Was a vehicle lease exempt when a federal contractor used the vehicle only on a Navy contract and passed the cost to the government?

Plain-English summary

D--- R--- leased operating vehicles from H--- P--- for government-contract performance. In category one, a vehicle solely transported Navy compressors, D--- R--- passed cost directly to government and paid H--- no sales/use tax. In category two, a vehicle served activities unrelated to a specific contract, cost went to overhead rather than directly to the United States, and D--- R--- paid rent-computed tax to H---.

Both categories were taxable leases. H--- remained lessor; D--- R--- remained equipment-using lessee; neither involved a sublease to the United States. Sole Navy-contract use and direct cost pass-through were immaterial to those identities.

Counsel stated—without cited authority—that a tangible-property lease to the United States was untaxed. But equipment was not leased to the United States when its contractor itself operated it under a government contract.

D--- R--- asked to correct any fault. Counsel directed it to district Principal Auditor Phillip K. Klepin for compliance, but no contact, return, assessment or correction outcome is supplied. The live annotation publishes the two categories/result without that procedural limit.

Common questions

Did exclusive use on a Navy contract make the lease exempt?

No. The contractor still leased and operated the vehicle.

Did direct government cost recovery matter?

No. Cost treatment did not change the identity of the lessee.

Did the contractor sublease the vehicle to the United States?

No under both stated categories.

When would the stated federal exemption apply?

The opinion limited it to a lease of tangible personal property to the United States itself.

What happened to the unpaid tax in category one?

Counsel said the lease was taxable and referred the contractor to a district auditor, but the source shows no correction or assessment.

Which law established the federal exemption?

The letter cites none, so its historical statement should not be treated as a complete current-law rule.

Citations and references

• No numbered authority cited
• Unspecified direct-U.S.-lease exemption — authority/scope absent
• May 6 request and vehicle/government-contract/cost/tax/compliance records — absent
• May 13, 1991 Jugum letter — both contractor categories taxable; auditor referral without outcome
• Official Annotation 330.2310.115 — category/result synthesis without payment/procedure/source limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2310.115
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2310-115.pdf

Original ruling text

330.2310.115

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-3723

May 13, 1991

Ms. A--- H--Accountant
D--- - R--- S--- D--Product Support Division
XXX --- Street, Suite ----- ---, CA XXXXX
SS --- XX-XXXXXX
Dear Ms. H---:
This is in reply to your letter of May 6, 1991, which was received in this office on May 10, 1991. We understand it is the practice of D--- - R--- to lease operating vehicle from H--- P--- to fulfill performance on government contracts. When a vehicle used for the sold purpose of transporting navy compressors under a government contract, the cost of such performance is passed by D--- - R--- directly to the government. In this instance, no sales or use taxes are paid to H---. If the transportation vehicle is used for various activities not related to a specific government contract, the cost is expensed out to an overhead account and not charged directly to the U. S. government. In this instance, you pay sales or use tax computed on the rental receipts directly to H---. You indicate that D--- - R--- wants to comply with our tax regulations. If you are at fault, you want to take immediate corrective action. It is our opinion that both categories are leases which are subject to tax. In both instances, the lessor is H--- - P---, and the lessee using the equipment is D--- - R---. There is no sublease of equipment to the United States in either case. It is immaterial that in some instances the vehicles are used solely for the purpose of transporting navy compressors under a government contract and the cost is passed on directly to the U. S.

Ms. A--- H---

-2-

May 13, 1991
330.2310.115

While tax does not apply to leases of tangible personal property to the United States, there is no lease of property to the U. S. where the government contractor itself operates the equipment under a government contract. Our recommendation is that you contact the Principal Auditor in our --- --- District Office to insure proper compliance with our requirements. The Principal Auditor is Mr. Phillip K. Klepin. His telephone number is (XXX) 237-7731. Very truly yours,

Gary J. Jugum
Assistant Chief Counsel

GJJ:sr
cc:

Mr. Phillip K. Klepin
--- --- District Principal Auditor