Did fixed rent qualify for California's historical fixed-price lease protection when mandatory maintenance and tax charges could increase?

Plain-English summary

XX's customer signed an equipment lease before July 15, 1991 and refused post-date use-tax rates, asserting fixed-price protection. XX collected use tax on rent and agreed that rental payments were fixed. But a mandatory maintenance contract allowed periodic monthly increases capped at an undescribed annual percentage.

Paragraph 11 also required the customer to pay invoiced sales, use, excise and other taxes then or later imposed on schedules, rent, equipment or use, excluding property tax and XX net-income tax. Thus XX could pass later tax increases through.

AB 2181 raised the statewide rate to 7.25% and added section 6376.1 protection for continuing-sale leases fixed before July 15, 1991, except periods any party could terminate solely on notice. The Board applied four criteria: binding before July 15; no notice-only termination; all costs fixed initially; and tax-included/fixed-amount/fixed-rate terms with no increase.

XX's lease failed because mandatory maintenance was a lease cost and could rise, so all costs were not fixed at outset. Independently, paragraph 11 passed tax increases to the customer. Counsel therefore denied historical fixed-price treatment.

No full agreement, amounts/cap, termination terms, tax filings or dispute outcome is supplied. The live annotation publishes only the variable-maintenance reason and omits the tax clause and historical framework.

Common questions

Did fixed rent make the whole contract fixed-price?

No. Mandatory maintenance was also a lease cost and could increase.

Why did the tax clause matter?

It made the lessee responsible for taxes later imposed, allowing tax increases to be passed through.

What four criteria did the Board state?

Pre-July 15 binding effect, no notice-only termination, every cost fixed at outset and fixed/no-increase tax wording.

Did the customer have a termination right?

The governing rule discusses it, but the supplied letter does not state this lease's termination terms; the full agreement is absent.

Is this a current exemption?

The letter addressed a specific historical protection created with the 1991 rate change.

Was the customer dispute resolved?

The opinion rejects the claimed protection but supplies no assessment, payment, appeal or later outcome.

Citations and references

• AB 2181, 1991 Cal. Stat. ch. 85; sections 6051, 6201, 6051.2, 6051.5, 6201.2, 6201.5 — 7.25% rate legislation
• Section 6376.1 — historical fixed-price continuing-lease protection/notice-termination limit
• Section 6203 — rent-measured continuing-lease use tax
• Board's four administrative criteria — stated without separate source
• June 18 request, complete lease/schedules and cost/tax/dispute records — absent
• August 3, 1992 Waid letter — two independent failures without later outcome
• Official Annotation 330.2265 — mandatory-maintenance reason only

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2265
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2265.pdf

Original ruling text

330.2265

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-3828

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

August 3, 1992

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Re: ---

Dear Ms. ---:
I am writing this in response to your letter of June 18, 1992, to Assistant Chief Counsel Gary J. Jugum. You asked if the exemption from the recent tax increases for fixed-price contracts applies to one of XXs leases. You indicate that you have a customer who executed a lease agreement prior to July 15, 1991, and is refusing to pay use tax at the rates in effect after that date claiming its lease qualifies as a fixed-price lease. You indicate that XX collects use tax measured by the rental payments. You agree with the lessee that the rental payments are fixed pursuant to the Term Lease Agreement, a copy of which you attached to your letter. You note, however, that the mandatory maintenance contract allows for periodic increases in the monthly maintenance costs not to exceed a designated percentage in any given year and ask if this provision negates the exemption. You attached to your letter a copy of the Term Lease Agreement in question. Paragraph 11, in pertinent part, provides as follows: "Customer agrees to pay to XX upon invoice, all sales, use, excise, and other taxes ... now or hereafter imposed by any governmental body or agency upon any Equipment Schedule, the Rental Payments due thereunder, and Equipment or the use thereof, exclusive of property taxes and taxes imposed upon the net income of XX." OPINION

Ms. ---

-2-

August 3, 1992
330.2265

A. Fixed-Price Leases Generally.
As you are aware, on June 30, 1991, the Legislature enacted Assembly Bill 2181, Statutes 1991, Chapter 85. This bill amended Sections 6051 and 6201, and added Sections 6051.2, 6051.5, 6201.2, and 6201.5, which raised the state-wide sales and use tax rate to seven and one-quarter percent. This bill also added Section 6376.1 which provides that leases of tangible personal property that are continuing sales of the property for any period of time for which the lessor is obligated to lease the property for an amount fixed by the lease prior to July 15, 1991, are not subject to the new rates. The exemption does not apply to leases for any period of time in which any party to the lease has the right to terminate it upon notice, whether or not the right is exercised. In determining whether a lease agreement is for a "fixed-price" we have consistently required that it satisfy the following criteria: (1) it be binding prior to July 15, 1991; (2) neither party has a right to terminate the contract conditioned solely upon notice; (3) the agreement must fix the amount of all costs at the outset; and (4) it must include a provision which fixes the tax obligation on a tax-included basis or sets forth either the amount or the rate of tax and does not provide for an increase in the amount of tax. 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. If the lease is a sale under this definition, that lease is subject to use tax measured by rentals payable unless it is specifically exempted by statute. (§ 6203). B. Tax Consequences to XX The lease agreement was executed prior to July 15, 1991. XX collects use tax measured by the rental payments, so the lease qualifies as a continuing sale. Since the maintenance agreement is mandatory, it is one of the lease costs incurred by the lessee. We thus agree with you that, because XX reserves the right to increase the amounts of the payments for the maintenance contract, the costs of the lease are not fixed at the outset. Also, Paragraph 11, quoted above, requires the lessee to be responsible for all taxes. XX can pass on any tax increases to its lessees. XX's lease agreements containing this paragraph do not qualify for the fixed-price lease exemption under the criteria set forth above.

I hope the above discussion has answered your question. If you need anything further, please do not hesitate to write again.

Ms. ---

-3-

Sincerely,

John L. Waid
Tax Counsel

JLW:es
bc: Out-of-State District Administrator

August 3, 1992
330.2265