Who was responsible for California use tax when an indenture trustee collected rent but the owner-lessor retained the equipment?

Plain-English summary

Two audit memoranda sent Legal Division contracts for two leveraged leases and asked who had to report/pay California use tax. They also supplied a March 1, 1978 James Mahler opinion, none of which is reproduced here.

In the 1978 structure, an owner/lessor formed a trust and chose a bank as owner-trustee. The trust bought/leased equipment and assigned rent to an independent loan-trustee under an indenture for outside lenders. That bank made loan payments, deducted service charges and remitted the balance to the owner/lessor.

Because a trust is a sales/use-tax person, it—not its controlling owner—owned/leased property, issued the resale certificate and bore tax responsibility through an owner-trustee holding its seller's permit. Counsel analogized a solely owned corporation: shareholder control did not replace the corporation as owner/lessor/tax person.

The two 1989 transactions had no owner-trustee/separate trust owner. Their documents showed the redacted owner/lessor itself owned and leased equipment. The indenture trustee held only lender security; its collection function resembled the prior loan-trustee and did not change ownership/tax responsibility.

The owner-lessor could assign collection to that trustee, but remained the retailer ultimately responsible to collect, report and pay use tax. No contracts, trustee powers, collections or payment outcome is supplied. The live annotation publishes both structures but omits the source/evidence gaps.

Common questions

Did collecting rent make the indenture trustee the lessor?

No. The contracts showed that it held only security for lenders.

When would a bank trustee report for a trust?

When a separate trust actually owned and leased the property, its trustee could hold the permit and act on the trust's behalf.

Did owner control of a trust change the tax person?

No. The trust remained the separate owner/lessor, like a corporation remained separate from its sole shareholder.

Could the owner-lessor delegate tax collection?

Yes, but the memorandum says ultimate payment responsibility stayed with the owner-lessor retailer.

Were both 1989 contracts reproduced?

No. Counsel says the documents made ownership clear and returned the attachments, but the supporting PDF contains none of them.

Is the 1978 Mahler opinion available here?

No. Its structure/conclusion are summarized only by the 1989 memorandum.

Citations and references

• Section 6005 — trust/corporation as sales/use-tax person
• Section 6201 et seq. — owner-lessor retailer's ultimate responsibility
• March 1, 1978 Mahler opinion — prior structure summarized; source absent
• February 10 and 24, 1989 audit memoranda — described but absent
• Two leveraged-lease contracts/attachments and ownership/trust/collection/tax records — absent
• March 15, 1989 Levine memorandum — document-specific comparison without later outcome
• Official Annotation 330.2285 — both structural branches without source/evidence limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2285
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2285.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

From:

Subject:

Mr. Jack Warner
Out-of-State District Principal Auditor

David H. Levine
Tax Counsel

330.2285

Date:

March 15, 1989

ATSS 485-5550
(916) 445-5550

Leverage Leasing Transactions

This is in response to your memorandum dated February 24, 1989 and a memorandum to you from Arthur Goldner of New York Out-of-State District dated February 10, 1989. Mr. Goldner has provided contracts for two leveraged lease transactions and asks which party is responsible for reporting and paying California use tax. Mr. Goldner has also included a copy of an opinion dated March 1, 1978 from Tax Counsel James Mahler on this subject. In the transactions considered by Mr. Mahler, the owner/lessor formed a trust, selecting a bank to act as trustee of that trust (designated as owner/trustee). The trust purchased equipment and leased it to a lessee. The rental receipts were assigned to an independent bank called a loan/trustee which acted under a trust indenture for the benefit of outside lenders. The loan/trustee collected the rents, making loan payments to the outside lenders and remitting the balance, less service charges, to the owner/lessor. Mr. Mahler concluded that it was the owner/trustee who was the only party who could issue a valid resale certificate when purchasing the property to be leased. The reason for this is that a trust is a "person" for sales and use tax purposes. (Rev. & Tax. Code § 6005.) Since it was the trust that was actually purchasing the property and leasing it, only the trust could issue a valid resale certificate when purchasing the property. The trustee would hold a seller's permit on behalf of the trust. The transactions about which Mr. Goldner inquires do not have an owner/trustee, but do have an indenture trustee. The ---, the indenture trustee in these transactions, disputes that it is the proper party to collect and report use tax on these transactions. We agree. In the transactions considered by Mr. Mahler, the actual owners of the leased property were the owner/trustees. Although the owner/lessors may have controlled the trusts, the owner/lessors were not the actual owners and lessors of the property. Rather, the owner/trustees owned the property and leased the property to the lessees. A similar analysis would apply to a lessor/corporation wholly owned by one stockholder. Although the sole stockholder may control the corporation, a corporation is a person for purposes of sales and use tax and it is that person

that owns the property and leases it to the lessees. The corporation is therefore responsible for collecting and paying use tax. The transactions considered by Mr. Mahler sometimes had a loan trustee acting pursuant to a trust indenture agreement. This did not alter his analysis. The responsibilities of the loan trustee in those transactions and the purpose of the trust indenture agreement appear to be identical to those involved in the transactions at issue in which the --- acts as indenture trustee. Just as in the transactions considered by Mr. Mahler, the existence of an indenture trustee does not alter the analysis of how tax applies to leases. Throughout the documents involved in both transactions, it is clear that the owner/lessor,
---, is the owner of the leased property as well as the lessor of that property. The indenture trustee holds only a security interest on behalf of the lenders. Thus, for purposes of sales and use taxation, the difference between these transactions and those considered by Mr. Mahler is that no independent "person" was established to own the leased property. Rather, the owner/lessor retained ownership of the property. As the owner and the lessor, --- is responsible for collecting, reporting, and paying use tax. Although it may assign to an indenture trustee the responsibility for collecting that tax from the lessee, is the retailer and is ultimately responsible for payment of that tax pursuant to Revenue and Taxation Code section 6201 et seq. As you requested, the attachments you transferred to us are being returned to you with this memorandum. If you have further questions, feel free to write again.

DHL/smt

cc: E. L. Sorensen, Jr.