Alterations to Wedding Dress Are Taxable If Dress Is New, Not Used. In a case involving a service that is subject to sales tax, the BOE noted that alterations to new wedding dresses are taxable, but alterations to previously worn wedding dresses are not.
The case involved Lynne Marie Gallagher and Francis Xavier Gallagher, who operate a sewing studio in San Francisco and specialize in helping brides-to-be fit into used wedding dresses. Mr. Gallagher testified that the used wedding dress business is booming as couples look for ways to cut the cost of getting married. He said more than 80 percent of the company's business involves altering used wedding dresses. He acknowledged, however, that he and his wife did not keep good records during the audit period (2003 to 2006), and said they have since learned more about how to run a business.
The couple claimed taxable activity totaling just $522 during the audit period, along with untaxable activity totaling $570,677. Based on a review of receipts and information provided by a small number of past customers, BOE auditors calculated that the couple owes more than $36,000 in sales tax and interest. The Gallaghers are protesting nearly $18,000 of the tax, plus interest.
While the board did not vote on the matter – choosing instead to give the taxpayers additional time to provide recent records to substantiate their claim that the vast majority of their work involves used dresses – they did discuss an interesting area of tax law, including what constitutes a "functional use" of a wedding dress.
The board's appeal summary explains how the sales tax is applied to sewing services: "The alteration of new clothing is fabrication, which is a sale under the Sales and Use Tax Law even if the customer provides all the tangible personal property that is fabricated. … Thus, fabrication for a consumer is a sale that is subject to sales tax. … On the other hand, the alteration of used clothing is regarded as a repair, and the charges for that repair are not subject to tax."
The August 25 discussion also touched on whether a wedding dress becomes "used" after being used as a floor model at a store, or only after being worn at a wedding. The summary explains: "With respect to petitioner's contention that the sample wedding dresses altered were used rather than new, there is no dispute that the sample wedding dresses were first sold by the bridal salons to the brides who had their dresses altered by petitioner. In other words, prior to the alterations completed by petitioner, the dresses had not been worn by brides at their weddings, and the bridal salons' use of the sample wedding dresses was limited to the purposes of demonstration and display in the regular course of business. Accordingly, we find the dresses had not been functionally used (worn at a wedding) until after petitioner altered them, the sample wedding dresses were new items when they were altered by petitioner, and the charges for those alterations were subject to tax." (CalTax: Is a dress worn by a "runaway bride" new or used? What about if the bride wears the dress to the wedding, but the groom doesn't show up? Bizarre, arbitrary decisions get injected into the tax code when governments tax services rather than tangible goods.)
Cal-TaxReports, August 30, 2010
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