Can one long-term equipment lease be a taxable business rather than an exempt occasional sale in California?

Plain-English summary

A redacted petitioner challenged tax for October 1, 1985 through March 31, 1990. The table identifies $644,913 of unreported taxable rental-receipt measure including a reaudit adjustment and a separate $77,847 EQRF measure. The body says the petitioner reported $644,915 of receipts and staff accepted that amount, leaving a two-dollar internal difference. The determination also included a 10% failure-to-file penalty stated as $4,146 originally and $4,211.39 after reaudit.

The petitioner had bought furniture-manufacturing equipment ex-tax for use in South Africa, brought it to California in 1984 and stored it about a year while seeking another manufacturing opportunity. He formed a redacted corporation and, on an accountant's advice, kept the equipment personally and leased it to the corporation to minimize income tax rather than contributing it.

The November 20, 1985 agreement covered 22 items—among them a gluing machine, drills, sanders, a saw and forklift—with stated total cost of $395,863. It referred to $12,000 rent for 50 months but left the payment-day blanks empty. The corporation agreed to pay assessed equipment taxes and had a right to add value through repairs; responsibility for insurance and maintenance was unstated. Neither the lease nor Appendix A appears.

Receipts varied without explanation: $248,837 in 1987, $144,365 in 1988 and $163,052 in 1989. The source speculates that changing equipment counts might explain this. The petitioner reported the rent on federal Schedule E and claimed depreciation; the reviewer did not know whether maintenance, insurance or other business expenses were deducted.

The petitioner's first theory was that one lease did not make him a seller or retailer engaged in business under sections 6014 and 6015. His second was that the same premise made the lease an exempt occasional sale under sections 6006.5(a) and 6367, rendering contrary regulation invalid. An October 2, 1992 representative letter said to contain the detailed arguments is referenced as an attached exhibit but is absent from the seven-page PDF.

Regulation 1595(a)(1) expressly treated a taxable continuing lease as nonoccasional. The recommendation distinguished an isolated transfer of title from a lease that exercises the selling privilege over months or years through rent collection, expenses and accounting. Section 6013 broadly defined business as activity pursued for direct or indirect gain, benefit or advantage.

The reviewer compared conflicting state decisions and found federal income-tax lease decisions persuasive though not controlling. The opinion quoted Cooper Tire's different 21-item, 10-year equipment-financing lease to illustrate ongoing conduct; those were that cited case's facts, not this petitioner's. It separately rejected a Florida yacht-broker decision because California would apparently exempt those leases on other grounds and that court had addressed whether a lease was a sale, not whether one lease was a business.

Regulation 1599(c)'s coin-and-bullion factors did not change the result. They were examples, not requirements, and were not designed for leasing. Here, 22 items costing $395,863, at least 50 months, the stated income-tax purpose, ongoing rent and expense activity, and $644,915 in receipts averaging $11,943 monthly supported business treatment. The recommendation found tax properly asserted.

Penalty relief remained undecided. Section 6592 required a signed statement under penalty of perjury; none had been filed, so the reviewer allowed 30 days from mailing. The exact recommendation was to redetermine under an absent April 12, 1991 reaudit. No penalty statement, final Board action or later outcome appears.

Live Annotation 330.3750 states the same single-lease rule but is dated May 27, 1993, while the signed PDF is dated May 6. It rounds the transaction to five years, while the PDF gives the exact 1985–1990 liability period and says the lease continued at least 50 months, perhaps longer. The source does not resolve those differences.

Common questions

Can a single lease be a taxable business?

Yes. The opinion distinguished a continuing lease from an isolated title transfer and found that ongoing lessor activity can constitute business even when there is only one lease agreement.

Why did the occasional-sale exemption fail?

Regulation 1595 expressly said a continuing lease is not an occasional sale, and the Board found that rule consistent with the statutes.

Did calling 22 items one lease matter?

No. The recommendation called that drafting choice fortuitous and evaluated the actual number, scope, character, term, and receipts.

What did the main dollar figures mean?

The table gives a $644,913 protested rental-receipt measure and $77,847 EQRF measure. The body separately says staff accepted $644,915 of receipts. It does not reconcile the two-dollar difference.

Was the stated 50-month lease complete and unambiguous?

No. The document says the rent provision contained blank payment-day fields, and neither the lease nor its 22-item Appendix A is reproduced.

Did the record prove who maintained and insured the equipment?

No. The agreement did not specify those responsibilities, and the reviewer did not know whether the petitioner deducted those expenses. The opinion's discussion of maintenance and insurance was part of its general distinction between leasing and a one-time title transfer.

