Were per-item subsidies paid by a site customer part of a vending operator's taxable gross receipts?

Plain-English summary

A vending operator sold beverages at reduced machine prices under customer contracts. The site customer separately paid a subsidy for each sale, with different stated amounts by product, such as a specified markup for each carton of milk or cup of coffee.

Gross receipts included the total amount of a retail sale. Because the subsidy was computed from the exact type and number of items sold, it was traceable to particular transactions and formed part of their taxable measure.

The operator therefore could not report only the money deposited in the machines. The letter also said food-product classification did not exempt these vending sales under the then-applicable rules.

What this means for you

Vending operators, workplace clients, and contract-pricing advisers

Include third-party payments that are calculated sale by sale. Calling the payment a subsidy does not remove it from gross receipts when it directly supplements the customer's price.

Common questions

Q: Were the subsidies traceable to sales?

A: Yes.

Q: Did only machine receipts enter the tax measure?

A: No.

Q: Did the payment label control?

A: No; the per-item calculation controlled.

Citations and references

• California Revenue and Taxation Code §§ 6006, 6012, 6051, and 6359
• California Sales and Use Tax Regulation 1602
• Szabo Food Service, Inc. v. State Board of Equalization, 46 Cal. App. 3d 268

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 590.0450
• Original supporting opinion: 590.0450 PDF

Original ruling text

590.0450
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916)920-6563

CONWAY H. COLLIS
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

October 16, 1985

RICHARD NEVINS
Fourth District, Pasadena
KENNETH CORY
Controller, Sacramento
DOUGLAS D. BELL
Executive Director

REDACTED TEXT
Dear REDACTED TEXT,
This is in response to your letter of July 9, 1985. We understand that REDACTED TEXT is a vending machine operator which enters into “subsidy” contracts with its customers whereby various beverages are sold at reduced prices through vending machines placed on the customers’ premises.

The products sold, include: canned sodas; coffee; tea; chocolate; Calistoga water; Hansen sodas; orange juice, and; milk. Pursuant to the “subsidy” contracts, the customers pay a “subsidy price” markup for each item sold in addition to the amounts paid through the machines. While the “subsidy price” amount varies depending on the type of beverages sold (e.g., milk $.35, coffee $.12), the specified markup is due based upon each sale of an item. REDACTED TEXT is currently reporting tax based only on receipts from the vending machines. You asked whether tax is also due based upon all or part of the “subsidy price” receipts. Generally speaking, retail sales of tangible personal property in California are subject to tax measured by gross receipts (Rev. & Tax. Code §§ 6006, 6012, 6051). “Gross receipts” is defined to mean the total amount of the sale (§6012). In Szabo Food Service Inc. v. State Board of Equalization, 46 Cal. App. 3d 268, the court indicated that, if subsidies can be traced to particular sales, such subsidies are includible in the taxable measure. Applying the foregoing rules to the facts in this matter leads us to conclude that the “subsidy price” charged with respect to each item sold through REDACTED TEXT vending machines is traceable to a particular sale. It follows, under the guidelines referred to above, all “subsidy price” receipts are part of the taxable measure. We note for your information that, although some of the vended items are classifiable as “food products” under the code and our regulation, their sales are not exempt since such sales are made through vending machines (see
§6359; Reg. 1602, copy enclosed).
Sincerely,

E. Leslie Sorensen, Jr.
Tax Counsel