Were computer-lease payments called interim rent taxable when paid after the lessor advanced purchase funds but before delivery?

Plain-English summary

On October 11, 1978, B--- offered in writing to buy a new computer and enter a five-year lease with M--- E---. The actual computer cost was unknown, so regular rent was $17.22 monthly per $1,000 of the lessor's cost. Acceptance was due October 31; the lessee accepted October 16.

Before the regular term and rent began with a “Schedule to Lease,” the offer required daily “Interim Rent” of $0.26 per $1,000. It stated equivalents of $7.20 monthly per $1,000 and 9.49% annually. The November 22 agreement substantially followed the offer.

Agreement section 1 said the lessor had ordered or would order the computer but, between the parties, was not obligated to pay until the lessee executed an Acceptance Supplement by the June 30, 1979 availability or delivery date. The supplement would confirm acceptance and application of the agreement. If the lessee failed, it instead assumed the lessor's obligation to pay for the equipment. The description says lessor-lessee rather than vendor-purchaser status became fixed only with the supplement.

Section 1.3 made interim rent consideration for the purchase. It accrued when the lessor advanced purchase funds at the daily rate, payable monthly through June 30. Regular rent of $17.22 per $1,000—about $10 higher than $7.20—began at delivery, when the lessor became obligated to lease rather than sell. Interim rent began with funds committed for either lease or sale and ended when the lease obligation became fixed.

The parties did not dispute that a bona fide lease ultimately existed. California possession was a continuing sale and purchase regardless of delivery time or place. The only question was whether required amounts paid before delivery entered taxable rental receipts.

Counsel said yes. Annotations 330.3400 and 330.3420 treated interest connected with leased property as taxable rent. Here, the interim payment was a condition of the lessor's willingness to lease and part of total rental consideration. Later delivery did not change that character under sections 6006.1 and 6010.1.

Live Annotation 330.3426 publishes the taxable result but simplifies the deal to a lessor buying property specified by the lessee, schedules starting regular payments and interim rent between the fund advance and schedules. The supporting letter gives the more complicated acceptance/vendor-versus-lessor branch. No actual offer, agreement, schedule, supplement, computer, fund advance, delivery, payment, tax computation or later outcome appears.

Common questions

Did tax apply only after the regular rental term began?

No. Required interim amounts accrued with the fund advance and remained taxable before the June 30 delivery and higher regular rent.

Why was a financing-style charge treated as rent?

The agreement made it purchase consideration, and the lessor would not have negotiated the lease without it, so it was total lease consideration.

Would every payment made before equipment delivery be taxable rent?

No. This result rests on the quoted mandatory formula and the undisputed completed bona fide lease.

Did the timing of possession change the continuing-sale analysis?

No. Sections 6006.1 and 6010.1 made delivery time or place immaterial to the continuing sale and purchase.

What were the interim and regular rates?

Interim rent was $0.26 daily per $1,000 of funds, stated as $7.20 monthly or 9.49% annually. Regular rent was $17.22 monthly per $1,000 of cost.

When did lessor-lessee status become fixed?

The quoted description says only when the lessee executed the Acceptance Supplement. Failure instead made it assume the equipment-payment obligation.

Are the offer, agreement and supplement available?

No. The letter quotes their terms, but none of the documents or the computer, payment, delivery or tax records is included.

Citations and references

• Cal. Rev. & Tax. Code §§ 6006(g) and 6010(e) — leases treated as sales and purchases with tax measured by rent
• Cal. Rev. & Tax. Code §§ 6006.1 and 6010.1 — continuing-sale and continuing-purchase provisions applied despite delivery timing
• Cal. Code Regs., tit. 18, reg. 1660(b)-(c) — lease rules cited by the opinion
• Annotations 330.3400 and 330.3420 — Board treatment of lease-related interest charges cited in the letter
• Live Annotation 330.3426 — simplified transaction and same taxable-interim-rent result
• Request and every offer, agreement, schedule, supplement, computer, fund, delivery, payment, tax and outcome record — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3426
• Original supporting opinion: 330.3426 PDF

