When rent began at installation but final acceptance and vendor billing could lag 120 days, when was purchase-price use tax due?

Plain-English summary

An unidentified requester described a contingent equipment purchase order: delivery/installation, lessor acceptance of the lease and lessee acceptance of the equipment all had to occur. Installation through acceptance could take up to 120 days. The parties said the lease and invoice payment waited for the lessee's Certificate of Acceptance, while the vendor retained title until payment.

The first question asked whether the vendor owed sales tax before its invoice was paid. Counsel explained that a retail sale occurs upon a transfer of title or possession for consideration. Although title can pass earlier, it generally passes no later than the vendor completes physical-delivery performance—either delivery to a common carrier for the lessor or direct delivery. If that transfer was retail, sales-tax liability arose then regardless of later payment.

But the vendor branch could instead be a nontaxable sale for resale. When a lessor acquired property solely to lease it and did not pay tax on cost, the acquisition could be for resale and the lease a continuing sale taxed on rentals. The vendor still bore the burden to disprove the statutory taxable-receipts presumption unless it timely accepted a resale certificate in good faith.

The second question concerned transactions where rent actually began on installation before the parties' supposed purchase date. Counsel said that once the lessor leased the equipment, it presumably had acquired some right to do so. If it had not paid vendor tax reimbursement, the lease was a continuing sale taxed on all rentals unless the property was leased in substantially the same form and the lessor timely elected use tax on purchase price.

That election and tax had to be reported and paid with the timely return for the period when the property first entered rental service. On the facts understood, that meant the first-lease period—not later acceptance or invoice payment.

Counsel requested both contracts for definitive answers. Neither they nor the request, delivery/title records, resale certificate, acceptance certificate, tax records or outcome is supplied. The live annotation states only the first-rental-service timing rule and omits the conditional vendor/resale analysis and source limits.

Common questions

Did an unpaid vendor invoice postpone sales tax?

Not if a retail sale had already occurred. The source tied timing to title or possession and completed delivery performance, not simply invoice payment.

Was the vendor's transfer necessarily retail?

No. It could be for resale when the lessor acquired equipment only for a rent-taxed lease, but the vendor needed proof or a timely good-faith resale certificate.

When did the lessor's election deadline arise?

In the reporting period when the property was first leased and rent began.

Could the lessor still avoid rent-based tax?

Only if the property was leased in substantially the same form and purchase-price use tax was timely reported and paid.

Did the Certificate of Acceptance control the election?

Not on the facts counsel understood, because rent began at installation and the property had entered rental service.

Did counsel give a definitive contract answer?

No. He said the transactions were not described in enough detail and requested the vendor-lessor and lessor-lessee contracts.

Are the contracts and transaction records available here?

No. The source supplies neither contract, the request, acceptance/delivery/payment records, resale documentation nor an implemented tax outcome.

Citations and references

• Sections 6051 and 6006(a) — retail-sale timing and vendor liability
• Regulation 1628(b)(3)(D); U.C.C. section 2401 — title/completed-delivery timing
• Sections 6007, 6006(g)(5), 6006.1; Regulation 1660(c)(2) — resale, continuing-lease and timely cost-election framework
• Section 6091 — taxable-receipts presumption, proof burden and resale certificate
• April 14, 1989 request and purchase-order/acceptance facts — summarized/quoted but request absent
• Purchase order, Certificate of Acceptance, invoices, delivery/title/payment records, both contracts, resale certificate and returns — absent
• May 18, 1989 counsel letter — expressly nondefinitive answers; Tax Tips Pamphlet #46 and later outcome absent
• Official Annotation 330.2137 — first-rental timing without vendor/resale/source-limit branches

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2137
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2137.pdf

Original ruling text

330.2137

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
(916) 445-5550
May 18, 1989
Re:
Dear
This is in response to your letter dated April 14, 1989 in which you ask two questions on the proper application of sales or use tax. You state that the relevant facts are as follows: 1. A purchase order is issued contingent upon a) delivery and installation, b) acceptance of the lease by the lessor and c) acceptance of the equipment by the lessee. 2. Completion of the deal --- from installation through acceptance -- may take up to 120 days. 3. The lease is not commenced nor is the equipment invoice paid until the Certificate of Acceptance is received from the lessee. 4. paid.

