Were percentage-based charges for film, processing, and prints supplied by a California photography franchisor to out-of-state franchisees taxable?

Plain-English summary

A California photography franchisor supplied independent out-of-state photographers with film, paper goods, mounts, prints, processing, and delivery services. Its price was an unspecified percentage of each franchisee's gross sales. The franchisees exposed the film and returned it to the franchisor, a laboratory developed it by the reversal process, and the franchisor mounted the transparencies and sent the slides back for customers to view.

Tax counsel agreed that the film and processing services were sold to the franchisees; using a gross-sales percentage to calculate price did not change that characterization.

Under the described chain, California sales tax did not apply to the franchisor's unexposed-film sales because they were interstate or for resale. The laboratory's reversal-processing charge was not for processing consumer-furnished property, while the franchisor's processing charge to its franchisees was interstate or for resale. The laboratory's print-making charge to the franchisor and the franchisor's corresponding charge to the franchisees were sales for resale.

The memorandum assumed that a franchisee selling only a slide would deliver it to the customer. It also reports conflicting evidence that 81% or about half of the slides were sold; neither underlying document is reproduced, and the PDF supplies no audit or later outcome.

Citations and references

• No numbered statute or regulation cited in the July 31, 1973 supporting memorandum
• May 24, 1973 Auditing memorandum asking about a California photography franchisor's charges to independent out-of-state franchisees — request, audit identity, tax period, amounts, transaction records, and copy not reproduced in the official PDF
• Franchise agreements requiring the franchisor to supply film, paper forms, order books, mounts, prints, processing, printing, and delivery for a percentage of franchisee gross sales — dates, parties, percentage, complete terms, agreements, orders, invoices, shipping records, resale documentation, and payment records not reproduced in the official PDF
• Tax counsel's express assumption that a franchisee selling only a slide would deliver it to the customer — no customer order, invoice, delivery record, or agreement supplied
• February 6, 1973 taxpayer letter stating that 81% of the slides were sold to franchisee customers, contrasted with a February 1, 1973 Report of Discussion suggesting about half were sold — letters' complete facts, report author and participants, basis for the differing percentages, and copies not reproduced in the official PDF
• July 31, 1973 Tax Counsel Headquarters memorandum concluding that the described film and processing were sold and separately analyzing unexposed film, laboratory processing, franchisee processing charges, and print-making as interstate, resale, or non-consumer-processing transactions — no audit adjustment, taxpayer response, assessment, petition, appeal, or later outcome supplied
• Official Annotation 295.1630's film-and-processing-sale, percentage-price, interstate-commerce, resale, and July 31, 1973 rules — annotation omits the fulfillment chain, laboratory-versus-franchisor transaction legs, express delivery assumption, conflicting slide-sale percentages, absent request, agreements and 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/295-1630.pdf

Original ruling text

State of California

Board of Equalization

Memorandum
295.1630
To:

--- – Auditing

From:

Tax Counsel - Headquarters

Subject:

--- ---.

Date:

July 31, 1973

SR -- -- ------

This is in response to your memorandum of May 24, 1973.
Taxpayer is a franchisor of its --- --- photographic and sales techniques, methods, and procedures. Taxpayer has entered into franchise agreements with independent photographers located outside the State of California. Under taxpayer’s franchise agreements, taxpayer is required to supply its franchisees with “. . .all film, paper forms, order books, mounts, prints, processing service, printing service, and delivery service necessary to carry out the business of
[the franchisee] as a photographic studio.” The “. . .price for these services, supplies and counsel. . .” is a percentage of the franchisee’s gross sales. Taxpayer ships unexposed film to its franchisees out of state. After exposing the film the frachisee returns the film to taxpayer for development. The film is sent by taxpayer to --- (a photo lab) where it is developed by the reversal process method. --- (The photo lab) returns the developed transparencies to taxpayer who mounts the transparencies. Taxpayer ships the slides to the franchisee who shows them to its customer. The franchisee may (a) make no sale, in which case it retains the slide, (b) sell the slide only, in which case we assume it would deliver the slide to the customer, or (c) obtain an order from the customer for prints. Upon obtaining an order for prints, the franchisee ships the slide to taxpayer who turns the slide over to --- (the photo lab). --- (The photo lab) makes the prints and returns the slide and the prints to taxpayer. Taxpayer then ships the slide and the prints directly to the customer of the out-of-state franchisee. Taxpayer indicates, in its letter of February 6, 1973, that 81 percent of the slides are sold to customers of the franchisee (although the Report of Discussion of February 1, 1973, suggests that about half the slides are sold). We are in agreement with taxpayer’s basic contention that film and processing services furnished by taxpayer to its independent franchisees are sold within the meaning of that concept as it is used in the Sales and Use Tax Law. That the price of the items sold is determined by a percentage of the franchisee’s gross receipts is immaterial.

--- – Auditing
SR -- -- ------

-2-

July 31, 1973
295.1630

We are of the opinion that sales tax does not apply on taxpayer’s sale of the unexposed film (the sale is in interstate commerce or for resale), that sales tax does not apply on --- (the photo lab’s) processing charge to taxpayer (not a processing of consumer furnished tangible personal property), that sales tax does not apply to taxpayer’s charge to its franchisees for the processing (interstate commerce or sale for resale), that tax does not apply on (the photo lab’s) charge to taxpayer for making the prints (sale for resale), and that tax does not apply on taxpayer’s charge to the franchisees for making the prints (sale for resale).

GJJ/ab

295.1630 (2-23-05).docx