Could tax collected on supposed lease payments continue offsetting the seller's liability after California told the parties the contracts were sales at inception?

Plain-English summary

A company transferred equipment under contracts labeled as leases and assigned those contracts to another party, which collected tax measured by lease payments. California audited the contracts as sales at inception and initially allowed amounts the assignee had paid on the supposed leases to offset the seller's assessment.

After the parties were told the correct tax treatment, Regulation 1700(b)(4) no longer permitted future offsets. The assignee could not keep collecting and remitting tax on lease payments merely to protect against future Board disputes, then apply those payments against the seller's remaining liability.

The seller also could not obtain refunds of those future payments through the offset mechanism. Any later amount represented as tax had to be returned to the customer or paid to the state, but it would not satisfy the seller's liability.

Common questions

Why was an earlier offset allowed?

It addressed tax collected before the contracts' correct sale-at-inception treatment had been established.

Could future tax collections reduce the seller's unpaid assessment?

No.

What had to happen to later customer tax amounts?

They had to be returned to customers or paid to the state, without being credited to the seller's liability.

Citations and references

• California Code of Regulations, title 18, Regulation 1700(b)(4)

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/460-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/460-0141.pdf

Original ruling text

State of California

Board of Equalization
Legal Division (MIC:82)

Memorandum
460.0141

To:

Mr. J. W. Cornelius
Supervisor, Petition Section

From:

David H. Levine
Senior Tax Counsel

Subject:

C--- S---, Inc.
SC OH XX-XXXXXX

Date:

January 8, 1992

This is in response to your memorandum dated November 17, 1991 regarding the availability of the offset provisions in Regulation 1700 to this taxpayer. C--- purchased equipment extax and thereafter transferred the equipment to purchasers pursuant to contracts designated as leases. C--- then assigned these “leases” to O---. O--apparently had been collecting tax measured by the “lease” payments. Upon audit of C---, we concluded that the contracts designated as leases were actually sales at inception and assessed tax against C--- on this basis. An offset was allowed against that assessment with respect to amounts paid by O--- to the state as taxes on the “leases.” The Out-of-State District Office has told O--- to discontinue collecting tax on “lease payments” under the subject “leases.” C--- states its belief that O--- will continue to collect and remit tax in order to avoid future problems with the Board. You ask: “If C--- refuses to pay the remaining liability and O--- continues to collect and remit tax, can amounts reported by O--- still be applied as offsets to C---’s liability even though O--- has been instructed not to collect the tax? If C--- pays the liability, can they receive a refund of future tax payments by O--- through the offset provisions by filing a claim for refund (the regulation states that ‘The offset can be made . . . when a refund is claimed’)? Is it true that offsets in general can be extended into the future so long as the person seeking an offset may file a claim for refund or has an unpaid liability?”

Mr. J. W. Cornelius

-2-

January 8, 1992
460.0141

Once the parties were advised as to the proper application of tax, the offset provisions of subdivision (b)(4) of Regulation 1700 no longer applied. Thus, future amounts reported and paid by O--- may not be applied as offsets against C---’s liability. C--- may not receive a refund of such payments made by O---. It is not true that offsets may generally be extended into the future as long as the person seeking an offset may file a claim for refund or has an unpaid liability. Rather, your memorandum dated October 15, 1991 to Mr. M--- R--- correctly states that such a rule would be inappropriate. As you stated, the tax liability in question here is that of C--- and if further amounts are collected by O--- which are represented as tax, those amounts must either be returned to the customer or paid to the state. They will not be applied to the liability of C---.

DHL:cl

460.0141.doc