Were separately invoiced costume selection, cleaning, dyeing, and alteration charges taxable with movie and TV costume rentals?

Plain-English summary

A redacted corporation formed January 1, 1979 rented a large selection of costumes, uniforms and period clothes to movie and television producers. Its petition followed an August 11, 1983 preliminary hearing in Sepulveda and concerned January 1, 1979 through December 31, 1981.

The protested liability was measured by $220,084 of unreported labor and expense items billed with costume rentals. That is the audit measure, not a final tax amount. The lessor argued that selection, cleaning and dyeing were separately contracted and outside costume sales price.

The lessor sent producers a price list. Producers generally used their own wardrobe personnel and signed a shipping sheet on taking possession; it stated rent and required cleaning before return or payment to the lessor. Alteration, cleaning and dyeing appeared separately on later invoices. When producers could not supply wardrobe personnel, the lessor selected costumes for a separately invoiced charge based on a verbal agreement, although the shipping sheet did not call selection part of the lease.

The lessor collected no use tax on separately stated selection, alteration, laundry or dyeing. The auditor treated all as lease sales price under Annotation 295.1690. The lessor conceded alterations but invoked the same annotation against taxing selection, cleaning and dyeing.

Sections 6006(g) and 6006.3 treated the costume leases as sales; the listed exceptions were not relevant. Sections 6390, 6401 and 6203 made use tax the principal lease tax on the lessee, sales tax applicable to the lessor when use tax was not, and the lessor responsible for collection. Sections 6201 and 6011 measured use tax by total sales or lease price without deducting labor or service costs.

Annotation 295.1690 included services the seller had to perform to produce and sell property or that the buyer had to pay for as a purchase or functional-use condition. The source later calls this quoted annotation a “regulation,” but identifies it as an annotation elsewhere; that wording remains unresolved.

The recommendation found the complete agreement controlling. Cleaning appeared in the shipping sheet; selection and dyeing appeared on invoices integral to the rentals and reflected earlier verbal agreements. When performed, the lessee had to pay as a lease and functional-use condition. A producer's ability to avoid a charge by doing work itself did not remove an agreed lessor service from the lease.

The hearing officer recommended redetermination without adjustment. The “Reviewed for Audit” signature and date are blank, and no final Board action or later outcome appears. Live Annotation 330.3565 matches the service-charge conclusion but supplies none of the underlying documents.

Common questions

Did separate invoice lines make the services nontaxable?

No. The source looked at whether the services were part of the complete rental agreement.

What if the producer selected or cleaned the costumes itself?

Then that lessor-provided service charge could be avoided. But when the lessor performed the agreed service, its charge was part of the lease.

Were alteration charges disputed?

No. The taxpayer conceded that alterations were part of costume rental sales price.

Why was costume selection part of rent even though it was verbally arranged?

The invoice reflected the prior agreement, and the recommendation treated both as integral to the rental transaction.

What did the $220,084 represent?

The measure of unreported labor and expense items billed with rentals for the audit period—not a final tax amount stated in the source.

Who normally selected the costumes?

The producer's wardrobe personnel. The lessor selected them only when a producer could not send its own personnel, based on a verbal charge agreement.

Did the lessor collect use tax on any disputed service lines?

No. The source says it collected none on separately stated selection, alteration, laundry and dyeing.

Was the recommendation a final Board decision?

No final action is published. It recommends redetermination without adjustment, and the audit-review signature block is blank.

Citations and references

• Revenue and Taxation Code sections 6006(g)(1)–(6) and 6006.3 — leases as sales and exceptions found irrelevant
• Revenue and Taxation Code sections 6390 and 6401 — lease sales/use-tax framework
• Revenue and Taxation Code section 6203 — lessor's use-tax collection duty
• Revenue and Taxation Code section 6201 — use tax measured by sales price
• Revenue and Taxation Code section 6011 — total lease price without labor- or service-cost deduction
• Annotation 295.1690 (Aug. 16, 1978) — seller-required and purchaser-condition/functional-use services; called an annotation and later a “regulation” in the source
• Live Annotation 330.3565 — contract-condition and functional-use result dated September 23, 1983
• Shipping sheets, price lists, invoices, verbal agreements, service and audit records, review approval, final action and later outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3565
• Original supporting opinion: 330.3565 PDF
• Cited supporting opinion: 295.1690 PDF

Original ruling text

STATE OF CALIFORNIA

330.3565

BOARD OF EQUALIZATION

In the Matter of the Petition for
Redetermination Under the Sales
and Use Tax Law of:
A--- C--- CORPORATION
Petitioner

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DECISION AND RECOMMENDATION

No. SR -- XX-XXXXXX-010

The preliminary hearing on the above taxpayer’s petition for Redetermination was held on August 11, 1983, in Sepulveda, California. Hearing Officer:

John B. Adamo

Appearing for Petitioner:

Mr. R--- M. S--Certified Public Accountant

Appearing for the Board:

Mr. George Swab
Auditor
W. E. Burkett
Tax Counsel
Protested Item

The protested tax liability for the period January 1, 1979 through December 31, 1981 is measured by:

Item

State, Local
and County

Unreported labor and expense items
Billed with costume rentals

$220,084
Contention of Petitioner

Amounts charged for costume selection, cleaning, and dyeing did not constitute part of the “sales price” of the costume rentals as these services were contracted for separately. Summary Petitioner, a corporation formed on January 1, 1979 is engaged in the business of leasing costumes to the motion picture and television industry.

