Would California sales or use tax apply if a parent contributed tax-paid equipment to its wholly owned subsidiary for no consideration, or leased it instead?

Plain-English summary

A redacted parent corporation proposed contributing machinery and equipment, office furniture and fixtures, and computers at its California plant to its wholly owned subsidiary. The property had a net book value of about $1.2 million, its fair market value was unknown, and the parent said it had paid California sales or use tax on it.

The letter concluded that a true contribution with no consideration would not be a sale or purchase, so no sales or use tax would apply. It warned that consideration includes the subsidiary's assumption of the parent's liabilities, an intercompany debt, canceled indebtedness, or additional subsidiary shares. Because the relevant contracts were not provided, counsel could not confirm that the transfer was truly consideration-free.

If the parent leased the property instead, the lease would not be a taxable continuing sale as long as California tax had been paid and the property was leased in substantially the same form as acquired.

Proposed transfer, alternative lease, and source limits

Staff Counsel Kelly W. Ching answered a March 15, 1996 letter from Mr. L--- K--- at H--- M---, Inc. Both the parent and subsidiary were described as corporations qualified to do business in California with sales tax registration numbers, and the parent owned 100 percent of the subsidiary. The source redacts their jurisdictions, numbers, plant location, and most names.

The parent contemplated contributing the property to capital without receiving consideration. If that treatment were taxable, it might lease the property instead. The letter explained that a sale requires a transfer of tangible personal property for consideration under Revenue and Taxation Code section 6006(a); a transfer without consideration is not a sale or purchase under sections 6006(a) and 6010(a). Its no-tax contribution answer therefore remained conditional on the subsidiary giving nothing in exchange for ownership.

For the alternative lease, the letter said a California lease is generally a continuing sale subject to use tax measured by rentals unless the property is leased in substantially the same form as acquired and the lessor paid California sales tax reimbursement or use tax to its vendor, or timely elected purchase-price use tax. A taxable continuing-sale lessor must collect the tax from the lessee and pay it to the state. On the stated paid-tax and same-form facts, this lease would not be a taxable continuing sale or purchase.

The PDF does not include the March 15 request, relevant contracts, incorporation or ownership records, sales-tax registrations, acquisition documents, invoices, proof of tax reimbursement or use-tax payment, asset ledger, plant records, fair-market-value appraisal, liability or intercompany balances, debt-cancellation records, share records, contribution or lease agreement, title or possession records, rental records, proof of the property's form, returns, audit, assessment, payment, refund claim, protest, appeal, or later outcome. It does not establish that either proposed transaction occurred.

The live annotation preserves the parent, wholly owned subsidiary, furniture, fixtures, machinery and equipment, tax-paid status, no-consideration premise, listed forms of consideration, no-tax contribution result, and May 9, 1996 date. It omits the computers, California plant, about-$1.2-million net book value, unknown fair market value, March 15 request, redacted registration facts, missing-contract warning, sale and purchase definitions and citations, alternative lease, continuing-sale and collection rules, paid-tax and substantially-same-form conditions, missing records, proposed posture, and absent transaction and tax outcome.

What this means for you

Parent and subsidiary companies

Calling a transfer a capital contribution is not enough. Confirm that the subsidiary gives no cash, debt relief, liability assumption, additional equity, or other consideration.

Accountants and tax professionals

For a related-party lease, document both the tax paid on acquisition and that the leased property remains in substantially the same form. This source contains neither the contracts nor the payment and asset records needed to verify those predicates.

Common questions

Q: Did the Board say the proposed capital contribution was taxable?
A: No, if the subsidiary provided no consideration in exchange for the property.

Q: What could turn the contribution into a sale?
A: An assumption of the parent's liabilities, intercompany debt, canceled indebtedness, additional shares, or other consideration.

Q: Was the answer unconditional?
A: No. Counsel had not received the relevant contracts and therefore could not confirm that the transfer lacked consideration.

Q: Would leasing the equipment create tax on rental receipts?
A: Not on the stated facts, because California tax had already been paid and the property would be leased in substantially the same form as acquired.

Q: Did counsel review the contribution or lease contracts?

A: No. The letter expressly says the relevant contracts were not provided, so counsel could not confirm that the transfer lacked consideration.

Q: Did the source show that either transaction occurred?

A: No. It supplies no executed contract, transfer, lease, return, audit, assessment, payment, appeal, or later outcome.

Citations and references

• California Revenue and Taxation Code sections 6006(a), 6006(g)(5), 6006.1, 6010(a), 6051, 6201, 6203, and 6401
• California Sales and Use Tax Regulation 1660, including subdivision (c)(1)
• March 15, 1996 request and relevant contracts — described but not included
• Corporate, ownership, registration, acquisition, tax-payment, asset, valuation, liability, debt, share, contribution, lease, title, possession, rental, return, administrative, and outcome records — implicated but not included

Verbatim support

From the official May 9, 1996 Staff Counsel letter:

A transfer of tangible personal property in which no consideration is given for the property is not a sale or purchase.

