When a buyer acquired water coolers already under tax-paid leases, was the asset sale exempt and did the sellers' tax-paid status carry over?

Plain-English summary

A multistate-tax manager described an unrelated buyer's acquisition of all assets—inventory, machinery/equipment, delivery vehicles, furniture, fixtures and more—from two related parent/subsidiary sellers. The buyer reportedly paid about $230 million on March 29 of a redacted year and planned to continue the business. The April 9 request framed all facts as to the best of our knowledge; complete request and purchase agreement are absent.

The sellers produced and distributed bottled-water products from 14 California locations and in 12 other states, mainly by routes using one-half- to five-gallon containers, plus third-party distributors and retail channels. They rented water coolers, filter/purification systems, ran an Office Refreshment Program and sold paper cups.

Cooler agreements were either month-to-month with 30-day cancellation or had a 12-month minimum before converting to month-to-month. Sellers bought all coolers tax-paid, charged no tax on rent, and assumed all but minor inventory were under lease at asset transfer. No agreements, cooler list, acquisition invoices or lease-status proof appears.

The request posed two scenarios: fewer than two cooler/equipment sales in prior 12 months, or a substantial number. Counsel reached same occasional-sale answer. Section 6367 excluded delivery vehicles. For other property, sellers held California permits because of taxable refreshment and cup sales; those activities related to cooler-leasing business, so property was used in permit-required activities and was not occasional-sale exempt regardless of sales count. Footnote says 12-month count matters only when seller did not otherwise use property in permit-required activities.

For leases, counsel expressly assumed no transferred property was mobile transportation equipment. A tax-paid, same-form lease was not continuing sale. Because sellers' cooler leases had that status, buyer's title acquisition subject to them was taxable retail sale under Regulation 1660(c)(9)(A), measured by sales price allocated to property—not automatically full $230 million all-asset price. No allocation appears.

Seller's tax-paid status did not carry over merely because seller owed tax but did not bill buyer. Carryover required seller to be a transferor through transaction described in section 6006.5(b); supplied information showed no such transaction. Counsel cited section 6094.1 only by comparison.

There was no new election: tax was due on sales price to buyer. Counsel found described rental agreements appeared to be leases under Regulation 1660(a)(1), while saying request's exact question was unclear. Existing assignments involved title transfer under (c)(9)(A). After buyer's taxed acquisition, neither current nor later cooler leases were continuing sales, so rent was not taxable.

The live annotation expands these conclusions but cites section 6006.5(c) for occasional-sale point where supporting opinion says (a); no source resolves subdivision change or conflict. It omits $230 million, redacted acquisition year, best knowledge qualifier, two frequency scenarios, vehicle/MTE limits, unclear question, missing records and no-outcome posture.

No closing statement, asset schedule, cooler allocation, lease assignment, permit record, invoice/acquisition-tax proof, resale/transfer document, sales/use-tax return, assessment, payment, refund, appeal or later outcome is supplied.

What this means for you

In an asset acquisition with leased equipment, separately classify vehicles/MTE, identify seller's permit activities, allocate price to equipment, confirm each existing lease and trace acquisition tax. Do not assume predecessor's tax-paid status carries over without qualifying transferor transaction.

Common questions

Did fewer than two cooler sales make asset transfer occasional sale?

No. Sellers used property in related activities requiring seller's permits, so sales frequency did not change result.

Were delivery vehicles covered by cited exemption?

No. Section 6367 expressly excluded vehicles; lease analysis also assumed no transferred leased property was MTE.

Did buyer inherit sellers' tax-paid status?

No. Supplied facts did not show qualifying section 6006.5(b) transferor transaction.

Did seller's failure to bill tax change carryover?

No. Counsel still denied inherited status and treated buyer's acquisition as taxable.

What amount was taxed?

Sales price of property transferred to buyer. Source gives about $230 million total asset price but no cooler/property allocation.

Were later cooler rents taxable?

No under opinion. Once buyer owed acquisition tax, current and later leases were not continuing sales.

Which section 6006.5 subdivision governs annotation statement?

Supporting letter cites (a), while current live entry prints (c). This page preserves conflict rather than selecting one.

