Was California use tax due after a computer under a taxed prime lease was subleased and moved to Arizona?

Plain-English summary

An absent March 28, 1990 Audit Review and Refunds mini-memo described a company paying use tax on computer rent under a prime lease. After commencement, it decided to sublease the computer to an Arizona customer and claimed a tax-paid-purchases-resold deduction on its return. The requesting unit thought prime tax remained due and no deduction was available because the taxpayer did not legally own the computer.

Counsel agreed with the result but not the ownership reason. He assumed the prime lessor manufactured the computer, making its lease a continuing sale without a purchase-price election. If property was subleased before lessee use, the sublease was also a continuing sale when no use tax was paid on prime rents; if prime-rental tax was paid, the sublease was not a sale and its rents were not separately taxed.

Once the prime lease began and rent-based tax was paid, the lessee could not switch methods, retroactively issue a resale certificate and obtain a tax-paid-purchases-resold refund. The method was fixed at prime rent, and sublease rent was not another taxable sale.

The source then creates an unresolved conflict. It says that a timely resale certificate would let the prime lessor lease tax-free, but that tax would not be due on sublease rents. That contradicts its preceding rule that an untaxed prime lease makes the sublease a continuing sale. Cited 330.2880's fresh backup likewise says the first lessee then reports/pays tax on sublease rent. This page preserves the source wording rather than selecting a correction.

The cited 330.2880 PDF is not a computer opinion. It combines two August 18, 1965 letters: one about 30 weekly rental trailers after prime-lessor purchase-price tax, and one allowing a sublessor to give an Illinois corporation a resale certificate and collect/remit tax from sublessees. It identifies an amended Ruling 70 enclosure not reproduced. It supports method timing but supplies no computer facts.

Location independently controlled the actual periods. Unless the computer was taxable mobile transportation equipment, a lease outside California was not subject to California tax. The memo says the property was no longer used in California, without dates or movement records. Use tax collected/remitted by the prime lessor for those periods was an overpayment that should be refunded. A lease contract calling for use tax could not make nontaxable amounts taxable.

Live Annotation 330.2877 publishes the manufacturer, California-to-Arizona sublease, denied late deduction/certificate and out-of-state refund conclusions. It omits the requesting unit's rejected legal-owner rationale, manufacturer assumption, untaxed-prime/sublease rule, source conflict, broader cited 330.2880 context, mobile-transportation exception and missing evidence.

No mini-memo, computer description/classification, manufacturer proof, prime lease, lessee use before sublease, Arizona sublease, resale certificate, return/deduction, contract, exact California/out-of-state periods, location record, tax invoices/payments, audit, refund claim/payment, assessment, petition, appeal or later outcome appears.

What this means for you

Preserve manufacturer/acquisition facts, property classification, prime and sublease dates, any lessee use, resale certificate timing, chosen reporting method, daily location and tax invoices/payments. Contract language cannot impose California use tax for periods the property is outside the state.

Common questions

Why was the resale deduction unavailable?

The lessee had already paid tax measured by prime-lease rentals. It could not retroactively issue a resale certificate and move the taxable measure to the sublease.

Why was a refund still available?

California's lease use tax applies to use in California. The computer was outside the state during the periods at issue, so the tax collected for those periods was an overpayment.

Did legal ownership decide the deduction?

No. Counsel rejected that rationale and used the fixed reporting-method analysis.

What is the timely-certificate conflict?

The memo says sublease tax would not be due, while its earlier rule and cited 330.2880 say rent-based tax moves to the sublease.

Does the memorandum decide Arizona tax?

No. It addresses California sales and use tax only.

Does the source establish exact out-of-state periods?

No. It gives no dates or location records.

Was the refund outcome published?

No. The memo says the overpayment should be refunded but supplies no claim or payment record.

