Could a chemical-toilet lessor recover acquisition tax even though California required tax on every rental payment?

Plain-English summary

The requester sought a May 1, 1996 legal opinion without identifying any client. Tax Counsel therefore gave general information only and expressly said the clients could not rely on it for Revenue and Taxation Code section 6596.

Regulation 1660(c)(2) generally allowed tax-paid, same-form tangible property to be leased without tax on rent. Chemical toilets were different under section 6010.7: lessors could not elect purchase-price tax and instead had to report and collect use tax on lease payments.

Regulation 1660(d)(1)'s “regardless of whether” acquisition tax had been paid language did not bar relief for an erroneous payment. Regulation 1701 allowed a tax-paid-purchases-resold deduction when someone erroneously paid sales-tax reimbursement or use tax, then sold the property without intervening use. A chemical toilet bought solely to lease was bought for resale.

The deduction belonged on the first return reporting that unit's rental receipts. If omitted, the taxpayer could claim a refund of self-paid use tax that would have been deductible on a timely return, or seek repayment of sales-tax reimbursement from its vendor. The taxpayer itself could not claim a refund of that reimbursement because only the retailer that sold the unit and paid the tax could do so.

A taxpayer that failed to report rents properly and timely could not offset acquisition tax on a later return. If the refund limitations period remained open, it could separately claim self-paid use tax; for sales-tax reimbursement, it again had to go to the vendor.

Live Annotation 330.3635 calls every chemical-toilet lease a taxable continuing sale, bars avoiding rent tax through purchase-price tax and allows a deduction when the lessor pays acquisition tax and makes no other use. No request, client identity, unit, acquisition, invoice, tax payment, intervening-use evidence, lease, rental report, return, deduction, refund, vendor repayment, limitations fact or outcome appears.

Common questions

Could paying tax on cost replace tax on chemical-toilet rents?

No. Rental receipts remained taxable under the special rule.

Could the lessor recover tax mistakenly paid at acquisition?

Yes, if the unit was bought solely for lease and the resale-deduction or refund requirements were met.

Could a late filer net acquisition tax against overdue rental tax?

No. The opinion rejected that offset approach.

When did the deduction have to be claimed?

On the first return that included rental receipts for the unit.

What if the lessor missed that return?

It could pursue a refund of self-paid use tax, subject to limitations, or seek repayment of sales-tax reimbursement from the vendor.

Could the lessor claim a refund directly for vendor-charged sales-tax reimbursement?

No. The opinion says that tax refund belonged only to the retailer that sold the unit and paid the tax; the lessor had to look to its vendor.

Why was section 6596 reliance unavailable?

The requester did not identify the client or clients, so counsel expressly classified the response as general information only.

Were any actual returns, payments or refund claims published?

No. The letter presents rules and hypothetical routes without implementation evidence.

Citations and references

• Revenue and Taxation Code section 6010.7 — special rental-receipt rule for chemical toilets
• Revenue and Taxation Code section 6596 — identified-client reliance relief expressly unavailable
• Regulation 1660(c)(2) — general tax-paid same-form rule
• Regulation 1660(d)(1) — rental reporting regardless of acquisition-tax payment
• Regulation 1701 — tax-paid purchases resold, no intervening use and first-return timing
• Live Annotation 330.3635 — continuing-sale and no-other-use deduction result dated July 19, 1996
• Request, client identities, units, tax and use evidence, leases, returns, deductions, refunds, vendor repayments, limitations facts and outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3635
• Original supporting opinion: 330.3635 PDF

Original ruling text

330.3635

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION (MIC:85)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0085)
Telephone: (916) 324-2653
FAX: (916) 324-2618

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento

July 19, 1996

────────
E. L. SORENSEN, JR.
Executive Director

Mr. C--- M. S--A--- S--- T--- C--XXXX --- Road, Suite XXX
---, California XXXXX
Re:

Tax-Paid Purchase Resold Deductions on Chemical Toilets

Dear Mr. S---:
I am writing in response to your letter of May 1, 1996 regarding the application of Sales and Use tax to leases of chemical toilet units. You have requested a legal opinion; however, you did not identify your client or clients. Therefore, this information is provided to you for general information only, and your client or clients may not rely on the information for purposes of Revenue and Taxation Code section 6596. As you pointed out in your letter, the general rule set out in Sales and Use Tax Regulation 1660(c)(2) provides that no sales or use tax is due with respect to the rentals charged for tangible personal property leased in the same form as acquired by the lessor as to which the lessor has paid sales tax reimbursement or has timely paid use tax measured by the purchase price. You further recognized that in the case of chemical toilets (hereinafter referred to as “unit” or “units”), an exception to the general rule set out in 1660(c) exists, whereby lessors of units are not permitted to elect to pay tax measured by the purchase price, but must report and collect the use tax from the lessee based on the lease or rental payments received. This results from the specific provisions of Revenue and Taxation Code section 6010.7. You then specifically inquired whether, if the lessor has paid sales tax reimbursement to his vendor or paid use tax on the purchase price and also properly reported the lease or rental receipts, the lessor may take the “tax-paid purchase resold” deduction provided for in Regulation 1701.

Mr. C--- M. S---

-2-

July 19, 1996
330.3635

I assume that you are concerned because Regulation 1660(d)(1) states that the taxpayer must report based on the lease or rental payments “regardless of whether sales tax reimbursement or use tax has been paid.” We do not construe this language as prohibiting the taxpayer from taking advantage of the tax-paid purchase resold deduction where it has erroneously paid sales tax reimbursement or use tax on the acquisition of units. Rather, the purpose of the quoted language is to apply the provisions of Revenue and Taxation Code section 6010.7 that the lessor of “units” may not elect to pay tax based on the purchase price of units. The tax-paid purchases resold deduction applies when a person erroneously pays sales tax reimbursement or use tax and thereafter sells the property with no intervening use. When a person purchases a chemical toilet solely for the purpose of leasing, the person purchases the unit for resale. Thus, the person is entitled to the tax-paid purchases resold deduction for use tax or sales tax reimbursement paid on the purchase price. (Sales and Use Tax Reg. 1701.) Regulation 1701 also requires that the deduction be taken “on the retailer’s return in which his sale of the property is included.” If the taxpayer fails to claim the deduction on the first return for which rental receipts are reported, then the taxpayer may file a claim for refund of the use tax paid that would have been deductible on a timely return, or look to its vendor for a refund of sales tax reimbursement paid. The taxpayer may not, however, attempt to claim the deduction on a return which is not the first return for which rental receipts on the unit was reported by claiming an “offset,” nor may it file a claim for refund for sales tax reimbursement paid, as that refund is only available to the retailer who sold the unit and who paid the tax. Finally, you inquired whether a taxpayer who has failed to properly and timely report lease and rental receipts for units, but who did erroneously pay sales tax reimbursement or use tax on the units, may use the tax-paid purchase resold deduction as an offset against use tax which is due on the rental or lease payments. No, but if the applicable statute of limitations on refund claims has not run, then the taxpayer may file a claim for refund of the use tax paid. As to sales tax reimbursement paid, the taxpayer must, again, look to its vendor for any applicable refund due. I hope our response to your inquiry will be helpful to you in advising your clients. Very truly yours,

John S. Butterfield
Tax Counsel
JSB:af