Was a two-to-eight-week espresso-machine trial a nontaxable demonstration when the customer paid 40 cents per cup, including 15 cents for beans?

Plain-English summary

A redacted company imported European espresso machines for resale without paying acquisition tax, then sold or leased them inside and outside California. It reportedly collected sales tax on California retail machine sales. An October 24, 1994 CPA letter did not identify the taxpayer; a November 2 call supplied the redacted corporate identity. Neither record is included.

As a sales incentive, the company offered two-to-eight-week customer trials and, “to date,” charged approximately $0.40 per cup served, including $0.15 for beans. Staff Counsel assumed the remaining $0.25 approximated fair machine rent and expressly said a wrong assumption would change the opinion.

Paid customer use was a lease under section 6006.3, not Regulation 1669 demonstration or display. With no acquisition-tax payment or timely election, the trial lease was a continuing sale taxed on rentals payable. Lessees owed use tax and the lessor collected and remitted it.

On the stated allocation, $0.25 per cup was taxable rent. The $0.15 bean sale was either nontaxable resale under sections 6007 and 6051 or, if the customer consumed the beans, exempt food under section 6359 and Regulation 1602. No customer sales or consumption evidence appears.

If the lessor later used a machine nonincidentally after paying rent-based tax, Regulation 1660(c)(6) imposed purchase-price use tax and allowed credit for tax previously paid on that machine's rentals. If credit was short, the difference was due with the return; that payment could then offset tax on later rentals. Subsequent rent remained taxable.

Lessee liability remained if the lessor failed to collect, but sections 6202–6204 did not let the lessor delegate its collection and remittance duty. On these facts, neither trial length nor lack of a written customer contract changed tax treatment.

The offset question cited page 12 of Pamphlet No. 46, which is not attached. No trial agreement, machine cost, acquisition election, cup count, invoice, rent-value analysis, bean disposition, later use or rerental, credit calculation, tax filing, audit or outcome appears.

Live Annotation 330.3429 publishes only the paid-trial lease and fee-minus-beans measure. It omits the fair-value caveat, acquisition/election path, bean alternatives, later-use credit mechanics, collection duties, no-writing rule and missing records.

Common questions

Was the paid trial a demonstration?

No. Payment for use prevented demonstration-or-display treatment.

What part of the 40-cent charge was taxable rent?

The assumed $0.25 machine-use portion. Counsel expressly said a different fair-rent fact would change the opinion.

Did an unwritten or short trial avoid tax?

No under the stated facts. Neither two-to-eight-week length nor absence of a written customer contract changed the result.

How was the 15-cent bean amount treated?

As nontaxable resale if the customer resold the beans, or exempt food if the customer consumed them.

What happened if the lessor later used the machine itself?

Nonincidental use triggered purchase-price use tax, with credit for prior rent-based tax and later-rental offsets under Regulation 1660(c)(6).

Could the lessor make customers handle all reporting?

No. Lessees remained liable for uncollected tax, but the lessor could not delegate its statutory collection and remittance duty.

Does the record show actual cup fees or tax paid?

No. It gives an approximate fee and assumed allocation but no customer, machine, invoice, return, audit or later outcome.

Citations and references

• Revenue and Taxation Code section 6006.3 — lease includes rental, hire, and license
• Regulation 1669 — demonstration or display treatment found inapplicable because customers paid
• Regulation 1660(c)(1) — tax measured by rentals payable
• Regulation 1660(c)(6) — credit when a lessor later makes nonincidental use after paying rental tax
• Revenue and Taxation Code sections 6007 and 6051 — bean resale treatment
• Revenue and Taxation Code section 6359 and Regulation 1602 — food-product exemption
• Revenue and Taxation Code sections 6202-6204 — lessee liability and lessor collection duties
• Pamphlet No. 46 page 12 — cited for the offset question; text absent
• Live Annotation 330.3429 — paid-trial lease and fee-less-beans rental measure only
• Request, call note and every agreement, machine, value, cup, bean, payment, credit, tax and outcome record — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3429
• Original supporting opinion: 330.3429 PDF

Original ruling text

330.3429

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION - MIC 82
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
Tele: (916) 324-2637a
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles

January 23, 1995

KATHLEEN CONNELL
Controller, Sacramento
────────
BURTON W. OLIVER
Executive Director

Ms. J--- A--- C--- A--G. H. P--- CPA
XXXX --- Avenue, Suite XXX
--- ---, CA XXXXX-XXXX
Re: SR --- XX-XXXXXX
Dear Ms. A---:

Your letter dated October 24, 1994 to Theresa Blue of the Board's Return Review Section has been referred to the Legal Division for a response. You ask how tax applies when your client provides espresso coffee machines to its customers on a trial use basis. We initially note that your letter does not identify the taxpayer subject to this opinion. We understand, however, that the taxpayer is the S--- U--- Corporation ("S---") based on your November 2, 1994 telephone conversation with Ms. Blue. You state that S--- imports espresso coffee machines from Europe for resale to its customers. No sales tax reimbursement or use tax is paid by S--- on its purchases of these machines. S--- thereafter sells or leases these machines to its customers located both inside and outside the state. We understand from your letter that S--- reports sales tax on the machines it sells at retail inside this state. As a sales incentive, S--- may offer a machine to a customer for a 2 to 8 week trial basis. During this test period, S--- collects a fee from the customer on a "per cup served" basis. To date, this per cup fee has been approximately $0.40 which includes a
$0.15 charge for the coffee beans.
You ask a series of questions regarding the application of tax to the espresso machines provided by S--- during the test period. For purposes of clarity, we have responded to each of your questions separately. "1. Is ... [the] trial basis use [by S---'s customers] subject to sales or use tax? Is this considered a form of demonstration or a rental?"

