Was a two-percent credit-card surcharge taxable when it reimbursed an electronics retailer for card-processing costs?

Plain-English summary

A partnership operating three electronics and accessories stores added two percent to credit-card purchases without tax reimbursement or reporting the surcharge as taxable. In July 1989 the auditor found $3,946 of surcharge against $355,049 reported taxable sales, or 1.111%, and applied that factor across the April 1987 through March 1990 audit period to reach a $169,842 measure. The petitioner argued the charge was interest but could not locate the accountant holding its records and supplied no duration proof during an extra 30 days.

The Board rejected that characterization. The charge was a flat amount unrelated to how long the customer took to pay and reimbursed the retailer for dealing with the card issuer. It was therefore a cost of doing business included in taxable gross receipts.

The audit also measured $903,206 of disallowed installation, $778,329 of disallowed resale, and a negative $3,200 computation item, for a total $1,848,177 measure. A June-July 1989 installation test produced a 92.4333% taxable factor, while resale samples produced separate error factors. Petitioner made no hearing comments on those three items. Section 6091's presumptions and the missing installation proof and resale certificates led counsel to uphold them, including leaving the credit item unchanged.

The December 20 transmittal allowed 30 days for a supported reconsideration request or written Board-hearing request before final Board consideration. The PDF supplies no request, final redetermination, Board decision, payment, refund, appeal, or later outcome.

Source-date note

The decision and recommendation is dated November 14, 1991. A separate cover letter transmitting it is dated December 20, 1991; this page follows the date of the operative recommendation.

Citations and references

• California Revenue and Taxation Code section 6012 — described as defining sales-tax gross receipts without deduction for labor, service, or interest paid and separately described as excluding qualifying installation charges; complete text, subdivisions, version, and later history not supplied
• California Sales and Use Tax Regulation 1641(a) — quoted for taxing the whole credit-sale contract unless adequate complete records separately show property price and insurance, interest, finance, and carrying charges; complete regulation, version, examples, and later history not supplied
• California Revenue and Taxation Code section 6091 — cited for presuming gross receipts taxable until the contrary is established and placing the burden on the seller to show a sale is not retail absent a buyer resale certificate; complete text, version, exceptions, and later history not supplied
• Audit for April 1, 1987 through March 31, 1990 with measures of $169,842 for credit-card surcharges, $903,206 for disallowed installation, $778,329 for disallowed resale, and a negative $3,200 computation item, totaling $1,848,177 — determination, audit report and workpapers, schedules, returns, tax and interest amounts, invoices, installation records, resale certificates, and payment records not reproduced
• September 25, 1991 Van Nuys hearing before Senior Staff Counsel H. L. Cohen, with a partner and consultant for petitioner and Supervising Tax Auditor G. McNamee and Senior Tax Auditor G. Weishaup for the Department — petition, hearing notice, transcript, exhibits, testimony beyond the summary, and staff submission not reproduced
• July 1989 surcharge sample of $3,946 against $355,049 reported taxable sales, yielding a 1.111-percent factor applied to all reported taxable sales, after petitioner stated an unavailable accountant had the records and supplied none during a requested 30-day period — sales records, accountant identity and files, sample workpapers, surcharge-duration evidence, and calculation schedule not reproduced
• June and July 1989 installation sample producing a 92.4333-percent taxable factor applied from June 1989 through the audit's end, and separate October 1987 and June-July 1989 resale samples producing error factors for periods without supporting documentation — sample records, workpapers, calculations, invoices, labor evidence, resale certificates, and contrary proof not reproduced
• November 14, 1991 H. L. Cohen Decision and Recommendation upholding every item and recommending redetermination without change because the surcharge was flat card-issuer processing reimbursement, installation and resale proof was absent, and the computation item was already a credit — no final Board action or redetermination supplied
• December 20, 1991 H. L. Cohen transmittal offering within 30 days a supported reconsideration request or written Board-hearing request and otherwise sending the recommendation for final Board consideration — no reconsideration, hearing request, Board decision, payment, refund, appeal, or later outcome supplied; copies with records or enclosure sent to Janice Masterton, Glenn Bystrom, and the Van Nuys District Administrator
• Official Annotation 295.2000's listed merchandise price, two-percent credit-card surcharge, card-issuer processing reimbursement, sale consideration, taxable gross receipts, and November 14, 1991 rules — annotation omits the petition and hearing posture, audit period and four-item $1,848,177 measure, sampling and records gaps, statutes and regulation, three other holdings, December transmittal and options, missing records, final-outcome gap, 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/295-2000.pdf

