Leases in General for Rental Companies

The Basics

Sales and Use Taxes in General

In general, all retail sales of items that can be seen, weighed, measured, and touched (otherwise known as tangible personal property) are taxable unless the law provides a specific exemption or exclusion. Sales tax is imposed on retailers and generally applies when the sale of the item takes place in California. The applicable sales tax is measured by the retailers' gross receipts from their sales of the merchandise in California.

When sales tax does not apply, use tax generally applies on taxable items purchased for use, storage, or consumption in California. You may owe use tax when you purchase items from out-of-state retailers for use in California and the sale occurs out of state. You may also owe use tax on items that you remove from your resale inventory and use or give away in California if you did not pay tax when you purchased the items. Use tax also applies on vehicles, vessels, and aircraft purchased from sellers who are not engaged in business of selling such property.

When use tax applies, retailers “engaged in business” in California must collect and pay the tax to the state. For more information, please see our online guide Use Tax Collection Requirements Based on Sales into California Due to the Wayfair Decision.

Leases — An Overview

What is a lease?

Generally, a lease is a contract in which a person receives temporary use and control of items for a fee. The term lease includes rental, hire, and license of tangible personal property.

However, the following are not considered a lease:

• The use of items for a period of less than one day for a charge of less than twenty dollars when the use is restricted to the business location of the person allowing the use.
• A contract that requires that the owner provide an operator with the leased tangible personal property.
• A sale at inception or a sale under a security agreement. This includes contracts, designated as leases, that bind the lessee for a fixed term, when the lessee obtains title to the tangible personal property at the end of the contract or has the option to purchase the property for a nominal amount. The option price is nominal if it does not exceed $100 or one percent of the total contract price, whichever is the lesser amount.

General Definition of Terms

Tangible Personal Property

Items that can be seen weighed, measured, and touched.

Examples of tangibles personal property: cars, home furniture (sofa, dining table, etc.) electronics (television, laptop, PS5, etc.), books, equipment, machinery, tools, etc.

Lessor

A person who owns tangible personal property and transfers the right to use the property to a lessee under a lease agreement.

Lessee

A person who pays a lessor for the temporary use of the tangible personal property and receives the right to use the property under a lease agreement.

Application of Tax to Leases

In California, leases of tangible personal property are generally subject to use tax, unless you pay sales tax reimbursement or use tax at the time of purchase of the property or you timely elect to pay use tax based on the purchase price and lease the property in substantially the same form as acquired. Property is generally considered to be leased in substantially the same form as acquired when you do not make any modifications to the property that changes its general function or value prior to leasing it out.

A timely election means that you report and pay the use tax on your sales and use tax returns for the period in which the property first enters rental service.

Once you pay tax based on the purchase price, you cannot change your reporting method to collect tax based on rental payments.

Leases — taxed based on rental receipts or payments (continuing sale and purchase)

The lease of tangible personal property is generally subject to use tax and tax is due based on the rental receipts or payments.

This type of lease is considered a “continuing sale and purchase,” and is one in which you grant the lessee or another person at the direction of the lessee, the possession of the items, for use in this state for any period of time the leased property is located in this state, regardless of the time or place of delivery to the recipient.

In a lease that is a continuing sale and purchase, you are generally required to collect the use tax from the lessee at the time rental is paid, including any payments for services that are required as part of the lease. You must also provide a receipt to the lessee to relieve them of the tax liability.

You must collect tax based on the rental receipts when you do not pay tax at the time of purchase, do not timely elect to pay the sales or use tax on the initial purchase price of the tangible personal property, or when -you do not lease the property in substantially the same form as acquired. (See Tax based on the cost of property to you section.)

Example 1:

You lease tables and chairs to your customers for parties and special events where you are not acting as a caterer. You did not pay tax when you purchased the tables and chairs or on your sales and use tax returns when the property was first placed into rental service. As such, tax applies based on the rental receipts to your customers.

