Could an equipment lessor stop taxing rental receipts by making a late election to pay tax on equipment that was originally bought ex-tax?

Plain-English summary

P--- Corporation provided consulting services and also leased equipment. A December 18, 1994 comment on page 3 of Schedule 12 for its April 1, 1991–September 30, 1994 audit said it chose to buy equipment ex-tax and charged tax on rent. The audit itself is absent.

Its February 15, 1995 letter said the sales-tax audit found additional tax from equipment used in a taxable manner, agreed with that finding, and asked to pay all sales taxes on the equipment immediately to avoid recordkeeping whose time cost exceeded the small tax. It said future equipment would be purchased post sales tax.

The agency response was delayed: that original letter stayed in P---'s central file and was never forwarded to Legal. Counsel discovered it while reviewing later letters dated October 28 and November 20, 1995 and apologized. The additional submissions are not reproduced.

Counsel assumed the request concerned the audited ex-tax equipment and that it was leased in substantially the same form. To choose purchase-price taxation, P--- had to pay tax to the vendor on purchase or timely elect/report/pay it with the return for the period when property first entered rental service.

P--- did neither for existing equipment. Under Action Trailer Sales, those leases remained continuing sales; lessees owed use tax measured by rent, and P--- had to collect/remit it. Administrative burden and willingness to pay later did not reopen the election.

Future equipment could be tax-paid instead if it remained in substantially the same form and P--- paid tax at purchase or timely elected when first put into rental service. No future acquisition or implemented treatment is supplied.

The live annotation publishes the existing-property result but omits the audit and delayed request, same-form assumption, future-equipment route and absent records. Its only parenthetical is Regulation 1660(c)(1), while the PDF also relies on the election timing in (c)(2) and Action Trailer Sales.

Common questions

Could administrative inconvenience justify a late election?

No. The opinion applied the timing rule even though the taxpayer said the tax amount was small compared with its recordkeeping burden.

Did the company dispute that additional tax was due?

No. Its quoted letter says it agreed with the audit finding.

What basis applied to the existing leases?

Use tax measured by rental receipts.

When was a purchase-price election timely?

By tax paid to the vendor at purchase or by election, reporting and payment with the return for the first-rental-service period.

Could future equipment be taxed on cost instead?

Yes, if the property and timing requirements were satisfied.

Why did the agency apologize?

The February 15, 1995 request had remained in the central file and was never sent to Legal.

Were the audit and later submissions published?

No. Only a Schedule 12 comment and one requester passage are quoted.

Does the source show a final audit payment or changed procedure?

No. It gives advice but no adjusted assessment, payment, future purchase or appeal outcome.

Citations and references

• Revenue and Taxation Code sections 6051 and 6201 — retail-sale/use-tax framework
• Revenue and Taxation Code sections 6006(g)(5), 6006.1 and Regulation 1660(b) — same-form/timely-tax exception
• Regulation 1660(c)(2) — purchase/first-rental-return election timing; (c)(1) — lessee rent tax/lessor collection
• Action Trailer Sales, Inc. v. State Board of Equalization, 54 Cal. App. 3d 125 (1975) — late-election bar; citation independently resolved
• December 18, 1994 Schedule 12 comments and 1991–1994 audit — reviewed/quoted; documents absent
• February 15, October 28 and November 20, 1995 letters/materials — described; only one excerpt supplied
• January 22, 1996 counsel letter — existing/future answer under assumptions with no implemented outcome
• Official Annotation 330.2021 — existing-equipment result without full authority/factual/procedural limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2021
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2021.pdf
• Citation verification: Action Trailer Sales

Original ruling text

330.2021

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 324-2634
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

January 22, 1996
Mr. A--- P--A--- P--- & Associates
XXXX --- Ct.
--- ---, CA XXXXX

KATHLEEN CONNELL
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Re: Account No. SR – XX-XXXXXX
Dear Mr. P---:
Please excuse our tardy response to your letters. When I reviewed the Board’s central file for P--- Corporation (P---) before responding to your letter dated October 28, 1995 and the materials which you sent by letter dated November 20, 1995, I discovered that your original letter dated February 15, 1995 was in that file and had never been forwarded to the Legal Division. I apologize on behalf of the agency for any inconveniences which this may have caused you or your client. You have written requesting advice in regards to an issue which surfaced in an audit of P---. You state: “My client, P--- Corporation, recently completed a Sales Tax audit. It was determined that additional taxes were due as a result of equipment being used in a manner that was deemed to be a taxable event. We agree with this finding. We are asking for permission to pay all sales taxes, on this equipment, now and avoid the record keeping. The amount owed is small compared to [the] amount of time this record keeping would entail. All future equipment will be purchased post sales tax.” (P--- letter, dated 2/15/95.) I have reviewed the audit comments (dated 12/18/94) on page 3 of Schedule 12 from the audit of P--- covering the period April 1, 1991 through September 30, 1994. The auditor notes that P---, in addition to providing consulting services, leased equipment which it “has chosen to purchase ex-tax,” and “charged tax on rental receipts.” In responding to your opinion request, I assume that this is the equipment about which you are writing. I also assume, for purposes of this opinion letter, that P--- leases the equipment in substantially the same form as acquired.

Mr. A--- P---

-2-

January 22, 1996
330.2021

Discussion
Under the California Sales and Use Tax Law, a retail sale in California of tangible personal property or a retail sale outside of California of such property for use in California is taxable unless otherwise exempt. (Rev. & Tax. Code §§ 6051, 6201.) A lease of tangible personal property is regarded as a continuing sale and purchase of the property unless the lessor leases the property in substantially the same form as acquired, and sales tax reimbursement or use tax was timely paid measured by the purchase price of the property. (Rev. & Tax. Code §§ 6006(g)(5), 6006.1; Reg. 1660(b).) To be timely, either sales tax reimbursement or use tax must be paid by the lessor to its vendor when the property is purchased, or the lessor must make an election to pay tax measured by the purchase price of the property by reporting and paying timely such tax with its return for the period during which the property is first placed in rental service. (Reg. 1660(c)(2).) The tax on a lease which is a continuing sale and purchase is a use tax owed by the lessee which is measured by the rentals payable on the lease. The lessor is required to collect the tax from the lessee and pay it to the Board of Equalization. (Reg. 1660(c)(1).) Thus, since P--- neither paid sales tax reimbursement nor use tax on the equipment at the time of purchase and did not timely elect to pay the tax with its return for the period during which the equipment was first placed in rental service, the lease of the equipment by P--- is a continuing sale and purchase. P--- is not permitted to now elect to pay tax measured by the purchase price of the equipment, but rather is obligated to collect use tax from its lessees as measured by the rental receipts derived from the leases of the equipment. (Action Trailer Sales, Inc. v. State Bd. of Equalization (1975) 54 Cal.App.3d 125.) As to future equipment which P--purchases and leases in substantially the same form as acquired, use tax will not be due on the rental receipts as long as P--- purchases the equipment tax-paid or timely elects to pay tax on the equipment when it is first put into rental service. (Rev. & Tax. Code § 6006(g)(5); Reg. 1660(c)(2).) I hope this information is of assistance to you and your client. Sincerely,

Sharon Jarvis
Staff Counsel
SJ:rz
cc:

--- --- District Administrator - --