Could a crane lessor receive tax-paid lease status after paying a registered seller tax on only about 90% of the taxable purchase measure?

Plain-English summary

An absent November 24, 1980 audit memo concerned a three-party California buyer, Delaware manufacturer and financing lessor. The April 20, 1978 construction contract covered four 37-ton overhead, rail-mounted yard gantry cranes for a berth the buyer leased from a California port.

Total price was $6,875,747: $5,938,347 cranes, $337,400 transportation and $600,000 erection/testing/delivery labor/services. Monthly progress payments could reach only 90 percent; final 10 percent followed acceptance. Title to components assembled for cranes vested immediately in buyer, which could terminate/default and remove materials from manufacturer plant.

Three agreements followed April 30, 1980. Assignment let financing lessor purchase each accepted crane while buyer retained purchaser rights and liability until acceptance. Manufacturer consent promised bills of sale, clear title and itemized sales-tax measure without changing construction contract. Purchase-and-lease required inspection, certificates, reimbursement of progress payments and financing-lessor purchase/payment, but refused units accepted after December 31, 1980. Equipment lease allowed buyer a fair-market-value end option and financing lessor removal after breach/termination. None is reproduced.

Only two cranes were accepted by deadline. Counsel treated all as fixtures under Regulation 1521 and construction contract. Original component title passed to buyer upon manufacturer acquisition, assumed in Ohio.

For two late cranes not bought by financing lessor, buyer owed use tax on sales price. Separately stated transport was excluded because third-party facilities moved components after Ohio title passage. Only jobsite fabrication before realty attachment was taxable labor, with manufacturer owing sales tax; installation/application was excluded.

For two timely cranes, documents purported to pass manufacturer title directly to financing lessor, but manufacturer no longer owned components. Title actually passed buyer-to-lessor at acceptance. Manufacturer-to-buyer was resale; buyer-to-lessor taxable retail. Although fixtures in place ordinarily realty, section 6016.3 kept them tangible property because financing purchaser was fixture lessor, had removal rights and did not lease berth realty.

Financing lessor leased same form. Manufacturer invoices called payment use tax but measured only Equipment Cost, excluding transportation, storage and erection/testing/delivery. Transport qualified; storage was for holding property in buyer's sale course; installation/application portions qualified. Remaining labor/services were taxable. The PDF visibly prints section 6012(a)(20 and (b)(1); rendered page confirms this malformed citation, which is not silently corrected.

Literal same-form rules required full gross receipts/purchase price, so underpayment fell outside them. Counsel nevertheless granted tax-paid status under unique circumstances: omitted amount was no more than 10 percent, and financing lessor paid registered manufacturer rather than buyer/Board in good faith under three-party agreements.

Audit staff said manufacturer was Board-registered and bound to report under a related California company's permit. Counsel accepted that understanding. Whether manufacturer remitted did not leave financing lessor liable for amounts paid to it, but lessor still owed omitted labor/service tax.

Live Annotation 330.2958 reduces this to outside-state purchase, authorized collector, approximate 90-percent payment after fabrication-labor error, clear ex-tax leasing intent and remaining difference. It omits four-crane amounts/contracts, two deadline/title branches, fixture rules, charge exclusions, malformed citation, registration assumption, potential nonremittance and all missing evidence/outcomes.

No request memo, construction/assignment/consent/purchase-and-lease/equipment-lease, crane/component record, port lease, invoice, progress/final payment, acceptance certificate, bill of sale/title/lien evidence, transport/storage/labor/service allocation, tax payment/remittance, seller registration/related permit, leaseback, return, audit adjustment, assessment, claim, appeal or later outcome appears.

What this means for you

Preserve every contract and title trigger, component delivery, crane acceptance, fixture/removal rights, invoices and full taxable allocation, authorized-collector registration and payment/remittance proof. The opinion repeatedly limits its partial-payment result to unique facts and still requires the omitted balance.

Common questions

Did tax on about 90% erase the balance?

