Who owed tax on repair parts used under mandatory maintenance terms when the lease was not a continuing sale?

Plain-English summary

An absent February 6, 1992 fax limited the inquiry to use-tax liability for repair materials under mandatory maintenance in a lease reportedly taxed on purchase price. A second absent fax contained other district-office questions and an incorrect “example 2,” but neither the questions, example, district answers, property, election, lease, maintenance terms, rentals, parts, repairs, charges, nor transactions are reproduced.

Under the stated conditions that the lessor leased property in substantially the same form as acquired and made a timely purchase-price tax election, California treated the lease as not a continuing sale. The lessor was the consumer of both the leased equipment and the parts it bought to repair that equipment, so sales or use tax applied when it bought the parts.

The source also cautioned that a lessor that manufactured the leased property could not avoid collecting use tax on rentals merely by trying to report tax on purchase price. And when another business performed a repair, Regulation 1546(b)(2) could make that repairer the consumer of parts and materials instead.

The live Annotation 315.0205 publishes the core lessor-consumer result but omits the use-tax and rental context, manufacturer-lessor and outside-repairer limits, missing faxes and district answers, incorrect example, absent regulation enclosure, and any later outcome.

Common questions

Did the maintenance charge inside the rent make the lessor a retailer of repair parts?

No, not under the assumed non-continuing-sale lease.

Where did tax apply?

To the lessor's purchase or use of the repair parts.

Did the same answer necessarily apply to manufacturer-lessors or third-party repairs?

No. The opinion expressly identified different rules for those situations.

Citations and references

• California Revenue and Taxation Code section 6005(g)(5) — substantially-same-form and timely purchase-price-election conditions; complete text, timing and method, definitions, exceptions, amendments, later history, and current law not supplied
• California Revenue and Taxation Code section 6006(g) and Board Regulation 1660 — manufacturer-lessor and rental-measured tax rule; complete text, facts, classifications, elections, exceptions, amendments, later history, and current law not supplied
• Board Regulation 1546(b)(2) — outside repairer as consumer of parts and materials under stated circumstances; enclosed copy, complete text, facts, measures, exceptions, amendments, later history, and current law not supplied
• February 6, 1992 fax and separate district-office fax — faxes, questions, example 2, district answers, lessor, property, acquisition, election, lease, maintenance, rentals, parts, repairs, charges, and transactions not reproduced
• March 5, 1992 Senior Tax Counsel David H. Levine letter — no reply, corrected example, election record, lease, invoice, enclosure, return, audit, assessment, refund claim, appeal, or later outcome supplied
• Official Annotation 315.0205's lease-form, election, maintenance, non-sale, consumer, repair-parts, and date rules — annotation omits the broader context, qualifications, faxes, example, enclosure, 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/315-0205.pdf

Original ruling text

315.0205

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

March 5, 1992

Mr. P--- B--H--- and C--XXXX --- Street
--- ---, California XXXXX-XXXX
RE:

SR -- XX-XXXXXX

Dear Mr. B---:
This is in response to your fax transmission dated February 6, 1992. You state that your inquiry is limited to whether there is use tax liability on materials consumed in the performance of repairs under terms of a lease that includes a mandatory maintenance contract. This is in the context of a lease where the lessor paid tax measured by purchase price and therefore is not regarded as making a continuing sale when leasing the property. Thus, use tax is not being collected upon the rentals payable, which include the charges for the maintenance. When a lessor leases property in substantially the same form as acquired and makes a timely election to pay sales tax reimbursement or use tax measured by the purchase price, then the lease is not regarded as a sale under the Sales and Use Tax Law. (Rev. & Tax. Code § 6005(g)(5).) That is, the lessor is the consumer of the leased property. If the lessor purchases parts to use in repairing the leased property, then the lessor is also the consumer of those parts since they are being incorporated into property which the lessor is not reselling. Therefore, the answer to your question is that the lessor of property which is being leased in transactions which are not regarded as continuing sales is the consumer of any parts that lessor purchases for use in repairing the leased property. Sales or use tax applies to that purchase of parts. Along with your fax transmission to this division, you included a copy of your fax transmission to the district office of the Board which included other questions which apparently were answered by the district office. I assume that the audit staff explained why your example 2 is incorrect since a lessor who manufactures property to be leased cannot avoid the requirement to collect use tax measured by rentals payable by attempting to report tax on purchase price. (Rev. & Tax. Code § 6006(g), Reg. 1660.) Additionally, I note that it is possible that some parts used to

Mr. P--- B---

-2-

March 5, 1992
315.0205

repair property leased in a continuing sale would not be purchased for resale. That is, if the lessor contracts to have repairs performed by another person, the repairer is the consumer of parts and materials furnished in connection with repair work under circumstances explained in subdivision (b)(2) of Regulation 1546. A copy of which is enclosed. Sincerely,

David H. Levine
Senior Tax Counsel

DHL:cl