the staff’s past practices.) Further, shipment must be directly to the purchaser. The place where the sale occurs is immaterial except when transportation is by facilities of the retailer or when the property is sold for a delivered price. (Regulation 1628(a).)

Mr. T--- C. S---

-3-

December 11, 1990
295.1073

Although shipping charges are separately stated by H--- they do not qualify for the transportation sales tax exclusion. The shipments are made to H---’s representatives (Hostesses) and not “directly to the purchaser” as required. Further, the charge is based “on the party size” and does not reflect the actual amount of postage. (Annotation 557.0450.) Under the facts you have given, H---’s charge for shipping must be included in the amount of taxable gross receipts. CLOTHING California has no exemption or exclusion from sales and use tax for clothing of any kind. Sales of clothing are subject to tax. BIBLES California has no sales and use tax exemption or exclusion for Bibles. Sales of Bibles are subject to tax. “HOSTESS – FREE – GOODS” According to your letter, H--- Hostesses receive a sales commission in the form of merchandise. H--- expects the Hostesses to pay sales or use tax on this merchandise. The definition of “gross receipts” includes “the total amount of the sale… whether received in money or otherwise…” (Rev. & Tax. Code § 6012). Here, H--- receives the sale price not in money, but rather in services performed by the Hostess. The measure of tax is in the value of these services performed in exchange for goods. Absent any express agreement to the contrary between H--- and the Hostess, the value of the services is equivalent to the retail value of the goods received. Thus, if a Hostess receives $50 worth of merchandise for hosting a party, taxable gross receipts would equal $50 plus other applicable charges, such as handling. It follows from this discussion that H--- is obligated to pay sales tax or collect use tax on its sales to Hostesses in this state. Since H--- maintains no inventory in California, we would designate the tax obligation as one for use tax rather than sales tax. Please feel free to contact us again if you have further questions. Sincerely,

Stella Levy
Tax Counsel
SL:cs
3670I