Was transferring title to plant equipment for cash and immediately leasing it back a taxable sale even though the equipment never moved?

Plain-English summary

A wood-products manufacturer that had bought plant equipment tax-paid transferred title to an Idaho company for $16,876 and leased the equipment back. The machinery stayed in place in the manufacturer's production line, and the transaction was undertaken to obtain operating funds.

California rejected the argument that the transaction was merely a loan. A transfer of tangible personal property title for consideration was a sale, and the continued business use under a leaseback made it a retail sale rather than a sale for resale.

The Board relied on California decisions recognizing both vessel sale-leasebacks and transfers of equipment attached to real property as taxable retail sales. It therefore sustained the audit measure of $16,876.

Common questions

Did the financing purpose make the transaction a loan?

No. The opinion treated the documented title transfer and leaseback as a retail sale.

Did the equipment need to be physically moved?

No. It remained in place and the source still found a taxable transfer.

What was the audit measure?

$16,876, the stated amount paid for title to the equipment.

Citations and references

• California Revenue and Taxation Code sections 6006, 6007, and 6051
• Union Oil Co. v. State Board of Equalization, 60 Cal. 2d 441
• Standard Oil Co. v. State Board of Equalization, 232 Cal. App. 2d 91

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/495-0340.pdf

Original ruling text

495.0340

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

February 23, 1968

Gentlemen:
Pursuant to audit dated July 31, 1967, a determination of sales tax was made by this Board against “T” for “Sales of equipment not reported”, measure $16,876. It is our understanding that you originally purchased this equipment tax paid for your plant. In 1964, presumably in order to obtain operating funds, you entered into a transaction pursuant to which you transferred title for $16,876 to “D” of Boise, Idaho, and “D” leased back the equipment to you, the equipment remaining in place in your plant. We understand your contention to be that, since this transaction was entered into for the purpose of obtaining funds, and the equipment was never moved and continues to remain in the production line, the transaction should not be regarded as a sale, but rather, as a loan. We regret that we cannot agree with this contention. Section 6006 of the Revenue and Taxation Code provides that the transfer of title to tangible personal property for a consideration is a sale. Section 6007 provides that a retail sale is a sale for any purpose other than resale in the regular course of business. In Union Oil Co. v. State Board of Equalization, 60 cal. 2d 441, the court recognized that transfers of vessels by an oil company to a company which leased them back to the oil company were retail sales. In Standard Oil Co. v. State Board of Equalization, 232 Cal. App. 2d 91, the court held that the transfer in place of equipment attached to real property was a taxable retail sale. In view of the foregoing, it appears that the transfer to “D” was a retail sale of tangible personal property under Sections 6007 and 6007 and that your receipts from such sale were taxable gross receipts under Section 6051. Accordingly, no adjustment appears to be in order. Very truly your,

George A. Trigueros
Tax Counsel
GAT:smk

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