Was transferring title to leased California equipment a taxable sale when the buyer took subject to the lease and the seller guaranteed the payments?

Plain-English summary

Headquarters Petitions Unit asked for an opinion on the second of two taxpayer transactions in a September 4, 1962 request. Counsel pointed to an October 23, 1962 letter for the first transaction. Neither document appears.

The preserved chronology begins April 5, 1960, when the taxpayer contracted to lease equipment. It installed the equipment in the lessee's office November 17. On November 28, the taxpayer contracted to transfer and immediately transferred title to financing lessor P/L.

P/L took the equipment subject to the existing lease and the lessee's purchase option, received assignment of the taxpayer's lease rights, and could not sell/lease elsewhere without breaching the agreements. If the lessee defaulted, the taxpayer promised to repurchase the equipment or make the lessee's required rental payments to P/L.

The taxpayer argued the Board had said November 20, 1960 that sales tax would not apply; no letter appears. It also argued P/L lacked possession, unrestricted sale/lease rights and ownership risks, and the sale form existed only to obtain financing.

Counsel found a taxable sale. The agreement expressly sold the equipment with immediate title passage. Section 6006 required title or possession, not both. Although the contract restricted P/L, it still had power to sell/lease to third parties and would owe damages if it did. The financing motive did not let the taxpayer claim benefits of a voluntary sale form while avoiding its sales-tax consequences.

Counsel then quoted a November 22, 1960 Board letter—not taxpayer's November 20 date—saying title passage to California-situated property was California sales-taxable, while title passage before property entered California made P/L user. Both letters are absent, so whether dates identify separate writings or a source discrepancy remains unresolved.

The taxpayer's final comparison was the May 14, 1958 Lease of Part of Aircraft opinion. Fresh official 105.0160 backup confirms that case concerned the section 6366 aircraft exemption: an airline had beneficial ownership of the complete aircraft while a third party held engine/propeller title for financing under Ruling 46-F(3). Counsel said it did not decide whether the equipment title transfer was a sale and was inapplicable here.

The PDF omits actual request, first-transaction response, both 1960 letters, lease, installation and location proof, title/assignment agreement, purchase option, default guarantee, consideration, financing, petition, assessment, payment, refund, appeal or later outcome. Live 330.2792 publishes title/power/damages/financing conclusion but none of this provenance.

What this means for you

An express transfer of title for consideration can be sale even without possession. Preserve property location at title passage, exact title and assignment terms, existing lease/option, guarantee, buyer powers and whether documents instead create genuine security interest.

Common questions

Did the buyer need physical possession for a taxable sale?

No. Section 6006 included transfer of title or possession, conditional or otherwise.

Did the existing lease and purchase option prevent a sale?

No. They restricted the buyer contractually but did not eliminate the power created by title.

Did the default repurchase/payment guarantee change the answer?

No in the memorandum's analysis. It was part of the described financing but title still transferred.

Did the financing purpose change the result?

No. Counsel said the taxpayer voluntarily used a sale contract for its benefits and had to accept the tax consequences.

Had the Board previously promised no tax?

The taxpayer said a November 20, 1960 letter did. Counsel instead quoted a November 22 letter supporting tax; neither source is reproduced.

Why did the 1958 aircraft opinion not control?

It preserved section 6366 exemption despite financing title; it did not decide whether title transfer was sale.

Is petition's final result known?

No. This is internal advice and supplies no final determination or later outcome.

Citations and references

• Section 6006 — title-or-possession transfer for consideration
• Section 6366; former Ruling 46-F(3); May 14, 1958 opinion — aircraft exemption distinguished
• September 4 request and October 23 first-transaction letter — absent
• November 20 taxpayer-cited and November 22 counsel-quoted letters — absent, date relationship unresolved
• Lease, installation, title/assignment, option, guarantee, consideration and proceeding records — absent
• Live Annotation 330.2792 — title, ownership power, damages and financing-form result

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.2792
• Original supporting opinion: 330.2792 PDF
• Distinguished aircraft source: Annotation 105.0160 and 105.0160 PDF

Original ruling text

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum
330.2792
To:

Headquarters – Petitions Unit

From:

Tax Counsel (CCK) - Headquarters

Subject:

P--- Corporation
--- and --- Streets
--- XX, ---

Date:

April 15, 1963

SO- --- -X-XXXXX

This is in reply to your request of September 4, 1962, for an opinion concerning the applicability of tax to the second of the two transactions in question. Please refer to our letter of October 23, 1962, with respect to the taxability of the first transaction. Our understanding of the facts is as follows: 1.

April 5, 1960. Taxpayer contracted to lease equipment to lessee.

2.

November 17, 1960. Taxpayer installed the equipment in the lessee’s office.

3.

November 28, 1960. Taxpayer contracted to, and did[,] transfer to P--Lessor (P/L) title to the equipment which was the subject matter of the lease agreement between taxpayer and lessee.

4.

This lease agreement contained the following terms:
(a) Taxpayer sold to P/L the equipment subject to the lessee’s rights under its lease contract of April 5, 1960. (b) Taxpayer’s rights under that lease contract were assigned to P/L. (c) P/L’s rights, however, were subject to lessee’s purchase option right. (d) If lessee defaults on the lease contract, taxpayer will repurchase the equipment from P/L or it will make the required rental payments to P/L in the amounts owed by lessee.

Headquarters – Petitions Unit
Re: SO- --- -X-XXXXX

-2-

April 15, 1963
330.2792

Taxpayer makes the following allegations in its behalf:
1.)

We stated in our letter of November 20, 1960, that sales tax will not apply to the transaction.

2.)

The transaction did not constitute a sale because P/L had none of the rights of ownership, such as possession, right to sell or lease the equipment, and risks of ownership.

3.)

The transaction was made to resemble a sale in form only in order to obtain financing; and we ruled that the tax will not apply in a similar situation (pp. 3411 – 3412 of annotations, “Lease of Part of Aircraft”).

Upon reviewing the facts completely, we are of the opinion tax will apply to the transfer of title to the equipment by taxpayer to (--). In this case, taxpayer expressly recited that it was selling to (--) the equipment described in the rental contract of April 5, 1960, with immediate passage of title to the equipment. The fact that (--) never had possession of the equipment would not in itself prevent a taxable sale since section 6006 defines a sale to include “any transfer of title or possession, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration.” Although (--) did not have the right to sell or lease the equipment to anyone other than the lessee since it had agreed to purchase the equipment subject to such obligations, it did have the power to sell or lease the equipment to any other third parties. Of course, if (--) did sell or lease the equipment to third parties, it would have been liable for damages to both taxpayer and the lessee. Although taxpayer may have worded the agreement in the form of a sale to obtain financing, It would be inconsistent to hold that an agreement will constitute a sale contract for the purpose of obtaining financing but something less than a sale for sales tax purposes. If a seller volitionally enters into an agreement and decides to term it a sale contract in order to derive the benefits obtainable in calling it a sale, he must accept the tax consequences which arise as a result of his voluntary action. With respect to our letter of November 22, 1960, we replied, “Where title passes to property which is situated in California, the transaction is a sale subject to the California sales tax. If title to the property passes (to Philco Lessor) before the equipment is moved to California, then it is Philco Lessor which is making a taxable use….” This statement is clearly consistent with the board’s action in determining the sales tax for the sale of equipment by taxpayer to P/L. Finally, our ruling of May 14, 1958, to which taxpayer makes reference, is inapplicable here. In that situation, the question was whether or not the aircraft exemption of section 6366 would be affected by transferring title to part of the aircraft to a third party. CCK:o;b cc:

Out-of-State District Administrator
New York – (SS)