Were flat monthly video-library membership fees and overdue penalties taxable when apartment residents could borrow unlimited cassettes?

Plain-English summary

An unidentified representative's May 25, 1990 request described a client's machine-based video library at large residential apartment complexes. Residents paid $14.95 monthly for unlimited cassette borrowing. Whether they borrowed 1, 10 or 15 movies, the flat amount stayed the same; overdue penalties discouraged hoarding.

Counsel assumed membership was month to month and one month did not commit the resident to another. The request, identities, program and membership agreements, machines, cassettes, member histories, bills and penalty records are absent.

California treated each actual cassette acquisition from the machine as a lease. Sections 6006(g)(7) and 6010(e)(7) made that private-use lease a sale and purchase. Under Regulation 1660(c), the lessee owed use tax on rentals payable and the lessor had to collect and pay it to the state. The stated regulation enclosure is not reproduced.

If a member borrowed one or more cassettes during a month, the entire flat membership fee was taxable rent regardless of how many titles were borrowed.

If the member borrowed nothing during the month, the fee was not taxable because no property was actually leased; a contractual right to borrow by itself did not transfer possession.

Required overdue penalties were also taxable rentals because the lease agreement required them and they directly related to the cassette lease.

Live Annotation 330.3465 matches the membership, no-borrowing and penalty results. It omits the $14.95 amount, 1/10/15 examples, May 25 request, lessee-liability/lessor-collection mechanics, absent enclosure and missing transaction record. No member-specific tax computation or later outcome appears.

Common questions

Did the number of movies borrowed change the monthly tax?

No. Once any cassette was borrowed, the entire flat monthly fee was rental consideration.

Was a paid month taxable if the member borrowed nothing?

No. The opinion found no actual lease in that month.

Were overdue fees taxable?

Yes. They were amounts required by and directly related to the lease.

Who owed and collected the use tax?

The lessee owed it on rentals payable, and Regulation 1660(c) required the lessor to collect and pay it to California.

What membership term did the opinion assume?

Month to month, with no requirement to remain a member for additional months.

Does the source show any member's bill or borrowing history?

No. It provides the request's description but no agreement, bill, cassette history, penalty record, tax computation or later outcome.

Citations and references

• Cal. Rev. & Tax. Code §§ 6006(g)(7) and 6010(e)(7) — private-use video cassette leases treated as sales and purchases
• Cal. Code Regs., tit. 18, reg. 1660(c) — rentals-payable use tax and lessor collection/payment; enclosure absent
• Live Annotation 330.3465 — membership, no-borrowing and penalty results
• May 25 request and every identity, agreement, machine, cassette, borrowing, billing, penalty, tax and outcome record — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3465
• Original supporting opinion: 330.3465 PDF

Original ruling text

330.3465

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

(916) 445-5550

July 9, 1990

Re:
Dear
This is in response to your letter dated May 25, 1990 regarding the application of tax to charges for rentals of video cassettes. You explain: “ --- is machine based video library program implemented at large residential apartment complexes. Residents pay our client $14.95 per month to be a member of the library. For this monthly membership fee they receive unlimited borrowing privileges from the --- library. Irrespective of whether they borrow 1, 10, or 15 movies in a month, they pay the same flat charge. There is no limit on the number of movies they may borrow. To prevent hoarding of cassettes, there is a penalty fee imposed on overdue items." You ask whether the membership fees or the penalty fees are taxable. I assume that the customer joins this program on a month-to-month basis and may become a member for one month without being required to be a member for additional months. Whenever a member acquires a video cassette from the machine, the member is leasing that video cassette. That is, this program is an arrangement to lease video cassettes. The lease of video cassettes under these circumstances is a sale and purchase under the Sales and Use Tax Law. (Rev. & Tax. Code §§ 6006(g) (7), 6010(e) (7).) The rentals payable from that lease are subject to use tax on the lessee which the lessor must collect and pay to this state. (Subdv. (c) of Reg. 1660, a copy of which is enclosed.) The membership fees are rentals payable from the lease of the video cassettes. Therefore, the membership fees are subject to use tax. The only exception to this is when a member actually borrows no cassettes for the month to which the membership fee relates. The reason for this is that there was actually no lease of tangible personal property during that month since, although the member had a right to borrow the video cassettes, the member never actually did so. Penalty fees are amounts required to be paid by the lease agreement

and directly relate to the lease of the video cassettes. Those penalty fees are rentals payable and are subject to use tax. If you have further questions, please feel free to write again.

Sincerely yours,

David H. Levine
Tax Counsel

DHL:wak 2297C
Enclosure
bc: Oakland District Administrator