Were buses leased to California exempt from sales and use tax because they were exempt from vehicle registration fees?

Plain-English summary

A company reportedly bought shuttle buses in October 1996 and leased them for five-year terms under contracts limiting them to shuttle service between State parking lots and California office buildings. Supplied registration records reportedly named the Department of General Services as lessee and treated the buses as exempt from vehicle registration fees. The lessor asked whether their purchase was also exempt from sales and use tax.

California said no. The registration-fee exemption did not create a sales-and-use-tax exemption, and the former low-emission-vehicle exemption was unavailable because it applied only to vehicles acquired during an earlier statutory period.

Buses were mobile transportation equipment. Their sale to a lessor was a retail sale, making the lessor's purchase or use taxable. A qualifying lessor could pay based on purchase price or make a timely, irrevocable election to report use tax on fair rental value. This lessor had paid sales tax at purchase, so it had chosen the purchase-price method.

Agency wording, former exemption, and missing proof

The letter first says the company contracted with the “General Services Administration,” then says DMV registration records named California's Department of General Services as lessee. It gives no contract or explanation resolving whether the first name is a drafting error or a different entity. It also refers once to buses acquired by “Amador” while otherwise redacting the lessor, without explaining that name.

An unidentified DMV representative reportedly said the vehicles were “most likely” exempt under Vehicle Code section 9101 because a government lessee held possession for at least 30 consecutive days. The registration records and DMV communication are not reproduced, so the source does not provide a formal DMV determination or vehicle-level proof.

During a December 23 call, the requester reportedly believed the buses qualified for former section 6356.5. Counsel said that provision exempted specified incremental low-emission-vehicle costs only for vehicles acquired from January 1, 1990 through January 1, 1995; the reported October 1996 acquisitions fell outside it. No bus specifications, emissions certification, incremental-cost calculation, invoice, or acquisition evidence is included.

The statement that sales tax was paid at purchase drove counsel's conclusion that the lessor had chosen purchase-price treatment for these buses. The PDF contains no vendor invoice, contract clause under Civil Code section 1656.1, tax reimbursement, return, receipt, purchase price, rate, or payment. It gives future guidance about resale certificates and FRV but supplies no completed future acquisition.

The final paragraph inconsistently says future use tax could be reported on “rental receipts” and later calls the measure “fair market value,” after the preceding analysis repeatedly says fair rental value. The source does not explain whether either phrase was intended to change the measure; this page preserves the distinction and does not rewrite the original text. Regulation 1661 is listed as enclosed but absent.

The live 335.0910 annotation preserves the registration-fee-versus-sales-tax distinction and purchase-price/FRV options. It omits the GSA/DGS and Amador wording, five-year shuttle-only contracts, October purchase, expired incremental-cost exemption, qualified DMV explanation, prior sales-tax payment and resulting existing-bus choice, inconsistent rental-receipt/fair-market-value terms, and missing records.

Common questions

Did leasing the buses to a California agency exempt the lessor?

No. The letter applied the general MTE tax rules to the lessor.

Could the lessor switch these buses to FRV after paying sales tax at purchase?

No. The letter said the purchase-time payment represented the choice not to use FRV for those buses.

Did the registration-fee exemption itself prove a sales-tax exemption?

No. The letter treated the systems separately, and even the Vehicle Code basis was described by the DMV representative only as “most likely.”

Citations and references

• California Revenue and Taxation Code sections 6006(g)(4), 6010(e)(4), 6023, 6051, 6092.1, 6094(d), 6201, 6243.1, 6244(d), and former 6356.5
• California Civil Code section 1656.1
• California Vehicle Code section 9101
• California Sales and Use Tax Regulation 1661(b)
• Requester's November 22, 1996 letter and December 23 telephone statements — referenced and summarized but not included
• DMV registration records and counsel's conversation with an unidentified DMV representative — referenced but not included
• Regulation 1661 enclosure — listed but not included
• Bus purchases, low-emission specifications and incremental costs, leases, use restrictions, invoices, returns, sales-tax payment, and election records — not included

Verbatim support

From the official December 30, 1996 letter:

Since these vehicles were purchased in October of 1996, they are not eligible for the exemption provided under section 6356.5. Thus, the tax obligations associated with the purchase of these vehicles must be analyzed under the general sales and use tax laws.

Since the sales tax was paid at the time --- purchased these buses, it has elected not to pay the tax liability measured by the fair rental value of these buses.