Citations and references

• Section 6051; Civil Code 1656.1 — seller liability and contractual reimbursement
• Sections 6201, 6401; Regulation 1620 — use tax framework
• Section 6367; section 6006.5(a) in letter versus (c) live — occasional sale and vehicle exclusion
• Sections 6006(g)(5), 6006.1, 6010(e)(5), 6010.1; Regulation 1660(c)(1)/(2) — continuing and tax-paid same-form leases
• Sections 6202-6204; Regulation 1660(c) — lessee tax/lessor collection
• Regulation 1660(a)(1), (c)(9)(A) — lease and title-transfer treatment
• Sections 6006(g)(5)(A), 6006.5(b); comparison to 6094.1 — transferor/carryover analysis
• Request and purchase, allocation, lease, permit, invoice/tax, return and later records — absent
• Live Annotation 330.2791 — expanded conclusion with unresolved subdivision difference

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.2791
• Original supporting opinion: 330.2791 PDF

Original ruling text

330.2791

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE (916) 322-2976
FAX (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento
___

May 30, 1996

E. L. SORENSEN, JR.
Executive Director

Mr. D--- B. F---, Manager
Multistate Tax Services
C--- & L--- L---.
XXX --- ---, Suite XXXX
---, CA XXXXX-XXXX
Re:

H---H--- Corporation
SY --- XX-XXXXXX

Dear Mr. F---:
This is in response to your letter dated April 9, 1996 regarding the application of tax to a certain transaction involving your client. You state: “Our client, H--- H--- Corporation (‘H&S’), has purchased all of the assets (inventory, machinery and equipment, delivery vehicles, furniture and fixtures etc.) from two corporations to which it was not related. The two selling corporations were engaged in the business of selling bottled water and related products to consumers in California as well as 12 other states. The two selling companies were related to each other as parent and subsidiary. To the best of our knowledge, the following are the facts and circumstances surrounding this transaction. “H&S, the buyer, acquired all of the assets of the two companies on March 29, 19XX for approximately $230 million. H&S plans to operate the acquired businesses in substantially the manner as previously conducted by the sellers. The two selling companies operated the business in California out of 14 locations. The sellers were principally engaged in the business of the production, marketing and distribution of non-carbonated bottled water. The two selling companies produced a broad range of water products including spring water, distilled water, natural artesian water, pure drinking water and premium mountain spring water. The two selling companies distributed their products primarily

Mr. D--- B. F---

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May 30, 1996
330.2791

through a route delivery system in 1/2 to 5 gallon containers. In certain markets, products are delivered through independent third party distributors. The two selling companies also sold branded and private label water in various container sizes through retail distribution channels. “The two selling companies also rented water coolers to many of their residential and business customers. (Occasionally customers desired to purchase the water coolers and, in those situations, the companies would sell the coolers - although the majority of the customers would rent.) The selling companies primarily used two types of cooler rental agreements with customers. The first type is for rental on a month-to-month basis under a written agreement which included a provision requiring 30 days notice in order to cancel. The other type of rental agreement specifies a minimum period of 12 months after which the rental converts to month-to-month with the same 30 day cancellation provision. All coolers were originally purchased by the selling companies with tax paid on cost, and tax was not charged on rental receipts. All coolers, with the exception of a minor amount held in inventory, are assumed to be under lease at the date of the transfer and sale of the business assets. “Finally, other sources of revenue earned by the two selling companies included the rental of water filter and purification systems to customers; an Office Refreshment Program which offers customers a wide variety of coffee, juices, refreshments and snacks; and the sale of paper cups to water cooler rental customers. “Both selling companies have California seller’s permits as a result of their activities of selling taxable items under the Office Refreshment Program and sales of paper cups. Sales tax was collected and remitted on sales of paper cups and other taxable items, but the sales of bottled water were claimed as exempt.” You ask us to answer questions based on the above facts in two separate scenarios. In the first scenario, you ask us to assume that the selling companies have made fewer than two sales of water coolers or other similar equipment in the previous twelve months. In the second scenario, you ask that we assume the selling companies have made a substantial number of sales of water coolers or similar equipment in the previous twelve months. First, you ask whether the sale of water coolers to H&S qualifies as an occasional sale exempt from tax. As you know, a retailer owes sales tax on its sales of tangible personal property in California, measured by gross receipts, unless the sales are specifically exempt from taxation by statute. (Rev. & Tax. Code § 6051.) The retailer may collect reimbursement for its sales tax liability from the purchaser if the contract of sale provides for such reimbursement. (Civ. Code
§ 1656.1.) When sales tax does not apply, the use tax, measured by the sales price of the

