Could an equipment lessee switch midlease from paying tax on the prime rent to collecting tax on its sublease and recover the earlier tax?

Plain-English summary

An absent March 5, 1991 request concerned a 36-month equipment lease beginning January 1, 1989. It required use tax collected from the lessee on monthly prime rent, which the lessee paid for 24 months. The lessee had subleased from inception and collected sales/use tax on sublease rental value at an appropriate rate. Counsel assumed that meant collection from the sublessee and that the amount was reported/paid to the Board; the source literally first says collection from the lessee.

For month 25, January 1, 1991, the quoted proposal says the storage-bin renter held a valid seller's permit, would tender a resale card, stop the lessor's tax, request refund of all first-24-month tax, and have the lessor debit its next return by the same amount. No lease, storage-bin description, permit/card, invoice, amount, return or refund document appears.

A taxpayer could not offset a claimed earlier overpayment on a later return; it had to pay current liability and file a separate refund claim. More fundamentally, paying prime-rent use tax fixed the lessee/sublessor's irrevocable election. It could not report sublease-rent tax and claim a tax-paid-purchases-resold deduction for prime rent. The first lease remained taxable and the sublease nontaxable.

For a future lease, a lessee planning no use other than subleasing could give a resale certificate when the lease began and collect rent-based tax from sublessees. Cited 330.2880's fresh backup combines two 1965 letters—one about 30 weekly rental trailers after purchase-price tax and another about an Illinois-corporation resale chain. It supports the future method but is not storage-bin evidence.

The lessor could not accommodate the month-25 request. It should not refund prime tax because the Board would deny the corresponding refund claim. Amounts separately represented as tax on nontaxable subleases were excess reimbursement under Regulation 1700 and had to be refunded to sublessees or paid to the state. Collection had to stop immediately. The sublessor could raise rent to recover prime-tax cost but could not separately state that amount as tax. The stated Regulation 1700 enclosure is not reproduced.

Live Annotation 330.2886 publishes the same-form purchase election analogy and prime/sublease irrevocable-election result. It omits the 36-month dates, 24-month payment/month-25 request, storage bins, assumptions about collected/reported tax, seller's permit/card, prohibited return offset, predicted refund denial, future no-other-use condition, excess tax remedy, immediate stop and missing records.

No request, equipment/storage bins, prime lease, sublease, use evidence, permit/card/certificate, rent/tax invoice, collection/payment, return, tax-paid-purchases-resold deduction, proposed refund, later refund claim/denial, excess-reimbursement correction, audit, assessment, petition, appeal or later outcome appears.

What this means for you

Set the tax method at lease inception and preserve same-form/use evidence, prime/sublease contracts, certificates, invoices and returns. If a nontaxable sublease was separately billed as tax, stop and trace every collection; the source requires customer refund or state payment, not relabeling after the fact.

Common questions

Did a seller's permit allow a month-25 change?

No. The earlier payment of tax on prime-lease rent had already fixed the election.

Could prior tax be offset on the next return?

No. A separate refund claim was required, and counsel said it would be denied here.

Could the sublessor pass its prime-tax cost to customers?

It could increase rent, but it could not separately label the amount as tax on a nontaxable sublease.

What happened to sublease amounts labeled tax?

They were excess tax reimbursement and had to be refunded to sublessees or paid to the state.

Could a future lease use the other method?

Yes, with a timely inception certificate and no use except subleasing.

Is Regulation 1700 included?

No. It is identified as an enclosure but not reproduced.

Is any correction or refund outcome available?

No.

Citations and references

• Regulation 1660(c)(3)/(c)(5) — irrevocable lease/sublease elections
• Regulation 1700 — excess tax reimbursement; enclosure absent
• Annotation 330.2880/1965 backup — future certificate/rent method within two trailer/rental letters
• Request and every lease/certificate/invoice/return/refund/correction/outcome record — absent
• Live Annotation 330.2886 — election result without actual chronology/remedy

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.2886
• Original supporting opinion: 330.2886 PDF
• Cited supporting opinion: 330.2880 PDF

Original ruling text

330.2886

STATE OF CALIFORNIA

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

April 26, 1991

Mr. G. M--- W--M--- Financial Corporation
P. O. Box XXXX
--- ---, California XXXXX
Re:

SR -- XX-XXXXXX

Dear Mr. W---:
This in response to your letter dated March 5, 1991 regarding the application of use tax to a lease of equipment. The subject agreement was for a lease of equipment for 36 months commencing January 1, 1989, and provided for use tax to be collected from the lessee measured by the monthly rental payments. The lessee complied with this agreement for 24 months. You state that from the inception of the agreement, the lessee subleased the equipment and collected sales/use tax measured by the rental value at the appropriate rate. I assume you mean that lessee collected tax from the lessee measured by the monthly rentals payable. I assume also that the lessee reported and paid to the Board the amount of the tax it collected. You ask whether the following request from the lessee is appropriate, which would commence with the 25th month of the 36-month lease: “1.