Example 2:

You fabricate and then lease tables and chairs to your customers for parties and special events. You paid sales tax when you purchased materials you used to build the tables and chairs. However, because you fabricate the tables and chairs, you do not lease them in substantially the same form as acquired. As such, tax applies based on the rental receipts to your customers. However, you may take a tax-paid purchases resold deduction for the sales tax you paid to the vendors for those materials when you purchased them to build the tables and chairs.

Common charges with leases that are subject to tax

Certain charges are generally considered to be included in rental receipts and are subject to tax when you elect to pay tax on rental receipts.

Mandatory Charges

Additional charges are included in a taxable lease if the lessee is required (mandatory) to use the services. These mandatory services may include equipment maintenance, warranty, assembly, and disassembly. For example, if a car rental company is requiring a customer to purchase a collision damage insurance as part of a car rental agreement, the charges for the collision damage insurance are included in the taxable rental receipts. However, if the lease contract merely requires that the lessee maintain the property, the lessee's maintenance costs are not included in the taxable rental receipts.

Training Fees

The training provided to the lessee may or may not be subject to tax depending on whether or not the training fee is mandatory or optional on a taxable lease agreement. If the lessee does not have the option to lease the equipment without purchasing the training, the training is considered mandatory and sold as part of the lease and is subject to tax. However, if training is optional and the lessee does not have to buy the training as part of the lease, the training is not subject to tax and must be separately stated on the invoice.

Delivery Charges

When the delivery of the leased property is made by your facility (for example, using your own vehicle to deliver the leased property and not by a common carrier), the delivery charge is generally subject to tax. However, if the delivery (transportation) happens after the right to possession is granted to the lessee (after the lease commences) and the delivery charge is separately stated on the invoice, the delivery charge is not subject to tax.

When delivery of the leased property is made by a common carrier, the delivery charge is not subject to tax if all the criteria below are met:

• The delivery charge must be separately stated.
• The leased property must be shipped by a common carrier directly to the lessee.
• The delivery amount charged to the lessee must be the actual amount charged by the common carrier.

Return Transportation Charges

Generally, transportation charges for the return of the rented property from the lessee are subject to tax. However, if the lessee has the option to provide their own return transportation, the return transportation charge must be separately stated and is not subject to tax.

License, Royalty, and Reproduction Rights

If a rental agreement calls for a royalty to be paid based on units produced or for use of the property, such royalties are subject to tax. For example, a photocopier is leased for monthly rate plus an additional amount for every copy produced by the machine (often called a click charge). All charges for the lease including the unit usage (click charge) are included in the rental receipts subject to tax.

For royalty and reproduction rights on photographs and artwork, please see Photographs and Artwork section under the Industry Topics tab.

Advance Rental Payments

Advance rental payments you received from the lessee are subject to the tax if amounts paid are received at the time when the lease begins. Generally, if the amount collected at the beginning of a lease is designated as a security deposit rather than an advance rental payment, the amount collected would not be subject to tax until it is actually applied to a rental payment.

Charges Designated as Interest

When you lease equipment and it is not sold on credit, the amounts designated as interest are included in the rental receipts subject to tax.

Property Tax

If the rental agreement calls for the lessee to pay for any personal property taxes assessed on the lease property, the charges are included in the rental receipts subject to tax regardless of whether the tax is assessed directly against you (the lessor) or the lessee. Such charges are considered to be part of the gross receipts and are subject to tax. However, these charges to the lessee are not subject to tax when a bank or financial corporation is the lessor.

Deficiency Charges

Deficiency charges represent the difference between the actual value of the property returned to you by the lessee at the end of the lease and the value of the property described in the lease contract. Additional deficiency charges are included in taxable rental receipts. On the other hand, credits to the lessee represent a reduction in the rental receipts if these adjustments are required in the lease contract.

Common charges with leases that are not subject to tax

Certain charges are generally considered not to be included in rental receipts subject to tax.

