When is a coin-operated prize machine selling property rather than providing nontaxable skill entertainment?

Plain-English summary

California considered a trivia machine that awarded sports cards for correct bonus answers and a claw machine that dispensed candy when the player successfully operated the claw.

When appreciable skill or knowledge was required and there was no assurance of receiving property, the primary purpose was entertainment. The play charge was not subject to sales tax, and the operator was consumer of any prizes dispensed.

If questions were so easy or the claw required so little skill that nearly everyone received property, the machine's purpose was retail sale and tax applied under vending rules. For food dispensed as sales, the letter referenced the statutory partial taxable measure.

What this means for you

Amusement operators, prize-machine owners, and tax advisers

Document game difficulty, win rates, and the operator's intended customer experience. Labels do not control if players are effectively buying a guaranteed item.

Common questions

Q: Are skill-game play charges taxable?

A: Not when entertainment is primary and a prize is genuinely contingent on appreciable skill or knowledge.

Q: What if nearly everyone receives property?

A: The machine is treated as making retail sales.

Q: Who consumes prizes in a genuine skill game?

A: The operator.

Citations and references

• California Revenue and Taxation Code § 6359.2
• California Sales and Use Tax Regulation 1574(b)(2)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 590.0800
• Original supporting opinion: 590.0800 PDF

Original ruling text

590.0800
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

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

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

June 18, 1993

GRAY DAVIS
Controller, Sacramento

Dear REDACTED TEXT,

BURTON W. OLIVER
Executive Director

This is in response to your letter of January 22, 1993 which requested the application of sales or use taxes to coin-operated machines. Your first example is a machine which asks trivia questions upon the insertion of 25¢. The player chooses a sport, and receives sport cards as prizes if certain bonus questions are correctly answered. It appears from your description that the primary purpose of this machine is to provide entertainment by challenging a player to test his knowledge of a certain sport. There is no assurance that a player will ever receive any tangible personal property in return for his money. The sport cards are prizes only dispensed to players displaying a certain level of knowledge. If this is true, no sales tax is applicable. If nearly everyone receives sports cards, and the primary purpose of the machine is to sell sports cards, sales tax would apply. This would be true if the questions were so easy that nearly everyone wins. Your second example is a machine that is filled with candy which requires the skill of the player in operating a claw before the candy is dispensed. If no appreciable skill is required, sales tax will apply. Regulation 1574(b)(2)(A) provides that "tax applies to the gross receipts from the retail sale of food products dispensed through a vending machine at retail for more than 15 cents...." Subparagraph (b)(2)(C) provides for a partial exemption, based on Revenue and Taxation Code section 6359.2, so that only 33% of gross receipts are subject to tax. If an appreciable skill is required, and the primary purpose of the machine is to provide entertainment by challenging a player to display the skill of operating the jaw, no tax would apply to the individual sales. The vending machine operator would be the consumer of the product dispensed. The tax would be measured by the sales price of the product to the operator, unless the product is itself exempt, such as candy or other food products. If you have further questions, please contact me. Sincerely,

Donald L. Fillman
Tax Counsel