Was additional tax due on the untaxed remainder of a lump-sum installed telephone-system price?

Plain-English summary

No additional tax was due on the $63,154.85 remainder of the installer's lump-sum construction contract. The installer had already paid the construction-contract tax based on the purchase price of materials and cost price of fixtures, represented in the letter by the stated $44,580.62 allocation and $2,897.74 tax.

The separate transaction between the system buyer and its customer could not be decided without their agreement. If it was a true lease of a tax-paid fixture attached to property the lessor did not own, the opinion said no use tax was due on the lease receipts; a later option sale would be taxable on its sale price.

If the customer agreement was an outright sale already in place before installation and title passed to the customer immediately upon installation, the installer still performed a construction contract and no further tax was due. Different facts could change the result.

Common questions

Was the installer's entire lump-sum price taxable?

No. The opinion treated tax on materials and fixture cost as sufficient for that construction contract.

Was a true lease automatically taxable on rental receipts?

No, where the lessor acquired the installed fixture tax-paid under the stated rules.

Was a later purchase-option sale taxable?

Yes, measured by the option-sale price.

Did the opinion finally classify the buyer-customer agreement?

No. The requester never supplied it.

Citations and references

• California Revenue and Taxation Code sections 6051 and 6016.3 and California Code of Regulations, title 18, section 1596(c) — downstream sale measure and leased-fixture treatment applied conditionally
• California Revenue and Taxation Code sections 6006(g)(5) and 6010(e)(5) and California Code of Regulations, title 18, sections 1521(b)(2)(B)3 and 1660(c)(2) — tax-paid fixture lease treatment applied conditionally
• November 24, 1987 request letter — telephone-system transactions and untaxed remainder described; not reproduced in the official PDF
• Buyer-installer sales agreement and invoice — lump-sum billing included tax, while the invoice did not specify whether tax was collected; described but not reproduced in the official PDF
• Prior Board letter to the installer — concluded that it was a construction contractor when installing telephone systems; described but not reproduced in the official PDF
• Installer allocation information — divided the $110,633.21 price among fixture and material cost, tax, and remainder; described but not reproduced separately in the official PDF
• Two December 1987 telephone conversations and requested buyer-customer agreement — the agreement was promised but never supplied, preventing final classification of that transaction

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/190-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/190-1055.pdf

Original ruling text

190.1055

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

January 20, 1988

Ms. C--- A. S--Region Credit Analyst
G--- --- --- Corp.
XXX --- St., Suite XXX
---, CA XXXXX
Re:

G--- --- --- Corp – SY -- XX-XXXXXX
U--- T--- – SR -- XX-XXXXXX

Dear Ms. S---:
This is in response to your letter dated November 24, 1987 regarding the application of sales tax to the sale of a telephone system. G--- --- --- Corporation (G---) purchased the system from U--- t--- (U---) in December, 1986. G--- then leased the system to R--- F--- Company (R---). As I understand the facts set forth in your letter, this lease to R--- was actually a sale at its inception under the Sales and Use Tax Law. The sales agreement between G--- and U--- showed that the lump sum billing included sales tax. The invoice, however, did not specify whether sales tax was being collected. You therefore asked that U--- reissue an invoice to G--- showing the amount of sales tax paid. U--- sent you a copy of a letter we wrote in which we concluded that U--- was a construction contractor when installing telephone systems. You have obtained information from U--- showing that the lump sum price to G--- of
$110,633.21 was apparently allocated as follows: $44,580.62 for costs of fixtures and materials;
$2,897.74 for sales tax; and $63,154.85 remainder. You ask whether there is sales tax on the
$63,154.85 untaxed remainder.
There are two transactions that must be analyzed, the first of which is the sale from U--- to G---. The letter we wrote which you obtained from U--- properly advised U--- that, as a construction contractor, tax applies to the purchase price of materials and the cost price of fixtures. I assume these amounts are represented by $44,580.62 in G---’s contract with U---. No further tax

Ms. C--- A. S---

-2-

January 20, 1988
190.1055

is due on U---’s construction contract with G--- for the installation of the telephone system. In other words, the tax related to the transaction between G--- and U--- was apparently properly paid. The next transaction to be analyzed is the one between G--- and R---. If this sale were subject to sales tax, the measure of that tax would be based on the sale price due to G--- from R---, and not the sale price from the prior sale due to U--- from G---. (Rev. & Tax. Code § 6051; see Reg. 1596(c).) However, whether sales tax applies to this sale depends on the actual facts involved in the transaction. In two telephone conversations in December, 1987, you agreed to send me a copy of the agreement between G--- and R---. Since you have not done so, I cannot ascertain the actual facts involved in the transaction. If the agreement between G--- and R--- were a true lease under the Sales and Use Tax Law, the following rules apply. As a leased fixture attached to real property not owned by the lessor, the telephone system constitutes tangible personal property. (Rev. & Tax. Code § 6016.3.) Since G--did not provide U--- with a resale certificate and sales tax was paid with respect to the sale of the telephone system to G---, no use tax would be due with respect to G---’s lease of the system to R---. (Rev. & Tax. Code §§ 6006(g)(5), 6010(e)(5), Regs. 1521(b)(2)(B)3, 1660(c)(2).) If G--- thereafter sold the system to R--- (such as upon exercise of an option by R---), sales tax would apply measured by the sale price. (Rev. & Tax. Code §§ 6016.3, 6051.) If the agreement between G--- and R--- were an outright sale under the Sales and Use Tax Law, the following rules apply. It appears that the contract between R--- and G--- may have been in place prior to the installation of the system by U---, and that title to the system passed to R--immediately upon installation. If such is the case, we would still regard the transaction as a construction contract by U--- whereby upon installation, the installed property constitutes real property. No further tax would be due. If the facts are different than discussed above, feel free to write again. If you do so, please include a copy of the agreement between G--- and R---. Also, if the account number noted above for G--- is incorrect, please let us know. Sincerely,

David H. Levine
Tax Counsel

DHL:ss