Could an MTE lessor claim a refund for tax reimbursement paid on California repair parts described in its lease as resold to the lessee?

Plain-English summary

An MTE lessor had to maintain tractors and trailers under its leases. The agreements said the lessor bought repair parts and maintenance items for resale to the lessees. After paying tax reimbursement to California parts vendors, the lessor sought a refund.

California said the lease wording did not control. An MTE lessor is the consumer of the equipment, and MTE includes property that becomes a component part. The lessor therefore consumed the repair parts in performing its lease obligations rather than reselling them to the lessees.

The special ability to buy MTE and component parts ex tax required a valid, timely election to measure use tax by fair rental value. On the presented facts, this lessor could not make that election because it had apparently owned and leased the equipment outside California for more than a year and had not purchased it for California use. It also was not the proper claimant for tax reimbursement paid to retailers because the retailers were the sales taxpayers. The memorandum rescinded contrary 2003 advice.

What the record establishes—and does not

The May 11, 2006 memorandum responds to Robert Buntjer's December 23, 2005 memorandum and quotes part of it. That quoted request says a district recommended denying a refund claim generated from September 30, 2003 Legal advice. Neither the request, district recommendation, claim, invoices, Master Equipment Lease Agreement, nor the 2003 letter appears in the published PDF.

The author calls the California parts purchases sales-tax transactions and says the lessor was not the proper claimant. The conclusion carefully refers to tax reimbursement the lessor paid “if any.” The source therefore does not establish a refund amount, purchase dates, particular parts, invoices, retailers, or the amount actually reimbursed.

The election analysis is expressly fact-dependent. It says the lessor had “apparently” owned and leased the equipment outside California for more than a year before bringing it into the state. A footnote says the opinion would differ if the equipment instead was bought for California use and the lessor timely elected fair-rental-value reporting. No equipment-level acquisition, lease, entry, or return records are supplied.

The memorandum quotes the operative sentence from Glenn L. Rigby's July 25, 1973 backup memorandum for Annotation 335.0010 and lists that memorandum as attached, but the official three-page PDF ends after the copy list without the attachment. It also says the rescinded Abbott letter failed to analyze an additional sublease issue; the letter, sublease facts, and resulting analysis are absent, so this page does not reconstruct them.

The live annotation preserves the repair-parts, consumer, election, and standing conclusions. It does not disclose the rescinded 2003 advice, the unresolved sublease issue, or the absent records behind the memorandum.

Common questions

Did the lease clause calling the repair parts resale property determine the California result?

No. The memorandum applied California's statutory treatment of the MTE lessor as consumer.

Could every MTE lessor buy repair parts ex tax?

No. The cited procedure required a timely, valid fair-rental-value election.

Would the memorandum reach the same result if the equipment had been bought for California use?

Not necessarily. Its footnote says the opinion would be different if the facts differed and the lessor bought the MTE for California use and timely elected to report use tax on fair rental value.

Citations and references

• California Revenue and Taxation Code sections 6023, 6092.1, 6094(d), 6243.1, 6244(d), and 6901.5
• California Sales and Use Tax Regulations 1620(b) and 1661(b)(1)
• Business Taxes Law Guide Annotation 335.0010
• December 23, 2005 Buntjer memorandum and district recommendation — referenced but not included
• September 30, 2003 Abbott letter — rescinded but not included
• July 25, 1973 Rigby memorandum — listed as an attachment but not included

Verbatim support

From the official May 11, 2006 memorandum:

Thus, notwithstanding how the transaction is characterized in the relevant lease agreements, the purchase of the parts by U--- is not a purchase for resale under California law.

Additionally, it should be noted that the application of tax depends on the actual facts, not on factual assumptions.

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/335-0043-500.pdf

Original ruling text

State of California

Memorandum

To :

Acting Supervisor
Audit Determination & Refund Section, MIC:39

From:

Denise L. Riley, Tax Counsel
Tax & Fee Program Division, MIC 82

Subject:

U---, Inc.
SR -- XXX-XXXXXX

Board of Equalization
Legal Department-MIC: 82

335.0043.500

Date: May 11, 2006

Telephone: (916) 445-3540
CalNet: 8-485-3540

This memorandum responds to Robert Buntjer’s memorandum to Acting Assistant Chief Counsel Selvi Stanislaus, dated December 23, 2005. In relevant part, Mr. Buntjer’s memorandum states: Attached is a district recommendation to deny a claim for refund filed by the above claimant for tax [reimbursement] paid on parts used for repairs on Mobile Transportation Equipment (MTE). The claim was generated based on advice provided by Legal in a letter [by Tax Counsel IV John Abbott] dated September 30, 2003. It appears that based on Section 6901, no action should be taken on the claim since claimant is the purchaser of the parts and paid sales tax
[reimbursement] on the transactions. However, the district requested that Legal be asked to review the advice provided and possibly rescind the opinion. DISCUSSION: We have reviewed the documents that you provided along with the relevant statutory provisions and regulations. As explained below, based upon our review of the law and facts underlying the claim, we concur that the purchase of parts in California for repair of the MTE that U---, Inc. (U---) leased to X--- G--- S---, Inc. and any other lessees (collectively, X---) constitutes a sales tax transaction, not a use tax transaction. Accordingly, U--- is not a proper claimant. U--- leases tractors and trailers (Equipment) to X---. The terms of the lease provide that U--- is to maintain, repair or alter the Equipment and that U--- “shall be responsible for purchasing all repair parts and maintenance items for resale to Lessee.” (Master Equipment Lease Agreement, ¶6.) However, under the definition of MTE, “mobile transportation equipment” includes equipment, such as truck tractors and truck trailers, and any tangible personal property which is or becomes a component part of such equipment, such as the parts being purchased by U--- for the leased Equipment. (Rev. & Tax. Code, § 6023.)

