When a vehicle lessee defaulted, did California sales-tax law require the lessor to apply the security deposit to particular debts first?

Plain-English summary

An unidentified vehicle lessor received monthly payments and paid tax when it received them. It asked three questions about hypothetical repossessed vehicles, disposition proceeds and security deposits. The assumed debts included two past-due lease payments with $800 base payment and $66 sales-tax totals, two late fees totaling $40, a $15 bounced-check fee, $300 repossession fee, $350 termination fee plus $28.88 tax, $750 collision damage and a $150 excess-mileage fee plus $12.38 tax.

First, the lessor hypothesized a $10,000 sale of a repossessed automobile to another dealership for resale, with a valid resale certificate. Staff Counsel concluded the sale was nontaxable if the purchasing dealer really acquired it for resale and the lessor timely accepted a proper certificate in good faith.

Second, the lessor asked whether a $1,000 deposit had to pay rent/tax and mileage/tax before out-of-pocket repossession costs, fees or vehicle damage. The Sales and Use Tax Law supplied no allocation order. Assuming no other statute, case or lease term did either, the lessor could allocate the deposit as it deemed appropriate.

The tax then followed the obligation actually satisfied: deposit funds used for taxable charges stayed taxable. The example treated $700 applied to late lease payments as taxable rent.

Third, a casualty hypothetical asked about insurance and a $250 deposit. The request says an insurer paid $500 ($700 less $250), which does not arithmetically reconcile. Staff Counsel did not resolve the numbers. Instead, she read sample-lease items 7 and 20 to make any gap between insurance proceeds and total lease obligations—including vehicle damage before return—the lessee's obligation. If the insurer withheld the deductible, the lessee owed that amount to the lessor; the same discretionary-allocation answer applied.

No actual sale, certificate, allocation, insurance record or tax outcome is supplied. The live annotation publishes only the no-order/taxable-use branch and omits the resale and casualty analyses and the assumptions.

Common questions

Did sales-tax law require the deposit to cover rent first?

No, not under the assumptions in the opinion.

Could the lessor choose any allocation?

Only if no other statute, case law or lease term established an order.

Could allocation make a taxable charge nontaxable?

No. Deposit money applied to a taxable obligation remained taxable.

Was the dealer-to-dealer repossession sale taxable?

Not when it was genuinely for resale and supported by a timely, proper resale certificate accepted in good faith.

Was the insurance deductible a lessee debt?

Yes under the described sample-lease terms when the insurer withheld it from proceeds owed for the casualty loss.

Did the source resolve the insurance arithmetic?

No. It reproduces $500 ($700 less $250) and does not explain the $50 difference.

Did an actual default allocation occur?

The source does not say. Its amounts and dispositions were expressly hypothetical, and the underlying account records are absent.

Citations and references

• Sections 6051, 6006(a) and 6007 — retail-sale, title-transfer and resale framework
• Sections 6091 and 6092; Regulation 1668 — proper timely resale certificate accepted in good faith
• October 9, 1995 request — three hypothetical questions, quoted/described but absent
• Sample Closed End Vehicle Lease Agreement, items 7 and 20 — described casualty-loss obligation; agreement absent
• January 3, 1996 counsel letter — conditional hypothetical answers without transaction/tax outcome
• Official Annotation 330.2140 — deposit-allocation rule without resale/casualty/source-limit branches

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2140
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2140.pdf

Original ruling text

330.2140

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

January 3, 1996

This responds to your letter dated October 9, 1995 concerning repossessed leased vehicles. You write that --- --- --- leases vehicles under lease contracts. You enclose a copy of a sample contract. You state that --- receives monthly lease payments on the vehicles and pays tax on the lease payments upon their receipt. You ask several questions concerning funds from the disposition of a repossessed vehicle and funds from a security deposit, and describe hypothetical situations as follows: "For these questions, I would like to make the following assumptions about the amounts owed and condition of the car on date of repossession: Past due 2 lease payments:

