Which tax rate applied when a rental-purchase agreement began before a rate increase but the customer exercised a substantial purchase option afterward?
Apply this to your situation
This page answers the general question as of 1967. Ask about yours and see what current California tax law says, with citations.
Plain-English summary
An absent August 8 request asked about equipment rented under rental-purchase agreement before August 1, 1967 and bought by option afterward. Agreement began August 1, 1966; option was exercisable anytime, with price determined then. Customer exercised August 5, 1967 at price described only as substantial.
Twelve months' rent before rate change were already sales under historical law. Had lease continued, rent after August 1 used new 5 percent rate. That percentage is source's 1967 rate only.
Option transaction—title transferred for cash payment or sales contract—was separate sale. Five percent sales tax applied to gross receipts determined at transfer, not pre-change rate from agreement date.
Letter cites no numbered authority and warns different facts can change conclusion. Live 330.2500 adds section 6376.1 reference for several fixed-amount continuing-lease grandfather exemptions, but supporting letter neither cites nor applies it.
Common questions
Did signing lease before increase lock old rate?
No. Later rental payments would use the new rate.
What rate applied to option purchase?
The rate in effect when the customer exercised the option and title transferred.
Was option price nominal?
No. The source describes it as substantial.
Did source give exact option price?
No. It says price was determined at exercise and was substantial.
Did payment method change result?
No. Letter described title transfer for cash payment or sales contract as sale.
Did PDF apply section 6376.1 grandfather exemption?
No. Only live annotation adds general reference; PDF cites no law and does not apply exemption.
Is five percent current California rate?
The source only establishes it as the historical rate in this 1967 example.
May another option holder rely on this result?
No. It is historical advice based on absent agreement/records and warns different facts can differ; current rate and transition law must be checked.
Citations and references
- No statute, regulation or case — cited in supporting letter
- August 8 request and rental-purchase/option/payment/title/tax evidence — absent
- Section 6376.1 — grandfather reference added only in live annotation
- August 16 Putnam/Petersen letter — historical separate-transaction rate result
- Official Annotation 330.2500 — concise result plus un-applied grandfather note
Source
- Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
- Annotation page: Annotation 330.2500
- Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2500.pdf
Original ruling text
330.2500
STATE OF CALIFORNIA
STATE BOARD OF EQUALIZATION
August 16, 1967
Gentlemen:
In your letter of August 8, you ask a question relating to tax consequences when equipment leased under a rental purchase agreement prior to August 1, 1967 is purchased pursuant to the option exercised after August 1, 1967. The facts, as we understand them, are that the rental purchase agreement was entered into on August 1, 1966. the option to purchase could be exercised at any time during the life of the agreement, and the purchase price was to be determined when the option was exercised. On August 5, 1967, the customer elected to exercise his option to purchase the equipment. The purchase price at this time is substantial. The lease payments for the 12 months prior to August 1, 1967 were consideration for transactions defined as “sales” under the Sales and Use Tax Law. If the lease arrangement had continued, you would have increased the sales tax on such payments to 5 percent after August 1, 1967. By the same token, the transaction under which you transferred title to the former lessee, pursuant to a cash payment or a sales contract, would be termed a sale. Five percent sales tax measured by gross receipts determined at that time is the proper tax to levy on this transaction. Specific fact situations which vary from that which I outlined could result in different conclusions. Should you have further questions, please feel free to write. Very truly yours,
T. P. Putnam
Tax Counsel
By
A. Wells Petersen
AWP:ab
[1b]
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