How did California tax a survey program that mailed printed surveys and pens, then delivered a custom research report?

Plain-English summary

The client supplied a computer disk of customer names and addresses. The survey company created personalized letters and labels, printed survey cards and envelopes, imprinted pens with the client's logo to motivate responses, assembled everything in California, and mailed nationwide. It later analyzed returned surveys and delivered a written report.

The request described two invoices. The first billed materials and printing plus a small markup and outgoing postage when the survey packet was mailed. The second billed the contract balance plus incoming postage when the report was submitted. No contract or invoice is reproduced.

The printed materials and pens were tangible personal property. Gross receipts for items mailed to California recipients were taxable. Items the survey company itself mailed outside California through the U.S. Mail were exempt under the interstate-shipment rule, provided neither the client nor its agents took possession in California.

Separately stated actual postage for delivery by U.S. Mail could be excluded, but handling charges could not. The source lacked enough facts to determine whether the invoiced postage met every requirement.

A report custom-created for this client could be a nontaxable service with one incidental paper or disk copy. A generic or reused report was taxable property. Renaming a property invoice as a milestone did not change the tax, but genuinely separate, terminable contract phases and separate invoicing could preserve the custom-report service treatment.

Counsel described noncustom indicators including established item pricing, generic statewide or countywide availability, reports furnished to multiple customers, and delivery on a medium generally requiring mass production. The source assumed the client could terminate before the report phase without further obligation, including when response counts were insufficient; the contract is absent.

The source said separately stated actual postage could be excluded only when the contract or contemporaneous invoice separately stated transportation and the amount represented shipment rather than handling. Counsel expressly lacked enough information to decide whether the actual charges qualified, and the enclosed Regulation 1628 is not included.

CDTFA's live annotation adds that the original unique report is incidental but additional copies make the survey company a retailer. The supporting response expressly discusses one incidental copy and generic or reused reports but does not separately state the additional-copy rule.

No mailing counts by state, material or pen costs, postage amounts, invoices, response data, report, taxable measure, tax filing, audit or later outcome is supplied.

Common questions

Which survey mailings were taxable?

Gross receipts for printed materials and pens sent to California recipients were taxable; qualifying contract-required U.S. Mail shipments outside California were exempt when neither client nor agent took possession here.

Was all separately labeled postage excluded?

No. It had to be contemporaneously and separately stated actual third-party transportation, not handling. Counsel could not decide the requester's charges from the facts supplied.

Did “milestone” billing change tangible property into a service?

No. Counsel said transaction substance controlled regardless of invoice wording.

When could the report remain a nontaxable service?

When specifically created or compiled for this client, with only an incidental copy, and genuinely separated from the property phase under terminable obligations and separate invoicing.

What made a report taxable property?

Reused or group-custom content, generic availability, established item pricing or mass-production media could indicate a tangible-property sale.

Were the actual postage and report arrangements approved?

No. The source supplies no contract, invoices, postage records or report and expressly says the postage facts were insufficient.

Citations and references

• California Revenue and Taxation Code sections 6006, 6010.5, 6012 and 6051, Uniform Commercial Code section 2401, and Regulation 1541 — cited for title, retail sales, gross receipts and printed materials; complete authorities, amendments, later history, and current law not supplied
• California Revenue and Taxation Code section 6396 and Regulation 1620(a)(3)(B) — cited for outside shipment; complete authorities, proof, amendments, later history, and current law not supplied
• Sales and Use Tax Regulation 1628(a) — quoted for actual postage and handling; complete regulation, proof, amendments, later history, and current law not supplied
• Sales and Use Tax Regulation 1501 and BTLG Annotation 515.0720 — cited for custom services and separate obligations; complete sources, later treatment, and current status not supplied
• March 8 request and transaction records — not reproduced or absent; contract, mailings, postage, reports, invoices, measure and outcome remain unproved
• April 10 response — assumption-bound and expressly inconclusive on postage, with no applied tax proceeding or later result
• Official Annotation 325.0341.500 — compresses the results and adds additional-copy treatment while omitting the provenance, evidence gap, custom criteria, contract analysis, missing records, outcome, and reliance status

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 325.0341.500
• Original supporting opinion: 325.0341.500 PDF

Original ruling text

325.0341.500

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 324-2637
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

