Destination Management Company’s Transfers of Property and Related Services are Exempt in California

A destination management company’s transfers of tangible personal property (TPP), as well as related service charges, were not subject to California sales and use tax. The taxpayer arranged various activities for its customers, including corporate getaways, meetings, seminars, dining, and tours, and made reservations at hotels, restaurants, transportation companies, and other businesses to provide services, products, venue rental, and transportation. Restaurants and caterers that the taxpayer used in its dining program billed the taxpayer for the food and beverages served to its customers, applied mandatory gratuities, and added sales tax reimbursement to the total bill. The taxpayer paid the restaurants and caterers for all of these items and billed those amounts, along with a markup on the TPP, in its invoices to its customers. The taxpayer also billed its customers a management fee but did not add sales tax reimbursement to any of its fees.

Under audit, the California Department of Tax and Fee Administration found that the taxpayer – not the restaurants – was the retailer of the TPP it transferred to its clients and also found that the management fees were taxable when they were part of the taxpayer’s gross receipts from taxable sales of food and beverages. The taxpayer argued that it should be treated as a consumer and not a retailer of TPP. The taxpayer argued that the true object of its contracts with its customers was the services it provided in creating, planning, and coordinating events, not the meals and other incidental goods. In California, sales of meals or hot prepared food by restaurants and similar establishments to persons such as event planners or party coordinators, which buy and sell on their own account, are sales for resale. Contrary to this provision, the California Board of Equalization concluded that the taxpayer was a service provider that arranged various activities for its customers and is considered the consumer of property transferred in connection with the services. As a result, the taxpayer’s transfers of TPP, as well as the related service charges, are not subject to tax. This case was delayed in its appeal following the Fun is First, another Destination Management Company case previously decided by the Board of Equalization.  In that case, the taxpayers were led to believe that legislative or regulatory changes were being enacted by the Department which never came to be.  Based on this, we do not recommend that taxpayers rely on this decision if they are Destination Management Company who purchases goods including meals under their own account. (In the Matter of Key Events, Inc., California State Board of Equalization, November 14, 2017, released April 6, 2018)

Posted on April 30, 2018