Was a temporary no-cash computer-equipment loan a taxable lease when the developer supplied marketing access, ads and reverse royalties?

Plain-English summary

A redacted computer manufacturer and software developer reportedly used a joint-marketing program to promote and sell each other's products. The manufacturer supplied equipment without a cash charge for trade shows and customer sites under agreements usually lasting no more than 18 months. It reportedly kept the equipment in inventory without depreciation, then returned it to inventory for sale.

An absent March 18, 1994 request attached excerpts from the joint-marketing and equipment-loan agreements. Absent Exhibit H reportedly gave the manufacturer a Manufacturing Advisory Council seat, no-additional-charge participation in a Financials User group, a full-page ad in four quarterly magazine editions, and 20% of assisted sales under an uncapped reverse-royalty program.

The PDF cites section 6051 for retail-sales tax. It prints section 6021 while describing a complementary use tax on California storage, use or consumption; that number is preserved as the official source prints it rather than silently corrected.

Regulation 1660(a) treated temporary use of tangible personal property for consideration, under the user's direction and control, as a lease. Because the equipment was exchanged for Exhibit H benefits and used by the developer, counsel classified the “loan” as a lease.

Sections 6006(g), 6010(e), 6006.1 and 6010.1 treated a California lease as a continuing sale and purchase with the lessor collecting use tax on rent. Sections 6006(g)(5), 6010(e)(5) and regulation 1660(c)(2) excluded tax-paid property leased in substantially the same form as acquired. The manufacturer instead acquired components and assembled the computers, so that exception did not apply.

Section 6011(a) included the value of all consideration paid to the manufacturer. California tax applied to consideration prorated by in-state use time over total use time; periods used outside California were not continuing California sales.

Live Annotation 330.3629 matches the core lease, assembled-equipment, valuation and California-time result, but calls the loan period 18 months without the PDF's “usually” and “no longer than” qualifiers. No agreements, Exhibit H, regulation enclosure, equipment, components, direction/control evidence, inventory records, use logs, benefit/royalty valuations, tax records, audit or later outcome appears.

Common questions

Did calling the equipment a free loan avoid lease tax?

No. Noncash marketing benefits were consideration.

Why did assembly matter?

The manufacturer acquired components but furnished completed computers, defeating same-form treatment.

Was all consideration taxable when equipment traveled?

No. The opinion prorated it for California-use time.

What exactly did the developer provide?

Reported benefits were a council seat, user-group access, four quarterly full-page ads and an uncapped reverse royalty equal to 20% of assisted sales. Exhibit H is absent.

Was every loan exactly 18 months?

No. The PDF says the agreements were usually no longer than 18 months; the live summary simplifies this to an 18-month period.

Did inventory accounting avoid lease treatment?

No. The request said the manufacturer kept the equipment in inventory, took no depreciation and held it for sale after return, but consideration and developer use still produced a lease.

How was the noncash consideration valued?

The letter says all consideration must be valued and prorated by California use time but provides no figures, method, logs or implemented calculation.

Why is section 6021 listed?

That is the number printed in the official PDF's use-tax paragraph. This page does not silently replace it with a different citation.

Citations and references

• Revenue and Taxation Code section 6051 — sales tax measured by gross receipts from retail sales
• Source-printed Revenue and Taxation Code section 6021 — use-tax description; printed number preserved unresolved
• Regulation 1660(a) — temporary directed or controlled use for consideration as a lease
• Revenue and Taxation Code sections 6006(g), 6010(e), 6006.1 and 6010.1 — continuing lease framework
• Revenue and Taxation Code sections 6006(g)(5), 6010(e)(5) and regulation 1660(c)(2) — tax-paid same-form exception
• Revenue and Taxation Code section 6011(a) — value of all consideration
• Joint-marketing agreement Exhibit H — council, user-group, ad and reverse-royalty benefits, described but absent
• Live Annotation 330.3629 — lease, assembly, consideration and California-time rule dated May 5, 1994
• Request, agreements, equipment, use and value evidence, tax records, audit and later outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3629
• Original supporting opinion: 330.3629 PDF

Original ruling text

330.3629

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 322-2976

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

May 5, 1994

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento

Mr. E--- T--E--- T--- & A--XXXX ---, Suite XXX
---, CA XXXXX
Re:

