Could a manufacturer treat x-ray equipment as resale inventory while leasing it back from a financing company and using it only for demonstrations?

Plain-English summary

A--- manufactured/sold specialized x-ray equipment, sold one unit to financial institution AF and leased it back for 36 months. Its purchase option was $1 plus a $250 termination fee. AF issued no resale certificate, no sales tax was paid on A---'s sale to AF, and AF billed A--- use tax on monthly lease amounts; A--- refused, claiming resale inventory used solely for nontaxable demonstration.

Audit staff reasoned that the $250 fee exceeded Regulation 1660's nominal-option limit, making a true lease rather than financing; without clear title, they thought A--- could not hold it for regular-course resale. The live annotation affirmatively adopts that true-lease conclusion and describes $251 as purchase price.

Legal Division did not need to decide it. Whether lease or not, these specific facts used the method to finance part of A---'s resale inventory; A--- held the unit for resale and used it only for demonstration/display. No tax applied until resale, and A--- could issue AF a resale certificate.

That answer was intentionally abbreviated. The absent file reportedly included an October 13 request, December 14 call, April 18 district memo, A--- correspondence, only the lease front page and an option amendment. No full contract, equipment/title/tax, resale/use, return/audit or later-sale outcome is supplied.

Common questions

Did the sale-leaseback automatically remove the equipment from resale inventory?

No.

Did Legal Division decide whether $251 was nominal?

No. It said the resale result was the same whether the contract was a lease or financing.

Why did audit staff think it was a true lease?

They treated the $250 termination fee as exceeding the nominal-option limit and thought A--- lacked clear title.

What use supported tax deferral?

The equipment was held for resale and used solely for demonstration and display.

Could A--- issue AF a resale certificate?

Yes under the stated specific facts.

Which law supported the resale-inventory conclusion?

The abbreviated memorandum cites none; Regulation 1660 appears only in the audit staff's lease-versus-financing concern.

Does the live annotation match the PDF on true-lease status?

No. Live says $251 made it a true lease; the PDF leaves that issue undecided as unnecessary to its result.

Are the full lease, use and resale records available?

No. Only their existence/partial review is described; the source gives no later audit or resale outcome.

Citations and references

• Regulation 1660 — audit staff's nominal-option/true-lease concern only
• No numbered authority for the resale-inventory/demonstration holding
• October 13/April 18 memoranda, December 14 call, correspondence and partial lease documents — absent
• December 29, 1995 Jarvis memorandum — abbreviated lease-or-financing-independent result
• Official Annotation 330.2310.200 — resolves true-lease issue left undecided in the PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2310.200
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2310-200.pdf

Original ruling text

State of California

Board of Equalization
Legal Division

Memorandum

To:

Supervisor
Audit Evaluation and Planning Section (MIC: 40)

From:

Sharon Jarvis
Staff Counsel

330.2310.200

Date: December 29, 1995

Subject: A---, Inc.
Account No. SR – XX-XXXXXX

This responds to a memorandum dated October 13, 1995 from your section concerning A---, Inc. (A---), and a December 14, 1995 telephone call from Ms. T--- A---. In order to facilitate a response at this time, we will answer your question in an abbreviated format, instead of providing a detailed legal analysis. We have reviewed your memorandum and the April 18, 1995 memorandum from the district, as well as the attached correspondence from A---, including the copy of the front page of A---’s lease with A--- F---, Inc. (AF) and the amendment to the lease which provides an option to purchase. A--- manufactures and sells specialized x-ray equipment. A--manufactured and sold a piece of this equipment to AF, and leased it back. AF did not issue a resale certificate and sales tax was not paid at the time of the sale to AF. AF has billed A--for use tax on the monthly lease amounts. However, A--- has refused to pay the use tax contending that the equipment is held for resale and is used solely for nontaxable demonstration purposes. The lease agreement is for 36 months with an option to purchase the equipment for $1, plus a $250 termination fee. You ask whether A--- may hold the equipment for resale and use the equipment ex-tax for purposes of demonstration and display. You are concerned that the
$250 termination fee exceeds the limit for the purchase option amount to be considered nominal, and, thus, that the transaction between A--- and AF is a true lease and not a financing transaction pursuant to Regulation 1660.

Supervisor
Audit Evaluation and
Planning Section

-2-

December 29, 1995
330.2310.200

You state, “It appears that due to the $250 termination fee, which exceeds the limit for the purchase option to be considered ‘nominal,’ the lease from AF to A--- is a true lease. Consequently, it is our opinion that the lessee does not have clear title to the equipment and cannot hold the equipment for resale in the regular course of business.” Under these specific facts, A--- has used this method for financing what amounts to a part of its resale inventory. Whether the contract between A--- and AF is a lease or not, under the specific facts here we agree with A--- that it is holding the equipment for resale, and that no tax applies until A--- resells the equipment. A--- may properly issue a resale certificate to the lessor/financing company, AF, for the equipment. We hope this information is of assistance.

SJ:rz