What California tax applied when a company let an at-will executive use a tax-paid car and transferred title after four years?

Plain-English summary

An unidentified corporation let a senior officer select and use a company car as compensation. It set a purchase limit; if the final cost including sales tax exceeded that limit, the officer reimbursed the excess including tax. Corporate policy gave the car to the officer after four years. Each year the corporation included one-fourth of the amount it had paid, including tax, in the officer's Form W-2.

The analysis assumed the officer could leave employment at will. On that assumption, California treated the use as a lease rather than a fixed-term contract ending in title. Because the car was leased in the same form as acquired and the corporation paid sales-tax reimbursement to the dealer, the tax-paid-lease exception made rent nontaxable.

The first quoted hypothetical used a $60,000 ex-tax car, a $30,000-plus-tax employee reimbursement above the company limit and a $10,000 residual value after four years. Because the officer paid nothing then to obtain title, counsel found no sale and no title-transfer tax; neither residual value nor earlier excess-cost reimbursement became a new title price.

The early-departure hypothetical assumed only $20,000 of the corporation's $30,000-plus-tax portion had been earned/included in W-2 compensation. The officer paid another $10,000 plus tax for that unearned portion, in addition to the earlier $30,000 excess reimbursement. Even though total employee payments were $40,000 and vehicle value was $10,000, purchase price was the additional $10,000 paid to obtain title.

If the corporation was not a licensed dealer, it was not liable for sales tax and should not collect reimbursement; the officer instead owed DMV use tax on that $10,000. A licensed dealer would owe sales tax measured by $10,000.

The fixed-term rule could change everything. A contract binding the officer until title passed after required payments—or offering a nominal option no greater than $100 or 1% of total contract price, whichever was less—would be a sale under a security agreement from inception. The footnote says an officer unable to end employment before title transfer might fall into that treatment, making this lease analysis inapplicable.

The request asked several questions, but the PDF reproduces only questions 3 and 8. Because the requester did not identify the client, counsel said section 6596 relief was unavailable and classified the response as general advice about hypotheticals.

The live annotation publishes the basic result but says one-fourth of total vehicle cost entered the W-2, whereas the PDF says one-fourth of the corporation-paid amount. It also adds an early option based on years remaining, including a 75%-after-one-year example not present in the PDF's reproduced excerpts.

Common questions

Why did California treat the employee's use as a lease?

The opinion assumed the officer could terminate employment at will, so the officer was not bound for a fixed term ending in automatic title transfer.

What if the officer was required to remain employed until title passed?

The footnote says there might be a sale at inception rather than a lease, so the stated analysis would not apply.

Was the compensation reported on Form W-2 taxable rent?

Not under these facts. The vehicle qualified for the tax-paid-lease exception because the corporation bought it tax-paid and leased it in the same form.

Was tax due when the company gave the car to the officer after four years?

No, because the officer paid nothing to acquire title, so the opinion found no sale.

Did the $10,000 residual value set tax after four years?

No. With no title payment, counsel found no sale despite that stated value.

What changed when the officer left early?

The officer paid the corporation to obtain title. That additional $10,000—not the total $40,000 previously/additionally reimbursed—was the taxable purchase price; who remitted tax depended on dealer status.

Who handled tax on an early vehicle purchase?

For a nondealer corporation, the officer paid DMV use tax and the corporation should not collect reimbursement. A licensed dealer owed sales tax.

Could the unidentified client rely on the letter for section 6596 relief?

No. Counsel said identity and all relevant facts were required and called this general hypothetical advice.

Were all request questions and records supplied?

No. Only questions 3 and 8 are reproduced, and there is no policy, agreement, invoice, W-2, payment, title, dealer proof or later tax result.

Citations and references

• Revenue and Taxation Code sections 6051 and 6201 — retail-sale and use-tax rules
• Revenue and Taxation Code sections 6006(g), 6006.1, 6010(e), 6010.1 and Regulation 1660(c)(1) — continuing lease/rental tax
• Revenue and Taxation Code sections 6006(g)(5), 6010(e)(5) — tax-paid same-form lease exception
• Revenue and Taxation Code section 6006.3 and Regulation 1660(a)(2)(A) — fixed-term/nominal-option sale at inception
• Regulation 1660(c)(7) — payment to buy leased property during or after a lease
• Revenue and Taxation Code sections 6275, 6282, 6291 and 6367 — cited DMV vehicle-use-tax provisions
• Revenue and Taxation Code section 6596 — reliance relief denied because the client was unidentified
• April 16, 1993 request — several questions referenced; only questions 3 and 8 reproduced
• September 24, 1993 counsel letter — two hypothetical applications and explicit general-advice posture; no implemented outcome
• Official Annotation 330.1885 — publishes the basic result with W-2 and early-option details that differ from or extend the PDF excerpts

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.1885
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-1885.pdf

