Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2013

Sales and Use Tax Annotations

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Annotation 330.2969


330.2969 Tax-Paid Status of Leased Property Changed. A partnership, consisting of two brothers, A and B, was a road construction contractor who from time to time rented construction equipment which the partnership owned. The partnership also held a 50% ownership in a batch plant with individual C who held a 50% ownership.

Both the construction equipment and the batch plant were purchased tax paid. In 1960 brother B died and his widow inherited his interest in the partnership. Title to the construction equipment was then held by a partnership which was formed consisting of A and the widow of B. On January 7, 1966, the widow of B sold her interest in the construction equipment to A without payment of tax; A then held title to the construction equipment as an individual.

Also, after B's death, title to the batch plant was held by the partnership formed by A and the widow of B (50%) and by C (50%) as an individual. In 1965, C sold its 50% interest to D, an individual. This was a taxable transfer and tax was reported and paid. Title to the batch plant was now held by a partnership consisting of A and the widow of B (50%) and D as an individual (50%). A, the widow of B, and D formed a partnership and their interests in the partnership were the same as their ownership interests in the batch plant. The batch plant was used in the partnership and also rented to third parties, but it was not contributed to the partnership, i.e., title did not pass to this new partnership but continued to be held in joint ownership.

On January 7, 1966, the widow of B sold her interest in the batch plant to A, ex-tax. Since that time the batch plant has been owned by A (50%) and D (50%) as individuals; each carries his 50% interest on his personal books.

In applying the Sales and Use Tax Law, a partnership generally is viewed as a distinct entity. Therefore, when title to property is transferred from the partnership to another partnership or to an individual, that new partnership or that individual becomes the "lessor." This new "lessor" must pay the tax on its purchase price, or have acquired the property from a "transferor" who paid the tax, or collect tax on rental receipts.

In the case of the construction equipment, when B died, that partnership dissolved by operation of law (Corporation Code section 1503.1). The property was then held by A as an individual and widow of B as an individual, and was thereafter contributed by them to a new partnership, a new entity consisting of these two individuals. The construction equipment became partnership property at that time (Corporation Code section 15008) and the partnership was the "lessor" of the property thereafter. When widow of B sold her interest to A, their partnership ceased to exist, and A became the "lessor" of the equipment. Therefore, since A does not meet the terms of Regulation 1660(c)(4), all rental receipts on the construction equipment received by A are subject to tax.

The same analysis is applicable to the 50% interest now held by A in the batch plant. However, 50% of the plant was purchased tax paid by D and he has continually held that portion in his ownership. D is the lessor as to that half, and the rental receipts attributable to it are not subject to tax. 7/14/70.