When an auto lessor timely paid tax on both vehicle cost and rental receipts, which payment controlled its lease-tax election?

Plain-English summary

An absent Audit Review and Refunds memorandum described an auto lessor that reported tax measured by rent. It later discovered its agent also paid purchase-price tax. The request said sales tax went to dealer; counsel said DMV use tax may instead have been paid. No payment proof resolves tax type, payee or date.

The lessor claimed refund of part of rent-based tax because it viewed purchase-price payment as election. Requesting staff agreed under Regulation 1660(c)(3), but asked whether erroneous dealer payment overrode the apparent intent to tax rent from first reporting period. No claim, amount, vehicle, return or lease appears.

Counsel identified two timely sequences: cost tax first then timely rent return, or timely rent election first followed in ordinary business timing by cost tax. He rejected an automatic cost-tax priority and chose the first actual payment. Lessor intent was irrelevant.

If no vendor/DMV/purchase tax had been paid by the last day to timely file the period when property first entered rental service, failure to report purchase-price tax made lease a continuing sale taxed on rent. A later cost payment did not change that, even before the last day of the month after the first-rental period or if timely under private business arrangements.

Counsel said cost tax would be first in almost all double-timely-payment cases, but did not find that fact here. Cost first meant rental-tax refund conditioned on proper lessee reimbursement and immediate stop to rental-tax collection. Rent first meant purchase-price-tax refund and continued rent collection/reporting. Staff had to confirm sequence before granting relief.

Live Annotation 330.2955 publishes same-form, mistaken double timely payment and first-payment rule, with cost-first/rent-first refund results. It omits unresolved dealer-sales-tax versus DMV-use-tax account, agent, exact deadlines, intent's irrelevance, almost-all-cases observation, lessee reimbursement/collection duties, missing evidence and unconfirmed outcome.

No request memo, claim, automobile list, invoice/purchase, same-form proof, agent authority/payment, dealer receipt, DMV record, tax type/payee, lease, first-rental date, rental-tax invoice/collection, return, filing/payment timestamps, lessee reimbursement, refund decision/payment, audit, assessment, petition, appeal or later outcome appears.

What this means for you

Build a single timestamped chronology from dealer/DMV receipts, first-rental date, returns and payments. Preserve agent authority and lessee reimbursement. Both payments being timely is insufficient; the first actual tax payment controlled this historical rule.

Common questions

Did lessor intent control?

No. The memorandum said the first actual timely tax payment controlled.

What if purchase-price tax was first?

Rental receipts were not taxable, subject to reimbursing lessees before receiving a refund of rental tax.

What if rental tax was first?

The lessor could seek a refund of purchase-price tax but had to keep reporting tax on rent.

Was the cost payment sales tax or use tax?

Unresolved. The request said dealer sales tax; counsel said DMV use tax may have been paid.

What filing deadline mattered?

The last day for a timely return covering the period when property first entered rental service.

Was actual payment order established?

No. Staff was instructed to confirm it before refund.

Was any refund granted?

No outcome appears.

Citations and references

• Regulation 1660(c)(3) — same-form irrevocable method election
• Request memorandum/refund claim and all vehicle/payment/return/reimbursement evidence — absent
• Live Annotation 330.2955 — first-payment rule without disputed tax account/evidence posture

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.2955
• Original supporting memorandum: 330.2955 PDF

Original ruling text

State of California

Memorandum

Board of Equalization

330.2955

To:

M. Kitchen
Audit Review and Refunds

April 15, 1991

From:

David H. Levine
Senior Tax Counsel

ATSS: 485-5550
(916) 445-5550

Subject:

F--- L--- Co., Inc.
SR – XX-XXXXXX

This is in response to your memorandum regarding a claim for refund filed by F--Leasing. F--- is a lessor of automobiles and it reported tax measured by rentals payable. Thereafter, it came to F---’s attention that P--- F--- A---, acting as F---’s agent, had paid tax measured by purchase price (although your memorandum states that sales tax was paid to the dealer, it appears that use tax may have been paid to the DMV). F--- has now filed a claim for refund of portions of its payment of tax measured by rentals payable since it had elected to pay tax measured by purchase price. The staff agrees with the taxpayer based upon the provisions of subdivision (c)(3) of Regulation 1660 which states that payment of tax measured by purchase price at the time of purchase constitutes an irrevocable election not to pay tax measured by rental receipts. You state that: “It appears taxpayer intended to collect and report tax measured by the rentals payable. Taxpayer timely elected and reported tax on rental receipts beginning with the reporting period in which the vehicle was first leased. Because taxpayer has paid both the tax to vendor and/or rental recipts, does the fact he, in error, paid tax to the vendor constitute an irrevocable election to exclude tax on rentals payable?” There are two possiblities under these circumstances: the lessor first pays tax measured by purchase price and thereafter timely reports tax measured by rentals payable; or the lessor timely elects to pay tax measured by rentals payable and, because of the timing of the particular transaction, pays tax measured by purchase price in the timely, regular course of business.

M. Kitchen

-2-

April 15, 1991
330.2955

Subdivision (c)(3) of Regulation 1660 states, in effect, that once tax is paid measured by purchase price, the lessor may not change over to tax collected on rentals payable even if that amount is reported on a timely return for the quarter in which the property is first leased. If the circumstances were reversed, we could apply the rule that tax paid on cost always takes priority or the rule that the first payment of tax always takes priority. We believe the latter is the better rule, and we believe that the intent of the lessor is irrelevant. If a lessor has not yet paid sales tax reimbursement or use tax to his vendor or use tax to the DMV, that lessor must make a decision no later than his timely return for the quarter in which the property is first leased. If on that return he fails to report tax measured by purchase price, he may not thereafter avoid the requirement to collect tax measured by rentals payable even if his payment of tax measured by purchase price to his vendor would be timely vis-à-vis their business arrangement. That is, if a lessor pays no tax by the last day he may timely file his return for the period in which the property is first leased, then that lease is a continuing sale subject to tax measured by rentals payable. We see no reason to reach a different result if a lessor timely elects to pay tax on rentals payable and thereafter somehow pays tax on purchase price before the last day of the month following the period in which the property is first place into rental service. When a lessor timely reports tax both on cost and on rentals payable, in almost all cases the tax that would have been paid first is the tax measured by purchase price. If these are the facts in this case, then F--- may not only file a claim for refund for taxes paid measured by rentals payable (conditioned on the proper reimbursement to their lessees), but in addition may not continue to collect tax measured by rentals payable. If, on the other hand, F--- timely reported tax measured by rentals payable before its timely payment of tax measured by purchase price, it may file a claim for refund for the taxes paid measured by purchase price and must continue to collect and report tax measured by rentals payable. In short, prior to granting the refund, you should confirm that tax was actually paid measured by purchase price prior to F---’s reporting of tax measured by rentals payable.

DHL:cl/0210E