Did destroying production samples during customer-requested testing make the manufacturer the retailer or consumer of those samples?

Plain-English summary

California concluded that destroying items selected from a production line for testing did not make the manufacturer either the retailer or the consumer of those tested items.

The result did not change because the customer specifically requested the test, the testing occurred in California, or the testing charge appeared separately on the bill. The memorandum also said the manufacturer would not become the consumer if it conducted the testing without a customer request.

If the delivered production items were sold at retail in California, however, the testing charge would be included in the taxable measure of that retail sale even when separately stated.

The memorandum further concluded that no use tax applied to the tested samples or the rest of a production lot when the entire lot was junked after the samples failed the quality standards.

Common questions

Did a separately stated testing charge make the destroyed samples taxable?

No. Separate billing did not change the testing-to-destruction result.

Could the testing charge still enter the sales-tax measure?

Yes. If the delivered production items were retail sales in California, the testing charge was part of the measure of that sale.

Citations and references

• Business Taxes Law Guide Annotation 570.1400 — prior production-testing position followed by the memorandum

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/570-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/570-1182.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Santa Barbara – Auditing (EMR)

From:

HDQRS – Tax Counsel (GJJ)

570.1182

Date:

Feb. 18, 1975

This is in response to your memorandum of December 13, 1974. You raise a question as to the application of the tax in instances where property manufactured from materials acquired under resale certificates is tested to destruction. We have previously said that the testing to destruction of articles selected from production lines generates no use tax liability [BTLG 570.1400.] You are of the view that in the situation which you have referred to us, taxpayer is taxable as the retailer of the items tested to destruction. You are of this view because (a) the customer has specifically requested the testing, (b) the testing was done in this state, and (c) the charge for testing was billed separately. In view of our previous rulings with respect to production testing, we are of the opinion that taxpayer is neither the retailer nor the consumer of the items tested to destruction. We note that if the production items which were actually delivered were sold at retail in this state, the measure of tax with respect to their sale would include the charge made for the testing in question. It would be immaterial that the charge was stated as a separate item. Taxpayer would not be the consumer of production items tested to destruction even if the testing were performed without the specific request of the customer. Where, following the testing to destruction of production items, a whole production lot is junked as a result of the failure of the tested items to meet quality standards, taxpayer is not the consumer of the tested items or of the junked items.

GJJ:lb