Does a lease statement saying 'Rental Not Taxable' itself protect the lessee when acquisition tax was not actually paid?

Plain-English summary

A lease said that when Rental Not Taxable was checked, the lessor warranted it paid section 6052 sales tax or purchase-price use tax, the equipment stayed substantially the same form, and it would indemnify the contractor against sales/use tax claimed on the lease, rent or other payments.

The July 1981 memorandum said this language neither required nor accomplished cost-tax payment; it merely stated payment and promised indemnity if false. Based on a representation that cost tax was not paid, the lessee remained liable for rent-measured use tax while the lessor owed contractual indemnity.

It called Regulation 1686(b)(2) inapplicable because that paragraph covered transactions where use tax actually did not apply. The erroneous notice left lessor/lessee liabilities to the taxing authority unchanged.

In September 1997, Levine proposed a clearer rationale: any 1686(b) notice only tells a lessee facts supporting noncollection; it is not an exemption certificate. A correct notice accompanies a truly nontaxable lease but does not cause that result. A wrong notice leaves the lessee liable, while its contractual status can support indemnity even without the explicit clause used here.

The live annotation reflects that clarification but adds December 4, 2001 and (Am. 2002-3) without supplying either source. No agreement, payment evidence, assessment or indemnity outcome is reproduced.

Common questions

Does checking Rental Not Taxable make a lease nontaxable?

No. The actual tax treatment of the property controls.

Who owes tax if the statement is wrong?

The source says the lessee remains liable for use tax measured by rentals when acquisition tax was not paid.

Does a false statement have no effect?

It does not change liability to the taxing authority, but it can create contractual indemnity rights against the lessor.

Is the notice an exemption certificate?

No. The 1997 clarification calls it a duty to explain why the lessor is not collecting tax.

Was cost tax proved unpaid here?

No. The 1981 memorandum says there was a representation it was not paid; underlying payment records are absent.

What happened in 2001/2002?

The live annotation lists December 4, 2001 and (Am. 2002-3), but no corresponding source or amendment history is supplied.

Citations and references

• Section 6052 — lease warranty's asserted sales-tax payment
• Regulation 1686(b)(2) — only transactions where use tax does not apply
• July 13 request/lease/tax records — described/quoted but absent
• July 16, 1981 Jugum memorandum — government liability/explicit indemnity
• September 26, 1997 Levine email — informational-notice clarification/implied indemnity
• December 4, 2001 source and (Am. 2002-3) — named live but absent
• Official Annotation 330.2297 — current live synthesis without later-source history

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2297
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2297.pdf

Original ruling text

Levine, David
From:
To:
Cc:
Subject:
Date:

330.2297
Levine, David
Khabbaz, Leila
Anderson, Vic;
330.2297 (7/16/81)
Friday, September 26, 1997 10:19AM

I think this annotation needs some clarification. The annotation (and backup) indicate that the notice is "inappropriate." When I first looked at it, I thought, why shouldn't this statement in the invoice relieve the lessee of liability?" In fact, it appears that the requirements in subdivision (b) of Regulation 1686 are not for the purpose of relieving the lessee of tax no matter what. Rather, the provision appears designed to ensure that, if the lease isn't taxable, the lessor notify the lessee of the facts supporting nontaxability. If the notice is wrong, the lessee is still liable for the tax, but the giving of the notice should put the lessor on the hook for indemnity to the lessee, as indicated in this annotation. Thus, it does not appear that the lessee remains liable for the tax because the notice was "inappropriate" and "erroneous," but rather because the lessee's liability is simply unaffected by ANY notice under Regulation 1686(b), whether correct or not. The notice does not act as an exemption certificate. Rather, it is simply a duty imposed on the lessor to explain why it isn't collecting tax from the lessee. If notice is correct, the lessee does not owe tax because the lease is not, in fact, a sale, not because the lessee received a notice. If the notice is wrong, the lessee remains on the hook. However, if such is the case, since the notice would be part of the lease contract, it is my opinion that the lessee would have indemnity rights against the lessor based on that notice even if it did not have the explicit statement to that effect as did the notice discussed in this annotation. I suggest this annotation be rewritten to clarify that the notice given under 1686(b) is simply to provide info to the lessee, and does not, itself, serve to relieve the lessee of liability for tax. I don't think the annotation should not use the term "inappropriate" because it is misleading in this context.

.

State of California

Board of Equalization

Memorandum

To:

Mr Robert Nunes

From:

Gary J. Jugum

Subject:

Liability for tax on leases

330.2297

Date:

July 16, 1981

This is in response to your memorandum of July 13, 1981. We understand that the lessee of certain tangible personal property has entered into an agreement with its lessor which provides, with respect to California rentals, as follows: “… if ‘Rental Not Taxable’ has been checked on the face of this Agreement, Lessor warrants that Lessor has paid sales tax pursuant to Section 6052 of the California Revenue Taxation Code or has paid use tax measured by the purchase price of the equipment and that the equipment is in substantially the same from as acquired; Lessor will indemnify Contractor against any sales or use taxes that may be claimed to be due in connection with this lease or the rentals or other payments hereunder.” The quoted language does not “require” that the lessor pay tax upon its purchase price of the equipment. This term is only a statement by the lessor that tax was paid on cost and a promise of indemnity if this statement is false. If tax has not been paid on cost, the lessee remains liable for use tax measured by rental receipts. However, the lessor has a contractual obligation to the lessee to indemnify the lessee. Regulation 1686, paragraph (b) (2), has no application in the case in question. That paragraph only applies “for lease or rental transactions with respect to which use tax does not apply.” [Emphasis added.] In the case in question there is a representation that tax was not in fact paid on cost. The “notice” was inappropriate, and the liabilities of the lessor and the lessee vis-à-vis the taxing authority are not affected by the erroneous “notice.”

J:alicetilton