Could a rental agency lease replacement cars to a dealer for resale when the dealer supplied loaners during warranty repairs?

Plain-English summary

Levine's April 17, 1997 response addressed four rental entities' February 18 request. Dealers requested replacement vehicles while owned/leased vehicles underwent standard-warranty or recall repairs. Agency nominally rented to customer but billed dealer, third party or manufacturer; dealer/third party might be manufacturer-reimbursed; customer owed no charge. Underlying agreements/bills absent.

Opinion only applies if actual rental contract was dealer-agency and customer was no party; customer payment followed by dealer reimbursement defeats it. It also assumes agency leases were taxable continuing sales, taxing rent rather than purchase price; otherwise question was irrelevant.

Ordinary accommodation during repair made dealer consumer; ex-tax resale-inventory vehicle use triggered fair-rental-value tax. But mandatory warranty whose charge was in taxed original vehicle sale, contractually requiring loaner and properly taxed, made loaner part of sale; dealer could rent agency vehicle ex-tax for resale.

For vehicle lessee, loaner requirement was irrelevant. If underlying lease was taxable continuing sale and lessee kept paying rent/tax during loan, dealer could rent loaner ex-tax for resale. If dealer paid tax on vehicle cost and leased tax-paid, dealer used loaner whether required or not; agency lease to dealer was use-taxable on rentals.

Request also described manufacturer recall replacement coverage, but opinion gives no separately labeled recall application. Live 330.2715.910 publishes three warranty/lease scenarios and omits recall, billing/reimbursement facts, contract-party limit, agency-tax assumption and absent records.

Common questions

Could dealer rent mandatory-warranty loaner for resale?

Yes, under the opinion's assumptions that the warranty was part of a taxable sale and required the loaner.

What about loaner during taxable continuing lease?

It could be rented for resale when the lessee continued paying taxable rent.

What if original vehicle lease was tax-paid?

Then the dealer's loaner was its own use, and the rental agency's lease was taxable.

What if customer signed or paid agency?

Opinion does not apply, including customer payment later reimbursed by dealer.

Did source separately resolve recall-program rentals?

No. It described them but stated its operative resale analysis through mandatory warranties and underlying taxable leases.

Did warranty always make resale?

No. Opinion assumed mandatory warranty required loaner, warranty charge was included in taxed sale, and tax was properly reported/paid.

Did loaner have to be required during taxable lease?

No. Under source, continuing taxable lease and continued rent/tax controlled, not loaner clause.

May another dealer/rental agency rely?

No. It is assumption-dependent advice without contracts/payment/tax proof; actual parties, flows, obligations, underlying tax and current law control.

Citations and references

• Regulation 1660 — agency and underlying continuing-sale lease treatment
• Section 6094(b); Regulation 1669.5(b)(6) — dealer accommodation use
• Request/contracts/warranty/recall/billing/resale/tax records — absent
• Official Annotation 330.2715.910 — three scenarios without recall/payment caveats

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.2715.910
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-2715-910.pdf

Original ruling text

330.2715.910

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 445-5550
FAX: (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
KATHLEEN CONNELL
Controller, Sacramento
_______

April 17, 1997

JOHN CHIANG
Acting Member
Fourth District, Los Angeles
_______
E. L. SORENSEN, JR.
Executive Director

Ms. P--- S. S--State Tax Supervisor
E--- R--XXX --- --- Drive
--- ---, MO XXXXX-XXXX
Re:

E--- R--- C--- of --- --E--- R--- C--- of --- --E--- R--- C--- of --E--- L--- C--- - West

Dear Ms. S---:
This is in response to your letter dated February 18, 1997 regarding the application of tax to certain short-term vehicle leases made by the entities listed above (collectively referred to herein as E---). You ask whether leases made under the following circumstances are nontaxable sales for resale: “At times motor vehicle dealers request that E--- rent vehicles to their customers as replacements. These replacement rentals are provided to the dealers’ customers according to a rental and transportation services program while their owned or leased vehicles are being repaired pursuant to the standard manufacturer’s warranty. For example, Automobile Manufacturer X has a courtesy transportation program that provides the motor vehicle owner/lessee with a replacement vehicle when his/her vehicle is in for overnight standard warranty repairs at a dealer location. E--- rents a replacement vehicle to the customer and bills the motor vehicle dealer, a third party, or the manufacturer directly. If E--- bills the dealer or a third party, such dealer or third party is then reimbursed by Automobile Manufacturer X. The customer is not responsible for the charges. “E--- also rents vehicles at a dealer’s request when a manufacturer provides for a replacement vehicle as a result of a recall. For example, Automobile Manufacturer X issues a recall for a specific problem and provides

