How did California tax Micro Diet foods and powdered drinks sold by a physician?

Plain-English summary

The Board reopened its analysis after other Micro Diet distributors requested opinions. The February 1991 letter expressly rescinded and superseded a July 17, 1990 letter to the physician and warned that the earlier opinion could no longer be relied on in an audit.

Using the supplied product sheet and literature, Tax Counsel classified the Uni-Vite Micro Bar, Micro Muesli, Micro Pasta, Micro Chili and Micro Soups as exempt food products. The bar was analogous to a candy bar. The cereal, pasta, chili and soup remained traditionally accepted foods even though they were dehydrated, could contain substantial powder and were designed to reduce caloric intake.

The powdered Micro Drink was different. Although its label reportedly made no weight-loss claim, the brochure made clear that the plan was for weight loss or maintenance. The letter therefore excluded the drink from food under historical Regulation 1602(a)(5) and treated its sales as taxable.

The plan also fell below the regulation's complete-dietary-food example: the literature reported 66 grams of protein and 630 calories, compared with the quoted example's 70 grams and 900 calories, and recommended sole-source use for no more than three consecutive weeks. The source applied those figures as a reason the Micro Diet products did not qualify as complete dietary foods.

Conditional prescription-medicine route

The letter described another possible route but did not find its facts established. It said food products furnished by physicians to patients during treatment could qualify as prescription medicines. It hypothesized a physician-supervised weight-loss regimen prescribed to treat another health problem, such as high blood pressure. Assuming those facts, it said the physician's sales and distributor purchases could be exempt under historical Regulation 1591.

No patient, diagnosis, prescription, treatment plan, product furnishing, invoice or separate charge is included. The published source therefore supports a conditional route, not a finding that this physician actually qualified.

Live annotation and source posture

The current live annotation summarizes only the conditional prescription-medicine route for granular diet products. It omits the product-by-product food analysis, the taxable Micro Drink conclusion, nutrition figures, seller-permit direction and express rescission of the 1990 opinion.

The source's conclusion is more nuanced than a general rule that diet products are medicine. Traditional-form foods stayed exempt. The powdered drink was taxable under the food analysis on the presented brochure facts. Only a separately established physician-treatment path could change that result.

The seller-permit instruction was also fact-dependent. The letter said physicians needed permits unless they sold only exempt prescription medicines or were consumers because they made a lump-sum charge to patients. Because it treated the stated Micro Drink sales as taxable, it directed this physician to obtain a permit. No application, permit, return or later compliance record appears.

The source contains visible defects. It prints superceded, Besides to the short-term use, and a Market Street Railway citation with 1953 and 290 P.2d 201. Legal research resolved the primary 137 Cal.App.2d 87 reporter to the named case filed in 1955; 290 P.2d 201 does not resolve, while 290 P.2d 20 resolves to the named case. The original remains unchanged. Standard Oil, 39 Cal.App.3d 765 with 114 Cal.Rptr. 571, also resolved to the named 1974 decision.

The product information sheet, brochure, packages, July 1990 opinion, other distributors' requests and Regulations 1591 and 1602 enclosures are absent. No quantities, prices, customers, tax amounts, audit, assessment, refund, appeal or final outcome is supplied.

The official four-page PDF has a complete native text layer. Its sole small raster image is letterhead artwork, not scanned body text, so no OCR was required. Two fresh direct PDF downloads and two live-page downloads were byte-identical; duplicate default text extractions also matched.

CDTFA's Annotated Legal Opinions collection says the opinion letters are summarized as annotations and statutory law controls when a statute and annotation conflict.

What this means for you

Product form and actual marketing mattered. A food bar or traditional cereal, pasta, chili or soup did not lose food treatment merely because it supported reduced calorie intake, while a powdered drink designed for weight loss triggered a different historical test.

Do not assume physician involvement alone creates a medicine exemption. Preserve the product's current label, brochure, ingredients and nutrition, together with patient-specific diagnosis, prescription, supervision, furnishing, invoice and charge records. Confirm current food, supplement, medicine and permit rules.

Common questions

Q: Did weight-loss marketing make every product taxable?

A: No. The products in traditional food forms remained exempt; the powdered drink received different treatment.

Q: Was the Micro Drink always taxable?

A: The letter treated it as taxable under the historical food rules on the stated facts, but described a conditional prescription-medicine route that required additional physician-treatment facts.

Q: Did the 66 grams of protein and 630 calories create a universal threshold?

A: No. The source compared those figures with a historical regulation's complete-dietary-food example and also relied on the recommended three-week sole-source limit.

Q: Did the physician actually prove a prescription-medicine sale?

A: No. The source says perhaps and assuming that you do; it supplies no patient or treatment records.

Q: Did the physician need a seller's permit?

A: The letter said yes on its stated taxable-sales conclusion, subject to the historical exceptions it described. No permit outcome is supplied.

Q: Could the physician still rely on the July 1990 letter?

A: No. The February 1991 source expressly rescinded and superseded it and ended reliance in an audit.

