Was a vendor's one-time sale of vending machines taxable after it supplied merchandise for resale to a military post exchange?

Plain-English summary

A vendor supplied merchandise to a military post exchange for resale through vending machines. The exchange owned the merchandise after delivery and accounted for its retail value, while the vendor received a percentage of the retail sales value as compensation.

Board staff said the merchandise sales were not subject to sales tax because they were both sales to a federal instrumentality and sales for resale. But those exemptions did not eliminate the vendor's seller-permit obligation. Because the vendor sold tangible personal property of a kind whose retail receipts were taxable, sections 6014 and 6066 required a permit. The memorandum identified an exception if only exempt food products were vended.

That seller status made the separate sale of vending machines, equipment, or other tangible personal property taxable under section 6015, even if it was a single sale. The conclusion was conditional: tax would not follow on this reasoning if the vendor did not actually sell the merchandise vended through the machines.

Contract-based ownership, single-sale rule, and source limits

E. H. Stetson sent the internal memorandum to Board staff member John J. Hayes on April 9, 1951. It answered Hayes's April 5 memorandum, which reportedly enclosed the contract mentioned in Auditor Farrar's March 19 report, that report, and Farrar's earlier March 6 report. None is reproduced in the official PDF.

Based on paragraph 5 of the absent agreement, Stetson found that the vendor sold supplied merchandise to the post exchange rather than ultimate vending customers: ownership passed to the exchange upon delivery and remained there until vending. Under paragraph 9, the vendor accounted to the exchange for the entire retail sales value and received a stated percentage as compensation, apparently whether the vendor or exchange supplied the goods.

Counsel treated the merchandise transactions as not subject to sales tax both because the exchange was a federal instrumentality and because the transactions were for resale. Yet sections 6014 and 6066 required the vendor to hold a permit when it sold tangible property of a kind taxable at retail. The federal buyer and wholesale posture did not remove that status. The identified exception was vending only exempt food products, which the memo said apparently was not the case.

Section 6015 then made the vendor a retailer when it made any retail sale. Stetson noted that a July 1, 1949 amendment extended the rule to a wholesaler's single retail sale, except wholesalers of exempt merchandise such as food for human consumption. The vendor's sale of vending machines, equipment, or other tangible property used in wholesaling to the exchange was therefore taxable.

The conclusion remained fact-dependent: Hayes was told tax applied unless he found that the vendor had not actually sold the merchandise dispensed through the machines. Stetson also said Legal apparently had not been contacted by an identified individual or anyone else; if that person or the taxpayers disagreed, Legal would write explaining its basis.

The PDF does not include Hayes's request, Farrar's reports, the vending contract, parties, exchange or federal status records, merchandise list, ownership or retail-value accounting, compensation calculations, proof of who supplied or sold the goods, food-product classification, vending receipts, seller's permit, equipment inventory or use, equipment sale agreement, buyer, price, return, audit calculation, assessment, payment, taxpayer response, protest, refund claim, appeal, or later outcome. It does not establish that staff confirmed the conditional fact, contacted the taxpayer, or finally assessed or collected tax.

The live annotation preserves equipment used to make resale sales to a federal instrumentality, permit requirement, taxable equipment-sale result, and April 9, 1951 date. It omits the internal correspondence and auditor reports, contract paragraphs and ownership terms, dual federal-and-resale treatment, percentage compensation, statutory seller and retailer provisions, 1949 single-sale amendment, food exception, conditional factual instruction, lack of taxpayer contact, missing records, and absent administrative outcome.

What this means for you

Wholesalers selling used business equipment

Exempt wholesale sales can still create seller status. That status may make a later one-time equipment sale taxable.

Vendors serving federal facilities

The federal customer's exemption protected the merchandise sales here, but it did not prevent California from requiring the vendor to hold a seller's permit.

Accountants and tax professionals

Separate the tax treatment of the operating sales from the sale of business equipment. Confirm who owned and sold the vended goods and whether the goods were exclusively exempt food products.

Common questions

Q: Were the merchandise sales to the post exchange taxable?

A: No. Staff treated them as exempt sales to a federal instrumentality and as sales for resale.

Q: Why was a seller's permit still required?

A: The vendor sold tangible personal property whose retail sale receipts were taxable, even though its own sales were wholesale and federally exempt.

Q: Did the conclusion cover a single equipment sale?

