How is tax measured when a video-rental business lets employees borrow rental tapes for free?

Plain-English summary

A video-rental business let employees borrow video tapes, cassettes, and discs without paying rent. Its computer initially recorded a rental charge and tax, then reversed them because the free rental was an employee benefit.

The memorandum treated ordinary private-use rentals as continuing sales taxed on rental receipts. For the free employee loans, however, it concluded that the business still held and continually sold the videos through rentals, and employee use was not inconsistent with that continued resale.

The business therefore owed tax measured by the fair rental value during employee use. On the stated facts, fair rental value was the amount a nonemployee would ordinarily pay to rent the same tape. The memorandum warned that under different facts the measure could instead be the property's purchase price.

What this means for you

Rental businesses offering employee use

Track each free employee loan and the price normally charged to customers. That regular price supplied the fair rental value in this memorandum.

Equipment lessors

The result depended on the property remaining in continuing taxable rental activity. Personal or internal use that is inconsistent with continued resale can produce a different measure.

Accountants and payroll teams

Reversing a customer-style charge in the rental system did not eliminate the tax consequence of the employee's free use.

Common questions

Q: Were the ordinary customer rentals treated as sales?
A: Yes. The memorandum treated private-use rentals of the videos as continuing sales and purchases taxed on rental receipts.

Q: Did the free employee loan trigger tax on the full purchase price?
A: Not on these facts. The business owed tax measured by fair rental value for the employee-use period.

Q: How was fair rental value determined?
A: It appeared to be the amount the business would charge a nonemployee to rent the tape.

Q: Is the fair-rental-value measure guaranteed for every lessor's employee use?
A: No. The memorandum expressly limited its conclusion to these facts and noted that Regulation 1669(d)(2) could require purchase-price tax under other facts.

Citations and references

• California Revenue and Taxation Code § 6006(g)(7)
• California Sales and Use Tax Regulation 1660(d)(2)
• California Sales and Use Tax Regulation 1669(d)(2) and (f)(1)(B)
• Return Review Section's October 16, 1993 memorandum and enclosed company letter — company letter quoted in part; separate memorandum and letter not reproduced in the official PDF
• Company computer rental and reversal records — process described; records not reproduced in the official PDF
• Copy to the San Diego District Administrator — copy recipient listed; no separate transmittal record supplied in the official PDF

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 210.0430
• Original supporting opinion: 210.0430 PDF

Original ruling text

State of California

Board of Equalization
Telephone: 324-2608

Memorandum

Legal Division MIC: 85

210.0430
To

:

T. Raboy
Return Review Section

From

:

Rachel M. Aragon
Staff Counsel

Subject:

Application of tax to employee rentals
O--- L--- V---, Inc.

Date:

December 30, 1993

SY --- XX-XXXXXX

This is in response to your memorandum dated October 16, 1993. You enclose a copy of a letter from O--- L--- V--- which states: "In order for our employees to rent at no charge, our computer program charges rental fees plus tax so we then have to reverse the charges. This is an employee benefit. No actual money is exchanged." You want to know what the tax consequence is on the transaction as described by O--L--- V---. The rental or lease of video cassettes, video tapes, and video discs for private use under which the lessee or renter does not obtain or acquire the right to license, broadcast, exhibit, or reproduce the video cassette, video tape, or video disc is a sale or purchase and tax applies measured by the rental receipts. (Rev. & Tax. Code §§ 6006(g)(7) & Reg. 1660(d)(2).) Thus, the rentals are a continuing sale and purchase and we assume the lessor (O--- L--- V---) is collecting tax from its customers when it rents them the videos. In regard to the videos O--- L--- V--- is lending its employees at no charge, the general rule states that if a lessor of tangible personal property who collects use tax from the lessees measured by the rental receipts makes any use of that property other than incidental use, the lessor is liable for use tax measured by the purchase price of that property. A different rule is found in Regulation 1669(f)(1)(B) which states that a purchaser of tangible personal property who gives a resale certificate and uses the property both for demonstration or display while holding it for sale in the regular course of business and uses it partly for other purposes, such as personal use by its employees, must report tax on such use measured by the fair rental value for the period of such other use.

T. Raboy
O--- L--- V--SY --- XX-XXXXXX

-2-

December 30, 1993
210.0430

O--- L--- V--- is holding these video tapes for demonstration and display, and is actually selling them (in continuing sales). Its use of the tapes (by lending them to its employees) is not inconsistent with its continued resale of them. We believe under these facts, that the rule of Regulation 1669 applies. O--- L--- V--- owes tax measured by fair rental value when lending tapes to its employees. In this case, it appears that fair rental value would be the amount O--L--- V--- would charge a non-employee for rental of the tape. Please note that our conclusion herein applies to these specific facts, and under other facts the appropriate measure could be the purchase price pursuant to Regulation 1669(d)(2). If you have any further questions please feel free to write again.

RA:cs
cc:

San Diego - District Administrator