Something that you might not be aware of is that in California, sales tax is added to certain types of leases. The California Department of Tax and Fee Administration (CDTFA) has guidelines that spell out which types of leases are taxed and if the tax is based on the purchase price or lease price.
Additionally, depending on what type of business you are in, you may be subject to special fees. This is particularly true for electronics and automotive businesses.
Leases that are issued outside of California may be tax-exempt as long as you have a resale or tax-exemption certificate. But, there is always a catch, it depends on why the item was leased and whether it will be used in-state as part of nexus-generating business activity.
Different types of leases may or may not be taxed depending on where the lease originated, what state the leased items will be used or stored in and their purpose.
Your best bet when dealing with a lease that has multistate ramifications is to consult with an experienced tax attorney. If your business is in that situation, reach out to me. My firm specializes in small business taxation and we can help you interpret your lease.
Taxes for Lessors and Lessees (General Rules)
In California, leases may be subject to sales and use tax. With some exceptions, the lessor (party who is loaning out the property) must collect use tax from the lessee (party obtaining the property) at the time of the rental installment payment. (CA Rev & Tax Code § 6203(b) (2017))
The lessor has the option of calculating tax through the purchase price, rental receipts or rental value (in the case of mobile transportation equipment). Lessors are responsible for selecting from one of these tax calculation options during the first reporting period in which the lease begins. Otherwise, a default option will be imposed. (Leasing Tangible Personal Property)
Leases that Require Tax Calculation Based on Purchase Price
Businesses must be aware that certain leases require that tax calculations be made based on their purchase prices when the item is leased. This is in contrast to other leases where the taxpayer has the option of calculating the tax based on rental receipts or rental value.
Among these types of leases are those for motion pictures, household furnishings that come with a lease of real property, linen supplies, mobile homes, and videotapes, and “restricted grant of privilege to use tangible personal property for less than one continuous 24 hour period and the charge is less than $20.” (Leasing Tangible Personal Property)
Other leases that fall within these categories are covered in detail in the CDTFA’s Publication 46, along with some exceptions and restrictions within the categories of leases mentioned.
However, the important point to keep in mind is that the type of lease a business or individual enters into will impact the tax calculation method so it is important to ascertain the specific rules surrounding the type of lease.
For businesses, restricted grants of privileges may be a common category that requires tax calculation based on purchase prices. Note, however, that restricted grants of privilege for the use of tangible personal property for which the period is less than 24 continuous hours and the charge is less than $20 are not considered leases.
Such restricted grants of privilege are applicable to businesses like laundromats and establishments using coin-operated amusement devices, among others.
Special Fees Applicable to Certain Lease Types
In many cases, businesses or individuals only need to concern themselves with determining whether they owe sales or tax. However, businesses must be aware that some of their leases may require the payment of either the tire recycling fee or the electronic waste recycling fee.
As their names suggest, these two fee types may apply to certain tire and electronic leases. The CDTFA encourages taxpayers to call their Customer Service (1-800-400-7115) for more information on these leases. (Leasing Tangible Personal Property)
As with any form of taxation, there must be nexus in order for a jurisdiction to have taxing power over any individual or entity.
From a multistate tax planning perspective, one of the most important points to know is that leased property located outside of California is considered tax exempt. As evidence of a lease’s tax exempt status, lessors must furnish lessees with either a resale or exemption certificate.
On the other hand, if an out-of-state lessor leases tangible personal property that will be physically located within the state of California, that property will be subject to California taxes. The state imposes taxes on any “retailer deriving rentals from a lease of tangible personal property situated in this state.” See Business Taxes Law Guide – Revision 2020, 6203(c)(3); see also Leasing Tangible Personal Property, 16.
Thus, having property in-state would be considered a nexus-creating activity. Nonetheless, leases entering the state for activities involving interstate commerce will not be taxed. The CDTFA gives the following example: if a lessee uses mobile transportation equipment leased from out of state and enters the state of California in the course of interstate commerce, the lessor and lessee of that equipment cannot be taxed. (Leasing Tangible Personal Property)
Other Key Lease Exemptions in California
Leases to the U.S. government are tax-exempt with the exception of leases for mobile transportation equipment (MTE), defined as “equipment (and component parts thereof) which are used for the transportation of persons or property over substantial distances.”
Examples of MTE include aircraft, busses, railroad cars, and ships. ((Leasing Tangible Personal Property)