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California Regulations 1591 and 1602 have been amended to clarify that dietary supplements, when supplied by a physician as part of a weight loss program to treat the disease obesity, are not classified as food products and, therefore, exempt from sales and use taxes. These meal replacements fall into the category of medicine because they are intended for internal use by human beings in the treatment of the disease obesity. (Regs. 1591 and 1602, California State Board of Equalization, effective December 14, 2008)


Effective January 1, 2009, the In-State Voluntary Disclosure Program provides additional benefits to California purchasers who are not required to hold a seller’s permit, but have a use tax liability. The benefits include a three year limitation for the Board of Equalization to assess prior taxes and allows the BOE to waive late filing and late payment penalties. (Special Notice L-215, California State Board of Equalization, December 2008)


On May 29, 2008, a resolution was reached between the California State Board of Equalization (SBE) and Barnes &, canceling two tax determinations against Barnes & and waiving claims for past sales and use taxes, interest, and penalties. The company had filed a previous complaint in the U.S. District Court for the Easter District of California for relief against actions of the state in seeking to collect California sales and use tax. Barnes and voluntarily began collecting and remitting sales and use taxes to California on November 1, 2005. (Form 10-Q Quarterly Report, Barnes & Noble, Inc., September 11, 2008)


The California Court of Appeals concluded that optional computer service contracts sold with computers for a single lump-sum price were not subject to California sales and use taxes. These mixed transactions were bundled in which goods and services are inextricably intertwined in a single sale. While the computers and service contracts are sold together for an aggregate price, they are distinct consumer items and each is a significant object of the transaction. The service contracts have readily ascertainable values, even without itemized invoices. In addition, there is no state statute or regulation that requires service contract charges to be separately stated on an invoice in order to avoid taxation. The appellate court held that it was proper to tax the computer (i.e., the tangible personal property) but not the service contract (i.e., the service or intangible property). (Dell, Inc. v The Superior Court of the City and County of San Francisco, California Court of Appeal, First Appellate District, No A118657)


In a California Tax Information Bulletin, the state explains the taxability for food packaged to include both food and non-food items – combination packages. Effective April 2007, pursuant to Regulation 1602, Food Products, which was recently amended to include combination packages, non-food items are taxable if they constitute more than 10% of the retail value of the package (excluding the container) and the retailer has records verifying the cost of the individual items in the package. If there are no records to establish the cost of the individual items and the non-food items exceed 10% of the cost of the entire package (excluding the container), the retail sales price of the entire package is taxable. The sale price of the package is nontaxable if the retail value of the nonfood products is 10% or less (excluding the container) and the container’s retail value is at most 50% of the entire package value. (Tax Information Bulletin, California State Board of Equalization, June 2007)



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