Was a trading-stamp distributor reselling stamps, books, catalogs, and advertising materials to participating merchants or consuming them in providing its plan?

Plain-English summary

A trading-stamp distributor bought stamps, saver books, catalogs, signs, and advertising materials tax-free under resale certificates or from out-of-state vendors. It supplied them to participating merchants as part of a sales-promotion and cash-discount plan, charging $15 for 5,000 stamps but no specific charge for the other materials.

Board staff concluded that merchants were buying the intangible promotional plan, not the tangible value of the paper stamps and materials. The distributor also retained title under its contracts and required merchants to return stamps, books, and other materials when they stopped using the service.

The distributor therefore made the final purchase of those materials for sales-and-use-tax purposes and consumed them in California. Section 6094 imposed use tax on property originally bought under a resale certificate and then used rather than resold. Section 6201 separately imposed use tax on materials bought from out-of-state retailers for California use.

Staff said the tax had been properly determined, but the letter offered either a preliminary hearing if the facts were disputed or a Board hearing if only the legal application was disputed.

What this means for you

Loyalty-program distributors, participating merchants, and tax professionals

Look beyond per-unit charges. Contractual title, return obligations, what merchants actually bargain for, and whether tangible materials are transferred for their own value can determine whether the program operator is a reseller or consumer.

Common questions

Q: Were merchants buying the stamps as tangible property?

A: Staff said no. They were buying the promotional plan, with the physical stamps incidental to that service.

Q: Why did retained title matter?

A: The contracts kept title in the distributor and required return of materials when services ended, supporting consumer rather than resale treatment.

Q: What purchases were subject to use tax?

A: California-used materials bought under resale certificates and materials bought from out-of-state vendors for use in California.

Q: Was this a final Board adjudication?

A: The letter stated staff's conclusion and offered further preliminary or Board hearing procedures.

Citations and references

• California Revenue and Taxation Code §§ 6094 and 6201

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 555.0140
• Original supporting opinion: 555.0140 PDF

Original ruling text

STATE OF CALIFORNIA

555.0140

STATE BOARD OF EQUALIZATION
January 17, 1950
Gentlemen:
The legal staff has made a careful study of your file and petition for redetermination. The facts upon which we base our conclusions are substantially as follows: The stamps, books, catalogs and advertising media are purchased by you tax-free, either by being purchased under a resale certificate in this state or by being purchased out of state. This material is then distributed to the merchants, dealers or licensees to be used in carrying out the sales promotion and cash discount plan which you operate. Your plan is widely advertised and used and apparently increases the merchant's business if he subscribes to your plan. It appears that no specific charge is made for these materials. The actual stamps are then issued to the respective merchants or dealers at a cost of $15 for each 5,000 stamps. Realistically, the merchant is not bargaining for, nor paying for the value of the stamps as a tangible, that is, he is not interested in, nor is he actually paying except, incidentally, for the value of the physical property which takes up the stamps. In other words, the merchant is not purchasing the stamps for their tangible value as one would purchase blank sheets of paper to write on. The merchant is merely purchasing an intangible plan of benefit to both parties. The stamps are issued to the merchant's customers at a determined ratio based on the amount of the sale. The customer may exchange the filled books for merchandise at the merchant's outlet or at one of the Redemption Centers. If the merchant redeems a filled book, then you reimburse him at the regular redemption rate. Section 6094 of the California Revenue and Taxation Code provides that if a purchaser gives a resale certificate and thereafter makes any use of the property other than retention, demonstration or display while holding it for sale in the regular course of business, the purchaser is subject to a use tax as of the time the property is first used by him and the sales price of the property to him shall be the measure of the tax. As already stated, we are of the opinion that you are not selling the stamps, or the other items, as a tangible. Accordingly, it is our opinion that you make the last purchase of the stamps, stamp books, catalogs and advertising media for sales and use tax purposes. Inasmuch as the use of these items occurs in ibis state it is our opinion that your plan is subject to a use tax under Section 6094. With respect to your purchases from out-of-state vendors, the use tax is again properly imposed. Section 6201 of the code imposes a use tax on the use, in this state, of tangible personal property purchased from a retailer for use in this state. While resale in the regular course of business would not be a taxable use, we have already indicated that it is our opinion that you are not

reselling these stamps and other items, but are merely consuming them in providing a sales promotion plan. It is also to be noted that in the contract form headed by the word FRANCHISE, it is stated in Section 9 "Title to all stamps, saver books, catalogs, signs, and other forms of advertising shall be and remain with [you]". There is similar language in the other two contract forms furnished to this office. Other language in the contract forms also indicate that you retain title to the property. For example, the merchant is required to return all stamps, books and other material if the services are no longer used. Accordingly, it is our view that the tax has properly been determined. However, if you are of the opinion that our understanding of the facts is incorrect, we shall be happy to schedule the matter for a preliminary hearing before a hearing officer. If you feel our understanding of the facts is correct but that the law has not been properly applied, we shall schedule the matter for a board hearing. Kindly let us know of your wishes. Very truly yours, W. W. Mangels Associate Tax Counsel WWM cc:

Glendale - Auditing