Were computer-maintenance charges optional and excluded from taxable rent when the lessee could choose between two lessor-provided plans?

Plain-English summary

R--- leased computer equipment under an agreement requiring maintenance. Plan one supplied all parts/service plus a full-time on-site field engineer. Plan two trained R--- staff for technical certification, supplied two on-site engineer inspections/per-diem availability and required buying lessor's replacement-parts spares kit.

Each maintenance agreement lasted one year and renewed automatically unless R--- converted to the other. R--- claimed it could provide maintenance itself. Counsel had no actual lease and understood instead that R--- always had to contract with lessor, merely choosing plan type.

Counsel apparently assumed the lease was a continuing sale with rent-measured lessee use tax. Regulation 1660(c)(1) included required lease payments except separately stated optional insurance/maintenance.

Annotation 330.3460 supported taxing lessor-required maintenance. Annotation 330.3360 analogized mandatory insurance: even separately stated insurance was excluded only when lessee could choose its own insurer. Two lessor-only choices therefore were not optional; all maintenance charges entered taxable rent.

No lease, maintenance contract, price, separate statement, equipment/acquisition-tax record, return or outcome is supplied. The formal letter is December 18, 1992; live 330.2325 prints February 18, 1991 without explanation.

Common questions

Did having two maintenance choices make the charge optional?

No. Both choices required a contract with the lessor.

What did plan one include?

All necessary parts/service and a full-time on-site field engineer.

What did plan two include?

Training for lessee personnel, two inspections, per-diem engineer availability and a mandatory replacement-parts kit.

What kind of option might support exclusion?

The opinion contrasted a real right to choose an independent maintenance provider rather than being required to buy from the lessor.

Did California review the signed lease?

No. The writer expressly relied on the facts described in the inquiry.

Was the lease proven to be a taxable continuing sale?

No. Counsel called it apparently one and no equipment acquisition/election evidence is supplied.

Was the opinion issued in 1991 or 1992?

The formal two-page letter twice says December 18, 1992; only the live annotation prints February 18, 1991.

Citations and references

• Sections 6006(g)(5)/6006.1/6010(e)(5)/6010.1 — continuing-sale lease framework
• Sections 6201-6204; Regulation 1660(c)(1) — rent tax and optional maintenance/insurance
• Annotations 330.3460/330.3360 — lessor-required maintenance and insurer-choice analogy; texts absent
• October 27 request, lease/plans/prices/equipment/tax records and enclosure — absent
• Formal December 18, 1992 Levine letter; live February 18, 1991 — unresolved date conflict
• Official Annotation 330.2325 — plan/result detail without provenance limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2325
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2325.pdf

Original ruling text

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

330.2325
WILLIAM M. BENNETT
First District, Kentfield
BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

December 18, 1992

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

Mr. [D]
Controller
[R]
XXX --- ----- ---, -- XXXXX-XXXX

BURTON W. OLIVER
Executive Director

Dear Mr. [D]:
This is in response to your letter dated October 27, 1992 regarding the amounts which are taxable with respect to the lease of certain computer equipment. You are the lessee of the equipment. The lease requires that a maintenance agreement be in force. You have the option of choosing between two different maintenance agreements. You believe that the charges for maintenance are not subject to tax since you have the option to provide the maintenance yourself. Under the first type of maintenance agreement, the lessor provides all necessary parts and service as well as providing a full time on-site field engineer. Under the second type of maintenance agreement, the lessor trains your personnel for technical certification on the equipment and provides two on-site inspections by its field engineer. The lessor will also have a field engineer available for maintenance on a per diem basis. You are required to purchase from the lessor a "spares kit" of replacement parts. Either maintenance agreement is for a term of one year, at which time it automatically renews unless you choose to convert your existing agreement over to the other type of maintenance agreement. Discussion A lease of tangible personal property is a continuing sale unless the lessor leases it in substantially the same form as acquired and has made a timely election to pay sales tax reimbursement or use tax measured by the lessor's purchase price of the property. (Rev. & Tax. Code §§ 6006(g)(5), 6006.1, 6010(e)(5), 6010.1.) A lease that is a continuing sale is subject to use tax measured by rentals payable. The lessee owes that use tax, and the lessor is required to collect it from the lessee and pay it to this Board. (Rev. & Tax. Code §§ 6201, 6202, 6203, 6204, Reg. 1660.) The lease about which you inquire is apparently a continuing sale, which means that you owe use tax measured by the rentals payable. Your question is whether the maintenance charges are included in the taxable rentals payable.

Mr. [D]

-2-

December 18, 1992
330.2325

The application of tax to leases of tangible personal property is explained in Regulation 1660, a copy of which is enclosed. As stated in subdivision (c)(1) of Regulation 1660, the rentals subject to tax include any payments required by the lease except, as relevant here, separately stated optional insurance and maintenance charges. We have previously concluded that where equipment is leased under a contract which provides that the lessee must contract with the lessor for maintenance, the charges for such maintenance are includible in the taxable rentals payable. (Business Taxes Law Guide Annotation 330.3460 (5/19/67).) Similarly, we have concluded that when the lessee is required under the lease contract to obtain insurance, the charge for that insurance by the lessor is excludable from the taxable rentals payable only if they are separately stated and the lessee is not required to obtain the insurance from the lessor but rather is entitled to purchase the insurance from the insurer of the lessee's own choice. (Business Taxes Law Guide Annotation 330.3360 (7/13/66).) You have not provided us a copy of the actual lease. However, your description is that you must contract with the lessor for the maintenance, but you can choose one of two different types of agreements. That is, my understanding is that the lease contract does not provide you the option of contracting for the maintenance with the person of your own choice, but rather requires that you contract with the lessor for such maintenance. That you have the choice of two types of maintenance agreements does not mean that the maintenance charges are optional within the meaning of Regulation 1660 since, regardless which type you choose, you are required to contract with the lessor for that maintenance. We therefore conclude that the charges must be included in the taxable rentals payable from the lease. If you have further questions, feel free to write again. Sincerely,

David H. Levine
Senior Tax Counsel
DHL:es