Could an MTE lessor using fair rental value buy replacement and maintenance parts ex-tax?

Plain-English summary

California considered whether a lessor that elected fair rental value for mobile transportation equipment could buy replacement and maintenance parts ex-tax.

The memorandum allowed ex-tax purchases when fair rental value was based on a fully maintained rental charge. It treated MTE as including its components, so the tax measure could encompass the replacement parts through that maintenance-inclusive rent.

The author recognized a possible theoretical distinction when the equipment had uses in addition to leasing: the parts might not themselves be frequently demonstrated or displayed, which could suggest tax on their cost and a base rent without maintenance. The agency rejected that split as difficult to administer and inconsistent with its established demonstrator-parts practice.

The adopted rule used fully maintained fair rental value without fuel charges.

Why staff chose one treatment

Glenn L. Rigby's July 25, 1973 memorandum to Robert Nunes relies on an earlier staff position that MTE includes its components. Under section 6094(d), sole leasing use therefore allowed component tax to be measured through full-maintenance rental value. Section 6094(c), addressing use in addition to leasing, raised a harder question: replacement parts might not themselves be frequently demonstrated or displayed, suggesting cost tax on parts and rental value without maintenance for the equipment.

Rigby acknowledged that alternative could be theoretically correct but rejected it as the practice to follow. Distinguishing the two use categories could be difficult; one parts rule was simpler; and staff had for years allowed dealers to add parts and accessories to demonstrators ex-tax because the 1/60th formula included their rental value. The memo says enactment of section 6094(d) had not changed that demonstrator policy. It does not provide the separate prior policy documents or derive the formula.

The author promised, “I will make a CLD of the foregoing conclusions,” and added that the result would modify his previously prepared aircraft-lease chart. Neither the CLD nor that chart is attached; the abbreviation is left as printed. No individual lessor, aircraft, parts purchase, charge, election or tax calculation is supplied.

The live annotation states the ex-tax-parts/full-maintenance-rent result but omits the fuel exclusion, rejected alternative, demonstrator comparison and missing follow-up documents. The PDF's broader reasoning remains an internal historical policy explanation, not proof of a later taxpayer's eligibility.

Common questions

Could replacement parts be bought ex-tax?

Yes, when the lessor properly used fair rental value based on the full maintenance rental charge.

Did the fair-rental-value measure include fuel?

No. The source specified a fully maintained charge without fuel charges.

Did California create separate parts rules for sole leasing and additional use?

No. Although the memorandum discussed the distinction, it chose one simplified rule for replacement parts.

Citations and references

• California Revenue and Taxation Code sections 6094(c), 6094(d), and 6244

Verbatim support

From the official memorandum:

it is our opinion that we should follow the practice of allowing the lessor to purchase such parts ex tax with the “fair rental value” based on a fully maintained fair rental value (without fuel charges).

The foregoing conclusions concerning the purchase of repair parts will necessarily modify the chart that I previously prepared regarding aircraft leases.

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/335-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/335-0010.pdf

Original ruling text

State of California

Memorandum

To:

Mr. Robert Nunes

From:

Glenn L. Rigby

Subject:

Leases of Mobile Transportation Equipment - Purchase and Use of Repair Parts

Board of Equalization

335.0010

July 25, 1973

As you are aware, Sections 6094 and 6244 provide for the use of “fair rental value” as a measure of use tax on mobile transportation equipment under limited circumstances. We previously hae taken the position that “mobile transportation equipment” includes components thereof. Accordingly, if the sole use of the property was the leasing of the “mobile transportation equipment (Section 6094(d)), it would be proper to report the use tax on components on the basis of fair rental value. This could be accomplished by using the “fair rental value” based on a full maintenance rental charge. If this procedure is followed, the replacement and maintenance parts can be purchased ex tax. If the use of the “mobile transportation equipment” falls under Section 6094(c) (use in addition to leasing), a question arises as to whether the use of the replacement parts may be reported on the basis of fair rental value. It could be argued that such parts are not “frequently demonstrated or displayed”, and therefore the use of fair rental value is inappropriate. Under this analysis, the replacement and maintenance parts would have to be reported at cost. Following this reasoning the “fair rental value” of the equipment would be a base rental without maintenance. Although the latter analysis may be theoretically correct, I question whether it would be desirable to apply it. First, distinguishing between situations involving Sections 6094(c) and 6094(d) may at times be difficult. Second, it would simplify matters to have just one rule with respect to replacement parts. Finally, and more important, for a number of years we have allowed auto dealers to place parts and accessories on demonstrators ex tax on the theory that the 1/60th formula included the fair rental value of such items. This policy was not changed with the enactment of Section 6094(d).

Mr. Robert Nunes

-2-

July 25, 1973
335.0010

Taking all things into consideration, it is our opinion that we should follow the practice of allowing the lessor to purchase such parts ex tax with the “fair rental value” based on a fully maintained fair rental value (without fuel charges). I will make a CLD of the foregoing conclusions.

GLR:lb

cc:

335.0010.doc

Mr. T. P. Putnam
Mr. Robert H. Anderson
Mr. Philip R. Dougherty
San Diego – District (WAS)
Marysville – District (JF)
The foregoing conclusions concerning the purchase of repair parts will necessarily modify the chart that I previously prepared regarding aircraft leases.