Was bookbinding equipment exempt when customers supplied the materials and the machinery also handled used books?

Plain-English summary

A bookbinding company's equipment was used for both new books and old-book rebinding. Staff reported that separating equipment used exclusively for rebinding would be difficult and likely not worthwhile. The company bound new publications that had never previously been bound.

Board counsel treated initial bookbinding as producing, processing, or fabricating under section 6006(c) and Ruling 15, even when the customer supplied some or all materials. Ruling 27 likewise treated the entire charge for furnishing a finished bound book as taxable.

Because new-book binding required a seller's permit, equipment used in that activity could not be sold as an exempt occasional sale. Equipment used exclusively on customers' used books might have been considered separately, but the facts did not establish a segregable group. No determination had yet issued, and the taxpayer retained petition rights.

Reported interview, mixed use, and pre-determination limits

Tax Counsel E. H. Stetson wrote to attorney C--- L. B--- of O---, D---, H--- & H--- for T. J. C--- Company on July 25, 1952. He had telephoned around 2 p.m. and sent the letter because he did not expect the attorney back that afternoon.

Stetson relied on a report from Mr. Anderson of the Board's San Francisco office. Anderson said Mr. Kelly had interviewed either J--- or G--- L---—Stetson expressly was unsure which—and learned that the machinery was used in both old- and new-book binding. Equipment used exclusively for rebinding or library binding reportedly could be segregated only with great difficulty, and the amount involved would hardly justify it. The operations included initially binding never-bound publications such as the Blue and Gold, the California year book, and other articles, which counsel treated as new production.

Sales and Use Tax Ruling 27, Bookbinders, was quoted as taxing the entire charge for binding connected with furnishing a finished bound book. Section 6006(c) and Ruling 15 treated initial binding as producing, processing, or fabricating even when the customer supplied some or all materials. That activity required a seller's permit, so equipment used in it could not be sold as an occasional-sale asset.

Counsel said prior discussions about excluding some equipment had proceeded on the understanding that certain machinery might be used only for customer-owned used books or rebinding. He quoted his October 11, 1951 letter: segregation might be possible if equipment could be shown to have been used exclusively to apply binding material to customers' used books. But mixed use on new books prevented excluding equipment from the tax measure even when it also handled used books.

The source says no determination had yet issued from the August 20, 1951 audit report. The Board proposed to issue one soon, after which the taxpayer could petition for redetermination and seek a Board hearing. The PDF therefore does not establish an assessed measure, final liability, or administrative outcome.

The PDF does not include the phone record, Anderson report, Kelly interview, identity or statement of the interviewed representative, October 11 letter beyond the quoted passage, Rulings 15 or 27, audit report, equipment inventory and use records, sale agreement, buyer, price, allocation, permit, returns, tax calculation, determination, petition, hearing, payment, refund, appeal, or later outcome. It copies Mr. Burnett Sheehan without explaining his role.

The live annotation preserves equipment used to bind new books for a consumer, customer-furnished materials, taxable-fabrication and permit rationale, non-occasional-sale result, and July 25, 1952 date. It omits the taxpayer and attorney, phone and interview chain, uncertainty over the representative, named publications, old-book and library work, segregation problem, Rulings 15 and 27, prior letter and quote, audit and pre-determination procedure, copied recipient, missing records, and absent outcome.

What this means for you

Printers and bookbinders selling machinery

Customer ownership of materials did not turn initial production into a nontaxable service. Equipment supporting that work remained tied to a permit-requiring activity.

Accountants and tax professionals

Document exclusive equipment use before seeking different treatment for repair or rebinding machinery. Mixed-use assets were not segregated here.

Common questions

Q: What work was treated as fabrication?
A: The initial binding of new publications.

Q: Did customer-furnished materials change that result?
A: No.

Q: Could equipment used only for old-book rebinding be different?
A: Possibly, but no practical exclusive-use segregation was shown.

Q: Had the Board issued a final determination?
A: No. The letter said one would issue and could be petitioned.

Q: How did counsel learn how the equipment was used?

