Could one continuing lease and a later sale of California hotel personal property be occasional sales requiring no seller's permit?

Plain-English summary

A Michigan partnership with its main office in Illinois primarily bought real property for long-term investment and leasing. In June or July 1971, it bought a California hotel, bar and restaurant from a finance company that had acquired the property by foreclosure or repossession. Some partners had held stock in the former corporate owner. The partnership paid one unallocated price for the real and tangible assets and paid no sales-tax reimbursement or use tax on the tangible-property portion.

At or shortly after purchase, the partnership leased all assets back to the former owner, which received full operating responsibility and presumably held a seller's permit. The lease expressly included hotel personal property but did not allocate rent between real and tangible property. In December 1973, the partnership sold all hotel assets to an unrelated company.

The July 1, 1971–December 31, 1973 determination used a $287,668 combined measure: $72,668 for leasing fixtures and equipment and $215,000 for selling off-lease fixtures and equipment. The source gives no tax, interest or penalty amount. The partnership had no California seller's permit and filed no California sales or use tax returns during the period.

The parties agreed the partnership had only the hotel lease and sale in California. They disputed its other-state activity; for the report, Hearing Officer James E. Mahler accepted the partnership's claim that it had no other tangible-personal-property lease or sale. He nevertheless rejected its mechanical argument that fewer than three sales avoided seller status. The ongoing, profit-oriented lease of tangible property was a “business” under section 6013 and required a permit under section 6066; Regulation 1595(a)(1)'s “generally” three-sales language did not exempt every lower count.

Because the lease required a permit, neither it nor the later asset sale was occasional under section 6006.5. California ownership and leasing also supplied nexus. Mahler acknowledged Alabama and Arizona decisions treating a single lease differently but found them unpersuasive under California law; he identified Ohio and New Jersey authorities taking the opposite view.

No returns were filed, so section 6487's eight-year period applied. For third-quarter 1971, the following month ended October 31, 1971; the determination issued October 24, 1979 and was timely.

For the lease, the audit used a county assessor's 6.93-percent personal-property allocation, apparently based on the partnership's own income-tax depreciation basis. For the sale, agreement Exhibit B allocated $215,000—about 5.51 percent of total price—to furniture, fixtures and equipment. Some listed items were clearly tangible; other items, such as refrigerators and ice machines, might have been affixed to realty. The partnership named central air-conditioning units and affixed televisions as disputed examples but supplied no evidence. Mahler retained the allocation while allowing 30 days after mailing for better evidence and a possible reaudit.

The partnership submitted the statement required by section 6592. Mahler recommended deleting the failure-to-file penalty and transmitting the relief request to the Board with a favorable recommendation. The source supplies no later evidence, allocation, reaudit, penalty decision, payment, appeal or final Board action.

Source posture and citation check

The live 410.0212 annotation retains the out-of-state partnership, hotel acquisition, leaseback and sale, absent permit and returns, no tax on purchase, seller-business analysis, no mechanical three-sale exemption, non-occasional-sale conclusion and nexus. It changes the supporting decision's “casual or isolated transaction” to “casual or isolated translation.”

The live annotation omits the related former-owner history, unallocated purchase and lease, contested other-state activities, $72,668 lease measure, $215,000 sale measure, $287,668 total, 6.93-percent and 5.51-percent allocations, mixed fixture evidence, eight-year calculation, Alabama, Arizona, Ohio and New Jersey authorities, 30-day evidence window, possible reaudit, section 6592 statement, penalty-relief recommendation, missing records and absent final action.

The printed reporter citations for State v. GM&O Land Co., 275 So. 2d 687, and State v. Selby, 544 P.2d 717, resolve to the named cases. The dated Ohio Board of Tax Appeals item is not a conventional reporter citation, and the New Jersey item is a newsletter reference; neither underlying item is reproduced, so this page does not claim independent verification of their propositions.

The official five-page PDF has a clean native text layer and one small page-1 stencil, so no OCR was required. Both fresh direct PDF downloads and both live-annotation downloads were byte-identical, and the duplicate default PDF text extractions matched. The original-text section remains byte-identical to its committed version and matches the fresh official extraction after removing only the extractor's terminal newline and form feed.

What this means for you

Real-estate investors, equipment lessors, and tax professionals

A single long-running lease was itself a selling business on these facts. Allocate mixed real and tangible assets contemporaneously, register and file, and preserve appraisals, attachment facts, agreements, returns and evidence supporting penalty relief. A promised later evidence window is not proof that an allocation changed.

Common questions

Q: Did fewer than three sales eliminate permit duties?

A: No. Regulation 1595 said three or more sales “generally” required a permit; it did not exempt every person with fewer sales. The ongoing lease was a profit-oriented business activity.

Q: Were the lease and later sale occasional?

A: No.

Q: Why did the eight-year assessment period apply?

A: The partnership filed no returns. The first quarter at issue ended September 30, 1971, the following month ended October 31, and the October 24, 1979 determination fell within eight years.

Q: What relief did the officer recommend?

A: Thirty days to submit allocation evidence for a possible reaudit, plus transmission of the section 6592 penalty-relief request with a recommendation that relief be granted.

