Did an office lessor have to tax tenant charges for decorative plants leased from a vendor and passed through at cost plus a markup?

Plain-English summary

An accounting manager's unreproduced April 5, 1994 letter asked about an office lessor's related tenant services. The source first addressed keys and locks, then decorative plants.

At move-in, tenants received office and mailbox keys. Lost or extra keys were rebilled at cost plus markup. Counsel assumed keys returned at office-lease end. Because their purpose was access to leased real property, the lessor consumed them: tenant charges were not taxable, while tax applied to the lessor's key purchases.

Lock changing/re-keying depended on performer. If the lessor bought and installed property, it consumed it and owed purchase/use tax. If a contractor furnished/installed, Regulation 1521 made the contractor consumer of materials and retailer of fixtures. Either way, the tenant charge remained part of the real-property lease and was not taxable.

For plants, the office lessor leased reception/common-area inventory from a vendor. If tenants wanted suite plants, the vendor added them, the office lessor kept paying for all plants, and tenants were charged cost plus markup. That was a tangible-property sublease whose tax depended on the prime level.

A lease was ordinarily a continuing sale/purchase taxable on rent. The purchase-price alternative required prime lessor tax on acquisition and substantially same-form leasing. Cited 330.4060 says growth alone breaks same form only when it increases value by more than 20 percent. Without identifying plants, values, term or growth evidence, counsel said value most likely crossed that line and called same-form treatment unlikely. He therefore assumed the vendor collected use tax on office-lessor rents.

Regulation 1660(c)(5) says sublease receipts escape tax when property was qualifying same-form property taxed on prime-lessor purchase price, or tax was paid on rents under a prime/prior lease. On the source's assumed prime-rental tax, the tenant plant receipts required no further tax; the markup did not change that result.

Fresh 330.4060 backup is broader than its one growth rule. It follows discussions of a plant/tree-rental redetermination petition, proposes a Hollywood-office reaudit, and addresses growth, bases, lessee-directed arrangements, tax-paid/ex-tax acquisitions and election issues across six numbered branches. It identifies an enclosed Business Taxes General Bulletin 66-15 and prior California Tax Service annotations not reproduced here. It supports the threshold but supplies no facts about this office lessor's plants.

Live Annotation 330.2870 publishes only the marked-up tenant plant sublease and prior-rental-tax result. It omits the key/lock branches, assumptions about key return and plant value/vendor tax, missing evidence and broader nature of cited 330.4060.

No request, office lease, key return/loss/purchase/tax, lock invoice/work/material-fixture allocation, contractor record, plant lease/identity/term/growth/value, vendor acquisition/rental tax, tenant sublease/bill/markup, return, audit, assessment, claim, appeal or later outcome appears.

What this means for you

For keys and locks, preserve ownership/return terms, invoices, installer and material/fixture treatment. For plants, preserve prime/sublease agreements, plant identity and value over time, vendor acquisition method, rental tax actually collected and every tenant charge. The no-second-tax result depends on tax at the prior level, not markup alone.

Common questions

Were extra-key charges taxable?

No under the assumed return-at-end facts; the office lessor consumed the keys and owed tax on its purchase.

Were tenant lock charges taxable?

No as real-property lease charges, but purchase/use tax treatment depended on self-work versus contractor materials/fixtures.

Was the tenant plant markup taxable?

No, if tax was already paid on prime-lease rents.

Why might the vendor's plant rents be taxable?

Plant growth could cause more than a 20% increase in value and defeat same-form treatment.

Did the source prove that growth threshold was crossed?

No. It said most likely and used that to assume vendor collection.

Would the answer change if no tax was paid on the prime lease?

Potentially. The opinion's no-further-tax conclusion depended on prior rental tax.

Was cited 330.4060 only about a growth threshold?

No. Its backup is a broader six-issue petition/reaudit letter; only its growth rule was applied here.

Citations and references

• Section 6091 — taxable-receipts presumption
• Regulation 1521 — lock-work contractor materials/fixtures
• Sections 6006(g), 6006.1, 6010(e), 6010.1 — continuing-lease framework
• Sections 6006(g)(5), 6010(e)(5); Regulation 1660(c)(2) — same-form purchase-price method
• Regulation 1660(c)(5) — no further sublease tax after qualifying prior tax
• Annotation 330.4060/1967 backup — growth threshold within broader plant petition/reaudit advice
• Request and all key/lock/plant/tenant/vendor/tax/outcome records — absent
• Live Annotation 330.2870 — narrow plant result without assumptions/evidence limits

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.2870
• Original supporting opinion: 330.2870 PDF
• Cited supporting opinion: 330.4060 PDF