April 10, 1996

Ms. J--- M--The A--- G--XXXX W. --- ---, Suite X
---, California XXXXX

KATHLEEN CONNELL
Controller, Sacramento

E. L. Sorensen, Jr.
Executive Director

Re: Account No. SR --- XX-XXXXXX
Dear Ms. M---:
This is in response to your March 8, 1996 letter to Assistant Chief Counsel Gary J. Jugum regarding the application of tax to your company’s operations. You state: “H--- - P--- Company contracts with The A--- G--- to gather data regarding customer satisfaction. HP provides A--- with a computer disk of the names and addresses of their customers. “From this disk, A--- creates a custom letter and address label. We also print a custom survey card and envelop, and imprint a pen with the HP logo to be enclosed in the survey mailing (in order to motivate responses). The printing and assembly is all done in California. A--- mails the survey cards and pen, and personalized letter to HP customers all over the county via the U.S. Mail. “A--- receives responses from customers, analyzes data, and provides a written report to H--- - P--- summarizing this information. “Two invoices are sent to HP for this transaction. The first invoice is generated upon the mailing of the survey forms, etc., and bills HP for our material and printing costs (plus a small mark-up) and for the out-going postage. The second invoice is generated when we submit our written report to HP and invoices HP for the balance of the contract amount, plus incoming postage.” You ask a series of questions based on the above facts. For purposes of clarity, we have separately responded to each of your questions below.

Ms. J--- M---

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April 10, 1996
325.0341.500

“1) Has A--- made a sale of tangible personal property to HP on our first invoice? If so, what is the correct measure of tax - 100% of the invoiced amount or just the percentage associated with the mailings to CA recipients? We believe that the U.S. postage charge on this invoice is not subject to tax.” California imposes a sales tax on a retailer’s gross receipts from the retail sale of tangible personal property in this state unless the sale is specifically exempt from taxation by statute. (Rev. & Tax. Code § 6051.) Taxable gross receipts include all amounts received with respect to the sale, with no deduction for the cost of the materials, service, or expense of the retailer passed on to the customer. (Rev. & Tax. Code § 6012.) Subdivisions (a) and (b) of Regulation 1541 provide that tax applies to the gross receipts from the sale of printed material as well as any services that are part of the sale of these materials regardless of whether the paper or any other materials are furnished by the customer. A sale of tangible personal property takes place where the property is physically located at the time title is transferred for consideration. (See Rev. & Tax. Code §§ 6006, 6010.5; Cal. U. Com. Code § 2401.) Title to property generally passes no later than the time when the seller completes its responsibilities with respect to physical delivery of the property. (Cal. U. Com. Code § 2401.) In this case, we assume that A--- completes its responsibilities with respect to physical delivery of its printed matter and pens when it places these items in the mail inside this state for delivery to HP’s customers. This means that A--- is making a retail sale of property inside this state and tax applies to this transaction unless an exemption otherwise exists. The only basis for an exemption on the materials mailed by your company is the exemption set forth in Revenue and Taxation Code section 6396. That provision exempts sales in this state from sales tax when goods are shipped outside the state under specific conditions. These conditions are explained in Regulation 1620(a)(3)(B) as follows: "Sales tax does not apply when the property pursuant to the contract of sale, is required to be shipped and is shipped to a point outside this state by the retailer, by means of:

1. Facilities operated by the retailer, or
2. Delivery by the retailer to a carrier, customs broker or
   forwarding agent, whether hired by the purchaser or not, for shipment to such out-of-state point. As used herein the term
   carrier' means a person or firm regularly engaged in the business of transporting for compensation tangible personal property owned by other persons, and includes both common and contract carriers. The termforwarding agent' means a person or firm regularly engaged in the business of preparing property for shipment or arranging for its shipment. An individual or firm not otherwise so engaged does not become a carrier' orforwarding agent' within

