Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 295.1678


295.1678 Services in Connection with Sales of Catalogs. A taxpayer operates three "catalog showroom" retail stores in California. The taxpayer purchases its catalogs from an out-of-state firm that has developed a comprehensive program for production of a basic catalog each year that could be used by a number of different catalog-showroom firms with relatively simple and inexpensive customizing as to any particular user.

The catalog development firm has the catalogs printed by another out-of-state firm. The taxpayer believes that the out-of-state catalog development firm performs services that are not part of the actual production of the catalogs and that such charges should be excluded from the amount subject to tax. These services include but are not limited to:

(1) Selection of merchandise for inclusion in the catalog;

(2) Negotiating all merchandise purchase terms with suppliers, then organizing this information and supplying it to member firms;

(3) Acting as a clearing house for merchandise problems of member firms;

(4) Providing data processing assistance to members;

(5) Providing in-store fixture layout assistance to members on request;

(6) Coordinating buying conferences;

(7) Maintaining product updates;

(8) Handling special purchases for members.

Typically, each catalog-showroom retailer (including taxpayer) executes a contract with the catalog development firm in the spring of each year, agreeing to purchase a certain number of copies of the out-of-state firm's basic "Fall" catalog. The contract includes details concerning customizing the catalog to the retailer's particular identity and preferences.

The taxpayer and the out-of-state firm contracted for the sale/purchase of catalogs on the basis of a quoted price per basic catalog, subject to adjustment for additional or nonincluded inserts/sections and/or special charges, such as handling.

Based on the following, it is concluded that all of the out-of-state firm's charges for services in connection with the sale/purchase of the catalogs are subject to tax:

(1) The contract shows that the agreement is one for the sale/purchase of catalogs only, with the price expressed as a charge for each copy of the catalog.

(2) The more important of the activities described as "services" are simply a catalog pricing arrangement. The out-of-state firm performs these activities in a proprietary capacity while developing a basic catalog "package" which it sells to many customers each year via contracts for sale of catalogs. The activities described as "coordinating buying conferences," "selections of merchandise for inclusion in the catalog," "negotiating merchandise for inclusion in the catalog," "negotiating merchandise purchase terms with suppliers" (and thereafter furnishing copies of forms containing the resulting information to all member firms who purchase catalogs), and "maintaining product updates" are not services that are provided to the customer's special order for just its needs. Instead the out-of-state firm is selling a pre-packaged product, of which such activities are a part. These activities cannot be separated for the purpose of establishing the product's sale price. Even if the contracts had been written in a form giving special mention to the above services, so as to assign part of the price per catalog to them, the Board would be unable to recognize an exempt status for any of the amounts so assigned. 8/16/78.