Were a credit-card processor's separately ordered microfiche copies, bad-card warning lists, and postmail notices taxable?

Plain-English summary

Tax Counsel answered a March 22, 1984 legal-opinion request about items 10, 11, and 12 in a March 20 Chicago-office audit memorandum. An attached August 3, 1981 opinion supplied the general business description: the processor served banks and airlines, maintained customer and merchant-account files, entered transaction documents or tapes, produced and mailed statements, embossed customer-supplied or customer-funded plastic cards and merchant plates, and mailed cards with printed carriers and envelopes.

Customers received daily tabulated processing output within the exempt processing fee. They separately contracted for microfiche originals and duplicates, produced by an outside firm from taped data and sent about four days later. Counsel distinguished microfiche received “instead of” tabulated output from these extra items. The charges were taxable under Regulation 1502(d)(5)(A)(2) because the customer used the microfiche apart from a mere record of the processor's output; counsel rejected Regulation 1502(d)(4) as the basis because the underlying contract unquestionably processed customer-furnished information.

Hard-copy bad-card-number lists were taxable either as additional copies of records or tabulations under the memorandum's Regulation 1502(d)(5)(B), or as printed matter under section 6006(f), depending on the facts. A service bureau billed the processor, which billed its customers with a markup.

Notices mailed to cardholders a few days after the cards—and returnable if no card arrived—were taxable printed matter. Mailing-preparation services remained nontaxable, but the printed-matter and mailing-service charges had to be separately stated.

Source and live-annotation limits

The PDF does not include the March 20 or March 22 audit memoranda, the attached August 3, 1981 prior opinion, contracts, processor data or output, microfiche, warning lists, notices, invoices, audit workpapers, transaction samples, tax measure, assessment, payment, or later outcome. The bad-card-list result expressly remains alternative and fact-dependent.

The live annotation preserves the processor's business description, bad-card-list alternatives, printed-notice result, and separate mailing-service rule. It omits the microfiche issue entirely, the audit and prior-opinion provenance, and the missing records. The memorandum cites Regulation 1502(d)(5)(B) and section 6006(f) for the warning lists; the live annotation instead cites Regulation 1502(d)(5)(F) and Regulation 1541(a). The source does not explain whether that difference reflects later renumbering or another change, so this page preserves both rather than reconciling them.

What this means for you

Payment processors and tax professionals

Separate included processing output from extra customer-use items, additional copies, warning publications, printed notices, and mailing preparation. Retain contracts, output descriptions, copy counts, and itemized invoices.

Common questions

Were extra microfiche originals and copies taxable?

Yes.

Were bad-card warning lists taxable?

Yes, but the legal classification depended on facts the memorandum did not supply.

Were mailing services taxable?

Not when separately stated from the taxable printed notices.

Citations and references

• California Revenue and Taxation Code section 6006(f)
• California Sales and Use Tax Regulation 1502(d)(4), (d)(5), (d)(5)(A)(2), and (d)(5)(B), as printed in the memorandum
• California Sales and Use Tax Regulation 1504(b) and (c)
• California Sales and Use Tax Regulations 1502(d)(5)(F), 1541(a), and 1504(c) — cited only in the live annotation
• March 20 and March 22, 1984 audit memoranda, August 3, 1981 prior opinion, contracts, and charge records — referenced but not included

Verbatim support

From the official May 22, 1984 memorandum:

We consider that subsection (d)(5)(A)(2) renders these charges taxable because the microfiche originals and duplicates are “similar items for use” by the customer; like inventory control cards, the customer has a use for the microfiche quite apart from a mere record of the service bureau’s output.

F--- D---’s charges for the notices sent to cardholders are for the sale of printed matter and are taxable. Services rendered in the preparing of material for mailing are, however, nontaxable.

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/340-0000-all.html
• Original supporting memorandum: https://cdtfa.ca.gov/lawguides/annotations/340-0148.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

J. E. Warner
Out-of-State - Auditing

From:

John Abbott
Tax Counsel

Subject:

F--- D--- R---, Inc. – SS OHA XX-XXXXXX
Data processing – microfiche copies

340.0148

Date:

May 22, 1984

This is in reply to your memorandum of March 22, 1984 to Legal asking for a legal opinion on certain charges made by F--- D--- to its customers. The charges are numbered 10, 11, and 12 on the memo from the Chicago office to Out-of-State auditing dated March 20, 1984 as follows: These following charges are also made and their tax status under Regulation 1502 is requested.

