After August 1, 1965, could a motion-picture lessor elect to treat film rentals as taxable sales?

Plain-English summary

The April 25 letter reviewed a $75 annual church plan: churches received film strips outright plus use of motion-picture films/projectors, or could lease equipment two years with purchase option. The charge required reasonable three-way allocation among film-strip price, motion-picture rental/use and equipment rent; no calculation is supplied.

Under historical section 6006(g), motion-picture film leases were not taxable sales. Lessor was consumer, with tax on acquisition—including use tax for out-of-state films used principally in California. By contrast, same-form equipment under former section 6006(g)(4) allowed acquisition-tax or rent-tax election.

For church equipment, a nonnominal option was taxed when exercised; nominal option made conditional sale at inception measured by total rent less financing charges. Nashville billing/payment did not change tax; a California office required collection from users when California sales tax would apply to an in-state sale.

The April 26 letter said general rentals became taxable August 1, 1965 but motion-picture rentals were excepted, so lessors could no longer elect rent as sale and instead consumed newer films. Pre-change films could retain an exercised rent-tax election. It mentioned 4% rent tax for recent films and said audits would require excessive customer-collected tax refunded or paid to state.

No agreement, allocation, acquisition/use, lease/option, office, bill/tax, prior election or outcome evidence is supplied. Live 330.2340 publishes only the post-change consumer rule.

Common questions

Could the annual church charge be treated as one item?

No. The source required allocation among sold film strips, use of motion pictures, and equipment.

Who was the consumer of newer motion-picture films after August 1, 1965?

The lessor. The retail sale subject to tax was the sale of the films to the lessor.

Did the same rule automatically apply to projectors?

No. The equipment lease had a separate historical election because the projectors were leased in substantially the same form as acquired.

How did a purchase option affect the equipment?

A nonnominal option price was taxed when exercised. A nominal option caused the source to treat the transaction as a conditional sale from the outset.

Could older-film rent still include tax?

Yes if lessor acquired it before the change and had exercised the prior rent-receipts election.

Did out-of-state billing remove collection duty?

No on the stated facts because provider had a California office.

What happened to excessive customer collections?

The second letter said audits would require refund to customers or payment to state.

Citations and references

• Section 6006(g), including former (g)(4) — motion-picture exception/equipment election
• Former Ruling 70 — enclosed rental guidance absent
• April 4/19 requests and church/property/allocation/lease/nexus/tax/election records — absent
• April 25/26, 1966 Knowles letters — multiple historical branches; visible was charged defect
• Official Annotation 330.2340 — post-change consumer excerpt only

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2340
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2340.pdf

Original ruling text

330.2340

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

April 25, 1966

Attention:
Contracts and Insurance Consultant

Gentlemen:
This is in reply to your letter of April 4, 1966, requesting our interpretation of the proper application of the California sales and use taxes to your plan for distributing motion picture films, film strips, and equipment to churches in California. The plan calls for each church to pay
$75 a year to participate. For the yearly charge, they receive a number of film strips outright and the use of motion picture films and motion picture projectors. The church may instead choose to lease the equipment for a period of two years with an option to purchase at the end of the period. The $75 a year charge constitutes in part the selling price of film strips furnished during the year and in part the rental of motion picture films and equipment. Under §6006 (g) of the California Sales and Use Tax Law, a copy of which is enclosed, leases of motion pictures cannot be considered as sales subject to the tax. The application of tax to motion pictures is that the lessor is treated as the consumer, and tax applies to the sale to him. If he purchases the motion picture from an out-of-state source and uses it principally in California, his use is subject to use tax and should be reported on his return. As the lessor of the equipment, tax applies to either the sale to you or the lease by you at your option. This is because under §6006 (g) (4) the property is leased in substantially the same form as acquired. It will be necessary for you to break down the $75 a year charge in the amounts attributable to the three different areas, the film strips, motion pictures, and the equipment. This allocation is reasonable, there should be no difficulty. You also mention a lease with an option to purchase which you, as lessor, entered with the churches for the equipment. Unless the option price is nominal, tax applies as mentioned in the paragraph above to the option price when it is exercised. If the option is nominal, we consider the transaction to be a conditional sale and subject to tax as a complete sale when made. Tax is measured by the total rental payments less financing charges.

The fact that billing is done from Nashville and payment will be sent to Nashville does not change the application of the tax. Since you have an office in this state, you are required to collect the use tax from California users in any situations in which sales tax would be applicable had the sale occurred in California. If you have any further questions concerning the film distribution plan or this lease, please feel free to call on us.

Very truly yours,

John H. Knowles
Associate Tax Counsel

JHK:lar
Enclosure
cc: Fresno – District Administrator

330.2340

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
cc: San Jose – District Administrator

April 26, 1966

Attention:
Accountant
Gentlemen:
This is in reply to your letter of April 19, 1966, concerning the application of California sales and use taxes to motion picture rentals. Enclosed is a copy of ruling 70 which explains the application of tax to rental transactions. You will note the application of tax was charged on August 1, 1965. Prior to this date, lessor of tangible personal property had the option to pay tax on their cost or to treat their leases as sales and report tax on rental receipts. In the latter case, they ordinarily passed the tax on to their customers. Since August 1, 1965, the application of tax to rentals of motion pictures differs from the application of tax to other rentals. The law was changed to make rentals taxable but motion picture rentals were excepted from the statutory change. Therefore, lessor of motion pictures cannot now elect to treat their rentals as sales. Rather, they are consumers of the property and the sale of the films to them is the retail sale subject to tax. Motion picture lessors who acquire films prior to the date of the change may have exercised the option to be taxed on rental receipts. With respect to older films then, they may quite properly be charging you tax on rentals. Out-of-state lessors doing business in California are required to pay sales or use tax to the state depending on the circumstances. A customer really has no way to tell with respect to the older films whether the particular lessor has elected to be taxed on rental receipts. Both California and out-of-state concerns, however, are audited by our auditing staff and if excessive tax is being collected from customers, we will require it to be returned to the customers or, in the alternative, paid to the state. With respect to more recent films, the customer may object to a film lessor charging sales or use tax computed at 4 per cent of the rental price. Very truly yours,

John H. Knowles
Associate Tax Counsel