Did furnishing self-manufactured replacement parts make rents taxable when the lessor had paid tax on the machinery at purchase?

Plain-English summary

A redacted CPA's absent letter, received December 8, 1995, concerned a California corporation leasing unidentified machinery in California. The PDF says it paid quoted “sales tax” at purchase and therefore did not collect tax on rent. Live Annotation 330.3996 more specifically calls that vendor sales-tax reimbursement and says the customer was in California; neither detail appears that way in the PDF.

The corporation manufactured and supplied replacement parts without a separate charge, while calculating rent from machine production. No machinery, invoice, tax proof, lease, rent computation, part, material or cost record appears.

California said the replacement parts did not make the rental receipts taxable. The machinery remained leased in substantially the same form as acquired.

The lessor did owe tax measured by the cost of materials incorporated into the replacement parts it manufactured.

Only a total refurbishment so substantial that the result was effectively a different machine would change the acquired-form conclusion and make the rental charge taxable. The opinion considered that scenario unlikely on the stated facts.

The final page prints “same for” where the sentence means same form; the original text remains unchanged. Neither official source cites numbered law, and no return, audit, refurbishment finding or later outcome appears.

Common questions

Did supplying replacement parts turn the lease into a taxable rental?

No.

Was the acquisition-tax evidence included?

No. The PDF restates payment of quoted “sales tax”; the live annotation calls it vendor reimbursement.

What tax applied to the self-manufactured parts?

Tax applied to the cost of the materials incorporated into them.

Was there any separate replacement-part charge?

No under the stated facts. The source supplies no invoice or rent computation.

Could refurbishment change the result?

Yes, if it was so extensive that the equipment became, in substance, a different machine.

Did the opinion find that total refurbishment occurred?

No. It called that scenario unlikely and shows no machine or refurbishment evidence.

Was an actual return or audit result shown?

No. The source is advice without reporting, audit or later outcome records.

Citations and references

• December 18, 1995 Assistant Chief Counsel opinion — applied the substantially-same-form rule to replacement parts
• Tax paid at machinery acquisition — basis for treating the rent as nontaxable on the stated facts
• Materials incorporated into manufactured parts — measure identified for the lessor's tax
• No numbered authority appears
• Live Annotation 330.3996 — vendor-reimbursement and California-customer wording
• Request, parties, machinery/transactions, returns, audit and outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.3996
• Original supporting opinion: 330.3996 PDF

Original ruling text

330.3996

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
LEGAL DIVISION - MIC: 82
450 N STREET, SACRAMENTO, CALIFORNIA
(P. O. BOX 942879, SACRAMENTO, CA 94279-0082)
TELEPHONE: (916) 445-3723
FAX: (916) 323-3387

DEAN F. ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento

BURTON W. OLIVER
Executive Director

December 18, 1995

Mr. B---W--G---, U--- & F--Certified Public Accountants
XXXXXX --- Boulevard, Suite XXX
--- ---, CA XXXXX

Dear Mr. W---:

This is in response to your letter to Mr. Robert Lambert, received here on December 8, 1995. We understand that your client is a California corporation which is the lessor of machinery. The corporation originally purchased the machinery and paid “sales tax” on it at the time of purchase. The machinery is leased in California, and the company is not required to collect sales tax on the rentals, because it paid the sales tax at the time of purchase. However, the company also provides replacement parts for the leased machines, which it manufactures itself. The rentals which the company collects are based on machine production. There is no additional charge for the replacement parts. Under the circumstances described, the rental charges remain nontaxable. Your client should pay tax based upon the cost of materials incorporated into the replacement parts. The machinery is regarded as having been leased in substantially the same form as it was acquired, notwithstanding the fact that your client may furnish replacement parts. Only if the machine were refurbished in its entirety, such that the change in the machine was so substantial that it was effectively a different machine, would the rental charge become taxable. That is, if after a total refurbishment, the machine was in substance a different machine, we would then conclude that

Mr. B--- W---

-2-

December 18, 1995
330.3996

the property was not leased by your client in the same for in which it was acquired. Such scenario would be unlikely. Very truly yours,

Gary J. Jugum
Assistant Chief Counsel
GJJ:sr
cc:

Mr. Robert Lambert

bc:

Mr. David H. Levine
Mr. Ronald L. Dick
Mr. John L. Waid
Ms. Candice McCanne