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/335-0910.pdf

Original ruling text

335.0910

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

December 30, 1996

Re: Purchase of Shuttle Buses Leased to General Services

Dear: --This is in response to your letter of November 22, 1996 in which you inquired about the application of California's Sales and Use Tax Laws on leases of buses used in --- to provide shuttle bus services from State parking lots to ---'s --- State office buildings. You explain that --- has entered into a contract with the General Services Administration to provide buses and shuttle bus service in the --- area between State parking lots and California State office buildings' --- --- ---. The leases are for five year terms and the contracts provide that the buses can only be used for shuttle services. With your letter, you include copies of registration records from the Department of Motor Vehicles which explain that these vehicles are exempt from vehicle registration fees. These records name --- as the lessor of the buses and the Department of General Services as the lessee. You have asked whether the purchase of these vehicles are also exempt under California's Sales and Use Tax Laws. I have contacted a representative of the Department of Motor Vehicles who explained that these vehicles are most likely exempt under section 9101 of the California Vehicle Code which provides, in part, that registration fees are not required to be paid for: "any vehicle operated by the State, or the county, city district, or political division of the State or the United States, as lessee under a lease, lease-sale, or rentalpurchase agreement which grants possession of the vehicle to the lessee for a period of 30 consecutive days or more." When I spoke to you on December 23, 1996, you indicated that it was your understanding that these vehicles qualified for the "low emission motor vehicle" sales and use tax exemption accorded under Revenue and Taxation Code section 6356.5. This section, which, under specified circumstances, provided an exemption from sales and use tax on the incremental costs of the sales and use of low emission vehicles, was only operative for vehicles acquired during the period of January 1, 1990 through January 1, 1995. Since these vehicles were purchased in October of 1996, they are not eligible for the exemption provided under section 6356.5. Thus, the tax obligations associated with the purchase of these vehicles must be analyzed under the general sales and use tax laws.

Revenue and Taxation Code section 6051 imposes a sales tax on all retailers measured by their gross receipts from retail sales of tangible personal property occurring in California. The sales tax is imposed upon the retailer, but the retailer may collect sales tax reimbursement (usually itemized on the invoice as "sales tax") from the purchaser if the contract of sale so provides. Civ. Code § 1656.1. Revenue and Taxation Code section 6201 imposes an excise tax, commonly referred to as the use tax, on the storage, use, or other consumption in this state of tangible personal property purchased from any retailer for storage, use, or other consumption in this state. The use tax complements the sales tax and is most frequently imposed upon in-state leases, out-of-state purchases of property for use in California, and use of property purchased with a resale certificate. The application of tax to sales and leases of mobile transportation equipment (MTE) is different from other tangible personal property. Section 6023 of the Revenue and Taxation Code includes buses in the definition of MTE. Thus, section 6023 applies to the buses acquired by Amador. The regulation which governs leases of MTE is Regulation 1661, a copy is enclosed for your review. A lease of MTE is never a sale and purchase. (See Rev. & Tax. Code § 6006(g)(4) and 6010(e)(4).) Thus, a sale of MTE which the purchaser subsequently leases is not a sale for resale. The sale of MTE to a person who will lease that property is a retail sale and the sale to the lessor, or the use by the lessor (by leasing), is subject to sales or use tax. (Rev. & Tax. Code §§ 6051, 6201; Reg. 1661(b)(l).) Where the use of MTE will be limited to leasing and the lessor makes a timely election to do so, the lessor may pay its tax liability measured by the fair rental value of the MTE. (Reg. 1661(b)(2).) This election is made by reporting tax measured by the fair rental value on a timely filed return for the period in which the MTE is first leased. Tax must thereafter be paid with the return for each reporting period, measured by the fair rental value, whether the MTE is within or without the state. The election may not be revoked with respect to the MTE as to which it is made. (Rev. & Tax. Code §§ 6092.1, 6094(d), 6243.1, and 6244(d).) Since the sales tax was paid at the time --- purchased these buses, it has elected not to pay the tax liability measured by the fair rental value of these buses. However, in future acquisitions of buses which are to be leased, --- may consider purchasing the vehicles under a resale certificate and reporting use tax on the rental receipts. (Reg. 1661 (b)(2).) As explained above, the election must be made by timely reporting the use tax, measured by the fair market value of the buses, for the reporting period in which the buses are first leased. If you have any further questions, please feel free to contact this office again.

Sincerely,

Patricia Hart Jorgensen
Senior Tax Counsel
PHJ:cl
Enclosure (Regulation 1661)
cc: --- District Administrator