Should part of a vending-machine business's contract price be allocated to the intangible value of established machine locations?

Plain-English summary

A vending-machine business sold 335 machines on location. Board staff agreed that an intangible was sold with the machines because machines on location were more valuable than the same number in a warehouse, and some expense had been incurred to obtain the location privileges.

The memorandum directed the audit to allow part of the contract price for that intangible. It cautioned that calling the value “goodwill” could be imprecise because the term's meaning was disputed.

For valuation, staff suggested that a Board representative contact someone other than the taxpayer's representatives to estimate the fair value of a vending-machine location and separately determine the fair market value of similar quantities of similar machines without locations. The source does not state either value, a final allocation, or an audit outcome.

Internal correspondence, valuation direction, and source limits

Headquarters Sales Tax Counsel Jack D. Paulson wrote to San Diego Auditing (JHMcC) on March 10, 1959 about a redacted account. The memorandum references Headquarters' February 6 letter and San Diego's January 19 and February 16 letters. None of those letters is reproduced, so the source does not provide the parties, business name, request, positions, evidence, contract, or earlier analysis.

Paulson reported a discussion with Tax Counsel E. H. Stetson and Principal Auditor H. A. Dickson. They agreed that the business sale included an intangible and reached a consensus that the audit should allow for it. The memorandum did not adopt “goodwill” as a precise label because that term meant different things to different people.

The factual basis is narrow: 335 machines were on location, those machines were more valuable than 335 machines in a warehouse, and some expense had been incurred to obtain the location privileges. The PDF does not identify the vending products, machines, customers, sites, location owners, agreements, duration or transferability of location rights, exclusivity, termination provisions, route income, installation cost, or other expense.

Dickson proposed two valuation inquiries. A Board representative should ask someone other than the taxpayer's representatives for the fair value of a vending-machine location, and staff should determine the fair market value of similar quantities of similar machines not on location. The source identifies no proposed expert, comparable transaction, appraisal method, valuation date, result, or allocation formula.

Paulson ended by reiterating that part of the contract price should be allocated to an intangible. The PDF gives no contract date, total or allocated price, payment terms, asset schedule, original allocation, tax rate, taxable measure, audit amount, appraisal, third-party estimate, revised audit, assessment, taxpayer response, protest, Board action, refund, collection, or later outcome. It cites no statute, regulation, case, or ruling and does not establish the completed intangible allowance.

The live annotation preserves only the business sale, machines on location, location-privilege intangible, and nontaxable portion of contract price. It omits the redacted account and internal-audit posture, all three prior letters, Paulson, Stetson and Dickson, 335-machine count, goodwill-label caution, warehouse comparison, acquisition expense, two valuation inquiries, missing values and records, and absent completed allocation or outcome.

What this means for you

Buyers and sellers of route-based businesses

This memorandum treated operating location privileges as value distinct from the machines. Document the legal rights and support their separate value when the transaction occurs.

Accountants and tax professionals

Use independent market evidence for location privileges and comparable off-location equipment rather than relying only on the parties' labels. Preserve both valuation inputs and the resulting allocation.

Common questions

Q: How many machines were involved?
A: Three hundred thirty-five.

Q: Why were placed machines worth more?
A: They came with established location privileges that cost money to obtain.

Q: Did counsel insist on calling the intangible goodwill? A: No. The memorandum said that term might be unfortunate because its meaning was disputed.

Q: Did the source fix a dollar value?
A: No. It directed further independent valuation work.

Q: What comparisons did staff request?

A: An independent estimate of a vending location's fair value and the fair market value of similar quantities of similar machines without locations.

Q: Are the location agreements included?

A: No. The source identifies no site, owner, contract term, exclusivity, duration, transfer right, or termination rule.

Q: Does the source show the completed audit allocation?

A: No. It states staff's consensus and direction but supplies no appraisal, revised audit, assessment, Board action, or later outcome.

Citations and references

• January 19 and February 16, 1959 San Diego Auditing letters — referenced but not included
• February 6, 1959 Headquarters letter — referenced but not included
• Discussion with Tax Counsel E. H. Stetson and Principal Auditor H. A. Dickson — described without a date or discussion record
• Business-sale contract and 335 machine-location privileges — described but not included
• Contract, location-right, machine, expense, valuation, audit, tax, administrative, and outcome records — described or implicated but not included
• No statute, regulation, case, or formal ruling is cited in the memorandum

Verbatim support

From the official March 10, 1959 Jack D. Paulson memorandum:

Perhaps the term “goodwill” is an unfortunate one in that there are differences of opinion with respect to what goodwill is.

It is our opinion that 335 machines on location are more valuable than 335 machines in a warehouse. Some expense has been incurred to obtain these location privileges.

Mr. Dickson suggested that a Board representative contact someone other than the taxpayer’s representatives to determine what the fair value of a vending machine location is.

We are still of the opinion that part of the contract price should be allocated to an intangible.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1040
• Original supporting opinion: 395.1040 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

395.1040
Sacramento
March 10, 1959

To:

San Diego Auditing (JHMcC)

From:

Headquarters – Sales Tax Counsel (JDP)

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Account ---

Reference: Our letter of February 6, 1959, and your letters of January 19, 1959, and February 16, 1959. This matter was discussed with Mr. E. H. Stetson, Tax Counsel, and Mr. H. A. Dickson, Principal Auditor, and it was agreed that an intangible was sold in connection with the sale of this business. Perhaps the term “goodwill” is an unfortunate one in that there are differences of opinion with respect to what goodwill is. However, it was the consensus of the above-mentioned men that an allowance should be made in the audit for this intangible. It is our opinion that 335 machines on location are more valuable than 335 machines in a warehouse. Some expense has been incurred to obtain these location privileges. Mr. Dickson suggested that a Board representative contact someone other than the taxpayer’s representatives to determine what the fair value of a vending machine location is. It is also suggested that you determine what the fair market value of similar machines in similar quantities not on location, would be. We are still of the opinion that part of the contract price should be allocated to an intangible.

Jack D. Paulson

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