Were single-use tuxedo rentals exempt as linen service, or taxable only on garment cost rather than rental receipts?

Plain-English summary

A partnership began renting/selling tuxedos/accessories in 1969 and had no prior audit. July 7, 1980 Pasadena hearing included its attorney and Hollywood District auditor. January 1, 1976-December 31, 1978 audit produced October 10, 1979 deficiency on $274,986 rent measure. No petition/hearing/audit/determination appears.

The partnership bought tuxedos ex-tax from California/out-of-state sources, reported outright sales but not rent, altered for customers and dry-cleaned after return. It assumed source tax because no resale certificates issued. But it paid no reimbursement and showed no vendor sales tax. No purchase, certificate, lease, rent, alteration/cleaning or return appears.

Section 6006(g)(2)/Regulation 1660(b)(1)(B) required recurring cleaning essential to lease. Regulation provision existed since December 21, 1972. Although tuxedos resembled caps/gowns, each one-use lessee received no recurring service. Prior multi-year educational cap/gown leases differed; individual leases without same-lessee recurring cleaning were taxable.

Purchase-price method also failed. Regulation 1660(c)(2) required use-tax payment when property first entered lease service—the only cited election. No certificate did not elect cost tax.

At seller-permit acquisition, a Board employee allegedly said rent was nontaxable. No exact question/answer existed, so employee or petitioner may have misunderstood. Verified Market Street Railway, 137 Cal.App.2d 87, supported that employee error could not create exemption.

Officer recommended redetermination without adjustment. Formal header/live date is August 20, 1980; signature date visibly says impossible 8/12/1780. Audit-review signature/date fields are blank, and no Board adoption appears.

Live Annotation 330.3015 publishes only single-use tuxedos not recurring linen service and continuing-sale rent tax absent timely purchase tax. It omits hearing/audit dates, $274,986, first-audit history, vendor/tax proof failure, cap/gown context, oral-advice analysis, recommendation, defective date and blank review/outcome.

No petition, hearing record, audit/workpaper, deficiency, purchase/vendor invoice/tax, certificate, sale/rent return, tuxedo lease, alteration/cleaning, seller-permit application, advice record, redetermination adjustment, audit review, Board order, payment, claim, appeal or later outcome appears.

What this means for you

Document recurring service for each lessee, purchase/vendor tax and certificates, first lease-service/election date, rent returns and every agency-advice request/response. Cleaning between one-use customers did not meet the recurring-service rule.

Common questions

Did cleaning after return make linen service?

No. The recommendation focused on whether cleaning recurred for the same lessee during that lease; a one-time renter received no recurring service.

Could lessor elect garment-cost tax later?

Not after missing the historical election deadline. The source required purchase-price use tax when the property was first placed in lease service.

Did no resale certificate prove election?

No. The recommendation said that was not the election method provided by the regulation.

Did alleged oral advice remove tax?

No. The record did not show the exact question or response, and the recommendation said an employee error could not create an exemption.

What period and measure were protested?

January 1, 1976-December 31, 1978 and $274,986.

Was redetermination adjusted?

Staff recommended no adjustment; final Board action is absent.

Which issue date is grounded?

August 20, 1980 from formal header/live entry, not impossible 8/12/1780 signature.

Citations and references

• Section 6006(g)(2); Regulation 1660(b)(1)(B) — recurring cleaning
• Section 6006(g)(5); Regulation 1660(c)(2) — purchase-price election
• Market Street Railway, 137 Cal.App.2d 87 — verified agency-error authority
• Multi-year educational cap/gown treatment — described, source absent
• Petition/hearing and all audit/purchase/lease/service/advice/outcome records — absent
• Live Annotation 330.3015 — linen/rent result without procedural posture

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 330.3015
• Original supporting recommendation: 330.3015 PDF
• Citation check: Market Street Railway

Original ruling text

STATE OF CALIFORNIA
BOARD OF EQUALIZATION

In the Matter of the Petition
for Redetermination of State
and Local Sales and Use Taxes

Petitioner

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330.3015
8/20/1980

DECISION AND RECOMMENDATION

The above-entitled matter came on regularly for hearing on July 7, 1980, in Pasadena, California, before H. L. Cohen, Hearing Officer.