Original ruling text

330.3426

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
(916) 445-8485

September 23, 1982

Mr. J--- C--M--- E--- Co.
P. O. Box XXXX
--- ---, CA XXXXX
Dear Mr. C---:
SY -- XX-XXXXXX
This is in response to your letter of July 22, 1982. You wondered whether certain payments identified as “interim rent” are subject to tax under the California Sales and Use Tax Law. The amounts in question were paid by M--- [E---] to B---, the ultimate lessor of the equipment. Your description of the transaction is reiterated below, followed by our comments. “The facts are as follows. On October 11, 1978, B--- in writing offered its commitment (the ‘Offer’) to enter into a lease with M--- E--- Co. The leased property would be a new computer which B--- was going to buy. The Offer set out the various terms of the proposed lease. It stated that the term of the lease would begin on the date of execution of a “Schedule to Lease’ and continue for five years. Since the actual purchase price of the computer equipment was not then known, the Offer stated the contemplated rent in terms of a cost per thousand of dollars expended; thus, the rate was to be $17.22 per $1,000 of B---’s cost to purchase the computer. Like the rental term, the obligation to pay rent was to being on the date of execution of the “Schedule to Lease.’ Prior to that date, however, the Offer called for a smaller payment, denominated ‘Interim Rent.’ This Interim Rent was at the rate of .26 per $1,000 of cost per day, which equals
$7.20 per $1,000 of cost per month or, if phrased as a percentage per annum, 9.49% (.26 x 365). The Offer required acceptance by October 31, 1978. M--accepted on October 16, 1978.

Mr. J--- C--SY -- XX-XXXXXX

-2-

September 23, 1982
330.3426

“Subsequently, on November 22, 1978, the parties entered into a “Lease Agreement’ (the ‘Agreement’). The Agreement substantially embodied the terms set forth in the Offer. In Section 1, the Agreement stated that B--- ‘has ordered or shall order’ the computer but would not, as between itself and M---, be obligated to pay for the unit until (Section 1.2) M--- executed and delivered (on or before the ‘Availability’ or ‘Delivery’ date, June 30, 1979) an ‘Acceptance Supplement
… confirming that [the computer] (i) has been accepted by [M---] as of such Delivery Date and (ii) has become subject to and governed by all the provisions of’ the Agreement. In the event of M---’s failure to meet that condition, the Agreement provided that M--- would be deemed to have assumed B---’s obligation to pay for the computer equipment. Thus, the relationship between B--- and M--- would be fixed as lessor/lessee, rather than vendor/purchaser, only upon execution of the Acceptance Supplement. “Section 1.3 of the Agreement went on to state that ‘in consideration of the purchase of the [computer, M---] agree[s] that Interim Rent … shall begin to accrue on the date funds for the purchase of such ‘computer’ are advanced by
[B---] at a daily rate of $0.26 per $1,000 of funds advanced, payable monthly until June 30, 1979….’ The following section of the Agreement, Section 2, governed the term of the lease and the amount of rent. As set out in an incorporated schedule, the rent was $17.22 per month per $1,000. The rent, thus, was approximately $10 per month higher than the ‘Interim Rent’ ($17.22 per month per $1,000 versus $7.20 per month per $1,000) and began on the Delivery date, i.e., the date on which B--- became obligated to lease, rather than sell, the computer. The Interim Rent, on the other hand, became effective on the date that B--- committed funds toward the purchase of the computer either for lease or sale, and ended on the date that B--- became obligated to lease rather than sell.” Comments Generally speaking, leases of tangible personal property in California are deemed “sales” and “purchases” with tax thereon measured by rentals payable (see Rev. & Tax. Code §§ 6006(g) and 6010(e); Reg. 1660(b) and (c), copy enclosed. The granting of possession by B--- to M--- in California is a continuing sale, and the possession by M--- in this state is a continuing purchase for use in this state irrespective of the time or place of delivery of the property to M--- (see Rev. & Tax. Code §§ 6006.1, 6010.1; Reg. 1660(b)(2)). There seems to be no dispute with respect to the conclusion that a bona fide lease of the equipment was entered into between B--- and M---. The question to be answered then, is whether amounts designated “interim rent” which were paid prior to delivery of the equipment are part of taxable rental receipts.

Mr. J--- C--SY -- XX-XXXXXX

-3-

September 23, 1982
330.3426

In our view, the “interim rent” amounts are subject to tax. It has long been the position of the Board that interest charges levied in connection with leased property are includable in the measure of rental payments subject to tax (see BTLG annos. 330.3400, 330.3420). In the instant case, the facts indicate that the “interim rent” was a condition to B---’s willingness to lease, without which the lease would not have been negotiated. As such, they represent part of the total consideration paid for rental of the equipment. The fact that actual delivery of the equipment occurred subsequent to the payment of the “interim rent” does not, as indicated in sections 6006.1 and 6010.1, affect the nature of the entire transaction as a continuing sale and purchase. Likewise, the fact that delivery occurred at a later date than payment of the “interim rent” does not preclude the inclusion of those amounts as part of taxable rental receipts. In our opinion the term “interim rent” properly describes the nature of these payments. We hope this has answered your questions. If it has not, feel free to contact us again. Very truly yours,

Les Sorensen
Tax Counsel

LS/at
Enclosures