Would rent be taxable if a United Kingdom company moved German-leased equipment to California and subleased it to an affiliate?

Plain-English summary

California company organized July 1993 and UK affiliate shared owners and manufactured/sold memory devices. UK affiliate wanted transfer production capacity requiring capital equipment; it leased German test equipment from August 1994 onward, first transfer planned January 1996. November 7 request/records absent.

Opinion assumed related-company leases arm's length under Annotations 330.1875/330.2800. Situation 1 proposed UK company move used German-leased equipment to California and sublease to affiliate at rent equivalent to German payment.

Regulation 1660(c)(5) made sublease taxable unless property same form and prime lessor paid California acquisition tax, or California tax was paid on prime/prior rent. Assuming neither, affiliate owed tax on sublease rent and UK sublessor collected/remitted.

Foreign use beyond 90 days did not exempt later rent. Under Regulation 1620(b)(3), outside-purchased property counted purchased for California use if first functionally used here or entered within 90 days (shipment/storage time excluded). Assumed foreign first use/late entry meant German lessor had no California use liability and thus no purchase-price election; rent remained tax route.

Situation 2: affiliate directly leased new assets from European lessor. Rent taxable unless lessor leased same form and timely paid California acquisition-price tax. Required payments including personal-property-tax amounts were rent; European lessor collected when paid.

Live 330.2541 publishes only Situation 1/90-day result. It omits arm's-length premise, Situation 2, property-tax charge, absent documents and unproduced Regulation 1660 enclosure.

Common questions

Did long foreign use exempt California rents?

No.

Who owed and collected tax on affiliate sublease?

The California affiliate owed use tax, and the UK sublessor had to collect it.

Why could German lessor not elect purchase-price tax?

Under assumed foreign first use and entry after 90 days, it had no California use-tax liability to pay without specific statutory authority.

Did 90 days run from UK possession or purchase?

Regulation discussion used 90 days from property purchase, excluding shipment/storage for shipment—not merely lessee possession duration.

Were direct leases from European lessor treated differently?

Not generally. Rental tax applied unless the lessor met the acquired-form and timely tax-on-cost requirements.

Were personal-property-tax amounts in taxable rent?

Yes if required by lease, under Situation 2 answer.

Were related-party agreements automatically respected?

No. Opinion expressly assumed arm's-length terms and no disregard under cited annotations.

May another foreign group rely on this result?

No. It is assumption-heavy advice on proposed transfers without underlying documents; exact tax/use/entry and current law must be checked.

Citations and references

• Sections 6006(g)(5), 6006.1, 6010(e)(5), 6010.1; Regulation 1660(c)(1)-(2) — lease/election/rent
• Regulation 1660(c)(5) — sublease after acquisition/prime/prior rent tax
• Sections 6202-6204; Regulation 1660(c) — lessee liability/lessor collection
• Section 6094.1; Regulation 1620(b)(3) — underlying liability and first-use/90-day rule
• Annotations 330.1875/330.2800 — arm's-length related-party assumption
• Request/agreements/equipment/use/shipping/rent/tax evidence and Reg. 1660 enclosure — absent
• Official Annotation 330.2541 — Situation 1 only

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2541
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2541.pdf

Original ruling text

330.2541
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 445-3723
FAX: (916) 323-3387

November 29, 1995

Mr. M--- P. D--S--- T---, Inc.
XXXX --- Road, Suite XXX
--- ---, California XXXXX

Re:

Account No. SR --- XX-XXXXXX

Dear Mr. D---:
This is in response to your November 7, 1995 letter to Mr. Travis Fullwood regarding the application of tax to various leasing arrangements involving S--- T---, Inc. (“STI”) and S--- Ltd. (“SL”). You state: “[STI], a California Corporation organized July 1993, is an affiliate of
[SL], a company located in the United Kingdom. They are affiliated in that both companies have the same owners. Both company’s business is manufacturing and sale of memory devices. [SL] is interested in transferring production capability to [STI] which requires substantial capital equipment. [SL] leased test equipment in August of 1994 and continues to lease additional equipment as volume increases. The lessor is a German leasing company which allows for the transfer of equipment to the US after being delivered and used in the UK. The initial transfer of equipment from [SL] to [STI] is scheduled to take place in January 1996. Additional equipment will be transferred as the production process and capacity in the US increases.”

