Were the described long-term automobile arrangements leases in lieu of sales under the rule cited by the Board?

Plain-English summary

An automobile lessor entered agreements lasting at least 12 and no more than 40 months. Monthly rent was based on a percentage of the vehicle's base price. When a lessee returned a car, the lessor sold it and compared the sale proceeds with a declining contract amount; depending on the result, the lessor and lessee could share an excess or the lessee could make up a shortfall.

Tax counsel concluded that these arrangements were not leases in lieu of sales under Sales and Use Tax Ruling 62 and directed the district office to reaudit on that basis.

The supporting letter does not discuss a separately stated state or local sales-tax charge, despite the proposition displayed for Annotation 295.1300 on the annotation page. This page therefore reports only the holding present in the official supporting opinion.

Citations and references

• Historical California Sales and Use Tax Ruling 62 — ruling text, date, version, and copy not supplied
• Redacted petition for redetermination and information presented for the taxpayer — petition, notice of determination, audit report, schedules, hearing record, submissions, and attachments not reproduced in the official PDF
• Automobile lease agreements, especially sections 10 and 15, twelve-to-forty-month terms, two-percent and 3.5-percent monthly rentals, $50-plus-invoice base price, accessories, delivery and handling, vehicle returns and resales, excess sharing, shortfall payments, and vehicle-care rationale — leases, invoices, vehicle records, rental histories, resale records, settlements, and accounting records not reproduced in the official PDF
• October 29, 1956 associate-tax-counsel conclusion that the described transactions were not leases in lieu of sales and direction to the district office to reaudit — no reaudit computation, revised determination, taxpayer response, hearing, final Board action, payment, appeal, or later outcome supplied
• Official Annotation 295.1300's separately stated state-and-local-sales-tax rental-receipts exclusion and October 29, 1956 date — the exact official PDF contains no separately stated sales-tax charge or that holding; the annotation supplies no alternate opinion, authority, transaction record, or proceeding outcome

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/295-1300.pdf

Original ruling text

295.1300
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

October 29, 1956

M--- and W--Attorneys at Law
XXX --- Street Building
--- XX, California
Attention:

Mr. W--Re:

--- & --- Lease Plans
Account --XXXXXX

Gentlemen:
We have considered the information presented with respect to the petition for redetermination filed on behalf of the above taxpayer. We understand the taxpayer enters into lease agreements whereby it leases automobiles to customers for a term of not less than 12 months and not to exceed 40 months. The lessee agrees to pay a fixed rental per month equal to 2% of the base price of the automobile for Fords, Chevrolets or Plymouths, or 3 ½ % of the base price of any other automobile. The base price is defined as being $50.00 plus the dealer’s invoice price to the lessor, plus accessories and delivery and handling charges. It is the practice for the lessees to return the cars either within or at the end of the 12-month period pursuant to section 15 of the lease agreement which allows the lessee to return the car “in the event the condition of any car becomes such that the continued repair and maintenance thereof is unwise in the judgement of the lessee.” Under Section 10 of the agreement, as soon as the car is returned by the lessee, the lessor will sell the car. If the sale price is equal to the base price reduced by an amount equal to 2% of the base price of Fords, Chevrolets or Plymouths, or 3 ½ % if the car is another make, multiplied by the number of months for which rent has been paid by the lessee, then the lessor will retain the sale price. If the sale price exceeds the amount computed as above, the lessor retains the first $50.00 of the excess and the amount above $50.00 is divided equally between the lessor and the lessee. If the sale price is below the price computed as above, the lessee may either pay the difference between the sale price and that price to the lessor or have the car returned to him. In which case, the rental will be continued or the lessee may sell the car for the account of the lessor. If the car is sold, settlement is made in the same manner as if the lessor sold the car. We understand that in most instances the automobiles are sold for an amount in excess of the base price less the percentage deductions, but rarely does a sale price equal or exceed by $50.00 the base price less the percentage deductions.

M--- and W---

-2-

October 29, 1956
295.1300

We are also advised that the reason that the lessor requires the lessee to make up the difference between the base price less the percentage deductions and the selling price of the automobile, in those instances where this occurs, is to make sure that the lessee will take reasonable care of the automobile while it is in his possession. We think that the above facts indicate that the transactions in question are not leases in lieu of sales within the meaning of Ruling 62. We will have our district office make a reaudit on the basis of the above conclusion. Very truly yours,

John H. Murray
Associate Tax Counsel

JHM:rc
cc:

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