Was a film-testing company's charge for a Methaline Blue Test taxable when it returned only a text report?

Plain-English summary

A company tested a customer-furnished, already processed film sample for residue to help determine the film's longevity. It then sent the customer the test results.

Tax counsel could not give an unconditional answer because the request did not fully describe every step or everything transferred. On the stated assumption that the company delivered only a written, text-only report, the customer's true object was the testing and analysis service. The paper report was incidental, so the service charge was not taxable.

The testing company was the consumer of the paper and owed tax when it bought or used that material. If it transferred other tangible property to the customer, the opinion said that transfer probably would be a taxable retail sale.

What this means for you

Testing laboratories

Document that the customer is buying analysis rather than a physical product, and identify every item delivered with the results.

Film and imaging businesses

A single text report supported service treatment here; photographs, drawings, diagrams, samples, or other property were outside the opinion's assumption.

Accountants and tax professionals

Apply the true-object test to the complete contract and deliverables, not just the invoice label.

Common questions

Q: Was the Methaline Blue Test charge taxable?

A: Not on the stated facts, if the only customer deliverable was a text report analyzing the test.

Q: Was the paper report itself a taxable sale?

A: No. It was incidental to the testing service.

Q: Who owed tax on the report paper?

A: The testing company was the consumer, so tax applied to its purchase or use of the paper.

Q: What if the company delivered other physical items?

A: The opinion said that would probably be treated as a taxable retail sale, but asked for more facts before deciding.

Citations and references

• California Revenue and Taxation Code §§ 6006(a), 6007, 6201, and 6401
• California Sales and Use Tax Regulation 1501

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.2000
• Original supporting opinion: 515.2000 PDF

Original ruling text

515.2000

STATE OF CALIFORNIA

JOHN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-3723

DEAN F. ANDAL
Second District, Stockton

October 30, 1995

ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento
BURTON W. OLIVER
Executive Director

Dear REDACTED TEXT,
This is in response to your letter dated September 27, 1995 asking how tax applies to certain sales activities undertaken by REDACTED TEXT. You state: “Our company runs a test on film called a Methaline Blue Test. The customer send us a sample piece of film which they have already processed. We then run the above test to check for any residue that might be left on their film (due to processing). This test lets them know the longevity of their film. We send them the results of [the] test.” Discussion Retail sales of tangible personal property is California are subject to sales tax, measured by the gross receipts, unless the sale is specifically exempt from taxation by statute. (Rev. & Tax. Code §§ 6201, 6401.) The term “sale” means any transfer of title or possession of tangible personal property for consideration. (Rev. & Tax. Code § 6006(a).) A sale at retail means a sale for any purpose other than resale in the regular course of business. (Rev. & Tax. Code § 6007.) Neither the sales nor the use tax applies to charges for services not constituting sales of tangible personal property. (Reg. 1501 (copy enclosed).) Whether a particular transaction involves a sale of tangible personal property or instead involves the transfer of tangible personal property incidental to the performance of a service depends upon the true object of the contract; that is, is the real object sought by the buyer the service per se or the property produced by the service. (Id.) If the true object of the contract is the performance of a service, the transaction is not subject to sales or use tax. Persons engages in the business of rendering services are consumers, not retailers, of the tangible personal property they transfer incidentally in rendering the service. (Id.) Tax applies to the sale of the property to those persons or to their use of that property. (Id.) However, if the true object of the contract is the procurement of the tangible personal property, the transfer of such property to the customer is regarded as a sale of tangible personal property subject to tax.

REDACTED TEXT
October 30, 1995
Page 2
You have not provided sufficient information for us to provide you with a definitive answer on whether the activities you describe constitute sales of tangible personal property. You explain that REDACTED TEXT sends its customers the results of the Methaline Blue Test performed on a sample piece of film provided by the customer. If all REDACTED TEXT transfers to its customers is a written report1 analyzing the results of Methaline Blue Test, we regard REDACTED TEXT as providing a nontaxable service. The transfer of the written reports to its customers is incidental to the service provided by REDACTED TEXT (Reg. 1501.) This means that REDACTED TEXT is the consumer of the tangible personal property (i.e., paper) it transfers incidentally in rendering the service. Tax applies to the sale of the property to REDACTED TEXT or to its use of that property. On the other hand, if REDACTED TEXT transfers any other tangible personal property to its customers, such transfer would probably be regarded as a retail sale of tangible personal property subject to tax. If you have any further questions, please write again. If you do so, please provide a detailed description of each step involved in the activity about which you inquire, including a complete description of what is provided to your customers, along with copies of any contracts relevant to your inquiry. Sincerely, Sophia H. Chung Staff Counsel SHC:rz

1

We assume that the written report consists of text only and contains no photographs, drawings or diagrams.