No. It supported tax-paid lease status under the memorandum's unique facts, but the lessor remained liable for tax on the omitted taxable labor and service charges.

Why did payment to manufacturer count?

The manufacturer was registered with the Board, and the financing lessor paid it in good faith under the three-party agreements.

Were all transport/labor/service charges taxable?

No. The memorandum excluded qualifying separately stated third-party transportation and installation or application charges, while treating the remaining fabrication-related labor and services as taxable.

Did all four cranes receive lessor treatment?

No. Only two were accepted before the purchase deadline. The other two were not bought by the financing lessor and remained subject to the separate analysis for the original buyer.

Why did title documents not control the timely cranes?

Component title already belonged to buyer, so acceptance transferred title buyer-to-financing lessor despite contract wording.

What was the total contract price?

$6,875,747, divided among cranes, transportation and erection/testing/delivery as stated above.

Is section 6012(a)(20 a corrected citation?

No. That is the visible official text; this page does not guess the intended subsection.

Was seller remittance proven?

No. Counsel said financing lessor was absolved regardless, based on assumed authorized registration.

Citations and references

• Regulation 1521; section 6016.3 — construction/fixture and lessor-removal status
• Sections 6006(g)(5), 6010(e)(5); Regulation 1660(c)(1)-(3) — same-form method
• Sections 6007, 6008 — retail/resale and sale-course storage
• Section 6011; Regulation 1628 — transportation exclusion
• Section 6012(c)(3); printed 6012(a)(20 and (b)(1) — installation versus remaining services
• Request, four agreements and every crane/title/acceptance/invoice/tax/registration/outcome record — absent
• Live Annotation 330.2958 — partial-payment headline without transaction/evidence posture

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.2958
• Original supporting memorandum: 330.2958 PDF

Original ruling text

State of California

Board of Equalization

Memorandum
330.2958
To

:

--- --- – Auditing (BQW-PS)

From

:

Headquarters – Legal (LS)

Subject :

M--- T---, Inc.

Date:

4/14/81

SR -- XX-XXXXXX

This is in response to your memorandum dated November 24, 1980 relating to the proper application of the Sales and Use Tax Law to a series of transactions entered into between M--T---, Inc. (MT) and M--- E--- (ME) and between MT and --- --- Equipment Leasing Corporation (Name). Below is a summary of pertinent information pertaining to various of the transactions which will be followed by our opinion as to the proper application of the tax under these circumstances. The MT ME Construction Contract Agreement (Construction Contract) On April 20, 1978, MT (a California corporation) contracted with ME (a Delaware corporation) for the construction by ME of four 37-ton yard Gantry Cranes. These huge cranes are of the overhead variety and are rail mounted to facilitate movement up and down the docks. The contract for their construction provided that ME was to furnish all labor, materials, supplies, and equipment, and was to perform all work necessary to construct, transport, erect, test, and deliver the cranes ready for operation at Berth XXX, Port of [Name 2], --- ---, --- ---, California. Berth XXX was and is leased by MT from the Port of [Name 2]. The Construction Contract provided for a total purchase price of $6,875,747 which breaks down into components of $5,938,347 (four cranes), $337,400 (transportation), and
$600,000 (labor and services for erection, testing, and delivery). Partial payments of the purchase price were to be made by MT at monthly intervals during the course of construction. However, these partial payments were not to total more than 90% of the total price since the Construction Contract called for the final 10% to be paid upon acceptance of the cranes by MT. The Construction Contract provided that title to all materials, supplies, and equipment assembled at ME’s plant or elsewhere for the purpose of being incorporated in the crane during construction and erection was to be immediately vested in MT. It was further provided that if ME defaulted on the Construction Contract, MT could terminate it unilaterally and remove the cranes, supplies, and equipment purchased for use from ME’s plant.

