California Concludes that Snow Producer is Required to Collect Sales Tax

By: Betsy Goldstein, SALT Senior Manager

At a glance 

• The main takeaway: A California Office of Tax Appeals opinion illustrates that a transfer of title or possession is not always necessary for a taxable sale when it concluded that charges for snow production using the customer’s water were subject to tax.   
• Assess the impact: This case highlights two important points about sales tax — sales involving tangible personal property do not need to be a transfer of title or possession and there are differences among the states over the taxability of services related to tangible personal property.
• Take the next step: Aprio’s State and Local Tax (SALT) team help you understand the vast sales and use tax considerations and help to ensure your business complies with its sales and use tax obligations. 

Schedule a free consultation today to learn more!

The full story

The California Office of Tax Appeals (OTA) recently published an opinion addressing whether the production of snow constituted as a taxable sale of tangible personal property.[1]   

A closer look at the case

Snowmagic (or the Taxpayer) is headquartered in New Jersey and contracts with its customers to operate snowmaking equipment to provide artificial snow to customers on location, and to provide related services. 

Snowmagic had several theme park customers located in California and contracted with them to produce artificial snow on their premises. In these instances, the Taxpayer performed the following services at each customer’s location:

• Setup, layout, and implementation of the snowmaking equipment,
• Hooking up the equipment to the customers’ water source to use the customers’ own water to create and maintain the snow, and
• Snowmaking equipment takedown and removal. 

The Taxpayer also provided on-site supervisory and management services that involved supervising and managing the snowmaking staff and managing and maintaining the snowmaking equipment.

In May 2018, the California Department of Tax and Fee Administration (CDTFA) involuntarily registered the Taxpayer for a seller’s permit, with a retroactive start date of January 1, 2012. Later that year, the CDFTA issued a notice of determination to the Taxpayer for underreported sales and use tax. The CDFTA’s position was that the Taxpayer is in the business of selling artificial snow, which is tangible personal property (TPP), and therefore it is making a taxable sale of TPP in California for which it should have collected and remitted sales tax.

California’s sales tax statute defines a “sale” to include, in part:

The producing, fabricating, processing, printing, or imprinting of tangible personal property for a consideration for consumers who furnish either directly or indirectly the materials used in the producing, fabricating, processing, printing, or imprinting.[2]

The ruling explained

The CDFTA argues that the Taxpayer is producing snow using the customers’ own material (water), and thus is making a taxable sale under this definition. Snowmagic made several arguments as to why its sales should not be taxable, all of which the OTA rejected.

First, the Taxpayer argued that there cannot be a taxable sale because it does not use any chemical additives to create the snow and the water does not change molecular form. As a result, it can’t be viewed as “producing” anything since it is H2O before and H2O after. The OTA disagreed, noting that there is no guidance requiring a change in molecular form and that changing the physical form of TPP, in this case from liquid to frozen liquid, is sufficient. For example, prior California guidance found that crushing broken concrete rubble represents a taxable process because the resulting product had different characteristics (e.g., shape, form, and quality)[3] and that cutting fallen timber into firewood constitutes a taxable sale.[4]

Second, Snowmagic argued that there was no transfer of title or possession of any TPP because it removed all the snow at the conclusion of the event and that its customers did not retain any of the snow. However, to constitute a sale under the statute, it only matters that the Taxpayer produced the property (snow) for consideration for customers who furnish the materials used in production (liquid water). A transfer of title or possession is not a requirement. 

Third, the Taxpayer argued that it is in the business of providing “Wintertainment” event production services, for which snowmaking is one component, and that these services are not taxable services. The OTA examined the Taxpayer’s contracts to determine the “true-object” of the transaction, and it concluded that the Taxpayer sold snow, and that any services provided were related to the production of snow. The OTA did not find any evidence in the contracts to indicate that any of the snowmaking, snow maintenance, or snow removal services were optional and therefore found it unlikely that customers would contract with the Taxpayer only for the snow itself and not for the related services provided or vice versa.

Finally, the OTA noted that charges for labor or services rendered in installing or applying the TPP sold are excluded from the tax base.[5] However, it determined that there was no information in the contracts, nor was there any other evidence presented to show how much of the fees charged by Snowmagic were for installation or application of the snow. Therefore, the OTA was unable to make any adjustment to the tax base.

The bottom line

This case highlights two important points about sales tax. First, for sales involving TPP, there does not necessarily need to be a transfer of title or possession for the sale to be taxable. Second, there are differences among the states over the taxability of services related to TPP, such as installation services, and there may be ways to structure a contract or invoice that minimizes the amount of sales tax required to be collected.

Aprio’s SALT team has experience helping businesses understand the various sales and use tax considerations of their transactions. Our goal is to ensure that your business complies with its sales and use tax obligations and does not incur unexpected liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.  

 

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[1] In the Matter of the Appeal of Snowmagic, Inc., 2024-OTA-308, Office of Tax Appeals, October 4, 2023.

[2] Cal. Rev. & Tax Code § 6006(b) (emphasis added). See also Cal. Code of Reg., title 18, § 1526.

[3] CDTFA Sales and Use Tax Annotation 315.0070 (1/21/77). 

[4] CDTFA Sales and Use Tax Annotation 435.0827 (7/11/83). 

[5] Cal. Rev. & Tax Code § 6012(c)(3).  Such amounts are excluded from the definition of “gross receipts” which is the measure of the sales tax base.  See Cal. Rev. & Tax Code § 6051.