After a lessor and lessee merge, can excess rental tax on one equipment item offset purchase-price use tax due on another?

Plain-English summary

An equipment lessor and its lessee planned a statutory merger. Before the merger, the lessor had bought equipment ex-tax for leasing, collected use tax measured by rent, and paid that tax to the Board. After the merger, the surviving corporation would stop leasing the equipment and use it internally.

That own use triggered use tax measured by the original purchase price. Regulation 1660(c)(6) allowed credit for rental tax previously collected and paid on the same property.

California rejected calculating one aggregate net amount across all equipment. Tax had to be computed item by item, and a credit tied to one item could not reduce purchase-price tax on another. If rental tax on a particular asset exceeded the hypothetical purchase-price tax, the excess was not an overpayment and could not be refunded or shifted elsewhere.

If the survivor later leased an item again, it could credit the additional purchase-price tax actually paid for that same item against future rental tax. That later credit also remained item-specific.

Initial Jan. 13 letter responded to absent Dec. 8, 1992 request and relied on Annotation 395.2150. That 1971 backup involved Nevada subsidiary-parent merger, equipment whose rents equaled about one-third of purchase price, post-merger use versus sale/out-of-state shipment, property taxes and two Board determinations. 330.3130 borrows survivor-use rule, not every 1971 fact or result.

Follow-up responds to absent Aug. 15, 1993 request. Its formal first page is Oct. 8, 1993, matching live annotation; pages 2–3 say Aug. 17, 2006. Date conflict is unresolved, so formal 1993 date controls metadata. The Regulation 1660 enclosure is absent.

Both letters describe contemplated/future merger and later internal use, while live annotation uses completed-merger past tense. No merger agreement/closing, equipment list, original purchases, rent/tax by item, purchase-price tax, calculation, return, refund claim, audit, appeal or later outcome appears.

Common questions

Why did the merger create purchase-price use tax?

The lessor and lessee became one entity. The survivor then used property regarded as having been purchased ex-tax for resale in continuing leases.

Can the survivor pool all equipment and pay one net balance?

No. Sections 6051 and 6201 required transaction-level calculation, so the opinion required item-by-item reporting.

Is rental tax above the purchase-price-method amount an overpayment?

No. The original election to tax rent was irrevocable and the rent tax was properly paid. The difference was neither refundable nor available against another asset.

Which source date does this page use?

October 8, 1993, formal first-page date also published live. Continuation pages conflict with August 17, 2006; source does not explain why.

What did cited Annotation 395.2150 establish?

Survivor's use of ex-tax leased equipment could trigger use tax after subsidiary-parent statutory merger. Its different asset/use/disposition facts do not prove proposed 330.3130 merger occurred.

Was merger or tax reporting completed?

Not shown. Source speaks prospectively and includes no closing, asset-level tax calculation, return, refund, audit or outcome.

Citations and references

• Cal. Rev. & Tax. Code §§ 6051 and 6201 — tax calculation by transactions involving tangible personal property
• Cal. Code Regs., tit. 18, reg. 1660(c)(6) — own-use liability and credits for tax previously paid on rentals
• Action Trailer Sales, Inc. v. State Bd. of Equalization, 54 Cal. App. 3d 125, 130 (1975) — authority cited for the irrevocable continuing-sale election
• Annotation 395.2150 PDF — survivor-use authority with different underlying facts
• January 13/October 8, 1993 letters; August 17, 2006 continuation headers — unresolved source-date conflict
• Dec. 8, 1992/Aug. 15, 1993 requests and Regulation 1660 enclosure — identified, absent
• Every merger, asset, tax and later-outcome record — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3130
• Original supporting opinion: 330.3130 PDF

Original ruling text

330.3130

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) (916) 445-5550

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

January 13, 1993

GRAY DAVIS
Controller, Sacramento
────────
BURTON W. OLIVER
Executive Director

Mr. W--- R. N--I--- S--- F--- & Company
Certified Public Accountants
XXXXX --- Street, #XXX
---, CA XXXXX
Re:

J. S. C--- Company
SR -- XX-XXXXXX

Dear Mr. N---:
This is in response to your letter dated December 8, 1992. J.S. C--- Company leases equipment to F--- Corporation, collecting use tax measured by rentals payable. (I assume that the leased property is not mobile transportation equipment as defined in Revenue and Taxation Code section 6023.) Cole and F--- are contemplating a statutory merger, and you inquire as to the application of tax to the use of the leased equipment by the survivor. You note that Business Taxes Law Guide Annotation 395.2150 (9/23/71) indicates that the survivor in a statutory merger owes use tax when it uses property after the merger that had been obtained extax for leasing. You ask whether the use tax which will be owed by the survivor of the C--- - F--- statutory merger with respect to the survivor's use of property previously leased by C--- will be reduced by the use tax which had been collected from lessees by C--- and paid to the state. The reason that this type of question arises when a lessor and lessee merge is that after the merger they become one entity, which means that the property that had been leased by the lessor to the lessee is thereafter used by the survivor. Since that survivor succeeds to all the property and obligations of the constituent corporations, if the pre-merger lessor had purchased the property extax for resale in continuing sales, the survivor is using property that it is regarded as having purchased extax for resale, and that use comes within the provisions of subdivision (c)(6) of Regulation 1660.

