When could separately charged operator or maintenance services be excluded from taxable equipment rent?

Plain-English summary

The October 5, 1965 Tax Counsel letter supplied seven numbered answers to an absent August 23 request discussed at a September 13 conference with railroad-company representatives and others. Live Annotation 330.3560 publishes only the service and maintenance rules from answers 6 and 7.

Answer 6 distinguished a service from a rental through the contract, possession and control. When the provider kept equipment entirely under its control while performing a service—particularly one authorized and regulated by government—the arrangement apparently was a service even though equipment was used. A contract specifying rental, or property passing into the other party's possession, was a rental.

For a rental, separately charged driver or personnel services could be excluded from the tax measure when buying them was optional for the customer.

Answer 7 applied similar considerations to maintenance. If the lease required the lessee to buy maintenance, the opinion treated all receipts as taxable. If maintenance was optional, a separate charge could be excluded from taxable rental payments.

The other answers provide source context but are not authority for the service and maintenance conclusions. Answer 1 excluded trailers or containers used with flat cars—piggyback equipment—from “rail freight cars” under section 6368.5; a printed asterisk has no footnote in the PDF. Answer 2 treated leased property situated in California as a continuing sale under section 6006.1 regardless of initial delivery and reasoned that Ruling 55(B) appeared to prevent use tax on the described interstate use, while section 6390 then produced sales tax. Answers 3–4 said the 90-day rule did not apply to leased property and repeated the sales-tax framing.

Answer 5 said Principal Tax Auditor Hal Dickson would consider allocation accounting problems and that district staff should review available records to find a reasonably accurate basis and satisfactory formula. No records, formula, follow-through or outcome appears.

The source publishes no underlying questions, conference record, contracts, equipment or movement records, governmental authorization, service or maintenance elections, separate charges, allocations, return, audit, claim or later result. The live annotation accurately generalizes answers 6–7 but supplies none of that missing evidence.

Common questions

Does using equipment automatically turn a service contract into a rental?

No. The source emphasized who possessed and controlled the equipment while the work was performed.

Could a separately charged driver or operator be excluded?

Yes, when purchasing that additional service was optional for the customer.

What if maintenance was required by the lease?

The opinion included the entire receipts in the taxable amount.

What if maintenance was optional?

A separate charge for the optional maintenance could be excluded from taxable rental payments.

Did the letter apply those rules to a particular service or maintenance contract?

No. The underlying questions and contracts are absent, and answers 6–7 state general rules.

What did the other five answers concern?

Piggyback equipment, California continuing-sale treatment of interstate leases, the historical 90-day rule, sales versus use tax, and a proposed review of allocation records.

Was the proposed allocation method completed?

Not in the published source. Answer 5 anticipated record review and a satisfactory formula but shows neither.

What does the asterisk after answer 1 mean?

The PDF does not say; no corresponding footnote appears.

Citations and references

• Answers 6 and 7 — service, control, possession, optional-personnel and maintenance rules; no numbered statute or regulation is cited for these answers
• Revenue and Taxation Code section 6368.5 — historical rail-freight-car category in answer 1
• Revenue and Taxation Code section 6006.1 — continuing California sale in answer 2
• Historical Sales and Use Tax Ruling 55(B) — apparent interstate-use use-tax treatment in answers 2 and 4
• Revenue and Taxation Code section 6390 — sales-tax result if rental was outside the use-tax measure in answer 2
• Live Annotation 330.3560 — generalized answers 6–7 dated October 5, 1965
• August 23 request, conference record, contracts, records, allocation formula, implementation and later outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3560
• Original supporting opinion: 330.3560 PDF

Original ruling text

STATE OF CALIFORNIA

330.3560

STATE BOARD OF EQUALIZATION

October 5, 1965

--- --- ----- --- ----- --- --Gentlemen:
This is in reply to your letter of August 23, 1965, which was discussed at our conference on September 13 in this office, with a number of representatives of railroad companies and others. We shall number our answers to correspond to the numbers of the different questions asked. 1. It is our opinion that trailers or containers used in conjunction with flat cars, e.g., piggyback equipment, are not within the category of “rail freight cars”, as that term is used in Section 6368.5 of the Sales and Use Tax Law. * 2. Under the provisions of Section 6006.1, it is our opinion that the granting of possession of tangible personal property by a lessor to a lessee is not limited to the initial delivery, but is a “continuing sale in this state” as respects any period of time the leased property is situated in this state “irrespective of the time or place of delivery of the property to the lessee.” The last quoted words from Section 6006.1 appear to us to indicate the legislative intent that the lease is a continuing sale while the property is in this state, even though the initial grant of possession had taken place outside the state. The fact that the equipment is in use in interstate commerce when it enters the state and remains in such use while in the state does not, in our opinion, necessarily prevent the application of the use tax under the Constitution, although under Ruling 55(B) the use tax would appear to be inapplicable. But, if the use tax is considered not to apply, the sales tax would apply in view of the provisions of Section 6390 which exempts rentals from the sales tax only when such rentals are required to be included in the measure of the use tax. 3. In our opinion the application of the tax is the same as to equipment used by the lessee more than 90 days outside California before being brought into California. The so-called 90-day rule we believe to be without application to leased property. 4. Because the sales tax, rather than the use tax is, in our opinion, the applicable tax, we are not concerned with the fact that the lessee is using the property in interstate commerce, even assuming that he would be immune from the use tax under Ruling 55(B).

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October 5, 1965
330.3560

5.
Mr. Hal Dickson, Principal Tax Auditor, who attended the conference on September 13, will consider the accounting problems involved in making an allocation and indicated at the hearing that it would be helpful for our district office personnel to review the available records to determine what basis exists for a reasonably accurate allocation. I am sure he will follow through on this to the end that some formula or plan may be devised which will be satisfactory to all concerned. 6. We agree that where the contract is for the rendition of a service as distinguished from a rental of tangible personal property, the tax would not be applicable to the amounts paid to the person providing the service. This would be true even though in performing the service, use of equipment is involved. If the use of the equipment is entirely under the control of the person furnishing the service, particularly if the furnishing of such service is authorized by appropriate governmental agencies and is subject to their regulations, apparently only a service is being performed. Where, however, the contract specifies that there will be a rental of certain property or where property passes into the possession of the other party to the contract, there is a rental. If it is optional for the customer to purchase the services of a driver or other personnel, we believe a separate charge for such additional services could be excluded from the measure of the tax. 7. Considerations similar to those mentioned under No. 6 would apply in determining whether charges for maintenance of equipment may be separated from rental payments. If maintenance is a condition of the lease, i.e., it is mandatory that the lessee purchase such maintenance, we believe the entire receipts are taxable. If the maintenance is optional with the lessee, separate charges for such optional maintenance could be excluded from the amount of rental payments subject to tax. Very truly yours,

E. H. Stetson
Tax Counsel

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