The vendor maintains title to the equipment until the purchase invoice is

Your first question is whether the equipment vendor has any sales tax liability prior to payment of the equipment invoice. A retailer incurs liability for sales tax when the retailer makes a retail sale in this state. (Rev. & Tax. Code § 6051.) For purposes of application of sales tax, "sale" means any transfer of title or possession, in any manner or by any means whatsoever, of tangible personal property for a consideration. (Rev. & Tax. Code § 6006(a).) Although title may pass at a prior time, it may pass no later than the time and place at which the retailer completes his performance with reference to the physical delivery of the property, even though a document of title is to be delivered at a different time or place. (Reg. 1628 (b) (3) (D). See U.C.C. § 2401.) If the equipment vendor completes his performance with reference to the physical delivery of the property either upon delivery to a common carrier for delivery to the lessor or by delivery by the vendor directly to the lessor, the sale would generally occur at that time. If that sale were at retail, the vendor would incur sales tax liability for the sale at the time of that sale regardless of when the invoice was actually paid. A retail sale is a sale for any purpose other than resale in the regular course of business. (Rev. & Tax. Code § 6007.) A lease of tangible personal property is regarded as a continuing sale unless the property is leased in substantially the same form as acquired by the lessor and the lessor has timely paid sales tax reimbursement or use tax measured by the purchase price of the property. (Rev. & Tax. Code §§ 6006(g) (5), 6006.1, Reg. 1660(c) (2).) Thus, the sale of tangible

personal property to a person who will lease the property without otherwise using it and who does not pay sales tax reimbursement or timely pay use tax measured by purchase price is a sale for resale. This means that the sale (lease) by the lessor would be subject to use tax on the lessee measured by rentals payable which the lessor is required to collect and pay to the state. This also means that the sale to the lessor by the vendor would be regarded as a sale for resale not subject to sales tax. However, we note that it is presumed that all gross receipts are subject to sales tax until the contrary is established and that the vendor would have the burden of proving that the sale to the lessor was a sale for resale unless the vendor takes from the lessor a timely resale certificate in good faith. (Rev. & Tax. Code § 6091.) Your second question involves transactions where the rent begins on the date of installation, which is prior to the date regarded by the parties as the date of purchase. You ask whether the collection of rent negates your election to pay tax on the purchase of the equipment. As mentioned above, the lessor's lease of tangible personal property will be regarded as a sale unless the property is leased in substantially the same form as acquired and the lessor has paid sales tax reimbursement to the vendor or has timely elected to pay use tax measured by purchase price. You have not described the transactions in sufficient detail for us to fully understand. Once the lease between the lessor and the lessee commences, the lessor presumably must have purchased or leased the property from the vendor. Otherwise, the lessor would presumably have no right to lease the property to the lessee. Since the lease between the lessor and lessee has commenced and the lessor has apparently not paid the vendor sales tax reimbursement, the lease will be regarded as a sale and use tax will be due measured by rentals payable for all leases of that property unless the lessor leases it in substantially the same form as acquired and timely elects to pay use tax measured by purchase price. To make such a timely election, the tax must be reported and paid timely with the return of the lessor for the period during which the property is first placed in rental service. (Reg. 1660(c) (2).) Under your circumstances as I understand them, this means that in order to avoid having the leases regarded as sales subject to use tax measured by rentals payable, the lessor must report and pay use tax measured by the purchase price of the leased property timely with the return of the lessor for the period during which the lessor first leases that property. Enclosed for your information is a pamphlet entitled Tax Tips for Leasing of Tangible Personal Property. After reviewing this letter and the pamphlet, if you have further questions feel free to write again. If you wish to have more definitive answers regarding the circumstances covered herein, you should include copies of the relevant contracts between the vendor and the lessor and between the lessor and the lessee.

Sincerely,

David H. Levine
Tax Counsel

DHL/smt:1381C
Enclosure: Tax Tips Pamphlet #46
bc: San Francisco District Administrator