Did a vending machine's posted tax-included statement mean its same-price exempt food sales to students included excess tax reimbursement?

Plain-English summary

A vending-machine operator posted the tax-included statement required by Civil Code section 1656.1(b)(1). An audit found that about 95 percent of the machine's food sales to students qualified for exemption, even though taxable and exempt buyers paid the same displayed price.

California applied the Regulation 1700 presumption that a posted tax-included statement means reimbursement is included in the gross receipts from taxable items. The better administrative reading was that exempt sales at the same price contained no tax reimbursement.

The operator therefore had not collected excess reimbursement on the exempt student sales. The source described the pricing as one amount for students and a lower base price plus included reimbursement for taxable nonstudent sales. Because the operator had nevertheless paid tax on the exempt sales, it could obtain a refund of that tax.

Common questions

Did the posted notice mean every vending sale included tax?

No. The Board presumed the notice applied only to sales that were actually taxable.

Did same-price exempt sales create excess reimbursement?

No. The memorandum treated those exempt sales as containing no reimbursement.

Why was the operator eligible for a refund?

It had paid tax on exempt student food sales without collecting reimbursement on them.

Citations and references

• California Civil Code § 1656.1(b)(1)
• California Code of Regulations, title 18, Regulations 1700(a)(2)(C) and 1700(b)(1)

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/460-0150.pdf

Original ruling text

State of California

Memorandum

To

:

Mr. Norman Jung
GH - Supervising Tax Auditor

From :

John L. Waid
Tax Counsel

Subject:

SR -- XX-XXXXXX
Excess Tax Reimbursement

Board of Equalization
Legal Division

460.0150

Date: September 9, 1993

I am responding to your memorandum of May 19, 1993, to the Legal Division. You indicate that the taxpayer ("S---") has filed a timely claim for refund for sales taxes paid on sales of food to students through a vending machine. Affixed to the machine is the tax-included statement mandated by Civil Code Section 1656.1(b)(1). During S---’s audit it was determined that approximately 95% of its sales through this machine were qualified exempt sales. OPINION You indicate that your audit review section has two concerns regarding S---’s Claim for Refund. I will discuss these in the order you raise them.

1. "Does this tax-included statement create an excess tax reimbursement situation for
   all exempt sales because all customers were notified that sales tax was included in the purchase price of the product. Regulation 1700(b)(1) states ‘When an amount represented by a person to a customer as constituting reimbursement for sales tax is computed upon an amount that is not taxable or is in excess of the taxable amount and is actually paid by the customer to the person, the amount so paid is excess tax reimbursement.’" The regulation is very clear on this point: "Excess tax reimbursement is charged when reimbursement is computed on a transaction which is not subject to tax...." (Ibid.) S--included tax reimbursement in the selling price of all of the tangible personal property at issue, a large proportion of which were exempt from tax, and even paid tax on those sales. You indicate that the auditor does not think there is excess tax reimbursement on the theory that the taxpayer’s intent was to notify its customers to whom taxable sales were made that sales was included in the price. The auditor relies on the presumption in Regulation 1700(a)(2)(C) that the gross receipts from sales of items subject to the sales tax is

Mr. Norman Jung

-2-

September 9, 1993
460.0150

sold at a price which includes tax reimbursement if the tax-included statement at issue is posted in the retailer’s premises. He concludes that where the sale was not subject to tax, the regulation resumes that reimbursement was not included in the sale price. We agree. While an argument can be made that the items as they sit in the vending machine are taxable and that their sales only become exempt if sold to the proper person, the better view, if only for the sake of administrative convenience is, to rely on the presumption stated above. Thus, we conclude that the tax-included statement sets up a presumption that reimbursement is included on only taxable sales. Exempt sales, though for the same price, do not include tax reimbursement. As a result, S--- is selling to students for one price and to non-students for a lesser price plus tax reimbursement. Since S--- collected no tax reimbursement, it may obtain a refund of the taxes it paid.

JLW:es