Did free possession of an analyzer and computer become a lease when the customer promised to buy a minimum quantity of test packs?

Plain-English summary

A customer promised to buy a minimum number of test packs each day for a fixed period at a stated price. In return, it received possession and use of an automatic clinical analyzer and computer.

California concluded that the purchase commitment was consideration for the equipment use. The arrangement therefore included both a lease of equipment and sales of test packs; it was not a “loan for use,” which historically required temporary use without reward.

The taxpayer had reported tax on all gross receipts, so the Board found tax had been reported on the proper overall measure. The memorandum nevertheless said the tax theoretically should be apportioned between sales tax on test-pack sales and use tax collected based on equipment rentals.

Common questions

Can a promise count as consideration even without a stated equipment rental charge?

Yes. The customer's binding promise to make minimum purchases supplied the reward for possession and use.

Why was this not a free loan of equipment?

Because the supplier received both the promise and actual purchases of test packs in exchange for the equipment use.

Did the source allocate a specific amount to the lease?

No. It stated the theoretical need to apportion the tax but gave no allocation formula or amounts.

Citations and references

• California Revenue and Taxation Code sections 6006(g), 6006.3, and 6010(e)
• Former California Civil Code sections 1605, 1884, and 1925
• California Sales and Use Tax Regulation 1660(a)
• Simmons v. California Institute of Technology, 34 Cal.2d 264
• Chrisman v. Southern Cal. Edison Co., 83 Cal.App. 249

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/495-0376.pdf

Original ruling text

State of California

Board of Equalization

Memorandum
495.0376
To:

Audit Review and Refunds

From:

E. Leslie Sorensen, Jr.

Subject:

E. I. D---

Date:

November 1, 1985

SZ --- XX-XXXXXX

As requested, we have considered the issue of whether or not the agreement entitled “The D--- A--- C--- A--- Computer 1 Full Service Price Per Test Plan Agreement” is a lease of equipment and sale of test packs or merely a loan of equipment and sale of test packs. Based upon the following analysis, it is our opinion that the agreement indicates a lease of equipment and sale of test packs. “Sale” and “purchase” are defined to include “any lease of tangible personal property in any manner or by any means whatsoever, for a consideration…” (Rev. & Tax. Code §§6006(g), 6010(e)). “Lease” is defined in the code to include rental, hire and license (Rev. & Tax. Code §6006.3). Section 1925 of the Civil Code defines a hiring as “…a contract by which one gives to another the temporary possession and use of property, other than money, for reward, and the latter agrees to return the same to the former at a future time.” Regulation 1660, subsection (a) incorporates the concepts of the foregoing provisions by defining a “lease” as follows: “The term ‘lease’ includes rental, hire, and license. It includes a contract under which a person secures for a consideration the temporary use of tangible personal property which, although not on his premises, is operated by, or under the direction and control of, the person or his employees….” “Good consideration” is defined in Civil Code Section 1605 as: “Any benefit conferred, or agreed to be conferred, upon the promisor, by any other person, to which the promisor is not lawfully entitled, or any prejudice suffered, or agreed to be suffered, by such person, other than such as he is at the time of consent lawfully bound to suffer, as an inducement to the promisor, is good consideration for a promise.”

Audit Review and Refunds

-2-

November 1, 1985
495.0376

The general rule is that any valid promise is sufficient consideration for another promise (see Simmons v. California Institute of Technology, 34 Cal.2d 264; Chrisman v. Southern Cal. Edison Co., 83 Cal.App 249). Section 1884 of the California Civil Code describes a “loan for use” as follows: “A loan for use is a contract by which one gives to another the temporary possession and use of personal property, and the latter agrees to return the same thing to him at a future time, without reward for its use.” (Emphasis added.) Applying the foregoing principles to the agreement in this matter we note that the customer promises to purchase a minimum of XX test packs per day for XXX days at a stated price per test pack. In return, the customer is entitled, among other things, to possession and use of an automatic clinical analyzer and computer. Under such circumstances, a lease of the equipment is clearly in evidence since consideration in the form of the customer’s promise to purchase a certain quantity of the test packs is given in return for possession and use of the equipment. A “loan for use” is not in evidence since D--- realizes “reward” in the form of the promise to purchase and actual purchase of the test packs. We understand that D--- has reported tax on gross receipts from the foregoing transactions. Accordingly, tax has been reported on the proper measure. Theoretically, however, the tax should be apportioned between sales tax from sales of test packs and use tax collected based upon rentals of the equipment.

ELS:rar