Optional Charges

Additional charges are not included in taxable rental receipts when the lessee is not required under the rental agreement to use the services provided by you. These optional services may include equipment maintenance, warranty, assembly, reassembly, disassembly, etc. For example, if a car rental company does not require a customer to purchase a collision damage insurance, the charges for the insurance, if the customer chooses to purchase, are not subject to tax.

Late Charges

Failing to pay the rental payment timely is not regarded as part of the taxable rental receipts. However, a charge for a late return of the property is an additional charge for use of the property and is subject to tax.

Automobile Annual License Fees

The annual license fees and taxes on motor vehicles are not included in taxable rental receipts whether paid by you or the lessee. The annual license fees and taxes on vehicles are specifically excluded by law from the measure of tax.

Airport Concession Fees

“Customer facility charges” required by an airport to be collected from customers of rental car companies operating in or near the airport are not subject to tax.

Taxed based on the cost of tangible personal property to you

If the tangible personal property is leased in substantially the same form as acquired and you paid sales tax at the time of purchase or timely reported the use tax based on the purchase price of the property, tax is not due on the rental receipts.

When you elect to pay tax based on the cost of the property to you, this election is irrevocable, and you cannot change your reporting method to collect and report tax based on rental payments. If you do not pay tax or if the tax payment is not timely, taxes will be based on rental payments, depending on the type of property leased.

Tangible personal property is not leased in substantially the same form as acquired when:

• You make significant changes to the property after you acquire it that affect functional capabilities, characteristics, or form.
• A significant amount of fabrication labor has been performed by you on the acquired property.
• An appreciable change in value accompanied by a change in configuration of functional capabilities has occurred after purchase.

If you purchased tangible personal property, paid sales tax reimbursement and you did not lease the property in substantially the same form as acquired because you made changes that increased the value or general function of the property, you may claim a tax paid purchase-resold deduction on your sales and use tax return for the tax-paid property and tax is due on the rental receipts.

Example 1:

If you purchased refrigerators from a supplier who has a California seller's permit and you do not issue a resale certificate, the supplier will generally charge you sales tax reimbursement and remit tax to the California Department of Tax and Fee Administration (CDTFA) based on the sales price of the property. As such, you paid an amount for sales tax at the time of purchase and if you lease the property in substantially the same form as acquired, tax is not due on the rental receipts.

Example 2:

You are a business that manufactures customized alarm systems. You acquire materials to build and assemble the alarm and pay sales tax on the purchase price of the materials to the vendor. Then, you hire an outside party to fabricate and assemble the materials for the alarm system. The outside party charges you sales tax on the fabrication labor. Then, you lease the alarm system to your customers. No tax is due on the rental receipts from the lease of the system because you paid the taxes on the full purchase price for the cost of the materials and the outside fabrication labor.

Please note: If the material had been fabricated using your own labor, the property would not be considered leased in substantially the same form as acquired and tax would apply to the rental receipts. A tax paid purchase-resold deduction would be allowed on the tax-paid materials.

Special Reporting Requirements

For some leases, you do not have the option to choose whether tax is due on the rental payments or the purchase price.

In these instances, you will either pay the sales tax to your vendor at the time of purchase, or you will report and pay use tax directly to us.

The following categories of items are not considered continuing sales and purchases and you must pay sales and use tax on the purchase price when purchasing for leasing purposes:

• Motion pictures or animated motion pictures, regardless of whether they are productions complete in themselves. This includes television, films, and tapes. This does not include leases of video cassettes, videotapes, DVDs, and videodiscs for private use, where the lessee or renter does not obtain the licensing rights to broadcast, exhibit, or reproduce the property.
• Household furnishings as part of a lease of the living quarters in which they are to be used. This rule applies when the living quarters are real property, for example, a house (as opposed to tangible personal property such as a mobile home).
• Linen supplies and similar articles, such as towels, uniforms, coveralls, shop coats, and dust cloths, when an essential part of the lease is the recurring service of laundering or cleaning these leased articles.
• A restricted grant privilege to use tangible personal property for less than one continuous 24-hour period when the charge is less than $20. In addition, the use of the property is restricted to use on the premises or at a business location of the grantor of privilege of the property. For instance, a business that rents out personal computers to the public for one-hour use within its store at $10 (see Grant of Privilege to Use Is Not a Lease section below).
• DVDs, Videotapes, and videodiscs leased or rented for commercial purposes.
• Mobilehomes originally sold new after June 30, 1980. For more information on mobilehomes, please see publication 47, Mobilehomes and Factory-Built Housing.

