Was a bill of sale followed by a conditional resale a taxable property sale when the documents secured what the parties treated as a loan?

Plain-English summary

A business that already owned and used tangible personal property wanted a secured loan. The proposed documents called for the owner to give the finance company a bill of sale in exchange for cash and simultaneously enter a conditional sales agreement to repurchase the property through installments while the finance company retained a security interest.

California looked at the assumed substance of the arrangement rather than the document labels. It concluded that the transaction was a loan of money, not a taxable sale of tangible personal property, if the customer retained ownership benefits such as income-tax credits and depreciation, the interest rate was nonusurious, the finance company recorded the transaction as a loan, and appropriate UCC financing statements were filed.

The opinion was conditional. It did not say that every sale-and-repurchase or sale-leaseback form is financing for sales-tax purposes.

Common questions

Did the “Bill of Sale” label control?

No. The opinion treated the combined documents as secured financing because the stated economic and accounting facts supported a loan.

Which retained benefits mattered?

The letter specifically identified state and federal income-tax credits and depreciation deductions.

What documentation did the opinion assume?

Loan treatment on the finance company's books and appropriate UCC financing statements, along with a nonusurious interest rate.

Citations and references

• California Constitution article XV, section 1
• Uniform Commercial Code financing statements, referenced without a numbered section

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/495-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/495-0254.pdf

Original ruling text

495.0254

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-8485

November 14, 1985

Mr. J--- R. W--District Sales Manager
F--- C---Corporation
XXXX --- Place
Suite XXX
--- ---, CA XXXXX
Dear Mr. W---:
This is in response to your letter of October 2, 1985. We understand that F--- C--Corporation (F---) is in the financing and leasing business. One of F---’s customers owns several items of tangible personal property which it utilizes in its business and has approached F--- concerning the possibility of obtaining a loan secured by that property. The customer proposes to issue a “Bill of Sale” to F--- transferring all right, title and interest to the property to F--- in exchange for a sum of money. Simultaneous with issuance of the “Bill of Sale”, F--- and the customer will enter into a “Conditional Sales Agreement” whereby the customer agrees to purchase the property from F---t through installment payments with F--- retaining a security interest in the property until all installment payments have been made. You asked our opinion as to whether the foregoing transaction triggered application of sales or use tax. Assuming the customer retains benefits of property ownership such as state and federal income tax credits and depreciation deductions, the interest rate charged by F--- is nonusurious (see Cal.Const.Art. XV, §1), and F--- treats the transaction as a loan on its books and files appropriate UCC financing statements, it is our opinion that the described transaction is for a loan of money and is not a sale of tangible personal property subject to tax.

Sincerely,

E. Leslie Sorensen, Jr.
Tax Counsel
ELS:rar