Did a lease qualify for the July 1991 rate-increase exemption when the lessee agreed to pay future tax increases?

Plain-English summary

A redacted correspondent asked whether a lease qualified for the section 6376.1 exemption from the 1-1/4% tax-rate increase effective July 15, 1991. Senior Tax Auditor R. D. Tucker had already said no in a November 8 response; the taxpayer insisted on an additional legal-staff answer. Neither the October 22 request, Tucker's response nor the lease is reproduced.

Section 6376.1 required, among other things, that the lessor be obligated to lease the property “for an amount fixed by the lease.” Counsel interpreted that phrase to require every payment—including the tax paid to the lessor—to be specified. The lease's section 12 instead required the lessee to pay any later increase in applicable taxes.

Because the parties anticipated rate changes and shifted them to the lessee, the total amount was not fixed and the exemption did not apply. Tax on the continuing-sale lease followed the rate in effect when the property was used.

Section 6011 did not change the result. Its sales-price exclusions addressed specified local sales taxes, not state tax, and counsel said the disputed phrase was “amount fixed by the lease,” not “sales price.” Sections 6376, 7261 and 7262 were cited as examples of the Board's same longstanding interpretation of equivalent exemption language.

Annotation 330.3760 addressed a different grandfather clause from the 1965 change in lease taxation, when previously no tax would have applied to rent. Even there, its quoted standard required fixed obligations for fixed periods.

The live annotation generalizes the result to exemptions from increased or new taxes. It also says an “estimated” itemized-tax amount prevents a fixed amount, but that example does not appear in this supporting opinion.

Common questions

Did excluding some local taxes from “sales price” decide the issue?

No. Counsel said the question was whether the lease amount was fixed, not the statutory definition of sales price.

Did section 6011 cover the state rate increase?

Not through the cited exclusions. Counsel said subdivisions (c)(5)-(6) addressed specified local sales taxes, not state sales tax.

Why did the tax clause matter?

It required the lessee to pay future increases, so the obligations were not fixed in all respects.

Which contract provision controlled?

The letter identifies section 12 as the provision requiring payment of tax increases, but the lease itself is absent.

Which rate applied to the rent?

For a lease treated as a continuing sale, counsel said the rate in effect at the time of use applied.

Did Annotation 330.3760 create a different answer?

No. It concerned a 1965 grandfather clause and itself required fixed obligations for fixed periods.

Did the supporting letter discuss estimated tax?

No. That example appears only in the live annotation, which says an itemized tax labeled “estimated” also prevents a fixed total.

Was an actual assessment or final appeal result supplied?

No. The source gives a counsel answer but no property, amounts, return, audit, assessment, payment, claim, appeal or later disposition.

Citations and references

• Revenue and Taxation Code section 6376.1 — historical July 15, 1991 rate-increase exemption
• Revenue and Taxation Code section 6011(c)(5)-(6) — specified local-tax sales-price exclusions, distinguished from the state-tax/fixed-amount issue
• Revenue and Taxation Code sections 6376, 7261(a)(7) and 7262(a)(6) — equivalent fixed-obligation language cited
• Lease section 12 — tax-escalation clause described, lease absent
• October 22 request and November 8, 1991 R. D. Tucker response — identified, not reproduced
• Annotation 330.3760 (August 5, 1965) — different grandfather clause discussed
• Official Annotation 330.1870 — adds an estimated-tax example absent from the PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.1870
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-1870.pdf

Original ruling text

330.1870

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

December 2, 1991

Dear [X]
This is in response to your letter dated October 22, 1991 regarding whether the exemption provided by Revenue and Taxation Code section 6376.1 from the 1-1/4 percent tax rate increase that went into effect on July 15, 1991 applies to your lease. Senior Tax Auditor R. D. Tucker of our Evaluation and Planning Division responded to your letter in a letter dated November 8, 1991. In that letter, Mr. Tucker explained that your lease does not qualify for the exemption provided by section 6376.1. I am writing you this additional letter because, as I understand it, you have insisted on a response from the legal staff. Section 6376.1 provides an exemption from the 1-1/4 percent tax rate increase for certain sales and leases. As relevant here, one of the requirements to qualify for the exemption is that the lessor is obligated to lease the property for an amount fixed by the lease. As explained by Mr. Tucker, we interpret “an amount fixed by the lease” to mean that all payments under the lease must be specified, including the amount of tax the lessee is required to pay to the lessor. You refer to Revenue and Taxation Code section 6011, which defines “sales price” as the total amount for which tangible personal property is sold or leased. You note that subdivisions (c) (5) and (c)(6) of section 6011 exclude from “sales price” certain sales taxes. Initially, I note that the sales taxes excluded from the definition of sales price by subdivisions (c)(5) and (c)(6) of section 6011 are sales taxes imposed by any city, county, city and county, or rapid transit district. It does not refer to sales taxes imposed by the state. More important, however, is that the definition of “sales price” is not at issue, but rather the definition of “an amount fixed by the lease.” The statute itself specifically defines “sales price.” On the other hand, the statute does not contain a specific definition of Ran amount fixed by the lease.” Nevertheless, every time an exemption using that term has been adopted by the Legislature, we have interpreted it in the same manner. (See, e.g., Rev. & Tax. Code §§ 6376 (exemption from the 1/4% earthquake tax), 7261(a) (7), 7262(a)(6) (exemptions from transactions and use tax ordinances which are periodically adopted by districts within this state).) Of course, in adopting section 6376.1, the Legislature is deemed to know the longstanding interpretation of equivalent provisions by this Board, the agency charged with administering the Sales and Use Tax Law.

[X]

-2-

December 2, 1991
330.1870

You also cite Business Taxes Law Guide Annotation 330.3760 (8/5/65). This annotation does not define “an amount fixed by the lease” and does not directly apply to section 6376.1. The annotation relates to a grandfather clause exemption that was adopted in conjunction with the 1965 change in application of sales and use tax to leases of tangible personal property. The annotation to which you refer applies to circumstances where, prior to the 1965 statutory changes, no tax whatsoever would have applied to the lease receipts. Thus, the lessor and lessee would not have provided for collection or payment of taxes in their lease. Nevertheless, as you note, the annotation explains that the exemption applied only when the lessor and lessee were “bound in all respects to perform fixed obligations for fixed periods.” In summary, the exemption provided by section 6376.1 does not apply if the parties have contracted for the lessee to pay the lessor applicable taxes. The applicable tax on a lease which is a continuing sale is the tax rate in effect at the time of use. The intent of the Legislature in adopting section 6376.1 was to exempt from the increase those leases where the parties neither contemplated an increase in the tax rate nor provided for the lessee to pay amounts of such increases to the lessor. Under the lease about which you inquire, the parties obviously anticipated that there might be a change in the tax rate and, under section 12, the lessee specifically agreed to pay any such increase in taxes to the lessor. Therefore, the exemption provided by section 6376.1 does not apply. Sincerely,

David H. Levine
Senior Tax Counsel
DHL:wk
3488C