Ms. J--- M---

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April 10, 1996
325.0341.500

the meaning of this regulation simply by being designated by a purchaser to receive and ship goods to a point outside this state...." Thus, tax does not apply to A---’s gross receipts from the sale of pens and printed materials that it ships outside this state by US Mail provided A--- actually ships these materials outside the state (or directly sends the goods to a carrier, customs broker or forwarding agent for shipment outside this state) and neither HP nor its agents obtain possession of the property inside this state. Tax does apply, however, to the gross receipts A--- receives from its sales of printed material and pens to HP that are shipped to HP’s customers inside this state. You also ask whether tax applies to A---’s postage charges to HP for the transportation of its pens and printed materials to HP’s customers inside this state. Subdivision (a) of Regulation 1628 (copy enclosed) provides that: “[T]ax does not apply to ‘separately stated’ charges for transportation of property from the retailer’s place or business or other point from which shipment is made ‘directly to the purchaser [or purchaser’s designee],’ provided the transportation is by other than facilities of the retailer, i.e., United States mail, independent contract or common carrier.... “Transportation charges will be regarded as ‘separately stated’ only if they are separately set forth in the contract for sale or in a document reflecting that contract, issued contemporaneously with the sale, such as the retailer’s invoice. The fact that the transportation charges can be computed from the information contained on the face of the invoice or other document will not suffice as a separate statement. If a separately stated charge is made designated ‘postage and handling’ or ‘shipping and handling’, only that portion of the charge which represents actual postage or actual shipment may be excluded from the measure of tax. Such amounts may be excluded from the measure even though such amounts are not affixed to, or noted on, the package. A separately stated charge designated ‘handling’ or ‘handling charge’ is not a separate statement of transportation charges. Tax applies to such charges, notwithstanding the fact that postage or shipment charges may or may not be affixed to or noted on the package. “....” This means that tax does not apply to A---’s charges for transportation (postage) of the pens and printed materials provided that its charges for transportation are separately set forth in its contract of sale to HP, the charges represent only that amount for shipment (and not “handling”) of the property, and A--- ships the material by U.S. mail. You have not, however, provided us with enough information in your letter to determine whether A---’s postage charges to HP meet the foregoing requirements.

Ms. J--- M---

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April 10, 1996
325.0341.500

You also state that A--- provides HP with a written report summarizing the information collected from the customer survey cards. We assume these reports are specifically created, collected, or compiled at the request of HP such that the transaction is a non-taxable service transaction. (See, e.g., Reg. 1501.) If so, the transfer of a single copy of the compiled information on a computer disk or paper is considered incidental to the providing of the service and tax only applies to the sale of such materials to A--- as the seller of the service. (Id.) However, if A--- is providing a report that includes information not customized to HP’s specific order (i.e., a report A--- previously prepared for a different customer on a custom basis or a report that is furnished to several different customers even if the report was custom prepared for the entire group of customers), the transaction is a sale of tangible personal property and is subject to tax unless an exemption otherwise applies. (Rev. & Tax. Code §§ 6051, 6201.) Information on computer disk or a paper report is generally not considered “custom” when the seller maintains an established price based on the item ordered, the product sold or leased to the customer is generic in nature (i.e., the product is available on a state or county-wide basis), or the product is delivered on a medium generally requiring mass production. “2) If the answer to question one is ‘yes,’ can the transaction be invoiced differently to avoid the application of CA tax? For example if A--- did not associate the first invoice with tangible personal property (printed material & pen) and instead identified the invoice as ‘milestone’ billing, would this language render the tax inapplicable?” No. Tax applies to the sale of tangible personal property inside this state regardless of how the parties to such a sale may describe the transaction. “3) How would tax status be affected if we were to invoice HP for the entire transaction on one invoice?” As set forth above, taxable gross receipts include all amounts received with respect to the sale, with no deduction for the cost of the materials, service, or expense of the retailer passed on to the customer. (Rev. & Tax. Code § 6012.) That is, where a retailer sells both property and a service in a single transaction, tax applies to the entire gross receipts from that sale unless the service portion of the transaction is specifically exempt or otherwise excluded from tax. Conversely, where a retailer provides a service and sells tangible personal property to a single customer pursuant to two separate purchase orders, tax does not apply to the gross receipts from the service provided the retailer is not under an obligation to deliver any tangible personal property as part of a single contract. (See, e.g., Annot. 515.0720 (1/22/58).) We assume from your letter that A---’s contract with HP provides for separate phases (e.g., data collection phase and report phase) wherein HP has the right to terminate the contract prior to commencement of the next phase without further obligation except for compensation for work completed. That is, we assume that HP is not required to purchase a written report from A-- where, for example, your company does not receive a predetermined number of responses to the customer surveys. Under these facts, tax does not apply to A---’s transfer of its written

Ms. J--- M---

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April 10, 1996
325.0341.500

report to HP provided the report is separately invoiced and constitutes “custom” research as discussed in our response to question one above. If you have any further questions, please write again. Sincerely,

Warren L. Astleford
Staff Counsel
WLA:rz
Enclosure - Reg. 1628
cc:

--- District Administrator - (---)