Ms. J--- A--- C--- A---

-2-

January 23, 1995
330.3429

S--- is providing some of its customers with the use of an espresso machine for a trial period in exchange for a "per cup served" charge. We regard this type of transaction as a lease of tangible personal property (Rev. & Tax. Code § 6006.3) and assume that S---'s $0.25 per cup charge ($0.40 per cup charge less the $0.15 charge for coffee beans) approximates the fair rental value of the espresso machine. (If this assumption is incorrect, our opinion would be different.) This transaction does not qualify as demonstration or display within the meaning of Sales and Use Tax Regulation 1669 since S---'s customers are making payments for their use of the machines. As such, the key issue is how tax applies to S---'s lease of this equipment and what is the measure of tax. The lease of tangible personal property in California is a continuing sale unless the lessor leases it in substantially the same form as acquired and has made a timely election to pay California sales tax reimbursement or use tax measured by the lessor's purchase price of the property. (Rev. & Tax. Code §§ 6006(g)(5), 6006.1, 6010(e)(5), 6010.1.) A lease that is a continuing sale is subject to use tax measured by rentals payable. (Reg. 1660(c)(1).) The lessee owes the tax and the lessor is required to collect it from the lessee and pay it to this Board. (Rev.
& Tax. Code §§ 6202, 6203, 6204; Reg. 1660.)
You state that S--- does not pay sales tax reimbursement or use tax on the purchase price of its espresso machines. This means that S---'s lease of the espresso machines on a trial basis constitutes a continuing sale to its customers. As such, S--- is required to collect, and remit to this Board, use tax from its customers measured by the rentals payable. "2. If so, how is the tax calculated? Can it be based on the fee per cup as described or must it be based on the cost of the machine to the importer?" The tax imposed on S---'s lessees is a use tax measured by rentals payable. (Reg. 1660(c)(1).) This means that S---'s lessees owe tax measured by the per cup served charge for use of the espresso machines. Our understanding is that $0.25 of the per cup charge is for use of the espresso machine and $0.15 is for S---'s sale of coffee beans to the customer. If so, S---'s sale of the coffee beans is either a nontaxable sale for resale (Rev. & Tax. Code §§ 6007, 6051) or, if the customer consumes the coffee beans, an exempt sale of food products (Rev. & Tax. Code § 6359; Reg. 1602). Based on this understanding, $0.25 is the taxable rentals payable from S---'s lease of the espresso machine. "3. Can these rental receipts be included in any offset against cost if lessor makes use of this equipment other than leasing or demonstration or display, as described in Page 12 of your Pamphlet No. 46?" Sales and Use Tax Regulation 1660(c)(6) provides: "If a lessor, after leasing property and collecting and paying use tax, or paying

Ms. J--- A--- C--- A---

-3-

January 23, 1995
330.3429

sales tax, measured by rental receipts, makes any use of the property in this state, other than incidental use, he or she is liable for use tax measured by the purchase price of the property. He or she may, however, apply as a credit against the tax so computed, the amount of tax previously paid to the board with respect to rentals of the property. If the credit is less than the tax, he or she must pay the difference with his return, but, may apply the amount of such payment against his or her liability for tax on subsequent rentals of the property...." This means that S--- may apply the tax collected and paid on the rentals payable of an espresso machine against the tax it owes (use tax measured by the purchase price of the espresso machine) when it uses the machine, other than for incidental use, after leasing it to a customer. If S--subsequently leases the machine again, the rentals payable from the machine are subject to tax as explained in the provision quoted above. "4. If lessor does not collect tax if due, can the lessee using the machine be responsible to report any pay such tax?" The person actually owing the tax is the lessee. (Rev. & Tax. Code § 6202; Reg. 1660(c)(1).) Thus, if S--- fails to collect this tax, S---'s lessees are responsible to report and pay tax to the Board. Nevertheless, as the lessor, S--- is required to collect the applicable use tax from its lessees and pay it to this Board. (Rev. & Tax. Code §§ 6202, 6203, 6204; Reg. 1660.) S--- cannot delegate its duty to collect and remit this tax to its customers. "5. Does the time period involved or the lack of any written contract make any difference?" Under the facts of your letter, the length of the trial use period or existence of a written contract between S--- and its customer(s) does not affect the application of tax as set forth above.

If you have any further questions, please write again.
Sincerely,

Warren L. Astleford
Staff Counsel
WLA:plh
cc:

--- District Administrator - --