Was a $300 return-shipping charge taxable when a California sublessee returned equipment to the out-of-state prime lessor?

Plain-English summary

A redacted California business's absent June 29 and October 30, 1989 letters described equipment it would lease from a New Jersey supplier, sublease in California, and charge $300 to ship back to the supplier when the sublease ended. Senior Tax Counsel gave three conditional answers.

First, if the property was leased in substantially the same form as acquired and the New Jersey supplier reported California tax measured by purchase price, no further tax was due on any amount under the sublease. Sections 6006(g)(5), 6010(l)(5) and regulation 1660(c)(5) supported that scenario.

Second, even if the property was not leased in the same form or purchase-price tax had not been paid, the $300 charge itself was not taxable if the New Jersey supplier collected and periodically reported California tax on the prime-lease rent. The letter does not extend that sentence to every other sublease amount.

Third, if the California business gave the supplier a valid resale certificate and periodically reported tax on sublease rent, the return charge turned on choice. It was nontaxable if the sublessee could provide its own transportation, but taxable under sections 6011(b)(1), 6012(b)(1) and Annotation 295.1690 if the contract required payment to the sublessor for shipping.

The letter enclosed absent Tax Tips Pamphlet No. 46, reportedly containing regulation 1660 and a page-7 comment under “Return Transportation Charges.” It supplies no property, lease, sublease, invoice, certificate, purchase-price or periodic-tax record, transaction, return shipment, audit or later outcome.

Live Annotation 330.3590 accurately states the third scenario for taxable sublease receipts, optional customer-arranged transportation and contract-required shipping. It omits the first two scenarios and missing-record limits.

Common questions

Is every end-of-lease transportation charge taxable?

No. This opinion distinguished optional transportation from a mandatory lease charge.

What if tax was already paid under the prime lease?

If the supplier reported purchase-price tax on qualifying same-form property, the letter said no further tax was due on any sublease amount. If the supplier instead reported periodic prime-lease tax, it said the $300 charge was not taxable.

What made the $300 charge taxable?

The sublease had to require the customer to pay the sublessor for return shipping, and the underlying sublease rentals had to be taxable.

Did the letter verify a resale certificate or tax reports?

No. Those were conditional assumptions; the underlying documents and transactions are absent.

What did Annotation 295.1690 contribute?

The letter cited it when treating mandatory shipping as taxable. The annotation's stated rule concerns services a purchaser must pay for as a purchase or functional-use condition; it is not itself titled as a return-transportation ruling.

Was Tax Tips Pamphlet No. 46 published with the opinion?

No. The letter says it enclosed the pamphlet and points to a page-7 comment, but the enclosure is absent.

Citations and references

• Revenue and Taxation Code sections 6006(g)(5) and 6010(l)(5) — same-form property and prime-lessor purchase-price tax scenario
• Regulation 1660(c)(5) — prime-lease and sublease tax treatment
• Revenue and Taxation Code sections 6011(b)(1) and 6012(b)(1) — mandatory return charge
• Annotation 295.1690 — service required as a purchase or functional-use condition, cited for mandatory shipping
• Tax Tips Pamphlet No. 46 and page-7 Return Transportation Charges comment — enclosed but absent
• Live Annotation 330.3590 — taxable-rent option/condition rule dated November 15, 1989
• Requests, contracts, property, certificate, tax records, transactions, shipment, audit and outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3590
• Original supporting opinion: 330.3590 PDF
• Cited supporting opinion: 295.1690 PDF

Original ruling text

330.3590

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-8485

November 15, 1989

J--- B--B--- D--- C---, Inc.
XXX ---, Suite ----- ---, CA XXXXX
B--- D--- C--- - SR -- XX-XXXXXX
Dear J--- B---:
This is in response to your letters of June 29, 1989 and October 30, 1989. We apologize for not corresponding with you sooner and regret any inconvenience caused by our delay. We understand that you will be leasing equipment from a New Jersey supplier. You will then sublease the equipment to a sublessee in California. Upon termination of the sublease, you will charge the sublessee $300 to ship the goods back to the New Jersey supplier. You wondered whether the aforementioned $300 charge was subject to California sales or use tax. The answer to your question depends on several variables. First, if we assume that the property in question is leased in substantially the same form as it was acquired in, and, your New Jersey supplier reported tax to California based upon the purchase price of the property, then no further tax would be due on any amount under the sublease arrangement (See Rev. & Tax. Code §§ 6006(g)(5), 6010(l)(5); Reg. 1660(c)(5)). Second, even assuming the property was not leased to you in substantially the same form as acquired or tax had not been paid based on the purchase price, you, nevertheless, would still not be subject to tax based on the $300 charge if the New Jersey supplier was collecting and reporting tax to California periodically under the prime lease (see Regulation 1660(c)(5)). On the other hand, if you gave the New Jersey supplier a valid resale certificate and thereafter reported tax periodically under the sublease, the answer would depend on whether the
$300 charge was mandatory or optional. If the subleasee has the option to provide his/her own return transportation, the charge would not be taxable. However, if the sublessee, as a condition of the sublease, is required to pay you to ship the goods, the $300 charge would be taxable (see Rev. & Tax. Code §§ 6011(b)(1), 6012(b)(1); BTLG Anno. 295.1690).

Jan Burg

-2-

November 15, 1989
330.3590

We are enclosing Tax Tips Pamphlet No. 46 relating to leasing of tangible personal property. This pamphlet relates to the general subject matter of your question and contains a copy of Regulation 1660, cited above. Please note the comment following the heading “Return Transportation Charges” on page 7 of the pamphlet. Very truly yours,

E. L. Sorensen, Jr.
Senior Tax Counsel

ELS:jb
Enclosure
bc:

San Jose District Administrator