Would a school district's purchase of a relocatable classroom be taxable tangible personal property when it exercised an option after fixed lease term expired?

Plain-English summary

Client manufactured relocatable/modular classrooms at its plant, then assembled and installed them on school-district sites. District leases often included purchase option after stated term. Rentals consistently treated as use-taxable under section 6016.3. March 21 request and all agreements/records are absent.

Requester argued that expired term meant section 6016.3 no longer controlled and property was realty. Letter said that might be true if property were not leased at exercise, but fixed-term expiration alone did not end lease while property remained in lessee hands.

Counsel treated holding over itself as lease under section 6006.3. Therefore property remained subject to lease, section 6016.3 classified it tangible personal property, and option exercise was taxable sale despite expired fixed term.

Live 330.2520 adds that property was fixture, lessor could remove it upon breach/termination, and lessor was not lessor of realty. Those material predicates do not appear in PDF. This page preserves live result without attributing added facts to missing letter.

Common questions

Did fixed-term expiration end all lease status?

No. Holding over while retaining possession created a continuing lease.

Why was installed classroom still tangible personal property?

The letter applied section 6016.3 because holdover meant it remained leased. Only live annotation adds removal-right and separate-realty-lessor facts.

Was tax already collected on rent?

Yes. The letter says the rentals had consistently been subject to use tax.

Was option purchase taxable?

Yes, as a sale of tangible personal property.

Did PDF prove removal rights or land ownership?

No. It says classrooms were installed on school-district sites; lease and realty/removal records are absent.

Where do removal and realty-lessor predicates come from?

Live Annotation 330.2520, not supporting letter, states lessor had removal right and was not realty lessor.

May another modular-classroom lessor rely on result?

No. It is historical advice with missing agreements and a live/PDF fact gap; fixture, holdover, option and current law must be checked.

Citations and references

• Section 6016.3 — leased classroom as tangible personal property
• Section 6006.3 — holding over as lease
• March 21 request and lease/classroom/site/holdover/option/tax evidence — absent
• Official Annotation 330.2520 — adds removal and separate-realty-lessor predicates absent from PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2520
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2520.pdf

Original ruling text

330.2520

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
April 1, 1968
Gentlemen:
In your letter of March 21 you request our opinion as to whether the sales tax is due upon the exercise of the option to purchase a modular classroom. It is our understanding that the relocatable classrooms are manufactured at your client's plant, and the modulars are assembled and installed upon the school district's site by your client. These classrooms are leased to the school districts. The leases are often accompanied by an option to purchase the classroom after the expiration of the stated term of the lease. Rentals received during the term of the lease have consistently been held subject to the use tax measured by the rentals by virtue of the definition of "tangible personal property" contained in Section 6016.3 of the Sales and Use Tax Law. A question has now been raised as to whether by virtue of the provisions of Section 6016.3 sales tax is applicable to the exercise by a school district of an option to purchase a relocatable classroom after the expiration of the term of the lease for such classroom. You contend that since the term of the lease will have expired when the option is exercised, the property is not tangible personal property under Section 6016.3 but is real property. We might well agree with your contention that Section 6016.3 is not controlling if in fact the property in question is not subject to a "lease" at the time the option to purchase is exercised. However, merely because the fixed lease term has expired prior to the exercise of the option does not necessarily mean that the property, which is in the hands of the lessee, is not subject to an existing lease. We are of the opinion that the "holding over" is in and of itself a lease as defined in Section 6006.3. In view of these circumstances, it is our opinion that at the time the purchase option is exercised, the property is subject to a lease notwithstanding the fact that the fixed term of the lease has expired. Accordingly, we have no alternative but to conclude that Section 6016.3 is controlling and the property is tangible personal property at the time of purchase and is subject to sales tax. Very truly yours, Glenn L. Rigby Tax Counsel GLR:kc [lb]