Mr. W--- R. N---

-2-

January 13, 1993
330.3130

The surviving corporation owes use tax measured by its purchase price of the property (i.e., the price paid by whichever of the constituent corporations purchased the property). As explained in subdivision (c)(6), the survivor may apply as a credit against the tax it owes measured by purchase price the amount of tax it (again, meaning whichever of the constituent corporations had been the owner and lessor of the property) had collected and paid to the state. Of course, if the property is subsequently leased, the lease would be subject to use tax measured by rentals payable with a credit against that tax as provided in subdivision (c)(6). If you have further questions, feel free to write again. Sincerely,

David H. Levine
Senior Tax Counsel
DHL:cl

330.3130

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-2642

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

October 8, 1993

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Mr. W--- R. N--Certified Public Accountant
I--- S--- F--- & Company
XXXXX --- Street, #XXX
---, CA XXXXX

Re:

J. S. C--- Company
#SR -- XX-XXXXXX

Dear Mr. N---:
This is in response to your letter dated August 15, 1993. J. S. C--- is requesting a further explanation of an opinion previously issued by Senior Tax Counsel David H. Levine. Our response is based on the assumption that none of the leased property is mobile transportation equipment as defined in Revenue and Taxation Code section 6023. In your letter you state: J. S. C--- Company (hereinafter Taxpayer A) will be merging in a tax free statutory merger with F--- Corporation (hereinafter Taxpayer B). For purposes of this ruling request, an assumption will be made that the statutory ("A" Reorganization) requirements will be met. In years before this merger, Taxpayer B had been leasing various equipment from Taxpayer A. Taxpayer A calculated and remitted the leased equipment's sales tax using the rental payment method. After the merger, the resulting corporation will cease equipment leasing and use the equipment internally.
....

Mr. W--- R. N--SR -- XX-XXXXXX

-2-

August 17, 2006
330.3130

Currently, on some assets, the sales tax calculated and remitted using the rental payment method exceeds the sales tax that will be due under the purchase price method. On other assets, the sales tax calculated and remitted using the rental payment method is less than the tax that will be due under the purchase price method.
....
You were previously informed that after the merger the lessor and lessee become one entity, which means that the property that had been leased by the lessor to the lessee is thereafter used by the surviving corporation. Therefore the surviving corporation owes use tax measured by the purchase price of the property (i.e., the price paid by whichever of the constituent corporations purchased the property). As explained in Sales and Use Tax Regulation 1660(c)(6), the survivor may apply the amount of tax it had previously paid to the Board with respect to rentals of the property as a credit against its liability for use tax measured by the purchase price of the property. You now ask whether you can calculate an aggregate tax due and then pay the net tax due for all equipment or alternatively if you can use the credit for tax previously paid under the rental payment method on one item of property to reduce the tax liability on the purchase price of another item of property. (You appear to be proposing two different methods of doing the same thing.) Tax may not be reported in the manner proposed because tax is calculated with respect to each transaction involving a sale of tangible personal property, meaning that for purposes of your inquiry tax is computed on an item by item basis. (Rev. & Tax. Code §§ 6051, 6201.) Our understanding is that J. S. C--- already elected to purchase the equipment ex-tax and thus has collected use tax from the lessee and paid the tax to the Board measured by the rentals payable. J. S. C--- has made an irrevocable election to treat the equipment as a continuing sale and purchase. (Reg. 1660.) Since J. S. C--- decided not to pay sales tax reimbursement at the time it purchased the equipment or make a timely election to pay use tax measured by the purchase price of the units, tax was properly collected and paid on the rentals payable. Action Trailer Sales, Inc. v. State Bd. of Equalization, (1975) 54 Cal.App.3d 125, 130. Your proposal appears to be based on the incorrect assumption that when tax collected and paid under the rental payment method exceeds the amount of tax that would have been due on the purchase price method for that item of property, then there has been a tax overpayment. It is irrelevant that on some of the assets the tax which J. S. C--- collected and paid under the rentals payable method exceeds the tax that would have been due under the purchase price method for calculating tax since such "excess" amounts are not overpayments and cannot be refunded. Accordingly, J. S. C--- cannot minimize its tax liability incurred by converting extax rental inventory to its own use by matching the credit available for tax already collected and paid on the rental receipts on one item of property, against its liability for tax measured by purchase

Mr. W--- R. N--SR -- XX-XXXXXX

-3-

August 17, 2006
330.3130

price of another. J. S. C--- must report its use tax liability for its use of property previously held in extax rental inventory on an item by item basis. It may take the credit allowed by Regulation 1660(c)(6) only on an item by item basis, meaning that it can claim a credit only to the extent of its tax liability with respect to the item for which the credit relates. I note that under these circumstances, any future lease of the property by J. S. C--- is a continuing sale subject to tax measured by rentals payable. However, Regulation 1660(c)(6) does allow J. S. C--- to apply the amount of tax it pays measured by purchase price (i.e., the tax due on purchase price in excess of tax previously paid on rentals) against its liability for tax measured by rentals payable from future rentals of the property. What this means is that if the survivor later decides to lease a particular item of property for which it paid tax on purchase price less the credit for tax paid on rentals, it can apply that amount of tax paid (i.e., tax on purchase price less the credit for taxes previously paid on rentals) against the tax due on rentals payable from future leases of that property. This again is on an item by item basis. If you have further questions, feel free to write again. Sincerely,

Gerald Morrow
Tax Counsel
GM/md
Enclosures: Regulation 1660