California Code of Regulations › Title 18 - Public Revenues › Division 3 - Franchise Tax Board › Chapter 2.5 - Personal Income Tax (Taxable Years Beginning After 12-31-54) › Subchapter 2 - Imposition of Tax › Article 1 - Joint Strike Fighter Wage Credit › Section 17053.49-6 - Leasing

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(See Regulation section
						17053.49-0 for Table of
						Contents.)
(a)
In
					 General.
For purposes of Regulations 17053.49-1 through 17053.49-11,
					 inclusive, in the case of any leasing transaction in which qualified property
					 is leased by a qualified taxpayer, the rules of this regulation shall apply.
					 Generally, the lessor must pay California sales tax on the lessor's acquisition
					 of the qualified property in order for the lessee to claim the credit for that
					 item of qualified property. Conversely, the lessee cannot claim the MIC for an
					 item of property where the lessor acquired the qualified property without
					 paying California sales or use tax and the lessor instead collects use tax
					 payments from the lessee measured by the lessee's rental payments to the
					 lessor. The determination of whether the rules in subsection (b) or subsection
					 (c) of this regulation apply shall be made by reference to the sales and use
					 tax treatment of the lease, rather than the income tax treatment of the lease.
					 Thus, for example, a lease of qualified property that would be treated as a
					 finance lease under income tax principles may still be treated as an operating
					 lease under this regulation. In addition, under California sales and use tax
					 law, a transaction denominated as a lease will instead be treated as a sale
					 under a security agreement if the lease contains a nominal option price. For
					 this purpose, California sales and use tax law generally treats the option
					 price as nominal if it does not exceed the lesser of $100 or 1 percent of the
					 total contract price.
EXAMPLE 1:
X, a leasing company, agrees
						to lease qualified property to Y, a qualified taxpayer, for use in Y's
						manufacturing facility in Garden Grove. Under the terms of the lease, X will
						lease the property to Y for $100 per year for a term of 10 years. Upon the
						expiration of the 10-year lease term, Y has an option to acquire the property
						for $1. Under these facts, the "lease" would be properly treated as a sale
						under a security agreement from its inception and not as a lease under Revenue
						and Taxation Code Section
						6006.3
						and California State Board of Equalization Regulation 1660 (a) (2) (A), Title
						18, California Code of Regulations so that the rules of subsection (c) of this
						regulation would apply.
EXAMPLE 2
: Assume the same facts as in
						EXAMPLE 1, except that Y's option price is $125, or 12.5% of the total contract
						price. Under these facts, notwithstanding that the "lease" may be treated as a
						finance lease (and thus as a "purchase") for California income tax purposes,
						under California sales and use tax law the "lease" would generally be treated
						as a lease and the rules of subsection (b) of this regulation would
						apply.
(1)
Lessor Not Entitled
					 to MIC
. A lessor of qualified property is never entitled to claim the
					 MIC with respect to any item of qualified property it leases to another party,
					 regardless of whether the lessor is otherwise a qualified taxpayer.
(2)
Binding Contract Rules Applicable
					 to Leases
. In the case of any qualified property leased pursuant to
					 any agreement or contract that is treated as a binding contract under the rules
					 of subsection (e) of Regulation
					 17053.49-4,
					 the allocation rules of subsection (e) of Regulation 17053.49-4 shall apply in
					 determining the amount of the qualified cost to the lessor upon which the
					 lessee is entitled to claim the MIC. For this purpose, if a lessor acquires
					 qualified property under the terms of a contract that is treated as a binding
					 contract with respect to the lessee (or a party related to the lessee within
					 the meaning of Internal Revenue Code Sections
					 267 or
					 318), then any payments or
					 reimbursements made by the lessor, directly or indirectly in the form of a
					 reduction in the amount of lease rental payments to be paid by the lessee under
					 the lease, upon or as a result of the lessor's assumption of the lessee's
					 obligations under the binding contract, shall be treated in the same manner as
					 if the lessor had not assumed the lessee's obligations under the contract.
					 Finally, in any case where a lessor has acquired property prior to January 1,
					 1994, and thereafter leases such property, the qualified cost to the lessor
					 upon which the lessee would be entitled to claim the MIC would generally be
					 zero (assuming the lessor has not paid otherwise qualified costs after January
					 1, 1994, to improve or otherwise modify the leased property, in which case the
					 lessor would have qualified costs to the limited extent of such post-1993
					 amounts that were paid).
EXAMPLE 1
: D, a qualified taxpayer, is
						engaged in the business of manufacturing medical and surgical instruments and
						apparatus in Sacramento. On September 20, 1993, D enters into a contract with X
						to acquire 3 machines that are qualified property for a total contract price of
						$900. Under the terms of the contract, D makes a non-refundable deposit to X of
						$150 upon execution of the contract, with an additional $150 due on July 1,
						1994, and the final payment of $600 payable upon delivery of the machines on
						February 15, 1995. Assume that this contract is treated as a binding contract
						under subsection (e) of Regulation 17053.49-4. On January 15, 1995, D decides
						that it would prefer to instead lease the machines, so D enters into a contract
						with L, an equipment leasing company, under which L will (i) assume D's
						obligations under D's contract with X, (ii) lease the qualified property to D
						for a term of 10 years, and (iii) refund to D the $300 in payments that D has
						previously made to X. Assume that L will pay California sales tax on its
						purchase of the qualified property from X. Under these facts, L will be treated
						as having $750 in qualified costs for which D will be entitled to claim the
						MIC, which is the total amount treated as paid by L after January 1, 1994 ($600
						paid directly by L to X under X's contract with D, plus $150 paid by L to D as
						reimbursement for D's payment on July 1, 1994, but excluding the $150 paid by D
						to X prior to January 1, 1994).
EXAMPLE 2
: Assume the same facts as in
						EXAMPLE 1, except that instead of L agreeing to refund the $300 in payments
						that D has previously made to X, L instead reduces the amount of the rental
						payments to be due from D under the lease. Under these facts, the result is the
						same as in EXAMPLE 1.
(3)
Special Rule Applicable to All Leasing Transactions -- "Placed in
					 Service".
In the case of any leasing transaction, the requirement that
					 qualified property must be placed in service in California in order for a
					 qualified taxpayer to claim the MIC shall be treated as having been satisfied
					 at the time when all the terms and conditions of the lease contract have been
					 completed so that the lessee has an unconditional obligation to pay all rents
					 due under the contract to the lessor of the qualified property. However,
					 notwithstanding the preceding sentence, the requirements of subsection (b) (3)
					 of Regulation 17053.49-5 that property be used in an activity described in
					 Division D of the SIC Manual and subsection (b)(4) of Regulation 17053.49-5
					 that property be primarily used in a qualified activity must still be satisfied
					 in order for a lessee to claim the MIC.
EXAMPLE:
On July 1, 1995, A, a qualified
						taxpayer, enters into a contract to lease a printing process from B, an
						equipment leasing company, for use in A's manufacturing facility in Roseville.
						Under the terms of the lease contract, A's rental obligations commence at the
						beginning of the month following the date that A provides B with a written
						statement that the printing press has been received from C, the original
						manufacturer of the printing press, and that the printing press has been
						installed and is in good working order (e.g., A provides a Certificate of
						Acceptance to B). On January 15, 1996, A executes and delivers the required
						written statement to B. Under these facts, A is treated as having satisfied the
						"placed in service" requirement as of February 1, 1996, and, assuming all other
						requirements of Revenue and Taxation Code Section
						17053.49 have been satisfied, A is
						entitled to claim the MIC.