Did combining separately purchased tax-paid restaurant furnishings and equipment into an operating franchise location change their form and make percentage rent taxable?

Plain-English summary

An absent March 25, 1968 district memo described a restaurant chain forming a separate corporation for each location. Each location corporation arranged for an outside landowner to erect a restaurant, then leased its land and building.

The corporation reportedly bought tax-paid equipment from several suppliers: dishes, utensils, glassware, cookware, tables, chairs, booths, stools, counters, refrigeration and cooking equipment, and other operating items. Tax Counsel expressly assumed vendors or third parties installed them; no purchase, tax or installation evidence appears.

The equipped site was operated by the corporation until franchised or franchised immediately. The absent franchise agreement combined a land/building sublease and equipment/furnishings lease “on a percentage basis”; the memo does not identify the percentage, measure or allocation.

Although management effort combined the separate items into a ready-to-operate restaurant, the memorandum found no substantial change in their form. The equipment remained the individual tax-paid property acquired from vendors.

The equipment lease therefore qualified for the historical same-form exception and was not subject to tax under the stated facts. The PDF cites former Ruling 70(c)(2)(B) and prints Revenue and Taxation Code “section 6606(g)(5).” Live Annotation 330.3974 and the surrounding rule identify 6006(g)(5); the original source wording remains unaltered.

No entity record, land/building agreement, equipment list or invoice, acquisition-tax proof, installation evidence, operation record, franchise agreement, rent allocation, return, audit or later outcome appears. The live annotation compresses the separate chain/location-corporation structure into one “franchiser” and omits the installation assumption and printed authorities.

Common questions

Did creating a functioning restaurant transform the equipment?

No. Management coordination alone did not substantially change the form of the individual items.

Which entity bought and leased the equipment?

The PDF says the restaurant chain formed a separate corporation for each location and that corporation did so. The live annotation instead refers generally to the franchiser.

Had tax been paid when the equipment was acquired?

Yes according to the assumed facts.

Was the equipment tax proof included?

No. The memo restates tax-paid purchases without invoices or returns.

Who installed the equipment?

The memorandum assumed vendors or third parties, not the franchisor's own fabrication operation.

Was the land and building arrangement the tax issue?

No. The opinion addressed the separate equipment lease under the franchise agreement.

What did “percentage basis” mean?

The source does not say. It provides no payment formula or allocation between the building sublease and equipment lease.

Was a return or final assessment shown?

No. The memo gives the legal conclusion without a reporting, audit or later outcome record.

Citations and references

• Cal. Rev. & Tax. Code § 6006(g)(5) — same-form lease exception identified by the official annotation; the source body prints “6606(g)(5)”
• Former Ruling 70(c)(2)(B) — historical tax-paid equipment rule cited in the source
• Live Annotation 330.3974 — same-form result, with entity structure compressed and installation assumption omitted
• Request, entities, property/tax, installation, agreements, payment allocation, returns and outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3974
• Original supporting opinion: 330.3974 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Los Angeles District - District Principal Auditor

From:

Tax Counsel (TPP:LAA) - Headquarters

330.3974

Date:

September 12, 1968

Subject:

This is in response to your memorandum of March 25, 1968, concerning the taxability of equipment leases under a restaurant franchise agreement. We understand the facts to be these. A certain restaurant chain forms separate corporations for each of its locations. Each of these corporations arranges with an outside landowner to erect a restaurant building and the corporation leases the land and building. The corporation then purchases from several suppliers on a tax-paid basis all of the equipment necessary to operate a restaurant: dishes, utensils, glassware, pots and pans, tables, chairs, booths, stools, counters, refrigeration and cooking equipment, etc. I assume installation is provided by the vendor or third parties. The location thus outfitted is either operated by the corporation until franchised or franchised immediately. The franchise agreement provides for the sublease of the land and building and a lease of the equipment to the franchise holder on a percentage basis. In a sense, then, management effort has combined individual items into a going restaurant unit which is leased to the franchise holder. The question raised is whether this process of assembly results in a substantial change in the form of the individual items of equipment so that the lease no longer comes within the exception of Revenue and Taxation Code section 6606(g)(5) and ruling 70(c)(2)(B). In our opinion this is no substantial change in form and the lease is not subject to tax.