Could equipment be tax-paid when the lessor paid sales-tax reimbursement to a seller with no permit and had lost the purchase order?

Plain-English summary

A sole-proprietor equipment lessor began business in 1979 and faced first audit. A November 24, 1982 deficiency for November 1, 1979 through June 30, 1982 used $42,714 unreported lease-receipt measure and imposed 10% failure-to-file penalty. August 31, 1983 Downey hearing included owner/CPA and Board auditor.

Dispute concerned April 1979 equipment purchase. Seller gave no invoice. Petitioner said April 27 purchase order was mailed to auditor but lost and not in file. Seller had no located permit, could not be found, and Board had no tax remittance record.

Petitioner recalled $45,000 asking price and his $46,000 including tax offer accepted three days later, but did not recall separately stated tax. Later finding instead calls tax-included price $46,500. Official source does not reconcile amounts. After some initial use, petitioner leased equipment ex tax to his corporation, assuming acquisition tax paid.

Other evidence persuaded hearing officer. Petitioner had bought about 40 other machines and customarily paid sales-tax reimbursement to avoid rent tax. Finding treated detailed negotiation recollection and that custom as proof reimbursement had been paid despite missing order.

Regulation 1660(c)(2) made same-form lease nontaxable when acquisition sales-tax reimbursement was paid. It required timely lessor reporting only if that tax had not been paid and lessor later wanted purchase-price method. Regulations 1660/1700 did not require receipt or proof seller remitted tax; 1685/1686 applied only to use-tax collection.

Missing permit did not stop seller/retailer status. Section 6071 made doing business as seller without permit crime, so violation presupposed person could still be seller. A sworn statement said seller manufactured tooling/parts, and business card said parts; Evidence Code 600(b) supported inference of retail rather than occasional sales. Neither item appears. Section 6015(a) and Civil Code 1656.1(a) then supported seller as retailer able to collect reimbursement.

Recommendation deleted deficiency including penalty. It did not reach petitioner's alternate theory that seller liability should block use tax if reimbursement was not paid. No final Board order or later outcome appears.

Live 330.2825 publishes conclusion and says permit/remittance proof unnecessary as long as transaction was sales-taxable. It adds that if payment labeled reimbursement was actually use tax, section 6202 applied; hearing decision does not contain that caveat. Live entry omits audit amounts, evidence, price conflict and recommendation posture.

What this means for you

A missing receipt was not fatal on this unusual record, but evidence burden remained. Preserve invoice/order, tax statement, payment, seller business/permit status, acquisition tax type, same-form use and timely return. Do not rely on custom alone when direct records can be kept.

Common questions

Was formal receipt indispensable?

No on this record. Negotiation testimony, about 40 comparison purchases and seller-business evidence supported payment finding.

Which negotiated price did source find?

Narrative says $46,000 including tax; analysis says $46,500. Conflict is unresolved.

Did missing seller's permit invalidate reimbursement?

No. Seller could be retailer despite violating permit requirement.

Did lessor need to prove seller remitted money?

Recommendation said no under Regulations 1660(c)(2) and 1700.

What if payment was actually use tax?

Only live annotation addresses that alternative and points to section 6202; decision itself does not.

What relief was recommended?

Deletion of $42,714 rental-receipt measure and 10% failure-to-file penalty.

Was recommendation final Board order?

Not shown. Source supplies no adoption, payment/refund adjustment or later appeal.

Citations and references

• Section 6006(g)(5); Regulation 1660(c)(2) — tax-paid same-form lease/timely election
• Sections 6452/6455 — timely-return language inside quoted rule
• Regulations 1700, 1685, 1686 — receipt/remittance and use-tax distinction
• Sections 6071, 6015(a); Civil Code 1656.1(a) — unpermitted seller, retailer and reimbursement
• Evidence Code 600(b) — inference from parts business
• Section 6202 — live-only caveat for actual use tax
• Purchase order/invoice, sworn statement/card, comparison purchases and seller/remittance records — absent
• Live Annotation 330.2825 — conclusion plus caveat, without audit/evidence limits
• September 20 recommendation — final Board action absent

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.2825
• Original hearing decision and recommendation: 330.2825 PDF

Original ruling text

STATE OF CALIFORNIA
BOARD OF EQUALIZATION

In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law of:
W--- H. R--dba B--- R--- L--Petitioner

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330.2825

HEARING
DECISION AND RECOMMENDATION

No. SR AD XX-XXXXXX-010

The above-entitled matter came on regularly for hearing on August 31, 1983 in Downey, California before Stephen A. Ryan, Hearing Officer. Appearing for Petitioner:

Mr. W--- R---, Owner
Mr. W--- K---, CPA

Appearing for the Board:

Ms. Shirley Baca
Tax Auditor IV
Protested Item

The petitioner has filed a petition for redetermination of a tax deficiency determination issued on November 24, 1982, for the period November 1, 1979 through June 30, 1982. The protest involves tax determined on the following audit item:

1.

