Could a film provider treat projectors and accessories in one customer package as free accommodations rather than taxable equipment rentals?

Plain-English summary

A corporation provided restaurants and pizza parlors a package of licensed motion-picture films, a specially designed projector and accessories. It contended that customers rented only the film and received the equipment without charge as an accommodation.

The hearing officer rejected that characterization. The contract expressly required the equipment, the hiring elements of customer possession/control were present, and equipment investment was approximately 77% of the total unit. The corporation was lessor, so tax was measured by fairly apportioned projector/accessory rental value. The source gives neither package price nor allocation calculation.

The equipment rental was also a taxable rental sale for two independently stated reasons: the corporation had not timely paid sales-tax reimbursement or use tax on full purchase price, and the specially designed property was not leased in substantially the same form as acquired.

The hearing officer nevertheless recommended deleting the $543 ten-percent negligence penalty. Earlier oral Board advice concerned tax-paid projectors leased in the same form; the officer found it reasonable, on the corporation's first audit, not to recognize the new consequences when acquisition method changed. The $65,657 protested rental measure was not recommended for deletion.

The PDF does not reproduce the contracts, investment/cost proof, acquisitions and tax payments, rental-allocation workpapers, patent/licensing/sales records or the oral advice. It dates the hearing only June 8, 19XX, dates the document July 6, 1977 and places June 24, 1977 beneath the hearing officer's signature. Live Annotation 330.2350 publishes only the apportioned-rent result and 77% fact.

Common questions

Could the company call the projector a free convenience?

No. The required contract terms, customer possession, and substantial equipment investment supported treating it as rented property.

How much of the package was taxable?

The source requires a fair apportionment to projector and related equipment but supplies neither the package charge nor the computation. Its 77% figure describes invested cost, not expressly the taxable allocation percentage.

Why was equipment rent a taxable rental sale?

The source states two reasons: no timely sales-tax reimbursement/use-tax payment on full purchase price, and property not leased in substantially the same form as acquired.

Was the negligence penalty upheld?

No. The recommendation deleted the $543 ten-percent penalty because prior advice fit former tax-paid, same-form projectors and the changed acquisition consequences were reasonably missed during a first audit.

Did the recommendation erase the rental-tax measure?

No. It upheld tax measured by fairly apportioned equipment rent and recommended deleting only the penalty; the source identifies the protested rental measure as $65,657.

Does the PDF prove the precise allocation or advice?

No. It reports the result and underlying descriptions but does not reproduce the allocation workpapers, customer contracts, cost/tax records or oral-advice record.

May another business rely on this recommendation?

No. It is a historical hearing-officer recommendation on redacted facts, not a final precedential decision; CDTFA also warns that current statutory law controls over an annotation.

Citations and references

• Civil Code section 1925; Culligan Water Conditioning v. State Board of Equalization, 17 Cal. 3d 86 — possession/control hiring authorities
• Revenue and Taxation Code section 6006(g)(5); Sales and Use Taxes Regulation 1660 — acquisition-tax and same-form rental-sale rules
• Contracts, cost/investment evidence, acquisition/tax records, allocation workpapers, projector design/licensing/sales records and oral advice — described or relied on but absent
• July 6, 1977 Burkett Decision and Recommendation — hearing dated June 8, 19XX; signature line dated June 24, 1977
• Official Annotation 330.2350 — apportioned equipment rent and 77% fact only

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2350
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2350.pdf

Original ruling text

STATE OF CALIFORNIA
BOARD OF EQUALIZATION

7/6/77

In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law
C--- - D--- SYSTEMS, INC.

Petitioner

330.2350

DECISION AND RECOMMENDATION
OF HEARING OFFICER

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Account No. SR -- XX-XXXXXX

This matter came on regularly for hearing in Los Angeles, California on June 8, 19XX, before W. E. Burkett, Hearing Officer. Appearances For the Taxpayer:

Mr. R. J. T---, resident
Mr. A--- Y---, Bookkeeper

For the Board:

Mr. Jan K. Ishii, District Principal Auditor
Mr. Peter R. Elack, Auditor
Protested Items
(Period 10-1-72 to 6-30-76)

1.

Taxable rental receipts not reported.

2.
Ten percent penalty assessed for negligence
in reporting

$65,657

$

543

Contentions of Taxpayer
1.
No consideration should be attributed to the property since it was provided as an accommodation with exempt film rentals. 2. This penalty should not have been applied in any event because we acted upon reporting advice obtained from a representative of the Board of Equalization.

C--- - D--- Systems, Inc.
SR -- XX XXXXXX

-4-

July 6, 1977
330.2350

Summary of Petition
The taxpayer is a corporation engaged in providing motion picture films and equipment for use by customers (chiefly restaurants and pizza parlors). The protested measure of tax consists of the apportioned rentals attributed to a motion picture projector and related equipment which the taxpayer provided for use by customers as part of a complete price package. The taxpayer licensed the film for use from the distributor thereof. It also provided the customer with the use of a specially designed motion picture projector and the accessory equipment which it acquired without payment of tax from various sources. The taxpayer’s representative contends that it only rents the film and that the projector and accessory equipment was provided as a convenience to the customer. Its representative pointed out that the customer was formerly provided with the use of projectors acquired tax paid from various sources. However, these projectors were inefficient in that their use resulted in excessive wear on the film. The taxpayer has specially designed and patented a new type of projector which permits long-life use of the film. The firm is currently licensing distributors and making volume sales of the projector units. The taxpayer also protests the application of the 10 percent negligence penalty determined for negligence in reporting. It appears that the taxpayer sought oral assistance from a board office in reporting its sales and use tax liability. However, at the time the advice was given it was utilizing projectors acquired tax paid and leased in the same form as acquired. This is the taxpayer’s first audit examination. Analysis and Conclusions It is our conclusion that the taxpayer was properly classified as the lessor of the property and is subject to tax measured by the fairly apportioned rental value of the projector and related equipment. The principal elements of a hiring of personal property are the transfer of possession to the hirer so that the hirer controls and uses the subject property (Cal.Civil Code Sections 1925; also see Culligan Water Conditioning v. State Board of Equalization, 17 Cal.3d 86). These elements are present in this petitioned matter. It is not reasonable to conclude that the taxpayer was providing the equipment without charge when the invested cost of the property amounted to approximately 77 percent of the total unit. Nor does this accord with the terms of the parties’ contract, which expressly requires the furnishing of the equipment. The rental of the equipment is subject to classification as a taxable rental sale because the taxpayer failed to make a timely payment of sales tax reimbursement or use tax on the full purchase price of the property, and for the additional reason that the property was not leased in

C--- - D--- Systems, Inc.
SR -- XX XXXXXX

-4-

July 6, 1977
330.2350

substantially the same form as acquired (Revenue and Taxation Code section 6006(g)(5); Sales and Use Taxes Regulation 1660). The information provided to the taxpayer by the board’s representative appears to have been correct because at the time he was leasing projectors acquired tax paid and leased in the same form as acquired. On the other hand it is our conclusion that the failure to note the new tax consequences resulting from the change in the method of acquiring the leased projectors was reasonable in the attendant circumstances. Accordingly, we conclude that the ten percent negligence penalty should be deleted from the amount proposed for redetermination. Recommendation The ten percent penalty should be deleted from the amount proposed for redetermination.

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W. E. BURKETT, HEARING OFFICER

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6-24-77
Date