Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales and Use Tax Annotations

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Annotation 335.0016.980

335.0016.980 Election to Report Use Tax on Fair Rental Value. Taxpayer is a seller and lessor of mobile transportation equipment (MTE). The taxpayer buys MTE without paying or reporting tax on its initial cost, choosing instead to report use tax measured by fair rental value of the MTE. In 1990 the taxpayer leased a unit to a California lessee for a five year term. Use tax was properly reported on fair rental value throughout the term of the lease. In 1995, at the end of the lease, the lessee returned the unit to the taxpayer. Three months later, the taxpayer leased the same equipment to a different lessee under a new contract. The taxpayer delivered the equipment to the new lessee's out-of-state headquarters. Thereafter, the equipment was used outside California and did not enter the state at any time.

When the lessor elects to pay tax measured by fair rental value, the election is irrevocable and the lessor must continue to report tax on that basis whether the MTE is inside or outside of California. Therefore, the taxpayer does not have the option to pay use tax measured by the purchase price at the beginning of the second lease with an offset for the use tax measured by fair rental value which was paid throughout the first lease. Since the taxpayer elected to spread out the payments on its liability and pay on fair rental value rather than on the purchase price, the lessor must continue to pay on fair rental value regardless of the location of the MTE. 5/7/96.