Base Payment

$800.00

Sales Tax

66.00

Late Fees

40.00

Past Due Bounced Check Fees: Bncd Ck Fees

15.00

Owes Repossession Fees:

Repo. Fees

300.00

Termination Fee Per Contract:

Term Fee

350.00

Tax on Term Fee

28.88

Past due 2 late fees:

The vehicle has $750 of collision damage.
The vehicle has 1000 more miles than agreed to:
Mileage Fee:

150.00

Tax on Miles Fee:

12.38"

Question 1
You ask us to assume that there is no security deposit, and that --- sells the repossessed vehicle to another automobile dealership for $10,000. You also ask us to assume that it is a sale for resale for which --- receives a valid resale certificate. You ask whether the entire $10,000 is considered to be "for resale" and, thus, not subject to sales tax. Response: For the privilege of selling tangible personal property at retail in this state, a tax is imposed upon the gross receipts of a retailer from such sales. (Rev. & Tax. Code § 6051.) A sale includes any transfer of title of tangible personal property for a consideration. (Rev. & Tax. Code § 6006(a).) A retail sale means a sale for any purpose other than resale in the regular course of business. (Rev. & Tax. Code § 6007.) A sale for resale is not subject to tax. (Reg. 1668.) In making a sale for resale, if the seller of tangible personal property in good faith accepts a timely resale certificate in proper form from the purchaser, the sale is nontaxable. (Rev. & Tax. Code §§ 6091, 6092; Reg. 1668.) Thus, if --- sells a repossessed automobile to another dealership for resale, that sale is not subject to tax as long as --- in good faith takes a timely resale certificate in proper form from the purchasing dealership. Question 2 You ask us to assume that there is a $1,000 security deposit which --- holds on the hypothetical account. Your question concerns the allocation of the security deposit funds upon the lessee's default. You ask: "A. Is there a required order for the allocation of the security deposit? "1. Can we first consider that the Security Deposit was reimbursing us for out of pocket costs, such as Repossession Fees, or other contractual amounts such as late fees, etc. "2. Can we first apply it to damage on the car. "3. Or are we required to first apply the security deposit to past due lease payments and the corresponding tax and/or the excess mileage fee and tax?" Response: There are no provisions in the Sales and Use Tax Law concerning the order in which funds from a security deposit must be applied upon default. Assuming that there is no other statutory or case law specifying an order, and that the lease contract itself does not specify an order, --- may apply the security deposit funds as it deems appropriate. Please note, however, that if --- applies any of the security deposit funds to satisfy charges which are taxable under the Sales and Use Tax law, --- is liable for payment of the tax. For example, in the hypothetical, if --- applies $700 of the security deposit to the late lease payments, the $700 is considered lease payments which are subject to tax. Question 3 You ask,

"[I]f we file an insurance claim for the damage and are paid $500 ($700 less $250 deductible) by the insurance company and there is a $250 security deposit: "A. Can we apply the insurance payment to damage (non-taxable), and the security deposit to the deductible that was not covered by the insurance company (thus also nontaxable)? "B. Or is there another required order for allocating the money?" Response: The sample contract provides that in the event of a casualty loss to the vehicle, the lessee is obligated to pay any difference between the proceeds of the lessee's insurance and the total amount of the lessee's obligations under the lease (which includes any damage to the vehicle during the lease term and before the vehicle is returned to the lessor). ("Closed End Vehicle Lease Agreement", Items 7. & 20.) Based upon this, it is our opinion that the amount of the deductible is part of the lessee's obligation under the lease. If the lessee does not pay that amount to the insurer, and the insurer withholds the amount of the deductible from the proceeds which it remits to ---, the lessee has an indebtedness to the lessor, --- for the amount of the deductible. The order in which the security deposit funds may be applied to a lessee's indebtedness to --- is discussed in our response to Question 2, above. I hope this information is of assistance. Please write again if we may answer further questions.

Sincerely,

Sharon Jarvis
Staff Counsel

SH:rz
District Administrator