Did use tax apply when a closed-end vehicle lessor charged back repairs the lessee could instead arrange before returning the vehicle?

Plain-English summary

A redacted recipient's Western Region vice president asked in an absent April 5, 1990 letter about a closed-end vehicle lease. The quoted description says the lessee could make necessary repairs before returning the vehicle or let the lessor provide repairs and debit the lessee's account. The lessor then was charging California use tax at charge-back.

Tax Counsel assumed the lessor had neither paid sales-tax reimbursement nor timely paid use tax measured by the vehicles' purchase price. The leases therefore were taxable continuing sales: lessees owed use tax on rentals payable, and the lessor had to collect and remit it.

Regulation 1660(c)(1)(D) generally included required lease payments in rentals payable but excluded costs incurred in disposing of the property at lease expiration or earlier termination. Counsel placed the repair-and-reconditioning charge-backs within that exclusion.

The customer's real ability to avoid paying the lessor by hiring someone else to restore the vehicle supported the conclusion. The lessor should not charge use tax on its repair and reconditioning amounts under those stated facts.

The live annotation matches the exclusion and customer-choice condition. Neither source supplies the actual lease, required-condition language, repair work, provider, amount, invoice, vehicle purchase-tax record, reported return, audit, refund or later outcome.

Common questions

Did the result depend on the underlying lease being taxable?

Yes. It assumed the lessor did not pay tax measured by vehicle purchase price, making the leases taxable continuing sales, but still applied the disposal-cost exclusion.

Why did customer choice matter?

The lessee could restore the vehicle elsewhere rather than being required to buy the lessor's repair service.

When did the exclusion apply?

The cited rule covered disposal cost at lease expiration or earlier termination. The source does not document an actual return or termination.

Had the lessor been charging tax?

Yes. The quoted request says it assessed California use tax when it charged the repair amount back to the lessee.

Does the source show the repair amount or completed tax outcome?

No. It supplies no lease, repair record, invoice, assessment, return, refund, appeal or later result.

Citations and references

• Cal. Code Regs., tit. 18, reg. 1660(c)(1)(D) — rentals-payable rule and exclusion for disposal costs at expiration or earlier termination
• Live Annotation 330.3190 — same repair-charge exclusion and independent-repair condition
• April 5 request and every lease, condition, repair, invoice, tax and outcome record — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3190
• Original supporting opinion: 330.3190 PDF

Original ruling text

330.3190

STATE OF CALIFORNIA

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

April 17, 1990
--RE:

Dear ---:
This is in response to a letter dated April 5, 1990 from your Vice President of the Western Region, ---. He asks how use tax applies to the following charge: “We are currently charging tax under a closed end lease which allows a charge-back to the lessee for repairs and reconditioning. The lessee has the option to make necessary repairs prior to the return of the vehicle, OR, we will provide such repairs and debit the lessee’s account. At the point of charge-back we are assessing California Use Tax.” I assume that you do not pay sales tax reimbursement or timely pay use tax measured by purchase price with respect to the vehicles in question and that your leases are therefore taxable continuing sales. The rentals payable from these leases are subject to use tax on the lessee which you are required to collect and pay to the state. Taxable rentals payable include any payment required by the lease, except as relevant here, the cost incurred in disposing of the leased property at expiration or earlier termination of the lease. (Reg. 1660(c)(1)(D).) We consider your charges to the lessees for repairs and reconditioning to come within this provision. We also note that the lessee may avoid making these payments to you by obtaining the services of someone else in order to restore the vehicle to the required condition. We conclude that you should not charge use tax on your charges for repairs and reconditioning. If you have further questions, feel free to write again. Sincerely, John L. Waid Tax Counsel DHL:wak cc: bc:

---- District Administrator