Who owed California use tax on MTE vehicles rented directly to the U.S. Navy?

Plain-English summary

A vehicle company reported renting MTE directly to the U.S. Navy under short-term contracts for carrying and installing telephone poles on a government installation. It asked for help explaining why it considered a use-tax charge necessary on the rentals.

California said the lessor, not the Navy, was subject to use tax on the MTE lease. If the contract allowed reimbursement of the lessor's costs, the lessor could recover that expense from the Navy, but it should not tell the Navy that the federal government itself was being charged tax.

The quoted regulation excluded a lessee's reimbursement of the lessor's use tax from fair rental value. It also said lump-sum charges would be assumed to include that reimbursement whether or not the lessor told the lessee.

Contract condition and missing records

The December 16, 1992 letter responds to an October 8 request and a later telephone conversation. The requester said its company rented vehicles directly to the Navy on short-term contracts for telephone-pole work at several locations on one government installation. The source does not identify the vehicle types, number of rentals, contract dates, rent, tax, invoice amounts, or installation.

Counsel did not find that the Navy contracts actually promised reimbursement. The answer was conditional: if a contract permitted the lessor to pass along costs or expenses incurred in fulfilling it, the lessor had a contractual reimbursement right. Routine reimbursements reported at other Navy installations showed only “a probability” that the contracts contained such a term. The request, telephone record, leases, invoices, and evidence of that other-installation practice are not included.

The quoted historical Regulation 1661(e)(2) says fair rental value excludes payment reimbursing the lessor's use tax, separately stated or not and regardless of the charge's label. It also includes an exception when the Board determines rental receipts are nominal. The letter applies no figures and makes no nominal-rent determination. Its concrete invoice instruction was that the lessor should not represent it was charging the Navy tax, because the lessor alone was subject to it.

The official PDF ends after listing Regulation 1661 as an enclosure; the enclosure is absent. The live annotation reduces the source to the general rule that the MTE lessor remains responsible for use tax when leasing to the United States. It omits the Navy facts, contract condition, fair-rental-value quotation, lump-sum rule, and invoice warning.

Common questions

Was the Navy the California use taxpayer?

No. The letter placed the tax solely on the MTE lessor.

Could reimbursement increase the FRV tax measure?

No. The quoted regulation excluded reimbursement for the lessor's use tax from fair rental value.

Did the letter establish that these Navy contracts authorized reimbursement?

No. It said reimbursement was contract-dependent and treated reported practice at other Navy installations only as evidence of a probable contract right.

Citations and references

• California Sales and Use Tax Regulation 1661(e)(2)
• October 8, 1992 request and Navy lease contracts — referenced but not included
• Regulation 1661 enclosure — listed but not included

Verbatim support

From the official December 16, 1992 letter:

This means that B--- E--- will be responsible for the use tax and the U.S. Navy is not subject to the tax.

However, B--- E--- should not represent to the U.S. Navy that it is charging it tax on the invoices billed. This is incorrect. B--- E--- is solely subject to the tax.

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/335-0045.pdf

Original ruling text

335.0045

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6496

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

December 16, 1992

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Ms. E--- -. S--Credit and Collections Manager
B--- E--- E--- Company
P. O. Box XXXXX
R---, VA XXXXX-XXXX
Re:

B--- E--- L--- Company
J--- I--- Inc.
SR --- XX-XXXXXX
Taxability of Rentals to the U. S. Navy

Dear Ms. S---:
In your letter to this office dated October 8, 1992, you requested this office's assistance in explaining to the Department of the Navy in Oakland, California, why it is necessary to charge use tax on vehicle rentals to the Navy. You stated in our recent telephone conversation that your company rents vehicles directly to the Navy on short-term contracts. The vehicles are used to carry and install telephone poles at various locations on a government installation. The vehicles rented to the Navy are considered to be "mobile transportation equipment" as defined by California Sales and Use Tax Regulation 1661. The use tax is imposed on the lessor of any mobile transportation equipment leased to the U.S. Navy. This means that B--- E--will be responsible for the use tax and the U.S. Navy is not subject to the tax. However, if B--E--- has a contract with the U.S. Navy that permits B—E--- to pass along any costs or expenses that B--- E--- incurs in fulfilling the lease contract, then B--- E--- has a contractual right to be reimbursed for the use tax that it must pay. Regulation 1661(e)(2) states, in part: "On and after September 30, 1980, 'fair rental value' means the rentals required by the lease, except where the Board determines the rental receipts are nominal. Fair

Ms. E--- -. S---

-2-

December 16, 1992
335.0045

rental value does not include any payment made by the lessee to reimburse the lessor for the lessor's use tax, whether or not the amount is separately stated, and regardless of how the charge is designated in the lease documentation and invoices. Lump-sum charges to the lessee will be assumed to include reimbursement for the lessor's use tax whether or not any statement to that effect is made to the lessee." A copy of this regulation is enclosed with this letter. The fact that other Navy installations routinely reimburse B--- E--- for the use tax to be paid on the equipment rentals indicates that there is a probability that a contractual right to the reimbursement is contained in the lease contracts. However, B--- E--- should not represent to the U.S. Navy that it is charging it tax on the invoices billed. This is incorrect. B--- E--- is solely subject to the tax. Very truly yours,

Thomas J. Cooke
Tax Counsel
TJC:wk
Enclosure - Regulation 1661