Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 330.2791


330.2791 Sale of Leased Property Subject to Existing Leases. Corporation A has purchased all of the assets from two corporations to which it is not related. The sellers produced a broad range of water products which they distributed primarily through a route delivery system in ½ to 5 gallon containers. They rented water coolers to many of their customers and made some sales of coolers to customers. The sellers primarily used two types of cooler rental agreements with customers. The first type is for rental on a month-to-month basis under a written agreement which included a provision requiring 30 days notice in order to cancel. The other type of rental agreement specified a minimum period of 12 months after which the rental converted to month-to-month with a 30 day cancellation provision. The sellers had purchased their coolers with tax paid on cost and tax was not charged on rental receipts. All coolers, with the exception of a minor amount held in inventory, were subject to existing leases on the date of sale of the business assets.

Other sources of revenue earned by the sellers included the rental of water filter and purification systems, an Office Refreshment Program which offered customers coffee, juice, refreshments and snacks, and the sale of paper cups to water cooler rental customers.

The sellers had California seller's permits as a result of their activities of making taxable sales under the Office Refreshment Program and sale of paper cups. Sales tax was reported and paid on sales of paper cups and other taxable sales, but the sales of bottled water were claimed as exempt.

Sales under the Office Refreshment Program appear to be related to the sellers' leases of water coolers and other related equipment. Their sales of the paper cups were clearly part of their business involving the leases of the water coolers. As a result of the activities in which the sellers were involved, they were required to hold, and did in fact hold, seller's permits. Since the sales were of assets used in the course of activities requiring the holding of those seller's permits, they were not occasional sales under section 6006.5(c).

With respect to the leases, all of the coolers were purchased by the selling companies with tax paid on cost. This means that corporation A purchased the coolers subject to leases which were not continuing sales. The sale to Corporation A is therefore a taxable retail sale, with tax measured by the sales price of the property to Corporation A. (Regulation 1660(c)(9)(A).) There is no election available to Corporation A. Tax is due on the sales price of the rental units to Corporation A. Neither the leases in effect at the time of the sale, nor any subsequent leases will be continuing sales. Therefore, the lease receipts will not be subject to tax. 5/30/96.