On January 1, 1991, since the lessee has been charging the sales tax each time the storage bins are rented, he claims a ‘for resale’ exemption on any further assessment for sales/use taxes by the Lessor. The Lessee also hears a valid Seller’s Permit and issues his resale card in support of his request.

“2.

He requests a refund from the lessor of all of the sales and use taxes paid to Lessor along with rental payments to date under the Agreement.

Mr. G. M--- W---

“3.

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April 26, 1991
330.2886

The Lessor makes a refund to Lessee of the amount collected to date under the Agreement and debits his following monthly Sales/Use Tax Return to the State Board of Equalization for an equal amount to offset.”

Initially, with respect to your subparagraph 3, it is never appropriate for a taxpayer to take an offset on its sales and use tax return from amounts which the taxpayer may have overpaid with an earlier return. Rather, the taxpayer must report and pay the tax actually due, with no offset, and may file a claim for a refund of the amounts it asserts were overpaid. Tax does not apply to subleases of tangible personal property. If the tax is paid by the lessee/sublessor measured by rentals payable under the prime lease. (Reg. 1660(c)(5).) However, a lessee may lease tangible personal property from the lessor ex tax by issuing the lessor a timely resale certificate and then collecting tax on rentals payable on the sublease provided the lessee/sublessor makes no use of that property except to sublease it. (Business Taxes Law Guide Annot. 330.2880 (8/18/65).) In other words, the same rules applicable to whether a lease is subject to tax or not are applicable to determine whether a sublease is subject to tax or not. When property is leased in substantially the same form as acquired, payment of tax or tax reimbursement at the time the property is acquired measured by the purchase price constitutes an irrevocable election not to pay tax measured by rentals payable, and the lessor may not change its election by reporting tax on rentals payable and claiming a tax-paid purchases resold deduction. (Reg. 1660(c)(3).) Again, the same rule is applicable to subleases. When a lessee contracts to lease property and pays use tax to the lessor measured by rentals payable, that lessee has made an irrevocable election not to pay tax measured by rentals payable from a sublease. The lessee/sublessor may not change its election by reporting tax on rentals payable and claiming a tax-paid purchases resold deduction. Applying these rules, the lessor will be unable to accommodate the lessee/sublessor. As long as the lease of required payment of tax measured by rentals payable by the lessee, the lessee is regarded as having made an irrevocable election to pay tax measured by rentals payable and not to collect tax measured by rentals payable from the sublease. The lessee/sublessor may not change that election. Of course, in future leases, if the lessee will sublease the equipment without making any other use of it, it may issue the lessor a resale certificate at the time the lease commences and collect tax measured by rentals payable from the sublease. As mentioned above, the lessor may not take an offset for the claimed overpayment on its sales and use tax return. Rather, it must file a claim for refund of any amounts it claims it overpaid. However, if it files a claim for refund of taxes reported on these leases, that claim will be denied for the reasons discussed above. Therefore, we recommend that the lessor not refund those amounts to the lessee since the Board will not refund those amounts to the lessor. I note also that since the lessee is subleasing the equipment in a lease that is not subject to tax, the sublessor may not collect an amount from the sublessee represented as tax. Such amounts are excess tax reimbursement and must be refunded to the sublessee or paid to the state. This is

Mr. G. M--- W---

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April 26, 1991
330.2886

discussed in Regulation 1700, a copy of which is enclosed. The lessee/sublessor must immediately cease collecting such amounts from its sublessees. If the sublessor wishes to reimburse itself for the amount of tax it pays the lessor under the prime lease, the sublessor must do so by increasing the amount of rentals payable and not by separately stating an amount represented as tax. If you have further questions, feel free to write again. Sincerely,

David H. Levine
Senior Tax Counsel
DHL:cl
Enclosure
bc:

--- District Administrator