Were inbound special-order shipping charges and fees for cutting board or paper into smaller pieces taxable?

Plain-English summary

A retailer passed through $7.50-to-$12 inbound shipping charges imposed by print vendors on special-order posters. Board tax counsel treated those amounts as the retailer's nondeductible expenses, not qualifying transportation from the retailer's place of business to the customer. They were included in taxable gross receipts.

The retailer also cut poster board, illustration board, or paper into smaller pieces, with the first three cuts free and later cuts charged at 25 cents each. Those cutting fees were taxable under either timing scenario described.

If the retailer cut property it sold before the sale, the cutting charge was nondeductible labor included in that sale. If it cut the item after the sale or cut property supplied by the customer, the cutting was a separate taxable fabrication sale.

Why each fee was taxable

• Passed-through inbound vendor freight: retailer expense included in gross receipts.
• Cutting before the retailer's sale: labor cost included in the property sale.
• Cutting after the sale or on customer-furnished property: separate fabrication for consideration.

Citations and references

• California Revenue and Taxation Code section 6012(a), described as measuring sales tax by total retail-sale gross receipts without deductions for labor, service costs, or other expenses (as cited)
• California Revenue and Taxation Code section 6012(c)(7), described as excluding qualifying transportation from the retailer's place of business to the customer rather than the retailer's inbound vendor shipping (as cited)
• California Revenue and Taxation Code section 6006(b), quoted in substance as making consideration-paid fabrication of tangible personal property for a consumer who furnishes the materials a sale (as cited)
• November 18, 1991 retailer letter describing vendor shipping on special-order posters and cutting charges, and January 22, 1992 memorandum from Toni Eaton asking about those fees — underlying letter, memorandum, attachments, invoices, orders, vendor bills, customer records, and cutting records not reproduced in the official PDF
• Retailer facts that vendor shipping passed through to customers ranged from $7.50 to $12 per item and that the first three cuts were free with each later cut priced at 25 cents — no transaction-level records reproduced in the official PDF
• March 12, 1992 memorandum from Tax Counsel Elizabeth Abreu to Toni Eaton, copied to the Arcadia District Administrator — no retailer reply, return review, audit, assessment, refund claim, agency adoption, appeal, or later outcome supplied
• Official Annotation 295.1507.150's handling-fee expense and customer-furnished fabrication rules and March 12, 1992 date — annotation says the company “issues” incoming shipping fees, compresses the source's distinct pre-sale and post-sale cutting analyses, and omits the underlying correspondence, exact fee figures, sections 6012(a) and 6012(c)(7), copied administrator, missing records, later outcome, and reliance status

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/295-1507-150.pdf

Original ruling text

State of California

Memorandum

To:

Toni Eaton, Tax Representative
Headquarters – Return Review Section

From:

Elizabeth Abreu
Tax Counsel

Subject:

A--- B---, Inc.
SY -- XX-XXXXXX

Board of Equalization

295.1507.150

March 12, 1992

This is in response to your memorandum dated January 22, 1992, in which you inquired about the handling fees and cutting fees described in A--- B---’ letter dated November 18, 1991. According to this letter, the handling fees are shipping fees that A--- B--- incurs when it orders special order posters for its customers. These shipping fees are charged to A--- B--- by the individual print vendors from which it orders prints for its customers. A--- B--- passes these fees, which range from $7.50 to $12.00 per item, to the customer that places the order. Sales tax is measured by gross receipts which are the total amount of the sale price of the retail sales of retailers without any deduction for costs of labor, service costs, or any other expense. Rev. & Tax. Code § 6012(a). The handling fees are merely an expense and therefore not deductible. Nor can they come under the transportation costs from the retailer’s place of business to the customer. Rev. & Tax. Code § 6012(c)(7). With respect to the cutting fees, the letter from A--- B--- states that these are labor costs it charges its customers for being a chop service. When a customer purchases a poster board, illustration board, or paper from A--- B---s or brings in his own item and wants it cut into smaller pieces, A--- B--- charges a fee for the labor of cutting the item up. The first three cuts are free, and every cut after that is twenty five cents. These charges are taxable but for different reasons, depending upon when the cuts are made. For cuts to items sold by A--- B--- to the customer, these charges are nondeductible labor costs if the cuts are made by A--- B--- before the sale. If the cuts are made after the sale of it the customer brings in his own item, the cuts and the charges to the customer for such cuts constitute another sale under Revenue and Taxation Code 6006(b) which provides that a sale includes the

Toni Eaton

-2-

March 12 1992
295.1507.150

fabrication of tangible personal property for a consideration for consumers who furnish the materials used in the fabricating. If you have any further questions on this matter, feel free to call me at 324-8208.

EA:cl
0638E

cc:

295.1507.150.doc

Arcadia District Administrator