M--- T---, Inc.
SR -- XX-XXXXXX

-2-

April 14, 1981
330.2958

The Construction Contract Assignment
(Assignment)
On April 30, 1980, MT entered into an agreement with [Name] providing for the assignment of MT’s rights and interest under the Construction Contract. [Name] agreed to purchase the cranes, on the acceptance date provided for in the MT [Name] Equipment Lease Agreement (Equipment Lease, below). Until such acceptance dates, MT- was to retain rights of a purchaser under the Construction Contract. The Assignment expressly provided for continuing liability of MT to ME under the Construction Contract. The ME Consent and Agreement (Consent) On the same day the Assignment was entered into, ME signed the Consent. Essentially, it concurred in the Assignment. It also provided for execution and delivery by ME of a Bill of Sale for each crane which would operate to transfer marketable title from ME to [Name] free and clear of liens and encumberances [sic]. ME further agreed to provide [Name] with an itemized invoice for each crane stating the measure of sales tax for which ME would be responsible. Finally, it stated that nothing in the Consent should be construed to modify or amend any of the terms of the Construction Contract. The MT [Name] Purchase and Lease Agreement (Purchase and Lease) The Purchase and Lease was entered into on April 30, 1980 between [Name] and MT. It referred to the Construction Contract and the Assignment and specified that MT desired to lease the cranes, not own them. The Purchase and Lease indicated [Name]’s willingness to purchase the cranes on the terms and conditions specified in the Purchase and Lease and in the Equipment Lease. MT was to inspect all cranes promptly upon delivery and accept each unit which conformed substantially to the Construction Contract. Certificates of Acceptance were to be delivered by MT to [Name] on the acceptance date of each crane. However, it was specifically provided that [Name] would not purchase any unit accepted by MT after December 31, 1980. MT was to be reimbursed by [Name] for progress payments made to ME under the Construction Contract and, with the exception of certain hold back amounts, any balance due under the Construction Contract was to be paid by [Name] to ME. The Purchase and Lease provided, also, that upon acceptance by MT of each unit and payment by [Name] of the purchase price, [Name] was to acknowledge receipt of the Certificate of Acceptance, accept title to the unit from ME under a bill of sale and lease the unit to MT pursuant to the Equipment Lease.

M--- T---, Inc.
SR -- XX-XXXXXX

-3-

April 14, 1981
330.2958

The MT [Name] Equipment Lease
(Equipment Lease)
This lengthy document, which was signed on April 30, 1980, covered all aspects pertaining to MT’s lease of the equipment from [Name]. Of particular relevance to our discussion are the provisions in the Equipment Lease granting MT the right to purchase the equipment for fair market value upon termination of the lease period and [Name]’s rights of removal of the equipment upon breach or termination of the lease. Analysis Before we render our opinion as to the tax consequences of the foregoing transactions, an important factor recently brought to our attention by your office should be mentioned. That is, only two of the cranes were accepted by MT prior to December 31, 1980. Under the terms of the Purchase and Lease, the two cranes which had not been completed by year’s end were, accordingly, not purchased by [Name]. In our opinion, the cranes were “fixtures” and the Construction Contract is a “construction contract” within the purview of Regulation 1521. ME was the retailer of these fixtures to MT and, pursuant to the explicit title provisions in the Construction Contract, the sale to MT occurred upon ME’s acquisition of the cranes’ components. Since ME’s manufacturing plant is in Ohio, we assume all components were delivered to MEn there and, hence, were sold to MT in Ohio. Insofar as the cranes which were accepted or will be accepted after December 31, 1980, MT owes use tax measured by the sales price of the cranes. Since the transportation charges were separately stated, the transportation was by facilities other than ME’s, and title to the cranes passed prior to shipment from ME’s Ohio plant to MT’s jobsite in California, the transportation charges are not includible in the sales price (Rev. & Tax Code § 6011; Reg. 1628). It would appear that the only labor taxable with respect to these cranes would be jobsite fabrication labor, if any, performed by ME prior to attaching the cranes to the realty (Reg. 1521 (b) (2) (B) 2.b.). ME owes sales tax based on this amount. Regarding the two cranes accepted by MT before December 31, 1980, the Assignment, Consent, and Purchase and Lease indicated title to the cranes was to pass from ME to [Name] upon acceptance by MT. However, as discussed above title to the crane components was, by this time, no longer in ME but was in MT. Accordingly, notwithstanding the language in the foregoing documents, title actually passed from MT to [Name] upon MT’s acceptance. We view the sales from ME to MT as sales for resale and, as will be explained below, the transfers from MT to [Name] as taxable retail sales.

