Could a grantor trust lease vehicles, issue resale certificates, and report rental tax under its trustor-beneficiary's seller's permit?

Plain-English summary

A grantor trust bought vehicles for leasing. Its trustor and sole beneficiary was registered as a California retailer, and the trust used that person's account number and return to defer tax at purchase and report tax on rentals. The May 18 request called the purchase document a “sales tax exemption certification”; Tax Counsel David H. Levine expressly said it was unclear whether the document was a valid resale certificate.

The request did not describe the vehicles. Levine assumed for the opinion that the fleet included mobile transportation equipment (MTE), such as buses and most trucks under section 6023, and non-MTE vehicles. The trust instrument, vehicle list, purchase prices, certificates, leases, first-lease dates, rental receipts and returns are absent.

For non-MTE property, a lease generally was a sale taxed on rentals unless substantially same-form property was excluded by the lessor's payment of sales-tax reimbursement or timely purchase-price use tax. When rentals were taxable, the lessee owed use tax and the lessor had to collect and pay it. Assuming no other use, the lessor could buy ex tax for resale with a Regulation 1668 certificate. As the owner-lessor and separate “person” under section 6005, the trust itself had to register, collect from lessees and report; the beneficiary could not serve as a conduit.

For MTE, the lease itself was not a sale and the lessor was the consumer. Without tax paid to the vendor, the trust owed use tax measured by purchase price unless it timely elected to measure its own use tax by fair rental value. The election had to occur by the return due date for the period of first lease, then applied whether the MTE was inside or outside California and could not be revoked for that equipment.

Levine said the trust had missed the fair-rental-value election for existing MTE and therefore owed use tax on purchase price. An MTE lessor did not need a seller's permit or registration solely because it leased MTE, but it had to register to make and report the fair-rental-value election. For MTE first leased in the future, the trust could use that method only through its own timely registration and return, not the beneficiary's.

The letter directs immediate trust registration for its non-MTE leases and identifies purchase-price liability for existing MTE, but supplies no measure, tax, interest, penalty, corrected certificate, registration, amended return, payment, audit or later outcome.

Source posture

The live 410.0218 annotation retains the grantor trust, vehicle leasing, beneficiary account, rental-receipt reporting, separate-person rule and prohibition on using another entity's permit and return. It says the trust “has issued a resale certificate,” while the supporting opinion says the certification's validity was unclear.

The live annotation also says the trust should obtain its own permit without preserving the MTE distinction. The opinion says an MTE lessor was not required to register solely because it leased MTE; registration was necessary if it elected fair-rental-value reporting. The live page omits the undescribed-vehicle assumption, MTE definition, non-MTE rental-tax mechanics, lessee liability and lessor collection, purchase-price exclusion, existing MTE's missed election, purchase-price liability, future election deadline, irrevocability, inside/outside-state rule, missing records, absent enclosures and no compliance outcome.

The official three-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

Trust lessors, fleet operators, and tax professionals

Register and report through the actual owning and leasing entity when current law requires it. Classify each vehicle as MTE or non-MTE and calendar the first-lease election deadline before choosing purchase-price, rental-receipt or fair-rental-value treatment. Verify any exemption or resale certificate rather than assuming its label or another entity's number is enough.

Common questions

Q: Was the trust a separate tax person?

A: Yes. Section 6005 treated the trust as a separate “person” from its trustor and sole beneficiary.

Q: Who had to register for non-MTE leases taxed on rentals?

A: The trust that owned and leased the property, not its beneficiary acting as a reporting conduit.

Q: What tax measure applied to existing MTE after the missed election?

A: Purchase price.

Q: Could future MTE use fair rental value?

A: Yes, under the opinion, only with the trust's own registration and an election by the return due date for the first lease. The election then was irrevocable for that MTE.

Q: Did the source establish that the trust used valid resale certificates?

A: No. Counsel said it was unclear whether the described exemption certifications were valid resale certificates.

Q: Did the trust later register or pay the identified tax?

A: The source does not say. It gives no corrected certificates, registration, amended returns, payment, audit or outcome.

Citations and references

• California Revenue and Taxation Code §§ 6005, 6006(g)(4)-(5), 6014, 6023, 6066, 6092.1, 6093, 6094(d), 6201–6203, 6226, 6243, 6243.1, and 6244(d) — as discussed in 1989
• California Sales and Use Tax Regulations 1660, 1661, and 1668 — as discussed in 1989
• May 18 request; trust instrument; vehicle classifications and values; purchase documents; certificates; leases and first-lease dates; rental receipts; registrations; returns; tax computations; amended reporting; payments; audit; and later outcome — described or implicated but not included
• Regulation 1660 and 1661 enclosures — identified but not reproduced after the opinion

Verbatim support

From the official Tax Counsel opinion:

It is unclear whether the certification to which you refer is by valid resale certificates.

The trust may not engage in this business under the seller's permit or registration of its sole beneficiary.

