Was a wind facility taxable tangible personal property when its owner leased it together with a sublease of the underlying land?

Plain-English summary

A redacted developer proposed building wind facilities for investors. Its land-use instruments, though labeled easements, gave exclusive rights to develop wind resources for terms from 30 years to perpetuity, barred landowner activity impairing those resources, and were described by counsel as substantive leases. The September 22, 1986 request and instruments are absent.

When a facility was built, the developer would assign investors corresponding rights for the facility's expected useful life. Counsel said that life was determined at construction and again ten years after completion. The assignment could be a sublease, subeasement, partial assignment or license; each gave exclusive rights inside the facility boundary and nonexclusive access. The investor assumed related developer obligations, allowed its facility lessee the land use needed for operation, and that lessee could pass full wind-use rights to a sublessee.

The opinion treated “lessor” in Revenue and Taxation Code section 6016.3 as including a sublessor. Because the facility owner leased both the fixture and its interest in the land, the combined transaction was a real-property lease rather than a taxable lease of tangible personal property.

That interpretation followed the opinion's severance rationale: a fixture leased together with the lessor's leasehold interest was less likely to be removed after default, like a fixture leased by the fee owner. It depended on the facility owner actually passing its realty interest with the fixture.

Tax still applied earlier in the chain. Regulation 1521 treated the contractor as consumer of materials and retailer of fixtures. On counsel's assumptions, the facility contained no machinery or equipment, the tower components were materials, and the turbine head was the only fixture. The developer owed sales tax on its turbine-head sale and could not accept its customer's resale certificate in good faith because the later facility lease was real-property treatment, not a lease of tangible personal property.

Live annotation matches the combined-lease and fixture-sale results and adds that the contractor is subject to tax on both materials and fixtures; the opinion itself states the contractor-consumer rule for materials but expressly applies its bottom-line sales-tax conclusion only to turbine heads. No land instrument, assignment, construction contract, facility lease, plans, component evidence, useful-life determination, price, invoice, certificate, return, audit or later outcome appears.

Common questions

Was the investor's lease of the completed wind facility taxable?

No, under the stated facts, because it transferred the facility together with the corresponding real-property interest.

Why did a sublease count like a lease of the realty?

The opinion read section 6016.3's “lessor” to include a sublessor, reasoning that the fixture was less likely to be severed after default when the same party leased the land interest.

Was the contractor's construction transaction exempt?

No. Sales tax applied to its sale of the turbine-head fixture.

Could the contractor take a resale certificate for the turbine head?

No, because the investor would not later lease that fixture as tangible personal property under section 6016.3.

What land rights had to accompany the facility?

The owner was said to receive exclusive rights within its facility boundary, nonexclusive access and a term matching expected facility life, then pass necessary use rights with the facility lease.

Did the opinion decide from the actual agreements?

Not shown. It relied on counsel's description; the request, land-use instruments, assignments and leases are absent.

What did the live annotation add?

It says the contractor is subject to tax on materials and fixtures. The opinion states the consumer rule for materials but expressly concludes sales tax was due on the turbine heads.

Citations and references

• Cal. Rev. & Tax. Code § 6016.3 — leased-fixture rule and exception when the fixture lessor also leases the realty
• Cal. Code Regs., tit. 18, reg. 1521(a)(6), (b)(2)(A)(1), and (b)(2)(B)(1) — machinery, materials, fixtures, and contractor status
• Cal. Code Regs., tit. 18, reg. 1521(b)(2)(B)(3) — resale certificate for fixtures installed for a non-owner who will lease them as tangible personal property
• Annotation 190.1420 and Regulation 1521 Appendix B — tower components as materials and turbine head as fixture
• Live Annotation 330.3168 — same realty-lease and turbine-head results; adds contractor tax on materials
• Request, land/lease/construction instruments and every transaction/tax/outcome record — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3168
• Original supporting opinion: 330.3168 PDF

Original ruling text

330.3168
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-2242

November 4, 1986

Mr. D--- S. F--B---, P--- & H--Attorneys At Law
--- --- ----- --- Plaza
--- ---, CA XXXXX

Dear Mr. F---:
Your letter of September 22, 1986 addressed to Mr. Gary Jugum of this office has been referred to me for a response. You write to us on behalf of your client, U---S--- W---, Inc. (“USW”) requesting a legal opinion regarding the application of Sales and Use Tax Law to the lease of wind power facilities. The facts, as set forth in your letter, are as follows: Facts: USW will be constructing wind power facilities for investors pursuant to construction contracts. Rights to the underlying realty will be passed along to the investors. USW has acquired long-term wind rights, land use agreements on the underlying realty for the wind power facilities. These land use agreements, which are denominated easements, give USW the exclusive right to develop the commercial wind resources for time periods varying from thirty years to perpetuity and do not allow the landowners to develop the wind resources on the properties nor to undertake any activities which impair the value of the properties’ wind resources. Although labeled easements, the documents

