What amount was taxed when a lessee exercised an option to buy the leased property?

Plain-English summary

An unidentified addressee sent seven questions August 2, 1965 about new lease-tax law operative August 1. Request and underlying agreements/records are absent. Stetson answered under historical transition law.

First, grandfather clause covered fully fixed pre-August obligations—even unsigned—when types, models, descriptions, quantities, rent and all other terms had already been contracted. Exercising renewal option on pre-August lease was renewal, making later rent taxable.

Except leases to United States, banks or insurers, lessee owed use tax on lease payments and lessor collected it; separate statement in lease did not matter. Because leases were continuing sales, amount labeled interest stayed in taxable gross receipts.

On option exercise, tax used specified selling price—the lessee's exercise payment. Former Ruling 70 could allow credit for prior lease payments on which tax was paid to stated extent; it allowed no credit merely because lessor bought property tax-paid. Enclosed ruling is absent, and source editor points to Regulation 1660.

For lease assignment/sale to bank, lessor paid tax on rent actually collected beforehand. After without-recourse transfer, bank effectively became lessor and collected/paid tax on rent it received. The letter supplies no contracts or recourse evidence.

Live 330.2480 publishes only option selling-price answer and omits transition, renewal, liability, interest, credit and bank-assignment branches.

Common questions

Was option tax measured by property's original price?

The option answer used the specified selling price—the amount paid by the lessee upon exercise.

Could previously taxed rent reduce option tax?

Potentially, but only to the extent provided by the cited historical rule.

Did tax paid when lessor purchased property create same credit?

No. The opinion expressly said no credit was provided on that basis.

Could unsigned pre-August 1965 lease qualify for grandfather clause?

Yes under this historical answer if every contract element and fixed obligation had already been agreed before August 1.

Was lease interest excluded from taxable receipts?

No. The letter treated lease as continuing sale and included amount designated interest.

Who owed and collected use tax on ordinary lease payments?

Lessee owed it and lessor collected it, except source separately identified leases to United States, banks or insurers.

What happened after lease was assigned to bank without recourse?

Original lessor handled rent it collected before assignment; bank became effective lessor for rent received afterward.

May another lessor rely on these answers now?

No. They address 1965 transition law, former authority and absent agreements; current statutes/regulations and exact facts must be checked.

Citations and references

• Former section 6006.3 — fixed pre-August 1, 1965 grandfather obligations
• Former Ruling 70 — prior taxed-rent credit; enclosure absent
• Regulation 1660 — later bracketed source reference for former ruling
• August 2 request and lease/renewal/option/assignment/tax/credit records — absent
• August 5 Stetson letter — seven historical transition answers
• Official Annotation 330.2480 — option measure only

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2480
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2480.pdf

Original ruling text

STATE OF CALIFORNIA

330.2480

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

August 5, 1965

--- --- ----- --- ----- --- --Dear Mr. ---:
This is in reply to your letter of August 2, 1965, asking a number of questions concerning the application of the new law, operative August 1, 1965, with respect to the application of sales and use taxes to leases of tangible personal property. Answering your questions in order, we advise: 1. The intention of the Legislature, in our opinion, was to afford relief from the added economic impact of the extension of the tax to leasing to those who had become previously bound in all respects to perform fixed obligations for fixed periods under prior existing agreements. Thus, where all elements of a lease contract have been fixed by the parties prior to August 1, 1965, and all terms and conditions, including the types, models, descriptions, quantities, and rental terms, etc., have been fully contracted, we will consider that the leasing of the property so designated is within the protection of the so-called “grandfather clause,” § 6006.3. If these conditions are present even though the lease has not been formally signed, as mentioned in your question, we will, nevertheless, consider that the lease was executed or entered into prior to August 1. 2. As long as the lessee has the option to renew a lease entered into prior to August 1, 1965, the exercise of such option constitutes, in our opinion, as a renewal, and, consequently, rentals received subsequent to such renewal would be subject to the tax. 3. Except in the cases of leases to the United States Government, to banks, or to insurance companies, the lessee is liable for payment of the use tax on the lease payments which the lessor is required to collect from the lessee at the time rentals are paid by the lessee under the lease. Whether or not the amount of the tax is separately stated in the lease document would be immaterial. The lessee is under a legal liability for the tax in any event. 4. Inasmuch as leases are continuing sales under the terms of the new law, it is our opinion that the amount designated as interest is not excludable from gross receipts with respect to which the tax applies. The lessee pays a certain amount of money for the merchandise and this, in our opinion, constitutes the measure of the tax.

Mr. --- ---

-2-

August 5, 1965
330.2480

5.
There would be a tax due upon the exercise of an option to buy by the lessee and the tax would be due upon the specified selling price, i.e., amount paid by the lessee upon exercise of the option to purchase. 6. Upon the exercise of an option to buy, credits for prior lease payments upon which tax has been paid, may be allowed to the extent indicated in the paragraph immediately preceding the concluding paragraph of ruling 70 [see now Sales and Use Tax Regulation 1660], copy enclosed. You will note that there is no provision for a credit when the property was purchased with tax paid on the purchase price. 7. The lessor is required to pay tax on the amounts of rent which it actually collects prior to the assignment or sale of the lease to the bank. Thereafter, if the assignment or sale is without recourse on the lessor, the bank becomes in effect the lessor and must collect and pay the amount of the tax upon the rental receipts which it receives. Very truly yours,

E. H. Stetson
Tax Counsel

EHS:fb
Enclosure
cc:

--- – District Administrator