Could a lessor exclude an amount labeled interest from taxable lease receipts under the 1965 rules?

Plain-English summary

An unidentified lessor asked seven questions about California lease-tax changes effective August 1, 1965. The August 2 request and every underlying agreement and transaction record are absent.

Answer 4 rejected an interest exclusion. Under the new law, leases were continuing sales, and the full amount the lessee paid for the merchandise was the measure. Merely designating part as interest did not remove it from gross receipts.

The other six answers supply the opinion's historical context:

• A pre-August 1 lease qualified for the section 6006.3 grandfather clause when all obligations for a fixed period—including types, models, descriptions, quantities and rental terms—were fully fixed before that date. Formal signature was unnecessary if those conditions were already contracted.
• Exercising a lessee's renewal option after August 1 made post-renewal rentals taxable.
• Except for leases to the United States, banks or insurance companies, lessees owed use tax on lease payments and lessors collected it when rent was paid. Separate statement in the lease was immaterial to liability.
• Exercising a purchase option triggered tax on the specified selling price, meaning the amount paid to exercise it.
• Prior lease payments on which tax had been paid might receive credit only to the extent described in absent Ruling 70. Property bought tax-paid received no such credit.
• Before assigning or selling a lease to a bank, the lessor paid tax on rent actually collected. A without-recourse transfer made the bank effectively the lessor for later rental collection and tax.

Live Annotation 330.3420 publishes only the interest answer. No actual interest amount, rent, property, option price, renewal, assignment, tax computation or later agency outcome appears.

Common questions

Did separately labeling an amount as interest exclude it?

No. Answer 4 included the labeled amount in gross receipts.

Why?

The historical law treated leases as continuing sales and the lessee's total merchandise payment as the tax measure.

Did the opinion decide every financing arrangement?

No. It states a historical rule without any actual contract, financing terms, amount or payment schedule.

What did the grandfather answer require?

All material obligations and property/rental terms had to be fully fixed before August 1, 1965, though formal signature could follow.

How were purchase-option credits handled?

Tax applied to the exercise price. Previously taxed rents could receive only the credit in absent Ruling 70; acquisition-tax-paid property received none.

What happened after a lease was sold to a bank?

For a without-recourse transfer, the bank became effectively the lessor and collected and paid tax on later rents.

Does the source show any implemented transaction?

No. It supplies no agreement, schedule, renewal, option exercise, assignment, filing, assessment, refund or later result.

Citations and references

• Former California Revenue and Taxation Code section 6006.3 — historical grandfather clause for fully fixed pre-August 1, 1965 commitments
• Former Sales and Use Tax Ruling 70 — lease-payment credit on purchase-option exercise; enclosure absent
• The interest answer itself does not cite a numbered provision.
• Live Annotation 330.3420 — interest branch only
• August 2 request and every agreement, property, schedule, renewal, option, assignment, tax and outcome record — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3420
• Original seven-answer supporting opinion: 330.3420 PDF

Original ruling text

STATE OF CALIFORNIA

330.3420

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

August 5, 1965

--- --- ----- --- ----- --- --Dear Mr. ---:
This is in reply to your letter of August 2, 1965, asking a number of questions concerning the application of the new law, operative August 1, 1965, with respect to the application of sales and use taxes to leases of tangible personal property. Answering your questions in order, we advise: 1. The intention of the Legislature, in our opinion, was to afford relief from the added economic impact of the extension of the tax to leasing to those who had become previously bound in all respects to perform fixed obligations for fixed periods under prior existing agreements. Thus, where all elements of a lease contract have been fixed by the parties prior to August 1, 1965, and all terms and conditions, including the types, models, descriptions, quantities, and rental terms, etc., have been fully contracted, we will consider that the leasing of the property so designated is within the protection of the so-called “grandfather clause,” § 6006.3. If these conditions are present even though the lease has not been formally signed, as mentioned in your question, we will, nevertheless, consider that the lease was executed or entered into prior to August 1. 2. As long as the lessee has the option to renew a lease entered into prior to August 1, 1965, the exercise of such option constitutes, in our opinion, as a renewal, and, consequently, rentals received subsequent to such renewal would be subject to the tax. 3. Except in the cases of leases to the United States Government, to banks, or to insurance companies, the lessee is liable for payment of the use tax on the lease payments which the lessor is required to collect from the lessee at the time rentals are paid by the lessee under the lease. Whether or not the amount of the tax is separately stated in the lease document would be immaterial. The lessee is under a legal liability for the tax in any event. 4. Inasmuch as leases are continuing sales under the terms of the new law, it is our opinion that the amount designated as interest is not excludable from gross receipts with respect to which the tax applies. The lessee pays a certain amount of money for the merchandise and this, in our opinion, constitutes the measure of the tax.

Mr. --- ---

-2-

August 5, 1965
330.3420

5.
There would be a tax due upon the exercise of an option to buy by the lessee and the tax would be due upon the specified selling price, i.e., amount paid by the lessee upon exercise of the option to purchase. 6. Upon the exercise of an option to buy, credits for prior lease payments upon which tax has been paid, may be allowed to the extent indicated in the paragraph immediately preceding the concluding paragraph of ruling 70, copy enclosed. You will note that there is no provision for a credit when the property was purchased with tax paid on the purchase price. 7. The lessor is required to pay tax on the amounts of rent which it actually collects prior to the assignment or sale of the lease to the bank. Thereafter, if the assignment or sale is without recourse on the lessor, the bank becomes in effect the lessor and must collect and pay the amount of the tax upon the rental receipts which it receives. Very truly yours,

E. H. Stetson
Tax Counsel

EHS:fb
Enclosure
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--- – District Administrator