Was a lessee's payment of personal property tax on leased equipment additional taxable rent when the lease shifted the owner's obligation to the lessee?

Plain-English summary

A redacted taxpayer manufactured personal property and leased it to various California lessees. Its contracts required lessees to bear all taxes levied against the property. Depending on the assessment, the lessee paid directly or the lessor paid for the lessee's account and then collected from it.

The December 8, 1968 request and every agreement, property, assessment, amount and payment record are absent.

Sections 6006, 6006.1 and 6010 applied sales and use tax to the continuing sale or lease. Sections 6011 and 6012 defined sales price and gross receipts as the total sale, lease or rental price valued in money or otherwise. The opinion therefore included the property-tax increments in taxable receipts.

Section 405 allowed the assessor to assess property on March 1 to people owning, claiming, possessing or controlling it. Counsel agreed either lessor or lessee could be assessed, but separated that administrative choice from ultimate liability.

Citing Hammond Lumber Co. v. Los Angeles, the opinion said a landlord-tenant relationship alone ordinarily imposed no duty on the tenant to pay property tax absent contrary agreement. It used Caldwell v. Moore and Kentucky Farm and Cattle Co. v. Williams for the proposition that statutory assessment to a tenant could facilitate collection without shifting the owner's ultimate liability.

Thus the owner-lessor bore ultimate liability despite possible assessment to the lessee. When the contract made the lessee pay, directly or indirectly, the lessee discharged the lessor's obligation. That was additional payment for use and part of sales price or gross receipts.

Counsel rejected an analogy to optional maintenance. The lessor argued that a lessee's Schedule F property statement let the lessee request assessment in its own name, but that choice did not bind the assessor. Payment of the tax was not optional in the relevant sense.

The letter recognized difficulty determining how much tax lessees paid. Mr. Costa reportedly made an approximate audit calculation that the taxpayer's controller agreed was fair, and counsel enclosed the conclusions and calculations. The audit work, calculation, controller confirmation and enclosure are absent; the letter requests a response but shows none.

Live Annotation 330.3535 matches the rule and adds its express limit: the result applies only when rental receipts are otherwise taxable. It supplies none of the missing contract, assessment, amount, audit or outcome evidence.

Common questions

Did it matter whom the assessor named?

No. The opinion distinguished assessment convenience from ultimate owner liability.

What did section 405 control?

Who could be assessed on March 1: persons owning, claiming, possessing or controlling the property. The opinion said that did not decide ultimate liability between lessor and lessee.

Was direct payment by the lessee outside rent?

No. Direct or reimbursed payment discharged the lessor's obligation under the stated rule.

Was the payment like optional maintenance?

No. The source said the assessor—not the lessee—controlled whom to assess, and the tax itself was not optional.

What was the Schedule F argument?

The lessee could ask on its property statement to be assessed as possessor, but the assessor was not bound by that request.

Was an actual tax amount established?

Not in the published source. It mentions an approximate audit calculation accepted as fair by the controller, but the calculation and supporting records are absent.

Did the rule apply if the underlying rent was nontaxable?

No according to the official annotation's express limitation.

Does the source show the taxpayer's response or a later outcome?

No. Counsel invited comments or an alternative after review of the missing enclosure, but no response or later action appears.

Citations and references

• Revenue and Taxation Code sections 6006, 6006.1 and 6010 — continuing taxable lease provisions
• Revenue and Taxation Code sections 6011 and 6012 — total sales-price and gross-receipts definitions
• Revenue and Taxation Code section 405 — March 1 assessment to persons owning, claiming, possessing or controlling property
• Hammond Lumber Co. v. Los Angeles (1936) 12 Cal. App. 2d 277 — landlord-tenant duty absent agreement
• Caldwell v. Moore (1849) 11 Pa. 581 — tenant-name assessment as collection mechanism without shifting owner liability, as cited
• Kentucky Farm and Cattle Co. v. Williams (1956) 140 Fed. Supp. 449 — cited with Caldwell; “Fed. Supp.” is preserved exactly as the official PDF prints it
• Live Annotation 330.3535 — payment result plus otherwise-taxable-rent limitation
• December 8 request and every agreement, property, statement, assessment, amount, payment, audit, calculation, controller and outcome record — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3535
• Original supporting opinion: 330.3535 PDF

