Could a modular-building lessor buy refurbishment materials for resale or deduct tax mistakenly paid on components?

Plain-English summary

M--- bought/refurbished used modular office buildings, then leased them without installing them on customer property. It asked whether tax paid on sheetrock, ceiling tiles and similar refurbishment material qualified for a tax-paid-purchases-resold deduction. The November 30 fax—received February 28—and underlying records are absent.

Counsel assumed the buildings were tangible personal property leased in rent-taxed continuing sales/purchases. The source does not decide which same-form or timely purchase-price-tax condition failed. The live annotation alone adds that M--- paid no acquisition tax on the used buildings.

Under Regulation 1525, material bought for the purpose of becoming a physical building component could be purchased ex tax for resale. Property bought merely for use in refurbishment, without physical incorporation, remained taxable at purchase.

Regulation 1701 allowed a purchase-price deduction when a retailer had paid vendor sales-tax reimbursement/use tax on property then resold before any use other than retention/demonstration/display while held for regular-course sale. Thus erroneous tax on qualifying components could be deducted.

The deduction belonged on the return that included the building lease. If omitted from the proper quarter, M--- had to file a refund claim. No invoices, incorporation/use proof, lease return, deduction, claim, audit or outcome is supplied; the enclosed regulation is absent.

Common questions

Did every refurbishment purchase qualify for resale?

No. Only property physically incorporated as a component of the leased modular building.

What about property merely used during refurbishment?

Those purchases were taxable when the items were used rather than incorporated.

Could mistakenly paid component tax be recovered?

Yes, through the tax-paid-purchases-resold deduction, provided the property was resold before disqualifying use.

What prior uses did Regulation 1701 allow?

Retention, demonstration or display while holding the property for sale in the regular course of business.

When should the deduction be claimed?

On the return that includes the taxable lease; otherwise, by a refund claim for the proper period.

Did the PDF establish why the leases were continuing sales?

No. Counsel expressly assumed that status; only the live annotation says no tax was paid on the used buildings.

Is there proof the buildings were not installed?

No. The letter states that understanding but supplies no lease, installation record, photograph or other evidence.

Citations and references

• Sections 6051/6201/6401 — retail-sale/use framework
• Sections 6006(g)(5)/6006.1/6010(e)(5)/6010.1; Regulation 1660 — continuing leases
• Sections 6202-6204; Regulation 1660(c)(1) — rent tax and collection
• Regulation 1525 — physical components bought for resale
• Regulation 1701 — tax-paid-purchases-resold deduction before disqualifying use
• November 30 fax, building/lease/material/tax/deduction records and enclosure — absent
• March 25, 1997 Chung letter — express property/lease assumptions without outcome
• Official Annotation 330.2310.100 — adds no-building-acquisition-tax fact absent from PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2310.100
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2310-100.pdf

Original ruling text

330.2310.100

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
TELEPHONE: (916) 324-2614
FAX : (916) 323-3387

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

March 25, 1997

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

Mr. J--- O--M--XXXX --- Ave., Ste. XXX
---, CA XXXXX
Re:

M---, Inc.
Account No. SR -- XX-XXXXXX

Dear Mr. ---:
This is in response to your fax dated November 30, 1996, which was received by the Legal Division on February 28, 1997. You state that M--- purchases and refurbishes used modular office buildings, and then subsequently leases the buildings. You ask whether M--may properly take a tax-paid purchases resold deduction for its tax-paid purchases of materials such as sheetrock and ceiling tiles which it uses to refurbish the used modular office buildings. DISCUSSION Retail sales of tangible personal property in California are subject to sales tax, measured by the gross receipts, unless the sale is specifically exempt from taxation by statute. (Rev. & Tax. Code
§ 6051.) When sales tax does not apply, use tax, measured by the sales price, applies to the use of tangible personal property purchased from a retailer for storage, use, or other consumption in California, unless the use is exempt from taxation by statute. (Rev. & Tax. Code §§ 6201, 6401.) Our understanding is that you lease the used modular office buildings as tangible personal property, that is, in connection with the lease of the buildings, you do not install the buildings on your customer’s property. A lease of tangible personal property in California is a continuing sale and purchase unless the lessor leases the property in substantially the same form as acquired and timely pays sales tax reimbursement or use tax measured by the purchase price of the property. (Rev. & Tax. Code §§ 6006(g)(5), 6006.1, 6010(e)(5), 6010.1; Reg. 1660, subds. (b)(1) and (c)(2).) When a lease is a continuing sale and purchase because either or both of the foregoing conditions have not been satisfied, the lease is subject to use tax measured by rentals payable. (Reg. 1660(c)(1).) The lessee owes the tax, which the lessor is required to collect from the lessee and pay to this board. (Rev. & Tax. Code §§ 6202, 6203, 6204; Reg. 1660(c)(1).)

Mr. J--- O---

-2-

March 25, 1997
330.2310.100

We assume that you are leasing tangible personal property in transactions which are continuing sales and purchases, subject to use tax measured by rentals payable. Under these circumstances, if you purchase materials for the purpose of incorporating it into the modular office buildings to be leased, that is, the materials become a component part of the modular office buildings, you may purchase such materials extax for resale. (Reg. 1525.) In contrast, tax applies to your purchase of tangible personal property for the purpose of using it in refurbishing the used modular office buildings and not for the purpose of physically incorporating it into the buildings. With regard to the tax-paid purchases resold deduction, Sales and Use Tax Regulation 1701 (copy enclosed) provides that a retailer who resells tangible personal property before making any use thereof (other than retention, demonstration or display while holding it for sale in the regular course of business) may take a deduction of the purchase price of the property if, with respect to its purchase, the retailer has reimbursed its vendor for the sales tax or has paid the use tax. Thus, if you have, through error, paid sales tax reimbursement with respect to the purchase price of property purchased for resale in the regular course of business, you may take a tax-paid purchases resold deduction. The deduction must be taken on the return in which your lease of the modular office buildings is included. If the deduction is not taken in the proper quarter, a claim for refund must be filed. If you have any further questions, please write again. Sincerely,

Sophia H. Chung
Tax Counsel
SHC:rz
Enclosure: Sales and Use Tax Regulation 1701

cc:

Oakland District Administrator (CH)