Does a sign saying all prices include sales tax create excess tax reimbursement when the retailer also makes exempt sales?

Plain-English summary

California said a sign stating “all prices include sales tax” created a rebuttable presumption that customers agreed to pay sales-tax reimbursement on every item covered by the sign. When the retailer sold an item tax-free to go at the same posted price, the sign therefore presumptively represented that part of the exempt-sale payment was tax reimbursement. The amount was excess tax reimbursement unless the retailer proved the customer understood it was paid for another purpose.

Changing the sign to “all prices include applicable sales tax” produced a different result. That wording indicated reimbursement was added only to taxable sales, so the exempt to-go sale did not include excess reimbursement.

The memorandum also said a retailer generally had to prove that its sales contracts included reimbursement. A cabinet seller's bid sheets and worksheets supported its claim about oral contracts but were not conclusive, and auditors could require customer statements. Bars with no separate charge, receipt disclosure, posted sign, or customer communication could not claim a tax-included allowance merely because they did not separately state tax.

Common questions

Did “all prices include sales tax” cover exempt items?

Presumptively, yes. The source treated the sign as applying to all items.

Could the retailer rebut that presumption?

Yes, by proving the customer understood the amount was for something other than tax reimbursement.

Did adding the word “applicable” matter?

Yes. “All prices include applicable sales tax” limited the representation to taxable sales.

Citations and references

• California Civil Code § 1656.1
• California Revenue and Taxation Code §§ 6901.5 and 6901.9 (both appear in the source)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/460-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/460-0149.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Mr. Don Bauman
Evaluation & Planning

From:

David H. Levine
Tax Counsel

Subject:

Excess Tax Reimbursement

460.0149

Date:

July 2, 1987

You have referred to us a memorandum dated May 28, 1987 from the Oakland District Principal Auditor to Principal Tax Auditor Glenn Bystrom regarding excess tax reimbursement and tax included price. There is one specific question regarding an audit in progress and three general questions. Audit A cabinet retailer billed lump sum and claimed a tax-included allowance. All contracts were verbal and taxpayer claims all customers knew the price was tax included even though tax was not separately stated on the invoices. Taxpayer’s bid sheets and worksheets reveal that sales tax was calculated and included in the total amount invoiced. Under Civil Code section 1656.1, a retailer may add sales tax reimbursement to the sales price of tangible personal property if the contract of sale provides for such reimbursement. The cabinet retailer states that the contracts, although verbal, provide for a tax-included price. The only issue is whether this claim is true. If so, the retailer’s tax-included allowance must be permitted. The retailer’s bid sheets and worksheets support this result, but not conclusively. Since the retailer has the burden of showing his right to the allowance, the audit staff may require him to establish the relevant terms of the sale contracts by producing statements from his customers. General Questions 1. Retailers, such as bars, do not make a separate charge for tax and do not have posted signs regarding tax included. Should a tax-included allowance be permitted?

Don Bauman
Evaluation & Planning

-2-

July 2, 1987
460.0149

As discussed above, the only issue is whether the contract between retailer and purchaser provides for the addition of sales tax reimbursement to the sales price. Civil Code section 1656.1(a) sets forth three means to gain a presumption that the sales price includes tax: the sale contract expressly provides that such is the case; sales tax reimbursement is shown on the sales check or other proof of sale; or an appropriate sign is posted visible to purchasers. Here, the retailer does not make a separate charge and presumably does not show a separate charge on the sales check. No sign is posted. And common sense tells us that each customer is not told that tax is included. Since the retailer has the burden of establishing his right to any deduction, his claim for a tax-included allowance must be denied. 2. A retailer posts a sign that states, “all prices include sales tax.” The retailer sells an item for consumption on his premises and reports it as taxable, taking a tax-included allowance. He sells the same item to go, at the same price as for consumption on premises, and he deducts the full sale price as an exempt to-go sale. The question is whether the retailer is collecting excess sales tax reimbursement on the exempt sales because the sign says all prices include sales tax. When a retailer “represents” that an amount constitutes reimbursement for taxes to a purchaser, and the purchaser actually pays the amount to the retailer on a sale not subject to sales tax, that amount is “excess tax reimbursement.” (Rev. & Tax. Code § 6901.9.) Civil Code section 1656.1 provides a presumption that the parties agreed to the addition of sales tax reimbursement if a sign is posted that reimbursement will be added to the sales price “of all items or certain items, whichever is applicable.” (C.C § 1656.1(a)(3) (emphasis added).) Based on this provision, we must presume that the parties agreed to the addition of sales tax reimbursement to the sales price of all items, even exempt sales, in conformity with the sign actually posted by the retailer. That is, the retailer represented that sales tax reimbursement would be collected on exempt sales and the customer paid it. This is excess tax reimbursement under Revenue and Taxation Code section 6901.5. However, please note that it is excess tax reimbursement by virtue of the presumption set forth in Civil Code section 1656.1. That presumption is rebuttable. (C.C. § 1656.1(d).) To rebut the presumption, the retailer would have to carry the burden of showing that the amount presumed to have been represented and paid as sales tax reimbursement was understood by the purchaser to have been for some other purpose. 3. Same question as number 2, except the sign states “all prices include applicable sales tax.” The meaning of this sign is that sales tax reimbursement is added only to those sales which are taxable. There is therefore no excess tax reimbursement included.

DHL:ss