Did a lessee's bid requirement make equipment maintenance mandatory when the lessor also leased equipment without maintenance?

Plain-English summary

An absent September 25, 1986 audit memorandum and later telephone conversation concerned a redacted county's lease of a printer subsystem and magnetic-tape storage devices. The county's December 20, 1982 request for bids required either bidder-provided maintenance or a separate manufacturer maintenance contract, but the auditor reported that the lessor sometimes leased equipment without maintenance. The complete RFB, bids, lease, equipment, audit file, and business-practice evidence are not reproduced.

California therefore treated the maintenance agreement as optional rather than a mandatory service forming part of the equipment lease.

The key question was whether the lessor required maintenance as a condition of every sale or lease. The county's own bid language did not change the agreement's optional status when the lessor's regular practice showed it was willing to lease without maintenance.

Because absent Exhibit A-4 reportedly separately listed the maintenance charges, those charges were not included in taxable rental receipts. The source said separate statement was necessary to support the position that maintenance remained apart from the equipment lease and to ensure proper accounting.

The conclusion rests on an express assumption that the county could lease without maintenance; the source supplies no actual unbundled county offer. It also leaves the lease date incomplete as “June 198.” and the audit date redacted as “January of 19XX.” The live Annotation 315.0158 calls the RFB a request for proposal and publishes the optional-contract rule, but omits the audit, assumption, incomplete dates, missing records, and any later outcome.

Common questions

Did the county's request for bids make maintenance mandatory?

No, not when the lessor was willing to lease the equipment without maintenance.

What fact did California emphasize?

The lessor's regular business practice.

Did the maintenance charge need to be separately stated?

Yes, under the source's analysis.

Did the record prove the county actually received a lease-without-maintenance offer?

No. Counsel expressly assumed that option from the lessor's occasional practice; the complete bid and lease records are absent.

Citations and references

• California Revenue and Taxation Code sections 6011(b)(1) and 6012(b)(1) — services rendered as part of a sale included in taxable receipts; complete text, definitions, lease rules, allocations, exceptions, amendments, later history, and current law not supplied
• Board Regulation 1546(b)(3) — mandatory-versus-optional maintenance; complete text, definitions, parts treatment, separate-statement rules, exceptions, amendments, later history, and current law not supplied
• Sales and Use Tax Annotation 330.3460 — underlying annotation and supporting opinion not reproduced
• December 20, 1982 request for bids — complete RFB, bids, manufacturer evidence, award, equipment specifications, bidder records, and negotiations not reproduced
• September 25, 1986 Principal Auditor memorandum, telephone conversation, June 198. lease, January 19XX audit, and Grant Elliott explanation — memorandum, call record, lease, Exhibit A-4, audit report and workpapers, returns, and calculations not reproduced
• October 30, 1986 HQ Legal memorandum — no unbundled county offer, complete lessor-practice record, exhibit, reply, adjustment, assessment, refund, appeal, or later outcome supplied
• Official Annotation 315.0158's seller-or-lessor willingness, customer bid, option, separate charge, choice, nontaxability, and date rules — annotation relabels the RFB, omits the audit, assumption, incomplete dates, authority, missing records, later outcome, and reliance status, and supplies no additional 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/315-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/315-0158.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Out-of-State – Principal Auditor

From:

HQ – Legal (TLA)

Subject:

S---T--SZ -- XX-XXXXXX

315.0158
Date:

October 30, 1986

I am writing in response to your memo of September 25, 1986 regarding the application of sales and use tax to maintenance services rendered under a lease agreement between the County of --- and S--- T--- (S---T---). Pursuant to our telephone conversation I am responding to you and not to the taxpayers, as originally directed in your memo. The subject maintenance agreement arises out of a request for bids (RFB) issued by
--- County on December 20, 1982 for the lease of printer sub-system and magnetic tape storage devices. The RFB contained the following maintenance specifications: “The bidder shall select one of the following approaches to equipment mainenance: “1. The bidder may be responsible for maintenance for the period of the contract. “2. The bidder may quote the equipment manufacturer’s price for maintenance. If this approach is selected award of contract under this RFB will be contingent on execution of a contract for maintenance of the bid equipment between the County and the equipment manufacturer within 30 days of execution of the lease contract with bidder. “3. The bidder shall state in the bid response which option has been selected. If the second option is chosen, then the bidder must also submit evidence that the equipment manufacturer is willing to provide this service.” The successful bidder was S---T--- and the parties entered into a lease in June 198. The County of --- has not been paying sales tax reimbursement on the maintenance charges in the belief that the maintenance contract included in the lease is an optional maintenance contract and therefore not subject to tax. S---T--- was audited by the State Board of Equalization in January of 19XX wherein S---T--- was advised by Grant Elliott, Senior Tax Auditor, that the leases with the County of --- included mandatory maintenace contracts which are subject to tax. In speaking with Mr. Elliott, I learned that the basis for his decision was the language contained

S---T---

-2-

October 30, 1986
315.0158

in the RFB prepared by the lessee. Mr. Elliott also stated that S---T--- occasionally leases equipment without providing maintenance. Analysis Included in the measure of taxable rental receipts are charges for any services that are rendered as part of the sale (see Rev. and Tax. Code §§6011(b)(1) and 6012(b)(1). Charges for a “mandatory maintenance contract” are subject to tax whereas charges for an “optional maintenance contract” are not subject to tax (Reg. 1546(b)(3)). In other words, an optional maintenance contract does not constitute services which are considered to be rendered as a part of the original sale or lease of the tangible personal property. A maintenance contract is considered to be mandatory if the buyer or lessee is required to purchase the maintenance contract from the seller or lessor as a condition of the sale or lease. A maintenance contract is considered optional if the buyer or lessor is free to contract for maintenance with anyone he or she chooses. The regular business practice of the lessor is the determining factor in deciding whether a maintenance contract is optional or mandatory. If a lessor is willing on occasion to lease equipment without requiring the lessee to purchase the maintenance, the maintenance services generally will be viewed as optional. Language contained in a RFB prepared by a lessee will only be determinative if the RFB clearly states that maintenance services will be contracted for separately. The County of ---, as the lessee, specified in their RFB that maintenance services were to be included with the lease. The RFB further allowed the lessor to either provide maintenance under the contract or to arrange with the manufacturer of the equipment to provide maintenance. However, as Mr. Elliott disclosed, S---T--- on occasion leases equipment without providing maintenance. We will therefore assume that the County of --- had the option of obtaining a lease of the S---T--- equipment without maintenance services. The election by the County of --- to obtain maintenance services from S---T--- does not alter the optional status of the maintenance contract. The maintenance services will therefore not be deemed to be a part of the lease and tax will not be imposed upon the charges for the maintenance. In order to preserve the nontaxable status of the charges rendered pursuant to the optional maintenance contract, these charges should be separately stated in the lease agreement (Sales and Use Tax Annotation 330.3460). This requirement is necessary in order to support the contention that the maintenance services are separate and apart from the lease of the equipment and to ensure proper accounting. Exhibit A-4 of the lease agreement entered into between S---T--- and the County of --- separately lists the charges for maintenance. The maintenance charges under the subject lease are not subject to the imposition of tax.

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