A--- C--- CORPORATION

-4-

September 23, 1983
330.3565

Petitioner maintains a large selection of costumes, uniforms, and period clothes. When contacted by a producer requiring some of these costumes, petitioner sends a price list describing the available items and their lease prices. Generally, the producer sends his own wardrobe personnel to petitioner’s location to select the needed costumes. The producer signs a “shipping sheet” upon taking possession of the costumes which sets forth the rental price and other provisions of the lease agreement, including that the lessee must either clean the costumes before returning them to petitioner or pay petitioner for this service. An invoice is subsequently sent to the producer setting forth the costume rental charge. Required alterations are performed by petitioner and separately set forth on the invoice; charges for cleaning and dyeing are similarly invoiced. On occasion, producers are unable to send their own wardrobe personnel to petitioner’s location to select the required costumes. In these cases, petitioner selects the needed wardrobe for the producer, and includes a separate charge for this service in the invoice. The aforementioned “shipping sheet” does not state that this later service constitutes part of the lease agreement. At the preliminary hearing conducted on this matter, petitioner’s representative stated that petitioner and the producer will verbally agree as to the charge for this service. Petitioner did not collect use tax on the separately stated charges for costume selection, alteration, laundry, and dyeing. The auditor concluded that these services constituted part of the sales price of the lease transactions, and that petitioner should have collected use tax on the amounts charged for those services. (Business Taxes Law Guide, Anno. 295.1690, Aug. 16, 1978.) Petitioner has conceded that the charges for alteration did constitute part of the sales price for the costume rentals. It asserts, however, that the above cited annotation supports its position that remaining services (i.e., costume selection, cleaning, and dyeing) were not part of the sales price for the costume rentals. Analysis and Conclusions Leases of tangible personal property are defined as sales by Revenue and Taxation Code Section 6006(g), subject to certain exceptions specified in the law which are not relevant here. (See Sections 6006(g)(1-6) and 6006.3.) The principal tax imposed on a lease transaction and the one applicable here, is a use tax imposed on the lessee; the sales tax is imposed on the lessor when the use tax is not applicable. (Section 6390 and 6401.) The lessor is required to collect the use tax from the lessee. (Section 6203.) Use tax is imposed on the “sales price” of tangible personal property purchased for storage, use, or other consumption in this state. (Section 6201.) The term “sales price” is defined by Section 6011 and includes the total amount for which tangible personal property is sold or leased without any deduction for, among other things, labor or service costs.

A--- C--- CORPORATION

-4-

September 23, 1983
330.3565

As previously noted, both the auditor and petitioner cite Business Taxes Law Guide Annotation 295.1690 in support of their respective positions. In pertinent part, that annotation provides as follows: “‘Services that are part of the sale’ include any the seller must perform in order to produce and sell the property, or for which the purchaser must pay as a condition of the purchase and/or functional use of the property, even where such services might not appear to directly relate to production or sale costs.” (Emphasis added.) Petitioner, relying on the emphasized portion of the above quoted regulation, maintains that it is not required to perform any services under the “shipping sheet,” and that the amounts charged for these services should not be included in the “sales price.” The auditor asserts, in essence, that petitioner could not lease its costumes without performing these services and that petitioner’s customers must pay for these services as a condition of the lease and in order to use the costumes. The mere fact that the “shipping sheet” may not reflect the charges made for the services in issue does not mean that those services are not part of the lease agreements. Initially, we note that the “shipping sheet” does provide for a cleaning charge whenever the lessee does not launder the costumes before return. Moreover, the charges for costume selection and dyeing are made in conjunction with the lease agreement and reflected on the invoices which constitute an integral part of the costume rental agreements. The invoice reflects the producer’s and petitioner’s previous verbal agreement with regard to services performed as part of the lease agreement. The unchallenged fact is that, with respect to those leases under which these services are performed, the lessee must pay for those services both as a condition of the lease and in order to make use of the costumes. The fact that a producer may avoid these charges by performing the services himself, e.g., selecting the wardrobe, etc., does not mean that these services are not part of the lease when the parties so agree. Recommendation Redetermine without adjustment.

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John B. Adamo, Hearing Officer

9/23/83
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Date

REVIEWED FOR AUDIT:

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Principal Tax Auditor

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Date