Citations and references

• Sections 6006(g), 6006.1 — assumed manufacturer-lessor continuing sale
• Regulation 1660(c)(5) — prime/sublease method
• Section 6201; Regulation 1660(c)(1) — California use periods
• Annotation 330.2880/1965 backup — trailer/Illinois-company method letters and conflict evidence
• Mini-memo, property, agreements, return, location, tax/refund and outcome records — absent
• Live Annotation 330.2877 — narrow method/refund result without assumptions and conflict

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.2877
• Original supporting memorandum: 330.2877 PDF
• Cited supporting opinion: 330.2880 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Mr. Richard Gerber
Audit Review and Refunds Unit

From:

David H. Levine
Tax Counsel

Subject:

M--- Corporation
S- -- XX-XXXXXX

330.2877

Date:

April 13, 1990

This is in response to your mini-memo dated March 28, 1990. Taxpayer leases a computer from I--- and pays I--- use tax measured by rentals payable. After the lease began, taxpayer decided to sublease the computer to a customer in Arizona. Taxpayer had taken a taxpaid purchases resold deduction on its return. You believe that tax is due to I--- on the original lease and that taxpayer is not allowed to take a tax-paid purchases resold deduction because it is not the legal owner of the computer. We agree that the taxpayer may not take a tax-paid purchases resold deduction, but not for the reason you state. I assume that I--- manufactured the leased computer. Under such circumstances, I---’s lease of the computer is a continuing sale, and there is no election available to pay tax on purchase price. (Rev. & Tax. Code §§ 6006(g), 6006.1.) If such leased property is subsequently subleased prior to use by the lessee, the sublease is also a continuing sale if use tax is not paid measured by rentals payable under the prime lease. If use tax is paid on the prime lease, then the sublease is not regarded as a sale and the rentals payable from the sublease are not subject to use tax. (Reg. 1660(c)(5).) The determination of whether tax is due measured by rentals payable under a prime lease or by rentals payable under a sublease is similar to the determination of whether tax is due measured by purchase price or by rentals payable under a prime lease. A lessor who has elected to pay tax measured by purchase price may not change methods after the lease has commenced and obtain a refund in order to collect tax on rentals payable. Similarly, a lessee who has been paying tax measured by rentals payable under the prime lease may not change methods and treat the lease as for resale in order to collect tax measured by rentals payable under a sublease. That is, once the prime lease has commenced and taxes are paid measured by rentals payable, the sublease is not a sale. The lessee may not change methods and issue the lessor a resale certificate. Therefore, a refund is not allowable on this basis (i.e., tax-paid purchases resold). On the other hand, had the lessee issued the lessor a timely resale certificate, the lessor could

Mr. Richard Gerber

-2-

April 13, 1990
330.2877

properly lease the property tax free and taxes would not be due on rentals payable under the sublease. (See BTLG Annot. 330.2880 (8/18/65).) Accordingly, if tax is due on these lease and sublease transactions, that tax must be measured by the rentals payable from taxpayer to I--since taxpayer may not change methods. Taxpayer’s sublease would not be a sale under the Sales and Use Tax Law and would not be subject to use tax. Notwithstanding the discussion above, we believe that the lease for the periods at issue is not subject to tax. A lease of tangible personal property outside California is not subject to California sales or use tax (unless it is a taxable lease of mobile transportation equipment). (Rev. & Tax. Code § 6201 (use tax applies to use in this state), Reg. 1660(c)(1) (tax on subleases is a use tax on use in this state).) That taxpayer has subleased the computer is irrelevant for this analysis. The property is no longer being used in this state. California use tax is not applicable to the lease for any periods in which the property is not inside California. Use tax collected by I--- from taxpayer and paid to this state with respect to those periods must be refunded as an overpayment of use tax and should be refunded. Regardless of any contractual provisions between I--- and taxpayer (i.e., that the lease is subject to use tax measured by rentals payable), I--- should not collect California use tax on amounts which are not subject to our use tax. If you have any further questions, feel free to write again.

DHL:wak
2107C