Appearing for Petitioner:

--Attorney at Law

Appearing for the Board:

Mr. R. N. Landes
Auditor
Hollywood District

Protest
Petitioner protests the assertion of tax on rentals of tuxedos purchased ex-tax. Tax was asserted based on an audit covering the period from January 1, 1976, through December 31, 1978. A deficiency determination was issued on October 10, 1979. The amount upon which the protested tax is based is $274,986. Contentions Petitioner contends that:

1. Petitioner's business is similar to a linen supply service which is exempt from tax.
2. Petitioner should not be held liable for the tax because it was informed by an employee of the
   Board that no tax was due.
3. If tax is due, it is due on the purchase price rather than rental receipts.
   Summary
4. Petitioner is a partnership engaged in renting and selling tuxedos and accessories. It began in
   business in 1969. There has been no prior audit.

2. Petitioner buys tuxedos ex-tax from both California and out-of-state sources. Petitioner reports and pays tax on outright sales but not on rental receipts. Tuxedos are altered to fit individual customers and dry-cleaned when they are returned. The auditor asserted tax on rental receipts because petitioner had not paid sales tax reimbursement or use tax on the purchase price at the time of purchase.

3. Petitioner states that it assumed that tax was paid at the source since no resale certificates were
   issued. Petitioner argues that the failure to issue resale certificates constitutes an election to pay tax on cost rather than rental receipts. Petitioner also argues that if tax is due, it is due on cost because the required election was made.
4. Petitioner argues that the rental of tuxedos constitutes a service activity which is exempt from
   tax under Section 6006(g) (2) of the Revenue and Taxation Code and under Sales and Use Tax Regulation 1660(b) (1).
5. Petitioner states that at the time it acquired its seller's permit, it was informed by an employee
   of the Board that tax did not apply to its rental receipts; therefore, it is unfair to assert tax now. Analysis and Conclusions
6. Section 6006(g) (2) of the Revenue and Taxation Code provides that "sale" does not include a
   lease of "linen supplies and similar articles when an essential part of the lease agreement is the furnishing of the recurring service of laundering or cleaning the articles". The Board, in adopting Sales and Use Tax Regulation 1660, has interpreted and clarified the statute. Subdivision (b) (1) (B) of the Regulation provides that tax does not apply to leases of "linen supplies and similar articles, including such items as towels, uniforms, coveralls, shop coats, dust cloths, caps and gowns, etc., when an essential part of the lease is the furnishing of the recurring service of laundering or cleaning of the articles leased". The Regulation has included this provision since December 21, 1972. While conceding that leases of tuxedos are similar to leases of caps and gowns, nevertheless it is required that the recurring service of laundering or cleaning be an essential part of the lease. We have in the past regarded leases of caps and gowns to be exempt under Section 6006(g) (2) only where an educational institution leased caps and gowns for several years, and a conclusion could, therefore, be reached that recurring cleaning was an essential part of the multi-year lease. Individual leases of caps and gowns without recurring cleaning for the particular lessee are not regarded as exempt. Similarly individual leases of tuxedos without recurring cleaning for the particular lessee cannot be regarded as exempt.
7. Section 6006(g) (5) of the code excludes from the definition of "sale" only those leases of
   tangible personal property acquired in a transaction that was a retail sale with respect to which the retailer paid sales tax or as to which the lessor has paid use tax. Petitioner paid no sales tax reimbursement to its vendors and has not shown that the vendors paid sales tax on the sales of tuxedos to petitioner. Regulation 1660 provides in subdivision (c) (2) that a lessor who desires to pay use tax on the purchase price of leased property must do so when the property is first placed in lease service. That is the only method provided for making the election to pay tax on the cost of the leased property. The failure to issue a resale certificate to the vendor of the property does not constitute such an election.
8. Petitioner states that it was informed by a Board employee that no tax was due on its leases.
   There is no evidence as to the specific questions asked by petitioner or what reply was given.

The employee may have misunderstood the questions or petitioner may have misunderstood the answers. At any rate, an exemption cannot be created by an error of a Board employee. See Market Street Railway Co. v. State Board of Equalization, 137 Cal. App. 2d 87. Recommendation Redetermine without adjustment.

8/12/1780
H. L. Cohen, Hearing Officer

Date

Reviewed for Audit:

Principal Tax Auditor

Date