How did optional engineers, programming, delivery, setup, pickup, and resale certificates affect short-term audio-visual equipment leases?

Plain-English summary

Unidentified Company A rented sophisticated audiovisual gear generally one–four days for events, supplying video wall processor, programmed computer and production equipment. Customer provided liability insurance while possessing gear. Optional delivery/pickup, setup/takedown crews, engineer and custom programming were separately billed. Request/agreement/records absent.

Company used Regulation 1660 rent-receipts method, paid no acquisition tax, and collected California tax on equipment, delivery/pickup, setup/takedown. It did not collect on engineer, claimed custom programming, outside-California use or claimed subleases with resale certificate. Letter expressly addresses two questions—rental/engineer and resale—not outside use.

Counsel stressed no ruling: true lease assumed only if engineer genuinely optional and customer actually possessed/controlled equipment; otherwise Company A consumed equipment while providing service. Under assumption, optional engineer charge stayed outside rent, and other item treatment did not change when engineer chosen.

Facts were insufficient to conclude on delivery/pickup/setup/takedown. Assuming lessor delivery, exclusion required section 6011(c)(7)/Regulation 1628 and lease commencement before delivery; counsel said such leases usually began after. Setup taxable unless optional and after commencement; pickup/takedown taxable unless optional. Live adds common/independent-carrier and delivered-price rules absent from PDF.

Regulation 1502 custom programming could be nontaxable, but no program facts; program existing at contract execution was not custom. Live explicitly calls such preexisting-program charge taxable.

Engineer suggested end use but did not bar real sublease. Same possession/control test applied downstream. If intermediate lessee retained control while supplying gear/engineer, it was consumer and could not buy for resale. Timely valid certificate accepted good faith relieved original lessor collection liability.

Legal staff said it did not issue rulings; unidentified client defeated section 6596 relief. Live 330.2525 omits that reliance limit and PDF's insufficient-facts posture.

Common questions

Was optional engineer charge taxable?

No, if the engineer was truly optional and the customer possessed and controlled the equipment.

Were delivery, setup, pickup and takedown automatically taxable?

No. The source described timing, transportation, and optionality conditions but lacked enough facts for a final classification of every charge.

What carrier rule appears only in live annotation?

Common/independent-carrier delivery was excluded unless delivered-price lease; delivered-price delivery stayed taxable unless lease began before delivery. PDF does not state branch.

Was custom programming nontaxable?

Potentially, if it qualified under Regulation 1502; the opinion did not have enough program facts to decide.

Could lessee give resale certificate when engineer provided?

Possibly. The actual sublease had to transfer possession and control, and the original lessor's good-faith acceptance mattered.

Did letter approve no tax on outside-California rentals?

No explicit answer. Requester described that practice, but two stated questions and discussion did not decide outside use.

Could unidentified client receive section 6596 relief?

No. Counsel said request needed all relevant facts, including identities.

May another audiovisual lessor rely on result?

No. It rests on explicit assumptions, missing facts and no section 6596 relief; each service/sublease and current law must be checked.

Citations and references

• Section 6596 — unidentified client barred written-advice relief
• Entremont — possession/control required for true lease
• Regulation 1660 — requester's rent-receipts reporting election
• Section 6011(c)(7); Regulation 1628 — delivery exclusion
• Annotations 330.3310/330.3280 — setup/pickup/takedown timing and choice
• Regulation 1502 — custom versus preexisting programming
• Request/agreement/control/service/billing/program/sublease/certificate evidence — absent
• Official Annotation 330.2525 — added carrier branch; omitted reliance/uncertainty limits

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2525
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2525.pdf

Original ruling text

330.2525

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

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

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

October 1, 1992

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Mr. W--- V--- W--P--- W--P. O. Box XXXX
--- ---, CA XXXXX-XXXX
Re: Unidentified taxpayer
Dear Mr. V--- W--This is in response to your letter dated July 22, 1992. You ask for a ruling with respect to application of sales and use tax to your client's lease transactions. Initially, I note that the legal staff does not issue rulings. Revenue and Taxation Code section 6596 provides the only basis for relieving a person of liability for sales or use taxes otherwise due. That section gives the Board the discretion to relieve a person of liability for tax if that person reasonably relied on written advise from the Board which stated that the transaction in question was not subject to sales or use tax. The advise from the Board must have been in response to a written request for advise that included all relevant facts, including the identities of the parties to the transaction. Since you have not identified your client, this letter does not come within the provisions of section 6596. You describe the transactions as follows: "Company A rents sophisticated audio visual projection equipment to its customers for short periods (generally one to four days), which is typically used to run audio-visual programs during conventions, trade shows, concerts, telethons and other similar events. A typical agreement obligates Company A to supply the audio/visual equipment, a video wall processor, a computer that is programmed by Company A and other equipment required for the video production. A typical agreement also requires that the customer provide liability insurance to cover the equipment while in the customer's possession at the production site. In addition, a client may request some or all of the following optional services from Company A:

