After buying back a previously sold backdrop for rental inventory, could the company avoid tax on later rents by paying tax on the buyback price?

Plain-English summary

R--- sold computer-painted television/film backdrops, sometimes repurchased them from original customers for a percentage of original cost, then put them in rental stock for repeated rentals. Two absent request letters posed three branches, including a $10,000 taxed sale followed by a $2,000 buyback.

First, a California retail sale was taxable on its gross receipts. A later buyback from that California customer was a separate taxable transaction; the customer's tax on the original sale did not carry over. A buyback from an out-of-state customer for California use—such as rental—was likewise taxable even when R--- had collected no tax on the original out-of-state sale.

For a backdrop leased in substantially the same form, R--- could timely pay applicable sales-tax reimbursement/use tax measured by its repurchase price, and later rent was untaxed. The same choice applied when it bought a newly manufactured backdrop for rental stock.

Payment was timely either to the vendor on purchase or by electing, reporting and paying purchase-price tax with the return for the period the property first entered rental service. If R--- did neither, California leases were continuing sales/purchases: the lessee owed use tax measured by rent, which R--- had to collect and remit.

No contract, invoice beyond the examples, title/delivery evidence, backdrop condition/use, tax record, rent, return, audit or later outcome is supplied. Regulation 1660 and Tax Tip Pamphlet 46 were enclosed but are absent. The live annotation publishes only the core buyback cost-tax/rent-tax choice.

Common questions

Did tax paid by the original customer cover the later buyback?

No. The repurchase was a new transaction.

Was the original California sale still taxable?

Yes, on its gross receipts. The later buyback did not undo it.

Could the company pay tax once on the buyback price?

Yes, if payment was timely and the backdrop was then rented in substantially the same form.

What counted as timely payment?

Vendor payment at purchase, or an election/report/payment with the return for the first rental-service period.

What happened without timely purchase-price tax?

California rent measured lessee use tax; R--- collected and remitted it.

Did the rule apply to newly manufactured rental backdrops?

Yes. The same acquisition-tax choice applied to a manufacturer purchase for rental stock.

What about a buyback from an out-of-state customer?

It was a taxable purchase/use when bought for California rental, even though the stated original sale had no collected tax.

Did the letter determine actual tax paid or due?

No. It gives rules for described scenarios without the transactions, records, filings or outcome.

Citations and references

• Sections 6051/6201/6401 — California sale and in-state use/consumption tax framework
• Sections 6006(g)(5)/6006.1; Regulation 1660(b) — lease continuing sale/purchase and same-form exception
• Regulation 1660(c)(2) — vendor-payment or first-rental-return timing
• Sections 6094.1/6006.5; Regulation 1660(c)(4) — election/reporting cross-references
• Regulation 1660(c)(1) — lessee rent-measured use tax and lessor collection/remittance
• March 21/April 16 requests, transaction/tax records and enclosures — absent
• May 27, 1997 Jarvis letter — scenario answers without completed-event outcome
• Official Annotation 330.2305.990 — core buyback choice without other branches/limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2305.990
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2305-990.pdf

Original ruling text

330.2305.990
STATE OF CALIFORNIA
JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE (916) 324-2634
FAX (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
KATHLEEN CONNELL
Controller, Sacramento
___

May 27, 1997

JOHN CHIANG
Acting Member
Fourth District, Los Angeles
___
E. L. SORENSEN, JR.
Executive Director

VIA FACSIMILE AND U.S. MAIL

Ms. M--- K--Senior Accountant
R--- L--- Inc.
XX --- --- Avenue
---, -- XXXXX
Re:

R--- L--- Inc.
SY --- XX-XXXXXX

Dear Ms. K---:
This responds to your letter dated April 16, 1997 and the letter from Ms. D--- R--- dated March 21, 1997 (received via facsimile by our Legal Division on March 24, 1997). The letters raise questions related to backdrops sold and rented by R--- L--- Inc. (R---). Ms. R---’s letter states: “We sell computer painted images that are used for television and film backdrops. There are occasions where we buy these drops back at a percentage of the original cost from the original purchaser. We now put them into rental stock which is rented on several occasions.” Questions “Do we need to charge tax on the first sale only? Do we need to charge tax on the rental drops each time we rent them? If a customer purchased a drop for
$10,000.00 and paid tax on that sale[,] [c]an I credit them the $2,000.00 buy back and not the tax on the $2000.00?

Ms. M--- K---

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May 27, 1997
330.2305.990

“If we purchase a drop from the manufacturer specifically for our rental stock and we pay tax on that item at the time of manufacturing[,] [d]o we have to charge tax on the rental of that drop? “A customer from a state which we are not required to charge tax buys a mural with no tax. We then buy back the drop for $2,000.00. Do we have to pay the tax on the $2,000.00 buy back only and not the subsequent rentals[?]” Discussion Under the California Sales and Use Tax Law, a retail sale in California of tangible personal property, e.g., backdrops, or the storage, use, or other consumption of property purchased at retail outside of California for use in this state is taxable, unless otherwise exempt. (Rev. & Tax. Code §§ 6051, 6201, 6401.) A lease (which generally includes rentals) of tangible personal property is regarded as a continuing sale and purchase which is subject to tax unless the lessor leases the property in substantially the same form as acquired, and sales tax reimbursement or use tax is timely paid measured by the purchase price of the property. (Rev. & Tax. Code §§ 6006(g)(5), 6006.1; Reg. 1660(b).) To be timely, either sales tax reimbursement or use tax must be paid by the lessor to its vendor when the property is purchased, or the lessor must make an election to pay tax measured by the purchase price of the property by reporting and paying timely such tax with its return for the period during which the property is first placed in rental service. (Reg. 1660(c)(2). See also Rev. & Tax. Code §§ 6094.1, 6006.5; Reg. 1660(c)(4).) The tax on a lease which is a continuing sale and purchase is a use tax owed by the lessee which is measured by the rentals payable on the lease. The lessor is required to collect the tax from the lessee and pay it to the Board of Equalization. (Reg. 1660(c)(1).) Thus, when R--- makes a retail sale in California of a backdrop, sales tax applies measured by the gross receipts from that sale. If R--- later buys the backdrop back from a California customer, that is a new transaction subject to tax, as is a buy-back from an out-of-state customer for use in California, e.g., for rental. If R--- is going to lease the backdrop in substantially the same form as acquired, R--- may chose to timely pay the applicable sales or use tax on its purchase or use of the backdrop measured by the purchase price. (This rule also applies to a purchase of a backdrop from a manufacturer.) In such an instance, no further tax is owed when R--- leases the backdrop. If R--- does not timely pay sales or use tax on its purchase or use of a backdrop, the subsequent rentals or leases of the backdrop in this state are continuing sales and purchases subject to tax measured by the rentals payable. As the lessor, R--- must timely collect that tax from its lessee and remit it to the Board. I hope this information is of assistance. For your further information, copies of Sales and Use Tax Regulation 1660 “Leases of Tangible Personal Property,” and the Board’s Pamphlet

Ms. M--- K---

-3-

May 27, 1997
330.2305.990

No. 46 “Tax Tips for Leasing of Tangible Personal Property in California” are enclosed. If you have further questions, please do not hesitate to write again. Sincerely

Sharon Jarvis
Senior Tax Counsel
SJ:cl
Enclosures (Regulation 1660; Tax Tip Pamphlet No. 46)
cc:

Ms. D--- R--- (R--- L--- Inc.)
--- District Administrator (--)
--- District Administrator (--)
--- --- District Administrator (--)