Could a company claim tax-paid purchases resold after renting equipment to a joint venture for six months and then selling it?

Plain-English summary

California denied the tax-paid purchases resold credit because the purchaser used the equipment before selling it. The company first rented the tax-paid equipment to a joint venture under a 34-month agreement and then, six months later, sold it to that venture for cost less the rental payments already made.

The source treated leasing as use outside the permitted retention, demonstration, or display exceptions. The later sale therefore did not satisfy former Ruling 71's no-use requirement.

Common questions

Did it matter that the first agreement transferred no title?

No. The rental itself was the disqualifying use.

Did the company's ten percent joint-venture interest change the result?

The opinion described that interest but based its denial on the intervening lease.

How long had the equipment been rented before sale?

Six months.

What uses did the historical rule permit before resale?

Retention, demonstration, or display while holding the property for sale in the regular course of business.

Citations and references

• California Revenue and Taxation Code section 6012(a) — historical gross-receipts and tax-paid resale provision cited
• Former California Sales and Use Tax Ruling 71 — historical no-use requirement applied by the source

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/545-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/545-0040.pdf

Original ruling text

545.0040

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION
April 20, 1955

Dear Mr. C.
We understand that C Company purchased certain equipment which it rented to a joint venture under an agreement calling for the payment of rent over a period of thirty-four months which was the estimated time required to perform the work under the contract. The total rental was five per cent in excess of the total equipment cost. Sales tax was charged on the vendor's invoice for this equipment and paid at the time of purchase by C Company. You state, "This was not a leasepurchase agreement, as no title or interest in title was to change". C is a member of the joint venture in the amount of ten per cent. Six months later an agreement was entered into whereby C Company sold the equipment to the joint venture for cost less six monthly payments made. You ask whether the sale to the joint venture falls within the provisions of Ruling 71 relating to tax-paid purchases resold. Section 6012 (a), defining gross receipts, and Ruling 71 allow a taxpaid purchases resold credit to a retailer who sells tangible personal property before making any use of it (other than retention, demonstration, or display while holding it for sale in the regular course of business) if he has reimbursed his vendor for sales tax or has paid use tax. You will note that before such a credit is allowable the retailer must have paid tax on the purchase and must have made no use of the property other than retention, demonstration, or display while holding it for sale in the regular course of business. Here C company made a use of the property by leasing it to the joint venture and, therefore, the tax-paid purchases resold credit under Ruling 71 may not be taken. Very truly yours,

John H. Murray
Associate Tax Counsel