Did an ocean-going vessel lose MTE status when leased only for stationary cement storage?

Plain-English summary

A huge ocean-going vessel was leased for stationary cement storage at a reported rent of $100,000 per month rather than active transportation.

Two Board staff members orally agreed to treat it as mobile transportation equipment. The vessel reportedly remained fully outfitted for ocean travel and, to their knowledge, was not substantially integrated into real property.

The internal memorandum acknowledged that the statutory wording could support focusing on actual transportation use, but recorded the agreed result based on the vessel's continuing design, capability, and separateness from real property. It sought to avoid reclassifying MTE based on how long it happened to be used only for storage.

Unresolved legal basis and missing vessel evidence

The author initially thought the Board looked to whether an item was designed for vessel transportation even when used solely for storage, but expressly said he could find no evidence of that position in a statute, regulation, or his file. He wrote that actual transportation use was “probably” the best statutory position unless further investigation supplied a design-only basis.

For this vessel, the memorandum relied on continued ocean-travel outfitting and the staff's knowledge that it was not substantially attached to real property, contrasting the Queen Mary. It gives no vessel name, owner, lessor, lessee, dimensions, outfitting inventory, seaworthiness inspection, registration, mooring or attachment evidence, cement-storage arrangement, lease, rental record, voyage capability, storage duration, purchase, return, assessment, payment, or tax measure.

The memo is the only surviving record of Glenn Bystrom and Donald J. Hennessy's oral agreement; no call or meeting note, research file, later investigation, authority, or approval is attached. Its concern about having to decide how long MTE may be used only for storage confirms that it did not establish a duration rule.

The live 335.0120 annotation states categorically that the lease was MTE because the vessel was designed and capable for transportation and was not integrated into real property. It omits the “to our knowledge” and “substantially” qualifications, counsel's inability to find authority for a design-only position, his tentative preference for actual use absent further research, the oral nature of the agreement, the $100,000 rent, and the missing records.

Common questions

Did stationary use alone turn the vessel into non-MTE property?

No under the source's stated facts.

Would a vessel integrated into real property receive the same answer?

The memorandum distinguished that situation and did not decide it.

Did counsel find a statute or regulation supporting the design-only test?

No. The memorandum expressly says none was found and suggests further investigation might be needed.

Citations and references

• California MTE classification principles discussed in the memorandum
• Oral agreement between Donald J. Hennessy and Glenn Bystrom — date and separate record not provided
• Internal MTE research file — searched, but no supporting design-only position was found or included
• Vessel, lease, outfitting, integration, capability, storage-use, and tax records — not included

Verbatim support

From the official January 15, 1987 memorandum:

But I cannot find evidence of that position of ours in either a statute, regulation or my file. On the face of it, the statute says that something is MTE only if for use in transportation of persons or property.

That would probably be the best position to take, unless further investigation would provide a basis for going solely on what the item was designed for.

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/335-0120.pdf

Original ruling text

335.0120

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

January 15, 1987

TO:
FROM:
SUBJECT:

MTE File
Donald J. Hennessy
MTE Used For Purposes Other than Transportation of Persons or Property

Glenn Bystrom and I orally agreed to consider as MTE a vessel leased for stationary storage of cement with a rental price of $100,000 a month. The huge ocean vessel is still fully outfitted for ocean travel and, to our knowledge, is not substantially integrated in real property as is for instance the Queen Mary. In researching this question I had thought that we looked at whether the item was designed for transportation as a vessel and, if so, that we treated it as MTE, even if used solely for storage. But I cannot find evidence of that position of ours in either a statute, regulation or my file. On the face of it, the statute says that something is MTE only if for use in transportation of persons or property. That would probably be the best position to take, unless further investigation would provide a basis for going solely on what the item was designed for. In this case, the vessel still being fully outfitted for ocean going trips, and not being substantially attached to real property, would call for it still being treated as a vessel. We do not wish to get into a situation in which we must distinguish between how long MTE is used solely for storage in deciding whether it retains its status as MTE.

DJH: rar