Were guaranteed minimum rentals taxable after a lessee returned construction equipment early and the lessor collected the balance through court?

Plain-English summary

A redacted business sold, serviced and rented construction equipment and elected to collect use tax on rental receipts. Its agreements reportedly required a guaranteed minimum continuous term. Some lessees returned equipment early, leaving it idle in the lessor's yard while owing rent for both actual-use time and the remaining minimum period.

The lessor sometimes sued and obtained judgment for all rent due. The opinion said full guaranteed receipts—including court collections for idle time—were taxable as the full contract price. No lease, term, rental amount, equipment, lawsuit, judgment or payment is included.

Counsel believe[d] the judgments were predicated on binding contracts: lessees promised full rent and the lessor promised use for the stated period. Counsel reasoned that judgment would require a finding of the lessor's full performance or tender. The source does not reproduce a court finding or independently prove performance.

With full performance or tender assumed, lack of further need could not change the contract. Parking in the lessee's, a third party's or the lessor's yard did not change the rent. Early return was not a unilateral termination right.

Section 6009 defined lease “use” to include possession and exercise of a right or power over property. The lessee exercised a right not to put equipment to normal use and power to park it while retaining the right to use it for the whole term. That continued lease status made the court-enforced rent taxable.

Live Annotation 330.3335 publishes the same guaranteed-minimum and court-judgment rule but omits the assumed judgment basis, missing records and excluded scenarios. The source supplies no tax amount, reporting record, collection result, appeal, bad-debt issue or later outcome.

Common questions

Was tax limited to days the lessee physically operated the equipment?

No. With a binding minimum term and performance or tender assumed, the retained right to use controlled rather than physical operation.

Did parking the equipment in the lessor's yard terminate the lease?

No under the described contracts. The source says early return did not give a unilateral termination right, but the agreements are absent.

Were court-awarded amounts treated as damages instead of rent?

No. Counsel treated them as enforcement of full rent, while expressly inferring the judgments' basis from unseen court records.

Why did statutory “use” continue?

Section 6009 included possession and exercising a right or power; the lessee chose nonuse and parking but retained use rights for the term.

Did the opinion review the judgments?

No judgment is reproduced. Counsel said he believed they rested on binding contracts and the lessor's full performance or tender.

Did it state a rental amount or minimum period?

No. The source gives neither a contract length nor any rent, judgment or tax amount.

Would the same rule govern a valid cancellation or damages settlement?

The opinion does not decide those situations, nor mitigation, repossession, re-lease or bad-debt treatment.

Citations and references

• Cal. Rev. & Tax. Code § 6009 — definition of use quoted to include a lessee's exercise of a right or power over tangible personal property
• Live Annotation 330.3335 — full guaranteed-rent and court-collection result
• February 11 request and every lease, equipment, return, court, payment, tax and outcome record — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3335
• Original supporting opinion: 330.3335 PDF

Original ruling text

330.3335

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

April 18, 1972

[B]
Post Office Box XXXX
--- ----- ---, California XXXXX
Attention:

Mr. [L]
Secretary

Dear Mr. [L]:
Re:

[B]
S- -- XX-XXXXXX
S- -- XX-XXXXXX

This is in response to your letter of February 11, 1972 regarding the application of California sales and use taxes to equipment rentals collected through legal action.
[B] ([B]) is in the business of selling, servicing, and renting construction equipment and as a lessor has elected to collect use tax on rental receipts. Equipment rentals are covered by lease agreements under which the lessee agrees to lease the equipment for a guaranteed “minimum” continuous period. Occasionally, a lessee will return leased equipment before the expiration of the guaranteed rental period, and it often happens that the lessee owes rentals to [B] covering both the time he actually used the equipment and the guaranteed rentals for the balance of the “minimum” period during which the equipment is in [B]’ yard not actually being used by the lessee or anyone else. [B] in certain cases has been forced to take legal action and has received judgment for all equipment rentals due (full guaranteed rentals). Therefore, [B] receives payment for rental of equipment covering a period of usage by the lessee, and payment of rentals covering a period when the equipment was just parked in [B]’ yard. In regard to the above facts, you ask if [B] should report use tax measured by the amount of the full guaranteed rentals or only those rentals covering periods of actual use by the lessee, with the payment covering periods when the equipment is not actually used by the lessee being nontaxable? In our opinion, [B] should report tax on the full guaranteed rentals received, that is, the full contract price between [B] and the lessee, regardless of the fact that the lessee chooses to allow the equipment to remain idle in [B]’ yard during a portion of the rental period. We believe that the judgments received by [B] are predicated on the courts finding that [B] and the lessee entered into binding contracts under which the consideration on the part of the lessee

[B]
S- -- XX-XXXXXX
S- -- XX-XXXXXX

-2-

April 18, 1972
330.3335

was the promise to pay the full guaranteed rentals, and the consideration on the part of [B] was to give the use of equipment to lessee for a certain period. In order to give judgment to [B] in the contract action the court must find that [B] has fully performed; or tendered full performance, per the contract; that is, [B] has given the use of the equipment to the lessee for the entire rental period. Once [B] has fully performed or tendered full performance, the lessee cannot change the terms of the contract because he has no further use for the equipment. If having no use for the equipment, the lessee parked it in his own yard or the yard of a third party, it is clear the lessee would be liable for the full rental and such rentals would be taxable. It seems equally clear that if the lessee chooses to park the equipment in [B]’ yard, he still owes the full rental and such full rental is still subject to use tax which must be collected by [B]. The tax on leasing sales is basically a use tax on the lessee. In regard to leases, “use” is defined in Section 6009 to include not only possession by the lessee, but also the “…exercise of any right or power over, tangible personal property by a lessee under a lease…” While the lessee does not have the “right” to terminate such a lease by returning the equipment prematurely, the lessee does have the “right” not to put the equipment to its normal use, and the “power” to park it in
[B]’ yard. By so exercising his rights and powers over the equipment, the lessee does not terminate the lease, but continues as the lessee liable for rentals for the entire rental period. The lessee retains the right to use the equipment for the entire period, and the court-enforced payments for the rights are subject to tax. Summarily, since [B] has elected to collect and report tax on rental receipts, all rental receipts received under the guaranteed rental contracts are subject to tax, including amounts received as the result of court judgments enforcing the lease contract. Very truly yours,

Donald J. Hennessy
Legal Counsel
DJH:lb