Missing evidence and references

• July 17, 1990 Ronald L. Dick opinion — expressly rescinded but absent
• Product Information sheet, labels, brochure, ingredients and packages — referenced but absent
• Other Micro Diet distributor opinion requests and resulting research — referenced but absent
• Product quantities, prices, purchases, sales, invoices and customers — not supplied
• Patient diagnoses, prescriptions, treatment plans, supervision and furnishing records — not supplied
• Lump-sum or separately stated patient charges — not supplied
• Seller's-permit application, issuance, returns and remittances — not supplied
• Regulations 1591 and 1602 enclosures — listed but absent
• Audit, assessment, refund, appeal and final transaction outcome — not supplied

Verbatim support

From the official February 28, 1991 Tax Counsel letter:

PLEASE TAKE NOTICE that the opinion expressed in Mr. Dick’s letter is hereby rescinded and is superceded by the opinion set forth below. You may no longer rely on Mr. Dick’s letter in the event of an audit.

Although the label does not make weight-loss claims, the brochure makes it clear that the Micro Diet plan is designed specifically for weight loss or maintenance.

Perhaps you furnish the Micro Diet products as part of a physician-supervised weight-loss regime which you have prescribed to treat other health problems of the patient, such as high blood pressure.

Assuming that you do, your sales of these products would be exempt from tax, and your purchase of these items from your distributor, if any, would be exempt from tax under Regulation 1591(a)(4).

Citations and references

• California Revenue and Taxation Code §§ 6051, 6091, 6359, 6359(c), and 6369 — tax, presumption, food-product and prescription-medicine provisions discussed in the letter
• Historical California Sales and Use Tax Regulations 1591(a), 1591(a)(4), 1591(b)(1), 1602(a)(1), 1602(a)(2), 1602(a)(4), 1602(a)(5), and 1603 — medicine, food, dietary-product and seller-treatment rules discussed in the letter
• Market Street Railway Co. v. California State Board of Equalization, 137 Cal.App.2d 87, 96 — defective year and parallel reporter disclosed above
• Standard Oil Co. v. State Board of Equalization, 39 Cal.App.3d 765, 769, 114 Cal.Rptr. 571 (1974)
• July 17, 1990 Ronald L. Dick opinion — expressly rescinded and superseded but not reproduced

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 425.0053
• Original supporting opinion: 425.0053 PDF

Original ruling text

425.0053

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-3828

February 28, 1991

Dr. S--- I. J---, M.D., P.C.
XXXX N. --- --- St., Suite XX
---, CA XXXXX
Dear Dr. J---:
I am writing this to correct our opinion regarding the sales and use tax consequences of your sales of products which are a part of “The Amazing Micro Diet Plan” as previously expressed in a letter of Senior Tax Counsel Ronald L. Dick to you dated July 17, 1990. The further research we have done on this matter pursuant to opinion requests from other Micro Diet Distributors has caused us to modify the advice previously given you. PLEASE TAKE NOTICE that the opinion expressed in Mr. Dick’s letter is hereby rescinded and is superceded by the opinion set forth below. You may no longer rely on Mr. Dick’s letter in the event of an audit. The Product Information sheet you supplied indicates that Micro Diet distributors sell Micro Food Bars, Micro Muesli cereal, Micro Chili, Micro Soups, Micro Pasta, and Micro Drinks. The literature you included indicates that the diet typically provides 100% of the Minimum Recommended Daily Allowance of vitamins and minerals, 66 grams of protein, and 630 calories, and further indicates that the dieter should use Micro Diet products as the sole source of nutrition for no more than three weeks running. I.

OPINION
A.

Sales and Use Tax Generally

In California, except where specifically exempted by statute, Revenue and Taxation Code Section 6051 imposes an excise tax, computed as a percentage of gross receipts, upon all retailers for the privilege of selling tangible personal property at retail in this state. (Unless otherwise stated, all statutory references are to the Revenue and Taxation Code.) “[I]t shall be presumed that all gross receipts are subject to tax until the contrary is established. The burden of proving that a sale of tangible personal property is not a sale at retail is upon the person who makes the sale …” (§ 6091.) “Exemptions from taxation must be found in the statute.” (Market St. Ry.

Dr. S--- I. J---, M.D., P.C.

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February 28, 1991
425.0053

Co. v. Cal. St. Bd. of Equal. (1953) 137 Cal.App.2d 87, 96 (290 P.2d 201.) “The taxpayer has the burden of showing that he clearly comes within the exemption.” Standard Oil Co. v. State Bd. of Equalization (1974) 39 Cal.App.3d 765, 769 [114 Cal.Rptr. 571].) B.

Food Products Exemption

Revenue and Taxation Code Section 6359, interpreted and implemented by Regulations 1602 and 1603, provides an exemption from sales and use taxes for the sales of food products for human consumption under certain circumstances. Subdivisions (1) & (2) of Regulation 1602(a) contain a list of products which, either singly or in combination, are considered “food products”. Regulation 1602(a)(5), however, excludes certain items from the definition of “food products” as follows: “(5) ‘Food products do not include any product for human consumption in liquid, powdered, granular, tablet, capsule, lozenge, or pill form (A) which is described on its package or label as a food supplement, food adjunct, dietary supplement, or dietary adjunct, and to any such product (B) which is prescribed or designed to remedy specific dietary deficiencies or to increase or decrease generally one or more of the following areas of human nutrition: 1. 2. 3. 4.

