Were disassembled hydraulic-bumper parts leased in the same form when the lessee assembled them with free technical supervision from the lessor?

Plain-English summary

Tax Counsel reviewed an absent sample hydraulic-bumper lease. As restated from an absent request, the lessor bought component parts under a resale certificate without acquisition tax and transferred them disassembled to customers. The number and type varied with the vehicle. Lessees assembled and installed them using printed instructions, while lessor personnel provided free technical help and supervision.

Paragraph 5 reportedly kept title with the lessor. A lease schedule showed a $155 “unit price,” equal to the rare cash-sale price. Tax was added to reach “total cost,” then interest or carrying charge—apparently slightly over 10% annually—produced total rent. The example used equal payments over 36 months, recovering retail price plus interest.

At term end, the lessee could renew for $10 per vehicle annually. The printed form never transferred title, but the supplied sample had a handwritten promise that after two such annual payments the lessee would own the products outright.

For lease-versus-sale classification, retention or nominal transfer of title was a major, often controlling factor. A right to terminate without paying the contract price supported true-lease treatment; its absence was not decisive because a full-term obligation fit either a lease or conditional sale.

The sample was a true lease during its initial term and first renewal. A sale occurred when the second-year renewal option was exercised, because ownership then followed; tax was due on that $10 option price. Without the handwriting, the printed form remained a true lease through all renewals. Counsel acknowledged likely practical nonreturn but emphasized that contractual title remained with the lessor and allowed legal reclamation.

For the same-form issue, the letter described unidentified prior Board holdings: independent-contractor fabrication preserved form, while assembly by lessor employees did not. Customer assembly was treated like independent-contracting. Although free lessor advice and supervision placed the arrangement between those categories, it did not amount to assembly by the lessor.

The components therefore remained in substantially the same form under section 6006(g)(5) and former Ruling 70(c)(2)(F). The lessor could pay its supplier, pay tax measured by purchase price when first placed in rental service—with no rent tax under either route—or pay tax on rent.

No request, lease/amendment, parts, resale certificate, instructions, service record, payment, renewal/option exercise, return/reclamation, tax return or later outcome appears. Live Annotation 330.3920 publishes only the customer-assembly and free-supervision conclusion, omitting the lease/sale analysis, $155 price, 36-month term, interest, $10 renewals, handwritten ownership clause and tax choices.

Common questions

Did lessor supervision count as lessor assembly?

No. The lessee performed the actual work, and free technical help did not become fabrication by the lessor.

What property and acquisition facts were assumed?

Hydraulic-bumper parts varying by vehicle were bought under resale certificate, transferred disassembled and assembled/installed by the customer. The underlying property and records are absent.

Could the lessor elect purchase-price treatment?

Yes because the property remained in substantially the same form.

What were the original payment terms?

The example used a $155 cash-equivalent unit price, acquisition tax, a slightly-over-10% annual interest/carrying charge and equal payments over 36 months. The contract and payments are not reproduced.

Was the printed contract a true lease?

Yes, including its low-cost renewals, because title remained with the lessor and the property could be reclaimed.

Did likely nonreturn turn the printed lease into a sale?

No. Counsel relied on the lessor's retained legal title and reclamation right despite expecting the bumpers probably would not be returned.

What did the handwritten amendment change?

It promised outright ownership after a second $10 renewal year, creating a sale when that option was exercised.

Was the whole arrangement taxed on only $10?

No. The $10 was the option-sale measure at the second renewal. The initial and first-renewal periods were true leases, with separate acquisition-or-rent tax choices.

What did the live annotation leave out?

Every contract, price, interest, renewal, option and election fact. It publishes only the same-form result for lessee assembly under free lessor supervision.

