Were rents taxable when a costume lessor built costumes from materials or substantially altered donated costumes after paying tax on purchased inputs?

Plain-English summary

A redacted April 4, 1994 request asked whether tax had to be collected on costume rent. Some costumes were donated and altered before rental; others were constructed entirely by the lessor. The lessor reportedly paid sales-tax reimbursement on purchased alteration and construction materials. No costume, donation, material, invoice or tax record appears.

The request did not disclose any obligation or option for a lessee to buy. Counsel therefore assumed true leases: the lessor retained title and every costume returned after its term. The contracts and actual return history are absent.

Sections 6006(g)(5), 6006.1 and regulation 1660 required both substantially same form and purchase-price tax to avoid continuing-sale treatment. Otherwise regulation 1660(c)(1) imposed use tax measured by rent. Annotation 330.3900 made substantial value excess a changed-form indicator, while 330.3980 treated fabrication as substantial change.

Costumes built by the lessor were clearly not in the same form as their materials. Although Annotation 330.4180 said minor temporary tuxedo adjustments did not change form, Counsel found it likely—not established from reproduced evidence—that these donated-costume alterations were substantial.

Tax paid on component materials did not make rents nontaxable when the finished property was substantially different. Donated costumes also had no tax-paid purchase price that could support the acquisition-tax exception, even if particular donated items remained in the same form.

The lessor could claim a tax-paid-purchases-resold deduction for tax paid on incorporated materials, provided it had not used the finished costumes before placing them in rental service.

Regulation 1701 was referenced and enclosed to explain the deduction, but the enclosure is absent. No prior-use evidence, return, deduction claim, audit or outcome appears.

CDTFA separately publishes the same letter as 330.2158. That PDF preserves a partially redacted managing-director/organization recipient, account number and district line that the 330.3955 copy more fully redacts; its substantive wording is the same apart from pagination. Live Annotation 330.3955 publishes only the constructed-costume branch, while live 330.2158 publishes the donated-costume branch. Neither live entry includes the true-lease assumption or the opinion's “appears likely” qualification for the alteration finding.

Common questions

Did paying tax on fabric and other materials make costume rents nontaxable?

No.

Were the leases proved to be true leases?

No. Because the request omitted purchase obligations/options, Counsel assumed retained title and mandatory return.

Were donated costumes automatically tax-free to rent?

No. No acquisition tax had been paid on them, and substantial alterations independently supported rental tax.

Did Counsel definitely find every donated-costume alteration substantial?

No. The letter says that result “appears likely.” Rental tax separately followed because no purchase-price tax had been paid on donated costumes, even if form remained unchanged.

Could the lessor recover tax paid on incorporated materials?

Yes, through the stated resale deduction if there was no prior use.

Was the Regulation 1701 enclosure available?

No. It is identified at the end of the letter but not included in the official PDF.

Why are there two official PDFs for this letter?

330.3955 and 330.2158 are differently redacted, separately numbered copies. The first live annotation emphasizes constructed costumes; the second emphasizes donated ones.

Was a deduction or final tax outcome shown?

No. The source gives advice without returns, a deduction claim, audit or later resolution.

Citations and references

• Revenue and Taxation Code sections 6006(g)(5) and 6006.1; regulation 1660 — same-form and acquisition-tax exception
• Regulation 1660(c)(1) — use tax measured by rent
• Annotations 330.3900, 330.3980 and 330.4180 — value, fabrication and minor temporary adjustment comparisons
• Regulation 1701 — tax-paid-purchases-resold deduction; enclosure absent
• Live Annotation 330.3955 — constructed-costume branch dated June 10, 1994
• Live Annotation 330.2158 — donated-costume branch dated June 10, 1994
• Companion official source for Annotation 330.2158: https://cdtfa.ca.gov/lawguides/annotations/330-2158.pdf
• Request, property/transaction evidence, returns, deduction, audit and outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3955
• Companion annotation page: Annotation 330.2158
• Original supporting opinion: 330.3955 PDF

Original ruling text

330.3955
STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 324-2641

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego

June 10, 1994

MATTHEW K. FONG
Fourth District, Los Angeles
GRAY DAVIS
Controller, Sacramento
────────

Mr---

BURTON W. OLIVER
Executive Director

Re:

Dear Mr. ---:
I am responding to your letter of April 4, 1994. You ask whether you must collect tax on costume rentals. Some are donated and you alter them before renting. Others are constructed entirely by you and then rented. You pay sales tax (reimbursement) on materials used to alter or construct the costumes. Your letter does not indicate whether the lessee has an obligation or an option to purchase the costumes during or at the end of the lease period. For purposes of this opinion, we assume that your leases are true leases, that is, you retain title to the costumes and they are always returned to you after the lease period is over. The lease (or rental) of tangible personal property in California is a continuing sale unless that property is leased in substantially the same form as acquired by the lessor and the lessor has paid sales tax reimbursement or use tax measured by the purchase price of the property. (Rev. & Tax. Code §§ 6006(g)(5), 6006.1, Reg. 1660.) If the lease is a continuing sale under this definition, that lease is subject to use tax measured by rentals payable. (Reg. 1660(c)(1).) If the value of the property leased is substantially in excess of the purchase price, the property is not leased in substantially the same form as acquired. (Business Taxes Law Guide Annotation 330.3900 (2/17/67).) Property is also regarded as not leased in substantially the same form as acquired if there has been a substantial change in the form (such as fabrication). (See, e.g., BTLG Annot. 330.3980 (11/1/67, 8/21/90).) When property is not leased in substantially the same form as acquired, the lease is a continuing sale subject to use tax measured by rentals payable without regard to whether the lessor reported tax on the purchase price of some or all of the property incorporated into the leased property.

Mr. ---

-2-

June 10, 1994
330.3955

You state that to be suitable for renting, your costumes are either altered or made from materials you purchase. The costumes you make are clearly not leased in substantially the same form as acquired. Although we have previously concluded that "minor temporary adjustments to rented tuxedos" do not substantially change the form of the tuxedos (BTLG Annot. 330.4180 (8/25/66)), it appears likely that your alterations of donated costumes substantially change the form. Additionally, although you have paid tax (reimbursement) on the property you purchased to make or alter the costumes, you did not pay tax on the purchase price of the donated costumes since they had been donated to you. Therefore, even if you have been renting the donated costumes in substantially the same form as acquired, you are obligated to collect use tax on the rentals payable on the costumes you altered or made. However, you may take a tax-paid purchases resold deduction for sales tax (reimbursement) paid on the purchase of materials incorporated into the costumes, provided you did not use the costumes prior to renting them. This is explained in Regulation 1701, a copy of which is enclosed. If you have further questions, please do not hesitate to write again. Very truly yours,

Victor G. Matl
Tax Counsel
VGM:plh
Enclosure - Regulation 1701
cc:

Sacramento District Administrator - KH