Were $100-per-day classroom computer sessions taxable rentals when customers supplied their own software and instructors?

Plain-English summary

A redacted operator's absent December 22, 1996 request described a business-site classroom with nine workstations and one server. It called them 486 DX2-66 machines with 250MB or larger hard drives and at least 8MB RAM.

Companies and small businesses paid at least $100 per day to bring students who used the computers for software instruction. Customers supplied the software and instruction. An absent sample invoice reportedly billed a flat $100 for each classroom-rental day.

The request said the computers were bought for resale and eventually would be sold. Counsel assumed, without published proof, that no acquisition sales-tax reimbursement or use tax was paid before rental and the operator made no use beyond retention, demonstration, display and rental before later sale.

Sections 6051, 6201, 6401 and 6007 supplied the retail sales/use framework. Sections 6006(g)(5), 6010(e)(5) and regulation 1660(c)(2) treated leases as sales/purchases subject to tax-paid same-form treatment or a timely first-rental-period election.

Section 6006.3 and regulation 1660(a)(1) excluded an on-premises privilege only when both use lasted less than one day and the charge was less than $20; regulation 1502(i) was cited for comparison. The $100 daily classroom charge missed the price limb. Customers' paid computer use was a lease.

Sections 6006.1, 6010.1 and regulation 1660(b)(2)/(c)(1) made the assumed ex-tax rentals continuing sales/purchases, with use tax measured by rent, collected by the lessor when paid. Later computer sales were separately taxable under section 6051.

Page 2 prints Annotation 330.2725, while page 1, the official URL and live annotation identify 330.3725. Live 330.3725 matches the result but supplies no request, invoice, computer, purchase/tax, classroom, customer software/instruction, rental, return, later sale, audit or outcome evidence.

Common questions

Did supplying only the computers, while customers supplied software and instructors, avoid rental treatment?

No. The customers still paid for use of the tangible computer equipment.

Did keeping the computers at the owner's classroom matter?

Not enough. The premises-use exception also required a charge of less than $20 and use for less than one day.

Why were the rentals taxable?

The owner had not paid acquisition tax on computers bought for resale before placing them into rental service.

Was the eventual sale also taxable?

Yes. The opinion says the later retail sale remained subject to sales tax.

What computers were described?

Nine 486 DX2-66 workstations with 250MB or larger hard drives and at least 8MB RAM, plus one server. No inventory record appears.

What did the customer supply?

Its own students, software and instruction; the operator supplied computer use at its business site.

Was acquisition tax actually proved absent?

No. Counsel expressly assumed none was paid because the correspondence said the computers were bought for resale.

Did the operator use the computers in other ways?

Counsel assumed no use beyond retention, demonstration, display and classroom rentals before sale. No use record appears.

Why does page 2 say 330.2725?

The PDF does not explain the continuation-header error. All controlling identifiers say 330.3725.

Citations and references

• Revenue and Taxation Code sections 6051, 6201, 6401 and 6007 — retail sales/use framework
• Revenue and Taxation Code sections 6006(g)(5), 6010(e)(5); regulation 1660(c)(2) — lease and tax-paid same-form election
• Revenue and Taxation Code section 6006.3; regulation 1660(a)(1); comparison to regulation 1502(i) — premises-use exception
• Revenue and Taxation Code sections 6006.1 and 6010.1; regulation 1660(b)(2)/(c)(1) — continuing lease, rent measure and collection
• Live Annotation 330.3725 — classroom rental and later-sale result dated March 28, 1997
• Request, invoice, computers, tax/use evidence, sessions, rentals, returns, sales, audit and outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3725
• Original supporting opinion: 330.3725 PDF

Original ruling text

330.3725

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
450 N STREET, SACRAMENTO, CALIFORNIA
(PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
TELEPHONE: (916) 324-2634
FAX : (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
KATHLEEN CONNELL
Controller, Sacramento
_______

March 28, 1997

JOHN CHIANG
Acting Member
Fourth District, Los Angeles
_______
E. L. SORENSEN, JR.
Executive Director

