Was a cosmetics distributor's initial membership fee taxable when it included a manual, brochure, and videotape?

Plain-English summary

A cosmetics manufacturer charged independent distributors a $35 initial membership fee that included a training manual, product brochure, and videotape. Because distributors received tangible personal property for the fee, the Board concluded that the initial fee was taxable.

The annual renewal fee could be nontaxable only if no tangible property was transferred, paying the fee did not entitle the distributor to buy products at a lower price than a nonmember, and the fee was $30 or less. If any condition failed, the renewal fee was taxable.

The letter also explained the distributor sales structure. The manufacturer could accept valid, timely resale certificates from distributors with seller's permits. Sales to distributors without permits were presumed taxable and measured by the manufacturer's price to them. Products bought for the distributor's own use, gifts, or samples were retail purchases; if acquired under a resale certificate and later used or given away, the distributor owed use tax on purchase cost.

The Board further noted that the manufacturer might be designated the retailer of its distributors' sales under section 6015, depending on the operating relationship and formal Board notification.

Fee treatment stated in the letter

• Initial fee including a manual, brochure, and videotape: taxable.
• Renewal with no property, no preferential product price, and a fee of $30 or less: nontaxable processing charge.
• Renewal failing any one of those conditions: taxable.

Citations and references

• California Revenue and Taxation Code sections 6007, 6012, and 6051, described as defining retail sales and measuring retailer sales tax by gross receipts (as cited)
• California Revenue and Taxation Code sections 6091 and 6092, described as presuming tangible-property sales taxable unless the seller proves otherwise and addressing good-faith resale certificates (as cited)
• California Revenue and Taxation Code section 6015(b), quoted as permitting the Board to treat specified sellers as agents and their dealers, distributors, supervisors, or employers as the retailer for efficient administration (as cited)
• California Civil Code section 1656.1, described as permitting contractual collection of sales-tax reimbursement from the purchaser (as cited)
• California Sales and Use Tax Regulation 1668 and subsection (b)(1)(C), described as governing resale certificates and generally requiring the issuer to hold a seller's permit (as cited) — a copy said to be enclosed is not reproduced in the official PDF
• California Sales and Use Tax Annotation 295.1540, cited for treating a renewal fee as nontaxable processing only when no property transferred, no preferential product price resulted, and the fee was $30 or less (as cited)
• November 20, 1992 manufacturer letter stating its distributor structure, sales-tax collection practice, $35 initial fee, and annual renewal fee and asking four questions — original letter, application, contracts, certificates, invoices, product-price records, manual, brochure, videotape, and renewal records not reproduced in the official PDF
• January 20, 1993 Tax Counsel Elizabeth Abreu response, Regulation 1668 enclosure, blind copies to Compliance Planning and a redacted district administrator, and internal note recording a Vic Day conversation and planned local-office contact — enclosure and conversation record absent; no contact result, section 6015 notice, company reply, return, audit, assessment, appeal, or later outcome supplied
• Official Annotation 295.1508's initial-fee holding and January 20, 1993 date — annotation omits the $35 amount, renewal-fee analysis and $30 ceiling, first two questions, statutes and regulation, absent records and enclosure, internal routing note, planned section 6015 review, 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/295-1508.pdf

Original ruling text

295.1508

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-8208

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

January 20, 1993

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento
────────

Mr. K--- S. C--L--- C--XXXXX --- Drive
---, CA XXXXX
Re:

BURTON W. OLIVER
Executive Director

SR -- XX-XXXXXX

Dear Mr. C---:
This is in response to your letter dated November 20, 1992 in which you state: "We are a manufacturer of cosmetic products, which are distributed by independent distributors. We collect sales tax from those distributors who do not have tax exempt certificates with us. To become an independent distributor, one must pay a $35 membership fee with the application form. There is an annual membership renewal fee." In your letter you ask the following questions: "1. Are we collecting the right sales tax if we base it on the retail price, rather than the wholesale price?" Revenue and Taxation Code section 6051 imposes a sales tax on all retailers measured by their gross receipts from retail sales of tangible personal property. Only retail sales are taxable. A "retail sale" or "sale at retail" means a sale for any purpose other than resale in the regular course of business in the form of tangible personal property. Rev. & Tax. Code § 6007. All gross receipts from sales of tangible personal property are presumed taxable until the contrary is established. The burden of proving that a sale of tangible personal property is not a sale at retail is upon the person who makes the sale unless he takes from the purchaser a resale certificate. Rev. & Tax. Code section 6091. The resale certificate relieves the seller from sales tax only if taken in good faith from a person who is engaged in the business of selling tangible personal property. Rev. & Tax. Code § 6092. Generally, a retail certificate is not valid unless issued by a purchaser who has a seller's permit. Sales and Use Tax Regulation 1668(b)(1)(C).

