Were personalized scholarship-search and SAT-preparation reports taxable when each student received one unique report plus some standardized material?

Plain-English summary

Students completed detailed questionnaires for a personalized 40-page scholarship report identifying likely grants and aid programs. They also could take a simulated SAT and receive scoring, phase-by-phase analysis, strategies for missed questions, and steps for raising scores.

Some content was identical for all students, such as general aid-application steps or test-taking strategies. California nevertheless treated the program as a nontaxable service on the assumptions that individualized portions were far larger and more valuable, each customer received one unique copy, billing was one unitemized lump sum, and contracts, order forms, and advertising did not contradict that service focus.

The provider was the consumer of reports and other property incidentally transferred to students. It could not buy those items for resale and instead owed sales or use tax on acquiring or using them.

What this means for you

Scholarship and test-preparation businesses

Personalized analysis can support service treatment when it dominates standardized handouts and reports.

Education platforms

Marketing, contracts, billing, copy count, and the relative value of common versus individualized content all mattered.

Accountants and tax professionals

Document student inputs, analysis, standard modules, separate pricing, customer deliverables, and tax on incidentally supplied property.

Common questions

Q: Was the scholarship-search program taxable?

A: No, under the opinion's assumptions.

Q: Was the SAT-preparation program taxable?

A: No, because personalized testing and analysis were assumed to dominate.

Q: Did standardized material make the entire program taxable?

A: No, because it was assumed to be much smaller and less valuable than the unique content.

Q: Who owed tax on the supplied reports and materials?

A: The program provider, as consumer.

Q: Could different contracts or advertising change the result?

A: Yes. The conclusion expressly depended on assumptions about documents that counsel had not received.

Citations and references

• California Sales and Use Tax Regulation 1501

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0014
• Original supporting opinion: 515.0014 PDF

Original ruling text

515.0014

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

October 9, 1992
Mr. S--- B--P. O. Box XXXXXX
---, CA XXXXX-XXXX

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Dear Mr. B---:
This is in response to your letter dated August 6, 1992. You ask whether sales tax would apply to your new business. You will provide a scholarship search and SAT preparation program and will provide a single unique copy of a report to each customer. More specifically, you state: "For the scholarship search a student will complete a questionnaire in which they answer questions about their intended field of study, choice of schools, financial circumstances, etc (see attachment 1). They mail the questionnaire back to me which is then entered into a computer program at our national center which analyzes this information and prepares a personalized 40 page report detailing the grant, scholarship and student aid programs the student is most likely to qualify for, plus an outline illustrating the steps the student needs to take to apply and receive the maximum in student aid awards (see attachment 2). "For the SAT preparation a student will begin by taking a simulated SAT test. Within three weeks the student receives complete scoring and analysis on each phase of the test, test taking strategies to solve each type of question they got wrong, how to find answers to questions they don't understand and steps they need to take to raise their scores (see attachment 3)." Discussion I note that you have not provided us a copy of the contract entered into between you and your customer nor any order forms that may have been completed by the customer to place an order with you. Furthermore, your manner of billing is not described. Also, although you mention an attachment 3, that attachment apparently was not in the package you sent us. For purposes of this opinion, I assume that the customer is billed a single lump sum, and that there is no separate itemization of that single lump sum. I further assume that there is nothing in the documents we have not reviewed, nor in any of your advertising for the matter under review, that is in conflict with any of the conclusions or assumptions contained herein.

Mr. S--- B---

-2-

October 9, 1992
515.0014

Sales or use tax applies to retail sales of tangible personal property in California or for use in California. On the other hand, the providing of a service which is unrelated to the sale of tangible personal property is not subject to sales or use tax. Whether a particular transaction involves a sale of tangible personal property or instead involves the transfer of tangible personal property which is incidental to the performance of a service depends upon the true object of the contract. That is, the question is whether the true object of the customer was to obtain the service per se or the property produced by the service. If the true object is the service per se, the transaction is not subject to tax even though some tangible personal property is transferred. (Reg. 1501.) With respect to the scholarship information, you apparently generate a report from a database in response to a questionnaire completed by the customer. We have previously concluded that a database operator is performing a service when responding to a unique request from a customer for information by providing a unique report. In your case, it appears that, in addition to the information which is unique to each customer, a portion of the report is identical for all customers (e.g., an outline to assist the customer in applying for student aid). I assume that the unique portions of each report are far larger than the identical portions and that nothing in your solicitations indicates that these identical portions are of equal or greater value than the unique portions. The SAT test portion appears in some respects similar to the portion discussed above. Viewing the testing portion alone, the test and the scoring and analysis of each phase of the test would be regarded as a service. On the other hand, an identical booklet describing test taking strategies which is provided to all customers, if viewed alone, would be regarded as the selling of tangible personal property. I again assume that the unique portions provided to each customer are far greater than the identical portions and that nothing in your solicitations, contracts, or billings are inconsistent with the conclusion that the true object of the contract was for service. Based upon your letter and the assumptions made herein, we conclude that you are providing a service. Your charge for this service would not be subject to sale or use tax. Since you are regarded as consuming the property you incidentally transfer to your customers, you may not purchase such property for resale. Rather, the sale of such property to you is subject to sales tax, or your use of the property is subject to use tax. If you have further questions, feel free to write again.

Sincerely,

David H. Levine
Senior Tax Counsel