Was a mandatory $300 vehicle-lease termination fee excluded from taxable rent as a disposal or payoff-processing charge?
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This page answers the general question as of 1994. Ask about yours and see what current California tax law says, with citations.
Plain-English summary
A redacted vehicle lessor's April 12, 1994 request followed a Board letter dated April 16, 1990. The earlier letter had lacked enough information to decide whether a “termination fee” covering processing fell outside the general rule for required lease payments; it requested the lease provision and a fuller processing-fee description. Neither letter is reproduced.
The lessor then enclosed an absent blank vehicle lease. Highlighted section 13a required a $300 termination fee at the end of the term. The lessor said customers were told it covered returned-car disposal or lease-payoff processing. Section 8b separately stated a $150 purchase-option fee plus other amounts; the prior letter reportedly had treated those amounts as taxable, but its reasoning is absent.
Continuing-sale leases were subject to use tax measured by rentals payable. Regulation 1660(c)(1) included required lease payments subject to exceptions in subdivisions (A) through (F). Subdivision (D) excluded amounts a lessee paid the lessor for the lessor's cost of disposing of property at expiration or early termination.
The letter said experience showed a termination fee was usually an additional final rental payment. The lessor did not identify the actual disposal costs associated with its fee. Payoff-processing costs were overhead that could not be deducted from taxable rent even if separately itemized. Based on the supplied information, counsel taxed the fee.
The PDF includes no lease, correspondence, disposal invoices or computations, fee communications, vehicle transactions, returns, payments, audit or later result. Live Annotation 330.3575 matches the final-rent and payoff-overhead rules and adds “Am. 2008-1,” but supplies no amendment text or history.
Common questions
Was every lease-end fee taxable?
Not necessarily; substantiated disposal costs can fall within the regulatory exclusion.
Did this $300 fee qualify?
No, based on the information provided.
Was payoff processing a nontaxable disposal cost?
No. The opinion treated it as overhead.
What did the earlier 1990 letter decide?
It reportedly lacked enough information to decide the termination-fee issue, asked for the lease and a fuller fee description, and treated the separately highlighted $150 purchase-option fee plus other amounts as taxable. The letter itself is absent.
Was the actual lease published?
No. The source describes a blank agreement and highlighted sections 13a and 8b but does not reproduce them.
What does the 2008-1 amendment marker change?
The live page does not say. It marks Annotation 330.3575 amended in 2008-1 but links only the 1994 letter and gives no amendment history.
Does the source establish the fee's actual use or a later outcome?
No. There are no disposal-cost records, transactions, tax records, audit findings or later action.
Citations and references
- Regulation 1660(c)(1) — required lease payments and subdivisions (A) through (F) exceptions
- Regulation 1660(c)(1)(D) — lessee payments covering lessor disposal costs at expiration or early termination
- April 16, 1990 Board letter — insufficient-information response and prior purchase-option-fee advice, described but absent
- Live Annotation 330.3575 — June 10, 1994 result plus unexplained “Am. 2008-1” marker
- April 12 request, blank lease, highlighted sections, disposal proof, communications, transactions, tax records, amendment history and later outcome — absent
Source
- Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
- Annotation page: Annotation 330.3575
- Original supporting opinion: 330.3575 PDF
Original ruling text
330.3575
STATE OF CALIFORNIA
STATE BOARD OF EQUALIZATION
MEMBER
First District
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-2641
BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles
June 10, 1994
GRAY DAVIS
Controller, Sacramento
────────
BURTON W. OLIVER
Executive Director
---Re: --Dear Ms. ---:
I am responding to your letter of April 12, 1994. You inquire about a lease that is a taxable continuing sale. We wrote a previous letter to you, dated April 16, 1990, regarding the tax applicable to such leases. Our letter stated that we did not have enough information to ascertain whether a charge you called a "termination fee" to cover processing fees came within the exception to the general rule that all payments required by the lease are taxable rentals payable. Our letter indicated that, if you had further questions on this issue, you should send us a copy of your lease containing the termination fee provision and that you should more fully describe the processing fee to which the termination charge relates. You have responded by enclosing a copy of a blank vehicle lease agreement, and you have highlighted section 13a which requires the payment of a termination fee. You state that you explain to your customers that the termination fee is to cover your costs associated with disposing of the returned car or processing the lease payoff. (You have also highlighted section 8b, which is a purchase option fee of $150 plus other amounts. In our previous letter, we advised you that such amounts are subject to tax.) As you know, leases which are continuing sales are subject to use tax measured by rentals payable. The taxable rentals payable include any payments required by the lease, with certain exceptions stated in subdivisions (A) through (F) of Regulation 1660(c)(1). Subdivision (c)(1)(D) provides that amounts paid to the lessor by the lessee for the cost incurred in disposing of the leased property at expiration or earlier termination of the lease are not subject to use tax. Section 13a of your lease contract requires the lessee to pay you a "termination fee of
$300" at the end of the lease term. Our experience is that a "termination fee" is usually merely an additional final rental payment. Such a fee would be subject to tax. You indicate that you
Ms. ---
-2-
June 10, 1994
330.3575
advise your lessees that the fees may be to cover your costs associated with disposing the returned cars. However, you have not advised us what the actual disposal costs are to which these fees relate. Further, you state that you also indicate to your lessees that the fees may relate to processing the lease payoff. Charges passed on to your lessees relating to processing the lease payoff are merely overhead expenses which cannot be deducted from the taxable rentals, whether separately itemized or not. Based on the information you have provided, we conclude that the fees about which you inquire are subject to tax. If you have further questions, please feel free to write again. Very truly yours,
Victor G. Matl
Tax Counsel
VGM:plh
---
cc:
San Francisco District Administrator - BH
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