Could a lessor exclude federal luxury tax from California rental receipts on daily or other short-term automobile rentals?

Plain-English summary

The memorandum distinguished daily and short-term automobile rentals from qualifying leases of at least one year. Under the federal rules described in the source, a nonqualifying lease generally caused the first retail sale to be the sale of the vehicle to the lessor, with the federal luxury tax imposed on that sale rather than on later rental payments.

California excluded federal tax only when it was imposed on or with respect to the transaction entering the California sales- or use-tax measure. Because the luxury tax on a short-term rental vehicle applied to the lessor's vehicle acquisition, it could not be passed through and excluded from taxable receipts of the later rental transaction.

The memorandum therefore concluded that no portion of daily or short-term rental payments was excludable from the California taxable measure on account of the federal luxury tax.

Shared-opinion note

CDTFA publishes this same June 22, 1992 memorandum under two official annotation PDFs. This 295-1255.pdf source is stamped 295.1255 and supports the nonqualifying-lease rule; 295-1257.pdf is stamped 295.1257 and supports the qualifying-lease exclusion. Both pages retain their separately indexed official sources.

Citations and references

• Internal Revenue Code section 4001(a), 4001(c), and 4001(c)(2)(A) (as cited)
• Proposed Treasury Regulations sections 48.4011-3(b) and 48.4011-6(a)(2), (4), (5), (6), and (7), plus the quoted background statement on nonqualified leases (as cited)
• California Revenue and Taxation Code sections 6011(c)(4), 6012(c)(4), and 6012(c)(4)(A) (as cited)
• California Sales and Use Tax Regulation 1617 (as cited)
• May 15, 1992 Bystrom memorandum asking how the federal luxury tax applied to automobile leases — memorandum and attachments, if any, not reproduced in the official PDF
• Several earlier Board letters concluding that luxury tax on rental payments or reimbursed up-front tax was excludable — dates, addressees, authors, identifiers, facts, and copies not supplied
• Daily and short-term rentals, qualifying leases, vehicle sales to lessors, $30,000 price threshold, ten-percent federal tax, lease payments, up-front elections, cancellations, dispositions, and reimbursements — no taxpayer lease, vehicle invoice, payment schedule, tax calculation, election, return, or reimbursement record supplied
• June 22, 1992 tax-counsel memorandum concluding that no short-term-rental amount was excludable — no recipient response, implementation guidance, taxpayer application, audit, assessment, refund claim, agency adoption beyond publication, appeal, or later outcome supplied
• Same supporting memorandum separately published as 295-1255.pdf and 295-1257.pdf, with only the annotation stamp and file label changed — both exact official URLs remain separately indexed
• Official Annotation 295.1255's less-than-one-year nonqualifying-lease definition, sale-to-lessor incidence, no-pass-through, no-rental-exclusion conclusion, and June 22, 1992 date — annotation omits the May 15 request, federal rate and threshold, statutory and proposed-regulation details, prior letters, qualifying-lease analysis, missing transaction records, duplicate-source provenance, later outcome, and reliance status and supplies no additional proceeding record

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/295-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/295-1255.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Glenn Bystrom
Principal Tax Auditor

From:

Elizabeth Abreu
Tax Counsel

Subject:

Application of Federal Retail Excise (Luxury) Tax to Car Leases

295.1255

Date:

June 22, 1992

(916) 324-8208
ATSS 454-8208

This is in response to your memorandum dated May 15, 1992, regarding the application of the federal luxury tax to automobile leases Section 4001(a) of the Internal Revenue Code (26 U.S.C.) imposes on the first retail sale of a passenger vehicle an excise tax, known sa the luxury tax, equal to 10 percent of the price for which the vehicle is sold to the extent such price exceeds $30,000. I.R.C. § 4001(a) defines “first retail sale” as the first sale, for a purpose other than resale, after manufacture, production, or importation. Under I.R.C. § 4001(c) a retail sale includes a lease, including any renewal or any extension of a lease or any subsequent lease of a vehicle. The sale of a passenger vehicle to a person engaged in a leasing or rental trade or business of vehicles of leasing by such person in a qualified lease (a lease for a term of one year or longer) shall not be treated as the first retail sale of the vehicle. I.R.C. § 4001(c)(2)(A). If a lease of a taxable vehicle is treated as the first retail sale of the vehicle, the luxury tax is imposed on the lease of the vehicle and is paid by the lessor. Prop. Treas. Reg. §48.4011-3(b). The total tax imposed is equal to the amount of the luxury tax that would have been imposed it, at the beginning of the lease term, the lessor had sold the vehicle for the “lease price,” which is the lowest price for which the vehicle is sold by retailers in the ordinary course of trade. Prop. Treas. Reg. §48.4011-6(a)(6) and (7). With respect to a qualified lease of a vehicle, unless an election is made, the tax is imposed on each lease payment due under the lease during the initial term of the lease and is equal to the total tax imposed multiplied by the percentage obtained by dividing the amount of the lease payment by the aggregate amount of payments due under the lease during the initial term of the lease. In other words, if a rental payment represents one-sixtieth of the total rental payments due, the tax on that rental payment is one-sixtieth of the total tax due. Prop. Treas. Reg. §48.4011-6(a)(2).

