How did California treat cruise-service charges, included meals and drinks, complimentary promotional cruises, bar beverages, and souvenirs?

Plain-English summary

A boat operator charged one amount for a day cruise with one complimentary beverage and a higher amount for a dinner cruise with dinner and unlimited customer-selected beverages. It also sold drinks at the bar and tangible souvenirs, and sometimes gave day or dinner cruises away for promotion.

The letter treated the amount reasonably allocated to the cruise itself as a nontaxable service charge. For the complimentary drink included in a paid day cruise, the operator was the consumer: tax applied when it bought the drink, or use tax measured by cost if it had bought the drink ex-tax for resale.

The dinner-cruise answer contains a material printed contradiction. It says “there is no tax due” on the portion allocated to the meal and beverages, but then directs the operator to Regulation 1700 to determine how “the tax is measured” and how to compute and pay it, while citing Regulation 1603. Read together, the letter treats the dinner allocation as taxable, but the contradictory sentence is preserved below and should be checked against current law rather than silently rewritten.

On entirely complimentary promotional cruises, alcoholic and carbonated drinks bought ex-tax were subject to tax measured by cost. Food furnished without charge was treated as consumed by the operator and exempt as food products. Separate customer purchases at the bar and souvenir concession were taxable retail sales.

Common questions

Was the cruise ride itself taxable?

No. The amount allocated to the cruise service was not a sale of tangible personal property.

How was the included day-cruise drink treated?

The operator consumed it in providing the service and owed tax on acquisition or, if bought ex-tax, use tax measured by cost.

What does the source say about the dinner allocation?

It contains a contradiction: “no tax due” appears in the answer, but the same paragraph directs computation and payment under Regulations 1603 and 1700. The operational reading is taxable, subject to the customer agreement.

Were bar drinks and souvenirs taxable?

Yes. The letter called both taxable retail sales.

Citations and references

• California Revenue and Taxation Code section 6359 (as cited)
• California Sales and Use Tax Regulations 1501, 1603, and 1700 (as cited)
• Board Pamphlet No. 22, “The Dining and Beverage Industry” (as cited)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/550-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/550-0130.pdf

Original ruling text

550.0130

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-8485

January 24, 1984

Mr. L--- B---, President
I--- C---, Inc.
XXXX --- Street
--- ---, CA XXXXX
SR – XX-XXXXXX

Dear Mr. B---:
This is written in response to your letter of October 31, 1983. You asked that we render our opinion as to the application of the Sales and Use Tax Law to the operations of I--- C---(I---). At the outset it should be stated that, we assume for purposes of this letter the cruises in question occur within California territorial waters. Your letter indicated the following business operations conducted for your customers: day cruise, priced at $6.50 per person, includes a cruise on your boat with one complimentary beverage; dinner cruise, priced at $29.50 per person, includes a cruise, dinner, and customers choice of beverages in unlimited quantity; sales to customers of tangible personal property through a souvenir concession on board the boat; sales to customers of beverages at the boat’s bar, and; complimentary day and dinner cruises for travel agencies and other customers. Based on the foregoing description, you asked the following questions, our comments with respect to which will follow each question. 1.

What is the sales tax status of the cruise itself?

Comments
There is no sales tax due with respect to amounts received which are allocable to the price of the cruise since such amounts are for services rendered, not for sales of tangible personal property.

Mr. L--- B---

2.

-2-

January 24, 1984
550.0130

What is the sales tax status of the complimentary beverage on the day cruise? If it is taxable, should the tax be computed at our cost, or at a marked up value, (i.e., the normal price charged at our bar)?

Comments
The complimentary beverages are considered tangible personal property used incidentally in providing the day cruise service and I--- would be deemed the consumer of those beverages (see Reg. 1501, copy enclosed). As a consumer of the beverages, tax would apply either upon acquisition by I--- of the beverages or, if the beverages were purchased by it ex-tax for resale, upon use. Assuming the beverages were purchased ex-tax for resale, I--- should compute and pay tax based upon its cost. 3.

What is the sales tax status of the meal and beverages served on our dinner cruise? Again, should the tax, if any, be computed on our cost, or at a marked-up cost?

Comments
As indicated above, there is no tax due with respect to the portion of the charges allocable to the meal and beverage portion of the total charge (see Reg. 1603, copy enclosed). How the tax is measured depends on the nature of your agreement with the customers. Regulation 1700, copy enclosed, explains the proper method of computing and paying the tax. We suggest you consult that regulation to determine how the tax applies to your specific type of arrangement. We are also enclosing a copy of board pamphlet No. 22, entitled “The Dining and Beverage Industry” which should be of assistance in clarifying other questions which may arise. 4.

What is the sales tax status of our complimentary cruises, both day cruises and dinner cruises, for sales promotion?

The only tax due from I--- with respect to the complimentary cruises would be tax, measured by cost, of the alcoholic and carbonated beverages which I--- serves to the customers. This conclusion assumes that such beverages were purchased by I--- ex-tax for resale. If the beverages were purchased by I--- tax paid, there would be no tax due with respect to them. Likewise, food items served to the customers are deemed consumed by I--- and, accordingly, are exempt from tax as “food products” (Rev. & Tax. Code §6359). 5.

What is the sales tax status of the beverage sales during the day cruise?

Comments
These sales are deemed taxable retail sales of tangible personal property. As indicated in our comments with respect to question 3, how the tax is measured depends on I---’s agreement with the customer (see Regulation 1700).

Mr. L--- B---

6.

-3-

What is the sales tax status of our souvenir concession?

Comments
See comments under question (5) above.
Very truly yours,

Les Sorensen
Tax Counsel

LS:rar
Enclosures

January 24, 1984
550.0130