Why did Regulation 1599's coin-and-bullion factors not control?

The recommendation treated them as nonexclusive examples designed for a different kind of activity, not mandatory elements of every business.

Was penalty relief denied permanently?

No recommendation for relief could be made without the required signed statement. The petitioner was given 30 days to file it.

Did the recommendation uphold the exact original determination?

It found the tax properly asserted but recommended redetermination according to an absent April 12, 1991 reaudit. The final amount and Board action are not shown.

Why do the official dates differ?

The PDF is signed May 6, 1993; live Annotation 330.3750 says May 27. Neither official source explains the difference.

Are all printed case citations internally consistent?

No. The PDF prints Alvary v. United States as “302 F.2d 290 at 796.” That printed citation did not resolve in the independent citation check and remains reproduced exactly in the original-text section.

Citations and references

• Revenue and Taxation Code sections 6051 and 6201 — sales and use tax on retail sellers
• Revenue and Taxation Code sections 6014 and 6015(a)(1)–(2) — seller and retailer definitions
• Revenue and Taxation Code sections 6006(g), 6010, 6006.5(a) and 6367 — leases and occasional sales
• Revenue and Taxation Code section 6013 — broad business definition
• Regulation 1595(a)(1)/(a)(4) and regulation 1660 — continuing leases and number, scope and character
• Regulation 1599(c) — nonexclusive evidence of a coin or bullion business
• Market Street Railway Co. v. State Board of Equalization, 137 Cal.App.2d 87 at 95 — isolated title transfer, citation verified
• RIA, United States Tax Reporter, vol. 4, ¶¶ 1624.002 et seq.; Mertens, Law of Federal Taxation, vol. 7, §§ 28.49 et seq. — profit activity
• State v. GM&O Land Co., 275 So.2d 687; Arizona v. Selby, 544 P.2d 717 — state single-lease cases, citations verified
• Hayes-Albion Corp. v. Kosydar, Ohio Board of Tax Appeals, May 21, 1975; New Jersey State Tax News, April–May 1974 [2 CCH N.J. Tax Reporter ¶60-590.70] — contrary state treatment
• Guggenheimer v. Commissioner, 209 F.2d 362; Gilford v. Commissioner, 201 F.2d 735; Reiner v. United States, 222 F.2d 770; Post v. Commissioner, 26 T.C. 1055 — federal sale/lease cases, citations verified
• Alvary v. United States, source-printed as 302 F.2d 290 at 796 — internally conflicting printed cite, unresolved and unaltered
• Cooper Tire & Rubber Co. Employees Retirement Fund v. Commissioner, 36 T.C. 96, aff'd 306 F.2d 20 — equipment lease, citations verified
• Richard Bertram & Co. v. Green, 132 So.2d 24 — distinguishable Florida yacht leases, citation verified
• Revenue and Taxation Code section 6592 — sworn-statement requirement for penalty relief
• Live Annotation 330.3750 — same single-lease rule, dated May 27, 1993
• October 2, 1992 argument exhibit, lease/Appendix A, audit/reaudit, penalty statement and final action — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3750
• Original supporting opinion: 330.3750 PDF

Original ruling text

STATE OF CALIFORNIA

330.3750

BOARD OF EQUALIZATION
BUSINESS TAXES APPEALS REVIEW SECTION

In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law of:
A--- J---

Petitioner

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DECISION AND RECOMMENDATION

No.

SN -- XX XXXXXX-010

The Appeals conference in the above-referenced matter was held by Senior Staff Counsel James E. Mahler on September 24, 19XX, in Culver City, California. Appearing for Petitioner:

C--- L. N---, CPA
Attorney at Law

Appearing for the
Sales and Use Tax Department:

Daniel E. Ellsberry
Senior Tax Auditor

Protested Item
The protested tax liability for the period October 1, 1985, through March 31, 1990, is measured by: Item

Unreported taxable rental receipts
(including reaudit adjustment)

State, Local,
County & Transit

EQRF

$644,913

$77,847

The determination includes a ten percent penalty in the amount of $4,146 ($4,211.39 after reaudit adjustment) for failure to file returns.

