Did two leased charter motor coaches qualify for California's interstate-commerce use-tax exemption?

Plain-English summary

An out-of-state company bought two motor coaches outside California and leased them for 84 months to a charter-tour business. Each agreement included a substantial end-of-term purchase option, and the lessor was already reporting use tax on rental receipts.

California treated the agreements as true leases rather than sales at inception because title did not pass automatically and the option prices were not nominal. The buses were MTE, making the lessor their consumer.

The interstate-commerce exemption required first functional use outside California, entry into California in interstate commerce, and continuous interstate use both within and outside the state. The operating records showed intrastate California use during each coach's first six months after entry, so neither coach qualified. The lessor had to continue its irrevocable FRV reporting whether the coaches were inside or outside California.

Contract numbers, assumption, and missing travel evidence

Each reported agreement required $3,575 monthly rent for 84 months and offered a $67,813 purchase option at the end. Counsel found a true lease because required payments did not automatically transfer title and the option was not nominal. The PDF does not include the agreements, coach purchase prices, valuation support for the options, title documents, or payment history.

The out-of-state purchase meant California sales tax did not apply to the lessor's acquisitions. Use tax still depended on purchase for California use and an exemption. Counsel expressly “assume[d]” California-use intent from the lessor's existing rental-receipts reporting and the fact that its question concerned only the interstate-commerce exemption; the source supplies no underlying acquisition-intent evidence.

The exemption analysis states three requirements: first functional use outside California, entry into the state in interstate commerce, and continuous interstate use inside and outside California. The memorandum rejects the exemption because documents reportedly showed each bus had intrastate California use during the six months after first entry. It does not identify a single trip, route, passenger, first-use date, entry date, intrastate-use date, mileage figure, or amount of California use. It therefore establishes the agency's document-based conclusion, not a reproducible trip audit.

The March 17 request, attachments describing use, coach purchase records, leases, returns, and remittance records are absent. Although the taxpayer also asked what documentation was needed for an exemption declaration, the letter supplies the governing test and outcome but no separate document checklist.

The live annotation preserves the monthly rent, 84-month term, $67,813 options, fair-rental-value election, intrastate-use conclusion, and ongoing tax result. It omits the true-lease reasoning, assumed California-use intent, missing trip detail, and unanswered request for a documentation checklist.

Common questions

Did an end-of-term purchase option make each agreement a sale at inception?

No. The option was not nominal and title did not pass merely by completing the required payments.

Could the lessor stop FRV reporting when a coach operated outside California?

No. The timely election continued regardless of location.

What intrastate trips defeated the exemption?

The letter does not say. It reports that supplied documentation showed intrastate California use during each six-month test but gives no routes, dates, passengers, or mileage.

Citations and references

• California Revenue and Taxation Code sections 6006(g)(4), 6010(e)(4), 6023, and 6244(d)
• California Sales and Use Tax Regulations 1620(a)(1), 1620(b)(2)(B), 1660(a)(2)(A), and 1661(b)(2)
• Business Taxes Law Guide Annotation 570.0430
• March 17, 1995 request, coach leases, and operating documentation — referenced but not included

Verbatim support

From the official June 16, 1995 letter:

Since you indicate that you are already reporting tax on rental receipts and you ask only about the interstate commerce exemption, I assume that you did purchase the MTE for use in California.

Since documentation you provided to us indicates that each bus was used in California for intrastate purposes and not exclusively and continuously in interstate commerce during the six months following its first entry into this state, the interstate commerce exemption does not apply to the use of either bus.

