Did California tax a photofinisher's purchases of chemicals used to develop customer film into negatives?

Plain-English summary

The memorandum concluded that tax applied to a photofinisher's purchases of all chemicals used to develop customer-furnished exposed film into negatives. The result did not change based on how the photofinisher billed its customer.

When the developing charge was separately stated, the memorandum did not view the negative as sold to the customer. The photofinisher was therefore the consumer of the developing chemicals, including chemicals incorporated into the negative and chemicals consumed during processing.

When the developing charge was not separately stated, the memorandum treated the negative as resold but still said tax applied to the chemical purchases under the historical processing rule. It accepted Eastman Kodak's submitted chemical list as accurate unless the Board later obtained clear contrary evidence.

Counsel endorsed an April 29, 1968 G. A. Trigueros letter and Counsel's own May 21, 1969 letter, neither reproduced. Counsel also said the memorandum had been circulated among several other Legal staff members and had their agreement, without identifying them or providing their comments.

Live annotation and source posture

The current live annotation preserves the all-chemicals, negative/positive-process, billing-method-independent, taxable-purchase and October 31, 1969 conclusions. It recasts the historical source as an interpretation of Regulation 1528(b) and adds that the customer furnished exposed film, the photofinisher used negatives and incorporated chemicals to make prints before transferring the negatives, and that this intervening use made the finisher the consumer. Those transaction facts and that explicit rationale do not appear in the linked memorandum, which instead distinguishes the two billing methods through historical Rulings 23 and 14.

The linked source also contains qualifications the live page omits: the separately stated branch applied regardless of whether a chemical was incorporated or consumed; the unsegregated branch called the negatives resold; the common practice was reportedly not to state development separately and to charge reimbursement on the full customer charge; Exhibit A was accepted only until clear contrary evidence; and the interpretation was an internally circulated Legal staff view.

The PDF supplies no October 17 memorandum, photo finisher or customer identity, exposed film, negative, print, positive, developing process, chemical identity or quantity, incorporation proof, customer invoice, separate or combined charge, tax reimbursement, purchase invoice, April 1968 or May 1969 letter, Ruling 14 or 23 text, Eastman Kodak Exhibit A, Sam Stein correspondence, contrary evidence, audit workpaper, assessment, petition, refund or applied outcome. It therefore states staff's interpretive rule without documenting a completed taxpayer transaction.

CDTFA's Annotated Legal Opinions collection says memoranda are summarized as annotations and that statutory law controls whenever a statute and annotation conflict. The official two-page PDF has a clean native text layer and no embedded raster image, so no OCR was required. Both fresh direct PDF downloads and both live-page downloads were byte-identical, duplicate default PDF text extractions matched, and the original-text section remains byte-identical to its committed version and the fresh extraction after removal of only the extractor's terminal newline and two form feeds.

What this means for you

Document the negative/positive workflow, each chemical, whether it remains in the negative or is consumed, when prints are made, when the negative transfers, and how development is billed. This source reached a taxable chemical-purchase result under either historical billing branch, but the live intervening-use description is not substantiated by the linked memorandum's transaction evidence.

Common questions

Q: Did separately stating development make the chemical purchases nontaxable?

A: No. Staff treated the photofinisher as consumer of the chemicals, whether incorporated in the negative or consumed during development.

Q: What if no separate development charge was stated?

A: The memorandum called the negatives resold but still applied tax to chemical purchases under historical Ruling 14.

Q: Did the linked source say the finisher made prints before transferring the negatives?

A: No. That intervening-use scenario appears in the live annotation, not in the memorandum's stated facts.

Q: Was Eastman Kodak's Exhibit A conclusively accepted?

A: No. Counsel said to accept it as accurate until the Board had clear evidence to the contrary. The exhibit itself is absent.

Q: Did the PDF provide an audit result for a named taxpayer?

A: No. It contains an internal interpretation without the underlying transactions, measures or outcomes.

Citations and references

• Historical California Sales and Use Taxes Ruling 23(b)
• Historical California Sales and Use Taxes Ruling 14
• April 29, 1968 and May 21, 1969 Legal letters — endorsed but absent
• Eastman Kodak Exhibit A sent to Sam Stein in New York — provisionally accepted but absent
• October 17 request, transactions, chemicals, billing, print use, audit, assessment and outcome — implicated but absent

Verbatim support

From the official October 31, 1969 Tax Counsel memorandum:

Where the charge for developing is separately stated, we do not view the transfer of the negatives as a "sale"; consequently there can be no purchase for resale.

The photofinisher is, therefore, the consumer of chemicals used in developing negatives; and tax applies to his purchases thereof where a separate charge is made, regardless of whether the chemical is incorporated into the finished product or consumed in the developing process.

On the other hand, if no separate charge is made, the negatives are "resold" and the tax is applied to the purchase of chemicals, under the principles of ruling 14.

Since the list, Exhibit A, sent by Eastman Kodak Company to Sam Stein in New York appears to have been drafted with adherence to the proper tax principles, it should be accepted as accurate until we have clear evidence to the contrary.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 420.0500
• Original supporting opinion: 420.0500 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

San Diego – District Principal Auditor (WLW)

From:

Tax Counsel (LAA) – Headquarters

Subject:

Chemicals Used in Developing Photographic Negatives

420.0500

Date:

October 31, 1969

This is in response to your memorandum of October 17, 1969, concerning taxability of chemicals used in developing photographic negatives. I believe that both Mr. G. A. Trigueros' letter of 4/29/68 and my letter of 5/21/69 are correct and that the key is found in the first paragraph of part (b) of ruling 23. That paragraph says charges for developing negatives are not taxable only if separately stated. In my opinion, the effect of this provision is to make the developing of the negatives a taxable processing where not separately stated and a nontaxable step in processing when separately stated. Where the charge for developing is separately stated, we do not view the transfer of the negatives as a "sale"; consequently there can be no purchase for resale. - The photofinisher is, therefore, the consumer of chemicals used in developing negatives; and tax applies to his purchases thereof where a separate charge is made, regardless of whether the chemical is incorporated into the finished product or consumed in the developing process. On the other hand, if no separate charge is made, the negatives are "resold" and the tax is applied to the purchase of chemicals, under the principles of ruling 14. As you point out, the current common practice is not to separately state such charges and to charge tax reimbursement on the entire charge to the customer. In most cases, therefore no problem will exist. A problem will exist where developing charges are separately stated and we attempt to tax purchases of chemicals that are incorporated into the negatives. Since the list, Exhibit A, sent by Eastman Kodak Company to Sam Stein in New York appears to have been drafted with adherence to the proper tax principles, it should be accepted as accurate until we have clear evidence to the contrary. I have circulated this memorandum to several other members of the legal staff and there is agreement on it. LAA:ph