Original ruling text

330.2870

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 322-2976

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

May 24, 1994

GRAY DAVIS
Controller, Sacramento
────────
BURTON W. OLIVER
Executive Director

Ms. J--- M--Accounting Manager
O--- S--- International
--- Center
--- --- Street, Suite XXXX
--- ---, CA XXXXX
Dear Ms. M---:
This is in response to your letter of April 5, 1994 in which you request advise as to the application of sales tax to the activities of O--- S--- International related to its leases of office space. O--- S--- International leases office space and provides related services to tenants. Your first two questions relate to locks and keys to suites leased to tenants. You state that when a tenant first moves in, you provide the tenant with keys to the office and the mailbox. There are occasions where the tenant will lose the keys or request additional keys. When you provide the new or additional keys, you charge the tenant for the cost of the keys plus a mark-up. Similarly, when you change or re-key locks, you charge the tenant for the cost of the lock and a mark-up. Discussion The gross receipts from the retail sale or lease of tangible personal property are presumed taxable unless the person making the sale proves otherwise. (Rev. & Tax. Code § 6091.) Charges for the sale or lease of real property are not subject to the sales tax. In the situation where you merely provide keys, we assume that the keys are returned to you at the end of the office lease term. Since the true purpose of the keys is to allow access to the leased real property, the providing of the keys is regarded as incidental to the lease of the real property. You are the consumer of the keys, and your charge for providing the keys is not subject to sales tax. However, you must pay sales tax on your purchase of the keys.

Ms. J--- M---

-2-

May 24, 1994
330.2870

The application of tax to the changing or re-keying of the locks depends upon who performs the work. If you purchase the property installed and install it yourself, then you are the consumer of any such property, and tax applies to the sale to you or your use. Since the charge passed on to your lessee is for the lease of real property, your charge is not taxable. If you hire a contractor to perform the work and the contractor furnishes and installs property, the application of tax is set forth in Regulation 1521. The contractor will be the consumer of any materials (tax on the sale to the contractor or to the contractor's use) and the retailer of any fixtures (tax on the sale to you). In any event, the charge to the lessee will again be for the lease of real property and will not be taxable. The other question posed in your letter related to the application of tax to leases of plants. You state that you lease plants for the reception and common areas from a vendor. Some of your tenants request that you also provide plants for their suites. Your vendor provides you the additional plants and you continue to pay for all of the plants. However, you charge your tenants for the additional plants for their suites at your cost plus a mark-up. You ask whether this transaction is subject to sales tax. Except as discussed below, a lease of tangible personal property is a continuing sale and purchase, and the lessor must collect and pay use tax measured by the rental payments. (Rev. & Tax Code §§ 6006(g), 6010(e), 6006.1 and 6010.1). However, certain types of leases are not treated as "sales". Revenue and Taxation Code sections 6006(g)(5) and 6010(e)(5) state that a "sale" and "purchase" do not include a lease of tangible personal property leased in substantially the same form as acquired by the lessor as to which the lessor has paid use tax or sales tax reimbursement measured by the purchase price of the property. As explained in Sales and Use Tax Regulation 1660(c)(2), no sales or use tax is due with respect to the rentals charged for such leases. Whether you must collect sales or use tax on the receipts from your sublease of the plants depends upon whether you are paying use tax on your lease. The lease of the plants to you is subject to tax unless your vendor paid tax when acquiring the plants and is now leasing them to you in substantially the same form as acquired. A plant or tree can only be regarded as remaining in substantially the same form as acquired until, by reason of its growth, its value has increased by more than 20 percent. (Sales and Use Tax Annotation 330.4060 (12/06/67).) The value of the plants you lease most likely increases by more than 20 percent during the course of the lease. Thus, it is unlikely that the plants are leased to you in substantially the same form as acquired. We therefore assume that the lessor of the plants has been collecting use tax from you measured by the rentals payable from your leases of the plants.

Ms. J--- M---

-3-

May 24, 1994
330.2870

Sales and Use Tax Regulation 1660 (c)(5) states the rule applicable to your sublease of the plants to your clients. "PROPERTY SUBLEASED. Tax does not apply to receipts from subleases of tangible personal property which is leased in substantially the same form as acquired by the primary lessor where the prime lessor has paid sales tax reimbursement or use tax measured by his purchase price. Also, tax does not apply to subleases of tangible personal property if the tax is paid on rental receipts derived under the prime lease, or any prior sublease." If you are paying use tax to your lessor on the prime lease to you, then you are not required to collect and pay sales or use tax on the rental receipts from the sublease. If you have any further questions, please do not hesitate to write again. Sincerely,

Sukhwinder K. Dhanda
Staff Counsel
SKD:plh
cc:

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