Original ruling text

STATE OF CALIFORNIA

330.3535

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

February 24, 1969

“Taxpayer”

Gentlemen:
Sections 6006, 6006.1, and 6010 of the Sales and Use Tax Law make the sales and use taxes applicable to gross receipts or the sales price on the continuing sale (lease) of personal property. Sales price and gross receipts are defined in Sections 6011 and 6012, respectively, as the “total amount of the sale or lease or rental price, valued in money, whether received in money or otherwise”. Taxpayer leases personal property it has manufactured to various lessees within the state. The terms of taxpayer’s lease agreements provide that all taxes levied against the property will be borne by the lessee. In practice, these taxes are either paid directly by the lessee or are paid by the taxpayer for the account of the lessee, and thereafter collected, depending on how the tax is assessed. The question raised by you in your letter of December 8, 1968, is whether under these facts those increments of property tax are additions to the sales price or gross rents and are, therefore, subject to sales or use tax. It is the state’s position that those increments are subject to tax. The rationale that applies the sales or use tax to the property tax rests on the theory that the property tax is a liability of the owner-lessor, and that the discharge of this obligation by the lessee, either directly or indirectly, is an additional component of rent. We realize that the liability for the property tax, in terms of who shall be assessed for it, is covered by Section 405 of the Revenue and Taxation Code. Section 405 provides that the assessor shall assess all taxable property on the first day in March to the “persons owning, claiming, possessing or controlling it”. We agree with your conclusion that the assessor can assess either the lessor or the lessee of the property. However, this does not answer the question of who is primarily liable for the tax. The general rule is that in the absence of a contrary agreement, the mere relationship of landlord and tenant ordinarily gives rise to no duty requiring the lessee to pay taxes and assessments levied against the leased property (see Hammond Lumber Co. v. Los Angeles (1936) 12 Cal. App. 2d 277.) Accordingly, the ultimate liability for payment of taxes is on the owner and not the lessee. This is so even if a statute allows assessment to the lessee. In Caldwell v. Moore (1849) 11 Pa. 581, the court pointed out that a statute permitting assessment in the name of the tenant was for the purpose of merely

“Taxpayer”

-2-

February 24, 1969
330.3535

facilitating the recovery by the state of its taxes and would not alter the ultimate liability of the owner for the payment of them (see Kentucky Farm and Cattle Co. v. Williams (1956) 140 Fed. Supp. 449). In view of the foregoing, it is our opinion that the ultimate liability for the payment of taxes is that of the lessor, notwithstanding the fact that the statute authorizes that the lessee may be assessed. It is true that the lessor can, by contract, require the lessee to pay the taxes; however, without such stipulation the responsibility would ultimately be the lessor’s. It is clear from this that when the lessor does so contract with the lessee, he is assuming a liability of the lessor’s and this assumption is part payment for the use of the leased property and is part of the sales price or gross receipts. We do not agree with your position that the tax payments are similar to optional maintenance contracts. I understand that you contend that the lessee, by virtue of preparing the personal property statement, particularly schedule F, has an option of paying the taxes directly to the taxing authority, by indicating that the assessment of possessed property be made in the name of lessee, rather than the lessor (taxpayer). The “option”, however, is not binding upon the assessor since he may assess either the lessor-owner or the lessee-possessor. In this sense, the payment of the taxes is not optional to the lessee. I realize that there will be some practical problem arising from this conclusion because of the difficulty in determining what amount of taxes the lessee pays. However, Mr. Costa informed me that in his audit he made an approximate calculation in which your controller agreed was fair. I am enclosing his conclusions and calculations. After reviewing these conclusions, please let us know if they are satisfactory and if you have any suggestions, or if it is not satisfactory, if you have an alternative. Very truly yours,

Glenn L. Rigby
Tax Counsel

GLR:kc