Could an automobile lessor claim a tax-paid-purchases-resold deduction for gasoline its lessee bought as the lessor's agent under a wet rental?

Plain-English summary

An absent August 2, 1972 Out-of-State Auditing memorandum asked about lessors reporting tax on wet-rental receipts. Lessees bought tax-paid gasoline during the lease and received credits or reimbursements from the lessors.

Operations Memo 434, dated June 30, reportedly required the lessee to pay sales tax to the service-station dealer despite later lessor reimbursement. Tax Counsel allowed a tax-paid-purchases-resold deduction when the lessor furnished that fuel to the lessee. The operations memo itself is absent.

An absent rental agreement supplied by the New York office expressly made the customer the lessor's agent “for the purchase of necessary fuel” in page 1, paragraph 2 of Terms and Conditions. Counsel required appropriate substantiation records and allowed the deduction even though the vehicle lease itself produced use-tax liability for the lessee.

The source acknowledged a possible implication in California Tax Service Annotation 330.0700 that the lessor did not sell fuel unless the gasoline charge was segregated, but still allowed the deduction. It cited an absent November 24, 1965 Philip R. Dougherty letter. An editorial footnote marks 330.0700 “No longer an annotation. SPJ 12/22/00,” without further history.

The live annotation expressly includes gasoline reimbursements credited to the lessee in the rental tax measure, then allows the deduction because the lessee bought as agent and the dealer's sale was to the lessor for resale. The PDF focuses on the deduction and agency facts rather than separately stating the credited-amount measure rule.

No request, operating memo, agreement, vehicle, fuel receipt, service-station tax, reimbursement, credit, deduction record, rental-tax report, audit or later outcome appears.

Common questions

Was the gasoline credit excluded from the rental measure?

No. The annotation says the credited reimbursement remained included in the measure of tax on the rental.

Why could the lessor still claim a deduction?

The lessee bought the fuel as the lessor's contractual agent, and the lessor then furnished that tax-paid fuel under the wet rental.

Did the lessee avoid tax at the service station?

No. The quoted operating instruction said the lessee paid sales tax even though the lessor later reimbursed the purchase.

What proof did the lessor need?

Appropriate records substantiating the tax-paid-purchases-resold deduction.

What did the agreement say about agency?

Page 1, paragraph 2 of Terms and Conditions reportedly made the lessee the lessor's agent to purchase necessary fuel. The agreement is absent.

Did the memorandum require the gasoline charge to be segregated?

No. It allowed the deduction despite a possible contrary implication from historical Annotation 330.0700.

Is Annotation 330.0700 still an annotation?

The PDF's editorial footnote says no as of December 22, 2000 and gives no additional history.

Were fuel receipts or deduction records published?

No. The memorandum instructs lessors to retain proof but supplies none.

Citations and references

• Operations Memo 434 (June 30, 1972) — quoted instruction that a wet-rental lessee pays sales tax on fuel despite reimbursement
• Rental agreement, Terms and Conditions page 1, paragraph 2 — lessee purchasing agency, quoted but absent
• Historical Annotation 330.0700 — possible segregation implication; marked no longer an annotation on December 22, 2000
• November 24, 1965 Philip R. Dougherty letter — additional support, cited but absent
• Live Annotation 330.3630 — fuel credit in rental measure, agency resale and deduction result dated September 26, 1972
• Request, vehicle/fuel/tax/credit/deduction evidence, rental-tax reports, audit and later outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3630
• Original supporting opinion: 330.3630 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Out-of-State – Auditing (DMA)

From:

Tax Counsel (GJJ) - Headquarters

330.3630

Date:

September 26, 1972

This is in response to your memorandum of August 2, 1972, in which you raise a question as to whether persons who lease automobiles on a “wet rental” basis and who are reporting tax on rental receipts are entitled to tax-paid purchases resold deductions in instances where lessees of the automobiles are given credit (i.e., are reimbursed) for tax-paid gasoline purchased by the lessees during the period of the lease. You refer us to Operations Memo 434, June 30, 1972, which provides that: “When a lessee on a ‘wet rental basis’ purchases gasoline, he shall pay sales tax to the service station dealer even though he will be reimbursed by the lessor.” We are of the opinion that the lessor may take a tax-paid purchases resold deduction with respect to his furnishing of the tax-paid gasoline to the lessee in the instance under consideration. The --- rental agreement furnished to us by our New York office specifically provides that the customer (lessee) is ---’s agent “…for the purchase of necessary fuel…” under “wet rental” leases. (Agreement, page 1, paragraph 2 of “Terms and Conditions.”) Lessors should retain appropriate records to substantiate their deductions. We note that it is our opinion that a tax-paid purchases resold deduction is proper here even though the basic tax liability with respect to the lease of the vehicle itself is a use tax liability on the part of the lessee, and notwithstanding any possible implication of CTS Anno. 330.0700 that the lessor is not selling the fuel to the lessee unless the gasoline charge is segregated.
[See Mr. P. R. Dougherty’s letter of November 24, 1965, to Mr. L--- D. K---, Attorney for C--- A---, Inc. (SR -- XX XXXXXX.)]
No longer an annotation. SPJ 12/22/00.
GJJ/ab
cc:

Mr. Robert Nunes
New York