Were sales of prepaid overnight-shipping envelopes taxable, and what if the reseller also supplied packing materials?
Apply this to your situation
This page answers the general question as of 1996. Ask about yours and see what current California tax law says, with citations.
Plain-English summary
An independent representative bought prepaid next-day shipping envelopes at a discount and resold them to businesses. The carrier did not charge the businesses again because the representative had already paid for the delivery service.
Tax counsel assumed the envelope merely represented the right to receive shipping without another charge, functioning essentially like a postage stamp. On that assumption, the carrier sold a nontaxable shipping service to the representative, and the representative resold that nontaxable service through the prepaid mailer.
The result did not cover additional packing supplies. If the representative also transferred tangible materials such as packing "popcorn" used to cushion a shipment, the charge for that property was taxable.
What this means for you
Shipping resellers
A physical mailer can represent prepaid service rather than a sale of the envelope itself when its purpose is to evidence the right to delivery.
Businesses buying prepaid mailers
The shipping right and extra packing materials should be analyzed separately.
Accountants and tax professionals
Confirm that the mailer has no independent purpose beyond prepaid transportation and identify any separately furnished boxes, insulation, cushioning, or other property.
Common questions
Q: Was the prepaid overnight envelope taxable?
A: No, under the opinion's assumption that it represented prepaid shipping service.
Q: Why compare the envelope to a postage stamp?
A: Both evidence a prepaid right to transportation rather than being the object of the transaction.
Q: Were packing peanuts or other cushioning taxable?
A: Yes. Those were separate items of tangible personal property.
Q: Did the carrier charge the end customer again?
A: No. The representative had already paid the carrier for the service.
Source
- Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
- Annotation page: Annotation 515.0016.600
- Original supporting opinion: 515.0016.600 PDF
Original ruling text
515.0016.600
STATE OF CALIFORNIA
STATE BOARD OF EQUALIZATION
JOHAN KLEHS
First District, Hayward
LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 445-5550
FAX: (916) 323-3387
DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
May 24, 1996
KATHLEEN CONNELL
Controller, Sacramento
E. L. SORENSEN, JR.
Executive Director
REDACTED TEXT
Dear REDACTED TEXT,
This is in response to your letter dated May 15, 1996 regarding the application of sales tax to your activities. You are an independent representative of REDACTED TEXT and you explain: "My association with REDACTED TEXT, allows me to purchase the UPS next day letter (overnight-like Federal Express) at a discount. I sell this shipping envelope/service to places of business. They use these envelopes to send next day shipments. UPS does not charge my customer because I have already paid UPS for this service." My understanding is that any tangible personal property you obtain from UPS, such as an envelope, merely represents the right to obtain shipping services from UPS without additional charge. That is, I assume that the envelope is used by UPS in essentially the same manner as the US Postal Service uses postage stamps. If this understanding is correct, UPS is making nontaxable sales of shipping services to you. If you in turn merely resell this right to obtain shipping services (by selling the prepaid "mailers"), then we agree that you also are making nontaxable sales of shipping services rather than selling tangible personal property. Please note that if you transfer to your customer any other tangible personal property other than the envelope whose purpose is to represent the prepayment for shipping services, you may be regarded as making taxable sales of such property. An example would be if you also provide your customer with shipping materials such as "popcorn" for use by your customer to insulate the contents of the customer's shipments. Your charges for such property would be subject to sales tax. If you have further questions, feel free to write again. Sincerely, David H. Levine Supervising Tax Counsel DHL/cmm cc: REDACTED TEXT
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