Did federal immunity prevent California tax when mobile transportation equipment was leased to the United States?

Plain-English summary

A Tax Division attorney asked why two federal trial-court judgments involving leases to the United States did not control California's treatment of mobile transportation equipment.

The opinion said MTE lessors were consumers of the equipment. California tax therefore applied to the sale of the equipment to the lessor or to the lessor's use when it had purchased under a resale certificate, with a timely option to measure use tax by rental charge.

That structure differed from a tax imposed on rental receipts with the United States treated as the purchaser. Because an MTE lease was not itself a sale, the tax incidence remained on the lessor rather than the federal lessee. The source therefore treated MTE leased to the United States the same as MTE leased to any other party.

The enclosed opinion also applied similar consumer reasoning to contractors improving real property for the United States: tax attached to the contractor's acquisition or use of materials and fixtures, not to a sale to the federal government.

Two judgments, contractor distinction, and missing sources

The 1982 letter responds to a Tax Division attorney who asked why United States v. State Board of Equalization, Nos. CV 79-03359 and CV 81-01588, did not govern. It says the judgments invalidated California sales tax on rental receipts from leases to the United States because federal law located incidence on the purchaser, and also says the trial court found the lease-sale method invidiously discriminatory. The official PDF supplies no court name, judgment date, opinion, docket record, facts, order, appeal, or later disposition for either case.

Counsel distinguished MTE because the lessor was the consumer: tax fell on the lessor's acquisition or leasing use, never on the United States as lessee. The letter identifies no actual lessor, MTE item, seller, resale certificate, lease, federal agency, purchase price, rent, return, election, assessment, or tax amount.

The construction analysis is not identical for all fixtures. Federal contractors were described as consumers of both materials and fixtures under sections 6007.5 and 6384, while contractors for nonfederal owners were consumers of materials but retailers of furnished-and-installed fixtures. Counsel reasoned that any difference taxed the federal contractor the same as or less than another contractor and that incidence still rested on the contractor, not the landowner. No contractor, project, property, material, fixture, contract, or tax record is included.

The 1982 opinion lists Regulations 1660 and 1661, Regulation 1521, and a pamphlet copy of the California Sales and Use Tax Law as enclosures; none appears in the PDF. A May 24, 1984 cover letter says the opinion was supplied after a May 18 meeting, but no meeting record is included.

The live 335.0980 annotation dates the entry May 24, 1984 and summarizes only MTE lessor-consumer treatment. It omits that the May letter merely transmitted the February 17, 1982 analysis, the two judgments and their stated holdings, the purchase-price and rental-charge alternatives, the full contractor analysis, missing enclosures and case sources, and absence of a taxpayer transaction.

Common questions

Was the United States treated as the taxable purchaser of the MTE lease?

No. The source treated the lessor as the consumer and located tax on the lessor's acquisition or use.

Were federal MTE leases taxed differently from other MTE leases?

No. The opinion said MTE leases to the United States and to other parties were not sales and were taxed in the same manner.

Why is the issued date 1982 rather than 1984?

The PDF's 1984 letter merely transmitted a copy of the substantive February 17, 1982 opinion that contains the analysis.

Did the official source include the two federal judgments?

No. It identifies only docket numbers and describes their holdings without the court, dates, opinions, or later dispositions.

Citations and references

• California Revenue and Taxation Code sections 6006(g)(4), 6007.5, 6023, and 6384
• California Sales and Use Tax Regulations 1521, 1660, and 1661
• United States v. State Board of Equalization, No. CV 79-03359 — trial-court judgment described, but court, date, and copy not supplied
• United States v. State Board of Equalization, No. CV 81-01588 — trial-court judgment described, but court, date, and copy not supplied
• May 18, 1984 meeting and May 24 transmittal — referenced without a meeting record
• Regulations 1660, 1661, and 1521 and pamphlet copy of California Sales and Use Tax Law — listed as enclosed but not included

Verbatim support

From the official February 17, 1982 opinion:

Thus, the incidence of the tax is never upon the lessee. The leases of mobile transportation equipment to the United States or to any other party are not sales and are taxed in the same manner.

However, where mobile transportation equipment and materials and fixtures used in performing construction contracts are concerned, there is no sale to the United States, and the lessor or the contractor, as the case may be, is the consumer of the tangible personal property involved, and the tax applies either to his acquisition or use of that property.

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/335-0980.pdf

Original ruling text

335.0980

STATE OF CALIFORNIA

CONWAY H. COLLIS
First District, Los Angeles

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 1799, SACRAMENTO, CALIFORNIA 95808)
(916) 445-5550

ERNEST J. DRONENBURG, JR
Second District, San Diego
William M. Bennett
Third District, Kentfield
RICHARD NEVINS
Fourth District, Pasadena

May 24, 1984

KENNETH CORY
Controller, Sacramento

DOUGLAS D. BELL
Executive Secretary

Mr. R--- C--Attorney, Tax Division
--- --- ----- Building
---, --- XXXXX
Dear Mr. C---:

As promised in our meeting on May 18, 1984, I enclose a copy of my letter of February 17, 1982 to C--- S--- concerning leases of mobile transportation equipment.

