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Evaluation units are products that vendors give to potential customers for the customers to try out in their business operations. The vendors do this in the hope that the customers will like the units enough to buy them, preferably in large quantities. Many vendors track these items by creating no-charge (zero) sales invoices in the names of the evaluating customers. (The creation of such invoices has no tax effect in itself.)
In most cases, the Board of Equalization Regulation 1669, Demonstration, Display and Use of Property Held for Resale—General determines the tax status of evaluation units. The regulation holds that property may be demonstrated and displayed without creating a sales or use tax liability if three criteria are met:
Whether or not tax applies to an evaluation unit generally depends on what happens to it after the customer evaluation. Let's look at three common scenarios.
Finally, vendors who provide evaluation units may have trouble on audit even when they meet the criteria for exemption if they do not keep records showing that each item was sold or returned to inventory after being evaluated. Many a valid exemption has been lost simply because the auditor couldn't verify the facts. You might want to consult with a CPA to determine when and if you are liable for sale taxes on evaluation units.
Dan Davis, CPA, CFE, is a partner with Associated Sales Tax Consultants in Sacramento. You can reach him at (916) 849-9111 or firstname.lastname@example.org.
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In accordance with IRS Circular 230, the information on this website is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.