Did leasing MTE create new tax or destroy an interstate-commerce exemption during the historical six-month test?

Plain-English summary

The requester described Company A as owning mobile transportation equipment used in intrastate and interstate commerce. Some units were tax paid; other units were reported to qualify for the historical interstate-commerce tests. The author accepted the latter through express assumptions rather than attached use records. Company A planned to lease all of them to Company B.

California said tax-paid MTE could be consumed in any manner, including leasing, without further sales or use tax. For the ex-tax units, leasing did not itself destroy the exemption because the lessor remained the consumer and an MTE lease was not a sale.

During the historical six-month test period, Company B's use was attributed to Company A. If the combined use satisfied the stated out-of-state or continuous-interstate-commerce test, Company A remained exempt. If the attributed use failed, Company A owed use tax; Company B did not become the taxpayer merely because it was the lessee.

The source also said a fair-rental-value election could allow the lessor to collect reimbursement under appropriate circumstances, but the legal liability remained with Company A. It did not answer the separate sublease issue because the facts were incomplete.

Assumed exemption facts and unfinished questions

David H. Levine's August 1, 1990 letter answers a June 27 request to confirm Assistant Chief Counsel Gary Jugum's advice. Neither the request nor the earlier advice is attached. The author assumes the ex-tax equipment was bought outside California, first functionally used outside California and brought here within 90 days, then met either test 3 or test 4 of Annotation 570.0430. That meant more than half of the six-month test outside California, or first interstate functional use outside California followed by entry in that use and continuous interstate use for at least six months. No unit-level records prove those assumptions.

A lease starting before the test ended did not restart the clock: Company B's use counted as Company A's use. The first printed example starts with four months—2½ inside California and 1½ outside—but moves directly into “for the next two months” without clearly saying what Company B did in that interval. It concludes no tax, but the missing description is not reconstructed here. The counterexample is clearer: two further months wholly in California produce 4½ California months in the test and a use-tax liability for A.

The author explicitly does not understand how the mentioned sublease relates to the facts and declines to answer it. There is no sublease approval. The final liability paragraph repeats a sentence about B incurring no tax if A's use is untaxed; the repeated wording remains in the original. Even when A owes tax and collects reimbursement in an allowed circumstance, the letter places liability on A rather than B.

The live annotation carries “Am. 2000–1” and adds a note requiring a timely first-lease-period FRV return to preserve that choice while exemption eligibility is uncertain, followed by a refund claim if eligibility is established. That detailed election/refund instruction is not in the PDF, which states the general election mechanism. No amendment document, filed return, tax payment, claim or later outcome is provided.

The PDF prints section 6010(g)(4) alongside section 6006(g)(4); its subsection is retained as printed. The page does not silently substitute another citation or supply missing transaction facts from other opinions.

Common questions

Did leasing tax-paid MTE create another tax?

No. The source said no further tax arose merely from that method of consumption.

Whose use counted during the historical exemption test?

The lessee's use was treated as the lessor's use.

Who owed tax if the use failed the test?

Company A, the lessor-consumer, not Company B as lessee.

Did the opinion decide a sublease question?

No. It requested a more complete factual description.

Citations and references

• California Revenue and Taxation Code sections 6006(g)(4), 6010(g)(4), 6092.1, 6094(d), 6243.1, and 6244(d)
• California Sales and Use Tax Regulation 1661
• Annotation 570.0430 — historical tests underlying the opinion
• June 27 request and earlier Gary Jugum advice — absent
• Official annotation marker: amended 2000-1

Verbatim support

From the official August 1, 1990 letter:

I assume that all MTE in question satisfied either test 3 or 4.

If the MTE is leased to Company B, Company B’s use of the MTE will be regarded as the use by Company A for purposes of ascertaining whether Company A qualifies for the exemption.

I am not certain how the sublease relates and therefore do not answer that question.