As discussed above, person leasing MTE is not "selling" tangible personal property in this state and is not required to hold a seller's permit or register with the Board solely on the basis of leasing MTE.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 410.0218
• Original supporting opinion: 410.0218 PDF

Original ruling text

STATE OF CALIFORNIA

410.0218

STATE BOARD OF EQUALIZATION
(916) 445-5550
June 3, 1989

Re: X-----------------Dear X----------------,
This is in response to your letter dated May 18, 1989 regarding the application of use tax to leases when a grantor trust is involved. X-------------- is registered as a retailer engaged in business in California with the above cited account number. You state that X------------- is the trustor and sole beneficiary under a grantor trust. The trust has purchased vehicles, but has used X-------’s “sales tax exemption certification to defer paying sales tax on the purchase of the vehicles, and instead tax on the rentals is being paid.” It is unclear whether the certification to which you refer is by valid resale certificates. You wish to continue using X-------------’s account number when the trust purchases vehicles. You also wish to continue paying tax measured by rentals payable rather than paying tax on the purchase price, and you believe that you should be allowed to continue paying tax in this manner on vehicles you have previously purchased in the manner described above. Discussion You have not described the vehicles about which you inquire. For purposes of this opinion, I assume they include mobile transportation equipment (MTE) as defined by Revenue and Taxation Code Section 6023 (this includes buses and most trucks) as well as other vehicles which are not MTE. A lease of non-MTE tangible personal property is a sale unless the property is leased in substantially the same form as acquired and the lessor has paid sales tax reimbursement or has paid use tax measured by the purchase price. (Rev. & Tax. Code
§ 6006(g) (5), Reg. 1660(b).) When a lease is a sale under this definition, the lessee owes use tax measured by rentals payable, which the lessor must collect and pay to this Board. (Rev. & Tax. Code §§ 6201, 6202, 6203, Reg. 1660(c).) That lessor is a seller and is required to hold a seller's permit. (Rev. & Tax. Code §§ 6014, 6066.) Assuming the property will be leased without other use, the seller/lessor may purchase the property

extax for resale (lease) by issuing the vendor a resale certificate as described in Regulation 1668. Unlike the lease of non-MTE tangible personal property, the lease of MTE is not a sale. (Rev. & Tax. Code § 6006(g) (4), Reg. 1661.) Rather, the lessor of MTE is regarded as the consumer of that MTE. This means that either the sale of the MTE to the lessor is subject to sales tax or the lessor's use of the MTE is subject to use tax. If the lessor does not pay sales tax reimbursement to its vendor, then it owes use tax on its use of the MTE (by leasing) measured by purchase price unless it makes a timely election to pay its own use tax liability measured by fair rental value. If a person who purchases MTE for the purpose of leasing wishes to pay its use tax liability measured by fair rental value, it may purchase that MTE extax by issuing its vendor a resale certificate for the limited purpose of reporting its use tax liability on this basis. (Rev. & Tax. Code §§ 6092.1, 6094(d), 6243.1, 6244(d).) In order to make a timely election, the lessor must make the election on or before the due date of the return for the period in which the MTE is first leased. When this election is made, use tax must thereafter be paid measured by the fair rental value, whether the MTE is within or without the state, and the election may not be revoked with respect to any MTE as to which it is made. If, on the other hand, the person who leases the MTE does not make the election in a timely manner, that person owes use tax measured by the purchase price of the MTE. Summarizing the above discussion, the lease of non-MTE tangible personal property is subject to use tax measured by rentals payable unless the lessor has made a timely election to exclude the lease from the definition of a sale by paying sales tax reimbursement to its vendor or timely paying use tax measured by purchase price. When the lease is a sale, the tax measured by rentals payable is a tax on the lessee's use of the tangible personal property. On the other hand, the lessor of MTE is the consumer of that MTE and it is only by virtue of the lessor's timely election to pay its own use tax liability measured by fair rental value that prevents the lessor from owing use tax measured by purchase price. A trust is a "person" for purposes of California sales and use tax. (Rev. & Tax. Code § 6005.) A person who is selling tangible personal property (this would include a lease which is a sale as defined above) is required to hold a seller's permit or register with the Board as a retailer. (Rev. & Tax. Code §§ 6014, 6066, 6203, 6226.) Thus, when a trust is engaged in the business of leasing tangible personal property in California and does not pay sales tax reimbursement or use tax to its vendors, that trust is required to register with this Board. The trust may not engage in this business under the seller's permit or registration of its sole beneficiary. As discussed above, person leasing MTE is not "selling" tangible personal property in this state and is not required to hold a seller's permit or register with the Board solely on the basis of leasing MTE. However, in order to make the election to pay its own use tax liability on the lease of MTE based on fair rental value, that lessor must register with this Board. (Rev. & Tax. Code §§ 6092.1, 6093, 6094(d), 6243, 6243.1, 6244(d).) If a trust that leases MTE wishes to pay its use tax liability for the use of the

MTE on the basis of fair rental value, that trust must register with this Board. It may not use the seller's permit or registration of its sole beneficiary to report tax on this basis. X---------------- and its trust have not conformed to the requirements of the California Sales and Use Tax Law with respect to the leases. With respect to the trust's leases of non-MTE tangible personal property, the trust did not make a timely election to pay use tax measured by the leased property's purchase price and those leases are therefore sales subject to use tax measured by rentals payable. Since it is the trust that is selling (leasing) that property, it is the trust that must register with this Board and collect use tax from its lessees and pay that tax to this state. The trust may not avoid this by having X------------------- report and pay the tax. Rather, it must immediately register with its local district office of the Board. With respect to the trust's leases of MTE, the trust did not make a timely election to pay its use tax liability measured by fair rental value. The trust therefore owes use tax measured by its purchase price of the property. The trust may not pay its use tax liability on leased MTE based on fair rental value for any MTE with respect to which that election is not made on or before the due date of the return of the trust for the period in which the MTE is first leased. If the trust wishes to pay its use tax liability measured by fair rental value on property first leased in the future, it must register with this Board. It may not report its use tax liability on the return of X----------------. Enclosed for your information are copies of Regulations 1660 and 1661. If you have further questions, feel free to write again. Sincerely, David H. Levine Tax Counsel DHL/smt:1414C Enclosures: Regulation 1660 and 1661 bc:

Out-of-State District Administrator
return Review – Ms. Sue Mayhew