For information on how tax applies on the lease of mobile transportation equipment (MTE), please see publication 46, Leasing Tangible Personal Property.

Collecting and Reporting Tax

This section explains the requirements for collecting and reporting sales and use tax on leases.

Seller's Permit

In California, each person who is engaged in the business of selling (or leasing under a lease defined as a continuing sale and purchase) tangible personal property is required to hold a seller's permit for each place of business in this state at which transactions relating to sales are customarily negotiated.

Registering for a seller's permit is free, although in some case a security deposit may be required. If you have multiple sales locations, you must register each location with us. You can register with the CDTFA for a seller's permit using our online registration service.

Out-of-state lessors leasing tangible personal property in California are generally required to obtain a seller's permit or Certificate of Registration — Use Tax, collect the applicable tax, and pay the tax to CDTFA.

Be sure to let us know about any changes to your business, or to your mailing or email addresses so we can keep your records updated and inform you of important changes in laws, tax rates, or procedures. You can easily update your account information through our online services system by logging in with a username and password, by calling our Customer Service Center, or by contacting any of our local offices throughout the state. Contact information is available in the Resources section of this guide.

Total Sales

In general, the law requires you to report any sale of merchandise in the period in which the sale takes place, whether or not you received payments for the property. In the case of lease payments, they are treated differently. They are generally reported for the period in which you receive the payments, regardless of when the taxable lease began.

The total sales are typically the total amount of your sales or lease/rental receipt payments and any mandatory services that are part of the lease agreement.

If any rental receipts are due but have not been paid to you by the lessee, these rental receipts are not considered gross receipts. You would not report any unpaid lease balances due as part of your total receipts. You are required to report rental receipts from leases on your sales and use tax return for the period in which the lessee made the payment. For instance, if you have an office furniture lease agreement with your customer and your customer has not paid the rental receipts for the months of January, February, and March, you will not be reporting these leases on your first quarter returns because you have not received the payments from the lessee. If the lessee pays the rental receipts in April including the delinquent lease balances, you are required to report the rental receipts for the period in which you received the payments.

Leases of Inventory Withdrawals for Personal Use

If you remove tangible personal property from your lease inventory and make personal use of the property rather than leasing it to your customers, you are required to report use tax on the purchase price of the property. You report the use tax on your sales and use tax return, provided the sales or use tax was not paid at the time of purchase.

Similarly, if you make personal use of the property other than by leasing, demonstration, or display and tax was paid based on rental receipts, you are required to report use tax on the entire purchase price of the property. Any tax previously reported from the rental receipts may be offset against the purchase price. If the rental receipts exceed the purchase price, no refund of the excess is allowed, and no additional tax is due on the purchase price. Subsequent rental receipts remain taxable but if tax paid on the purchase price exceeds tax paid on the prior rentals, the excess may be used as an offset against an equal amount of subsequent rentals.

Example:

You purchased equipment for $5,000 and issued a resale certificate to the vendor at the time of purchase. You lease it for $150 per month for 12 months. After 12 months, you removed the equipment from the lease inventory for personal use. In this case, you made a taxable use of the equipment and you are required to report the entire purchase price of $5,000 as purchases subject to use tax. However, you can offset the 12 months of previous rental payments which is $1,800 (calculated by multiplying the price per month for twelve months, $150 × 12), in this example. After the offset, you are only required to report $3,200 (calculated by finding the difference of the purchase price minus the previous rental payments, $5,000 − 1,800) as purchases subject to use tax. If you decide to place the equipment back into the rental service after you paid use tax on the full purchase price, you are still required to report tax based on rental receipts of $150 per month, assuming that you charge the previous rate. However, you can offset up to $3,200 against any subsequent rental receipts of the leased equipment. For instance, if you decide to place the equipment back into the rental service for the next two years and the total rental payments for two years is $3600, you are able to offset up to $3,200 against the rental receipts of $3,600 ($3,600 − $3,200).