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/335-0041.pdf

Original ruling text

335.0041

STATE OF CALIFORNIA

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

August 1, 1990

Mr. P--- T. C--A--- S--- T--- C--XXXX ---Road, Suite XXX
---, CA XXXXX
Dear Mr. C---:
This is in response to your letter dated June 27, 1990 in which you ask for confirmation of advice given to you by Assistant Chief Counsel Gary Jugum. Company A acquired mobile transportation equipment (MTE) which it used in both intrastate and interstate commerce. Some of the MTE was acquired ex-tax and some of these were leased. All the ex-tax MTE qualified for the interstate commerce exemption pursuant to the four tests set forth in Business Taxes Law Guide Annotation 570.0430. With respect to the remaining MTE, Company A paid tax on costs. Company A now wants to lease all of its MTE to Company B, and your questions relate to Company A’s tax liability for such leases. A lessor of MTE is always regarded as the consumer of that MTE. (See Rev. & Tax. Code §§6006(g)(4), 6010(g)(4).) Thus, a sale of MTE to a person who will lease that MTE is the retail sale subject to sales or use tax. However, rather than paying tax on purchase price, the lessor may make an election to pay the tax liability that arose at the time of the purchase measured by fair rental value. (Rev. & Tax. Code §§6092.1, 6094(d), 6243.1, 6244(d).) In summary, a lessor of MTE is always regarded as the consumer of that MTE even if the lessor elects to pay use tax measured by fair rental value. Company A held some of the MTE in question tax paid. Regardless of the manner that Company A consumes that MTE, no further sales or use tax is due, even if Company A chooses to consume that MTE by leasing it. The remainder of this opinion relates to the MTE that Company A does not hold tax paid. By your reference to qualifying for the interstate commerce exemption pursuant to Annotation 570.0430, I assume that the relevant facts are as follows. Company A purchased the subject MTE outside California and sales tax therefore does not apply. The MTE was not first functionally used in California. (If it were, it fails the first test of Annotation 570.0430 and use tax applies.) The MTE was brought into California within 90 days from the date of purchase, raising the presumption that it was purchased for use in California. Use tax would apply unless test 3 or 4

Mr. Paul T. Curtis

-2-

August 1, 1990
335.0041

is satisfied. The subject MTE did satisfy either test 3 or 4. That is, for a test period of six months after the MTE entered California, the MTE was used more than one-half the time outside California, or the MTE was first functionally used in interstate commerce outside California, entered California in the course of such use, and then was continuously used in interstate commerce for at least six months after the MTE entered California. (I note that with respect to any MTE failing both tests 3 and 4, Company A would owe use tax measured by purchase price. I assume that all MTE in question satisfied either test 3 or 4.) Based on the assumptions made above, Company A acquired the subject MTE in transactions which were exempt from sales or use tax. As the consumer of that MTE, even if the MTE is leased, Company A owes no sales or use tax since it acquired the MTE in transactions exempt from these taxes and will not transfer the MTE in a transaction constituting a sale under the Sales and Use Tax Law. That is, the lease of the MTE by Company A does not effect the MTE’s exempt status, without regard to the location of delivery to the lessee or how or where the equipment is used by the new lessee, and no tax liability is incurred by Company A. Additionally, you asked for confirmation that even if the lease of the MTE from Company A to Company B occurred before the six-month test period had ended, the fact that all or part of the six-month test was after the lease began would not negate the interstate commerce exemption or create any tax liability on Company A. As mentioned above, Company A is regarded as the consumer of the MTE whether it consumes the MTE by using the MTE itself or by leasing the MTE to Company B. If the MTE is leased to Company B, Company B’s use of the MTE will be regarded as the use by Company A for purposes of ascertaining whether Company A qualifies for the exemption. For example, if Company A leases the MTE to Company B after having used the MTE for four months, two and one-half months inside California and one and one-half months outside California for the next two months, Company A will have no tax liability because the presumption of purchase for use in California will have been overcome. On the other hand, if Company B were to use the MTE solely inside California for the next two months, that two months would be added to Company A’s previous two and one-half month’s use in California for a total California usage in the test period of four and one-half months. Use tax would apply because Company A would be regarded as having purchased the MTE for use in California. (I note that you mention a sublease. I am not certain how the sublease relates and therefore do not answer that question. If you have a question regarding subleases in this context, please write again with a more complete description.) You also ask for confirmation that as far as Company B is concerned as a lessee of Company A, Company B incurs no sales or use tax liability. We agree. If Company A’s use of the MTE is not subject to use tax, as discussed above, then Company B incurs no tax liability. Even if Company A’s use of the MTE is not subject to use tax, as discussed above, then Company B incurs no tax liability. Even if Company A’s use of the MTE incurs a use tax liability, that liability would be on Company A. Although Company A may collect use tax measured by fair rental value from its lessees under certain circumstances, the actual liability is on Company A and not Company B. (See generally Reg. 1661.)

Mr. Paul T. Curtis

-3-

If you have further questions, feel free to write again.
Sincerely,

David H. Levine
Senior Tax Counsel

DHL:wak
2353C

August 1, 1990
335.0041