Was an early equipment buyout taxed only on the lease's end-of-term option price, or on the full amount paid for immediate title?

Plain-English summary

The stated example began with a lessor buying equipment for $10,000 and paying $500 of sales-tax reimbursement. A lessee received possession under a 60-month lease at $230 per month, with a $1,000 purchase option exercisable only at the end.

After 12 months, the lessee wanted immediate title. The lessor calculated $10,810 of gross remaining rent, subtracted a $1,300 “courtesy rebate,” and reached a $9,510 net lease receivable. It added the $1,000 option and $60 labeled sales tax, producing a stated $10,570 termination total.

The opinion treated this as a new contract for title, not exercise of the unavailable end-of-term option. Tax applied to the whole title price except stated sales-tax reimbursement: $10,570 minus $60, or a $10,510 tax measure. It does not explain why the gross remaining-rent line is $10,810 or reconcile that figure with the month count; this page does not recalculate it.

The absent May 19 request reportedly called another payment advance last-month rent. At the June 16 meeting, counsel requested typical contracts. The July 17 forms did not expressly mention advance last-month rent; they instead described security deposits.

One form held the deposit for lease performance and, if the lessee was not in default at term end, required refund or allowed the lessor alone to apply it to rent in inverse maturity order. Another allowed the lessor to cure lessee default from the deposit and required refund if all conditions were met. The source supplies neither form nor deposit amount.

If the lessee was not in default when contracting for title and the lessor did not refund the deposit, counsel included it in the sale's tax measure. The letter does not show whether any deposit was retained, whether title passed, what tax was reported, or any later audit or refund outcome. Live Annotation 330.3305 matches the two results but omits the computation and source gaps.

Common questions

Was tax limited to the $1,000 end-of-term option price?

No. That option was exercisable only after 60 months. The purchase after month 12 was a new immediate-title agreement.

Were the remaining scheduled rentals excluded because the lease ended?

No. The stated $9,510 net lease receivable after the courtesy rebate formed part of the new title-transfer price.

Was stated sales-tax reimbursement itself part of the taxable measure?

No. The letter excluded the separately identified $60 from the $10,570 total, leaving a $10,510 measure.

Could a security deposit be taxable in the buyout?

Yes, if the lessee was not in default and the lessor retained rather than refunded it when the lessee acquired title.

What was the early-buyout calculation?

$10,810 gross remaining rent minus a $1,300 rebate equaled $9,510; adding the $1,000 option and $60 tax produced $10,570.

Was the extra payment last-month rent or a security deposit?

The request reportedly said advance last-month rent, but the submitted typical forms described security deposits. The opinion does not reconcile them.

Did the source document an actual transfer or deposit amount?

No. The underlying documents, actual equipment, deposit amount, title record, invoice, tax return and later outcome are absent.

Citations and references

• May 19, 1978 taxpayer letter, June 16 discussion, and July 17 contract submission — factual materials described but not reproduced separately in the official PDF
• The source cites no statute or regulation; its conclusion rests on characterizing the early buyout as a new contract for transfer of title
• Live Annotation 330.3305 — same new-contract, full-price and retained-deposit rules without the accounting or record mismatch
• Equipment, executed agreements and every deposit, invoice, title, tax and outcome record — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3305
• Original supporting opinion: 330.3305 PDF

Original ruling text

330.3305

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-3723

August 7, 1978

Mr. R--- S. J---, III
President
C--- L--- Corporation
P.O. Box XXX
--- ---, CA XXXXX

Re:

SR -- XX-XXXXXX

Dear Mr. J---:
We have completed our review of your letter of May 19, 1978, in relation to our discussion of June 16 and the documents that you sent on July 17. It remains our view that tax applies to the entire amount paid by the lessee to obtain immediate title under the facts you have described, exclusive of any amount paid by him as sales tax reimbursement. To restate the facts, a lessor acquires certain equipment for $10,000.00 and pays sales tax reimbursement of $500.00 upon his purchase. The lessee then acquires possession of the equipment under a lease with a term of 60 months, with monthly payments of $230.00. The lessee is given an option to purchase the equipment for $1000.00 at the expiration of the lease term. The lessee, however, decides to purchase after the first 12 months. The lessor requires a payment of $10,570.0 to accomplish this, which he computes as follows: Gross lease remaining Less courtesy rebate Net lease receivable Purchase option Sales tax on option Total purchase price Total to terminate

$10,810.00
1,300.00
$ 9,510.00
1,000.00
60.00
1,060.00
$10,570.00

Mr. R--- S. J---, III

-2-

August 7, 1978
330.3305

It is our view on these facts that the lessor and lessee have entered into a new contract which is for transfer of title to the lessee and that tax applies to the entire amount paid by the lessee for that transfer of title, less the amount of $60 that is intended as sales tax reimbursement. Accordingly, the measure of tax on that sale is $10,510.00. In your original letter, you state as one of the facts that the lessee had made an advance payment of the last month’s rental to the lessor at the time the lease was entered into. At our June 16 meeting we asked for copies of typical contracts to more clearly define those payments. The contracts you sent do not expressly refer to advance payments of the last month’s rent, but do refer to a security deposit. One contract form provides that the deposit is to be held as security for performance of the terms of the lease and, if the lessee is not in default at the end of the term, is to be refunded to the lessee or, solely at the lessor’s option, is to be applied to payment of rent due in the inverse order of their maturities. Another contract form provides that the deposit may be applied by the lessor to cure any default of the lessee and, if all conditions are complied with, is to be refunded to the lessee. If the lessee is not in default at the time he contracts to acquire title, and the security deposit is not refunded to him, it is our view that the measure of tax on the lessor’s sale of the equipment should also include the amount of the security deposit. If you have any further questions, please let us know. Sincerely,

Thomas P. Putnam
Assistant Chief Counsel

TPP:po

cc:

A--- K---, President
A--- S--- Leasing
P. O. Box XXX
---, CA XXXXX