Cal. Code Regs. Tit. 18, §§ 17053.37-6
Leasing -- (See Regulation 17053.37-0 for Table of Contents.)
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.
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 17053.37-4. 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.
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 17053.37 have been satisfied, A is entitled to claim the JSF Property Credit.
EXAMPLE: L, a taxpayer engaged in the equipment leasing business, purchases 20 machine tools for $10 from P, a retailer of machine tools. L intends to immediately lease the machine tools, without modification, to X, a qualified taxpayer engaged in the business of manufacturing aircraft cockpit canopies in Visalia, for a term of 10 years. L pays California sales tax on its purchase of the machine tools, and then leases the machine tools to X. Assume that X does not have an option to purchase the machine tools upon the expiration of the lease term. Since L has paid California sales tax on its purchase of the machine tools and then leased the property in substantially the same form as acquired, L's lease to X is not treated as a sale under Revenue and Taxation Code section 6006, subsection (g)(5), and the rules of this subsection of this regulation apply.
EXAMPLE 1: L, a taxpayer engaged in the equipment leasing business, acquires two cranes from R, a manufacturer of cranes in Oxnard, for $100. L intends to immediately lease the cranes to M, a qualified taxpayer, for use by M in its manufacturing facility located in Ventura. Assume the lease is properly treated as an operating lease under this regulation and that L pays sales tax to R of $8 (8% of $100) at the time of L's purchase. Under these facts, M will be entitled to claim a $10 JSF Property Credit (10% of $100) since L's qualified cost is $100.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that at the end of the lease term L re-leases the cranes to P, a qualified taxpayer, which manufactures synthetic resins and composite materials at a facility in Moorpark. Under subsections (b)(3)(A) and (b)(4)(B) of this regulation, L's qualified cost upon which P may claim the JSF Property Credit is zero ($0) since L's qualified cost is $0 ($100 original qualified cost to L, less $100 qualified cost taken into account by a predecessor lessee, M, when claiming the JSF Property Credit).
EXAMPLE 3: Assume the same facts as in EXAMPLE 2, except that M, the initial lessee, cancels the lease with L after 10 months, with L repossessing the cranes. Under these facts, M would be required to recapture (pursuant to Regulation 17053.37-8) the entire $10 JSF Property Credit previously claimed by M, and L's qualified cost upon L's re-lease of the cranes to P would be $100 ($100 original qualified cost to L, less $100 qualified cost taken into account by a predecessor lessee, M, plus $100 of qualified cost recaptured upon M's cancellation of the lease with L).
EXAMPLE 1: G is engaged in the equipment leasing business. G acquires three drill presses from Q, a manufacturer of drill presses, for $300. G immediately leases the printing presses to D, a qualified taxpayer, for use by D in D's machine tool facility in Santa Barbara. Assume the lease is properly treated as an operating lease under this regulation, and that G pays sales tax to Q of $24 ($300 X 8%) at the time of purchase. Under these facts, D would be entitled to claim a JSF Property Credit of $30 (10% of $300, G's qualified cost of the drill presses). Three years later G sells the drill presses to H, who is also engaged in the business of equipment leasing, for $250. Assume that G terminates its lease with D prior to the sale of the drill presses to H, and that H delivers a resale certificate to G so that H's purchase is exempt from California sales and use tax. Assume further that D agrees to re-lease the drill presses from H following H's acquisition of the drill presses from G. D terminates its lease two years after H's purchase of the drill presses, and H then re-leases the drill presses to E in a transaction treated as an operating lease under this regulation, for use by E in its tool and die facility in Bakersfield. Under these facts, H's qualified cost upon which E may claim the JSF Property Credit is $0 ($250 paid by H to G, less $300 qualified cost taken into account by a predecessor lessee, D).
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that G does not terminate its lease with D prior to G's sale of the drill presses to H. Under California sales and use tax law, the sale by G to H would be subject to California sales tax and H would not be entitled to deliver a resale certificate to G. As a result, assume H pays California sales tax reimbursement to G on the $250 purchase price. Since H has paid California sales tax reimbursement to G, H's qualified cost upon which E may claim the JSF Property Credit is $250.