10. Microfiche Original and
    Microfiche Duplicates
    Taxpayer furnishes customer a tabulated listing daily of the output of processing information. This is included in the exempt processing fees. In addition customer contracts for microfiche copies (and duplicates of some) of these tabulated listings. The process is that the microfiche is sent to the customer about four days after the tabulated listing – it is prepared by an outside firm from the taped data sent to them. Regulation 1502(d)(5) paragraph 5 – wording is “instead” not in addition to. Do these microfiche charges fall under Regulation 1502(d)(4)?
11. Warning Notice Distribution
    Example – [service bureau] distributes lists of bad card numbers to merchants (hard copy). [service bureau] bills charges for this to F--- D--R--- Inc. FDR bills on to the customers with a mark-up.

J. E. Warner
Out-of-State District

12.

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May 22, 1984
340.0148

Postmailers
As part of the embossing work there is often a charge for a notice sent a few days after the credit cards are mailed to individual cardholders. It is to be returned if no card has been received.

You also helpfully attached the legal section’s previous opinion memorandum on F--- D---, from Richard H. Ochsner to Out-of-State dated August 3, 1981. Mr. Ochsner’s memorandum covered other types of charges then made by F--- D--- [FDR] and summarized the general nature of F--D---’s business operations as follows: FDR contracts with banks and airlines to process their charge card transactions…. FDR maintains computer master files on the client’s customer charge accounts and, in the case of [service bureau] and [service bureau] systems for banks, on the participating merchant accounts. FDR receives charge accounts sales documents or tapes reflecting the transactions and enters same in its computer system….FDR produces and mails out customer and merchant charge account statements. It also provides embossing services using plastic supplied by, or purchased from the account of, the client to produce and imprint the plastic charge cards and merchant plates. FDR provides the printed card carrier with envelope and mails the card to the cardholder. Our conclusions regarding F--- D---’s questioned charges are as follows: 10. Microfiche originals and microfiche duplicates. Regulation 1502(d)(5), which states in part:

The issue you raise concerns

Where a service bureau enters into a contract for the processing of customerfurnished information…and the output is in part of in whole transferred to the customer in tabulated listing or similar human readable form, the true object of the contract is regarded to be the rendition of a service….

Where a service bureau enters into a contract to process customer-furnished information, tax will not apply even though the computer output media may be microfilm or photorecording paper, instead of a tabulated listing…. The Chicago office points out that F--- D--- is preparing these microfiche originals and duplicates in addition to, rather than instead of, the tabulated listing, and therefore asks whether Regulation 1502(d)(4) applies instead. As relevant, Regulation 1502(d)(4) states:

J. E. Warner
Out-of-State District

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May 22, 1984
340.0148

Tax applies to charges for microfilming or photorecording except, as provided in paragraph (d)(5), where the microfilming or photorecording is done under a contract for the processing of customer-furnished information. Our opinion is that tax applies to the charges for microfiche, but our conclusion is based not on subsection (d)(4), but instead on subsection (d)(5)(A), which states in part: Where a service bureau has entered into a contract which is regarded as a service contract under this paragraph (d)(5) and the service bureau, pursuant to the contract, transfers to its customer…(2) inventory control cards for use by the customer, membership cards for distribution by the customer, labels (other than address labels) or similar items for use, tax applies to the charges made for such items. We consider that subsection (d)(4) cannot apply because the contract between F--- D--- and its customers is unquestionably for the processing of customer-furnished information. And the phrase “instead of” rules out a conclusion that the above-quoted provisions of subsection (d)(5) could apply. We consider that this provision of subsection (d)(5) merely means that a service bureau’s customer could elect to receive the service bureau’s output in microfiche form, instead of tabulated listing form, without changing the essential characterization of the contract as a service transaction. We consider that subsection (d)(5)(A)(2) renders these charges taxable because the microfiche originals and duplicates are “similar items for use” by the customer; like inventory control cards, the customer has a use for the microfiche quite apart from a mere record of the service bureau’s output.

11. Warning notice distribution. We conclude these lists of bad card numbers are either taxable
    as additional copies of records or tabulations, pursuant to Regulation 1502(d)(5)(B), or taxable as printed matter under Code section 6006(f), depending upon what facts apply.
12. Postmailers. Here Regulation 1504(b) and (c) applies. F--- D---’s charges for the notices
    sent to cardholders are for the sale of printed matter and are taxable. Services rendered in the preparing of material for mailing are, however, nontaxable. The charges for the printed matter should be separately stated from the charges for mailing services.

JA:ss