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May 6, 1993
330.3750

Petitioner's Contentions

1. The lease of equipment is not subject to tax under the Sales and Use Tax Law.
2. If Sales and Use Tax Regulation 1595(a) were construed to mean that the lease is
   taxable, the regulation would conflict with the statute and thus be void.
3. Relief from the penalty for failure to file returns should be allowed.
   Summary
   On or about November 20, 1985, petitioner contracted to lease certain equipment to M--- L---, Inc. (later called P--- I---, Inc., hereinafter "ML"). Appendix A of the lease agreement listed 22 pieces of equipment subject to the lease, with a total "cost" of $395,863. The equipment included a gluing machine, drills, sanders, a saw, a forklift and other items intended for use in manufacturing furniture. The principal issue is whether tax applies to petitioner's lease receipts. The lease price was not clearly set out in the agreement. Section 3 stated that ML would day of each " for a term of 50 months, but the blanks were pay rent of $12,000 "on the not filled in. ML also agreed to pay any taxes which might be assessed on the equipment. The agreement did not specify who would be responsible for insuring or maintaining the equipment, but did provide that ML had a "right" to add to the value of the equipment by making repairs. Petitioner advised the audit staff that his lease receipts totalled $644,915 for the period October 1, 1985, through March 31, 1990, and the staff accepted this figure as correct. Petitioner's figure was broken down by years, but not by quarters. The yearly receipts varied greatly. For example, petitioner received $248,837 in 1987, $144,365 in 1988 and $163,052 in 1989. No explanation for these fluctuations has been offered, but they may reflect additions to or deletions from the number of items being leased. According to petitioner, he originally purchased the equipment for use in manufacturing furniture in South Africa. (The audit staff found that the purchases were ex-tax, and petitioner does not dispute this finding.) Petitioner emigrated to California and brought the equipment with him in 1984. He stored the equipment in this state for about a year while he looked for an opportunity to open another furniture-manufacturing business, and ultimately set up ML to conduct the business. On the advice of an accountant, he decided to minimize his income taxes by retaining ownership of the equipment and leasing it to ML, rather than contributing it to the corporation. (For federal income tax purposes, petitioner has reported the lease receipts on Schedule E of his returns as supplemental income, and has claimed depreciation deductions, but we do not know whether he has also claimed other business expense deductions such as maintenance and insurance.)

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May 6, 1993
330.3750

Analysis and Conclusions
Subdivision (a)(1) of Sales and Use Tax Regulation 1595 provides, in the third paragraph: "Tax does not apply to a sale of property held or used in the course of an activity not requiring the holding of a seller's permit unless the sale is one of a series of sales sufficient in number, scope and character to constitute an activity for which the seller is required to hold a seller's permit or would be reburied to hold a seller's permit if the activity were conducted in this state. If tangible personal property is leased under a lease which is a 'sale' as defined in Section 6006 or a 'purchase' as defined in Section 6010, tax applies to the lease as provided in Regulation 1660. The lessor is making a 'continuing sale' which is not an 'occasional sale'." (Emphasis added.) The parties agree that petitioner's lease to ML was both a "sale" and a "purchase" as defined in the statutes cited in the regulation. In the staff's view, the lease is therefore subject to tax under the express terms of the regulation. Petitioner attacks the staff's position on two fronts. He contends, first, that the regulation does not apply to him, and second, that the regulation would be void if it were construed as applying to him. Petitioner's arguments on these points are set out in detail in his representative's letter dated October 2, 1992, which we have attached hereto as an exhibit. Briefly summarized, petitioner's first argument runs as follows. Sales and use taxes apply only when property is sold by a "retailer". (Rev. & Tax. Code §§ 6051 and 6201.) With certain exceptions not relevant here, a vendor is not a "retailer" unless he or she is also a "seller" or a "person engaged in the business of making sales [at retail]." (Rev. & Tax. Code § 6015, subds. (a)(1) and (a)(2).) Similarly, "seller" means a person "engaged in the business of selling" taxable property. (Rev. & Tax. Code § 6014.) "[T]he term `business' requires that the seller engage in more than one isolated sale." (Market Street Railway Co. v. State Bd. of Equalization, 137 Cal.App.2d 87 at 95.) A lease of the type in question is a "sale". (Rev. & Tax. Code § 6006, subd. (g).) Petitioner concludes that a person who makes a single lease is not "engaged in the business" of selling, and thus is not a "seller" or "retailer", so tax does not apply. The second argument, again briefly summarized, is based on Revenue and Taxation Code section 6367, which authorizes an exemption for "occasional sales". Subdivision (a) of section 6006.5 defines that term to mean a sale of tangible personal property not held or used by a "seller" in the course of activities requiring a seller's permit. Using the same chain of reasoning just described, petitioner argues that he was not a "seller" because he was not "engaged in

