Did a steam-generation plant sale and leaseback become taxable because the land was not sold and the structure contained fixtures?

Plain-English summary

After receiving more information and installation photographs, assistant chief counsel reversed an earlier position and recommended granting a tax refund for a steam-generation plant sale and leaseback.

The sale and the leaseback had to be analyzed separately. The plant was a building, structure, or fixed work, and no severance was contemplated. Under Regulation 1596, its sale was therefore a transfer of an interest in realty, even though the land itself was not sold.

The later lease did not turn the facility into tangible personal property. Although the plant contained components that could be fixtures under Regulation 1521, the contract leased the building as a whole, and the fixtures were attached to that realty. Section 6016.3 therefore did not make the transaction a taxable fixture lease.

Common questions

Did excluding the underlying land make the plant sale taxable?

No. The fixed plant itself was treated as an interest in realty.

Did leasing the facility after sale change its character?

No. The lease remained a lease of realty.

Was this the staff's original recommendation?

No. The memorandum expressly superseded the earlier recommendation after reviewing added evidence.

Citations and references

• California Revenue and Taxation Code section 6016.3 (as cited)
• California Sales and Use Tax Regulations 1596 and 1521 (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/150-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/150-0290.pdf

Original ruling text

State of California

Memorandum

To:

Audit Review & Refund Unit
Attention: Mike Hilbert

From:

Gary J. Jugum
Assistant Chief Counsel

Subject:

B--- L--- Corporation
SS -- XX-XXXXXX

Board of Equalization

150.0290

December 8, 1989

By memorandum dated March 27, 1989, Mr. David H. Levine of our office communicated with you in regard to a claim for refund of tax filed by B--- of A--- L--Corporation. The facts related to the claim are set forth in this earlier memorandum. We have had an opportunity to review the tax consequences of this transaction in light of further information furnished to us, in particular, photographs of the installation in question. It is now our recommmendation that the refund be granted. This supercedes our earlier recommendation. Transactions involving sales of buildings and other property affixed to realty are governed by our Regulation 1596 and by Revenue and Taxation Code section 6016.3. The transaction in question has two aspects, a sale and a leaseback. Each transaction must be analyzed separately. A transaction is not a sale of tangible personal property if it is a sale of an interest in real property. Paragraph (a) of Regulation 1596 provides that “the transfer of buildings or minerals or the right affixed to land is taxable as a sale of personal property [only] if, pursuant to the contract or agreement of sale, the buildings or minerals or the right are to be severed by the seller thereof.” This rule is based upon the provisions of the Uniform Commercial Code identifying contracts for the sale of “goods”. The facility in question is a steam generation plant. It is a building or structure or fixed work. Severance is not contemplated. Accordingly, the sale is a sale of an interest in realty. Following the sale, the facility is then leased. The facility does not lose its character as an improvement to realty under the lease contract. It is true that the facility incorporates within it

Audit Review and Refund Unit
Attention: Mike Hilbert

-2-

December 8, 1989
150.0290

items which would be classified as “fixtures” under our Regulation 1521 concerning construction contracts. Paragraph (c) of Regulation 1596 applies to transfers of fixtures, but the contract in question involves the lease of a building, not merely the sale or lease of fixtures. Under section 6016.3, leased fixtures are classified as “tangible personal property” unless the lessor of the fixtures is also the lessor of the realty. Here the realty is the structure, and the fixtures in question are attached to the realty. Under these circumstances, the lease is a lease of realty, not tangible personal property, and tax does not apply. Attached are two of the photographs furnished to us by taxpayer.

GJJ:sr
Attach.

cc:

150.0290.doc

Mr. Donald J. Hennessy
Mr. E. L. Sorensen, Jr.
Mr. David H. Levine