Could a plant lessor exclude separately broken-out maintenance when every lease required weekly care?

Plain-English summary

An unidentified individual proprietor began selling, leasing and maintaining plants in the first quarter of 1979. The Board's first audit of the business covered January 1, 1979 through March 31, 1982. A July 14, 1982 determination included tax and interest calculated through that date. The disputed unreported plant-lease receipts had a $37,457 tax measure.

The proprietor protested that the maintenance portion was optional and said a Covina Board office had advised in 1979 that maintenance receipts were exempt. A December 22, 1983 hearing was set after notice sent November 28, but neither the proprietor nor a representative appeared. The hearing officer used the file and audit work papers. The petition, notice, determination and work papers are not reproduced.

The two-page Plant Lease Agreement always stated a lump monthly charge, although payments were not necessarily monthly. Section 4 required feeding, watering, pruning, insect inspection, polishing and other general or special foliage care. Section 7 required weekly service on an agreed day during normal business hours with at least one employee in the building. The plants and containers remained lessor property.

Only the second-page price breakdown separated maintenance from plant-and-container lease amounts. From all available contracts, the auditor found no straight lease without maintenance and no maintenance-only agreement. At a district discussion, the proprietor's accountant did not think any lease omitted maintenance. The staff therefore treated the service as automatic.

The proprietor later supplied letters from three customers calling maintenance optional. The recommendation gave them no weight as after-the-fact, self-serving evidence and noted that customers faced billing for tax on the entire charge.

Section 6006(g) made the lease a continuing sale because none of its five exceptions applied. Section 6011(b)(1) put a service forming part of the sale into sales price. Because the records did not support optional maintenance, the entire required charge was taxable.

The oral-advice claim also failed. The record did not show how the question or answer was phrased. The opinion cited Market Street Railway and Fischback & Moore for the rule that state employees could not estop collection of validly owed tax and that the taxpayer still had to pay from its own funds what would originally have been paid.

Both case reporters resolved during verification. The official PDF prints Market Street Railway without Co. and Fischback & Moore; the reporter records use Market Street Railway Co. and Fischbach & Moore. The official source tail remains unchanged.

The hearing officer recommended redetermination without adjustment. Live Annotation 330.3453 publishes only the mandatory-maintenance taxable-rent result. It omits the audit period and amount, nonappearance, contract clauses, evidence dispute, oral-advice/estoppel issue and recommended disposition. No final Board action appears.

Common questions

Did showing maintenance separately on the form make it optional?

No. The operative agreement required weekly service, and no contrary contract was produced.

Did later customer letters prove optionality?

No. The recommendation gave them no weight because they were obtained after the fact and customers faced tax on the entire charge.

Could alleged oral advice eliminate the tax?

No under the source's analysis. The actual exchange could not be established, and the cited cases rejected estoppel against valid tax collection.

What period and amount were disputed?

The first audit covered January 1, 1979 through March 31, 1982. The measure assigned to unreported plant-lease receipts was $37,457.

What weekly work did the lease require?

Feeding, watering, pruning, insect inspection, polishing and other general or special foliage care during normal business hours.

Did the proprietor attend the hearing?

No. Notice was sent November 28, 1983, but no one appeared for the proprietor at the December 22 hearing.

Was any lease without maintenance produced?

No. The auditor found none among the available contracts and no separate maintenance-only agreement.

What disposition did the hearing officer recommend?

Redetermine without adjustment, leaving the disputed measure unchanged. The source shows no later final Board action.

Citations and references

• Cal. Rev. & Tax. Code § 6006(g) — plant lease as a continuing sale
• Cal. Rev. & Tax. Code § 6011(b)(1) — services that are part of the sale included in sales price
• Market Street Railway v. State Board of Equalization, 137 Cal. App. 2d 87 (1955); Fischback & Moore, Inc. v. State Board of Equalization, 117 Cal. App. 3d 627 (1981) — source-printed names; both reporters resolve, with the name differences disclosed above
• Live Annotation 330.3453 — mandatory plant-maintenance taxable-rent result
• Petition, notice, determination, agreements, work papers, customer letters, advice record, billing/payment records and final Board action — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3453
• Original supporting Decision and Recommendation: 330.3453 PDF

Original ruling text

STATE OF CALIFORNIA
BOARD OF EQUALIZATION

In the Matter of the Petition
for Redetermination of State
and Local Sales and Use Tax;

Petitioner.

