Did the historical acquisition sale-and-leaseback exclusion also exempt a purchase-option sale at the end of the lease?

Plain-English summary

An attorney's January 15, 1992 letter asked how historical section 6010.65 applied to acquisition sale-and-leaseback arrangements executed before January 1, 1995 but extending beyond that cutoff. The complete request, client and transaction are absent. The published response's subject says Amendment of Regulation 1660, but it provides no amendment or regulation text.

Section 6010.65(c) made the leaseback portion of a qualifying pre-cutoff acquisition sale-and-leaseback not a continuing sale. Rent after January 1, 1995 therefore stayed outside use tax when the arrangement had been executed before the cutoff and otherwise qualified.

That protection did not cover a later repurchase. Subdivision (b) expressly included a title transfer to the lessee upon termination as a sale and purchase. The repurchase date was irrelevant regardless of when the option was granted; there was no section 6010.65 exemption for an end-of-lease sale.

If the lessee sold its business and assigned the qualifying lease plus option, rent paid by the assignee remained nontaxable lease receipts. The source corrected the request's role description—the assignee was the new lessee paying rent, not receiving it. The assignee's option exercise remained taxable no matter who exercised.

The final questions covered no option exercise. Because the lessor acquired title in an untaxed qualifying transaction, its own later use was not taxable. The source says this was so before or after January 1, 1965, while every earlier cutoff reference is 1995. The same text appears in both official PDFs; no source resolves it.

A later lease to a different lessee was a taxable continuing sale measured by rentals because the lessor had not timely paid acquisition tax. It had no purchase-price election without specific statutory authority; section 6094.1 was given as contrasting authority after an exempt occasional sale.

No qualifying agreement, execution date, lease term, rent, option, business sale, assignment, title transfer, later use/lease, tax return, assessment, payment, claim, appeal or outcome is supplied. Live 330.2795 publishes only taxable end sale. Companion 330.5300's identical backup letter and live entry publish lessor-use/later-lease branch.

What this means for you

Separate leaseback exclusion from later title transfer. Preserve original execution and qualification evidence, lease term/rent, option grant/exercise, any assignment and what lessor does if property returns. Historical cutoff and typo are not current guidance.

Common questions

Did a qualifying leaseback make the final purchase exempt?

No. The leaseback rent exclusion and later title transfer were separate.

Did post-1995 rent become taxable automatically?

No under letter, if arrangement was executed before January 1, 1995 and otherwise qualified.

Did the option's original contract date exempt a later exercise?

No. The opinion said the repurchase date was irrelevant regardless of when the option was granted.

What if the business and lease were assigned?

Qualifying rent could remain excluded, but assignee's later option exercise was taxable.

Was the lessor taxed for its own use after no exercise?

No under historical analysis, though source's 1965/1995 wording conflict must remain unresolved.

What if the lessor rented the property to a new customer?

That later lease was taxable on rents, with no purchase-price election identified.

Are actual transaction and outcome known?

No. Source answers questions without underlying records or later proceeding history.

Citations and references

• Historical section 6010.65(c) — pre-January 1, 1995 execution cutoff and leaseback exclusion
• Historical section 6010.65(b) — title transfer at termination as sale/purchase
• Section 6094.1 — comparison showing need for specific purchase-price-election authority
• Amendment of Regulation 1660 subject — no amendment or regulation text supplied
• January 15 request and all transaction/reporting/outcome records — absent
• Live Annotation 330.2795 — taxable end sale only
• Companion Annotation 330.5300 — retained-property use and later lease; identical source with same date conflict

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.2795
• Original supporting opinion: 330.2795 PDF
• Companion official publication: Annotation 330.5300 and 330.5300 PDF

Original ruling text

330.2795

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

February 21, 1992

Mr. C--- L. N--Attorney and Counselor at Law
XXXX --- --- East, Eleventh Floor
--- ---, California XXXXX
Re:

Amendment of Regulation 1660

Dear Mr. N---:
This is in response to your letter dated January 15, 1992 regarding the application of Revenue and Taxation Code section 6010.65. You note that the section is in effect until January 1, 1995. If a taxpayer enters into a sale and leaseback transaction prior to that date but the lease itself extends past January 1, 1995, you ask whether the lease payments made after January 1, 1995 would be taxable. You also inquire as to the tax treatment of a repurchase of the equipment after January 1, 1995 if the repurchase were pursuant to an option granted in the contract signed prior to January 1, 1995. Subdivision (c) states that section 6010.65 applies to acquisition sale and leaseback arrangements executed before January 1, 1995. Thus, if the acquisition sale and leaseback arrangement is executed prior to January 1, 1995, the leaseback portion comes within the terms of section 6010.65 and is not regarded as a continuing sale subject to use tax. With respect to repurchases, the date of the repurchase is irrelevant, regardless of when the option is granted. Subdivision (b) of section 6010.65 specifically states that “sale” and “purchase” include, for purposes of application of sales and use tax, the transfer of title to a lessee upon termination of an acquisition sale and leaseback. That is, there is no exemption or exclusion under section 6010.65 with respect to a sale at the end of the lease term. You ask what happens if the lessee sells its business and the lease is assigned to the new buyer along with the option to acquire the property at termination of the initial lease contract. Assuming the lease is pursuant to a qualifying sale and leaseback, the lease is not regarded as a sale for purposes of sales and use tax. You ask whether the rentals to the assignee are exempt. I assume you are asking whether the rentals paid to the lessor are not taxable since the assignee is not the lessee (that is, the assignee in your question is the lessee and is not receiving rents but rather is paying them). As noted above, if the acquisition sale and leaseback qualifies under section 6010.65,

Mr. C--- L. N---

-2-

February 21, 1992
330.2795

the lease receipts are not taxable rentals. You ask whether the exercise of a purchase option on the equipment by the assignee would be subject to tax. As noted above, the exercise of the option to purchase is not exempt or excluded from taxation under section 6010.65 no matter who exercises the option. Your final questions relate to use of the property upon termination of the lease when the lessee does not exercise an option to purchase. You ask whether subsequent use of the rental property by the lessor is subject to tax. Since the lessor acquired the property in a transaction not subject to tax, its use of the property is not subject to tax, regardless of whether that use occurs before or after January 1, 1965. On the other hand, when the lessor leases that property to a different lessee, that lease is a continuing sale and purchase and is subject to use tax measured by rentals payable. I note further that there is no election for the lessor to pay tax measured by purchase price since there is no specific statutory authority to do so. (See, e.g., Rev. & Tax. Code § 6094.1 (specific authority to pay tax measured by purchase price when lessor acquires property in an exempt occasional sale).) If you have further questions, feel free to write again. Sincerely,

David H. Levine
Senior Tax Counsel

DHL:cl
0612E
bc:

--- --- District Administrator