Therefore, no sales or use tax would apply to the transaction about which you inquire if no consideration is provided by P--- in exchange for obtaining ownership of the property.

Of course, since you have not provided us with a copy of the relevant contract(s), we cannot say for certain that the transfer does not involve consideration given in exchange for the property.

As long as such tax has been paid and the property is leased in substantially the same form as acquired, the lease would not be a continuing sale or purchase subject to tax.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 395.0079.200
• Original supporting opinion: 395.0079.200 PDF

Original ruling text

395.0079.200

STATE OF CALIFORNIA

JOHAN KLEHS
First District, Hayward

STATE BOARD OF EQUALIZATION
LEGAL DIVISION - MIC: 82
450 N STREET, SACRAMENTO, CALIFORNIA
(P. O. BOX 942879, SACRAMENTO, CA 94279-0082)
TELEPHONE: (916) 322-2976
FAX: (916) 323-3387

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

May 9, 1996
E. L. SORENSEN, JR.
Executive Director

Mr. L--- K--H--- M---, Inc.
XXX East M--- Avenue
Z---, -- XXXXX-XXXX
Re:

H--- M---, Inc.- SZ --- XX-XXXXXX
P--- D---, Inc. - SC --- XX-XXXXXX

Dear Mr. K---:
This is in response to your letter dated March 15, 1996 regarding the application of tax to certain transfers of tangible personal property. You state: “H--- M---, Inc., (HMI) is a --- corporation qualified to do business in California and has been issued California sales tax registration number SZ --XX-XXXXXX. HMI owns 100 percent of P--- D---, Inc., (P---) which is also a
--- corporation qualified to do business in California. P--- has been issued California sales tax registration number SC --- XX-XXXXXX. “HMI owns some depreciable personal property (machinery and equipment, office furniture and fixtures, and computers) with a net book value of about $1.2 million located at its plant in R---, California. HMI has paid California sales or use tax on this depreciable personal property. The fair market value of the depreciable personal property is not known.” You state that HMI is contemplating transferring the property to P--- as a contribution to capital for which HMI would receive no consideration. You indicate that if such a contribution to capital would be considered by us to be subject to tax, then rather than making such a contribution, HMI might instead lease the property to P---. Retail sales of tangible personal property in California are subject to sales tax, measured by gross receipts, unless specifically exempt from taxation by statute. (Rev. & Tax. Code § 6051.) When sales tax does not apply, the use tax, measured by the sales price of the property sold, applies to the use of property purchased from a retailer for storage, use, or other consumption in California unless such use is specifically exempt from taxation by statute. (Rev. & Tax. Code §§ 6201, 6401.) The term “sale” means and includes any transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal

Mr. L--- K---

-2-

May 9, 1996
395.0079.200

property for a consideration. (Rev. & Tax. Code § 6006(a).) You state that HMI plans to transfer the tangible personal property to P--- as a contribution to capital, and that HMI will receive no consideration from P--- for the property. Please note that consideration would include the assumption of HMI’s liabilities by P---, an intercompany debt, the cancellation of indebtedness, or HMI’s receipt of any additional shares in P---. Of course, since you have not provided us with a copy of the relevant contract(s), we cannot say for certain that the transfer does not involve consideration given in exchange for the property. A transfer of tangible personal property in which no consideration is given for the property is not a sale or purchase. (Rev. & Tax. Code §§ 6006(a), 6010(a).) Therefore, no sales or use tax would apply to the transaction about which you inquire if no consideration is provided by P--- in exchange for obtaining ownership of the property. If, rather than transferring the property as a contribution to capital as discussed above, HMI leases the property to P---, the rules regarding the application of tax to leases as explained in Regulation 1660 apply. The lease of tangible personal property in California is a continuing sale subject to use tax measured by rentals payable unless the lessor leases the property in substantially the same form as acquired and has either paid California sales tax reimbursement or use tax to its vendor, or has made a timely election to pay use tax measured by purchase price. (Rev. & Tax. Code §§ 6006(g)(5), 6006.1, Reg. 1660.) When a lease is a taxable continuing sale, the lessor must collect the tax from the lessee and pay it to the state. (Rev. & Tax. Code § 6203, Reg. 1660(c)(1).) You indicate that HMI has paid California sales tax reimbursement or use tax on the purchase price of the property. As long as such tax has been paid and the property is leased in substantially the same form as acquired, the lease would not be a continuing sale or purchase subject to tax. If you have further questions, please feel free to write again. Sincerely,

Kelly W. Ching
Staff Counsel

KWC:cl
cc:

Out-of-State District Administrator