Mr. D--- B. F---

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May 30, 1996
330.2791

property sold, applies to the use of property purchased from a retailer for storage, use, or other consumption in California, unless such use is specifically exempt from taxation by statute. (Rev. & Tax. Code §§ 6201, 6401; Reg. 1620.) The applicable exemption is set forth in Revenue and Taxation Code section 6367, which provides an exemption for certain occasional sales as defined in subdivision (a) of Revenue and Taxation Code section 6006.5. Section 6367 provides an exemption from tax for an “occasional sale” of tangible personal property other than vehicles, vessels, and aircraft. You state that some of the assets purchased by H&S constitute delivery vehicles. With respect to the transfer of the vehicles, the exemption set forth in section 6367 does not apply. Further, section 6006.5(a) defines “occasional sale” as a sale of property not held or used by a person in the course of activities for which the person is required to hold a seller’s permit. You state that the two selling companies had California seller’s permits for the purpose of selling paper cups, and for making sales of taxable items under the Office Refreshment Program. The sales under the Office Refreshment Program appear to be related to the selling companies’ leases of water coolers and other related equipment. Their sales of the paper cups were clearly part of their businesses involving the leases of the water coolers. As a result of the activities in which the selling companies were involved, they were required to hold, and did in fact hold, seller’s permits. Since it appears that the tangible personal property sold was used in the course of activities requiring the holding of those seller’s permits, the section 6367 exemption does not apply, even with respect to property that does not constitute vehicles, without regard to the number of sales that took place within any twelve-month period. 1 With respect to the leases, we assume that none of the property transferred constitutes mobile transportation equipment. As you know, a lease of tangible personal property in California is a continuing sale and purchase 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 lessor's purchase price of the property. (Rev. & Tax. Code §§ 6006(g)(5), 6006.1, 6010(e)(5), 6010.1, Reg. 1660(c)(2).) When a lease is a continuing sale and purchase because either or both of the foregoing conditions is not satisfied, the lease is subject to use tax measured by rentals payable. (Reg. 1660(c)(1).) The lessee owes the tax, which the lessor is required to collect from the lessee and pay to this Board. (Rev. & Tax. Code
§§ 6202, 6203, 6204; Reg. 1660(c).)
You state that all coolers were purchased by the selling companies with tax paid on cost, and that tax was not charged on rental receipts. This means that H&S purchased the coolers subject to leases which are not continuing sales. The sale to H&S is therefore a taxable retail 1

The number of sales taking place in a particular twelve-month period is relevant only where the property sold is not held or used by a seller in the course of activities for which he or she is otherwise required to hold a seller’s permit or permits or would be required to hold a seller’s permit or permits if the activities were conducted in this state.

Mr. D--- B. F---

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sale, with tax measured by the sales price of the property to H&S. (Reg. 1660(c)(9)(A).) This conclusion is correct with respect to both scenarios 1 and 2. In light of this conclusion, you ask whether the “tax-paid status” of the water coolers under lease carry over to the purchaser where the seller is required to pay sales tax on its sale of the water coolers but does not bill the tax to the purchaser. The answer is no. The only way a H&S would acquire the tax-paid status of the seller is if the seller were a “transferor” within the meaning of subdivision (g)(5) of section 6006. As relevant here, “transferor” means a person from whom the lessor acquired the property in a transaction described in subdivision (b) of section 6006.5. (Rev. & Tax. Code § 6006(g)(5)(A).) None of the information provided to us indicates that H&S acquired the property in a section 6006.5(b) transaction. Thus, it appears that the sellers are not “transferors” as defined in subdivision (g)(5)(A) of section 6006, and that H&S does not acquire the tax-paid status of the sellers. (Cf. Rev. & Tax. Code § 6094.1.) Next, you ask: “Must the purchaser make a timely election to pay tax on cost, or will it be required to pay tax on rental receipts with respect to the water coolers under lease at the time of the asset transfer?” As discussed above, the sale to H&S is not an occasional sale. H&S purchased the property at retail. There is no election available; tax is due on the sales price to H&S. (Reg. 1660(c)(9)(A).) Next, you ask: “Are the rental agreements described above sufficient to constitute leases in accordance with Regulation 1660 so that there is an assignment of leases of tax-paid property with a transfer of title as described in Regulation 1660(c)(9)?” It is not clear exactly what you are asking in this question. It appears from the information you have provided that the rental agreements you have described constitute leases as that term is defined in subdivision (a)(1) of Regulation 1660, and that the assignment of the leases by the selling companies to H&S involved a transfer of title as discussed in Regulation 1660(c)(9)(A). As stated in that subdivision, if title is transferred, tax applies measured by the sales price. You ask whether, if the purchaser pays no tax on the purchase of the leased water coolers, a new election to pay tax on the cost of the water coolers will be required when the current leases expire and the water coolers are leased to new lessees. As explained above, H&S owes tax on cost. There is no election available. Neither the leases in effect at the time of the sale to H&S, nor any subsequent leases, will be continuing sales; therefore, the lease receipts will not be subject to tax.

Mr. D--- B. F---

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If you have further questions, please feel free to write again. Sincerely,

Kelly W. Ching
Staff Counsel
KWC:cl
cc:

--- District Administrator
--- District Administrator

May 30, 1996
330.2791