Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2013

Sales and Use Tax Annotations

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495.0000 SALE

Annotation 495.0493


495.0493 Transfer of Title or Possession. A construction equipment dealer is involved in sales and leasing of new and used equipment. In January 1988, the dealer entered into a lease agreement with a construction firm (customer) for a lease of a wheel loader. Although the customer never took possession during the term of the lease, it paid a total of $176,000, at the rate of $11,000 per month. The agreement provided a purchase option; but it was never exercised. The wheel loader was resold by the dealer to another purchaser and the $176,000 was later applied towards the purchase/lease of a second price of equipment. The dealer and customer entered into another lease agreement for another wheel loader on February 21, 1990. On July 11, 1990, the customer exercised the purchase option; and the dealer applied the $55,000 paid in lease receipts and the $176,000 paid in transaction #1 above against the purchase price. It was intended that the equipment be delivered to Oregon; however, delivery was never made during the term of the lease or when option was exercised. The equipment remained at the dealer's place of business and is currently available for sale.

The dealer and the customer also entered into another transaction involving a lease of a scraper which was entered into on June 1, 1990. The agreement provided for monthly payments of $14,000 and contained a purchase option. On January 21,1991, the option was exercised, and the dealer applied the $112,000 paid in lease receipts, towards the purchase price. As above, it was intended that the scraper would be delivered to Oregon; however, delivery was never made during the term of the lease or when the option was exercised. The equipment remained at dealer's place of business until April 7,1994, at which time it was sold to another purchaser. The dealer issued a check made payable to the customer in the amount of $250,893 involving three transactions with the customer.

The chief characteristic of renting or leasing is giving up possession to the hirer, so that the hirer and not the owner uses and controls the rental property (Entremont v. Whitsell (1939) 13 Cal.2d 290, 295; California Civil Code sections 1925 and 1955). This is consistent with Revenue Code section 6006.1. Although Regulation 1628(b)(3)(B) does provide that a sale by lease does not occur even where there is a right to possession, this portion of the regulation is limited in its purpose. This rule only applies in a situation where there has in fact been a delivery. Therefore, there has been a lease of the equipment and no tax is due on the lease receipts. Likewise, the second and third transactions did not amount to sales. Revenue and Taxation Code section 6006(a) defines a "sale" to mean and include any transfer of title or possession of property for a consideration. Here, possession was never transferred to the customer. Uniform Commercial Code section 2401 provides that title passes to buyer "in any manner and on any condition explicitly agreed upon by the parties." However, where there is no passage of title provision in the contract, such as here, once goods are identified, the passage of title depends on the type of performance required of the seller; i.e., whether shipment or delivery of the goods is required, or delivery is to be made without moving the goods. Where the goods must be moved, title passes to the buyer at time and place at which seller completes physical delivery of the goods.

Accordingly, since there was no transfer of title or possession, there was no sale. 8/25/94.