Ms. P--- S. S---

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April 17, 1997
330.2715.910

replacement rental coverage to the vehicle owner/lessee while the car is being repaired. The customer rents a motor vehicle from E---. E--- bills the dealer who is then reimbursed by Automobile Manufacturer X. The vehicle owner is not responsible for the charges covered by the recall.” Leases of tangible personal property in California are continuing sales (which are taxable unless for resale or specifically exempt by statute) unless the property is leased in substantially the same form as acquired and the lessor has timely paid sales tax reimbursement or use tax on purchase price. (See Reg. 1660.) Your question is only relevant if E--- does not elect to pay tax on purchase price, but instead collects tax on the rentals payable from the leases unless the leases are exempt or for resale. Thus, for purposes of this opinion, I assume that E---’s leases are continuing sales. I note also that this opinion is based on the understanding that the contracts for the lease of the vehicles are in actual fact contracts between the dealer and E---, and that the customers are in no way parties to the contract with E---. If this understanding is incorrect, this opinion does not apply (e.g., if the customer paid E--- and was reimbursed by the dealer, this opinion does not apply). When a dealer provides a vehicle as an “accommodation” to its customer when repairing a vehicle, the dealer is a consumer of that vehicle. (See Rev. & Tax. Code § 6094(b) (if a dealer provides a vehicle from extax resale inventory as an accommodation, it owes tax measured by the fair rental value of the vehicle for the duration of the accommodation loan); see also Reg.1669.5(b)(6).) On the other hand, when a dealer is required to provide a vehicle to its customer who awaits repairs to his or her vehicle pursuant to the terms of a mandatory warranty the charge for which was included in the measure of tax, the dealer’s loan of the vehicle to that customer is regarded as part of the original taxable sale of the vehicle. That is, the dealer is not regarded as using the loaned vehicle and no further tax is due with respect to the loan. Our understanding is that the loaner program is part of the sale of a mandatory warranty contract, and that the dealer is obligated pursuant to the terms of its contract with the owner to provide the loaner vehicle. Based on this understanding, its loans are not accommodation loans but rather are part of the sale contract. We assume that tax was properly reported and paid on the sale and warranty contract. The dealer under these facts may lease the loaner vehicles from E--extax for resale as part of the original sale contract. With respect to vehicles loaned to lessees of vehicles, it is irrelevant whether the lease contract requires the dealer/lessor to provide a loaner vehicle while the leased vehicle is being repaired. If the lease is a taxable continuing sale, the loaner is regarded as sold as part of the taxable continuing sale. When a dealer/lessor leases a vehicle from you for the purpose of loaning the vehicle to such a lessee (one who is paying tax on rentals payable and continues to pay such rentals and tax thereon during the loan period), the dealer may lease the vehicle from E--- extax for resale as part of that taxable lease. On the other hand, if the lease is not a taxable continuing sale, then a loaner vehicle obviously cannot be regarded as sold to the customer as

Ms. P--- S. S---

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April 17, 1997
330.2715.910

part of a taxable continuing sale. Thus, a dealer who paid tax or tax reimbursement on its purchase price of a vehicle and leases that vehicle tax-paid uses any loaner vehicle provided to the customer whether that loan is required by the lease contract or not. When a dealer/lessor leases a vehicle from you for the purpose of loaning the vehicle to such a lessee (one who is not paying tax on rentals payable), the dealer/lessor may not lease the vehicle for resale. Rather, your lease of such vehicles to the dealer/lessor is subject to use tax measured by the rentals payable. If you have further questions, feel free to write again. Sincerely,

David H. Levine
Supervising Tax Counsel
DHL/cmm
cc:

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