California Code of Regulations › Title 18 - Public Revenues › Division 2 - California Department of Tax and Fee Administration- Business Taxes (State Board of Equalization- Business Taxes, See Ch. 6 and 9.9) › Chapter 4 - Sales and Use Tax › Article 15 - Leases of Tangible Personal Property › Section 1660 - Leases of Tangible Personal Property-in General

Current through Register 2024 Notice Reg. No. 28, July 12, 2024
(a) Definitions.
(1) Lease. The term "lease" includes rental,
				  hire, and license. It includes a contract under which a person secures for a
				  consideration the temporary use of tangible personal property which, although
				  not on his or her premises, is operated by, or under the direction and control
				  of, the person or his or her employees. "Lease," however, does not include a
				  use of tangible personal property for a period of less than one day for a
				  charge of less than twenty dollars ($20) when the privilege to use the property
				  is restricted to use thereof on the premises or at a business location of the
				  grantor of the privilege (see (e) below).
(2) Sale Under a Security Agreement.
(A) Where a contract designated as a lease
				  binds the "lessee" for a fixed term and the "lessee" is to obtain title at the
				  end of the term upon completion of the required payments or has the option to
				  purchase the property for a nominal amount, the contract will be regarded as a
				  sale under a security agreement from its inception and not as a lease. The
				  option price will be regarded as nominal if it does not exceed $100 or 1
				  percent of the total contract price, whichever is the lesser amount.
(B) In the case of a contract designated as a
				  lease with any state or local government, the governmental agency designated as
				  a lessee shall be treated as bound for a fixed term notwithstanding any right
				  it may have to terminate the contract to the extent that sufficient funds are
				  not appropriated to pay amounts due under the contract. Such transactions are
				  subject to tax as sales under a security agreement at their
				  inception.
(3) Sale and
				  Leaseback Transactions.
(A) General.
				  Transactions structured as sales and leasebacks will be treated as financing
				  transactions if (1) the "lease" transaction would be regarded as a sale at
				  inception under paragraph (a)(2) of this regulation, (2) the purchaser-lessor
				  does not claim any deduction, credit or exemption with respect to the property
				  for federal or state income tax purposes, and (3) the amount which would be
				  attributable to interest, had the transaction been structured originally as a
				  financing agreement, is not usurious under California law. Transactions treated
				  as financing transactions are not subject to sales or use tax.
(B) Special Application. Transactions
				  structured as sales and leasebacks will also be treated as financing
				  transactions if all of the following requirements are met:
1. The initial purchase price of the property
				  has not been completely paid by the seller-lessee to the equipment
				  vendor.
2. The seller-lessee
				  assigns to the purchaser-lessor all of its right, title and interest in the
				  purchase order and invoice with the equipment vendor.
3. The purchaser-lessor pays the balance of
				  the original purchase obligation to the equipment vendor on behalf of the
				  seller-lessee.
4. The
				  purchaser-lessor does not claim any deduction, credit or exemption with respect
				  to the property for federal or state income tax purposes.
5. The amount which would be attributable to
				  interest, had the transaction been structured originally as a financing
				  agreement, is not usurious under California law.
6. The seller-lessee has an option to
				  purchase the property at the end of the lease term, and the option price is
				  fair market value or less.
(C) Tax Benefit Transactions. Tax does not
				  apply to sale and leaseback transactions entered into in accordance with former
				  Internal Revenue Code section
				  168(f)(8), as
				  enacted by the Economic Recovery Tax Act of 1981 (Public Law
				  97-34).
(D) Acquisition Sale and Leaseback
				  Transactions. No sales or use tax applies to the transfer of title to, or the
				  lease of, tangible personal property pursuant to an acquisition sale and
				  leaseback, which is a transaction satisfying all of the following conditions:
1. The seller/lessee has paid California
				  sales tax reimbursement or use tax with respect to that person's purchase of
				  the property.
2. The acquisition
				  sale and leaseback is consummated within 90 days of the seller/lessee's first
				  functional use of the property (this 90 day period does not begin to run until
				  the first functional use of the property; a period of storage after the
				  purchase, but before the first functional use, is not used to calculate the 90
				  day period).
3. The acquisition
				  sale and leaseback transaction is consummated on or after January 1, 1991.
The sale of the property at the end of the lease term is
					 subject to sales or use tax. Any lease of the property by the purchaser/lessor
					 to any person other than the seller/lessee would be subject to use tax measured
					 by rentals payable. A lease to the seller/lessee at the end of the original
					 lease term is subject to use tax measured by rentals payable unless such lease
					 is pursuant to an election to exercise an option to extend the lease term,
					 which option was contained in the original lease
					 agreement.