Was parking-lot entry and exit equipment leased in the same form when the lessor designed it and assembled numerous purchased components into finished systems?

Plain-English summary

An undated telephone inquiry described a lessor designing and engineering automatic parking-entry/exit equipment, buying numerous components from multiple suppliers, assembling at its plant and installing at lessee premises. The lessor made no individual component; whether parts were standard or special was unknown and considered immaterial.

Four variants used card keys, coins, free entrance or ticket dispensers. The described card-key entrance linked a receptacle, gate, treadles and protective posts electronically; card insertion raised the gate and treadles closed it after passage. The exit combined treadles, an illuminated “Do Not Enter—Severe Tire Damage” sign and one-way spring spikes that permitted exit but could damage tires of vehicles entering backward.

An absent auditor list/schedule reportedly showed 23 components initially listed at $426.65 plus 2½ hours at $3 ($7.50), totaling $434.15. Because $42.85 of subassembly labor was embedded in the first figure, Counsel recast this as $383.80 parts and $50.35 labor, still $434.15. Named subassemblies had 6, 3, 14, 16 and 18 components respectively.

The lease reportedly kept the apparatus personal property and allowed either party to cancel on 30 days' notice. No contract, installed system, list/schedule, invoice, component-tax record or payment appears.

Section 6006(g) treated consideration leases as sales unless an exception applied; motion pictures, linen supplies, household furnishings and mobile transportation equipment were inapplicable. Section 6006(g)(5), section 6052 and former Ruling 70(c)(2)(E) required same form plus acquisition tax.

The memorandum found a substantial change. Components did not resemble the finished product; lessor engineering and labor created its form, shape and function. Counsel asserted significant value increase from both labor relative to parts and finished value over components, although no finished value appears. The work was substantial, not mere clamping/bolting of completed items.

Rental receipts were therefore taxable. For equipment completed and placed in service after August 1, 1965, component tax was credited against rent tax.

Pre-August equipment became rent-taxable at its first post-August renewal. With 30-day cancellation, an agreement not renewed between August 1–31 was deemed renewed September 1 under Ruling 70(c)(3)(A); later rent was taxable, without credit for tax paid on pre-August equipment materials.

Live Annotation 330.4020 publishes only the engineering/design and multi-supplier component-assembly conclusion. It omits the four system variants, exact component/labor breakdown, lease terms, statutory exceptions and transition/credit rules. No return, credit computation, audit or later outcome appears.

Common questions

Did it matter that the lessor did not manufacture the individual components?

No. Its design, engineering, and assembly created the finished system.

What evidence quantified the assembly?

An absent auditor list/schedule. The memo restates an adjusted $383.80 parts and $50.35 labor breakdown, totaling $434.15.

Were standard versus custom parts decisive?

No. The memorandum says that distinction was not significant.

How did the card-key system work?

A coded card triggered the gate; ground treadles closed it after passage. Exit treadles and one-way spikes allowed cars out while deterring reverse entry.

Why was this not same-form leasing?

The assembled system had a new form, shape, function, and value compared with the separate parts.

Was the claimed finished-value increase quantified?

No. Only the component and labor breakdown appears.

Could the lessor receive credit for component tax?

Yes for the post-August 1, 1965 equipment described, but the historical transition rule differed for earlier equipment.

How did the old 30-day cancellation term affect renewal?

If a pre-August lease was not renewed during August 1965, the memo deemed it renewed September 1; later rent was taxable.

What does the live annotation omit?

All detailed equipment, cost, lease, transition and credit facts. It publishes only the high-level changed-form conclusion.

Citations and references

• Revenue and Taxation Code section 6006(g) — lease-as-sale rule and named exceptions
• Revenue and Taxation Code sections 6006(g)(5) and 6052; Ruling 70(c)(2)(E) — same-form/acquisition-tax exception
• Former Ruling 70(c)(3)(A) — September 1, 1965 deemed renewal
• Live Annotation 330.4020 — engineering/design/component-assembly conclusion dated September 23, 1968
• Inquiry, parties, equipment and evidence, leases/payments, taxes/returns/credits, audit and outcome — absent

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: Annotation 330.4020
• Original supporting opinion: 330.4020 PDF

Original ruling text

State of California

Board of Equalization

Memorandum

To:

