Were three-year hotel television leases with $10 or $25 purchase options treated as sales, and could bundled services be excluded?

Plain-English summary

Field Audit Report Item D and a March 16, 1960 office discussion concerned a redacted taxpayer that leased televisions and other appliances primarily to hotel and motel operators. The Board's Sacramento auditing office requested an interpretation on March 23, and Headquarters Tax Counsel also discussed it with J. D. Dotson on April 13.

The formal leases usually ran three years for fixed monthly payments. The lessor installed, repaired, and maintained the appliances without separate charges and, in some areas, supplied tie-in television reception facilities the same way. Separate agreements gave lessees nominal $10 or $25 purchase options.

Stanley O. Lerner's memorandum treated the arrangements as sales under historical Ruling 62. Customers had no option about buying installation, maintenance, repair, and reception services, so no amount was excluded from taxable gross receipts. The PDF supplies no Ruling 62, transaction documents, reaudit, assessment, appeal, or later outcome.

Citations and references

• California Sales and Use Tax Ruling 62 — cited for treating the lease-and-nominal-purchase-option transactions as sales; copy, complete text, factual test, authority, version, and later history not reproduced in the official PDF
• Field Audit Report Item D, March 16, 1960 office discussion with the redacted taxpayer, March 23 Sacramento Auditing memorandum, and April 13 discussion with J. D. Dotson supplying the transaction and audit context — report, audit workpapers, taxpayer discussion record, memorandum, Dotson discussion record, amounts, periods, contracts, and tax records not reproduced in the official PDF
• Formal leases, usually for three years at fixed monthly payments, for televisions and other appliances supplied primarily to hotel and motel operators, with bundled installation, repair, maintenance and some tie-in reception facilities, plus separate $10 or $25 purchase-option agreements — leases, supplemental agreements, invoices, equipment lists, service records, reception-facility records, option exercises, and payment records not reproduced in the official PDF
• April 14, 1960 Headquarters Tax Counsel Stanley O. Lerner memorandum concluding that the transactions were sales under Ruling 62 and that no service amount was excludable because customers had no option about purchasing the services — no reaudit, assessment, redetermination, taxpayer response, refund claim, appeal, or later outcome supplied
• Official Annotation 295.1780's hotel, determinate-period lease, fixed-payment, installation, maintenance, supplemental nominal-option, sale, nonoptional-service, taxable-receipts, and April 14, 1960 rules — annotation omits motel operators and other appliances, three-year norm, repair and tie-in reception facilities, $10 and $25 amounts, Field Audit Report and three internal-contact provenance, Ruling 62's missing record, absent transaction records, 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/295-1780.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

295.1780

To:

Sacramento - Auditing

From:

Headquarters - Tax Counsel (SOL)

Subject:

Television-lease-agreements with option to purchase for nominal fees

Date:

April 14, 1960

Pursuant to your memorandum of March 23, 1960, and our discussion with Mr. J. D. Dotson on April 13, 1960, it is our understanding that you desire an interpretation of the transactions reflected in Item D of the Field Audit Report and office discussion with the above taxpayer held on March 16, 1960. It appears that taxpayer would enter into a formal lease agreement with customers who are primarily operators of hotels and motels whereunder taxpayer would lease television sets and other appliances for a term of usually three years for payments of a given amount per month over the period of the lease. The lessor installs these appliances and, during the period of the lease, repairs and otherwise maintains them, but makes no separately-stated charge therefor. Likewise, in certain areas the lessor provides tie-in reception facilities for the television sets but makes no separately-stated charge therefor. In addition to the above-stated lease agreement, taxpayer also enters into another agreement with the lessees whereunder the latter are given options to purchase these appliances at nominal amounts of $1 0 or $25 as the case may be. We are of the opinion that these transactions are sales under Ruling 62, and that since the customer is not given any option with respect to the purchase of the above-mentioned services, it would appear that the taxpayer is not entitled to exclude any amounts therefor from his taxable gross receipts.

Stanley O. Lerner