Q: What was the audit measure?

A: $287,668: $72,668 for the lease and $215,000 for the sale. Those were measures, not stated tax amounts.

Q: Did the allocation change after the 30-day window?

A: The source does not say. It supplies no later evidence, reaudit or final allocation.

Citations and references

• California Revenue and Taxation Code §§ 6006.1, 6006.5, 6013, 6014, 6066, 6487, and 6592
• California Sales and Use Tax Regulation 1595(a)(1)
• State v. GM&O Land Co., 275 So. 2d 687 (Ala. Civ. App. 1973)
• State v. Selby, 544 P.2d 717 (Ariz. Ct. App. 1976)
• Hayes-Albion Corp. v. Kosydar, Ohio Board of Tax Appeals, May 21, 1975 — identified but not supplied
• New Jersey State Tax News, April-May 1974, 2 CCH New Jersey Tax Reporter ¶ 60-236.50 — identified but not supplied
• Purchase and lease agreements; sale agreement and Exhibit B; asset and fixture records; appraisals and depreciation schedules; returns; audit workpapers; determination; section 6592 statement; later allocation evidence; reaudit; penalty decision; payment; appeal; and final Board action — described or implicated but not included

Verbatim support

From the official hearing decision and recommendation:

Under section 6066, a person must hold a permit if he is "engaged in business" as a seller, regardless of the number of sales.

Petitioner will be allowed 30 days from mailing of this report to submit evidence from which a better allocation can be made.

Transmit the request for the relief from the penalty to the Board with a recommendation that relief be granted.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 410.0212
• Original supporting opinion: 410.0212 PDF

Original ruling text

410.0212

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
STATE OF CALIFORNIA
BOARD OF EQUALIZATION
In the Matter of the Petition for
Redetermination Under the Sales
and Use Tax Law

DECISION AND RECOMMENDATION
OF HEARING OFFICER

X---------------Petitioner

The above entitled matter came on regularly for hearing on Thursday, july 31, 1980, in West Los Angeles, California. James E. Mahler, Hearing Officer. Appearing for Petitioner:

X--------------------X---------------------

Appearing for the Board:

X--------------------Auditor

Protest
Petitioner protests a determination of sales and use tax deficiency for the period July 1, 1971, through December 31, 1973. the protested taxes are measured by: Audit Item

State, Local and County

A. Lease of fixtures and equipment.

$72,668

B. Sales of off-lease fixtures and equipment.

$215,000
$287,668

Contentions
1.

Petitioner was not a retailer and was not required to hold a seller’s permit.

2.

The lease was an exempt occasional sale.

3.

The sale was an exempt occasional sale.

4.

Petitioner is not subject to the Board’s jurisdiction

5.

The determination is barred by the statute of limitations.

6.

Some of the items which the audit classes as “fixtures and equipment” were not tangible personal property.

7.

The failure to file returns was due to reasonable cause and not willful neglect.

Summary
Petitioner is a partnership organized under Michigan law with its main office in Illinois. Its principal business is buying real property for long term investment purposes and then leasing the property. It did not have a California seller's permit or file California sales and use tax returns during the period in question. In June or July 1971, petitioner purchased the assets of a hotel with a bar and restaurant in X---------, California. It appears that the hotel had formerly been owned by a corporation whose stock was held by some of petitioner's partners. However, petitioner bought the hotel from a finance company which had acquired it by foreclosure or repossession. Although the hotel assets included some tangible personal property in addition to the realty, petitioner did not pay sales tax reimbursement to the seller or use tax to the state with respect to the purchase. The price paid by petitioner was a lump sum with no allocation between the real and tangible personal property. For property tax purposes, however, the local County Assessor determined that 6.93 percent of the price was paid for "personal property." Apparently this determination was based on petitioner's own calculation of the basis of depreciable assets for income tax purposes. Simultaneously with the purchase or soon thereafter, petitioner leased all the assets to the same corporation that had previously owned the hotel. Although the lease agreement expressly included the personal property used in the hotel business, the lease payments were not allocated between the real and tangible personal property. The corporation was given full authority and responsibility for operating the business and presumably held a seller's permit for such operations. In December 1973, petitioner sold all the hotel assets to an unrelated company. Exhibit B to the sale agreement provided that $215,000, or about 5.51 percent of the total sales price, was allocable to "furniture, fixtures and equipment." That term was defined in Exhibit B to include many items which are clearly tangible personal property, such as

bedding and silverware, as well as many items which mayor may not have been affixed to realty, such as refrigerators and ice machines. The parties agree that petitioner did not lease or otherwise sell any property in California except the hotel assets during the period in question. However, there is disagreement concerning petitioner's operations outside this state. The audit work papers state that petitioner was leasing property in both Florida and Illinois, but do not state whether the property was real or personal. Petitioner states that its only lease outside California was a warehouse in Illinois, and that that lease did not involve any tangible personal property. The audit asserted tax on petitioner's lease of the tangible personal property included in the hotel assets. The lease payments were allocated between the tangible and other assets to determine the measure of tax. The County Assessor's 6.93 percent allocation of the original purchase price was used to allocate the lease payments. The audit also asserted tax on petitioner's subsequent sale of the hotel assets measured by the agreed selling price of "furniture, fixtures and equipment.