Original ruling text

295.2000

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 920-7445

December 20, 1991

G--- F--- and I--- F--XXXX --- --- Avenue
--- ---, CA XXXXX

Dear Sirs:

Re:

SY -- XX XXXXXX-010
F--- A--- V--- M---

Enclosed is a copy of the Decision and Recommendation pertaining to the petition for redetermination in the above-referenced matter. I have recommended that the determination be redetermined without adjustment as explained in the Decision and Recommendation. There are three options available to you at this point. 1. If, after reading the Hearing Decision and Recommendation, you believe that you have new evidence and/or contentions, you should file a Request for Reconsideration. No special form is required to file the Request for Reconsideration, but it must be filed within 30 days from the date of this letter and clearly set forth any new contentions. If new evidence is the basis for filing the request, the evidence must be included. Direct any such request directly to me, with a copy sent to the State Board of Equalization, P.O. Box 942879, Sacramento, CA 94279-0001, Attn: Principal Tax Auditor. I will subsequently notify you whether the request has been taken under review or whether the request is insufficient to warrant an adjustment. If I conclude that no adjustment is warranted, I will then notify you of the procedure you can follow to request an oral hearing before the Board.

G--- F--- & I--- F--SY -- XX XXXXXX-010

-2-

December 20, 1991
295.2000

2.
If, after reading the Hearing Decision and Recommendation, you find that there is no basis for filing a Request for Reconsideration, but nevertheless desire to have an oral hearing before the Board, a written request must be filed within 30 days with Ms. Janice Masterton, Assistant to the Executive Director, Board of Equalization, P.O. Box 942879, Sacramento, CA 94278-0001. 3. If neither a request for Board Hearing nor a Request for Reconsideration is received within thirty (30) days from the date of this letter, the Hearing Decision and Recommendation will be presented to the Board for final consideration and action. Very truly yours,

H. L. Cohen
Senior Staff Counsel
HLC:ct
Enc.
cc:

Ms. Janice Masterton
assistant to the Executive Director (w/enclosure)
Mr. Glenn Bystrom
Principal Tax Auditor (file attached)
Van Nuys – District Administrator (w/enclosure)

STATE OF CALIFORNIA

295.2000
BOARD OF EQUALIZATION
BUSINESS TAXES APPEALS REVIEW SECTION

In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law of:
G--- AND I--- F---,
A PARTNERSHIP
dba F--- A--- V--- M--Petitioner

)
)
)
)
)
)
)
)
)

DECISION AND RECOMMENDATION

No. SY --C XX XXXXXX-010

The above-referenced matter came on regularly for hearing before Senior Staff Counsel H. L. Cohen on September 25, 1991, in Van Nuys, California. Appearing for Petitioner:

Mr. I--- F---, Partner
Mr. G. S---, Consultant

Appearing for the Sales and
Use Tax Department

Mr. G. McNamee
Supervising Tax Auditor
Van Nuys District
Mr. G. Weishaup
Senior Tax Auditor
Van Nuys District
Protested Items

The protested tax liability for the period April 1, 1987 through March 31, 1990 is measured by:

A.

Item

State, Local
and County

Surcharges on Credit Card Sales

$169,842

G--- AND I--- F---,
A PARTNERSHIP
SY -- XX XXXXXX-010

-2-

November 14, 1991
295.2000

B.

Claimed Installation Charges Disallowed

903,206

C.

Claimed Sales of Resale Disallowed

778,329

D.

Computation Error

• 3,200
  TOTAL

$1,848,177

Contentions
Petitioner contends that:
1.
not taxable.

The credit card surcharge is in the nature of an interest charge and is thus

2.
At least some of the charges for labor are for installation and are thus not subject to tax. 3.

Additional records are available to support claims for resale.

4.

No satisfactory explanation has been given for the computation error. Summary

Petitioner is a partnership which operates three stores selling electronic equipment and accessories. It began in business January 1, 1987. There has been no prior audit. The auditor noted that on credit card sales petitioner made a surcharge to customer of two percent of the price of the merchandise. No sales tax reimbursement was charged on the two percent surcharge and no tax was reported. The auditor examined petitioner’s July 1989 sales in detail and found that the total surcharge was $3,946. Total taxable sales reported for the month were $355,049. The unreported surcharges were thus 1.111 percent of recorded taxable sales. This percentage was applied to total reported taxable sales to arrive at the amount subject to tax (Audit item A). At the hearing, Mr. I--- F--- stated that his brother, G--- F---, handled bookkeeping and tax matters while he handled sales. The records were given to an accountant who I--- F--- has been unable to locate. I--- F--- suggested that the surcharge may not have been in effect during the entire audit period. However, he has no records to verify this.