Mr. W--- V--- W---

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October 1, 1992
330.2525

· Delivery and pickup of the equipment
· A crew to set up the equipment
· An engineer to operate the equipment
· A crew to take down the equipment
· Custom computer programming
"Charges for the rental of the equipment furnished by Company A and any optional services provided pursuant to the rental agreement (and related expenses if any) are always separately stated when billed to the customer. In accordance with California Sales and Use Tax Regulation 1660, Company A has elected to report use tax on a rental receipts basis and currently charges its California customers tax on all separately stated charges for the rental of equipment, delivery and pickup, set-up and charges for a crew to disassemble (take-down) the equipment. Consequently, California sales/use tax has not been paid on the purchase price of the rental property. "Company A does not collect use tax on the optional charges for the engineer to operate the equipment, custom computer programming, rentals of equipment to out-of-state customers for use outside California and rentals to companies who will sublease the equipment. In the latter case, a valid resale certificate is obtained and kept on file." You ask: "1)

Is Company A correctly collecting and remitting use tax on
equipment rentals (including agreements where the customer elects that a Company A engineer operates the equipment)?

"2)

Can Company A accept a resale certificate for rentals of equipment when an engineer is provided at the customer's request to operate the equipment?"

Discussion
You state that the providing of an engineer to operate the equipment is optional. Since this could be a critical factor in determining whether we agree that the transaction is, in fact, a lease, it is appropriate to emphasize that this opinion is based on the assumptions that the engineer is truly optional and that the customer actually gains possession and control of the equipment in question. (See, generally, Entremont v. Whitsell (1939) 13 Cal. 2d 290 (the lease of tangible personal property requires the transfer of possession and control, and if the "lessor" does not transfer possession and control to the "lessee," there is no true lease; rather, the "lessor" is simply the consumer of the property).)

Mr. W--- V--- W---

-3-

October 1, 1992
330.2525

You state that the lessor collects tax on delivery and pickup charges, set up charges, and take down charges. Although this may be correct, we do not have sufficient information to be certain. The delivery charges would be excluded from tax if meeting the requirements of Revenue and Taxation Code section 6011(c)(7) and Regulation 1628. I assume that the delivery is by facilities of the lessor. If so, one of the requirements for the charges to be excluded from tax is that the sale occurs before delivery. In the context of leases, the sale occurs before delivery, for purposes of exclusion of transportation charges from tax, if the lease commences prior to delivery. My experience is that leases such as the ones you describe usually commence after delivery. Set up charges would be taxable unless the lessee has the option not to hire the lessor for the set up and that set up occurs after the lease commences. (See, e.g., BTLG Annot. 330.3310 (7/16/68, 1/30/87).) Charges for pick up and for taking down the equipment would be taxable unless the lessee has the option not to hire the lessor for such pick up and take down. (See, e.g., BTLG Annot. 330.3280 (12/28/66).) We agree that charges for custom computer programming would not be taxable. Such nontaxable custom computer programming is defined in Regulation 1502. Since you have not provided any information about such computer programs, I have no opinion as to whether they actually qualify as custom programming within the meaning of the regulation. I note, however, that any computer program in existence at the time the lease contract is executed cannot be custom programming for purposes of sales and use tax. When the lessee has the option whether or not to retain the services of the lessor's engineer, we agree that the charges for those services are not part of the lessor's taxable rentals payable. When the transaction is a true lease and the engineer's services are optional, the application of tax to the items discussed above remains the same regardless of whether or not the lessee chooses to obtain the services of the engineer. With respect to your second question, this is a question of fact. The providing of the engineer is some indication that the lessee is the end user and will not act as a sublessee. On the other hand, it is also possible that the lessee has contracted to lease the property in question to its sublessee together with the optional services of an engineer. As discussed above, a lease involves the transfer of possession and control of tangible personal property. The same analysis applicable to whether we consider the transaction between the lessor and the lessee to be a true lease is also applicable to whether the transaction between the lessee and sublessee will be regarded as a true lease. If the lessee is providing the leased equipment to its customer along with the services of the lessor's engineer, the lessee would be regarded as the consumer of the equipment if, as between the lessee and its customer, the lessee retained control of the equipment. When the lessee is the consumer under this analysis, it may not acquire the equipment for resale.

Mr. W--- V--- W---

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October 1, 1992
330.2525

However, the critical question with respect to whether a timely and valid resale certificate will relieve the lessor of potential liability for use tax collection is whether such certificate is accepted by the lessor in good faith. If so, the lessor is relieved of liability for use tax collection. If you have further questions, feel free to write again.

Sincerely,

David H. Levine
Senior Tax Counsel
DHL:cl