Collection of District Tax

The total sales and use tax rate is not the same throughout California. Total sales and use tax rates may be higher than the 7.25 percent statewide base rate in areas where there are voter-approved district taxes.

When you report tax on rental receipts, district tax applies to the lease of tangible personal property when the property is used in the district. The correct rate of tax to charge on the lease transaction is the tax rate in effect in a district where the equipment is being used by the lessee. If the district of use is not known, the tax rate is calculated based on where you deliver the equipment to the lessee.

If you pay tax on the purchase price of the property, you are liable for the district tax where the property is first used if both of the following conditions apply:

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

Example 1:

You paid tax when you bought tangible personal property in County A (district tax rate of 0.50 percent) and you first leased it at a location in County B (district tax rate of 1 percent). You owe County B district use tax at a rate of 0.50 percent (1.00%-0.50%) of the purchase price.

Example 2:

Your customer leases tangible personal property from you for use at their place of business in Alameda County. You purchased the property without payment of tax and report use tax based on rental receipts. You will need to charge your customer the district taxes for Alameda County because the district taxes where the leased property is used apply to this transaction.

For information on local and district taxes, please see publication 44, District Taxes and our online Local and District Tax Guide for Retailers.

Record Keeping

If you hold a California seller's permit or any other CDTFA license or permit, you are required to maintain your business records to prove that you have properly paid the appropriate taxes and fees.

Maintaining accurate books and records will help you keep track of your sales and purchases and assist you when preparing your sales and use tax return. You are required to keep records for at least four years, unless directed by us to keep them for a longer period. Not maintaining records may be considered as evidence of negligence or perceived as an intent to evade the tax and may result in penalties. Although Sales and Use Tax Regulation 1698 authorizes the destruction of records after four years, that does not apply to records needed to show that rented property was purchased tax paid. It is the taxpayer's burden to show that tax does not apply to current rental receipts.

Your records should be accurate and detailed enough so CDTFA representatives may:

• Verify the accuracy of your tax returns; and
• Determine if you have correctly paid the tax due on your sales and purchases.

Digital and/or paper records you should keep include but are not limited to:

• Cash register tapes/receipts
• Purchase invoices
• Sales invoices
• Shipping documents
• Resale Certificates
• Tax returns and supporting documents

For more information on recordkeeping, please see publication 116, Sales and Use Tax Records.

Other Helpful Information

Purchases for Resale

If you purchase items that you plan to sell or lease in the regular course of business without making an intervening use, you can purchase the items without paying tax to your vendor by providing them with a resale certificate. Instead, sales tax applies when you sell the items at retail or use tax generally applies, measured by the rental payments.

You can provide CDTFA-230, General Resale Certificate, to your vendor when purchasing items you will resell in the regular course of business operations. You should not provide a copy of your seller's permit in-lieu of a resale certificate.

Example:

You lease Segway rentals and provide touring services to your customers. Occasionally, you also make sales of touring merchandise to your customers. When you make sales of the touring merchandise, you are the retailer of those items. As the retailer, you may purchase your resale items (for example, sweatshirts, postcards, backpacks, etc.) without tax by issuing your vendor a valid and timely resale certificate CDTFA-230, General Resale Certificate. A timely resale certificate means that the certificate is received: before the seller bills the purchaser for the sale; or at any time within the seller's normal billing and payment cycle; or at any time prior to or upon, delivery of the item sold.

Sales for Resale

Tax does not apply to your sales of tangible personal property to purchasers who will resell the property in the regular course of their business operations.

