Did tax-paid status carry to a buyer of water coolers already subject to nontaxable leases?

Plain-English summary

The June 20, 1996 follow-up thanked counsel for an absent May 30 response to an absent April 9 inquiry and referenced an unrecorded June 10 call. A client bought assets of two bottled-water sellers. The source incorporates the first inquiry and quotes the earlier opinion, but provides none of the underlying documents.

The requester called occasional-sale treatment remote, at best, yet asked hypothetically whether coolers subject to nontaxable leases would qualify if the asset sales were occasional. Counsel reiterated that actual sales were retail, not occasional, and did not directly answer that counterfactual cooler question.

The absent first opinion said section 6367 excluded delivery vehicles. Other assets failed section 6006.5(a) because both sellers held California permits for paper-cup sales and taxable Office Refreshment Program items related to cooler/equipment leases. Property sold appeared used in permit-requiring activities, so exemption failed regardless of sales count in any 12 months.

Counsel assumed no mobile transportation equipment. Sellers reportedly bought all coolers tax-paid and did not tax rent, making existing leases non-continuing sales. Regulation 1660(c)(9)(A) therefore treated coolers-plus-existing-leases as taxable retail asset sales, measured by purchaser price.

The follow-up then assumed taxable retail sales. Based on supplied facts, sales occurred in California and sellers owed section 6051 tax. Purchaser reimbursement depended on contract under Civil Code section 1656.1. The request said actual contract put any sales tax on sellers and attached an extract, which is absent.

If sellers paid sales tax without collecting reimbursement, no further asset-sale tax was due and existing leases remained nontaxable. But general tax-paid status did not carry. Purchaser/new lessor paid neither tax nor reimbursement, and seller was not statutory transferor; future leases were taxable continuing sales. The source says future leases, not renewals.

Live Annotation 330.2968 publishes only seller tax-paid equipment with existing lease, seller Board payment/no reimbursement, retail/no-resale-option status, existing lease protection and taxable future leases. It omits all correspondence, bottled-water/cooler facts, occasional-sale analysis/unanswered hypothetical, vehicles, permits/product programs, California-location and mobile-equipment assumptions, actual seller-pays contract and missing evidence.

No April/May/June correspondence, call note, contract extract, asset list, delivery vehicle/cooler, seller permit, paper-cup/refreshment sale, use-in-business record, purchase agreement/location/price, seller tax return/payment, purchaser reimbursement, existing lease/rent, future lease, audit, assessment, claim, appeal or later outcome appears.

What this means for you

Preserve the asset/use list, seller-permit activities, sale location, purchase agreement and tax clause/payment, existing lease tax history and purchaser reimbursement. Separate protection of an existing lease from tax status for a later lease; the latter did not carry here.

Common questions

Who owed tax on the asset sale?

The sellers, as retailers making California retail sales.

Did buyer necessarily reimburse sellers?

Only if the contract gave the sellers that reimbursement right.

Were existing rents taxable after sale?

No. Those leases retained their existing nontaxable treatment.

Did protection apply to future leases?

No. Future leases were generally taxable on rental receipts.

Why did occasional-sale treatment fail?

Vehicles were excluded, and other assets appeared used in sellers' permit-requiring activities.

Did counsel answer the hypothetical if sale were occasional?

Not directly. He reiterated that actual facts produced retail sales.

Were renewals decided?

The letter says future leases; it does not separately discuss renewal.

Citations and references

• Sections 6367, 6006.5(a) — occasional sale/vehicle and permit-activity limits
• Sections 6006(g)(5), 6006.1, 6010(e)(5), 6010.1, 6202-6204; Regulation 1660(c) — lease method
• Regulation 1660(c)(9)(A) — existing-lease asset sale
• Section 6051; Civil Code section 1656.1 — seller tax and contractual reimbursement
• Four writings/call/attachment and all asset/permit/sale/lease/tax/outcome evidence — absent
• Live Annotation 330.2968 — only retail-sale scenario

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.2968
• Original supporting follow-up: 330.2968 PDF

Original ruling text

330.2968
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
TELEPHONE (916) 322-2976
FAX (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

August 29, 1996

KATHLEEN CONNELL
Controller, Sacramento
___
E. L. SORENSEN, JR.
Executive Director

Mr. D--- B. F---, Manager
Multistate Tax Services
--- & --- L.L.P.
XXX --- ---, Suite XXXX
---, CA XXXXX-XXXX
Re:

H--- & S--- H--- Corporation
SY --- XX-XXXXXX

Dear Mr. F---:
This is in response to your letter dated June 20, 1996 in which you state: “Thank you for your response of May 30, 1996 to our inquiry regarding the application of California Sales and Use Taxes to the above-referenced client’s purchase of the assets of two companies engaged in the business of selling bottled water and leasing water coolers. Your response was very informative and provided us guidance in advising our client with respect to its California Sales and Use Tax obligations. “As we discussed in our telephone conversation of June 10, however, there remain a couple of questions for which we would appreciate additional clarification.” “Scenario 1 - Transactions Are Occasional Sales “We discussed the possibility of the transactions ultimately being held to be exempt occasional sales and we agreed the possibility was remote, at best. Nonetheless, for the sake of clarification, could you please answer the following question: “In the event the transactions were found to be exempt occasional sales, is there any provision in the law that the water coolers, sold subject to leases which are not continuing sales, would not qualify for the exemption? That is, would