Analysis and Conclusions

1. The initial question is whether petitioner was a seller required to hold a seller's
   permit.
   Revenue and Taxation Code section 6066 requires a permit application from “[e]very person desiring to engage in or conduct business as a seller within this state ....” The term "business" is defined in section 6013 of the Code to include “any activity engaged in by any Person or caused to be engaged in by him with the object of gain, benefit, or advantage, either direct or indirect.” Section 6014 defines “seller” to include “every person engaged in the business of selling tangible personal property of a kind the gross receipts from the retail sale of which are required to be included in the measure of the sales tax.” In addition, Sales and Use Tax Regulation 1595(a) (1) provides: Generally, a person who makes three or more sales for substantial amounts in a period of 12 months is required to hold a seller's permit. A person who makes a substantial number of sales for relatively small amounts is also required to hold a seller's permit. Petitioner points out that section 6006.1 of the Code provides that a lease is a "continuing sale" in the singular and not "sales" in the plural. Therefore, petitioner argues, it made only two sales during the entire audit period, namely, the lease of the hotel assets and the subsequent sale of those assets. Petitioner concludes that it was not a seller required to hold a permit because it did not make three or more sales in any 12 month period.

We agree that petitioner made only the two sales in California during the audit period. For purposes of this report, we also accept as true the allegation that petitioner was not leasing or otherwise selling tangible personal property in any other state. However, we cannot agree that a person who makes less than three sales is necessarily exempt from the permit holding requirement. Under section 6066, a person must hold a permit if he is "engaged in business" as a seller, regardless of the number of sales. For example, a person who is in the business of building and selling boats is a seller required to hold a permit, even though he may sell only one or two boats per year. In this case, we conclude that petitioner was engaged in the business of leasing tangible personal property. The lease of the hotel assets, including the tangible personal property, was unquestionably entered into with the object of gain, benefit or advantage, and this comes precisely within the statutory definition of “business.” The on-going nature of the lease also indicates that it was a business activity rather than a casual or isolated transaction. In short, while leasing tangible personal property may not have been petitioner's principal business, it was nevertheless a business activity and required the holding of a seller's permit. The above quoted provisions of Regulation 1595 (a) (1) are not to the contrary. The regulation states that persons who make three or more sales are “generally” required to hold a permit. It does not state that persons who make fewer sales are necessarily exempt from the permit holding requirement. Finally, we are aware that a single lease is not considered a business activity under the laws of Alabama and Arizona. (State of Alabama v. GM&0 Land Co., 275 So. 2d 687; Arizona, et a1. v. Selby, 544 P.2d 717.) However, we do not find these decisions persuasive authority for interpreting California law. We also note that Ohio and New Jersey do consider a single lease to be a business. (Hayes-Albion Corp. v. Kosydar, Ohio Board of Tax Appeals, May 21, 1975; New Jersey State Tax News, April-May 1974 [2 CCH New Jersey Tax Reporter ,60-236.50].)

2. In relevant part, Revenue and Taxation Code section 6006.5(a) defines
   “occasional sale” to include a "sale of property not held or used by a seller in the course of activities for which he is required to hold a seller's permit ....” Since petitioner's lease of the hotel assets required the holding of a seller's permit, the lease ·was not an occasional sale under this section. No contention has been raised that the lease would qualify under section 6006.5(b).
3. For the same reasons, petitioner's sale of the hotel assets was not an occasional
   sale.
4. Petitioner owned a hotel and was engaged in a leasing business in California.
   These facts provide a sufficient nexus for taxation.
5. Revenue and Taxation Code section 6487 provides that in the case of failure to
   file returns, the notice of determination shall be mailed "within eight years after

the last day of the calendar month following the quarterly period for which the amount is proposed to be determined." Since petitioner did not file returns, the eight year period applies. The first quarterly period in the determination is 3Q71, and the last day of the following month was October 31, 1971. The determination was issued on October 24, 1979, and is therefore timely.

6. The measure of tax on the lease is based on the County Assessor's allocation of
   the original purchase price. According to petitioner, this allocation is in turn based on its own calculation of the basis of depreciable assets for income tax purposes. Petitioner alleges that the calculation included several items which were depreciable but which should not be considered tangible personal property for sales and use tax purposes. Petitioner lists central air conditioning units and television sets affixed to the realty as examples of such property, but no evidence has been presented. Absent evidence to the contrary, we have no choice but to accept the audit's allocation of the lease and sale prices. Petitioner will be allowed 30 days from mailing of this report to submit evidence from which a better allocation can be made.
7. Petitioner has submitted the statement required by Revenue and Taxation Code
   section 6592. It is recommended that the penalty be deleted.

Recommendations
Allow petitioner 30 days to submit additional evidence. Reaudit if necessary in accordance with the evidence. Transmit the request for the relief from the penalty to the Board with a recommendation that relief be granted.

James E. Mahler, Hearing Officer

12/9/80