Original ruling text

330.1885

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-8208

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

September 24, 1993

GRAY DAVIS
Controller, Sacramento
────────

Mr. V--- B. S--XXXXX --- ----- ---, CA XXXXX

BURTON W. OLIVER
Executive Director

Dear Mr. S---:
This is in response to your letter dated April 16, 1993, which was forwarded to the Legal Division for review. In your letter, you state: “I request an opinion with respect to the following matter: “A corporation purchases (and pays sales tax) on a car selected by, and driven by a senior officer. The corporation sets a dollar limit on the amount it will pay for the vehicle, and if a more expensive car is selected, the senior officer is required to pay (i.e., reimburse) the company for the difference between the (final) cost of the car (including sales tax) and the corporation’s dollar limit (including sales tax). The reason the officer is willing to pay this difference is because it is the policy of the corporation to give the car to the senior officer at the end of four years. “The corporation includes 1/4 of the amount paid by the corporation (including any sales tax paid) as compensation in the senior officer’s Form W-2. “At the end of the four year period, the car becomes the property of the senior officer.” You ask several questions concerning the sales tax consequences of these transactions including the questions for the following two hypothetical facts: “(3) If the vehicle purchased tax paid cost $60,000 (ex-tax) and the senior officer reimbursed the corporation $30,000 (plus tax) for the portion exceeding the limit, is any tax due upon registering the vehicle when title is transferred to the senior officer if the vehicle has a residual value of $10,000, but the corporation is paid nothing. . . .

Mr. V--- B. S---

-2-

September 24, 1993
330.1885

“(8) Sometimes a senior officer will quit before four years passes. Assuming the same facts as in question (3) above, except that only $20,000 (plus tax) of the
$30,000 (plus tax) paid by the corporation has been earned (i.e. included as compensation in the senior officers’ Form W-2), and the senior officer reimburses the company an additional $10,000 (plus tax) for the portion unearned (as is the policy) in addition to the previously reimbursed $30,000 in excess of the corporation’s limit (i.e. $40,000 in total) how much tax is due if the vehicle is worth $10,000 at the time of registration (due to the transfer of title)?” Revenue and Taxation Code section 6051 imposes a sales tax on all retailers measured by their gross receipts from retail sales of tangible personal property. Revenue and Taxation Code section 6201 imposes a use tax on the storage, use, or other consumption in this state of tangible personal property purchased from any retailer for storage, use, or other consumption in this state. In California the general rule is that a lease of tangible personal property is a continuing sale and purchase. The lessor must collect use tax from the lessee at the time rentals are paid and pay the tax to the state. The use tax is measured by the rentals payable. Rev. & Tax. Code §§ 6006(g), 6006.1, 6010(e), and 6010.1 and Regulation 1660(c)(1). For certain types of tangible personal property, however, the lessor may elect to pay tax on the purchase price of the property rather than on rental receipts. This is the tax-paid lease exception. It applies to a lease of tangible personal property which is leased in substantially the same form as acquired and for which the lessor has paid sales tax reimbursement or use tax measured by the purchase price of the property. Rev. & Tax. Code §§ 6006(g)(5) and 6010(e)(5). If a lessor sells property to a lessee during the term of the lease or after the lease of the property terminates, tax applies to the amount paid by the lessee for the property. Rev. & Tax. Code §§ 6051 and 6201. See also Regulation 1660(c)(7). This rule applies whether the tax-paid lease exception applied to the lease or the lease was a continuing sale and purchase. A “lease” includes rental, hire, and license. Rev. & Tax. Code § 6006.3. Where a contract designated as a lease binds the “lessee” for a fixed term and the “lessee” is to obtain title at the end of the term upon completion of the required payments or has the option to purchase the property for a nominal amount, the contract will be regarded as a sale under a security agreement from its inception and not as a lease. The option price will be regarded as nominal if it does not exceed $100 or 1 percent of the total contract price, whichever is the lesser amount. Rev. & Tax. Code § 6006.3 and Regulation 1660(a)(2)(A). According to your description of the facts, the corporation provides its senior officers vehicles for their use as part of their compensation from the corporation. We assume that a senior officer may terminate at will his or her employment with the corporation. In that case, we

Mr. V--- B. S---

-3-

September 24, 1993
330.1885

regard the officer’s use of the vehicle as a lease.1/ Since the corporation is leasing the vehicle to the officer in the same form as acquired and the corporation has paid sales tax reimbursement to the dealer of the vehicle, the rent is not subject to tax. If at the end of four years the officer is not required to make a payment to the corporation to obtain title to the automobile, there is no sale to the officer and therefore no tax. If the officer quits before four years have passed and the officer must pay a certain amount to obtain title to the vehicle, there is a sale. If the corporation is not a licensed dealer, the corporation is not liable for sales tax and should not collect tax reimbursement from the officer. Rather, the officer must pay to DMV use tax measured by the purchase price. Rev. & Tax. Code §§ 6275, 6282, 6291, and 6367. The purchase price is the amount paid by the officer to the corporation to obtain title. In the first example quoted above, neither the corporation nor the officer would have a tax liability when title is passed to the officer since no sale has occurred. Assuming the corporation is not a licensed dealer, in the second example the officer would have to pay use tax on $10,000 which is the amount the officer paid to the corporation to acquire title. If the corporation is a licensed dealer, the corporation is liable for sales tax on $10,000. Revenue and Taxation Code section 6596 provides the only basis for relief from tax if a taxpayer relies on incorrect written advice from the board. The primary conditions to qualify are that the request for opinion must be in writing and must disclose all relevant facts, including the identity of the taxpayer. Since you have not identified your client, this opinion does not come within the provisions of section 6596 but rather is simply general advice regarding a set of hypothetical facts. If you have further questions regarding Sales and Use Tax Law, please do not hesitate to write again. Sincerely,

Elizabeth Abreu
Tax Counsel
EA:cl

1/

If the officer may not terminate his employment prior to the time title to the vehicle is to pass to the officer, there may be a sale at inception rather than a lease. If so, the above analysis would not apply.