Citations and references

• Revenue and Taxation Code section 6006(g)(5) — same-form leasing election
• Former Sales and Use Tax Ruling 70(c)(2)(F) — historical election authority
• Unidentified prior Board holdings — independent-contractor versus lessor-employee fabrication
• Live Annotation 330.3920 — customer assembly/free lessor supervision conclusion dated December 31, 1968
• Request, sample lease/amendment, parts, work, payments, option/title events, taxes, returns and outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3920
• Original supporting opinion: 330.3920 PDF

Original ruling text

STATE OF CALIFORNIA

330.3920

STATE BOARD OF EQUALIZATION

December 31, 1968

Gentlemen:
As you requested, we have reviewed the sample you provided of your lease agreement for hydraulic bumpers. Restating the facts as we understand them, you purchased the component parts of the hydraulic bumpers giving a resale certificate to your supplier and therefore not paying any tax at acquisition. You then transfer the parts, disassembled, to your customer pursuant to the lease agreement. The number and kind of parts varies, depending upon the make of the vehicle upon which the bumper is to be installed. The lessee assembles and installs the bumpers in accordance with printed instructions and the technical assistance of your personnel, who are provided free of charge. Title to all parts remains in the lessor under paragraph 5 of the lease. The lease agreement includes a “lease schedule” which shows a “unit price” for the bumpers of
$155, which is the price at which the bumpers would be sold for cash. (However, the bumpers are almost never sold for cash.) Tax is then computed on the total unit price and added thereto to arrive at the “total cost”. Some form of interest or carrying charge is added to the total cost to arrive at the “total rental payable”. Based on the sample, this charge appears to be slightly in excess of 10 percent per year on the total cost. The total rental is payable in equal installments over a definite period, in the example, 36 months. In other words, the total retail selling price, plus an interest charge, is recovered over the period of the lease. At the expiration of the lease term, the lessee has the option of continuing the lease for a smaller sum, in this example, $10 per vehicle per year. The printed lease form has no provision for transfer of title to the lessee; however, the sample supplied was amended in handwriting to provide that after the $10 annual rental was paid for two years the lessee “would then own the products outright”. Two questions arise. First, is the contract a true lease or a conditional sales contract in the form of a lease? Second, if it is a true lease, are the bumpers leased in substantially the same form as acquired thereby affording you the election provided by Section 6006(g)(5) and Ruling 70(c)(2)(F)?

-2-

Dec. 31, 1968
330.3920

In determining whether an agreement is a true lease, we look to a number of things, but a major factor, often cited as controlling, is whether title is to remain with the lessor or to pass to the lessee for no additional fee or for a nominal sum at the end of the lease term. Another factor is the presence of a provision that the lease can terminate the agreement at any time without paying the contract price. Where present, such a provision is evidence that a true lease exists, but its absence is not significant since a continuing obligation for the entire term is consistent with both leases and conditional sales. In the sample you supplied, then, the transaction is a true lease for the initial term and the first renewal period. However, because the lessee will “own the products outright” at the end of the second year of additional rental after the expiration of the term, a sale occurs when the option is exercised for the second year. Tax is due on the amount of the option price, $10. On the other hand, the lease as printed, without the handwritten amendments, is a true lease for the entire term including renewals. It appears to us that the option to continue the lease for a low annual rental is more consistent with a lease arrangement than with a sale. It is true that, as a practical matter, the bumpers will probably not be returned at the end of the term regardless of the actual payment of the annual rental, but by the terms of the contract, title remains with the lessor and he can legally reclaim the bumpers. We must then determine whether the property is leased in substantially the same form as acquired, for if it is not, tax would be due on the rental receipts. We have previously held that where the components are fabricated into the final form by independent contractors, the items are in the same form but if employees of the lessor assemble the item, it is not leased in the same form. To be consistent with this ruling, it appears we must hold that assembly by the customer is equivalent to fabrication by an independent contractor, and the items are leased in substantially the same form. The question then arises whether the supervision by the lessor’s employees changes the situation. In our opinion, such advice and supervision do not amount to assembly to the lessor, though it does place the transaction somewhere in between assembly by an independent contractor and assembly by employees. Accordingly, you have the option of: (1) paying tax to your supplier, or paying tax measured by the purchase price at the time the property is first placed in rental service (in either case tax is not due on rental receipts); or (2) paying tax on the rental receipts. Very truly yours, T. P. Putnam Tax Counsel By Lawrence A. Augusta LAA:ph

[1b]