Does a seller's internal pricing calculation make the customer price tax-included when the order form says nothing about tax?

Plain-English summary

A seller could not establish tax-included pricing merely by showing that its internal cost analysis accounted for sales or use tax. Whether it used state-specific tax costs, an average cost, or no specific tax calculation was irrelevant.

California looked instead to the contract with each customer. The seller had to clearly demonstrate that the customer understood one part of the charge was for the goods and another part was tax or tax reimbursement. Because the order form contained no tax-included statement, the source concluded that the amounts received were not tax-included.

The memorandum said future order forms could give adequate notice by stating that all prices of taxable items included the applicable use taxes computed to the nearest mil. It also said the comparable Regulation 1700(a) sales-tax-reimbursement wording would be broad enough to cover use tax collected on a tax-included basis.

Common questions

Did including tax in the seller's internal price calculation suffice?

No.

What evidence controlled?

The sales contract or order-form notice showing what the customer understood the charge to include.

Why did the seller lose on the existing orders?

Its order form said nothing about the amount being tax-included.

Citations and references

• California Revenue and Taxation Code § 6053
• California Code of Regulations, title 18, Regulation 1700(a)

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/460-0258.pdf

Original ruling text

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum
460.0258

To:

Out-of-State - Auditing

From:

Headquarters – Legal (PRD)

Subject:

S--- M---, Inc.

Date:

April 22, 1977

SS --- XX XXXXXX

Whether taxpayer sets its prices as a result of an analysis of its costs which include a specific amount of sales tax for each individual state, whether S--- uses the same average cost figure for establishing its prices in each state, or whether S--- does not take sales taxes into specific consideration as such a cost, is irrelevant to the question. Whether the taxpayer’s prices are tax included is determined solely by an analysis of the contract between the taxpayer and its customers, and not by any cost analysis of its operations or price. So the taxpayer’s internal method of setting its charges is irrelevant to the question. Since the sales and use taxes are measured by gross receipts and sales price, which are similarly defined, the taxpayer must very clearly demonstrate that each customer understood that part of the charge was for the goods and that the other part was for tax or tax reimbursement before the taxpayer can regard the price or amount charged that customer was “tax included” price. In this instance, the order form did not have any statement about the tax included nature of the amount charged. That fact is sufficient, in my opinion, to negate the possibility that the amounts received were tax included. Taxpayer’s counsel was correct in its advice that the former announcement that taxpayer would “absorb” the taxes was in violation with Section 6053. However, in the future, taxpayer would accomplish its purpose by advising the customer with each order form that “all prices of taxable items include use taxes computed to the nearest mil”. Even if the statement set forth in

Out-of-State - Auditing

-2-

April 22, 1977
460.0258

Regulation 1700(a): “All prices of taxable items include reimbursement for sales taxes computed to the nearest mil”, was used, that statement would be sufficient to comprehend use taxes collected on a “tax included” basis.

PRD:jw