Who was the meal retailer when a private dormitory contracted with student boarders and hired a caterer to provide the food?

Plain-English summary

A private dormitory contracted directly with student boarders and received their room-and-board payments. It hired a caterer to provide meals. Board staff classified the dormitory as a boarding house under Regulation 1603(a) and treated the entity dealing with the students as the meal retailer.

The dormitory therefore had to make a reasonable segregation of its lump-sum room-and-board charge and report tax on the fair retail selling price of the meals. The caterer sold the board-student meals to the dormitory for resale if it held a valid resale certificate.

The caterer remained the retailer for its own cash sales. If it lacked a valid resale certificate, the memorandum said the caterer could owe tax measured by its selling price while the dormitory should be assessed on its meal markup.

The source rejected switching retailer classifications merely because a private rather than school-operated dormitory produced a different exemption or tax measure. It said the underlying Redlands Rule had survived two Attorney General conference reviews.

Common questions

Who was the retailer to student boarders?

The private dormitory entity that contracted with them and received their payments.

How was the meal amount determined from one room-and-board charge?

The source required a reasonable segregation using the meals' fair retail selling price.

Was the caterer's sale to the dormitory a resale transaction?

Yes, assuming the caterer had a valid resale certificate from the dormitory entity.

Who reported the caterer's direct cash sales?

The caterer remained the retailer for those sales.

Citations and references

• California Sales and Use Tax Regulation 1603(a) (as cited)
• Automatic Canteen case, 238 Cal. App. 2d 372 (as printed)
• “Redlands Rule” (as identified in the source)

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/550-0525.pdf

Original ruling text

State of California

Board of Equalization

550.0525

Memorandum
To:

Mr. Jack A. Najarian

From:

Donald J. Hennessy

Subject:

REDACTED TEXT

Date:

March 27, 1972

This is in response to your February 10, 1972 memo regarding contracts for the serving of meals to student boarders at private dormitories and the San Mateo office’s February 4, 1972 memo relative thereto. It is the opinion of our San Mateo office that such dorms should be classified as “boarding houses” within Regulation 1603(a) and that tax should be reported on the fair retail selling price of meals based on a reasonable segregation of the lump-sum charge for room and board. I agree with San Mateo’s opinion and believe that under our prior decisions, most notable the Redlands Rule, the retailers here is the entity which contracts with the board students and receives payment directly from the board students. The caterer (REDACTED TEXT) would be the retailer only as to cash sales. I am assuming that REDACTED TEXT would have a valid resale certificate on file from the entity contracting with the board students. If not, REDACTED TEXT would be liable for sales tax measured by its selling price, and the entity contracting with the board students should be assessed sales tax measured by its markup on meals. The above is only the Redlands Rule applied to a situation involving a private dorm. While I realize the above poses audit problems, as mentioned in San Mateo’s memo, I do not believe we can substantiate classifying REDACTED TEXT as selling for resale when the dorm is operated by a school and as the retailer when a private entity operates the dorm. While the Redlands Rule is open to criticism, it has twice withstood review through Attorney General conferences, the second review occurring after the Automatic Canteen case, 238 Cal. App. 2d 372. The factual situation here is identical, except that the retailer does not benefit from an exemption. To decide REDACTED TEXT is the retailer when a private dorm is involved would be to admit that when students are the consumers we will go in any direction that affords an exemption or a lesser measure of tax. I find such an admission legally unacceptable and therefore agree with San Mateo’s conclusion. As I mentioned to you, I presently am reviewing the same situation involving dorms operated by REDACTED TEXT Company and REDACTED TEXT Corporation in Goleta, California, and Riverside, California, respectively. I presently propose to write REDACTED TEXT, the caterer, that their understanding that their sales of meals for board students are for resale is correct. As to REDACTED TEXT, which holds a permit for the Goleta location (REDACTED TEXT), there appears to be no problem unless the measure they are reporting is only cost. As to REDACTED

TEXT, alpha files has no record of a permit and REDACTED TEXT may be liable for tax due to the lack of a resale certificate. I shall withhold sending the REDACTED TEXT letter for a few days in case you with to discuss this matter with us. DJH:lb