Were rents on donated costumes taxable when the lessor paid tax only on materials used to alter them?

Plain-English summary

An orchestra association asked about two costume groups: donated costumes it altered before rental and costumes it constructed entirely. It said it paid sales-tax reimbursement on purchased alteration/construction materials, but did not describe any lessee purchase right. Counsel therefore assumed true leases with the association retaining title and always recovering the costumes after each term.

A tangible-property lease was a continuing sale taxed on rent unless the property remained substantially the same form and the lessor paid sales/use tax measured by its purchase price. Substantially greater value or substantial fabrication could defeat same-form treatment even when some inputs had been taxed.

Constructed costumes clearly were not the same form as their component materials. For donated costumes, counsel contrasted minor temporary tuxedo adjustments and said the association's alterations appears likely to be substantial. That made rent taxable regardless of tax paid on incorporated alteration materials.

The donated costumes had another independent defect: because they were donated, the association paid no tax on their purchase price. Thus, even a particular item rented in the same form would not satisfy the acquisition-tax exception, and its rent was taxable.

Regulation 1701 allowed a tax-paid-purchases-resold deduction for tax reimbursement paid on incorporated materials, provided the association did not use the finished costumes before renting them.

No lease, costume, donation, alteration, invoice, tax or prior-use record is supplied, and no implemented assessment/deduction outcome appears. A separately redacted copy of the same June 10 letter supports live Annotation 330.3955's constructed-costume branch; live 330.2158 states only the donated-costume/acquisition-tax result.

Common questions

Did receiving the costumes by donation make rent nontaxable?

No. Donation meant the lessor had paid no tax on a purchase price, so the rent-tax exception failed.

Did tax on alteration materials substitute for costume acquisition tax?

No.

Were the alterations conclusively substantial?

No. Counsel said it appears likely they changed form substantially, but the absent acquisition tax independently made donated-costume rent taxable.

What about entirely constructed costumes?

They clearly were not leased in the same form as acquired materials, so their rent was taxable.

Was a deduction available for taxed materials?

Yes, if the finished costumes had not been used before rental.

Did the source show the deduction was actually claimed?

No. It supplies no returns, input-tax records, prior-use proof, audit or later outcome.

Citations and references

• Sections 6006(g)(5), 6006.1; Regulation 1660(c)(1) — same-form/acquisition-tax exception and rent tax
• Annotations 330.3900, 330.3980 and 330.4180 — value, fabrication and minor-adjustment comparisons
• Regulation 1701 — tax-paid-purchases-resold deduction; enclosure absent
• April 4, 1994 request, leases, costumes and acquisition/alteration/input-tax/prior-use records — absent
• June 10, 1994 counsel letter — true-lease assumptions and conditional conclusions without outcome
• Official Annotation 330.2158 — donation/acquisition-tax branch
• Companion official source for Annotation 330.3955: https://cdtfa.ca.gov/lawguides/annotations/330-3955.pdf — separately redacted copy supporting construction branch

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2158
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2158.pdf

Original ruling text

330.2158
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-2641

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

June 10, 1994

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento
────────

Mr. R--- L--Managing Director
S--- L--- O--- Association's
M--- C--XXXX --- Street, Suite XXX
---, CA XXXXX
Re:

BURTON W. OLIVER
Executive Director

SR -- XX-XXXXXX

Dear Mr. L---:
I am responding to your letter of April 4, 1994. You ask whether you must collect tax on costume rentals. Some are donated and you alter them before renting. Others are constructed entirely by you and then rented. You pay sales tax (reimbursement) on materials used to alter or construct the costumes. Your letter does not indicate whether the lessee has an obligation or an option to purchase the costumes during or at the end of the lease period. For purposes of this opinion, we assume that your leases are true leases, that is, you retain title to the costumes and they are always returned to you after the lease period is over. The lease (or rental) of tangible personal property in California is a continuing sale unless that property is leased in substantially the same form as acquired by the lessor and the lessor has 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.) If the lease is a continuing sale under this definition, that lease is subject to use tax measured by rentals payable. (Reg. 1660(c)(1).) If the value of the property leased is substantially in excess of the purchase price, the property is not leased in substantially the same form as acquired. (Business Taxes Law Guide Annotation 330.3900 (2/17/67).) Property is also regarded as not leased in substantially the same form as acquired if there has been a substantial change in the form (such as fabrication). (See, e.g., BTLG Annot. 330.3980 (11/1/67, 8/21/90).) When property is not leased in

Mr. R--- L---

-2-

June 10, 1994
330.2158

substantially the same form as acquired, the lease is a continuing sale subject to use tax measured by rentals payable without regard to whether the lessor reported tax on the purchase price of some or all of the property incorporated into the leased property. You state that to be suitable for renting, your costumes are either altered or made from materials you purchase. The costumes you make are clearly not leased in substantially the same form as acquired. Although we have previously concluded that "minor temporary adjustments to rented tuxedos" do not substantially change the form of the tuxedos (BTLG Annot. 330.4180 (8/25/66)), it appears likely that your alterations of donated costumes substantially change the form. Additionally, although you have paid tax (reimbursement) on the property you purchased to make or alter the costumes, you did not pay tax on the purchase price of the donated costumes since they had been donated to you. Therefore, even if you have been renting the donated costumes in substantially the same form as acquired, you are obligated to collect use tax on the rentals payable on the costumes you altered or made. However, you may take a tax-paid purchases resold deduction for sales tax (reimbursement) paid on the purchase of materials incorporated into the costumes, provided you did not use the costumes prior to renting them. This is explained in Regulation 1701, a copy of which is enclosed. If you have further questions, please do not hesitate to write again. Very truly yours,

Victor G. Matl
Tax Counsel
VGM:plh
Enclosure - Regulation 1701
cc:

--- District Administrator - --