When did shipping ex-tax California MTE to an out-of-state lessee create California use tax?

Plain-English summary

A California business reported shipping a new mobile boiler room to Washington for a six-month-to-one-year lease. Counsel assumed both that the unit qualified as mobile transportation equipment (MTE) and that it had been obtained ex-tax. The answer depended on where the lease began.

If the lease began in California, leasing was a California use beyond merely transporting the MTE out of state. Use tax applied based on purchase price unless the lessor timely elected fair-rental-value (FRV) reporting, which then continued whether the equipment was inside or outside California.

If the lease began outside California and the only California activity was transport to the out-of-state lessee, section 6009.1 initially excluded that activity from use. The MTE had to remain outside California for more than six months. A return within six months triggered purchase-price tax unless a timely FRV election had been made for the first lease period.

Assumptions, timing, and missing records

The letter did not decide whether the mobile boiler room actually met section 6023's MTE definition; counsel expressly assumed the requester's classification was accurate. Counsel also assumed the unit had been acquired ex-tax. The official PDF does not include the purchase record, resale certificate, equipment specifications, or classification evidence.

The requester's August 1 letter reportedly said the lease “started when the MTE was shipped.” Counsel assumed that meant the lease commenced in California. The June 30 and August 1 letters, lease, acceptance and delivery terms, shipping records, first-use evidence, and Washington records are not included, so the source does not independently establish the place of commencement.

For a California-started lease, an FRV election had to be made on the return for the reporting period in which the equipment was first leased. Without a timely election, tax was measured by purchase price. With one, FRV remained the measure while the MTE was inside or outside California.

For an out-of-state-started lease, the initial exclusion required no functional California use beyond transport to the lessee. The PDF says use outside California for “over six months” satisfied its solely-outside test and that a return “within six months” triggered tax; the live annotation phrases the first branch as no return “for at least six months.” This page does not reconcile that wording difference. The source supplies no evidence of the actual lease term, return date, tax election, return filing, payment, or final transaction outcome.

Common questions

Did shipping the equipment out of California make a California-started lease exempt?

No. Commencing the lease here was already a taxable use by the lessor.

What protected an out-of-state-started lease?

California activity had to be limited to transport, and the equipment had to remain outside the state beyond the six-month test.

Did the opinion establish that the boiler room was MTE or that the lease began in California?

No. Counsel expressly assumed the classification and inferred California commencement from the requester's statement that the lease started when the unit was shipped; the supporting records are absent.

Citations and references

• California Revenue and Taxation Code sections 6006(g)(4), 6007, 6009.1, 6010(e)(4), 6023, 6092.1, 6094(d), 6243.1, and 6244(d)
• California Sales and Use Tax Regulation 1661
• Stockton Kenworth, Inc. v. State Board of Equalization (1984) 157 Cal.App.3d 334
• Business Taxes Law Guide Annotations 570.1040 and 570.1080
• Requester's June 30 and August 1, 1988 letters — referenced but not included
• Mobile-boiler purchase, resale-certificate, shipment, lease, use, return, and tax-reporting records — not included

Verbatim support

From the official October 26, 1988 letter:

The exclusion from the definition of use provided by Section 6009.1 does not include the situation where a lease of MTE commences in California, even if the MTE is thereafter transported outside California.

If, on the other hand, the lease of the MTE commenced outside California with no functional use of the MTE in California except to transport it outside California, we would regard the transaction as initially coming within the exclusion from “use” of Section 6009.1.

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/335-0064-500.pdf

Original ruling text

335.0064.500

STATE OF CALIFORNIA

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

January 7, 1985

Ms. H--- B--N--- B--- Inc.
XXXXX --- Street
---, CA XXXXX
Re:

SR --- XX-XXXXXX

Dear Ms. B---:
Your letters dated June 30 and August 1, 1988 to the Hayward District office of the Board have been referred to us for response. You ask how sales and use tax applies to the lease of a mobile boiler room which you state is mobile transportation equipment. You state: “This is a new unit that has been shipped to the state of Washington for lease. The lease will be from 6 months to 1 year. Are we required to pay use tax now to the state of California? Will we have to pay use tax when/if we bring it back into California? Are we required to pay tax on the rental receipts (now or later) if we do not pay use tax now?” I assume that your characterization of the mobile boiler room as mobile transportation equipment (MTE) is accurate under Revenue and Taxation Code Section 6023. The lease of MTE is not a sale or purchase under the Sales and Use Tax Law. (Rev. & Tax. Code §§ 6006(g)(4), 6010(e)(4).) Rather, the sale of MTE for the purpose of leasing is a retail sale. (Rev. & Tax. Code § 6007.) However, a person purchasing MTE for the purpose of leasing may purchase the MTE extax by issuing the seller a resale certificate for the limited purpose of reporting the purchaser’s use tax liability measured by fair rental value. (Rev. & Tax. Code §§ 6092.1, 6243.1.) The lessor’s election to pay his or her use tax liability measured by fair rental value must be made by reporting tax measured by the fair rental value on the return for the period in which the equipment is first leased. (Rev. & Tax. Code §§ 6094(d), 6244(d), Reg. 1661.) If the lessor does not make a timely election, the lessor’s use tax liability would be measured by the purchase price of the MTE. I assume the MTE about which you inquire was obtained extax.

Ms. H--- B---

-2-

October 26, 1988
335.0064.500

When you withdraw MTE from your extax inventory for use in California, that use is subject to use tax measured by either the cost of the MTE or by fair rental value. Revenue and Taxation Code Section 6009.1 provides that “use” does not include the “keeping, retaining or exercising any right or power over tangible personal property for the purpose of subsequently transporting it outside the state for use thereafter solely outside the state….” The transporting referred to in the previous section would include transportation by common carrier or by your personnel. (See Stockton Kenworth, Inc. v. State Board of Equalization (1984) 157 C.A.3d 334.) The exclusion from the definition of use provided by Section 6009.1 does not include the situation where a lease of MTE commences in California, even if the MTE is thereafter transported outside California. The lessor in such situation is exercising a right or power over the MTE beyond merely transporting; rather, the lessor is exercising the power to use the MTE by leasing in California. Such use is not excluded by Section 6009.1. In your August 1, 1988 letter, you state that the lease about which you inquire started when the MTE was shipped. I assume this means that the lease commenced in California. Your use of the MTE in this manner is subject to use tax which, if you make a timely election, would be measured by fair rental value of the MTE whether the MTE is within or without this state. If you do not make such a timely election, use tax would be measured by your purchase price of the MTE. If, on the other hand, the lease of the MTE commenced outside California with no functional use of the MTE in California except to transport it outside California, we would regard the transaction as initially coming within the exclusion from “use” of Section 6009.1. No tax would be due on your use of the MTE provided it is used solely outside California. We apply a six month test in this situation. If the MTE is actually used outside California for over six months, such use will satisfy the requirement of use solely outside California. (Business Taxes Law Guide Annots. 570.1040 (2/3/66), 570.1080 (5/7/57). If you bring the property back into California within six months, use tax would be due at that time measured by your purchase price (unless an election to pay use tax measured by fair rental value were made with the return for the period in which the MTE was first leased). If you have further questions on this subject, please feel free to contact this office directly. Sincerely,

David H. Levine
Tax Counsel
DHL:ss
bc:

--- – District Administrator