Was leased loading and unloading equipment MTE merely because it handled government cargo moving interstate?

Plain-English summary

A Navy contractor leased loaders, transporters, forklifts, scales, and dollies for ground handling of military cargo that another company airlifted among bases. It asked whether interstate government cargo made the equipment MTE.

California said no. The MTE rule covered equipment whose essential use was carrying persons or property substantial distances. These items primarily loaded and unloaded cargo; any transportation was incidental.

The government contract did not independently exempt the rentals. Under the historical ordinary-lease rules, tax applied to rental receipts if the lessor had bought the items ex tax and had not timely elected cost treatment; rentals were not taxable if the lessor had properly paid California tax on cost.

Reported operation, assumptions, and missing records

The requester reported that its only business was stevedoring and warehousing for the Navy at military bases across the continental United States under the “Quicktrans” program. It ground-handled cargo that its corporate parent actually airlifted between bases. The company leased loaders, transporters, forklifts, scales, and dollies from another corporation for the work and asked about rental payments attributable to equipment in California.

The November 25, 1969 request, Navy contract, equipment leases, parent-company records, asset list, locations, invoices, costs, rents, returns, and election records are not in the PDF. Counsel expressly assumed the lessor leased the items in substantially the same form as acquired. The source gives no unit-level design or use evidence, so its “essential use” determination is confined to the described loading-and-unloading operation.

The letter notes that section 6006(g)(4) had taken effect on November 8, 1969 and quotes its then-current coverage of MTE used for for-hire interstate or foreign property transportation. Counsel limited that general term by its listed examples: their essential use was transporting property substantial distances, while this equipment's transportation was only incidental to loading and unloading. Government-contract use supplied no separate exemption.

The tax-measure result remained conditional. If the lessor bought the equipment ex tax and did not timely elect tax on cost, tax was measured by California rental receipts. If it properly paid California tax on cost, the rentals were not taxable. The source does not establish which branch actually applied.

The letter says a copy of historical Ruling 70(c)(2)(F) was enclosed and later lists Regulations 1684, 1686, and 1685 as enclosures, yet the published PDF ends after “Enclosures (3)” and contains none of them. The September 16, 1987 note says only that the annotation should move to the Leases of Mobile Transportation Equipment heading. The live annotation combines the 1969 and 1987 dates and adds a cross-reference to Regulation 1661 without claiming that the later note changed the original answer.

Common questions

Did handling interstate Navy cargo make the equipment MTE?

No. The equipment itself did not transport the cargo substantial distances.

What did the 1987 addition to the PDF change?

Only the annotation's subject placement, not the 1969 holding.

Did the source establish whether cost or rental-receipts tax ultimately applied?

No. It gave two branches based on the lessor's purchase and timely-election history, but the necessary tax records are absent.

Citations and references

• California Revenue and Taxation Code section 6006(g)(4)
• Historical Sales and Use Tax Ruling 70(c)(2)(F)
• California Sales and Use Tax Regulations 1684, 1685, and 1686 — listed as enclosures but not included
• California Sales and Use Tax Regulation 1661
• November 25, 1969 request, Navy contract, and equipment leases — referenced but not included

Verbatim support

From the official December 16, 1969 letter:

The essential use of the items you lease, on the other hand, is to load and unload property and the element of transportation is only incidental to that use.

There is no exemption from such tax merely because the leased article is used by the lessee in performing a government contract.

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/335-0046.pdf

Original ruling text

335.0046

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

December 16, 1969
Amended 9/16/87
A--- T--- S---, Inc.
--- ---, NY XXXXX

Attention:

Mr. F--- W. C--Assistant Secretary

Dear Mr. C---:
This is in regard to your letter of November 25, 1969, regarding the taxability of your lease payments to C--- L--- Corporation (C---). It is our understanding that the sole business activity of your company (A.T.S.) is stevedoring and warehousing services under contract for the United States Navy at various military bases throughout the continental United States. This operation is basically the ground handling of military cargo under the Navy’s “Quicktrans” program. This ground handling consists of loading and unloading Navy cargo which will be flown to various military bases throughout the continental United States. O--- N--- A--- does the actual airlifting of the cargo. A.T.S. is a wholly owned subsidiary of O--- N--- A---. To perform its ground handling contract with the United States Navy, A.T.S. leases various types of stevedoring equipment such as loaders, transporters, forklifts, scales, and dollies from C---. (We assume C--- is leasing the items in substantially the same form as they were acquired.) You request our opinion as to the taxability of the rental payments paid to C--- for the above-described property located in California. Generally speaking, a lease of tangible personal property in substantially the same form is subject to tax measured by either rental receipts or cost as provided in ruling 70(c)(2)(F), copy enclosed. If the lessor does not timely elect to pay tax on the cost of the leased item, tax is due on rental receipts. There is no exemption from such tax merely because the leased article is used by the lessee in performing a government contract. It should be noted that effective November 8, 1969, section 6006(g)(4) was added to the Revenue and Taxation Code. It provides that a “sale” does not include a lease of:

A--- T--- S---,
Inc.

-2-

December 16, 1969
335.0046

“Mobile transportation equipment for use in for-hire transportation of property in interstate or foreign commerce, such as railroad locomotives, trucks, truck tractors, truck trailers, dollies, bogies, chassis, and cargo shipping containers.” In essence, the result of this amendment was to make the lease of certain property used by the lessee in the described manner a nonsale thereby making the lessor the user of the property in question. Under certain circumstances, this use will result in tax being due on the cost of the property. In such a case, there is no election to pay tax measured by rental receipts. However, it is our opinion that this section does not apply to the lease of items such as yours, i.e., loaders, transporters, forklifts, and dollies. It is to be noted that the generality of the term “mobile transportation equipment” is to be limited, under the rule of ejusdom generis, by the more specific examples included in the statute. The examples included in the statute are equipment, the essential use of which is to transport property for substantial distances, and not merely to load and unload it. The essential use of the items you lease, on the other hand, is to load and unload property and the element of transportation is only incidental to that use. Summarily, if C--- purchased the items ex tax and has not made a timely election to pay tax on their cost, it is our opinion tax is due measured by your rental receipts attributable to the property located in California. If, on the other hand, C--- has properly paid California tax measured by his cost of the items, the rental receipts will not be subject to tax. For your general information, I am enclosing copies of Regulation 1684, 1686, and 1685. Very truly yours,

Glenn L. Rigby
Tax Counsel
GLR:lt
Enclosures (3)
9/16/87
This annotation dealing with mobile transportation equipment more properly belongs under the subject heading “Leases of Mobile Transportation Equipment”, and shall be moved to that subject heading, where it will appear as Annotation 335.0046 – Loading and Unloading Equipment.

DJH:rar