In such cases, the purchaser should provide you a valid resale certificate at the time of purchase. Any resale transactions supported by valid resale certificates accepted timely and in good faith should be claimed on your sales and use tax return. This includes sales of equipment along with subleases where the sublessor issues a timely resale certificate and elects to report tax on rental receipts from the sublease. To properly document sales for resale, you should retain copies of all resale certificates and any purchase orders issued with the qualified resale certificates as support.

Example:

You lease a scissor lift to your customer, and you would normally charge tax on the rental receipts. The lessee/sublessor rents the scissor lift from you with the intent to sublease it to their customers. The lessee/sublessor issues a resale certificate to you so that you (as prime lessor) will not charge them tax on the rental payments. Because the lessee/sublessor provided you a resale certificate, no tax is due on the rental payments to you; instead, the lessee/sublessor is responsible for collecting and remitting the use tax from their customers.

For more information about sales for resale, see publication 103, Sales for Resale.

Subleases

Generally, the lease of tangible personal property is subject to tax unless the lessor timely paid sales and use tax on the purchase of the property and leased the property in substantially the same form as acquired. Subleasing is treated the same way.

If you (the prime lessor) paid sales or use tax based on the purchase price of the property, no tax is due on the rental receipts if the property is subleased in substantially the same form as acquired. You must indicate on the receipt to the lessee/sublessor that tax has been paid on the purchase price of the property. Similarly, the lessee/sublessor must also indicate this on the receipt to the sublessee.

However, if you charge tax on the rental receipts to the lessee/sublessor, no tax is due on the rental receipts on the sublease. This is true, even if the sublessor marks up the rental receipts when subleasing.

In some instances, the lessee/sublessor may elect to issue a resale certificate to you and pay tax based on rental receipts to the sublessee.

Example:

You (the prime lessor) lease cameras, lenses and other supporting accessories to Party Rentals & More Company (Party Rentals). You paid tax to your vendor when you purchased the property and your receipts to Party Rentals indicate that tax has been paid on the purchase price. Then, Party Rentals subleases the property to its customer as part of its wedding event package and its receipts to the sublessee also indicate that tax has been paid on the purchase price. Because you paid tax on the purchase price of the property and the receipts for the lease and sublease show that tax was paid, your lease to Party Rentals and its sublease are not subject to tax.

Leases to the United States Government

Your sales and leases made to the U.S. government and its instrumentalities are generally exempt from California sales and use tax.

However, sales to state, county, and city government agencies are still generally subject to tax. Likewise, the exemption does not extend to agents of the U.S. government, U.S. construction contractors, and national banks.

For more information, see publication 102, Sales to the United States Government.

Interstate Leases

Tax does not apply to the rental payments of leased tangible personal property located outside of California.

However, if the leased property is located inside California for any portion of the lease term, tax applies for the period of time it is located in California, unless tax is paid when the property is purchased and the property is rented in substantially the same form as acquired or a timely election is made to pay the California tax on the purchase price of the property at the time it is first leased.

Grant of Privilege to Use Is Not a Lease

Certain restricted grants of a privilege to use tangible personal property are not considered a lease and you are considered the consumer of the property on these types of transactions. As a consumer of the property, you are required to pay tax on the cost of the property.

Exemptions

Some of your lease transactions may qualify for a full or partial exemption.

Certain leases may be exempt from tax and you may take a deduction for these leases on your sales and use tax return. You must retain all documentation to support your deduction.

For a list of exemptions related to leasing tangible personal property, please see publication 46, Leasing Tangible Personal Property.

For a complete list of all exemptions, please see publication 61, Sales and Use Taxes: Tax Expenditures.

Property Affixed to Realty

The application of tax to a lease of property affixed to realty is governed by Regulation 1521, Construction Contractors. The application of tax on a construction contract will depend on whether the item being installed qualifies as a material or a fixture and the type of contract the parties are entering.

