California Code of Regulations › Title 18 - Public Revenues › Division 3 - Franchise Tax Board › Chapter 3.5 - Bank and Corporation Tax › Subchapter 3 - Corporation Income Tax › Article 3 - Tax Credits › Section 23637-6 - Leasing

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
Leasing -- (See Regulation 23637-0 for Table of
						Contents.)
(a) In General. For
					 purposes of Regulations 23637-1 through 23637-11, 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 JSF Property Credit 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 generally 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 franchise and 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 JSF
					 Property Credit. A lessor of qualified property is never entitled to claim the
					 JSF Property Credit 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
					 23637-4,
					 the allocation rules of subsection (e) of Regulation
					 23637-4
					 shall apply in determining the amount of the qualified cost to the lessor upon
					 which the lessee is entitled to claim the JSF Property Credit. 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,
					 2001, and thereafter leases such property, the qualified cost to the lessor
					 upon which the lessee would be entitled to claim the JSF Property Credit would
					 generally be zero (assuming the lessor has not paid otherwise qualified costs
					 after January 1, 2001, to improve or otherwise modify the leased property, in
					 which case the lessor would have qualified costs to the limited extent of such
					 post-2000 amounts that were paid).
EXAMPLE 1: D, a qualified taxpayer, is engaged in the
						business of manufacturing aircraft landing gear in Palmdale. On September 20,
						2000, 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, 2001, and the final payment of $600
						payable upon delivery of the machines on February 15, 2002. Assume that this
						contract is treated as a binding contract under subsection (e) of Regulation
						23637-4. On January 15, 2002, 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 JSF Property Credit, which is the total amount
						treated as paid by L after January 1, 2001 ($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, 2001, but excluding the $150 paid by D to X prior to January 1,
						2001).
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 Rules
					 Applicable to All Leasing Transactions:
(A)
					 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 JSF Property Credit 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 requirement of
					 subsection (b)(4) of Regulation 23637-5 that property be primarily used in
					 qualified activities to manufacture a product for ultimate use in a Joint
					 Strike Fighter must still be satisfied in order for a lessee to claim the JSF
					 Property Credit.
(B) Bid Amount
					 Reduced by Credit. In no event shall any leasing transaction qualify for the
					 JSF Property Credit unless the bid reduction requirements contained in Revenue
					 and Taxation Code section
					 23637, subsection (i)(2) and
					 Regulation 23637-7 have been satisfied with respect to the bid which contains
					 the Joint Strike Fighter Property Credit allowable for the qualified property
					 that is the subject of the lease.
EXAMPLE: On July 1, 2001, A, a qualified taxpayer, enters
						into a contract to lease a drill press 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 drill
						press has been received from C, the original manufacturer of the drill press,
						and that the drill press has been installed and is in good working order (e.g.,
						A provides a Certificate of Acceptance to B). On January 15, 2002, 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, 2002, and, assuming all other requirements of Revenue and Taxation Code
						Section 23637 have been satisfied, A is
						entitled to claim the JSF Property Credit.