Mr. M--- P. D---

-2-

November 29, 1995
330.2541

You ask a series of questions based on the above facts. For purposes of this opinion, we assume that any leasing agreements between SL and STI are at arms length and would not be disregarded for purposes of the California Sales and Use Tax Law since SL and STI are related parties. (See e.g., Business Taxes Law Guide Annots. 330.1875 (7/8/92), 330.2800 (8/14/69).) Our responses to each of your questions are set forth below. “Situation #1: “[SL] transfers existing leased equipment to [STI]. [STI] would make lease payments to [SL] equivalent to the lease payments required by the German leasing company. Is this a taxable transaction? Does the time period of ownership and possession of the equipment prior to transfer effect taxability? If so, how? Our understanding is that if [SL] possesses and used the equipment for a minimum of 90 days then any subsequent transfer and lease is non-taxable. Is this true?” A lease of tangible personal property in California is a continuing sale and purchase unless the lessor leases it in substantially the same form as acquired and has made a timely election to pay California sales tax reimbursement or use tax measured by the lessor’s purchase price of the property. (Rev. & Tax. Code §§ 6006(g)(5), 6006.1, 6010(e)(5), 6010.1, Reg. 1660(c)(2).1) When the lease is a continuing sale and purchase because either or both of the foregoing conditions are not satisfied, the lease is subject to use tax measured by rentals payable. (Reg. 1660(c)(1).) The lessee owes the tax and the lessor is required to collect it from the lessee and pay it to this Board. (Rev. & Tax. Code §§ 6202, 6203, 6204, Reg. 1660(c).) Similarly, a sublease of tangible personal property is a continuing sale and purchase subject to use tax on the rentals payable from the sublease unless the subleased property is leased in substantially the same form as acquired and the prime lessor paid California sales tax reimbursement or use tax measured by the purchase price of the property, or California use tax is paid on the rental receipts derived under the prime lease or any prior sublease. (Reg. 1660(c)(5).) SL leases the test equipment from a German leasing company which allows for the transfer of this equipment to the United States after its use in the United Kingdom. SL proposes to sublease this equipment to STI in California for an amount equivalent to the amount of the lease payments SL is required to pay to the German lessor. We assume that the German leasing company did not pay California sales or use tax with respect to the leased property. We further assume that SL does not pay California use tax measured by the rentals payable from its lease with the leasing company. Under these facts, SL’s sublease of the equipment to STI will be regarded as a continuing sale and purchase since the German lessor did not pay California tax or tax reimbursement on its purchase price of the property and SL does not pay California use tax measured by the rental receipts it pays to the leasing company. This means that SL’s sublease of the property to STI will be subject to tax measured by STI’s rental receipts. STI owes the tax and SL is required to collect this tax and pay it to this Board.

1

A copy of Regulation 1660 is enclosed for your review.

Mr. M--- P. D---

-3-

November 29, 1995
330.2541

You also ask whether the length of SL’s possession and use of the equipment outside this state affects the application of tax on the rental receipts paid by STI. As set forth above, a lease of tangible personal property is subject to tax measured by rentals payable unless the lessor leases the property in substantially the same form as acquired and has made a timely election to pay California sales tax reimbursement or use tax measured by the purchase price of the property. That is, when a lessor pays tax up front to avoid having to collect tax on rentals payable, the lessor is electing to be a consumer (and not a retailer) of the property. This means that if the lessor’s own use of the property in California would be subject to use tax, it may elect to pay tax on purchase price and no further tax would be due with respect to its use of the property by leasing it to a third party. On the other hand, if the lessor may itself use the property in this state without incurring a use tax liability, that lessor has no potential use tax liability with respect to which it can report tax measured by purchase price. Such a lessor may not elect to exclude its leases from the definition of a continuing sale and purchase by paying use tax measured by purchase price without specific statutory authority to do so. (Cf. Rev. & Tax. Code § 6094.1.) Here, the lessor’s own use of the property inside this state would be taxable only if the lessor purchased the property for use in California. Property purchased outside this state from a retailer is regarded as purchased for use in California if the property is first functionally used inside this state or if the property is brought into California within 90 days of its purchase (exclusive of any time of shipment to California, or time of storage for shipment to California). (Reg. 1620(b)(3).) Thus, a lessor who purchases property outside this state may elect to pay California use tax on the purchase price of the property only if the property is first functionally used inside this state or is brought into California with 90 days of its purchase. A lessor has no election to pay California use tax on property purchased outside this state where the property is first functionally used outside California and is not brought into this state within 90 days of its purchase. Under the facts of your letter, California tax will be due on the use of the equipment inside this state. The relevance of the equipment’s use outside California pertains only to whether the lessor has an election to pay California use tax measured by purchase price or if instead the rentals payable are subject to tax. As set forth above, we assume that the German lessor did not pay California sales tax reimbursement on the equipment leased to SL. We further assume that the equipment was first functionally used outside this state and that it was not brought into California within 90 days of its purchase. As such, the German lessor has no option to elect to pay California use tax on the equipment which will ultimately be subleased to STI. This means that tax applies to STI’s rentals receipts with respect to the leased property regardless of the time SL may (or may not) have possessed this property outside this state. “Situation #2: “[STI] leases new assets directly from a European Lessor. Is this a taxable transaction? If so how is the liability determined and what is the timing of payment of tax?” Tax applies to STI’s rental receipts unless the European lessor leases the assets in substantially the same form as acquired and has made a timely election to pay California sales tax reimbursement or use tax measured by its purchase price of the property. (Rev. & Tax. Code §§ 6006(g)(5), 6006.1, 6010(e)(5), 6010.1, Reg. 1660(c)(2).) Rental receipts subject to tax include

Mr. M--- P. D---

-4-

November 29, 1995
330.2541

any payments required by the lease including amounts paid for personal property taxes (if any) on the leased property. (Reg. 1660(c)(1).) If tax applies to STI’s lease payments, the European lessor must collect the tax at the time rentals are paid by STI and pay it to this Board. (Rev. & Tax. Code §§ 6202, 6203, 6204; Reg. 1660(c).) We hope this answers your questions. If you have any further questions, please write again. Sincerely,

Gary J. Jugum
Assistant Chief Counsel

GJJ:WLA:rz
Enclosure – Reg. 1660
cc:

Mr. Travis S. Fullwood, MIC:77
San Diego District Administrator – (FH)

bcc:

Mr. Glenn Bystrom, MIC: 43