A common thread throughout many of the regulations centers around the definition of gross receipts. Gross receipts, the measure upon which sales tax is based, is defined in Revenue and Taxation Code 6012. Many industry specific regulations are based upon the following excerpts of that definition:
“Gross Receipts” mean the total amount of the sale or lease or rental price as the case may be, of the retail sales of retailers, valued in money, whether received in money or other¬wise, without any deduction for………..The cost of transporta¬tion of the property……………and any services that are part of the sale.
Starting with Regulation 1502 (automatic data processing services and equipment) we find that consulting and maintenance services in the connection with the sale of canned software are taxable. This is the case whether the software is leased or sold as long as the services are mandatory. If, on the other hand, the serv¬ices are optional they are not considered part of the sale and are thus exempt. To be optional, the software must be available and priced with or without the service. Recently in a State Board of Equalization case at the local level, the separately stated charge for optional service along with a contract which clearly stated the service was optional was disregarded. The SBE held that since the company always provided the consultation service along with the software it wasn’t really optional. The taxpayer was asked to provide an example of invoices where no such service was billed. He provided one or two examples of such transactions but the board’s position was that these two isolated cases did not prove the service was really optional. An appeal is pending.
In Regulation 1524 we find that alterations to new clothing are taxable. As part of the sale, the store tailor alters the pants, jacket, or dress. Also, charges for painting, polishing or finishing tangible personal property for the first time is tax¬able. The common thread in both scenerios is the concept of service in connection with a sale.
Photographers (Regulation 1528) must include in the measure of tax the total charge with no deduction for travel time, telephone calls, rental of equipment, or salaries or wages paid to assistants or models. These direct costs are taxable even if they are separately stated.
Ad agencies (Regulation 1540) are responsible for tax on consultation, research, supervision, model fees, talent fees, and typography charges when they are directly related to tangible personal property while auto dealers charge tax on the document preparation fee (annotation 295.1315). Again, both cases are ex¬amples of services in connection with a sale.
The measure of tax for Florists includes charges made for telegrams or telephone calls as well as relay or service charges (Regulation 1571).
Regulation 1628 dealing with transportation charges is also based on the definition of gross receipts.
Lastly, we find in Regulation 1660, concerning leases, that services that are part of the lease are also taxable. If the service is optional (as in the software consultation example above) it is exempt. In a recent case with the State Board of Equalization, a company that rented plants to restaurants for in¬terior flavor was held liable for tax on not only the charge for “plant rental” but for maintenance as well. A major benefit in renting the plants was that the lessor would keep them green by following a regular maintenance schedule. This extra maintenance charge was part of the taxable lease receipts. Again, had this service been optional, it would be exempt.
This is a partial list of some industries that are effected by the definition of gross receipts. As you can see, the tax treatment stems from the definition of gross receipts. A sales tax consultant can be very helpful in this area.