How could a proprietorship acquire a related corporation's heavy equipment and lease it back without creating inconsistent tax treatment?

Plain-English summary

Single-shareholder corporation without seller's permit used owned or independently leased heavy equipment/trucks. Owned and independent-lessor property reportedly acquisition-tax paid, so rent untaxed. For proposed cost-plus contract, corporation wanted sell all owned equipment to proprietorship and lease it back. Request and records absent.

First planning route: proprietorship paid purchase-price use tax on all property—trucks through DMV, other equipment directly to Board in calendar quarter first placed in leased service. Then all rent to corporation was nontaxable.

Second: proprietorship applied for seller's permit, acquired all for resale and collected rent-based tax from corporation. Either route kept uniform tax status.

Neither route: trucks incurred purchase-price use tax at DMV reregistration, so truck rent nontaxable. Other equipment transfer qualified as tax-free occasional sale, but lease rent taxable because proprietorship had not paid purchase-price tax. Result was mixed tax-paid trucks/ex-tax other equipment.

Corporation's prior taxable acquisition did not benefit proprietorship. Same-stockholder ownership of lessor/lessee, and use of lessor corporation rather than proprietorship, was immaterial.

PDF cites section 6094.1 for non-truck branch. Live 330.2527 instead cites Regulation 1595 and says corporation wished sale to single shareholder/lease from him, while PDF says proprietorship without expressly equating it to shareholder. This page preserves those source differences.

Common questions

Could proprietorship make all rent nontaxable?

Yes, by timely paying use tax measured by the purchase price of all the equipment under the described approach.

Could it instead tax every rental payment?

Yes, by acquiring the equipment for resale and holding the required seller's permit.

What happened if it did neither?

The trucks became tax-paid with nontaxable rent, while the other heavy-equipment rent remained taxable.

Why did trucks differ in default route?

Their transfer triggered use tax at DMV reregistration, putting them tax-paid while other equipment arrived through occasional sale.

Did corporation's prior tax payment benefit new proprietorship?

No.

Did common shareholder make tax consequences disappear?

No. Letter says entity form/common ownership immaterial to result.

Were proposed transfer and leaseback completed?

Source provides advice on intended transaction but no sale, title, registration, lease, rent or tax records.

May another related business rely on this result?

No. It is historical planning advice with absent proof and live/PDF differences; exact transaction and current law must be checked.

Citations and references

• Section 6094.1 — PDF's non-truck purchase-price-tax reference
• Regulation 1595 — live annotation's different citation
• DMV procedure — truck tax at transfer/reregistration
• February 8 request and entity/equipment/transfer/lease/tax evidence — absent
• Official Annotation 330.2527 — adds shareholder identity and Regulation 1595

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2527
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2527.pdf

Original ruling text

330.2527

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-3723

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

March 24, 1993

GRAY DAVIS
Controller, Sacramento
────────

Mr. A--- M---, CPA
XXXX --- ---, Suite XXX
--- ---, CA XXXXX

BURTON W. OLIVER
Executive Director

Dear Mr. M---y:
This is in response to your letter of February 8, 1993, which was referred to this office on March 18, 1993 by Ms. Kristie Marinello of Mr. Brad Sherman's office. We understand that your client, a corporation owned by a single shareholder, uses heavy equipment, including trucks, which the corporation owns or leases from independent leasing firms. The firm does not have a resale permit (seller's permit). The firm paid sales tax reimbursement at the time it acquired the equipment which it owns. Apparently, the equipment lessors pay tax at the time of their acquisition of the leased equipment, and thus tax is not being collected based upon the rental amounts charged to the client. The corporation is now negotiating a cost plus contract, and finds that charges related to equipment use would be greatly simplified if the corporation could lease all the equipment used on the job. The corporation intends to transfer all of the heavy equipment owned by it to a proprietorship and leaseback all this equipment. You inquire as to the sales and use tax consequences of the described proposed transaction. Apparently, the corporation will sell the heavy equipment in question to the proprietorship. Your client has two planning opportunities. Your client may place the heavy equipment (including the trucks) on a tax-paid basis by paying use tax based upon the purchase price of the property to the proprietorship. Use tax on the trucks would be paid directly to the Department of Motor Vehicles. Use tax on the other heavy equipment must be paid directly to this agency in the calendar quarter in which the equipment is first placed in leased service. If tax is paid on the

Mr. A--- M---

-2-

March 24, 1993
330.2527

cost of all the heavy equipment, the rental charges made by the proprietorship to the corporation will be nontaxable as to all of the equipment.

Mr. A--- M---

-3-

March 24, 1993
330.2527

Alternatively, the proprietorship may apply to this agency for a seller's permit and may acquire all of the heavy equipment for resale. If this approach is taken, the proprietorship would have to collect tax from the corporation based upon rental receipts paid by the corporation to the proprietorship as to all of the equipment. If your client does not chose to follow one of these two approaches, this is what will happen: The proprietorship will be required to pay use tax measured by the purchase price for the trucks at the time the trucks are re-registered at DMV. The client will be required to collect and pay tax as to the lease of heavy equipment (other than trucks), based upon the rental receipts measured. In other words, the client would have a "mixed inventory" of tax-paid and ex-tax equipment. The basic rules are that the sale of heavy equipment, other than trucks, qualifies as an occasional sale (tax free), but the sale of the trucks is taxable. The lease of the heavy equipment (other than trucks) would be taxable, because the client would not have paid tax measured by the purchase price under Revenue and Taxation Code section 6094.1. The lease of the trucks would be nontaxable, because the client would have paid use tax measured by the purchase price of the vehicles. The proprietorship would not benefit from the fact that the corporation may have purchased the heavy equipment in a taxable transaction. It is immaterial that the lessor may be a corporation (rather than a proprietorship) wholly owned by the same stockholder who owns the lessee. Very truly yours,

Gary J. Jugum
Assistant Chief Counsel
GJJ:sr