Could a vehicle lessee credit tax economically borne in Texas against California use tax on rents after moving the vehicle to California?

Plain-English summary

An individual leased a vehicle in Texas and later moved it to California. The lessor increased the monthly bill by $53.90 for California tax. The lessee argued that the contract already reflected $3,147.38 of Texas rental tax.

California tax applied for every lease period when the vehicle was in California because the lessor had not paid California tax measured by the vehicle's purchase price.

The contract did not actually prove that the lessee had paid $3,147.38 of tax. It described that figure as an estimate of taxes over the lease term, while the formula inputs were marked not applicable. The Board understood that any Texas tax was imposed on the lessor and built into the lease economics.

California's other-state credit did not apply. The Texas tax was imposed on the lessor, while California use tax on continuing-sale lease payments was imposed on the lessee. Economic burden was not enough when legal liability fell on different people.

The opinion also stated that California does not credit prior-period out-of-state rental taxes against California tax on later rental periods. An internal note questioned whether the lessor had separately documented the California tax as Regulation 1686 required.

The missing contract's item 9b reportedly called $3,147.38 estimate of taxes over lease term using 4b x 6 + 3c; item 3c meant inception tax, 4b monthly tax and 6 lease term, but 3c/4b were N/A. Letter could not explain figure. Its internal note says supplied statement did not separately state California tax; another document was possible but seemed unlikely. It suspected—not established—Regulation 1686 noncompliance and sent note to two compliance offices because account location uncertain.

Live Annotation 330.3128 says multi-year lease and contract showed $3,147.38 in rental tax paid to lessor. It adds Texas rule for vehicles leased over 180 days: tax on lessor's purchase and no lease-receipts tax. Supporting letter cites no Texas authority, does not state term and treats amount only as estimate. Both sources reach no-credit result, but live explanation shifts from different persons/prior periods to different transaction/same payments.

No Dec. 29 request, lease contract, increased statement, separate tax receipt, vehicle acquisition/location, Texas assessment/payment, California rental-payment/collection, tax return, audit, assessment, appeal or later outcome appears.

What this means for you

Obtain contract and receipts before claiming multistate credit. Prove who legally owed each tax, transaction/measure and overlapping California period; economic pass-through and an estimated lifetime-tax figure are not enough under letter.

Common questions

Was the California vehicle rent taxable after the move?

Yes, while the vehicle was in California.

Did bearing the Texas tax economically create a credit?

No. The taxes were legally imposed on different people.

Did the contract prove $3,147.38 of Texas tax had been paid?

No. The source found the figure unclear and described as an estimate.

Why does live annotation describe amount differently?

It says contract showed rental tax paid; letter says item 9b was estimate with N/A inputs. Missing contract does not resolve conflict.

Was lessor found to violate receipt rule?

No. Internal note says it appears lessor may not comply, allows another-document possibility and shows no investigation outcome.

Did letter establish Texas >180-day law?

No. That detail appears only in live annotation; supporting letter gives uncited understanding that Texas tax was on lessor.

Was any audit or assessment final?

Not shown. Source answers individual inquiry and contains only internal suspected-compliance note.

Citations and references

• Revenue and Taxation Code sections 6006(g)(5) and 6006.1 — continuing-sale lease while property is in California
• Regulation 1660 — use tax measured by rental payments and imposed on the lessee
• Revenue and Taxation Code section 6406 — credit only against the same person's California use-tax liability
• Regulation 1686 — lessor receipt for California tax collected from the lessee
• Texas >180-day lessor-purchase rule — live annotation only; no Texas authority in letter
• Lease/statement/receipt and every tax/outcome record — identified, absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3128
• Original supporting opinion: 330.3128 PDF

Original ruling text

330.3128

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 445-5550
FAX: (916) 323-3387

JOHAN KLEHS
First District, Hayward
DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

March 16, 1995

KATHLEEN CONNELL
Controller, Sacramento

BURTON W. OLIVER
Executive Director

--Re: XX
--Dear Mr. ---:
This is in response to your letter dated December 29, 1994 regarding the application of tax to your lease of a vehicle in California. You entered into a lease of a vehicle in Texas. You thereafter moved to California, bringing the vehicle with you. You then received a new lease statement which reflected an increase in your rental payment of $53.90. When you inquired the reason for the increase, the lessor, A, advised you that the increase was for California tax on the lease. You enclosed a copy of your lease contract and state that it reflects a rental tax that you paid to Texas in the amount of
$3,147.38. You ask whether you must pay tax to California. As relevant here, leases of tangible personal property in California are continuing sales with respect to any period in which the property is in California unless the lessor has paid California sales tax reimbursement or use tax measured by purchase price. (Rev. & Tax. Code
§§ 6006(g)(5), 6006.1 (the property must also be leased in substantially the same form as acquired).) When a lease is a continuing sale, the lessee owes use tax measured by the rentals payable. (Reg. 1660.) The lessor must collect that tax from the lessee and remit it to the state, and must give a receipt to the lessee showing the amount of tax collected. (Reg. 1686.) Here, the lessor did not pay California sales tax reimbursement or use tax. Therefore, its lease of the vehicle to you is a taxable continuing sale with respect to any period in which the vehicle is in California.

You note your concern regarding the tax paid to Texas. You state that you paid tax to Texas in the amount of $3,147.38. However, the lease contract you provided actually states that

Mr. ---

-2-

March 16, 1995
330.3128

the amount in question, included on the lease contract as item 9b, is an estimate of taxes that you will pay during the term of the lease. Furthermore, it indicates that such amount is calculated with the formula "4b x 6 + 3c." (Item 3c is Sales/Excise/Use Tax due at lease inception. Item 4b is Sales, Use or Rental Tax due on the monthly lease payment. Item 6 is the lease term.) Items 4b and 3c are both marked "N/A," so it is not clear how the amount shown in item 9b was calculated. However, it is our understanding that the lessor would have paid an amount of tax to Texas and included that amount in its calculations of how much to charge you as lease payments. The figure you mention apparently reflects that calculation. The only credit available in California for taxes a person pays to another state is against that person's own use tax liability in this state. (Rev. & Tax. Code § 6406.) The California use tax on leases of tangible personal property is imposed on the lessee whereas our understanding of the Texas tax in question is that it is imposed on the lessor (even though you may end up bearing the ultimate economic burden in both states). Since each tax is imposed on a different person, the section 6406 credit is not available. Furthermore, the section 6406 credit is not allowed against taxes measured by the periodic payments due under a lease to the extent that the taxes imposed by the other state were also measured by periodic payments made under the lease for a period prior to the use of the property in this state. Thus, we conclude that your lease of the vehicle is subject to California use tax for periods that the vehicle is in this state. If you have further questions, feel free to write again.

Sincerely,

David H. Levine
Supervising Staff Counsel
DHL:cl
cc:

Torrance District Administrator
Out-of-State District Administrator
Sacramento District Administrator

Mr. ---

bc:

-3-

March 16, 1995
330.3128

Torrance Compliance (w/attach.)
Out-of-State Compliance (w/attach.)
Although it appears that this is a Torrance account, I am not positive, so I am sending this note to both of you. The statement provided by A (copies of the statement and the lease are attached) does not separately state an amount for tax even though A claims that is the reason for the increase. Although it is possible that A sent some other document to Mr. --- reflecting the amount of California tax included in his rental payment, it does not seem likely based on Mr. ---'s comments. Thus, it appears that A may not be complying with Regulation 1686.