A: Yes. The memorandum said section 6015, as amended effective July 1, 1949, reached a single retail sale by a wholesaler.

Q: What facts could change the result?

A: The stated reasoning might not apply if the vendor sold only exempt food products or did not actually sell the merchandise dispensed by the machines.

Q: Who owned the goods in the vending machines?

A: As counsel described the absent contract, the post exchange owned vendor-supplied merchandise from delivery until it was vended.

Q: How was the vendor compensated?

A: It apparently received a stated percentage of the full retail sales value it accounted for to the exchange, whether the vendor or exchange supplied the goods.

Q: Did Legal have the taxpayer's response?

A: No. The memorandum says Legal apparently had not been contacted and offered to explain its position if the taxpayer later disagreed.

Q: Does the source show a final assessment or payment?

A: No. The contract, audit reports, transaction and tax records, taxpayer response, and administrative outcome are absent.

Citations and references

• California Revenue and Taxation Code § 6014
• California Revenue and Taxation Code § 6015
• California Revenue and Taxation Code § 6066
• April 5, 1951 request, vending contract, and Auditor Farrar's March 19 and March 6 reports — described but not included
• Parties, merchandise and ownership, vending and accounting, permits, equipment and sale, tax proceeding, taxpayer response, and outcome records — described or implicated but not included

Verbatim support

From the official April 9, 1951 E. H. Stetson memorandum:

It is specifically stated that the merchandise from the time it is delivered to the exchange is the property of the exchange until vended.

We think that the sale of the merchandise, even though made to the exchange for resale purposes, required --- & --- to hold a seller's permit.

Therefore, under section 6015 defining “retailer” as “every seller who makes any retail sale or sales of tangible personal property”, the tax is applicable to the sale of the equipment by --- & --- to ---, Inc., even though only one sale thereof is made, unless you find that actually the merchandise vended through the machines was not sold by --- & ---.

We have not apparently been contacted in this connection by Mr. --- or anyone else.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0420
• Original supporting opinion: 395.0420 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Mr. John J. Hayes

From:

E. H. Stetson

395.0420

Date:

April 9, 1951

Subject:

This is in answer to your memo of April 5 enclosing a copy of the form of contract referred to in Auditor Farrar's report of March 19 together with a copy of that report and his prior report of March 6. There seems to be no doubt but what --- & --- are not subject to sales tax on their sales of merchandise both because such sales are made to a post exchange and because they are made for resale. It seems clear from paragraph 5 of the agreement that r --- & --- to the extent that they supply merchandise, sell it to the exchange rather than to the ultimate consumer. It is specifically stated that the merchandise from the time it is delivered to the exchange is the property of the exchange until vended. It also appears from paragraph 9 that --- & --- shall account to the exchange for the entire retail sales value of all merchandise vended. --- & --- compensation is a stated percentage of the retail sales value of the vended merchandise, apparently whether the merchandise is supplied by --- & --- or by the exchange. It appears, accordingly, that the only question is whether --- & --- are liable for sales tax measured by receipts from the sale of the vending machines or other tangible personal property to --- Inc. We think that the sale of the merchandise, even though made to the exchange for resale purposes, required --- & --- to hold a seller's permit. The only exception would be in the event food products were vended exclusively. Apparently, however, this is not the case. A permit is required because --- & --- are selling tangible personal property of a kind the receipts from the retail sale of which are taxable (section 6014 defining seller and section 6066 requiring sellers to hold permits). It is immaterial that the sales are made to a Federal instrumentality. Therefore, under section 6015 defining "retailer" as "every seller who makes any retail sale or sales of tangible personal property", the tax is applicable to the sale of the equipment by --- & --- to ---, Inc., even though only one sale thereof is made, unless you find that actually the merchandise vended through the machines was not sold by --- & ---.

As you know, section 6015 was amended effective July 1, 1949, so as to make the tax applicable with respect to a single retail sale made by a wholesaler, except wholesalers of exempt merchandise such as food products for human consumption. It appears, accordingly, that tax is due with respect to the sale of vending machines, equipment, or other tangible personal property used in connection with the wholesaling of merchandise to the post exchange. We have not apparently been contacted in this connection by Mr. --- or anyone else. If Mr. --- or the taxpayers disagree with our conclusion we shall be glad to write to either, setting forth the basis for our position. EHS:ph