When did tax apply to a refundable automobile-lease deposit, and when was advance rent collected at lease commencement reported?

Plain-English summary

Sacramento audit staff asked two questions about an automobile lessor: when advance rent should be reported and whether deposits counted as advance rent. The February 27 memorandum and attached lease are absent.

Some customers paid deposits, and some leases collected the final rental payment when the lease began. Lease Item 2 reportedly said deposits were not rent, did not release any rental obligation and were refundable at termination. Counsel therefore found no tax on the deposit.

If lessor and lessee later agreed verbally at termination to apply the deposit to final rent, that applied amount became taxable and was reported in the application period.

Advance rent differed. Although it generally accrued when due, section 6203 required collection when the lessee paid amounts under a taxable lease. Counsel called advance rent generally nonrefundable rental receipts and, for administrative purposes, required reporting when received.

Recording advance rent as a current liability did not control sales/use-tax timing. An enclosed 1967 letter addressed advance payments collected in a 4% period but applicable to final rent in a 5% period; its answer is not reproduced.

The live annotation publishes only receipt-time taxation of advance rent and says final-period designation is immaterial. It omits the deposit analysis, accounting issue and rate-transition source.

Common questions

Was every upfront payment taxable?

No. A genuinely refundable deposit was not rent.

When did a deposit become taxable?

When the parties applied it to a rental payment; the letter's example used a verbal agreement at termination and reporting in that application period.

Did labeling an amount a deposit decide the result?

The opinion depended on the described Item 2 terms: refundability, no rent payment and no release from rent obligations. The actual lease is absent.

When was advance rent reported?

When received, under counsel's administrative reading of section 6203, even if designated for the lease's final period.

Could accounting treatment defer advance-rent tax?

No. Carrying the amount as a current liability was not controlling.

Which tax rate applied across the 4%-to-5% transition?

The missing 1967 letter addressed that exact issue, but this PDF supplies no answer.

Was an actual audit result supplied?

No lease payment, return, adjustment, assessment, payment, refund or later proceeding appears.

Citations and references

• California Revenue and Taxation Code section 6203 — collection when taxable lease amounts are paid
• Lease Item 2 — described refundable-deposit terms, agreement absent
• February 27, 1969 audit memorandum — identified, not reproduced
• October 11, 1967 A. Wells Peterson letter — enclosed rate-transition source absent
• Official Annotation 330.1830 — publishes only the advance-rent timing conclusion

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.1830
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-1830.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Sacramento – Auditing (JAN)

From:

Tax Counsel (TPP:JM)

330.1830

Date:

March 25, 1969

In your memo of February 27, 1969 you request an opinion as to when advance rental payments should be reported and whether deposits are considered advance rental payments. We understand that the taxpayer is in the business of leasing automobiles. Its policy is the require certain customers to pay deposits and in some leases requires that the final rental payment be made at the time the lease commences. We have examined the lease agreement attached to your memo. Item 2, Deposit, provides that the deposits are not considered as payment of any rent and in on manner releases lessee from his obligation to pay the rentals. The deposit is refundable upon termination of the lease. It is our opinion that tax does not apply to the deposit. However, in those instances in which lessor and lessee verbally agree to apply the deposit to the final payment of the contract upon termination, tax would apply to the amount of the deposit applied to the final payment and should be reported in the period in which applied. Advance payments of rent generally are considered as accruing on the day on which the rent is due, however, Section 6203 of the Revenue and Taxation Code provides in pertinent part that: “As respects leases constituting sales of tangible personal property, the tax shall be collected from the lessee at the time amounts are paid by the lessee under the lease.” Accordingly, for administrative purposes it is our opinion that the advance payments should be reported in the period when received. Advance payments for rent generally are not refundable and constitute rental receipts upon which tax should be collected by the lessor at the time the rentals are paid by the lessee. The fact that the taxpayer carries the advance payments on his records as current liabilities is not controlling for sales and use tax purposes. For your additional information, we are enclosing a copy of a letter written by A. Wells Peterson on October 11, 1967 (particularly last paragraph), which states our position in those instances of advance payments collected in the 4 percent tax period but applicable to the rental of a final payment which falls in the 5 percent period.

JM:smb

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