Was a school food-vending contractor an employee whose sales qualified as exempt school sales?

Plain-English summary

A contractor agreed to furnish and sell all food needed during the school day through vending machines on a high-school campus. It argued that it was the school's employee, so the food sales should receive exemptions for school or religious-organization meals.

California found an independent contractor-retailer. The operator shared profits, assumed loss risk, maintained a distinct organization and occupation, could not be immediately discharged without cause, agreed to comply with operating laws, and carried product and public-liability insurance.

The agreement expressly said the contractor would furnish and sell the food. Because the school was not the seller and no employment relationship existed, the claimed exemptions did not apply.

What this means for you

Schools, food-service contractors, and tax advisers

Review the actual allocation of sales responsibility, profit, risk, control, termination rights, compliance duties, and insurance. A school-site contract does not automatically make the contractor an employee or the school the retailer.

Common questions

Q: Was the operator a school employee?

A: No.

Q: Who sold the food?

A: The independent contractor.

Q: Did the school-sales exemption apply?

A: No.

Citations and references

• Former California Sales and Use Tax Ruling 53(g) and (i)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 590.0140
• Original supporting opinion: 590.0140 PDF

Original ruling text

590.0140
State of California

Board of Equalization

Memorandum
To:

Petition Unit (RNZ)

From:

Tax Counsel (GLR)

Subject:

REDACTED TEXT

Date:

June 21, 1967

This is in reply to your inquiry of May 23, 1967 regarding the taxability of the sale of food to students through vending machines located on the premises of “S” high school. The time period involved is from 9/17/65 to 3/31/67. It is our understanding that taxpayer contends that such sales are exempt from tax based upon sections (g) and (i) of Ruling 53. Section (g) in essence provides that the sale of meals to students by private schools is exempt from tax. It goes on to provide, however, that if such sales are made by concessionaires or other retailers, it is subject to tax. It is the taxpayer's contention that it is an employee of “S” and not an independent contractorretailer. After reviewing the arguments put forth by the taxpayer and the agreement entered into by the parties, we find that we are unable to agree with the taxpayer. It is our opinion that an employee-employer relationship does not exist where a contractor by contract agrees to furnish and sell all food necessary during the regular school day to the students, is paid on a profitsharing basis with respect to profits, assumes the risk of loss, is engaged in a distinct occupation, is a separate organization and cannot be immediately discharged (without cause), agrees to comply with all laws in connection with serving of food to students through the vending machines, and agrees to maintain products and public liability insurance covering its operations. Quite to the contrary, it is clear that under such facts the taxpayer-contractor is an independent contractor-retailer. Accordingly, the sales by it are not exempt from tax under section (g). Section (i) provides in part that the sales of meals by religious organizations at gatherings under its auspices for the purpose of raising revenue and for carrying on its religious activities are exempt from tax. Since it is provided under paragraph 1 of the agreement between the taxpayer and “S” that the taxpayer is to “furnish and sell all food,” we are of the opinion that this is a clear indication that the taxpayer is selling the food and not “S”. Accordingly, it is our opinion such sales are not exempt from tax under section (i) of Ruling 53. GLR:dse [lb]