Mr. K--- S. C---

-2-

January 20, 1993
295.1508

Tax is measured by gross receipts which are the total amount of the sale price of the retail sales of retailers, valued in money, whether received in money or otherwise. Rev. & Tax. Code
§ 6012. Although the sales tax is imposed upon the retailer, the retailer may collect sales tax reimbursement (usually itemized on the invoice as "sales tax") from the purchaser if the contract of sale so provides. Civ. Code § 1656.1. In your case we assume that the independent distributors are purchasing the cosmetics from your business. If so, you may take timely and complete resale certificates from those distributors who have seller's permit. You will not be liable for tax on those sales for which you have received timely, complete, and valid resale certificates. The distributors, however, must pay tax on their retail sales of the cosmetics measured by the total amount of their sales price. The proper use of resale certificates is set forth in Sales and Use Tax Regulation 1668, copy enclosed. For those independent distributors which do not have seller's permits, you may not accept a resale certificate because they cannot issue valid certificates. Such sales are presumed taxable. If your contract so provides, you may charge such distributors sales tax reimbursement on your sales to them. You must report and pay tax on such sales. The measure of tax is your sales price to the distributors. Please note that such distributors are operating outside of the law by engaging in business as sellers without obtaining a seller's permit. You should advise such distributors to obtain a seller's permit immediately. If such a distributor sells the item, he or she is liable for sales tax on the sale of the item, even though he or she is not registered with the Board. If your company is not selling the cosmetics to the distributors, i.e., the distributors are taking orders and receiving payment on your company's behalf, your company is making the retail sales and must pay tax on the total sales price. Revenue and Taxation Code section 6015(b) provides that the Board, for the efficient administration of the sales and use tax laws, may regard any salespersons, representatives, peddlers, or canvassers as the agents of the dealers, distributors, supervisors, or employers under whom they operate or from whom they obtain the tangible personal property sold by them, irrespective on whose behalf they are making the sales, and may regard the dealers, distributors, supervisors, or employers as the retailer. Someone from our local Board office will contact you to determine if your company should be treated as a "section 6015 retailer." If so, you will be notified in writing by the Board that your company is a section 6015 retailer. After notification from the Board, your company becomes the retailer of all the sales made by its distributors and must report and pay tax on the sales price charged by the distributors. "2. Many distributors purchase the products for their own use or give away as gifts or samples. On which basis--wholesale price or retail price--should we collect sales tax for such purchases?"

Mr. K--- S. C---

-3-

January 20, 1993
295.1508

Sales to distributors who will use the products for their own use or give them away as gifts or samples are retail sales. The measure of tax is the sales price your company charges the distributor. If a distributor issues a valid, timely resale certificate for the sale of an item he or she subsequently uses or gives away and your company does not report tax on the sale, the distributor is liable for use tax measured by his or her purchase price of the product. "3. The initial membership fee includes a training manual, a product brochure, and a video tape. Should this membership fee be taxed?" Since a distributor is receiving tangible personal property in exchange for the fee, the fee is subject to tax which must be reported and paid by your company. "4. The annual membership fee applies to the renewal of the active status of the distributorship; no material is to be given. Should we charge sales tax on the renewal membership fee?" If no tangible personal property is transferred to the distributor in exchange for the renewal fee, if distributors who pay the fee are not entitled to purchase the products from your company at a lower price than someone who does not pay the fee, and if the renewal fee is $30 or less, the fee is regarded as a charge for processing the membership renewal and is not taxable. BTLG, Annotation 295.1540. If any of those conditions are not met, however, the renewal fee is taxable. Very truly yours,

Elizabeth Abreu
Tax Counsel
EA:cl
Enclosure
bc:

Compliance Planning
--- District Administrator
L--- C--- appears to be a good candidate for a section 6015 retailer. We spoke with Vic Day in Compliance Planning who agreed to have someone from the --Office contact the taxpayer.