Acting Supervisor
Audit Determination & Refund Section

-2-

May 11, 2006
335.0043.500

In addition, California Code of Regulations, title 18, section (Regulation or Reg.) 1661, subdivision (b)(1), provides that “with respect to leases of mobile transportation equipment, the sale to the lessor is the retail sale and the lessor is the consumer of the equipment.” As such, U-­

• is the consumer of the MTE and the consumer of any parts used to maintain or repair the MTE.
  In other words, U--- is not the retailer of the parts to its lessee. Rather, U--- is purchasing the parts for its own use in connection with the lease. Thus, notwithstanding how the transaction is characterized in the relevant lease agreements, the purchase of the parts by U--- is not a purchase for resale under California law. Moreover, because U--- is the consumer of the parts, and not the retailer, it has no standing to request a refund of the tax reimbursement that U--- may have paid to California retailers. The general rule prohibits suits or claims for refund by anyone other than the taxpayer, here the retailers. (See Rev. & Tax. Code, § 6901.5.) Additionally, we concur that U--- may not purchase parts ex tax based upon the alleged mandatory maintenance contracts it has with its lessees. Because U--- has apparently owned and leased the MTE out of state for more than a year before bringing the MTE into California, U--did not purchase the MTE for California use. (See Reg. 1620, subd. (b).) Therefore, U--- would not be liable for California use tax with respect to its purchase and use of the MTE. Accordingly, based on the presented facts, U--- could never have made an election to pay use tax on the fair rental value of the MTE in California.1 In this regard, Annotation 335.0010 states, in relevant part: A lessor of mobile transportation equipment who has properly elected to measure his use tax liability by “fair rental value” may properly purchase the repair parts he places on such equipment ex[ ]tax for resale.[2] (Business Taxes Law Guide, vol. 2, Annotation 335.0010 (7/25/73) [emphasis added]; see also Rev. & Tax. Code §§ 6092.1, 6094, subd. (d), 6243.1, 6244, subd. (d).)

1

Obviously, if the facts differ and U--- purchased the MTE for use in California and timely elected to pay use tax based on the fair rental value of the MTE, then the opinion expressed herein would be different. Additionally, it should be noted that the application of tax depends on the actual facts, not on factual assumptions.
[2]
For the limited purpose of allowing lessors of MTE the option of reporting use liabilities based on fair rental value, such lessors are permitted to issue resale certificates to purchase MTE (inclusive of component parts of MTE, like repair parts) on an ex-tax basis. (See Rev. & Tax. Code, §§ 6092.1, 6243.1.) However, this legislative grace does not convert such transactions to sales for resale in fact. As explained above, under California law, the lessor is always the consumer of the MTE and the parts that are incorporated into the MTE.

Acting Supervisor
Audit Determination & Refund Section

-3-

May 11, 2006
335.0043.500

The relevant back-up legal memorandum for Annotation 335.0010 emphasizes that this procedure of making a valid, timely election to report use tax liability based upon fair rental value for the lease of MTE must be followed before a taxpayer is allowed to purchase parts for the leased MTE ex tax. (See memorandum of Glenn L. Rigby to Robert Nunes of 7/25/73, attached hereto for your reference, which states “If this procedure is followed [i.e. the timely election to report use tax on the purchase and use of MTE measured by the fair rental value], the replacement and maintenance parts can be purchased ex tax.” [Emphasis added].) In conclusion, we affirm that Annotation 335.0010 is only applicable with respect to mandatory maintenance agreements where the lessor of MTE has made a timely, valid election to pay tax on fair rental value. If such an election cannot be made because, as with U---, the MTE was not purchased for use in California, then Annotation 335.0010 is inapplicable. In this case, because U--- never timely elected to pay use tax on fair rental value in California, it is not qualified to purchase the subject parts in California ex tax, nor may it claim a refund for tax reimbursement it paid, if any, to the retailers. Finally, because John Abbott’s September 30, 2003, letter misapplies the rule of Annotation 335.0010 and failed to analyze an additional sublease issue presented by the facts associated with that letter, we are rescinding Mr. Abbott’s letter. I hope the above answers your questions. If you have any further questions, please do not hesitate to contact me.

DLR:ds
Attached:
cc:

Back-up memorandum to Annotation 335.0010

Mr. Jeff McGuire (MIC:92)
Mr. Joe Young (MIC:49)
Mr. Brian Manuel (MIC: 39)
Mr. Robert Wils (MIC: 39)
Mr. Steve Sisti (MIC: 39)
Out-of-State District Administrator (OH)