Were an online classified-advertising company's listing and success fees taxable, and did it have to collect tax on sales completed directly by its users?

Plain-English summary

A California company operated an online service similar to newspaper classified ads. Sellers paid to list merchandise and could pay extra to feature or bold an item. If an item sold, the company also received 2.5% to 5% of the selling price.

The seller set the minimum price and listing period. Buyers placed electronic bids, but the company could not accept or reject them for the seller. It did not hold the merchandise, transfer title, provide warranties or escrow, or participate in payment and shipment. Buyers and sellers completed those steps themselves.

The Board agreed that the company provided a nontaxable service. It also agreed that the company had no obligation to pay or collect California sales or use tax imposed on the separate merchandise transaction because the company was not buying or selling the goods and was not acting as an auctioneer or consignor.

The company delivered no disks, manuals, or other tangible property. Users accessed instructions online and electronically downloaded the software needed to use the service without buying or leasing that software.

What this means for you

Online advertising platforms

Under this historical model, listing fees, enhancement fees, and a sale-based percentage remained service revenue because the platform did not control or transfer the goods.

Sellers using online listings

The platform's nontaxable service did not decide the taxability of the seller's merchandise sale. It only decided that this company was not responsible as seller, auctioneer, or consignor.

Accountants and tax professionals

Focus on actual authority and possession: who accepts offers, who holds the goods, who transfers title, and who completes payment and delivery.

Common questions

Q: Were the listing and feature fees taxable?

A: No. They were charges for an online service under the stated facts.

Q: Did the percentage fee make the company the seller?

A: No. The company received a percentage if an item sold, but it still lacked possession, title-transfer authority, and control over the transaction.

Q: Did the platform have to collect tax on sales between users?

A: No, according to this opinion, because it was neither the seller nor an auctioneer or consignor.

Q: Did electronic software delivery create a taxable sale or lease?

A: Not on these facts. Users did not purchase or lease the downloaded software.

Citations and references

• California Revenue and Taxation Code §§ 6006, 6015, and 6019
• California Sales and Use Tax Regulations 1565 and 1569

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0012.400
• Original supporting opinion: 515.0012.400 PDF

Original ruling text

515.0012.400

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

450 N STREET - SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE: (916) 445-3723
FAX: (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
KATHLEEN CONNELL
Controller, Sacramento
_______
JOHN CHIANG
Acting Member
Fourth District, Los Angeles

April 8, 1997

_______
E. L. SORENSEN, JR.
Executive Director

Ms. J--- K. I--H--- E--- W--- & M--Attorneys
XXX West ---, XXth Floor
--- ---, CA XXXXX
Re: ---, Inc.
Dear Ms. I---:
This is in reply to your letter of April 1, 1997. You have sought our opinion on behalf of your client, X, Inc. (“X”), as to application of the California Sales and Use Tax Law to certain payments to be made to your client for online service. We understand that X is a California corporation with its headquarters located in --- --County. X provides an online service much like a classified section of a newspaper to its customers. Potential users of X’s services register online with X as buyers or sellers. X’s customers are located in California, other parts of the United States and overseas. X does not charge for registration or impose an online service charge. A prospective seller pays X a fee to place an advertisement online for sale of an item. X receives extra fees to “feature” or “bold” a seller’s item. X does not edit a seller’s advertisement. The seller states in the advertisement the minimum sales price for the item and that bidding is to be open for a period of 3, 7 or 14 days. Prospective buyers then electronically place “bids” on the item. X does not have authority to nor does it accept or reject bids on behalf of the seller. If the item advertised sells, X receives a percentage (2.5-5%) of the selling price. X does not provide product warranties, an escrow, or otherwise become involved in the transaction between the buyer and the seller. The buyer and the seller make arrangements between themselves for both payment and shipment. X never takes possession of the property advertised and has no authority to transfer title of the property from the seller to the buyer.

Ms. J--- I---

-2-

April 8, 1997
515.0012.400

X assumes that an item receiving at least one valid bid will sell. X bills sellers monthly for the prior month’s activities. Billing is done by e-mail and payment is made by check, money order, or credit card. X does not deliver any computer diskettes, manuals or other tangible personal property to potential buyers or sellers. A potential buyer or seller, who accesses X’s web site, receives online instructions on how to use X’s services. A potential buyer or seller will download electronically the software necessary to use X’s services. This software is neither purchased nor leased by the buyer or seller. We are in agreement with your conclusion that X is conducting a service which is not subject to tax under the California Sales and Use Tax Law. Rev. & Tax. Code § 6006. We are further in agreement with your conclusion that X has no obligation to pay or collect California sales or use tax which may be imposed upon a sale between a seller and buyer using X’s online service. X is neither selling or purchasing tangible personal property, nor is it acting as an auctioneer or consignor with respect to property owned by another. Rev. & Tax. Code §§ 6006, 6015 and 6019; Sales and Use Tax Regs. 1565 and 1569. Very truly yours,

Gary J. Jugum
Assistant Chief Counsel
GJJ:sr
cc:

San Diego District Administrator