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330.3453

DECISION AND RECOMMENDATION

The above-entitled matter was set for hearing on Thursday, December 22, 1983, in Covina, California before Robert H. Anderson. Appearing for Petitioner:

--- --- --- ¹

Appearing for the Board:

Mr. R. Kingsbury
Auditor
Covina Branch Office

Protest
Petitioner was audited for the period from 1-1-79 through 3-31-82, and a determination for tax and interest calculated through July 14, 1982 was issued on July 14, 1982. Petitioner protests the assessment for tax on unreported receipts from leases of plants. The measure of tax is $37,457. Contentions Petitioner contends that the unreported receipts represent charges for maintenance of plants that were leased and that the maintenance agreement was optional. Petitioner contends that in 1979 they inquired at the Covina office of the Board of Equalization about the application of tax on maintenance receipts and were told that such receipts were exempt from tax.

¹ A notice of the time, date and place of hearing was sent to petitioner at the address of record on November 28, 1983. Petitioner did not respond to the notice and no appearance was made by petitioner or anyone to represent petitioner. Thus, this matter is written up based on information in the file and audit work papers.

Petitioner operates an individual proprietorship business that commenced in the first quarter of 1979. Petitioner sells and leases plants and maintains plants that are leased. The audit under consideration in this petition is the first by the Board of Equalization of the business. This controversy is over a charge for maintenance of plants that are leased; no tax was reported and paid on the maintenance portion of the charge for reasons set forth in petitioner's contentions. Petitioner used a two-page "Plant Lease Agreement" form, copies of which are in the audit work papers. Section 2 of the agreement covered the charge and when it is to be paid. The charge was always entered as a lump sum on a monthly basis; payments were not necessarily made monthly, however. Section 3 covered, in general terms, items the lessor agreed to provide. Section 4 provided as follows: The lessor is to maintain all plants, which includes feeding, watering, pruning, insect inspection, polishing and treatment encompassing general care and special treatment of foliage. Section 7 provided as follows: Maintenance service to be conducted once weekly upon a mutually agreeable day during normal business hours, and at least one employee must be in building for services to be rendered. All plants and containers remain the property of --- --- --at all times. The foregoing is the only reference to maintenance in the lease agreement, except on the second page there was a breakdown of the monthly charge between what is billed for maintenance and what is billed for plant and container lease. The auditor examined as many contracts as were made available, and he found no evidence of straight lease contracts without maintenance provisions. Also, he saw no evidence of a separate agreement on maintenance alone. In other words, he saw nothing that would indicate that maintenance was optional to the lessee. At a district level discussion of the audit findings with a --- petitioner's accountant, --- was asked whether there were any lease contracts without the maintenance agreement; he did not think that there were any. Accordingly, the audit staff concluded that the maintenance was automatic and consisted of a service that was provided with the lease (continuing sale) of the plants. Petitioner submitted letters from three customers containing statements that the maintenance on plants they leased was an optional feature. This evidence was noted but was not given any weight because the letters were obtained after the fact and were obviously self serving.

Conclusions
The records petitioner maintained do not support a conclusion that the maintenance feature of the plant leases was optional to the lessees. The letters from three customers appear to be self serving if for no other reason than the fact customers would stand to be billed for tax on the entire monthly charge under the Plant Lease Agreement. The lease is a type of sale (continuing sale) as defined in section 6006(g) of the Sales and Use Tax Law since none of the exceptions under (g) (1) through (5) apply. Accordingly, section 6011 (Sales Price) is applicable. Sales price is defined under the section to mean the total amount for which tangible personal property is sold, leased or rented as the case may be, valued in money, whether paid in money or otherwise ... Subsection (b) (1) of the definition provides that the total amount for which the property is sold or leased or rented includes… "any services that are a part of the sale". This means that the maintenance service is a part of the sale and any charge for the maintenance is part of the sale price. We cannot say with any degree of certainty that petitioner was given erroneous advice about how the tax applied to the lease of plants or the maintenance service feature that was a part of the lease because we do not know: (1) how the question was phrased; and (2) how the answer was phrased. The allegation that petitioner was told that no tax applied to a charge for maintenance services raises the issue of estoppel. This was answered by the Court as long ago as 1955 in the case of Market Street Railway v. State Board of Equalization, (1955) 137 Cal.App.2d 87, and more recently in Fischback & Moore, Inc. v. State Board of Equalization, (1981) 117 Cal.App.3d 627. The courts held that state employees do not have the power to estop the Board from collecting a validly owed tax. It was determined that a taxpayer must pay from its own funds as much as would have been paid originally, but for the erroneous information. Thus, we cannot use petitioner's allegation as a basis for recommending to the Board that there be relief of tax that we conclude is legally owed the State. Recommendation Redetermine without adjustment.

Robert H Anderson, Hearing Officer

Feb 21, 1984
Date

Reviewed for Audit:

Principal Tax Auditor

Date