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May 6, 1993
330.3750

business". Therefore, he concludes that he must qualify for the occasional sales exemption under the statute and, if the regulation is to the contrary, the regulation must be void. While petitioner's two contentions are analytically separate, they both boil down to the same question. Is a person who makes a single lease (of a type which qualifies as a "sale" and a "purchase") engaged in "business" as a seller? The term "business" is broadly defined in Revenue and Taxation Code Section 6013 to include "any activity engaged in by any person ... with the object of gain, benefit, or advantage, either direct or indirect." This definition is consistent with the income tax rule that an activity for profit is a trade or business. (See RIA, United States Tax Reporter, Vol. 4, ¶¶ 1624.002 et seq.; Mertens Law of Federal Taxation, Vol. 7, §§ 28.49 et seq.) As petitioner correctly notes, despite the broad statutory definition, the California courts have held that a single sale by way of title transfer is generally not a business for sales and use tax purposes. However, no California case has decided the precise question before us here, that is, whether a single lease is a business. The issue has been litigated in other states. The courts of Alabama and Arizona have concluded that a single lease is not a business activity. (State of Alabama v. GM&O Land Co., 275 So.2d 687; Arizona, et al. v. Selby, 544 P.2d 717.) Ohio and New Jersey, on the other hand, have held that a single lease is a business. (Hayes-Albion Corp. v. Kosydar, Oh. Bd. Tx. App., May 21, 1975; New Jersey State Tax News, April-May 1974 [2 CCH N.J. Tx. Rptr. ¶60590.70].) The issue has also been litigated under the federal income tax law. As in California, the federal courts do not view a single sale by way of title transfer as a business. (See Guggenheimer v. Commissioner, 209 F.2d 362 at 365.) A single lease, however, is classified as a business activity. (Gilford v. Commissioner, 201 F.2d 735; Reiner v. United States, 222 F.2d 770 at 772-773; Alvary v. United States, 302 F.2d 290 at 796; Rosalie W. Post v. Commissioner, 26 T.C. 1055.) Most of these cases deal with leases of real property, but the rule has also been applied to a single lease of equipment for use in manufacturing. (Cooper Tire & Rubber Co. Employees Retirement Fund v. Commissioner, 36 T.C. 96, aff'd. per curiam, 306 F.2d 20.) The appellate court in the last cited case explained its holding as follows: "We do not think that a trust must necessarily engage in more than one venture in order to be regularly engaged in the business.... Here was a transaction of considerable magnitude involving 21 pieces of equipment and extending over a period of 10 years or even additional periods of time. The trust was required to purchase tire manufacturing machinery, borrow money and execute a chattel mortgage to finance the purchase price. Mere purchase of the machinery did not produce the income. The trust had to lease the machinery, collect the rentals and make monthly payments on the bank note. To us the deal looks more like one to finance the entire purchase price of machinery needed by the tire company rather

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May 6, 1993
330.3750

than a conventional investment for the trust. The statute prohibited loans by the trust to the tire company without adequate security...." (306 F.2d at 21, citations omitted.) Of course, the income tax has different goals and policies than our Sales and Use Tax Law, so federal authorities are not necessarily dispositive. In this case, however, the federal decisions are persuasive. The sales tax, which is complimented by the use tax, is imposed for "the privilege of selling tangible personal property at retail" in this state. (Rev. & Tax. Code § 6051.) A person who makes a single sale by transferring title has arguably not exercised the privilege to an extent sufficient to warrant imposing the tax. In contrast, a lessor exercises the privilege over a period of months or years. A lessor must regularly collect the rent, take steps to maintain and insure the property and account for receipts and expenses. Even a single lease is therefore a significant exercise of the selling privilege and justifies the tax. Petitioner's arguments are based on the assumption that title transfers and leases must be treated identically because they are both defined as "sales". This assumption ignores the obvious differences between the two types of transactions. As just noted, a title transfer may be an isolated event completed in a short time, while a lease endures for long periods and requires the continuous involvement of the lessor. Further, while profit undoubtedly motivates many title transfers, such sales are sometimes also made simply to dispose of the property. A lease, however, is almost by definition undertaken for profit. While a single sale by title transfer may thus not be a business venture for profit, a single lease is almost invariably so. Petitioner draws our attention to Richard Betram & Co. v. Green, 132 So.2d 24, a case decided in 1961 by the Florida Court of Appeal under that state's sales tax law. Plaintiff therein was a broker who listed yachts for lease. He collected the rentals and remitted the money (less a commission) to the yacht owners. Tax was asserted against the broker in part because of a regulation which provided that a rental could not qualify for exemption as an occasional sale. In order to support this regulation under Florida law, the taxing authorities argued that a lease was a "sale" only for purposes of imposing the tax, not for purposes of the exemption statutes. The court rejected this distinction and concluded that a lease is a "sale" for all purposes. Thus, the court invalidated the regulation and determined that the broker did not owe tax. The Florida case is readily distinguishable. First, Florida law appears to differ greatly from our Sales and Use Tax Law in this area. The yacht leases would apparently have been nontaxable under California law for reasons independent of the occasional sales exemption. Second, there is no doubt that petitioner's lease was a "sale" under California law for purposes of both the imposition statutes and the exemption statutes. The problem addressed by the Florida court (inconsistent definitions of the word "sale") is therefore not present here. Third, and most important, the Florida court did not review the question which does concern us here (whether a single lease would be a "business") nor did it express any opinion on that subject. Accordingly, we find the Florida case of no relevance.

