Did a lease covenant requiring bowling-alley equipment to remain on site prevent taxable sales of the prior lessee's property and trade fixtures?

Plain-English summary

A bowling-alley operator bought the business from the site's prior lessee. The assets included inventory, furniture, equipment, stock in trade, bowling lanes and related equipment, and the leasehold interest. The operator's lease required listed fixtures, furniture, and equipment to stay on the premises during the lease and required obsolete items to be replaced.

The operator argued that this covenant meant it had no present right to remove the fixtures, which would prevent treating the in-place transfer as a taxable sale of personal property under Regulation 1596(c).

Tax counsel disagreed. The landowner treated the operator as the owner of the fixtures and equipment. The promise to keep them on site was a contractual obligation, not ownership produced by accession to the realty. The same covenant covered plainly movable items such as typewriters, cash registers, glassware, dishes, balls, and pins, whose sale remained taxable.

The memorandum applied the same conclusion to attached trade fixtures because the lessor and lessee treated them as property owned and transferable by the lessee.

Common questions

Did the promise to leave equipment on site transfer ownership to the landlord?

No. The memorandum treated it as a contractual promise while recognizing the lessee's ownership.

Were plainly movable business assets taxable?

Yes. Their sale was taxable despite the keep-on-premises covenant.

Did tax counsel reach a different result for trade fixtures?

No. Lessee-owned trade fixtures treated as alienable by the parties were analyzed the same way.

Citations and references

• California Sales and Use Tax Regulation 1596(c) (as cited)
• California Civil Code sections 1013 et seq. and 1019 (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/150-0386.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

San Diego – Auditing (CRG)

From:

Hdqrs - Tax Counsel (GJJ)

Subject:

L--- T--- S---

150.0386

August 20, 1976

SY -- XX XXXXXX

This is in response to your request of August 12, 1976, that we consider the argument made by Attorney M--- A. S--- in his letter to you of August 10, 1976. The question at issue is the taxability of a transaction involving L--- T--- S--- (taxpayer) and T--R--- C---. Taxpayer was the lessee of land and a building located in --- ---, California. Taxpayer operated a bowling alley at the site. Taxpayer purchased the business from H---, Inc., the previous lessee of the site. Taxpayer’s purchase included “the liquor license, fixed assets, inventory, bowling lanes, ball return tracks and lifts, the seats, the telescorers, the control desk, the billiard tables, office furniture, typewriters, accounting machines, cash registers, restaurant stoves, refrigerators, vending machines owned by seller, the bar furniture, fixtures and equipment, the glassware, dishes, stock in trade, including resale merchandise, balls, pins, food and liquor stocks, and leasehold interest.” Pursuant to the lease agreement entered into between the owners of the location, L--- H--- S--Co., Ltd., and taxpayer, taxpayer covenanted that “the fixtures, furniture, and equipment listed” in the preceding paragraph “shall remain on the premises during the entire period covered by the present lease and its extensions, and that as and when any of the fixtures and equipment installed in or upon the demised premises shall become obsolete, lessee shall replace the same….” Our Regulation 1596 “Buildings and Other Property Affixed to Realty” provides, with respect to fixtures and machinery and equipment affixed to real property, that: “The transfer ‘in place’ of affixed fixtures and machinery and equipment, owned by a lessee of land or buildings to which those items are affixed, is also taxable as a sale of personal property when the lessee-seller has the present right to remove the items either as trade fixtures under Section 1019 of the Civil Code or under the express terms of the lease.”

San Diego – Aud. (CRG)
(SY -- XX XXXXXX)

-2-

August 20, 1976
150.0386

Taxpayer has argued that it did not have the “present right to remove the fixtures at the time of their sale since it was obligated to maintain them on the site pursuant to the lease. The rule for determining whether items sold in place by lessees of real property are taxable is stated in paragraph (c) of Regulation 1596. It is clear that the owner of the real property, L--- H--- S--- Co., Ltd., regarded taxpayer as the owner of the fixtures and equipment. The fact that taxpayer has agreed to keep the property in place during the term of the lease does not negate a conclusion that taxpayer had the present right to remove the items within the meaning of the regulation. The lessor’s “interest” in the property arose not from the law concerning accession to real property (see Civil Code Section 1013, et seq.) but from taxpayer’s contractual undertaking to leave the items in place during the term of the lease. Under the lease agreement taxpayer has undertaken to keep on the premises office furniture, typewriters, accounting machines, cash registers, vending machines, glassware, dishes, balls, pins, and other items in no way affixed to the real property. Clearly the sale of these items was subject to tax despite the undertaking of taxpayer not to remove them from the premises. We think the conclusion should not differ with respect to items which may have been affixed to the realty when the items constituted trade fixtures and were treated by the lessor and the lessee as property belonging to, and alienable by, the lessee.

GJJ:lb

150.0386.doc