Van Nuys – Subdistrict Administration (CH)

From:

Tax Counsel (TPP:LAA) – Headquarters

Subject:

Rentals Research & Development

330.4020

Date:

September 23, 1968

This is in response to your request telephone inquiry concerning the taxability of leases of automatic entry and exit equipment to operators of parking lots and other areas where access is controlled. It id our understanding that the lessor purchases numerous component parts from various suppliers and assembles them into the various pieces of entry and exit equipment. The equipment has been designed and engineered by the lessor, but they manufacture none of the components. Whether the parts are standard parts or manufactured specially for lessor is not known, but is not significant. There are four variations available: card key operation, coin operation, free entrance operation, and ticket dispenser operation. As an example, the card key operation entrance installation includes a card key receptacle, a “torqscrew” parking gate apparatus, ground treadles and appurtenant metal posts to protect the apparatus. The system is connected electronically so that when a user inserts his coded card key in the receptacle, impulses are sent to the gate apparatus which lift the gate. The car then passes through the gate and over the ground treadles, which sends impulses to the gate apparatus to close the gate. The card key exit apparatus includes a “one-way” steel spring apparatus installed at ground level, two-ground level treadles, an illuminated red octagonal sign indicating to vehicles outside the parking lot “Do Not Enter— Severe Tire Damage.” The steel spring spike apparatus is designed so that cars exiting pass over them without difficulty, but autos attempting to enter through the exit contact a stiff spike, causing tire damage. To illustrate the assembly required on the various pieces of equipment, the auditor secured a copy of a list of the components of assemblies itemized on the list. The list and schedule each indicate assembly labor involved. The list shows 23 component parts costing $426.65 with 2 ½ hours of labor at $3.00 or $7.50 to assemble for a total of $434.15. the auditor’s schedule shows that the B-3 hood assembly has 6 components; the rocker arm assembly, 3; the trunion assembly, 14; the motor and brake assembly, 16; the G-300 series control, 18; plus other components. The

labor to assemble these subcomponents, which was included in the $426.65 above, was $42.85. thus a more accurate breakdown of the cost would be: Parts, $383.80; labor, $50.35 for the total of $434.15. the equipment is assembled at the lessor’s plant and installed at the lessee’s premises. The lease signifies that the property shall at all times remain personal property. The apparatus are leased with each party having the option to cancel with 30 days notice. On these facts, I believe there is no question the rental receipts are subject to sales and use tax. Revenue and Taxation Code Section 6006 (g) includes among those transactions subject to sales tax “Any leases of tangible personal property in any manner or by any means whatsoever, for a consideration,…” unless the lease falls within one of the exceptions listed in the section. Since this is not a lease of motion pictures, linen supplies, household furnishings, or mobile transportation equipment, the only exception under which it might come is section 6006 (g) (5)
[ruling 70(c) (2) (E)] as property leased in substantially the same form as acquired as to which tax reimbursement has been paid pursuant to section 6052 or use tax has been paid measured by the purchase price of the property. In our opinion the property leased in the present case is not in substantially the same form as acquired. The lessor has actually created or produced a piece of equipment from component parts which bore no resemblance to the finished product before assembly. The equipment was engineered and designed by the lessor and thus takes its form, shape and function through the lessor’s efforts. There is a significant increase in value as a result of the labor involved in assembly, not only from the stand point of relation of the labor cost to the cost of the parts, but also, I am certain, from the standpoint of increase in value of the finished product over the cost of the components. The amount of labor involved is substantial. This is not a matter of merely clamping or bolting together of previously completed items. On equipment completed and placed in service after August 1, 1965, on which tax measured by rental receipts is to be asserted, lessor should be credited with any tax paid on components. On equipment completed and placed in service prior to August 1, 1965, the tax would apply on rental receipts on the first renewal after August 1, 1965. since the contracts in question provide for cancellation with 30 days notice, if they were not renewed between August 1, 1965, and August 31, 1965, they would be deemed renewed as of September 1, 1965 pursuant to ruling 70 (c) (3) (A), and all subsequent rental receipts would be taxable. No credit would be allowed for any payment of tax on cost of materials on equipment rented prior to August 1, 1965.

LAA:ph
cc: Los Angeles District – District Administration