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May 6, 1993
330.3750

To sum up, subdivision (a)(1) of Sales and Use Tax Regulation 1595 reflects a finding by the Board that a single lease is a "business", which requires imposition of the tax and precludes the claimed occasional sales exemption. The Board's finding is supported by the income tax precedents and is consistent with the sales and use tax statutes. Petitioner's arguments to the contrary are without merit. Petitioner next contends that his particular lease to ML was not a business, even if the general rule would classify most leases as business activity. He points out that the Board generally looks to the "number, scope and character" of an activity to determine whether it requires the holding of a seller's permit. (See Sales & Use Tax. Reg. 1595, subd. (a)(4).) He alleges that his lease to ML bears none of the indicia of "business" as set out in subdivision (c) of Sales and Use Tax Regulation 1599, which provides: "PURCHASE OF COINS AND BULLION AS INVESTMENT. Purchases of coins and bullion as investments are purchases at retail. It is immaterial that a gain, benefit, or advantage may not be realized until the resale of the coins and bullion. A resale certificate may not be issued for purchases for this purpose. "A person purporting to hold coins or bullion solely for resale in the regular course of business must be able to prove that he actively engages in business as a seller of coins and bullion. The following are some examples of relevant evidence: "(1) The number, scope, and character of the person's purchases and sales of coins or bullion. "(2) Evidence of the person's continuing efforts to advertise and sell coins or bullion. "(3) Evidence that the person held out to the public that he was engaged in business as a seller of coins or bullion at an identified place of business. "(4) The manner in which income from transactions in coins or bullion was reported by that person for income tax purposes. "(5) Whether a local business license was issued to that person to engage in sales of coins or bullion. "Seller's permits may be held only by persons actively engaging in the business of selling tangible personal property."

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May 6, 1993
330.3750

We are not impressed with this argument. Regulation 1599 deals with sales and purchases of coins and bullion, that is, with title transfers. While it is true that the factors listed in the regulation have also been applied in cases involving other types of property, the regulation was not drafted with the unique problems of leases in mind, and the factors listed in the regulation are not particularly relevant to leasing businesses. More importantly, the regulation expressly states that the listed factors are "examples of relevant evidence." The regulation does not even remotely suggest that the listed factors are requirements which must be met before an activity can be classified as a business. We find that petitioner's lease to ML is properly classified as a business. The lease included 22 individual pieces of equipment with a total cost of $395,863. (It is fortuitous that petitioner chose to draft the transaction as a single lease instead of having 22 separate lease agreements.) The lease continued for at least 50 months, perhaps longer. The admitted purpose of the lease was to create income tax savings. Throughout the term of the lease, petitioner had to take actions typical of a business, such as collecting rents, paying expenses, and accounting for profits and losses. The lease generated receipts of $644,915 during the periods at issue, an average of $11,943 per month. In our view, it borders on the frivolous to argue that an activity of such "number, scope and character" was not a business. We find that the tax was properly asserted. With respect to the penalty, Revenue and Taxation Code Section 6592 provides that the Board may grant relief only if the taxpayer files a statement, signed under penalty of perjury, explaining the reasons for the failure to file returns. Petitioner has not as yet filed the required statement and we are therefore unable to recommend relief. If petitioner wishes to file a statement, signed under penalty of perjury, he should do so within 30 days from the date this Decision and Recommendation is mailed. Recommendation Redetermine in accordance with the reaudit dated April 12, 1991.

5/6/93

James E. Mahler, Senior Staff Counsel

Date