Did selling 11 decoder boxes make a cable company's entire asset sale taxable?

Plain-English summary

A cable company sold about 11 decoder boxes for a total of $4,295 during an unspecified audit period. The buyers owned satellite dishes and did not receive the company's cable service. Subscriber converters and parental locks were purchased tax paid or timely reported, with no separate subscriber charge; separately charged TV Guides were treated as exempt periodicals.

The memorandum treated cable television as a service enterprise. The decoder-box sales were separate from that service activity and functioned as their own small sales business.

Tax Counsel concluded that tax on the company's asset sale applied only to tangible property held or used in selling decoder boxes, not to every asset used in providing cable service. The source does not identify those assets, calculate the taxable receipts, or show a completed audit or later outcome.

Request, competing Regulation 1595 tests, and source limits

Tax Counsel David H. Levine wrote to District Principal Auditor Jack E. Warner on March 19, 1990 about the redacted account of I. R. D--- Corp. L--- P---. Levine was answering Warner's January 24 memorandum and relied on a January 18 taxpayer letter. Neither incoming document is included, so the source preserves only the facts quoted or summarized in Levine's response.

The company had sold about 11 decoder boxes for $4,295 during the audit period to satellite-dish owners who did not receive its cable service. Warner also reported three facts: converters and parental locks were purchased tax paid at source or timely reported on returns and carried no separate cable-bill charge; cable subscribers paid a separate charge for a TV Guide treated as an exempt periodical under section 6362; and no other tangible-personal-property sales or leases occurred.

Regulation 1595(a)(5)(A)(1) supplied the service-enterprise rule. When a service enterprise makes some incidental sales, the asset-sale tax reaches only gross receipts from tangible property held or used in the selling activity. Regulation 1595(a)(5)(B)(2) supplied the alternative: when the service enterprise and sales business operate together as one business, tax reaches gross receipts from all assets of that business.

Levine regarded cable television systems as service enterprises. Because the decoder customers supplied their own satellite dishes and did not buy cable service, he treated the decoder sales as separate from the company's service activity—in effect, a separate business. Based specifically on Warner's facts and the absent taxpayer letter, the conclusion reached only tangible property held or used in that decoder-selling activity.

The PDF does not include the auditor memorandum, taxpayer letter, audit-period dates, decoder invoices, buyer or subscriber records, satellite-dish evidence, equipment purchase invoices, tax-paid support, returns, cable billings, TV Guides, periodical-exemption evidence, other-sales ledger, asset-sale agreement, asset list, asset-use records, prices, allocation, tax computation, audit workpapers, assessment, taxpayer response, Board action, appeal, collection, refund, or later outcome. It does not identify which assets were assigned to decoder sales or show that the stated conclusion became the completed audit result.

The live annotation preserves eleven decoder-box sales to satellite-dish owners who did not receive cable service, the service-enterprise and separate-business classifications, both Regulation 1595 provisions, and the limited asset-sale conclusion. It omits Levine, Warner, the redacted company and account, both January letters, unspecified audit period, “about” before eleven, the $4,295 total, tax-paid or reported converters and parental locks, no separate equipment charge, separately charged exempt TV Guides and section 6362, no other sales or leases, missing records, and absent completed audit or outcome. Its statement that the company's “only sales” were the decoder boxes does not mention the supporting memo's separately charged exempt periodical.

What this means for you

Service businesses making isolated product sales

On these facts, product sales to non-service customers were treated as a separate business rather than converting the entire service operation into a sales business. Customer and operational separation mattered.

Accountants and tax professionals

Trace customers, charges, equipment use, tax-paid purchases, returns, and operational links between product sales and the core service before allocating asset-sale consideration.

Common questions

Q: Who bought the decoder boxes?
A: Individuals with their own satellite dishes who did not receive the company's cable service.

Q: How many decoder-box sales were involved?
A: About 11, totaling $4,295 during the audit period.

