WALLACE BERRIE CO v. BOARD OF EQUALIZATION OF STATE OF CALIFORNIA (1984)

Plaintiff appeals from a judgment determining that it is liable for a “use” tax on certain articles it purchases and distributes.   We reverse the judgment.

Plaintiff is the wholesale distributor of sundry items of souvenir and novelty nature.   It purchases such items from manufacturers, giving a resale certificate.   It also purchases cardboard racks suitable for display of the articles it wholesales.   It advertises that it gives such racks “free” with the purchase of a minimum number of the resale articles.   Concededly, no separate charge is made for those racks and the sales price of the resale articles covers the total costs of them and the racks in an amount such that plaintiff actually recoups at least 50 percent of the cost to it of the racks.

The Board, and the trial court, interpreted the governing regulations as imposing a “use” tax on the racks, measured by their cost to plaintiff.   Plaintiff contends that the transfer of the racks is a “Sale” on which it owes a sales tax only on the racks delivered to its California customers.¹  Plaintiff paid, on December 8, 1980, under protest, the use tax demanded by the Board and has sued for refund.   It is stipulated that if plaintiff is correct, it is entitled to a refund of taxes and interest in the amount of $17,160.11 and interest of $7,378.85 or a total refund of $24,538.96 plus interest from the date of payment.   We reverse the judgment and direct entry of judgment for the stipulated amount together with interest from the date of payment and costs.

The governing statutes are sections 6094(a) and section 6244(a) of the Revenue and Taxation Code, which read as follows:

“(a) If a purchaser who gives a resale certificate makes any use of the property other than retention, demonstration, or display while holding it for sale in the regular course of business, the use shall be taxable to the purchaser under Chapter 3 (commencing with Section 6201) of this part as of the time the property is first used by him, and, except as provided in subdivisions (b)(c), and (d) of this section, the sales price of the property to him shall be the measure of the tax.”

“(a) If a purchaser who gives a resale certificate or purchases property for the purpose of reselling it makes any storage or use of the property other than retention, demonstration, or display while holding it for sale in the regular course of business, the storage or use is taxable as of the time the property is first so stored or used.”

The Board relies on its Regulation section 1670(c), which reads as follows:

“MARKETING AIDS.   The tax applies to sales of advertising material, display cases, counter display cards, racks, and other similar marketing aids to persons acquiring such property for use in selling other property to customers.   A marketing aid is deemed to be ‘sold’ if a consideration of at least equivalent to 50% of the purchase price of the aid is obtained from the customer, either by the making of a separate charge or by increasing the regular sales price of other merchandise sold to the customer and delivered with the marketing aid.

“Manufacturers or others who provide marketing aids to persons engaged in selling their products without obtaining reimbursement equivalent to 50% of the purchase price of the aid are deemed to be the customers of the property provided.   In such case the sales tax applies to the sale to or the use tax applies to the use by the manufacturer or other person purchasing the aid for distribution whether it is delivered directly to the person engaged in selling its product or is delivered to a distributor, wholesaler, or jobber for redelivery to such persons with ‘deal merchandise.’   Distributors, wholesalers, or jobbers are the retailers of aids which they ‘sell’ to persons engaged in marketing their products.”

The plaintiff points ² to the provisions of the Board's Regulation section 1670(d) which reads as follows:

“PREMIUM DELIVERED WITH GOODS SOLD.   When a person delivers tangible personal property as a premium together with other merchandise sold, and the obtaining of the premium by the purchaser is certain and not dependent upon chance or skill, the transaction is a sale of both articles.   Tax applies to the gross receipts received from the purchaser for the goods and the premium except when the premium is delivered along with a food product for human consumption or other exempt item.   In such case, tax applies to the gross receipts from the sale of the premium, which will be regarded as the cost of the premium to the retailer, in the absence of any evidence that the retailer is receiving a larger sum.   If there is no such evidence, and if sales tax or use tax has been paid, measured by the sale price of the premiums to the retailer, no further tax is due.”

 We think it immaterial that plaintiff refers to the racks as being “free.”   Nothing which can be obtained only by a purchase of something is “free.”   Some samples are, of course, given “free” in the hopes of inducing subsequent purchases, but the recipient of the sample is under no obligation to buy and the sample is not “sold.”   But the question here is whether the sale of goods accompanied by a bargained-for additional article is a taxable “sale” as defined in the Revenue and Taxation Code.   The Board itself recognizes the exemption from a use tax of a “premium,” but insists that a “premium” is something delivered along with purchased goods but of no economic use to the purchaser as an adjunct to the sale of the accompanying product—such as the child's whistle in a package of breakfast food.   We can see no valid distinction between premiums and “merchandising aids” nor can we see any valid distinction between a price differential between bulk purchases and single purchases;  “10¢ a piece, 12 for a $1.00” is a familiar mode of merchandising, carrying no use tax penalty.  “11 dozen dolls at $X.00 per dozen;  a gross of dolls plus a display rack at $X.00 per dozen is no different—it is no more, or less, than a discount for purchasing a gross rather than a smaller amount.   In one case the buyer gets two units “free” for buying 12;  in this case the buyer gets a rack “free” for buying a gross.

 The Regulation section 1670(c) is not authorized by the Revenue and Taxation Code, both because it requires a separate price for the racks, but it is doubly bad in fixing an arbitrary 50 percent as the required price.   Even if we were to agree (which we do not) that the statute permitted a regulation requiring a stated price, nothing in the statute or otherwise prevents a merchant from fixing his own price.   That price might be one cent for a rack if purchased in connection with a bulk purchase;  and a tax of a one cent sale would be too de minimus to deserve the effort of collection.

The Board cannot rely on its regulation to impose a use rather than a sales tax on the delivery of the cardboard racks.

The judgment is reversed with directions to enter judgment for plaintiff in the amount of $24,538.96, plus interest thereon from December 8, 1980, and costs.

FOOTNOTES

1.   The “use” tax, if applicable, applies to all racks acquired by plaintiff whether ultimately distributed to California customers or to customers in other states;  it also applies to racks acquired by plaintiff and never delivered to customers.

2.   Plaintiff also points to the fact that the Board takes a different position with regard to wire display racks, which plaintiff sells for a price, and delivers a small amount of goods “free” to the purchasers of those racks.

KINGSLEY, Acting Presiding Justice.

McCLOSKY and ARGUELLES, JJ., concur. Rehearing denied;  ARGUELLES, J., dissenting.