A: A San Francisco office employee relayed another employee's interview with either J--- or G--- L---; the letter says counsel was unsure which person had been interviewed.

Q: What did the earlier 1951 letter suggest?

A: Its quoted passage said segregation might be possible for equipment proven to be used exclusively to apply binding material to customers' used books. The complete letter is absent.

Q: Does the source show the eventual assessment or Board ruling?

A: No. It predates the determination and includes no later petition, hearing, payment, refund, or final disposition.

Citations and references

• California Revenue and Taxation Code § 6006(c)
• California Sales and Use Tax Ruling 15 and Ruling 27, Bookbinders — cited or quoted but not reproduced
• October 11, 1951 counsel letter — quoted in part but not included
• August 20, 1951 audit report and resulting proposed determination — referenced but not included
• Interview chain, equipment and use records, sale and permit records, tax proceeding, hearing, and outcome — described or implicated but not included

Verbatim support

From the official July 25, 1952 Tax Counsel letter:

Mr. Anderson told me that the company's operations included the binding of such new publications as the Blue and Gold, the California year book, and other articles which had never previously been bound and hence the work constitutes new production.

It seems clear to us that the initial binding of a book is clearly a producing, processing, or fabricating under Section 6006(c) and Ruling 15, even though all or a portion of the materials are furnished by the customer.

Perhaps such a segregation is possible in the present case if any of the equipment in question can be shown to have been used exclusively in the application of binding material to customers' used books.

There has been no determination as yet issued on the basis of our audit report of August 20, 1951.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0360
• Original supporting opinion: 395.0360 PDF

Original ruling text

395.0360

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

July 25, 1952

Mr. C--- L. B--O---, D---, H---, & H--Attorneys at Law
XXX --- Street
--- --- X, California

• • XXXXX
    T. J. C--- Company

Dear C---:
As you were not expected to return to your office this afternoon when I placed a call to you at about 2:00 p.m. I am writing this letter so you will undoubtedly receive it Monday. I talked to Mr. Anderson of our San Francisco Office who informs me that Mr. Kelly of that office interviewed J--- or G--- L--- (I am not sure which) and was told that the equipment in question was used exclusively in binding of both old and new books and that the equipment used exclusively in rebinding or library binding could not be segregated without great difficulty and the amount of such equipment would hardly make such segregation worth-while. Mr. Anderson told me that the company’s operations included the binding of such new publications as the Blue and Gold, the California year book, and other articles which had never previously been bound and hence the work constitutes new production. Sales and Use Tax Ruling 27, Bookbinders, provides in the concluding paragraph that “Tax applies to the entire charges for binding done in connection with the furnishing of a finished product, i.e., a bound book”. It seems clear to us that the initial binding of a book is clearly a producing, processing, or fabricating under Section 6006(c) and Ruling 15, even though all or a portion of the materials are furnished by the customer. Therefore, such an activity is an activity which requires the holding of a seller’s permit and the sale of equipment that had been used in that activity could not be regarded as an exempt occasional sale. When we previously discussed the matter in connection with the possible exclusion of the tax from the sale of a portion of the equipment, it was upon the understanding, at least so I thought, that we were concerned with equipment used in connection with the binding of used books or rebinding operations. In my letter to you of October 11, 1951, I stated in part, “Perhaps such a segregation is possible in the present case if any of the equipment in question can be shown to have been used exclusively in the application of binding material to customers’ used books.” (Underscoring added.)

Mr. C--- L. B--Account No. - - XXXXX

-2-

July 25, 1952
395.0360

I am sorry if we subsequently misunderstood each other in our oral discussions, but I do not see upon what basis we can exclude from the measure of the tax the sale of that equipment used in binding of new books, even though some or all of the equipment may also be used in the binding of used books. There has been no determination as yet issued on the basis of our audit report of August 20, 1951. We propose to issue such a determination in the near future and, of course, the taxpayer can file a petition for Redetermination and be heard before the Board if he desires. Very truly yours,

E. H. Stetson
Tax Counsel

cc:

Mr. Burnett Sheehan