Was assembling customer-furnished pages, folders, binders, and kit materials taxable before mailing?

Plain-English summary

A business assembled customer-furnished sheets, dividers, binders, folders, and containers into training kits, promotion kits, sales folders, loan-application folders, and product binders, then prepared them for mailing or sent them to another mailer.

California distinguished nontaxable mailing preparation from taxable fabrication of a distinct end product. Related pages inserted into a purpose-specific loan folder, pages placed in binders, consecutively numbered or bound pages, and items commonly delivered in the same assembled form in person all indicated creation of an end product.

Charges for creating that end product were taxable even when the purchaser supplied every item. Qualifying mailing services remained nontaxable even if another person performed the final mailing, and the memorandum called for allocation between taxable property or fabrication and nontaxable mailing services.

Common questions

Did forwarding assembled items to another mailer destroy mailing-service treatment?

No, if the activities otherwise qualified as nontaxable mailing preparation.

Was simply leaving pages unattached enough to avoid fabrication tax?

No. Related unattached pages could still form a distinct end product, as with the loan-application folder example.

Citations and references

• California Revenue and Taxation Code sections 6006(b), 6011, 6012, 6051, and 6379.5
• California Sales and Use Tax Regulations 1504(b), 1526, 1541(c), and 1541.5
• Business Taxes Law Guide Annotations 340.0140, 430.0060, and 435.1160

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/430-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/430-0146-250.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Mr. Morris Verna, Jr.
San Francisco – Audit

From:

David H. Levine
Tax Counsel

Subject:

X----------------------------

430.0146.250

Date:

October 31, 1989

This is in response to your memorandum dated September 20, 1989 regarding the application of sales tax in the following situation: X--------------- prepares items for mailing for such clients as X--------------- and X--------------. Typically all material (looseleaf sheets, tab dividers, binders, folders, fibreboard kit containers, etc.) are furnished by the clients. X--------------- puts together theses various separate items, usually in some desired order, to create a completed training kit, promotion kit, sales folder, loan application folder, product binder, etc. Once these items are assembled, they are then prepared for mailing to various client locations. In some cases, X--------------- forwards the completed items to another warehouse/mailer of the client for final shipping. X--------------- usually makes a separate charge for shipping/mailing. It also has various charges for making up the various kits, folders, etc. certain materials of X---------------, if any, are usually charged as a separate line item to the client. Some examples of various invoices are enclosed for reference.” Initially, I assume that the exemption provided by Revenue and Taxation Code Section 6379.5 and explained in Regulation 1541.5 does not apply to these transactions. I also assume sales of tangible personal property by X--------------- are not otherwise exempt (e.g., the container exemption does not apply) or for resale. Finally, I assume that all items about which you inquire with respect to mailing services are printed matter. Only the mailing of printed matter comes within the provisions of Regulations 1504(b) and 1541(c). Otherwise, such activities are services part of the sale and are subject to tax unless separately stated charges for transportation. (Rev. & Tax. Code §§ 6011, 6012.)

Regulations 1504 and 1541, as well as annotations you noted, 340.0140 (9/1/66), 430.0060 (6/1/65), and 435.1160 (12/5/58), are applicable to these transactions. Subdivision (b) of Regulation 1504 and subdivision (c) of Regulation 1541 discuss the activities regarded as nontaxable mailing services. Annotation 340.0140 explains that if a person’s activities would otherwise be regarded as nontaxable mailing services, those activities will not be regarded as sales of tangible personal property even if that person does not perform the actual mailing but rather transfers the items to another person for mailing. Thus, X-----------’s transfer of items it prepares to another person for mailing does not alter the analysis. If the activities would have been regarded as nontaxable mailing services had X------------- performed the actual mailing, the activities will still be regarded as nontaxable mailing services even if another person performs the actual mailing. Annotation 430.0060 distinguishes between mere collating of diverse advertising materials preparatory to mailing (nontaxable) or collating which is a step in the fabrication of an end product (taxable). For example, the collating of a number of unrelated pages into a certain order followed by stapling would not be taxable fabrication if the stapling was merely preparatory to mailing and the attached pages did not form a distinct end product. If, on the other hand, the pages were consecutively numbered, this is a strong indication that the attached pages then form a distinct end product. Methods of binding such as with a book or with plastic strips (unfortunately, I cannot remember this method’s technical name, but a strip is placed on each side of the pages and are attached to each other through the pages) would be conclusive evidence that an end product has been created. It seems that insertion of pages into binders would always, or almost always, be regarded as the creation of an end product. Examples are our Business Taxes Law Guide binders. Even items that are not attached may be regarded as creating an end product. For example, insertion of unattached pages into a folder to form a loan application folder would likely be regarded as the creation of an end product since the pages are all related and necessary to a specific purpose, applying for a loan. When considering a question, it would be useful to determine whether the item(s) to be mailed is commonly created in substantially the same form for delivery in person (e.g., a loan application folder would usually be identical whether mailed to the applicant or retained by the bank for delivery in person with no envelope). If so, an end product has probably been created. X--------------- charges for creating an end product are subject to sales tax, even if all tangible personal property is furnished by the purchaser. (Rev. & Tax. Code §§ 6006(b), 6012, 6051.) However, even if it is the seller of the printed matter to be mailed, its charges for mailing services d4escribed in Regulations 1504(b) and 1541(c) are not subject to tax and it is the consumer of any items it uses to perform such services. Address labels are examples of such consumables, but X--------------- is the retailer of items such as envelopes and other containers it provides or fabricates. (See Reg. 1541(c).) In answer to your specific question, an allocation should be made between X------------’s charge for sales of tangible personal property and its charge for nontaxable mailing services. Although the invoices you have provided us indicate that X------------- has acted as a seller of the invoiced items, we cannot make definitive conclusions based on those invoices. We hope this discussion is sufficient to assist you in completing your audit. If not, or if you have further questions, feel free to write again.

DHL:wak
1662C

Bc:

Mr. Donald J. Hennessy
Mr. E. L. Sorensen, Jr.