A construction contract includes a contract (whether on a lump sum, time and material, cost plus, or other basis), to erect, construct, alter, or repair any building or other structure, project, development, or other improvement on or to real property. Generally, the contractor doing the installation is regarded as a consumer of materials and retailer of fixtures.

Construction contractors usually contract on a lump-sum basis and do not itemize tax on their billings. If you are a lessor of realty, you should not collect tax from the lessee with respect to rental receipts attributable to materials installed to become part of real property. Also, you may not purchase such materials for resale. If you are also leasing fixtures, the fixtures are regarded as a component part of the realty and rental receipts are not taxable. The tax would apply on the contractor's sale of the fixtures to you.

If you are a lessor of fixtures, but not a lessor of the realty, you may elect to pay tax or tax reimbursement on the price of the fixtures. If you wish to pay tax on the purchase price of the fixtures, you should have the contractor itemize and collect the appropriate sales tax reimbursement. If you wish to collect tax on the rental receipts of the fixtures, you should have the contractor itemize the price of the fixtures separately from the other line items and you should issue a resale certificate to the contractor for the fixtures.

For more information about lease of tangible personal property affixed to realty, please see publication 46, Leasing of Tangible Personal Property.

Sale and Leaseback Transactions

Generally, the goal of a person who purchases property, and then sells it and leases it back (usually for financing purposes), is to avoid two taxes on the series of transactions. If you purchase the property and make no use of the property prior to the sale and leaseback transaction, this is considered a sale for resale to the entity providing the financing (purchaser/lessor). When this happens, tax applies to the sale to the purchaser/lessor based on the selling price, or on the leaseback to you.

For example, you purchased forklifts and paid tax to the vendor based on the purchase price of the equipment. Then, you sold the forklifts to XYZ leasing company for financing purposes, and then leased it back within 15 days of your original purchase. You made no use of the forklifts prior to the sale and lease back transaction with the XYZ leasing company. This series of transactions would qualify as a sale and leaseback transaction, and tax would not apply to the sale of the forklifts to XYZ leasing company, nor would tax apply to the leaseback of the equipment to you.

However, if you did not pay tax to your vendor because you purchased the forklifts outside of California, and you resold the forklifts prior to use to XYZ leasing company who issued a valid and timely resale certificate, then the lease of the forklifts back from XYZ leasing company would have tax due on the rental receipts to you.

For more information on what type of transaction is structured as a sale and leaseback or acquisition sale and leaseback, please see publication 46, Leasing of Tangible Personal Property.

Lease of Motor Vehicles

The general rules regarding the application of tax to leases applies to vehicle leases. However, for tax to be reported based on rental receipts, leased vehicles must be registered in the name of the lessor or in the name of the lessor and lessee jointly. If vehicles are registered in the name of the lessee only, tax may not be measured by rental receipts and the transaction is regarded as a retail sale subject to tax.

Generally, all retail motor vehicle lease transactions managed by new and used motor vehicle dealers, the dealer is initially the owner of the leased vehicles. The dealer appears on the lease contract as the lessor. Usually, the dealer collects from the lessee the first month's lease and various other up-front charges. The dealer is responsible for collecting and reporting tax on all the taxable rental payments received from the lessee. Sometime after, the dealer may assign the lease contract to a third party. The third party will then be responsible for collecting and reporting tax on all subsequent lease payments.

A transfer of a vehicle to a lessee by a lessor, as defined in Vehicle Code section 372, is presumed to be a sale for resale if the lessee transfers title and registration to a third party within ten days from the date the lessee acquired title from the lessor at the expiration or termination of the lease. The presumption may be rebutted by evidence that the sale was not for resale prior to use. Transfer of title and registration occurs when the lessee endorses the certificate of ownership. At the time of registration, the Department of Motor Vehicles (DMV) will collect the tax from the final purchaser and then flag all such transactions for review by the CDTFA.

For more information about leases of vehicles and other transactions, please see publication 46, Leasing of Tangible Personal Property.