Vitamins
Proteins
Minerals
Caloric intake”

Regulation 1602(a)(5), subsequently, however, restricts the limitation on the definition of “food products” as follows: “Tax, however, does not apply to any such products which either are exempted by Section 6369, respecting prescription medicines, or are complete dietary foods providing the user in the recommended daily dosage with substantial amounts of vitamins, proteins, minerals and foods providing adequate caloric intake. An example of the latter is a food daily requirement providing the user with the following: 1. 70 grams of high quality protein 2. 900 calories 3. Minimum daily requirements as established by the Federal Food and Drug Administration of the following vitamins: A, B1, C, D, Riboflavin, and Niacin or

Dr. S--- I. J---, M.D., P.C.

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Niacinamide;
the
following
Phosphorus, Iron and Iodine.”

February 28, 1991
425.0053

minerals:

Calcium,

(Sales and Use Tax Regulations are Board promulgations which have the force and effect of law.) In interpreting and implementing the broad provisions of Section 6359(c), Regulation 1602(a)(5) sets up a two-step analysis. The threshold question is whether or not the food product under discussion is in one of the enumerated forms – liquid, powdered, granular, tablet, capsule, lozenge, or pill. If so, then its sales are taxable if one of the two following conditions also occurs: (A) its label or package describes it as a food supplement, food adjunct, dietary supplement, or dietary adjunct; or (B) it is prescribed or designed to remedy specific dietary deficiencies or to increase or decrease generally the intake of vitamins, protein, minerals, or calories. The subsequent references to “such products” in that subsection refer to products which occur in one of the enumerated forms, not products for which the claims prescribed in subsections (A) and (B) are made. C.

Tax Consequences

Based on the above standards, we conclude as follows:
1.
Uni-Vite Micro Bar: We have previously considered that food bars are analogous to candy bars which are listed as “food products” in Regulation 1602(a)(1). Because the Uni-Vite Micro Bar is not in one of the forms of food products to which the strictures of Regulation 1602(a)(5) apply, its sales are exempt from tax. Micro Muesli, Micro Pasta, Micro Chili, and Micro Soups. These products are described as dehydrated cereal, pasta, stew and soup products, respectively. Regulation 1602(a)(5) states that it does not apply to items traditionally accepted as food even though other nutritional items have been compounded in. Although they probably contain a high proportion of powder, these items represent products traditionally accepted as foods. Cereal, flour products, and soup are among the items defined as “food products” under Regulation 1602(a)(1). Therefore, despite the fact that they are designed to decrease caloric intake, sales of these items are exempt from tax under the above authority. 2.

3.
Micro Drinks. This is a powdered drink mix. Although the label does not make weight-loss claims, the brochure makes it clear that the Micro Diet plan is designed specifically for weight loss or maintenance. Indeed, the product is sub-titled “The Micro Diet Drink Range.” As a result, we conclude that Micro Drinks are excluded from the definition of a “food product” under Regulation 1602(a)(5) and that its sales are subject to tax.

Dr. S--- I. J---, M.D., P.C.

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February 28, 1991
425.0053

As noted above, Micro Diet products typically provide only 66 grams of protein and 630 calories, and can be used as the sole source of nutrition for only three weeks. Besides to the short-term use, the amount of protein and calories are well below the standard set for tax-exempt “complete dietary foods” set by Regulation 1602(a)(5) and so do not qualify Micro Diet products as such. There is another route by which your sales of the Micro Drink might be exempted. We have previously considered that, while medicines are not “food products” under Regulation 1602(a)(4), food products may be “prescription medicines” if furnished under the proper circumstances. We have previously determined that items which are ordinarily considered “food products” are furnished by physicians to their patients during the course of treatment, they qualify as “prescription medicines” as that term is used in Regulation 1591(b)(1). Perhaps you furnish the Micro Diet products as part of a physician-supervised weight-loss regime which you have prescribed to treat other health problems of the patient, such as high blood pressure. Assuming that you do, your sales of these products would be exempt from tax, and your purchase of these items from your distributor, if any, would be exempt from tax under Regulation 1591(a)(4). Physicians must hold seller’s permits unless they sell only exempt prescription medicines or unless by virtue of making a lump sum charge to the patient they are consumers. Since we have determined that your sales of Micro Drink are not exempt from tax, you must obtain a seller’s permit. The address and telephone number of your local Board of Equalization Field Office are as follows: 31 East Channel Street, Room 264 P.O. Box 1890 Stockton, California 95201-1890 (209) 948-7720 For your information, I have enclosed a copy of Regulations 1591 and 1602. If you need anything further, please do not hesitate to write again. Sincerely,

John L. Waid
Tax Counsel

JLW:es
3740I
Enclosure:

Regulation 1591 & 1602