Were separately stated chemical-toilet cleaning charges excluded from taxable rent when the lease said service was optional?

Plain-English summary

B--- S--- Inc. had a prior audit for July 1, 1981–March 31, 1989 and a current audit for July 1, 1989–June 30, 1992. In the current period, it separately stated cleaning charges but its lease was silent. Counsel assumed the question covered only transactions using an apparently recent revision; the source does not decide unrevised agreements.

The auditor said B--- attached its revised lease/delivery receipt. It was the only agreement a lessee received, usually at unit delivery rather than monthly. It separately itemized service, rental, tax and total; the top service space alone had a clearly visible asterisk pointing to Service is optional to the lessee. The actual attachment is absent.

One clause required enough service not to overtax the restroom's designed capacity and continued rental-service charges until proper stop notice. Counsel read order as not requiring purchase from B--- and thought the notice clause probably addressed reduced use, while also permitting service termination when another provider was hired.

Another clause said B--- will furnish said unit(s) with all necessary services. Counsel thought this probably reflected B---'s intent to supply everything, but not a lessee obligation to buy from it; it could mean only that B--- promised availability.

All lessees apparently bought all service from B--- because it was the only chemical-toilet rental business in a remote area. Yet counsel concluded the contract would not be breached if another capable provider—possibly subject to licensing—entered and the lessee hired it. Under the alternate-provider logic of Annotation 330.3360, cleaning was optional and excluded from lease receipts.

No audit adjustment or actual alternate-provider transaction is supplied. The live annotation publishes the optional statement and sufficient-service clause but omits agreement delivery/itemization, clause interpretations, remote monopoly, licensing hypothetical, audit scope and missing records.

Common questions

Did the duty to arrange sufficient cleaning make the lessor's service mandatory?

No. The customer had to obtain enough service but could obtain it elsewhere.

Was the statement Service is optional to the lessee sufficient?

Yes, because the remaining contract provisions did not contradict it.

How was the optional statement displayed?

A visible asterisk in the top service-itemization space referred to it; the lease also separated service, rent, tax and total.

When did the lessee receive the agreement?

Usually at unit delivery, and not as a new copy each month.

Did will furnish ... all necessary services make purchase mandatory?

No under counsel's interpretation; it promised availability without requiring the lessee to use B---.

Did the lessor's practical monopoly make the charge taxable?

No. The memorandum focused on the customer's contractual freedom to hire another capable provider.

Had any customer actually hired another provider?

The source suggests no: all apparently used B---. Counsel used a hypothetical future capable provider, possibly needing licenses.

Did the opinion cover earlier silent lease forms?

No. It assumed the question was limited to transactions under the revised form.

Were the attached lease and audit adjustment published?

No. Neither the attachment nor a completed audit/return outcome appears.

Citations and references

• BTLG Annotation 330.3360 (July 13, 1966) — alternate-provider principle; live entry confirms rule, underlying source absent here
• 1981–1989 prior audit and 1989–1992 current audit — identified; workpapers/outcomes absent
• November 18, 1992 audit memorandum — revised-form question quoted; standalone memo absent
• Revised lease/delivery receipt — analyzed as attachment; absent from PDF
• December 18, 1992 Legal memorandum — revised-form optional-service result without audit outcome
• Official Annotation 330.2079 — core clause result without audit/form/hypothetical/source limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2079
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2079.pdf

Original ruling text

State of California

Board of Equalization
Legal Division

Memorandum
To

:

Mr. Bill Stallings
--- Audit Supervisor

From :

David H. Levine
Senior Tax Counsel

Subject:

B--- S--- Inc.
SR --- XX-XXXXXX

330.2079
Date:

December 18, 1992

Telephone:

(916) 445-5550
ATSS 485-5550

This is in response to your memorandum dated November 18, 1992 regarding the measure of tax on leases of chemical toilets. You note that there was a previous audit of B--for 7/1/81 through 3/31/89 and a current audit for 7/1/89 through 6/30/92. In the current audit period, B--- separately stated the charge for cleaning services but the lease agreement was silent. I assume that your question relates only to those transactions entered into pursuant to the agreement which B--- has apparently recently revised, which you describe as follows: "Taxpayer has submitted the attached lease agreement and delivery receipt. The statement 'Service is optional to the lessee' has been added to the lease agreement. This is the only lease agreement the lessee receives. It is usually presented to the lessee when the unit is delivered. A copy of the lease agreement is not sent to the lessee each month. Is this statement sufficient enough to consider the cleaning charges to be optional and not subject to tax?" The agreement contains an itemization of the charges, with spaces for service, rental, tax, and total. The space for service, which is the top one, is the only space which includes an asterisk. That asterisk is clearly visible, and refers to the phrase you note, "*Service is optional to the lessee." I believe this is sufficient to regard the service as optional unless there were a provision in the agreement contrary to such a conclusion. The agreement contains the following provision: "Lessee agrees to order sufficient service so as not to overtax the restroom unit's designed capacity. Rental service charges continue until Lessee has properly notified B--- S--- Inc. to stop service." That the lessee must obtain sufficient service based on the level of use of the unit does not make the service

Mr. Bill Stallings

-2-

December 18, 1992
330.2079

mandatory unless the lessee does not have the option to obtain it from someone else. (See, e.g., BTLG Annot. 330.3360 (7/13/66).) Although this provision uses the term "order," it does not say that the lessee must obtain it from B---. The second sentence of the provision quoted above was probably intended to cover the situation where the lessee finds it is using the units less than it had originally intended, and needs less service from B---. Of course, until B--- is notified it would continue to perform the service originally ordered. Notwithstanding the probable original intent of this provision, it is not inconsistent with the notification of B--- to cease servicing when and if the lessee obtains another person to perform the servicing. The agreement also contains a provision stating that B--- "will furnish said unit(s) with all necessary services." This was probably included because B--- intends to provide all the services in question. However, this phrase alone does not require the lessee to obtain those services from B---, and is consistent with an interpretation that B--- agrees to be available to provide any and all of the services needed without being a provision requiring the lessee to obtain those services from B---. It appears likely from your memorandum that all lessees obtain all the services in question from B--- since these units are being located in a remote area in which B--- is the only chemical toilet rental business. Nevertheless, if another person who was capable of performing the services in question (this might involve certain licensing requirements) moved into the area, I believe that B---'s lessees would not be in breach of the lease agreement if they contracted with the other person to provide these services. I therefore believe we should regard the services as optional. If you have further questions, feel free to write again.

DHL:es