Who owed California use tax when an MTE sublessee's trailer use failed the interstate-commerce exemption?

Plain-English summary

A lessee-sublessor rented truck trailers from an out-of-state prime lessor and subleased them to others. It intended all trailers to qualify for the interstate-commerce exemption but asked who would owe tax if sublessee activity caused a trailer to fail both that exemption and the principal-use test.

California said an MTE lease was not a sale or purchase. The prime lessor was the consumer of the equipment, and use by a lessee or sublessee was attributed to that lessor.

Any California use tax arising from a sublessee's nonexempt use therefore was owed by the prime lessor, not the lessee-sublessor.

Hypothetical scope, quoted rule, and missing proof

The October letter is an additional clarification of earlier correspondence. It quotes the requester's second question, part of the May 10 response, and the requester's stated understanding, but the original request, the full May 10 response, and the May 18 clarification letter are not separately reproduced. Other questions and advice from that exchange therefore cannot be audited here.

The source describes possible future failure—“in the event” one or more trailers “may not qualify”—rather than an identified trailer that actually failed. It provides no purchase record, trailer identity, prime lease, sublease, route, entry or first-use evidence, continuous-interstate-use evidence, principal-use calculation, election, return, assessment, payment, or tax amount.

The quoted Regulation 1661 passage distinguishes California sale and delivery from an outside sale and delivery. For an outside purchase intended for California use, it states purchase-price use tax applies unless the equipment enters in interstate commerce and is used continuously that way, or the lessor timely elects fair-rental-value reporting. The letter applies only the allocation point: lessee and sublessee use is attributed to the MTE lessor-consumer.

The live 335.0079 annotation preserves the attribution and prime-lessor result but gives failure of first use in interstate commerce as an example. The PDF's quoted question instead expressly pairs failure of the interstate-commerce exemption with failure of the principal-use test; neither source documents an actual failure.

Common questions

Did the sublessee's conduct matter even though the prime lessor did not operate the trailer?

Yes. The conduct was attributed to the lessor when testing and taxing the lessor's MTE use.

Did the letter make the lessee-sublessor liable for the equipment use tax?

No. It expressly placed that liability on the prime lessor.

Had a particular trailer already failed the tests?

No. The request sought reassurance about a possible failure, and the underlying trailer, route, use, and test records are absent.

Citations and references

• California Revenue and Taxation Code sections 6006(g)(4) and 6010(e)(4)
• California Sales and Use Tax Regulation 1661(b)(1)
• Requester's original letter, Board's May 10, 1995 response, and requester's May 18 clarification letter — referenced but not separately included
• Trailer purchase, prime lease, subleases, routes, first-use and continuous-use evidence, principal-use computations, elections, and tax records — not included

Verbatim support

From the official October 3, 1995 letter:

Since the lessor is the consumer of the MTE, any use of the MTE by the lessee or sublease is attributable to the lessor. Hence, any tax owed on the use of the MTE is owed by the lessor.

Therefore, if there was a use tax obligation which arose from a non-exempt use of the MTE in this state by the subleases, the prime lessor would be liable for that use 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/335-0079.pdf

Original ruling text

STATE OF CALIFORNIA

335.0079

STATE BOARD OF EQUALIZATION
LEGAL DIVISION – MIC: 82
450 N STREET, SACRAMENTO, CALIFORNIA
PO BOX 942879, SACRAMENTO, CALIFORNIA 94279-0082
TELEPHONE (916) XXX-XXXX
FAX (916) XXX-XXXX

www.boe.ca.gov

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

BURTON W. OLIVER
Executive Director

October 3, 1995

Mr. D--- B. F----- & --- --XXX --- ---, Suite XXXX
---, CA XXXXX
Dear Mr. F---:
This is in response to your letter of May 18, 1995, in response to our May 10, 1995, letter. You request additional clarification of the advice provided to you in response to your second question in your original letter. Your second question was: “If any trailer does not qualify for the interstate commerce exemption and also fails the principal use test, what are the sales and use tax consequences with respect to our client and to the prime lessor?” You state: “Our client, as stated, is the lessee/sublessor of truck trailers leased from an outof-state lessor. It is intended that all of the trailers will qualify for the exemption from use tax for property used in interstate commerce. In the event, however, that one or more of the trailers may not qualify for the exemption based upon the activities of the sublessees, you responded, ‘(s)ince the trailer is purchased for use in California and the use does not qualify for the interstate exemption, the lessor’s use of the MTE in this state (i.e., the lease by the lessor for use by the lessee in this state) is subject to use tax.’ “We have advised our client that your response means that the prime lessor would be responsible for any use tax obligation that may arise from any non-exempt use of the MTE in this state by the sublessees. Our client would like reassurance that it, as the lessee/sublessor, would not be held liable for sales or use tax obligations that may arise from the transactions as described above.”

Mr. D--- B. F---

-2-

October 3, 1995
335.0079

As noted in our previous letter, a lease of mobile transportation equipment (MTE) is not a sale or a purchase. (Rev. and Tax. Code §§ 6006(g)(4), 6010(e)(4).) In this regard, Sales and Use Tax regulation 1661, Leases of Mobile Transportation Equipment, provides at subdivision (b)(1): “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. Accordingly, either the sale of the equipment to the lessor or its use in this state may be subject to tax. For example, if the sale and delivery occur within California, the transaction is subject to sales tax unless the lessor makes a timely election to report his or her tax liability measured by the fair rental value as provided in (b)(2) below. On the other hand, if the sale and delivery occur outside California and the property is purchased for use in California, use tax will apply measured by the purchase price unless the equipment enters the state in interstate commerce and is used continuously thereafter in interstate commerce, or the lessor makes a timely election to report use tax liability measured by the fair rental value as provided in (b)(2) below.” Since the lessor is the consumer of the MTE, any use of the MTE by the lessee or sublease is attributable to the lessor. Hence, any tax owed on the use of the MTE is owed by the lessor. Therefore, if there was a use tax obligation which arose from a non-exempt use of the MTE in this state by the subleases, the prime lessor would be liable for that use tax. I hope that this additional clarification and assurance satisfies the needs of your client. If you have any further questions in regard to this matter, please do not hesitate to write. Sincerely,

Anthony I. Picciano
Staff Counsel

AIP:cl
cc:

Sacramento District Administrator