Ms. M. H--Office Manager
I--- Corporation
XXX-XXX --- --- Drive
--- ---, CA XXXXX-XXXX
Re: Account No. SR -- XX-XXXXXX
Dear Ms. H---:
I am responding to your letter dated December 22, 1996 to Mr. Rick Wall of the State Board of Equalization’s Return Review Section requesting a legal opinion concerning the application of sales and use tax to I--- Corporation’s (I---) “classroom rentals”. You indicate that I--- has a “classroom” at its business site. In the classroom are 9 computer workstations and 1 server. You state, “These are 486 DX2-66 machines with 250MB hardrives or higher and at least 8mb of RAM.” Corporations or small businesses (companies) pay I--- a minimum of $100 a day to bring “students” to use the computers for instruction on the application of various software. I understand that the companies provide their own software and instruction, but utilize I---’s computers. A sample invoice which you enclosed with your letter shows that the companies are billed a flat rate ($100 on the sample invoice) for each day of “classroom rental”. Your correspondence indicates that the computers in the classroom were purchased for resale and that they eventually will be sold to customers. Since the computers were purchased for resale, I assume for purposes of this opinion that I--- did not pay any sales tax reimbursement or use tax on the purchase of the computers prior to or at the time that they were placed into rental use. I further assume that other than the rental of the computers, no use beyond retention, demonstration, or display of the computers is made by I--- either before or after the rental periods prior to the eventual outright sale of the computers to I---’s customers. Discussion Generally, under the California Sales and Use Tax Law, sales tax is imposed on all retailers measured by their gross receipts from retail sales of tangible personal property, e.g., computers, occurring in this state. (Rev. & Tax. Code § 6051.) When sales tax does not apply, use tax applies to the use of property purchased from a retailer for use in California. (Rev. &

Ms. M. H---

-2-

March 28, 1997
330.2725

Tax. Code §§ 6201, 6401.) A retail sale is a sale for any purpose other than resale in the regular course of business. (Rev. & Tax. Code § 6007.) In general, the terms “sale” and “purchase” also mean and include any lease of tangible personal property in any manner or by any means whatsoever, for a consideration (such as money), except for tangible personal property leased in substantially the same form as acquired by the lessor as to which the lessor has paid sales tax reimbursement or use tax measured by the purchase price, or timely elects to pay such tax by reporting and paying it with its sales and use tax return for the period during which the property is first placed in rental service. (Rev. & Tax. Code §§ 6006(g)(5), 6010(e)(5); Reg. 1660(c)(2).) The term “lease” includes rental, hire and license, but does not include a use of tangible personal property for less than one day for a charge of less than $20 when the privilege to use the property is restricted to use on the premises or business location of the grantor of the privilege. (Rev. & Tax. Code § 6006.3; Reg. 1660(a)(1); cf. Reg. 1502(i).) In the case of a lease which is a “sale” and a “purchase”, the granting of possession of tangible personal property by a lessor to a lessee is a continuing sale in this state by the lessor and a continuing purchase for use in this state by the lessee. (Rev. & Tax. Code §§ 6006.1, 6010.1; Reg. 1660(b)(2).) Tax on such a lease is measured by the rentals payable. Generally, the applicable tax is a use tax upon the use in this state of the property by the lessee. The lessor must collect the tax from the lessee at the time rentals are paid by the lessee and remit the tax to the Board. (Reg. 1660(c)(1).) Thus, I---’s “classroom rentals” are considered rentals or leases of tangible personal property, i.e., the computers. Since I--- has paid neither sales tax reimbursement nor use tax on the purchase price of the computers, the leases are continuing sales and purchases subject to tax measured by the rentals payable. When I--- later sells the computers, those sales are also subject to tax. (Rev. & Tax. Code § 6051.) I hope this information is of assistance. Please write again if we may answer any other questions. Sincerely,

Sharon Jarvis
Senior Tax Counsel
SJ:rz
cc:

Santa Rosa District Administrator (JH)
Mr. R. M. Wall - (MIC: 35)