Mr. D--- B. F---

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August 29, 1996
330.2968

H&S be required to pay use tax on the purchase price of the water coolers even though it were an occasional sale and even though it would not have a right to elect to pay tax measured by rental receipts? “Scenario 2 - Transactions Are Not Occasional Sales “Based on the facts presented in our inquiry, you concluded that the sales of the assets at issue were taxable retail sales, including the sales of tax-paid water coolers subject to leases which were not continuing sales. Our understanding is that the transactions would be subject to sales tax and that the obligation of the purchaser to reimburse the seller for its tax liability is governed by the contract of sale in accordance with Civil Code section 1656.1 (Pursuant to the actual contract of sale in our transaction, any sales tax due is borne by the seller - see extract from the sales contract attached.) However, at the bottom of page 4 of your letter, you state, ‘As explained above, H&S owes tax on cost.’ “If these transactions are not occasional sales but are taxable retail sales, “A.

Who is liable for the tax?

“B.
If the seller is liable for the tax and pays the tax to the State Board of Equalization and does not charge the tax to the purchaser nor get reimbursed from the purchaser, does the tax-paid status of the leased equipment carry over to the purchaser?” “....” With respect to the facts you provided in your inquiry dated April 9, 1996 (incorporated herein by reference), I stated: “The applicable exemption is set forth in Revenue and Taxation Code section 6367, which provides an exemption for certain occasional sales as defined in subdivision (a) of Revenue and Taxation Code section 6006.5. Section 6367 provides an exemption from tax for an “occasional sale” of tangible personal property other than vehicles, vessels, and aircraft. You state that some of the assets purchased by H&S constitute delivery vehicles. With respect to the transfer of the vehicles, the exemption set forth in section 6367 does not apply. “Further, section 6006.5(a) defines ‘occasional sale’ as a sale of property not held or used by a person in the course of activities for which the person is required to hold a seller’s permit. You state that the two selling companies had California seller’s permits for the purpose of selling paper cups, and for making sales of taxable items under the Office Refreshment Program. The sales under the

Mr. D--- B. F---

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Office Refreshment Program appear to be related to the selling companies’ leases of water coolers and other related equipment. Their sales of the paper cups were clearly part of their businesses involving the leases of the water coolers. As a result of the activities in which the selling companies were involved, they were required to hold, and did in fact hold, seller’s permits. Since it appears that the tangible personal property sold was used in the course of activities requiring the holding of those seller’s permits, the section 6367 exemption does not apply, even with respect to property that does not constitute vehicles, without regard to the number of sales that took place within any twelve-month period. “With respect to the leases, we assume that none of the property transferred constitutes mobile transportation equipment. As you know, a lease of tangible personal property in California is a continuing sale and purchase unless the lessor leases the property in substantially the same form as acquired and has made a timely election to pay California sales tax reimbursement or use tax measured by the lessor's purchase price of the property. (Rev. & Tax. Code §§ 6006(g)(5), 6006.1, 6010(e)(5), 6010.1, Reg. 1660(c)(2).) When a lease is a continuing sale and purchase because either or both of the foregoing conditions is not satisfied, the lease is subject to use tax measured by rentals payable. (Reg. 1660(c)(1).) The lessee owes the tax, which the lessor is required to collect from the lessee and pay to this Board. (Rev. & Tax. Code §§ 6202, 6203, 6204; Reg. 1660(c).) “You state that all coolers were purchased by the selling companies with tax paid on cost, and that tax was not charged on rental receipts. This means that H&S purchased the coolers subject to leases which are not continuing sales. The sale to H&S is therefore a taxable retail sale, with tax measured by the sales price of the property to H&S. (Reg. 1660(c)(9)(A).)” You ask what our analysis would be if we had found that the sales to H&S were occasional sales. As I stated in my May 30, 1996 letter to you, based on the information you provided, the sales to H&S were not occasional sales but were instead taxable retail sales. You ask us to assume in answering your next two questions that the sales are taxable retail sales. The answers to these questions are as follows: A. A retailer owes sales tax on its retail sales taking place in California. (Rev. & Tax. Code § 6051.) It appears from the facts you have provided that the sales to H&S occurred inside of California. Where sales tax applies, a retailer may collect reimbursement for its sales tax liability from the purchaser if the contract of sale provides for such reimbursement. (Civ. Code § 1656.1.) Therefore, the entities that sold the property to H&S owe the sales tax. If such entities have a contract right of reimbursement against H&S, then H&S owes those entities tax reimbursement on the sales price of the property to H&S.

Mr. D--- B. F---

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330.2968

B.
You have asked whether the tax paid status of the leased equipment carries over to the purchaser. The answer to this question is no. The sale to the purchaser is a retail sale with no option to purchase the equipment for resale. (Reg. 1660 (C)(9)(A).) Thus, if the sellers pay sales tax, no further tax is due on the transactions between the sellers and the purchaser, and the question of sales tax reimbursement is a matter of contract between the sellers and the purchaser. In addition, the existing leases are still not continuing sales. However, for any future leases, sections 6006(g)(5) and 6010(e)(5) govern. Those provisions provide that a lease is a continuing sale unless the lessor has paid sales tax reimbursement or use tax on purchase price. Since the lessor here would not have paid tax or tax reimbursement (and the seller is not a “transferor” as defined in these sections), future leases would be taxable continuing sales. If you have further questions, please feel free to write again. Sincerely,

Kelly W. Ching
Tax Counsel
KWC:cl
cc:

Out-of-State District Administrator
Sacramento District Administrator