Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2017
Sales and Use Tax Annotations
330.0000 LEASES OF TANGIBLE PERSONAL PROPERTY—IN GENERAL—Regulation 1660
(a) IN GENERAL
330.2675 Purchase, Lease, and Resale. A California bank entered into a lease agreement with an out-of-state vendor to lease 10,000 merchant card reader terminals. The original lease required the bank to make 36 monthly payments broken down between principal, interest, and use tax on the lease payments.
After the terms of the lease were set, the bank and vendor agreed to amend the lease to include a purchase option price of $1.00 at the end of the lease for all 10,000 machines. At about the same time, both agreed to another change which would allow the bank to transfer ownership of the terminals to the merchants prior to the termination of the original contract which commenced on January 30, 1993.
On November 1, 1993, the bank reached an agreement with an unrelated Company to transfer ownership of the 10,000 terminals to it. Under the agreement, the Company subleased the terminals from the bank under the exact same terms as the bank's main lease with the out-of-state vendor. As of the sublease date, the bank utilized the terminals acquired from the vendor in avariety of ways. Some were still in inventory awaiting future lease to merchants. Others were lost, sold, given away, leased free of charge, and some remained in the bank's repair pool.
The original lease contract, as amended, is considered to be a sale under a security agreement from inception and not a true lease. (Regulation 1660(a)(2)(A).) Since the vendor is located out of state, the applicable tax to the transaction is use tax on any use of the terminals in the state by the bank. Since the bank is also holding some terminals in resale inventory, has sold terminals and has leased terminals for a monthly rental, the sale of these terminals to the bank is a sale for resale. The sales price of each category should be based on the per unit purchase price less interest and finance charges (if adequate and complete records were kept of such charges by the vendor).
Sales tax applies to the bank's subsequent retail sale of terminals to merchants. Likewise, use tax applies to the bank's subsequent lease of the terminals to merchants; that is, the bank is required to collect use tax on the rental receipts.
As noted, the bank had disposed or lost some of the terminals prior to the subsequent transfer of the units to the Company. If the Company contracted to pay the same amount to the bank, that the bank originally agreed to pay the vendor, then the bank sold the Company fewer terminals, (only those still on hand) for the same price the bank paid for the 10,000 terminals. The unit selling price should be determined based on the remaining terminals. Accordingly, the application of tax to the bank's sale to the company is as follows:
The sale of the terminals which are leased to merchants is a sale for resale. The Company does not have an option to pay sales tax reimbursement to the bank and consider the lease as nontaxable. (Regulation 1660(c)(9)(A).) The Company may elect to purchase for resale or pay sales tax reimbursement to the bank on the sale of terminals in the bank's inventory depending upon the planned disposition of these terminals. The sale of the terminals which are committed to the repair pool is a retail sale subject to sales tax. Also, the sale of the terminals loaned at no charge to merchants is a retail sale if the Company will continue to provide them to the merchants at no charge. 8/22/94.