Q: Were subscriber converters and parental locks part of the sales activity?
A: No separate charge was made, and the company had purchased them tax paid or reported the tax.

Q: What portion of the business-sale assets was taxable?
A: Only property held or used in the decoder-box selling activity.

Q: What were Regulation 1595's two alternatives?

A: Incidental sales in a service enterprise reached only selling-activity property; an integrated service-and-sales business would bring all of its tangible assets into the tax measure.

Q: Did the company make any separately charged subscriber sale?

A: Yes. It separately charged for a TV Guide, which the memorandum treated as an exempt periodical under section 6362.

Q: Does the source identify the decoder-business assets or tax amount?

A: No. It supplies no asset list, usage record, allocation, tax computation, revised audit, or final outcome.

Q: Was the conclusion independent of the missing submissions?

A: No. Levine expressly based it on the facts in Warner's memorandum and the taxpayer's January 18 letter, neither of which is reproduced.

Citations and references

• California Revenue and Taxation Code § 6362
• California Sales and Use Tax Regulation 1595(a)(5)(A)(1)
• California Sales and Use Tax Regulation 1595(a)(5)(B)(2)
• January 24, 1990 District Principal Auditor memorandum — identified and partly quoted but not included
• January 18, 1990 taxpayer letter — identified but not included
• Decoder, customer, subscriber, satellite-dish, equipment, tax-paid, return, billing, periodical, other-sale, asset-sale, allocation, audit, administrative, and outcome records — described or implicated but not included

Verbatim support

From the official March 19, 1990 David H. Levine memorandum:

The taxpayer purchased converters and parental locks tax paid at source or timely reported on returns. No separate charge was made on their cable subscriber billings.

We regard cable television systems as service enterprises. We believe that taxpayer’s sales of decoder boxes were separate from its service activities, in effect, a separate business.

Therefore, based on the facts presented in your memorandum and the letter from taxpayer dated January 18, 1990, we conclude that tax applies only to the gross receipts from the sale of the tangible personal property held or used in its activity of selling decoder boxes.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 395.1057
• Original supporting opinion: 395.1057 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Mr. Jack E. Warner
District Principal Auditor

From:

David H. Levine
Tax Counsel

Subject:

I. R. D--- Corp. L--- P---.
SU -- XX-XXXXXX

395.1057

Date:

March 19, 1990

This is in response to your memorandum dated January 24, 1990 regarding the application of sales tax to a sale of a cable TV company’s assets. During the audit period, the company had made sale of about 11 decoder boxes in a total amount of $4,295 to individuals who owned their own satellite dishes. You describe the other relevant facts as follows: “1. The taxpayer purchased converters and parental locks tax paid at source or timely reported on returns. No separate charge was made on their cable subscriber billings. “2. A separate charge was made to cable subscribers for a TV Guide. The TV Guide is an exempt periodical under Section 6362. “3. No sales or leases of tangible personal property, other than those described above, were made.” You ask whether the sales of decoder boxes were sufficiently related to the company’s primary activity of providing cable service so that the sale of the company’s assets would be subject to sales tax. As set forth in subdivision (a)(5)(A)1. of Regulation 1595, when assets are sold of a service enterprise which also makes some incidental sales, sales tax applies only to the gross receipts from the sale of the tangible personal property held or used in the selling activity. On the other hand, under subdivision (a)(5)(B)2. of Regulation 1595, where a service enterprise and a sales business are operated together so as to constitute one business, tax applies to all gross receipts from the sale of the assets of that business. We regard cable television systems as

Mr. Jack E. Warner

-2-

March 19, 1990
395.1057

service enterprises. We believe that taxpayer’s sales of decoder boxes were separate from its service activities, in effect, a separate business. Therefore, based on the facts presented in your memorandum and the letter from taxpayer dated January 18, 1990, we conclude that tax applies only to the gross receipts from the sale of the tangible personal property held or used in its activity of selling decoder boxes.

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395.1057.doc