Tax Measure
$42,714

Unreported lease receipts

A 10 percent penalty was imposed for the failure to file returns. Petitioner’s Contentions 1. Petitioner paid sales tax reimbursement to the retailer on the purchase of the equipment and, therefore, the subsequent leases are not subject to tax. 2. If it is determined that sales tax reimbursement was not paid, the seller is liable to the Board for sales tax on the retail sale because petitioner did not issue a resale certificate to the seller. This liability should preclude the Board from seeking use tax from the petitioner. 3.

The penalty should not be imposes.

W--- H. R--dba B--- R--- L---

-2-

September 20, 1983
330.2825

Summary of the Case
Petitioner, is conducting a leasing business as a sole proprietor. He began this business in 1979 and this is the first audit. In April 1979, petitioner purchased equipment from T--- S--- dba S--- P--- P--- of [city], Ca. The seller did not issue an invoice to petitioner. Petitioner stated that he issued a purchase order dated April 27, 1979, to the seller. The copy of this purchase order was lost. Petitioner claims to have mailed it to the auditor but it is not located in the files. The petitioner does not recall whether or not there was a separate amount specified for tax. He thinks that it stated that the price “included sales tax”. He also recalls that the original asking price was $45,000. He offered the seller $46,000 including tax. Three days later, after thinking it over, the seller accepted. The seller told petitioner that he accepted in order to use the money to vacation to Hawaii with his wife. Apparently Mr. S--- was operating without a seller’s permit. The auditor’s investigations have not located the seller or identified any permit for his [city] location. Thus, the Board has no record of sales tax being paid to the Board on this sale. After some initial use, petitioner subsequently leased the equipment ex-tax to his corporation assuming that tax had been paid on the purchase. Petitioner has purchased approximately 40 other machines since he began his business and he has paid sales tax reimbursement on each one. He stated that it was his custom to always pay sales tax reimbursement so that tax would not apply to the lease receipts. Having no record of tax being paid on the purchase, the auditor assessed tax on the lease receipts. Analysis and Conclusions Regulation 1660(c)(2) [Cal. Admin. Code, title 18, section 1660(c)(2)], which implements section 6006(g)(5) of the Revenue and Taxation Code, states: “PROPERTY LEASED IN FORM ACQUIRED. No sales or use tax is due with respect to the rentals charged for tangible personal property leased in substantially the same form as acquired by the lessor, or by his transferor, as to which the lessor or transferor has paid sales tax reimbursement or has paid use tax measured by the purchase price. If such tax has not been paid, and the lessor desires to pay tax measured by the purchase price, it must be reported and paid timely with the return of the lessor for the period during which the property is first placed in rental service. A timely return is a return filed within the time prescribed by Sections 6452 or 6455, whichever is applicable.”

W--- H. R--dba B--- R--- L---

-3-

September 20, 1983
330.2825

If petitioner paid sales tax reimbursement to Mr. T--- S--- on the purchase of this equipment, then no sales or use tax arises form the use or lease by petitioner to the corporation. The factual question then is whether sales tax reimbursement was paid by petitioner to Mr. S---. Although the written purchase order has bee lost, there is other evidence that sales tax reimbursement was paid by petitioner. Petitioner’s detailed recollection of the price negotiations for the machine indicate that the parties intended the $46,500 price to include sales tax reimbursement. This together with petitioner’s custom of always paying sales tax reimbursement lead the hearing officer to conclude that petitioner did pay sales tax reimbursement to Mr. S---. Nothing in either Regulation 1660(c)(2) or 1700 require that petitioner produce a receipt or prove that Mr. S--- actually paid the tax to the Board. Regulation 1685 and 1686 only apply to the collection of use tax. Accordingly, the lease receipts are not subject to tax. The lack of a seller’s permit would not preclude Mr. S--- from collecting sales tax reimbursement because he would still be a “seller” and a “retailer”. Section 6071 of the Revenue and Taxation Code provides that it is a crime for a person to be engaged in business as a “seller” without holding a permit. Thus, a person can be a “seller” without holding a permit. A “retailer” is a “seller” who makes retail sales of tangible personal property (Rev. & Tax. Code section 6015(a)). It appears that Mr. S--- was making retail and not occasional sales. Petitioner submitted a statement (signed under penalty of perjury) from Mr. F--- P--- of L--- P---, XXXXX
--- Ave., [city 2], Ca. Mr. P--- stated that Mr. S--- manufactured tooling and parts in a machine shop business. An inference can be made that Mr. S--- made sales of the tooling and parts also (Evidence Code section 600(b)). Mr. S---’s business card showed the name as S--- P--- P--- and that it specialized in “parts”. Civil Code section 1656.1(a) provides that “retailers” may add sales tax reimbursement to the sales price of tangible personal property. Therefore, Mr. S--- was a seller and a retailer who could have collected sales tax reimbursement from petitioner on this sale. Recommendation It is recommended that the deficiency determination, including the penalty, be deleted from the measure of tax.

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Stephen A. Ryan, Hearing Officer

9-20-83
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Date