What tax applied when a lessor kept and later used property after a qualifying acquisition sale and leaseback ended?

Plain-English summary

The opinion addressed a historical acquisition sale and leaseback qualifying under Revenue and Taxation Code section 6010.65. If the lessee did not exercise its purchase option at the end, the lessor retained the property it had acquired in the excluded transaction.

California said the lessor's own later use of that property was not subject to tax. But if the lessor then leased the property to a different customer, the new lease was a taxable continuing sale measured by rent.

The lessor could not switch the new lease to tax measured by purchase price. It had acquired the property without paying purchase-price tax and lacked a specific statute authorizing a later cost election.

Other questions answered in the same letter

Senior Tax Counsel David H. Levine's February 21, 1992 response to a redacted attorney's January 15 request has the subject “Amendment of Regulation 1660.” The request and actual purchase, lease, assignment or option documents are not attached. The opinion answers questions on the assumption that the original acquisition sale and leaseback qualifies under historical section 6010.65; it does not establish qualification for a named transaction.

Under subdivision (c) as described in the letter, execution before January 1, 1995 controlled the leaseback exclusion. Payments after that date remained outside continuing-sale treatment if the original arrangement qualified. But subdivision (b) expressly included a title transfer to the lessee at termination as a sale and purchase. Section 6010.65 therefore did not exclude that end purchase, regardless of the repurchase date or when the option was granted.

If the lessee sold its business and assigned the qualifying lease and purchase option to the buyer, the same distinction applied. The assignee's lease payments remained nontaxable receipts, but its exercise of the purchase option was not excluded by section 6010.65. The letter clarifies that it is answering about rents the assignee pays, although one sentence prints that the assignee “is not the lessee” before the parenthesis explicitly identifies it as the lessee. That wording is not resolved by the source.

For the lessor's own use after an unexercised option, the letter prints January 1, 1965, while its other cutoff discussion consistently uses January 1, 1995. This unexplained date conflict remains in the original text. For later leasing, section 6094.1 is cited as a contrasting example of express authority to elect tax on cost for property acquired in an exempt occasional sale; the author finds no such authority for this acquisition-sale-and-leaseback property.

The live 330.5300 annotation summarizes only later lessor use and leasing. It presents a lessee's failure to exercise an option as an event; the full letter poses this as a question and reports no completed transaction. Companion Annotation 330.2795 separately publishes the same letter for the end-purchase issue.

Common questions

Was the lessor taxed merely for keeping and using the property?

No, under the historical section 6010.65 transaction described in the opinion.

What happened if the lessor rented it to a new customer?

That later lease was taxable on rental payments.

Could the lessor elect to pay tax on cost instead?

No. The opinion found no specific statutory authority for that election in these circumstances.

Did the exclusion also protect an end-of-lease purchase?

No. The letter says section 6010.65 did not exempt or exclude that purchase, whether the original lessee or an assignee exercised the option.

Did the opinion prove that an actual sale and leaseback qualified?

No. It assumed qualification when answering the attorney's questions.

Citations and references

• Cal. Rev. & Tax. Code § 6010.65 — historical acquisition sale-and-leaseback exclusion
• Cal. Rev. & Tax. Code § 6094.1 — example of specific purchase-price election authority distinguished by the opinion

Verbatim support

From the official February 21, 1992 letter:

That is, there is no exemption or exclusion under section 6010.65 with respect to a sale at the end of the lease term.

the exercise of the option to purchase is not exempt or excluded from taxation under section 6010.65 no matter who exercises the option.

there is no election for the lessor to pay tax measured by purchase price since there is no specific statutory authority to do so.

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/330-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/330-5300.pdf

Original ruling text

330.5300

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

February 21, 1992

Mr. C--- L. N--Attorney and Counselor at Law
XXXX --- --- East, Eleventh Floor
--- ---, California XXXXX
Re:

Amendment of Regulation 1660

Dear Mr. N---:
This is in response to your letter dated January 15, 1992 regarding the application of Revenue and Taxation Code section 6010.65. You note that the section is in effect until January 1, 1995. If a taxpayer enters into a sale and leaseback transaction prior to that date but the lease itself extends past January 1, 1995, you ask whether the lease payments made after January 1, 1995 would be taxable. You also inquire as to the tax treatment of a repurchase of the equipment after January 1, 1995 if the repurchase were pursuant to an option granted in the contract signed prior to January 1, 1995. Subdivision (c) states that section 6010.65 applies to acquisition sale and leaseback arrangements executed before January 1, 1995. Thus, if the acquisition sale and leaseback arrangement is executed prior to January 1, 1995, the leaseback portion comes within the terms of section 6010.65 and is not regarded as a continuing sale subject to use tax. With respect to repurchases, the date of the repurchase is irrelevant, regardless of when the option is granted. Subdivision (b) of section 6010.65 specifically states that “sale” and “purchase” include, for purposes of application of sales and use tax, the transfer of title to a lessee upon termination of an acquisition sale and leaseback. That is, there is no exemption or exclusion under section 6010.65 with respect to a sale at the end of the lease term. You ask what happens if the lessee sells its business and the lease is assigned to the new buyer along with the option to acquire the property at termination of the initial lease contract. Assuming the lease is pursuant to a qualifying sale and leaseback, the lease is not regarded as a sale for purposes of sales and use tax. You ask whether the rentals to the assignee are exempt. I assume you are asking whether the rentals paid to the lessor are not taxable since the assignee is not the lessee (that is, the assignee in your question is the lessee and is not receiving rents but rather is paying them). As noted above, if the acquisition sale and leaseback qualifies under section 6010.65,

Mr. C--- L. N---

-2-

February 21, 1992
330.5300

the lease receipts are not taxable rentals. You ask whether the exercise of a purchase option on the equipment by the assignee would be subject to tax. As noted above, the exercise of the option to purchase is not exempt or excluded from taxation under section 6010.65 no matter who exercises the option. Your final questions relate to use of the property upon termination of the lease when the lessee does not exercise an option to purchase. You ask whether subsequent use of the rental property by the lessor is subject to tax. Since the lessor acquired the property in a transaction not subject to tax, its use of the property is not subject to tax, regardless of whether that use occurs before or after January 1, 1965. On the other hand, when the lessor leases that property to a different lessee, that lease is a continuing sale and purchase and is subject to use tax measured by rentals payable. I note further that there is no election for the lessor to pay tax measured by purchase price since there is no specific statutory authority to do so. (See, e.g., Rev. & Tax. Code § 6094.1 (specific authority to pay tax measured by purchase price when lessor acquires property in an exempt occasional sale).) If you have further questions, feel free to write again. Sincerely,

David H. Levine
Senior Tax Counsel

DHL:cl
0612E
bc:

--- --- District Administrator