M--- T---, Inc.
SR -- XX-XXXXXX

-4-

April 14, 1981
330.2958

Normally, sales of fixtures in place are deemed sales of realty and, accordingly, are not subject to sales tax. An exception to this rule is provided when the purchaser is also the lessor of the fixtures, has the right to remove the fixtures upon termination or breach of the contract, and is not also the lessor of the realty whereon the fixtures are located. Under such conditions, the fixtures remain tangible personal property (Rev. & Tax. Code 6016.3). Here, the fixtures transferred to [Name] clearly remained tangible personal property. What, then, are the tax consequences of these transfers? Where property is leased in substantially the same form as acquired and where the acquisition of that property by the lessor was by a retail sale with respect to which sales tax reimbursement was paid to the vendor based upon gross receipts or use tax was paid by the lessor based upon the purchase price, the lessor owes no further tax (Rev. & Tax. Code §§ 6006 (g)(5), 6010(e)(5); Reg. 1660(c)(2)). If these conditions are not met, however, tax is due from the lessor measured by rental receipts (Reg. 1660(c)(1)). In the instant matter, the facts show the property was leased in substantially the same form as acquired. Also, the sale was at retail (Rev. & Tax. Code § 6007). The final criteria to be met in order to deem the cranes as tax paid in the hands of Wells Fargo, then, are that [Name] has either paid sales tax reimbursement on gross receipts or use tax based on the purchase price. The record discloses that [Name] remitted to ME amounts designated as “use tax” on the two invoices which ME submitted to [Name]. The “use tax” on the invoices was measured by “Equipment Cost” only. Excluded from the measure were amounts designated as “Transportation,” “Storage,” and “Labor & Services for erection, testing and delivery.” The transportation charges are identifiable as those incurred in transporting the crane components from Ohio to California and, as previously discussed, are not subject to tax. The storage charges were incurred through retention of the property for the purpose of sale in MT’s regular course of business and, therefore, were also properly excluded from the taxable measure (Rev. & Tax. Code § 6008). The portions of the charges for labor and services for erection, testing and delivery which are identifiable as charges for installing or applying the property sold were also properly excluded (Rev. & Tax. Code § 6012(c)(3)). However, the remainder of the labor and service charges should not have been excluded from the measure (Rev. & Tax code § 6012(a)(20 and (b)(1)). A literal construction of the provisions in the law relating to tax paid property leased in substantially the same form as acquired (Rev. & Tax. Code §§ 6006(g)(5), 6010(e)(5); Reg. 1660(c)(3)) indicates that our fact pattern falls outside those provisions. This is because the tax was not measured either by total gross receipts or the total purchase price. However, insofar as [Name] is concerned, we are of the opinion that, under the unique circumstances of this matter, its payment of “use tax” to ME should give it tax paid status. In reaching this conclusion, we note that the amount upon which tax was not measured was no more than 10% of the total taxable measure. Further, [Name] remitted the tax reimbursement to ME, rather than to MT or directly to the Board, in good faith pursuant to the various agreements negotiated by the three parties.

M--- T---, Inc.
SR -- XX-XXXXXX

-5-

April 14, 1981
330.2958

Based on our discussions with your office, it is our understanding that ME has registered with the Board for Sales and Use Tax purposes and is bound to report taxes under a related California company’s permit number. Under these conditions, regardless of whether or not ME has remitted the tax reimbursement paid it by [Name], [Name] is absolved of liability for such amounts. Of course, [Name] is still liable for any unpaid liability with respect to the aforementioned labor and service charges.

LS:po