Could a manufacturer that leased its own MTE trailer pay tax on raw-material cost instead of lease receipts?

Plain-English summary

A trailer manufacturer planned to lease a trailer it had built to a California customer and asked whether use tax could be measured by the purchase price of the raw materials incorporated into the trailer.

California said yes. The trailer qualified as mobile transportation equipment, so the lease was excluded from the definition of a sale. The manufacturer-lessor was therefore the consumer of the raw materials it incorporated into the trailer.

The manufacturer could pay tax measured by the raw materials' purchase price, and tax would not apply to the lease transaction. The source also noted that an MTE lessor could elect in some circumstances to measure use tax by fair rental value, but the manufacturer was free to decline that election.

Proposed facts and missing records

The May 7 letter confirms advice reportedly given on May 5, but the earlier communication is not reproduced. The transaction remained a plan: the source says the redacted business “plans to lease” the trailer and supplies no executed lease, delivery, commencement, return, or evidence that the proposal closed.

The letter states that the trailer qualified as MTE under section 6023 but gives no dimensions, configuration, transport function, highway capability, registration, inspection, or other classification evidence. It also includes no raw-material invoice, purchase price, tax-paid record, fabrication schedule, fair-rental-value election or non-election record, return, payment, or tax amount.

The live 335.0082 annotation identifies the inquirer as a trailer manufacturer and materially tracks the proposed material-cost and lease-receipt treatment. It omits the May 5 prior advice, section 6094's optional fair-rental-value election, and the absent transaction and classification records.

Common questions

Was the manufactured trailer treated as MTE?

Yes. That classification meant the lease itself was not a taxable sale.

What was the manufacturer treated as consuming?

The raw materials incorporated into the trailer.

Was fair-rental-value reporting mandatory?

No. The letter said the lessor could decline that election and pay tax measured by raw-material purchase price.

Did the source document the trailer's MTE features or a completed lease?

No. It asserted MTE status for the proposed trailer but included no specifications, lease, commencement evidence, return, or tax record.

Citations and references

• California Revenue and Taxation Code sections 6006, 6023, and 6094
• May 5, 1976 prior advice — confirmed but not separately included
• Trailer specifications, raw-material purchase records, proposed lease, election records, returns, and tax-payment evidence — not included

Verbatim support

From the official May 7, 1976 letter:

We are of the opinion that you may pay the tax measure by the purchase price of the raw materials and that tax will not apply to the lease transaction.

Since the lease will not qualify as a sale, you will be regarded as the consumer of the raw materials incorporated into the trailer.

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/335-0082.pdf

Original ruling text

335.0082

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

May 7, 1976

916-445-2641

This is to confirm our advice to you of May 5, 1976.
We understand that --- --- --- plans to lease a trailer to a customer here in California. You have inquired as to whether you may pay use tax measured by the purchase price of the raw materials incorporated into the trailer. We are of the opinion that you may pay the tax measure by the purchase price of the raw materials and that tax will not apply to the lease transaction. Revenue and Taxation Code Section 6006 provides that the term “sale” means and includes any lease of tangible personal property except a lease of “mobile transportation equipment for use in transportation of persons or property…” the trailer in question will qualify as an item of mobile transportation equipment under Revenue and Taxation Code Section 6023. Since the lease will not qualify as a sale, you will be regarded as the consumer of the raw materials incorporated into the trailer. Revenue and Taxation Code Section 6094 provides that a lessor of mobile transportation equipment may in certain circumstances elect to pay his use tax measured by the fair rental value of the equipment. The lessor is free, however, to decline to make this election.

Very truly yours,

Gary J. Jugum
Tax Counsel

GJJ:lb
Bc:
Out of State
Chicago