Where did California place tax in a chain of three or more leases when only the final customer used the property?

Plain-English summary

Bakersfield Auditing described tangible property leased/subleased through at least three lessors. It audited the first sublessor, could not readily tell whether the first lessor paid tax, knew its taxpayer had not issued an upstream resale certificate or reported tax on the next lease and was told no downstream certificate was received. It did not know the second sublessor's tax handling.

Assistant Chief Counsel Jugum had orally advised going to the chain end/last sublessor; audit staff preferred the first lessor if no tax existed and requested a definite point. Counsel confirmed the endpoint: the sublessor leasing to the consumer.

Assuming no tax anywhere, each prior lease was an actual sale for resale regardless of a certificate. The live annotation also expressly assumes no property use except by the final sublessee; the PDF does not state that fact directly. If the last sublessor was uncollectible, the agency could look only to the consumer-lessee—not an earlier lessor.

The source cites only an attached 1974 Rigby memorandum that the PDF omits. It also contains the impossible 1978/1985 date conflict and supplies no leases, tax/use evidence, certificates, assessment or collection outcome.

Common questions

Did a missing certificate make an intermediate lease taxable?

Not under the memorandum's stated assumptions. It treated the actual no-use intermediate leases as sales for resale.

Who had the primary collection responsibility?

The final sublessor leasing to the consumer.

Could the agency assess the first lessor if collection was hard?

The memorandum said no. If the last sublessor was uncollectible, it could look only to the consumer-lessee.

Was original-purchase tax actually known to be unpaid?

No. Audit staff said it could not readily determine that; counsel then gave the chain rule assuming no tax anywhere.

Where does the no-intermediate-use fact come from?

The live annotation states it. The supporting memorandum does not expressly do so and its attached 1974 authority is absent.

Why use the 1985 annotation date?

The PDF's printed 1978 date conflicts with its statement that it responds to an August 1985 request, while the official annotation supplies September 16, 1985.

Citations and references

• December 5, 1974 Rigby chain-leasing memorandum — referenced attachment absent
• August 2, 1985 Bakersfield memorandum — quoted/described but absent
• Recent Jugum conversation — no date or record supplied
• August 1, 1978 PDF date versus August 2/September 16, 1985 request/live dates — unresolved
• Lease/use/tax/return/certificate/assessment/collection records — absent
• Official Annotation 330.2289 — supplies no-intermediate-use fact/end-chain rule without source limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2289
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2289.pdf

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Bakersfield – Auditing (CWS)

From:

Donald J. Hennessy
Tax Counsel

Subject:

Place of Incidence of Tax in a Series of Leases

330.2289

Date:

August 1, 1978

This is in reply to your memorandum of August 2, 1985 regarding a situation in which “…tangible personal property is being leased and subleased in a series of at least three lessors. We are auditing the first sub-lessor and cannot readily determine whether the property was tax paid on the part of the first lessor. Our taxpayer has stated that he did not give a resale certificate to the first lessor, and our taxpayer is not reporting tax on his lease to the second sublessor. We do not know how the second sub-lessor is handling the tax. Our taxpayer says he has not received a resale certificate from the second sub-lessor.” In a recent conversation with Assistant Chief Counsel Gary Jugum, you were advised to go to the end of a chain of subleases and assess the tax against the last sublessor. You believe that the more logical place to tax would be the first lessor, assuming that no tax has been paid anywhere. You request our opinion on “a definite point” at which tax applies. The “definite point” at which tax applies is the end of the chain, i.e., the sublessor leasing to the consumer, as indicated by Mr. Jugum. We attach a copy of a December 5, 1974 memorandum by then Tax Counsel Glenn Rigby to Out-of-State Auditing (DMA), on the subject of chain leasing. As such memo points out, assuming no tax paid anywhere, all leases prior to the lease to a consumer are leases (sales) for resale, whether or not a resale certificate is given. If uncollectible from the last sublessor, we can look only to the consumer/lessee for the tax.

DJH:rar

Attachment