Did banks and insurers have to collect use tax on property they acquired tax-free and then leased?

Plain-English summary

The 1965 amendment to Revenue and Taxation Code section 6401 exempted a use when sales tax had applied to the lessor's acquisition, but did not extend that protection to a lessee exercising rights over property under a lease.

Counsel therefore said a lessee owed use tax when the lessor had acquired the leased property ex-tax. Newly added section 6390, in turn, exempted rental receipts from sales tax when those same receipts had to be included in the use-tax measure.

The practical result was that a bank or insurance company acquiring tangible personal property without tax and then leasing it had to collect use tax measured by the rental receipts.

Common questions

Was the tax measured by the property's purchase price?

Not under the arrangement described. The memorandum said to measure the collected use tax by rental receipts.

Did this apply when sales tax had already applied to the lessor's purchase?

The source addressed property acquired ex-tax; section 6401's stated protection concerned property whose acquisition had been subject to sales tax.

Citations and references

• California Revenue and Taxation Code section 6401, as amended in 1965 (lessor acquisition and lessee use, as cited)
• California Revenue and Taxation Code section 6390, as added in 1965 (rental receipts included in the use-tax measure, as cited)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/135-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/135-0180.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Marysville – Auditing (CD)

From:

Tax Counsel (RHA) - Headquarters

Subject:

Leasing of Tangible Personal Property by Banks and
Insurance Companies

135.0180

Date:

Sacramento
August 11, 1965

Section 6401 (as amended in 1965) provides that the use of property in this state is exempt from the use tax if the gross receipts from the sale of the property (when acquired for use) were subject to sales tax. However, the exemption does not extend to the exercise of any rights or power over such property by a lessee under a lease. This means that a lessee is liable for use tax on tangible personal property he leases if the property leased was acquired by the lessor ex-tax. Section 6390 (added in 1965) exempts from sales tax receipts from rentals where such receipts are required to be included in the measure of use tax. Therefore, banks and insurance companies that acquire tangible personal property ex-tax and who lease that property are required to collect the use tax measured by the rental receipts from such leases.

RHA:dse