────────
BURTON W. OLIVER
Executive Director

Application of Tax to Joint Marketing Agreement

Dear Mr. T---:
This is in response to your letter of March 18, 1994 in which you request our opinion as to the application of tax to a computer manufacturer's loan of computer equipment to a software developer for “promotional and demonstration purposes”. You state that the manufacturer and developer enter into a joint marketing agreement, referred to as the S--- A--- C--- P---, whereby the parties actively work to promote and sell each other's products. The manufacturer loans the computer equipment on a temporary, no-charge basis, for use by the developer at trade shows and at customer sites. These equipment loan agreements are usually for a period no longer than eighteen months. During the time that the equipment is on loan to the developer, the manufacturer accounts for the equipment on its books as inventory. No depreciation is taken on the equipment. When the developer returns the equipment, it is returned to inventory where it is held for sale. You also attached excerpts from the joint marketing agreement and the equipment loan agreement. Exhibit H attached to your letter specifies the benefits of the joint marketing agreement to the manufacturer. Under the agreement, the developer provides the manufacturer a seat on the developer's Manufacturing Advisory Council; the developer allows the manufacturer to participate in the developer's Financials User group at no additional charge; the developer provides the manufacturer with a one full page advertisement in four quarterly editions of the developer's magazine at no additional charge to the manufacturer; manufacturer receives “reverse royalty program with 20 percent of assisted sales going to manufacturer”, and the agreement provides that there is no cap on the amount of revenue that the manufacturer can generate via the reverse royalty scheme.

Mr. E--- T---

-2-

May 5, 1994
330.3629

Revenue and Taxation Code section 6051 imposes a sales tax on all retailers measured by their gross receipts from retail sales of tangible personal property. Revenue and Taxation Code section 6021 imposes an excise tax, commonly referred to as the use tax, on the storage, use or other consumption in this state of tangible personal property purchased from any retailer for storage, use, or other consumption in this state. The use tax complements the sales tax and is most frequently imposed upon in-state leases and out-of-state purchases of property for use in California. Regulation 1660(a) (copy enclosed) states that a lease includes a contract under which a person secures for a consideration the temporary use of tangible personal property, which is operated by, or under the direction and control of, the person or his employees. From the facts provided, it appears that the manufacturer is loaning the equipment to the developer for the developer to use in trade shows and at customer sites in exchange for the benefits described in Exhibit H. This transaction is therefore a lease of the equipment. Except as explained below, a lease of tangible personal property in this state is a continuing sale and purchase, and the lessor must collect and pay use tax measured by the rental payments. (Rev. & Tax Code §§ 6006(g), 6010(e), 6006.1 and 6010.1.) However, certain types of leases are not treated as “sales”. Revenue and Taxation Code sections 6006(g)(5) and 6010(e)(5) state that a “sale” and “purchase” do not include a lease of tangible personal property leased in substantially the same form as acquired by the lessor as to which the lessor has paid use tax or sales tax reimbursement measured by the purchase price of the property. As explained in Sales and Use Tax Regulation 1660(c)(2), no sales or use tax is due with respect to the rentals charged for such leases. Since the manufacturer acquired the component parts of the equipment and then assembled them to make the equipment, the property is not being leased in substantially the same form as acquired. Therefore, the lease of the equipment in California is a continuing sale subject to use tax. The use tax due on a lease of tangible personal property is measured by the rentals payable. In the agreement described, the rentals payable would include all amounts paid in exchange for the equipment. That is, the taxable rentals payable from the lease includes the value of all consideration paid to the manufacturer. (Rev. and Tax. Code § 6011(a).)

Mr. E--- T---

-3-

May 5, 1994
330.3629

For any period of time that the equipment is used outside this state, the lease is not a continuing sale in this state. California use tax therefore does not apply to the rentals payable for any portion of the lease term where the developer uses the equipment outside California. If the developer uses the equipment both inside and outside California, use tax applies to the value of all consideration paid to the manufacturer, prorated for the time of use inside California compared to the total time of use. Sincerely,

Sukhwinder K. Dhanda
Staff Counsel
SKD:plh
Enclosure - Regulation 1660
cc:

--- District Administrator - --