Mr. Glenn Bystrom

-2-

June 22, 1992
295.1255

If a qualified lease of a taxable vehicle is canceled, or the vehicle is sold or otherwise disposed of, before the total tax imposed on the qualified lease is paid, the balance of the tax is imposed on the date of the cancellation, sale, or disposition. The balance of the tax is the difference between the tax imposed on prior payments received under the lease and the total tax imposed on the lease. Prop. Treas. Reg. §48-4011-6(a)(5). A lessor of a qualified lease may elect to pay the total tax imposed on the lease at the beginning of the lease term. If the lessor makes this election, the total tax is imposed at the inception of the lease. The election may be made for any lease and once made is irrevocable with respect to that lease. Prop. Treas. Reg. §48-4011-6(a)(4). The definitions of “gross receipts” and “sales price” exclude the amount of any tax (excepting certain manufacturers’ or importers’ excise taxes) imposed by the United States upon or with respect to retail sales whether imposed upon the retailer or consumer. Rev. & Tax. Code
§§ 6012(c)(4) and 6011(c)(4). Regulation 1617 provides that gross receipts subject to sales tax and the sales price subject to use tax do not include the amount of any federal tax imposed upon or with respect to retail sales whether imposed upon the retailer or upon the consumer and regardless of whether the amount of federal tax is stated to the consumer as a separate charge. We have concluded in several letters that where the luxury tax is imposed on rental payments, the amount of the luxury tax on each rental payment ie excludable from the measure of tax whether the luxury tax is separately stated or included in the rental payments set forth in the lease. We have also concluded that if the lessor elects to pay the luxury tax up front and the lessee reimburses the lessor for the tax at the beginning of the lease, the reimbursement is not included in the measure of tax. We have not, however, addressed in writing the issue of the measure of tax where the lessor elects to pay the luxury tax up front but does not require reimbursement for the entire tax from the lessor at the beginning of the lease. Nor have we issued a written opinion concerning daily and short term rentals and leases. Revenue and Taxation Code section 6012(c)(4)(A) excludes taxes imposed by the United States upon or with respect to retail sales. The luxury tax is a tax on retail sales which include leases. When a lessor of a qualifying lease elects to pay the luxury tax up front, he or she is paying a federal excise tax on the lease which is a retail sale. Thus, that tax on the lease is a tax imposed by the United States upon or with respect to a retail sale, and it should be excludable from the gross receipts. Assuming that the lease is a continuing sale and purchase, the amount excluded is a portion of each rental payment which, if the rental payments are equal, is calculated by dividing the total amount of the luxury tax by the number of rental payments due under the initial term of the lease.

Mr. Glenn Bystrom

-3-

June 22, 1992
295.1255

Neither the Internal Revenue Code nor the proposed Treasury Regulations clearly state how luxury tax applies where a lessor uses the vehicle for daily and short term rentals. The background statement, however, for the proposed regulations contains the following: “Nonqualified leases (such as short-term rentals) are generally taxed in one of two ways. If the article is purchased by the lessor for leasing in a nonqualified lease, then the luxury tax is paid by the person who sells the vehicle to the lessor. If the article is sold to the lessor for resale or for lease in a qualified lease, but the first lease of the article is a nonqualified lease, then the total luxury tax is paid by the lessor at the beginning of the lease term.” Thus, where the lessor does not lease the vehicle under a qualifying lease, the first retail sale is the sale of the vehicle to the lessor and the luxury tax is imposed on that sale, not on the lease. It is our opinion that where the luxury tax is not imposed on the transaction subject to sales or use tax, the luxury tax cannot be passed through to that subsequent taxable transaction and excluded from the gross receipts of that transaction. Therefore, no amount of the rentals on daily or short term rentals is excludable from the measure of tax. Please call me if you wish to discuss this matter further.

EA

295.1255.doc

Elizabeth Abreu