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/335-0053.pdf

Original ruling text

335.0053

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

JOHAN KLEHS
First District, Hayward

LEGAL DIVISION (MIC:82)
450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082)
Telephone: (916) 322-2976
FAX: (916) 323-3387

DEAN ANDAL
Second District, Stockton
ERNEST J. DRONENBURG, JR.
Third District, San Diego
BRAD SHERMAN
Fourth District, Los Angeles
KATHLEEN CONNELL
Controller, Sacramento

June 16, 1995

────────
BURTON W. OLIVER
Executive Director

Mr. K--- R. N--Corporate Counsel
A--- B--- L---, Inc.
XXXX - XXth ---- --I--- P-----, MN XXXXX
Re:

A--- B--- L---, Inc.
SR -- XX-XXXXXX

Dear Mr. N---:
This is in response to your letter dated March 17, 1995 regarding the application of tax to the sale and use of mobile transportation equipment. You purchased two motor coaches outside of California, and you lease them to W--- C--T---. Under the lease for each motor coach, W--- is to pay you $3,575.00 per month for a term of eighty-four months, and has an option to purchase the motor coach for $67,813.00 at the expiration of the lease. You state that you collect use tax on the rental receipts and remit the tax to the Board. You have attached information about the use of the two motor coaches, and you ask whether the use comes within the exemption for interstate use of mobile transportation equipment (MTE). You also ask what documentation you need to provide to us in order for the transactions to be declared exempt. Initially, I note that some agreements characterized by the parties as leases are actually sales. However, in the present case, since the lease agreement does not provide for W--- to obtain title at the end of the lease term upon making the required payments, and since the option price is not nominal, the agreement represents a true lease, not a sale at inception. (See Reg. 1660(a)(2)(A).)

Mr. K--- R. N---

-2-

June 16, 1995
335.0053

Motor coaches, or buses, are included in the definition of MTE (Rev. & Tax. Code § 6023) and the rules applicable to leases of MTE therefore apply. A lease of MTE is excluded from the definition of “sale” and “purchase” for purposes of the Sales and Use Tax Law. (Rev. & Tax. Code §§ 6006(g)(4), 6010(e)(4).) This means that the retail sales are the sales of the buses to you, and you are the consumer of the MTE you lease. Since the sales to you took place outside of California, sales tax does not apply. (Reg. 1620(a)(1).) However, if you are regarded as having purchased the MTE for use in California, that use is subject to use tax unless exempt. When MTE is purchased outside California for use by leasing in California and the use is not exempt, use tax applies to the purchase price of the MTE unless the lessor makes a timely election to report its use tax liability measured by the fair rental value of the MTE. (Rev. & Tax. Code § 6244(d).) An election to pay tax measured by fair rental value is made by the lessor’s reporting and paying tax on that basis with its timely return for the period in which the MTE is first leased. (Reg. 1661(b)(2).) Such an election cannot be revoked, and the lessor must thereafter pay use tax on fair rental value whether the MTE is inside or outside California. When the lessor fails to make a timely election to pay tax on fair rental value, tax is due measured by the purchase price. Since you indicate that you are already reporting tax on rental receipts and you ask only about the interstate commerce exemption, I assume that you did purchase the MTE for use in California. Thus, unless the use of the MTE satisfies the requirements of the interstate commerce exemption, you must continue to report tax on fair rental value whether the MTE is inside or outside California. The interstate commerce exemption applies only when the MTE is first functionally used outside California, enters California in interstate commerce, and is used continuously thereafter in interstate commerce, both within and without the state. As stated in Regulation 1620(b)(2)(B): “Use tax does not apply to property purchased for use and used in interstate or foreign commerce prior to its entry into this state, and thereafter used continuously in interstate or foreign commerce both within and without California and not exclusively in California.” We use a six-month test period after the MTE’s first entry into California to ascertain whether the California use qualifies for the interstate commerce exemption. (Business Taxes Law Guide Annotation 570.0430 (1/7/74, 3/23/84, 1/28/91).) Since documentation you provided to us indicates that each bus was used in California for intrastate purposes and not exclusively and continuously in interstate commerce during the six months following its first entry into this state, the interstate commerce exemption does not apply to the use of either bus. Therefore, the use of each bus in this state is subject to tax, and as discussed above, you must continue to report and pay tax on fair rental value whether the buses are inside or outside California.

Mr. K--- R. N---

-3-

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

Kelly W. Ching
Staff Counsel
KWC:cl
cc:

-- District Administrator

June 16, 1995
335.0053