EXAMPLE 1: J, a qualified taxpayer, leases five lathes which are qualified property from Z, which is engaged in the equipment leasing business, for use in J's manufacturing facility in Folsom. Assume J's lease is treated as an operating lease under this regulation, and that J has claimed the JSF Property Credit. Nine months after J first uses the lathes, J exercises an option under the lease to acquire the lathes from Z for their fair market value. Under the rules of this regulation, and Regulation 17053.37-8, J would be required to recapture any JSF Property Credit claimed by J. However, if J paid California sales or use tax on the purchase of the lathes, then J may have qualified costs on J's purchase from Z under the rules of Regulation 17053.37-4.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that K, a wholly owned subsidiary of J, instead purchases the lathes from Z. Under the rules of this regulation, since K is related to J under both Internal Revenue Code sections 267 and 318, K's acquisition of the lathes will be treated as a disposition by J of the qualified property and J will be required to recapture the JSF Property Credit. If K continues to lease the lathes to J, then the rules of subsection (b)(4)(C) of this regulation shall apply in determining whether K will have qualified cost in the lathes upon which J may claim a JSF Property Credit upon K's acquisition of the lathes. On the other hand, if K cancels the lease with J (assuming K may legally do so) and uses the lathes in a qualified activity conducted by K, then, assuming K has paid California sales or use tax on its acquisition, K may have qualified costs under the rules of Regulation 17053.37-4 assuming K continues to use the lathes in a qualified activity instead of re-leasing the lathes.
EXAMPLE: On January 15, 2001, F, a qualified taxpayer engaged in the business of manufacturing aircraft navigational instruments, purchases three glass grinders that are qualified property from Y, the manufacturer of the glass grinders. Y collects California sales tax on the purchase by F. On January 30, 2001, F places the three grinders in service in its manufacturing facility in Crescent City. On May 15, 2001, G, which is engaged in the equipment leasing business, purchases the three grinders from F and immediately leases them back to F. Under the rules of this regulation, and Regulation 17053.37-8, F would be required to recapture any JSF Property Credit claimed by F. In addition, since this transaction would not be treated as an "acquisition sale and leaseback" under Revenue and Taxation Code section 6010.65, G must pay California sales or use tax on G's purchase of the grinders in order for F to claim any JSF Property Credit under the rules of this regulation. If G delivers a resale certificate upon its acquisition of the grinders, so that G does not pay California sales or use tax upon G's acquisition of the grinders, then no JSF Property Credit could be claimed by F upon F's lease of the grinders from G.
EXAMPLE 1: On December 1, 2001, P, a calendar year qualified taxpayer engaged in the business of manufacturing composite material, purchases and immediately places in service two mixing tanks that are qualified property from Z, the manufacturer of the mixing tanks. Z collects sales tax on the purchase by P. On January 15, 2002, R, which is engaged in the equipment leasing business, purchases the two mixing tanks from P and immediately leases them back to P. Since R's acquisition and leaseback occurs within 90 days of P's first functional use of the mixing tanks, and assuming the other requirements of Revenue and Taxation Code section 6010.65 are satisfied, P's sale to R and R's leaseback to P are treated as an "acquisition sale and leaseback" under Revenue and Taxation Code section 6010.65 and the rules of subsection (b)(5)(B) of this regulation would apply. Under the rules of this regulation, and Regulation 17053.37-8, P would be required to recapture any JSF Property Credit claimed on P's 2001 California return. However, R would be "deemed" to have paid California sales or use tax upon R's acquisition of the mixing tanks from P, and P would be entitled to claim an JSF Property Credit on its 2002 California return in an amount equal to R's qualified cost, as determined under subsections (b)(3)(A) and (b)(3)(B) of this regulation. For this purpose, R's qualified cost could not exceed P's qualified cost determined under Regulation 17053.37-4.
EXAMPLE 2: Assume the same facts as in EXAMPLE 1, except that P purchases and places the mixing tanks in service on December 1, 2000, and R purchases the mixing tanks from P and immediately leases them back to P on January 15, 2001. Under these facts, even though the transaction would be treated as an "acquisition sale and leaseback" under Revenue and Taxation Code section 6010.65, since P's qualified cost under Regulation 17053.37-4 would be equal to zero, R's qualified cost under this regulation would similarly be equal to zero, and thus no JSF Property Credit would be allowed to R.
EXAMPLE 3: Assume the same facts as in EXAMPLE 1, except that P purchased the mixing tanks under a contract that was treated as a binding contract under the rules in Regulation 17053.37-4. Assume further that 25 percent of P's total cost for the mixing tanks was actually paid prior to January 1, 2001, so that P's qualified cost for the mixing tanks was equal to 75 percent of the total cost of the tanks. Under these facts, since P's qualified cost under Regulation 17053.37-4 would be equal to 75 percent of P's total cost for the mixing tanks, R's qualified cost under this regulation could not exceed the amount of P's qualified cost, irrespective of the total amount paid by R to P to purchase the mixing tanks.
Cal. Code Regs. Tit. 18, §§ 17053.37-6
Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 17053.37, Revenue and Taxation Code.