Very truly yours,

John H. Murray
Tax Counsel

JHM:ss
Enclosure

335.0980

STATE OF CALIFORNIA

CONWAY H. COLLIS
First District, Los Angeles

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 1799, SACRAMENTO, CALIFORNIA 95808)
(916) 445-5550

ERNEST J. DRONENBURG, JR
Second District, San Diego
William M. Bennett
Third District, Kentfield
RICHARD NEVINS
Fourth District, Pasadena
KENNETH CORY
Controller, Sacramento

February 17, 1982

DOUGLAS D. BELL
Executive Secretary

Express Mail
Mr. C--- E. S--Attorney, Tax Division
--- ----- Building
---, --- XXXXX
Dear Mr. S---:
Leases of Mobile Transportation Equipment

You have asked that I give you the reasons why we consider the judgments in United States v. State Board of Equalization, No. CV 79-03359, and United States v. State Board of Equalization, No. CV 81-01588, do not govern the application of the California sales and use tax to leases of mobile transportation equipment to the United States and to the tax liability of construction contractors constructing improvements on or to realty in this state. Under Section 6006 of the California Revenue and Taxation Code (all references, unless otherwise stated, will be to that code) provides, in part: “‘Sale’ means and includes:

“(g) Any lease of tangible personal property in any manner or by any means whatsoever, for a consideration, except a lease of:

“(4) Mobile transportation equipment for use in transportation of persons or property as defined in Section 6023.

″
The application of tax to leases in general and mobile transportation equipment in particular is explained in Regulations 1660 and 1661, copies of which are enclosed for your ready reference. We also enclose a pamphlet copy of the California Sales and Use Tax Law.

Mr. C--- E. S---

-2-

February 17, 1982
335.0980

The lessor of mobile transportation equipment under California law is the consumer of that equipment. Accordingly, either the sales tax applies to the sale of the equipment to the lessor or if the property is purchased under a resale certificate, use tax applies to the purchase price of that property. The lessor is given the option to report and pay his use tax liability measured by his rental charge provides he makes a timely election to do so. The above two cases held that the application of the California sales tax to the rental receipts with respect to leases to the United States was invalid because the incidence of the California tax is, for federal purposes, upon the purchaser. The states may not tax the United States without its consent. Accordingly, the California sales tax on the rental receipts from leases is an unconstitutional tax upon the United States. The trial court also found that the California method of taxing lease sales of tangible personal property invidiously discriminated against the United States. Neither of these holdings applies to leases of mobile transportation equipment. In all instances lessor of mobile transportation equipment are the consumers of that equipment. The sale of the equipment to the lessor is subject to sales tax or the use of the equipment by the lessor in leasing the equipment is subject to the use tax. Thus, the incidence of the tax is never upon the lessee. The leases of mobile transportation equipment to the United States or to any other party are not sales and are taxed in the same manner. There is no discrimination for or against lessor leasing mobile transportation equipment to the United States. The application of the California tax to construction contractors is explained in Regulation 1521, a copy of which is enclosed. You will note that construction contractors doing business with the United States are the consumers of materials and fixtures which are used by the contractor in the performance of contracts with the United States for the improvement of real property. This is provided by Sections 6007.5 and 6384. Construction contractors performing contracts for the construction of improvements to real property for persons other than the United States are the consumers of materials and the retailers of fixtures which they furnish and install. In each instance, the contractors are the consumers of materials, and any tax is imposed upon either the acquisition of those materials by the contractor or the use by the contractor in performing the contracts. Thus, there is not sale to the United States, no gross receipts from such a sale, and the incidence of tax is upon the contractor, not the United States. While United States contractors are the consumers of fixtures and other contractors are the retailers of fixtures, the incidence of the California tax is each instance is upon the contractor and not upon the landowner. Any difference in treatment with respect to fixtures is a difference under which the federal contractor is taxed either the same as or less than a contractor performing construction contracts for someone other than the United States. This cannot be considered to be invidious discrimination.

Mr. C--- E. S---

-3-

February 17, 1982
335.0980

In summary, the two cases mentioned above involve instances in which property is leased to or sold to the United States or its instrumentalities. The only tax in question is a sales tax measured by the gross receipts from those sales. The trial court held the incidence of this tax to be upon the United States or its instrumentalities. However, where mobile transportation equipment and materials and fixtures used in performing construction contracts are concerned, there is no sale to the United States, and the lessor or the contractor, as the case may be, is the consumer of the tangible personal property involved, and the tax applies either to his acquisition or use of that property. Accordingly, it is our belief that the issues raised and the conclusions reached in the above two cases are different than any issues which might be involved in connection with leases of mobile transportation equipment or the application of tax to construction contracts. If you have any further questions, please call me. Very truly yours,

John H. Murray
Tax Counsel
JHM:at
Enclosures
cc:

Mr. N--- J. G---