Publication 44, District Taxes (Sales and Use Taxes)
Leases

This section discusses the application of district tax to leases. Read this section if you are the lessor or lessee of tangible personal property, which is being used in a tax district. As with other types of transactions, the application of district tax to a lease is generally affected by how the lease is treated under the Sales and Use Tax Law. This section briefly discusses the sales and use tax treatment of leases and then discusses the application of district tax.

Leases and the sales and use tax law

The Sales and Use Tax Law distinguishes between leases of:

• Tangible personal property in general, and
• Tangible personal property which qualifies as mobile transportation equipment.

The following sections summarize how the law applies to these two types of leases and then discusses provisions that apply to all leases.

Leases of tangible personal property in general

Under the Sales and Use Tax Law, most leases are treated as continuing sales or purchases. Generally, the tax that applies is a use tax on the amounts payable under the lease (rentals), which is imposed on the lessee. If use tax does not apply (for example, in the case of insurance companies) the payments are subject to the sales tax. Even though the tax is imposed on the lessee, the lessor is usually required to collect the tax and report it in the period during which they received the rental payments. The lessee is not relieved from the liability until they are given a receipt of the kind called for in Regulation 1686, Receipts for Tax Paid to Retailers, or the tax is paid to the state.

As an alternative, under certain circumstances the law allows the lessor to pay tax on the purchase price of the leased property instead of on the rentals. This choice is an irrevocable election and may be taken only if both of the following conditions are met:

• The lessor leases the property in substantially the same form as purchased, and
• The lessor makes the election during the first quarterly reporting period in which the property is rented.

These general rules apply whether the lessor purchases the property specifically for leasing or purchases it for resale and then decides to lease it.

Leases of mobile transportation equipment

Mobile transportation equipment includes rail cars, locomotives, truck tractors and trailers, ships, reusable shipping containers, and airplanes. The law considers lessors of mobile transportation equipment to be consumers of the equipment. Consequently, they are usually required to pay tax on the purchase price.

As an alternative, lessors may issue a resale certificate when purchasing the equipment and elect to report tax on the fair rental value of the equipment. If lessors make this election, they need to remember that:

• The election must be made during the first period in which equipment is leased (usually the calendar quarter), and
• The tax rate that applies to the fair rental value is the rate imposed at the location where the equipment is first used. If the lessee moves the equipment to another location, even outside California, the tax rate still applies.

Conditions applying to all leases

In addition to the specific conditions noted above, the following rules apply to all leases:

• Property that has been leased and is then sold either to the lessee or another person is subject to sales and use tax in the same manner as other retail sales. If the sale occurs as the result of a purchase option in the lease contract, the sale occurs at the time the option is exercised.
• Property which has been leased and then converted to personal use by the lessor is subject to use tax measured by the original purchase price unless the lessor paid the correct amount of tax on the original purchase. The amount of tax due may be offset by tax already collected on rentals.

For more detailed information about the treatment of leases under the Sales and Use Tax Law, see Regulation 1660, Leases of Tangible Personal Property—In General; Regulation 1661, Leases of Mobile Transportation Equipment; and publication 46, Leasing Tangible Personal Property.

Leases and district tax

Leases of tangible personal property in general

Payments on most leases are subject to district tax if:

• The property is used in a district, and
• The payments are subject to the statewide use tax.

These general rules apply unless one of the following exemptions or exclusions applies to the lease:

• The lease contract qualifies as an exempt fixed-price contract, and the payments are exempt from district tax. For more information, see What exempts a fixed-price contract from district taxes? Qualifying contracts must be entered into prior to the effective date of the district tax, be for a fixed amount, and have all parties obligated to the terms of the contract.
• The property was purchased before the effective date of the district tax, tax was paid on the purchase price, and the property was leased in the same form as acquired in the district after the effective date.

In addition, district tax applies only while the property is used in the district. In general, leased property that is moved from a district is no longer subject to that district’s tax. If moved into another district, the property would be subject to the district tax imposed at the new location; if the property is moved to a non-district location, no district tax would apply. Similarly, leased property that is first used outside a district and then moved into a district generally becomes subject to the district tax.

The lessor is generally responsible for reporting district tax on a lease when the property is located in the district. When the lessor is not responsible for collecting and reporting the district tax, the lessee is liable.

Lessors who elect to pay tax on the purchase price of property may be liable for district tax if both the following conditions apply:

• The property is first leased in a district, and
• The lessor paid no district tax or paid district tax at a rate less than the rate that is imposed in that district.

For example, if you pay tax when you buy property in a district that has a district tax rate of 0.50 percent and you first lease it at a location in a district where the district tax rate is one percent, you owe additional district use tax at a rate of 0.50 percent of the purchase price.

Leases of mobile transportation equipment

When a lessor pays tax on the purchase of mobile transportation equipment, the application of district tax follows the same rules as any other sale of tangible personal property. That is, district tax is due on the sale if the property is either delivered or first used in a tax district.

If a lessor elects to pay tax on the fair rental value of the equipment, district tax applies if the first use of the equipment is in a tax district. If the equipment is part of a resale inventory which is located in a tax district, the lease is generally subject to district tax at the time the equipment is withdrawn from inventory for lease. However, district tax will not apply if:

• The only use of the equipment in the district is its transport to a lessee located outside a district, and
• The equipment is thereafter used solely outside any district.

Lessors whose inventories are located outside districts are not subject to district tax on their leases if the equipment is not used within any district for more than 90 days. For more information, see Regulation 1661, Leases of Mobile Transportation Equipment.

Conditions applying to all leases

The subsequent sale of leased property by the lessor is a retail sale, which is subject to district tax if the property is delivered or first used in a tax district. For an overview of when district tax would apply, see the first three sections of this publication.

Lessors who convert leased property to personal use will generally not be liable for district tax if one of the following conditions applies:

• They have already paid district tax equal to that due in the district of use.
• They are not first using the property in a district.
• They originally purchased the property under a fixed-price contract.
• They acquired the property as the result of a transaction excluded or exempted from the sales tax such as an occasional sale, a gift, or a bequest.

Leases—Example

Should I pay tax based on my cost of the property or the rental charges?

For more information about leases, please contact our Customer Service Center.

Revision June 2026