Mr. D--- S. F---

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substantively describe long-term leases of the properties to USW for the development of all the wind resources on the properties. At the time USW constructs a wind facility, USW assigns a portion of land use agreement to the owner of the particular wind facility for a time period equal to the expected useful life of the wind facility (as determined both at the time of construction and ten years from the date of completion). Under the terms of the assignment, the owner of the wind facility undertakes to perform all of the obligations of USW under the land use agreements to the extent the obligations relate to the owner’s wind facility. The assignments are accomplished either through subleases, subeasements, partial assignments or license agreements, each of which gives the wind facility owner exclusive rights to the property to the extent of the boundaries of the wind facility, and non-exclusive access rights to the property. The owners of a wind facility allow the use of the property by a lessee of the wind facility to the extent necessary to allow the lessee to operate its wind facility. The lessee may further assign, to any sublessee of the wind facility, full rights to the use of the property to generate wind resources. Analysis In the above described factual situation, USW enters into a construction contract with an investor or investment group to build a wind power facility. The wind power facility is constructed on property leased by USW and subleased to the investor or investment group. The owner of the wind power facility leased the wind power facility to a lessee and subleases the interest in real property to the lessee of the wind power facility. You request an opinion as to whether tax would be due and payable on the lease between the owner of the wind power facility and their lessee. As stated in your letter, under a construction contract materials and fixtures are transformed into real property (Regulation 1521, Cal. Admin. Code, Title 18). Generally, construction contractors are considered to be consumers of materials which they furnish and install in the performance of a construction contract (Regulation 1521(b)(2)(A)(1)). Construction contractors are generally considered to be retailers of fixtures (Regulation 1521(b)(2)(B)(1)). As correctly stated in your letter a wind power facility contains no “machinery or equipment”, as defined by Regulation 1521(a)(6). The components of the supporting tower are considered to be materials and the only fixture is the wind turbine head (Sales and Use Tax Annotation 190.1420 and Regulation 1521, Appendix B).

Mr. D--- S. F---

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November 4, 1986
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Under certain circumstances tangible personal property which becomes affixed to real property will be regarded as tangible personal property rather than real property. Revenue and Taxation Code Section 6016.3 provides as follows: Leased fixtures. “Tangible personal property,” for the purpose of this part, includes any leased fixtures if the lessor has the right to remove the fixtures upon breach or termination of the lease, unless the lessor is also the lessor of the realty (emphasis added). As stated above, construction contractors are generally retailers of fixtures and sales tax is due on the sale of the fixtures. Regulation 1521(b)(2)(B)(3) allows a construction contractor to accept a resale certificate in a situation in which the construction contractor installs a fixture for a person, other than the owner of the realty, who intends to lease the fixture in place as tangible personal property as provided in Section 6016.3 of the Revenue and Taxation Code. The principle question for our review is whether the lease of the wind power facility constitutes a taxable lease of tangible personal property or a non-taxable lease of real property. The last sentence of Revenue and Taxation Code Section 6016.3 provides, in effect, that a lease of a fixture shall be regarded as a lease of real property if the lessor of the fixture is also the lessor of the realty. Under the given facts, in which the lessor of the fixture is also the “sublessor” of the realty, the question then becomes whether the term “lessor” may be interpreted to include “sublessor”. We conclude that the correct interpretation of section 6016.3 defines “lessor” so as to include “sublessor”. The apparent intent of the statute is to tax as a lease of tangible personal property fixtures which are likely to be severed from the real property upon a default under the lease. The lease of an interest in real property, together with a lease of the fixture will more likely result in the fixture remaining attached to the realty in the event of a default. Hence, a lease of a fixture by a lessor who holds a mere leasehold interest in the real property may be treated the same as a lessor with a fee ownership in the realty, in that in both instances the fixture is less likely to be severed from the realty in the event of a default on the lease. If we follow the interpretation that “lessor” is intended to include sublessors, then the lease of the fixture together with the sublease of the realty will be a lease of real property, which is excluded from sales and use tax. Sales tax, however, would be due and payable on the sale of the fixture by the construction contractor. The construction contractor would not be able to accept a resale certificate from his customer since the lease of the fixture would not constitute a lease of tangible personal property as provided in Section 6016.3 (Regulation 1521(b)(2)(B)(3)). Following the above described interpretation of Revenue and Taxation Code Section 6016.3, sales tax would be due and payable by USW on the sale of the fixtures, the wind turbine heads. USW could not accept in good faith a resale certificate from their customer since pursuant to Revenue and Taxation Code Section 6016.3 the wind power facility does not constitute

Mr. D--- S. F---

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tangible personal property. It follows therefore that the lease of the wind power facility is not subject to sales or use tax. If you have any questions concerning this matter, please contact us again. Sincerely,

Teresa Armstrong
Legal Counsel

TLA:rar