When is equipment supplied with an operator a lease rather than a service under California's possession-and-control test?

Plain-English summary

E--- bought heavy construction equipment ex tax. A lessee with a licensed operator could take equipment alone; otherwise E--- provided one, and only a licensed operator could operate it. The absent March 24 request asked whether owner-operator transactions were leases or services.

For ordinary property, leases were continuing sales/purchases with rent-measured lessee use tax collected by the lessor. Same-form property could instead qualify for purchase-price tax. A lessor could therefore buy ordinary property for resale; E--- used that route by buying ex tax.

MTE differed: its lease was never a sale/purchase, and a sale to a later MTE lessor was not resale. An exclusive-leasing purchaser nevertheless could buy with a resale certificate and irrevocably elect fair-rental-value use tax on a timely first-lease-period return, then pay every reporting period whether property was inside/outside California. The source lists included/excluded examples but never says whether E---'s equipment was MTE.

Staff then gave three possession/control categories. No operator generally meant lease. Property available only with its owner's operator generally meant nontaxable service; the owner was consumer and owed purchase-price use tax if resale-certificate property was first used beyond retention/demonstration/display. A customer option to take property with or without an operator meant lease even when the owner supplied one; taxable equipment rent excluded operator services.

Entremont found no lease where truck/operator possession and control stayed with the owner: operators did not become department employees; department directions were limited; selection/discharge stayed with Entremont. Here, E---'s customers had selection power even though limited to licensed operators, so they possessed/controlled operator and equipment and the transactions were leases. Treating them as services instead would have exposed E--- to full purchase-price tax.

No agreements, equipment/MTE classification, invoices, licenses, operator control/allocation, return/election or outcome is supplied. Live 330.2307.725 publishes only Entremont's chief sentence; live 330.2465 separately publishes the operator-choice branches.

Common questions

What is the chief characteristic of a lease?

The owner gives up possession so that the customer uses and controls the property.

Does an owner-supplied operator always make the transaction a service?

No. If the customer can choose to supply a qualified operator, the transaction is still treated as a lease.

What if the owner never supplies equipment without its operator?

That generally is a service. The owner remains the equipment's consumer and can owe tax on its purchase or use.

Was customer supervision alone decisive?

No. Entremont considered limited directions insufficient where operator employment, selection/discharge and possession/control stayed with the owner.

Is the operator charge included in taxable rent?

No. The opinion included the equipment rent but excluded the charge for the operator's services.

Did the letter classify E---'s equipment as MTE?

No. It describes both ordinary and MTE rules but does not identify the equipment sufficiently to choose between them.

What made E---'s transaction a lease?

The customer could select a licensed operator rather than accept E---'s operator, giving it the relevant selection power.

Were the actual prices, contracts and tax elections reviewed here?

The source refers to a request and Board file but reproduces none of those records or a later audit outcome.

Citations and references

• Sections 6006(g)/6006.1/6010(e)/6010.1; Regulation 1660(c)(1) — ordinary rent-tax lease
• Sections 6006(g)(5)/6010(e)(5) — same-form purchase-price-tax exception
• Sections 6006(g)(4)/6010(e)(4)/6092.1/6094(d)/6243.1/6244(d) — MTE election/measure
• Sections 6023/6024 — MTE included/excluded examples
• Section 6094(a) — nonresale use of resale-certificate property
• Entremont, 13 Cal.2d 291, 295; Civil Code sections 1925/1955 — possession/control/operator powers
• March 24 request, Board file and transaction/tax records — absent
• August 5, 1993 Abreu letter — three categories and E--- answer without outcome
• Official Annotations 330.2307.725/330.2465 — separate excerpts of the same letter

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2307.725
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2307-725.pdf
• Separate official excerpt of the same letter: Annotation 330.2465 PDF

Original ruling text

330.2307.725

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-8208

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

August 5, 1993

GRAY DAVIS
Controller, Sacramento
────────
BURTON W. OLIVER
Executive Director

Mr. A--- A. O--S--- & Z--Attorneys at Law
Suite XXXX
--- --- --- Center
--- ---, CA XXXXX-XXXX
Re:

E--- E--- Corporation
SY -- XX-XXXXXX

Dear Mr. O---:
Your letter dated March 24, 1993 has been forwarded to the Legal Section for a response. According to the information in your letter and in our file, your client leases heavy construction equipment which it had purchased ex tax. If the lessee of the equipment has a licensed operator, the lessee may lease the equipment without an operator. If the lessee does not have a licensed operator, your client provides the licensed operator. Only a licensed operator may operate the equipment. The issue raised by your letter is whether those transactions in which your client provides the licensed operator are leases or services. A.