G---Y AND I--- F---,
A PARTNERSHIP
SY -- XX XXXXXX-010

-4-

November 14, 1991
295.2000

The auditor noted that in June 1989, claimed exempt labor charges increased significantly. From April 1, 1987 through June 30, 1989, claimed exempt labor charges varied from $969 to $37,344 per quarter. For the last three quarters of the audit period, the claimed exempt labor charges ranged from $194,238 to $420,784 per quarter. As a percentage of total sales, the range for the earlier period was from 0.155 percent to 2.598 percent. For the later period, the range from from 9.991 percent to 14.083 percent. The auditor’s test of installation labor revealed that the majority of the increased deductions were actually sales of installed tangible personal property. The auditor conducted a test of June and July 1989 and concluded that 92.4333 percent of the labor deductions were taxable. This percentage was applied to labor deductions from June 1989 to the end of the audit period (Audit Item B). At the hearing, petitioner made no comments with respect to this item. The auditor examined petitioner’s records of claimed sales for resale for June and July 1989 and for October 1987. No supporting documentation was on file for some of these sales. In addition, there was a substantively greater amount claimed in periods prior to and including the fourth quarter of 1987. The auditor calculated an error factor from the October 1987 sample and applied it to sales for the fourth quarter 1987 and prior periods. Another error factor was calculated for the June and July 1989 period and this factor was applied to the remainder of the audit period (Audit Item C). Petitioner made no comment with respect to this item at the hearing. The auditor also found a small overpayment on one of petitioner’s returns and allowed a credit for it (Audit Item D). Although petitioner had included this item in its petition, petitioner made no comment with respect to it at the hearing. I--- F--- requested that he be allowed 30 days in which to obtain records to justify reduction in the amount subject to tax. As of November 14, nothing had been received from petitioner. Analysis and Conclusions Section 6012 of the Revenue and Taxation Code defines “gross receipts”, which is the amount subject to the sales tax, to mean the total amount of the sale. No deduction is allowed for the cost of labor or service or interest paid. Sales and Use Tax Regulation 1641 provides in subdivision (a):

G---Y AND I--- F---,
A PARTNERSHIP
SY -- XX XXXXXX-010

-4-

November 14, 1991
295.2000

“If tangible personal property is sold on credit, either under a security agreement, or otherwise the whole amount of the contract is taxable, unless the retailer keeps adequate and complete records to show separately the sales price of the tangible personal property, and the insurance, interest, finance, and carrying charges made in the contract. If such records are kept by the retailer, the insurance, interest, finance and carrying charges may be excluded from the computation of the tax.” The surcharge is not an interest charge because it is a flat amount unrelated to the length of time taken by the buyer in which to pay for the goods. It is a charge made by petitioner to reimburse itself for the cost of dealing with the issuer of the credit card. It is a cost of doing business and is therefore part of gross receipts, just as a salesperson’s commission or salary is. The only difference is that the commission or salary is included in the posted price. Petitioner has produced no evidence that would indicate that the practice of making a surcharge for credit sales was not in effect throughout the audit period. I conclude that the tax was properly applied to Audit Item A. Section 6012 excludes charges for installation from gross receipts subject to tax. Section 6091 provides that it shall be presumed that all gross receipts are subject to tax until the contrary is established. Petitioner has submitted no evidence to show that the disputed charges were in fact charges for installation labor. The statistical evidence submitted by the auditor is extremely convincing as to a change in petitioner’s method of reporting taxable charges. The auditor’s position should be upheld on Audit Item B. Section 6091 provides that it is the burden of the seller to show that a sale is not at retail unless the seller takes a resale certificate from the buyer. The transactions in question in Audit Item C are unsupported by resale certificates. Petitioner has produced no evidence to show that the property was in fact resold. Accordingly, tax was properly imposed in Audit Item C. Audit Item D is a credit item. I see no basis for changing it. Recommendation Redetermine without change.

__________
H. L. Cohen, Senior Staff Counsel

11-14-91
____
Date