Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 330.3165


330.3165 Subleasing—Tax Liability. Manufacturer A leases equipment to B leasing company who subleases to C, the consumer. No tax has been paid to the state in connection with any of these transactions. All parties are located in California.

The prime lessor, A, has "prime liability" for any tax due on the lease, i.e., A should be looked to first for payment to the state. If tax is uncollectible from A, the next person in the chain should be looked to and so on to the ultimate lessee, provided resale certificates have not been presented.

The tax on rentals is a use tax on the lessee. (Section 6202.) Therefore, the prime legal liability is on the consumer who must pay the tax to the lessor. However, section 6203 requires the lessor to collect the tax from the lessee at the time amounts are paid by the lessee under the lease. Section 6241 provides further that it shall be presumed that property sold for delivery in this state is sold for storage, use, or other consumption in this state (i.e., that tax is due and must be collected by the retailer until the contrary is established). The burden of proof is on the retailer unless he accepts a resale certificate. From this, it is concluded that "primary liability" for tax due is on the prime lessor, in this case A.

At the same time, the purchaser-lessee remains liable for the tax imposed on him by section 6202 until he can show that: (1) tax has been paid to the holder of a valid seller's permit or Certificate of Registration—Use Tax through presentation of the receipt required by Regulation 1685, (2) tax has been paid on rental receipts of the prime lessor or other prior sublessor, or (3) a basis for exemption otherwise exists. Thus, the prime lessee would be looked to next for the tax.

When A leases to B, and B states the intention not to sublease, the correct procedure is for A to collect tax from B and remit it to the state.

However, once A can establish a sublease, A is relieved from his responsibility to collect and remit tax on the transaction. The tax is then due from B or if it cannot be collected from B, from C.

In summary, the Board can assess a deficiency against anyone in the chain. The burden is then upon them to establish the contrary. 11/20/68.