Application of Tax to Leases of Tangible Personal Property

In California the general rule is that a lease of tangible personal property is a continuing sale and purchase. The lessor must collect use tax from the lessee at the time rentals are paid and pay the tax to the state. The use tax is measured by the rentals payable. Rev. & Tax. Code §§ 6006(g), 6006.1, 6010(e), and 6010.1 and Regulation 1660(c)(1). Since a lease is a continuing sale and purchase, the lessor may purchase the property ex tax by issuing a resale certificate to the seller.

Mr. A--- A. O---

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August 5, 1993
330.2307.725

For certain types of tangible personal property, however, the lessor may elect to pay tax on the purchase price of the property rather than on rental receipts. This is the tax-paid lease exception. It applies to a lease of tangible personal property which is leased in substantially the same form as acquired and for which the lessor has paid sales tax reimbursement or use tax measured by the purchase price of the property. Rev. & Tax. Code §§ 6006(g)(5) and 6010(e)(5). The application of tax to sales and leases of mobile transportation equipment (MTE) is different from other tangible personal property. 1/ A lease of MTE is never a sale and purchase. Rev. & Tax. Code § 6006(g)(4) and 6010(e)(4). Thus, a sale of MTE to a purchaser who subsequently leases the MTE is not a sale for resale. Under the Revenue and Taxation Code, however, a purchaser of MTE who limits his or her use of the MTE to leasing may issue a resale certificate when purchasing the MTE and make an election to pay use tax measured by the fair rental value of the MTE. The election is made by reporting tax measured by the fair rental value on a timely filed return for the period in which the MTE is first leased. Tax must thereafter be paid with the return for each reporting period, measured by the fair rental value, whether the MTE is within or without the state. The election may not be revoked with respect to the MTE as to which it is made. Rev. & Tax. Code §§ 6092.1, 6094(d), 6243.1, and 6244(d). B.

Lease v. Service

The Board's staff applies the following rules with respect to tangible personal property provided by one party to another: 1. If temporary possession and control of tangible personal property is transferred by one person to another for a consideration and the transferor does not provide an operator for the property, the transaction generally is a lease.

1/

Revenue and Taxation Code section 6023 defines mobile transportation equipment as equipment such as railroad cars and locomotives, buses, trucks (except "one-way rental trucks"), truck trailers, dollies, bogies, chassis, reusable cargo shipping containers, aircraft and ships, and tangible personal property which is or becomes a component part of such equipment. MTE does not include passenger vehicles, trailers and baggage containers designed for hauling by passenger vehicles, or "one-way rental trucks" as defined in Section 6024.

Mr. A--- A. O---

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August 5, 1993
330.2307.725

2.
If the owner of the property always provides the operator, i.e., the owner will not provide the property without its own operator, the transaction is not a lease. The charges made by the owner are regarded as charges for nontaxable services. The owner of the property should not purchase such property for resale. If the owner does issue a resale certificate when purchasing such property, the owner is liable for use tax measured by the purchase price when it first uses the property for any purpose other than retention, demonstration, or display. Rev. & Tax. Code § 6094(a). 3. If the person desiring to use the property has the option to obtain the property with or without an operator, the transaction is a lease even if the owner of the property provides the operator. In those transactions in which the owner of the property provides the operator and the lease payments are subject to tax, the measure of tax will include the charges for rent but will not include the charges for the operator's services. The California Supreme Court addressed the issue of whether a transaction was a lease in Entremont v. Whitsell (1939) 13 Cal.2d 291. In concluding that the contract was not for the lease of the equipment, the Court stated: "This conclusion follows from the fact that under the contract the possession and control of the trucks and the operators did not pass to the department - the operators did not become the employees of the department - but such possession and control remained in Entremont. The chief characteristic of a renting or a leasing is the giving up of possession to the hirer, so that the hirer and not the owner uses and controls the rented property. (Civ. Code, secs. 1925, 1955.) The record is clear that the only supervision exercised by the department over the operators of the trucks was to direct them where to load and unload the material hauled, when to go on or leave the job, and to inform the operators whether the load should be dumped or spread. The department had no power to discharge the drivers - that power, and the power of selection, rested in Entremont. That is a factor of some importance in ascertaining whether Entremont or the department controlled the operators...." (Id. at 295. Emphasis added.) In the third type of transaction we described above, the person contracting with the owner of the property has the power of selection. Even where the person's selection is limited to hiring a licensed operator, that person still has the power of selection and therefore is regarded as having possession and control over the operator and equipment. The staff's position on the third type of transaction benefits lessors such as your client because the lessor generally has the election to pay tax up front on the purchase of the equipment or to pay tax measured by rentals payable or the fair rental value of the equipment. Your client

Mr. A--- A. O---

-4-

August 5, 1993
330.2307.725

took advantage of this election by purchasing its equipment ex tax. If such transactions were regarded as services, your client would have to pay tax on the full purchase price of the equipment. If you have further questions regarding Sales and Use Tax Law, please do not hesitate to write again. Sincerely,

Elizabeth Abreu
Tax Counsel
EA:cl