Did repairing ex-tax water-softener units with tax-paid replacement parts eventually create new tax-paid units whose rental receipts were exempt?

Plain-English summary

On November 12, 1965, a redacted taxpayer acquired approximately 1,900 old water-softener units ex-tax in what the memorandum calls a section 6006.5(a) occasional sale. It put them in rental service without reporting/paying purchase-price tax and without collecting/paying rent tax. Rental-receipts tax was later being asserted, but the audit/amount is absent.

Many old units needed component replacement. All replacement parts were purchased tax-paid. Auditing asked whether mixing them with ex-tax components created new tax-paid units or merely repaired old units with taxable rent and deductions—and, if repair, what threshold of replacement created a new unit.

Counsel chose repair. Once ex-tax property entered rental service without a purchase-price election, it retained ex-tax status for purposes of the historical lease rules. Future rent remained taxable, subject to tax-paid-purchase deductions for tax-paid parts actually used in repair.

There was no percentage or component threshold. Even if every part in the acquired units was replaced over time, the memorandum said no new tax-paid property arose and rent remained taxable with the part deductions.

The source supplies no work order, unit tracking or example distinguishing repair from manufacture. It also does not show that any particular deduction was computed/allowed or how asserted rent tax ended.

The live annotation accurately publishes the full categorical rule but omits the 1965 acquisition, quantity, occasional-sale premise, failure to report any original rent tax, tax assertion and evidentiary/procedural limits.

Common questions

Did mixing tax-paid parts into an ex-tax unit change the unit's status?

No. The work was treated as repair of the existing unit.

Could enough repairs eventually create a new tax-paid unit?

No under the memorandum, even if every original part was replaced over time.

Was there a percentage-of-parts threshold?

No. The memo said even replacing all parts over time did not create new property.

Were the replacement-part taxes ignored?

No. They supported tax-paid-purchase deductions against taxable rental receipts.

Why were rental receipts taxable in the first place?

The units were acquired ex-tax and placed in rental service without an election to report tax on purchase price.

Had the taxpayer originally reported rent tax?

No. The source says it had not collected/paid rent tax and that rent-based tax was then being asserted.

Did the source prove the occasional-sale acquisition?

No. It states the premise but supplies no purchase agreement or exemption record.

Were any actual part deductions allowed?

The rule permits them for tax-paid parts used in repair, but no invoice, schedule, computation or audit adjustment is supplied.

Does the memo decide when reconstruction becomes manufacture?

No. It categorizes the described gradual replacement as repair without a separate manufacture test or unit-level evidence.

Citations and references

• Revenue and Taxation Code section 6006.5(a) — stated occasional-sale basis; transaction proof absent
• February 13, 1970 San Jose Auditing memorandum — replacement questions referenced; absent
• November 12, 1965 acquisition/rental/tax history — stated without agreements, returns or audit records
• Replacement parts/repairs/deductions — described without invoices, tracking or computation
• March 13, 1970 counsel memorandum — categorical repair/status rule without implemented adjustment
• Official Annotation 330.2100 — full rule without acquisition/evidence/procedural limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2100
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2100.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

San Jose - Auditing (MSS:VW)

From:

Tax Counsel (JKM)

330.2100

Date:

March 13, 1970

Subject:

This is in reply to your memo dated February 13, 1970 concerning the application of tax to this taxpayer's rental units. On November 12, 1965 taxpayer acquired approximately 1,900 water softener units ex tax as the result of a section 6006.5(a) occasional sale and placed them in rental service. However, taxpayer did not report and pay tax measured by the purchase price of the units and did not collect and pay tax measured by rental receipts. Tax measured by rental receipts is now being asserted. In this regard many of the units acquired were old, and it became necessary for taxpayer to replace various parts thereof. All replacement parts used were purchased tax paid. With regard to these replacement parts, you ask the following questions:

1. Does the commingling of ex-tax and tax-paid parts create new units, thus exempting
   future rental receipts?, or
2. Does the commingling of ex-tax and tax-paid parts constitute the repair of old units,
   thus making future rental receipts subject to tax with tax-paid purchase deductions allowed to taxpayer for tax-paid parts used? If the commingling of the parts constitutes the repair of old units, taxpayer asks what parts of the old units must be replaced in order to create new units, thus exempting future rental receipts. It is our position that where property acquired ex tax has been placed in rental service, and where the lessor has not elected to report and pay tax measured by the purchase price of the property, the commingling of ex-tax and tax-paid parts constitutes a repair of the

property. Thus, future rental receipts remain taxable, subject to tax-paid purchase deductions for tax-paid parts used in the repair of the property. It is also our position that once ex-tax property has been placed in rental service, tax being measured by rental receipts, the property thereafter retains its ex-tax status for purposes of the law. Thus, the commingling of ex-tax and tax-paid parts does not ever create new property, the rental receipts therefrom which will not be taxable. If over a period of time all parts of taxpayer's units as acquired are replaced with tax-paid parts, its rental receipts will remain taxable, subject to tax-paid purchase deductions for tax-paid parts used.

JKM:smb [lb]