Sam Brotman, JD, LLM, MBA August 24, 2014 6 min read

Specific Issues in California Use Tax Audits


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

California Use Tax Audits - Use Tax on Leases

In general, during California use tax audits, use tax will only be asserted against the lessor since it is difficult to determine from the lessee’s records whether the lease is a “sale” under the Sales and Use Tax Law. Therefore, a review of the lessor’s records will be made to determine if any tax liability exists. Whenever the audit of a lessee reveals that tax has not been collected by the lessor, and the auditor cannot determine that tax was properly due, an audit memorandum (Form BOE–1164) will be prepared and sent to the lessor’s district. During use tax audits, he auditor will not assert tax against the lessee. An exception to the above general policy is that tax may be assessed against the lessee if the lessor is located out-of-state, and the property being leased is not mobile transportation equipment (MTE). If tax is assessed, Form BOE–1164 will be sent to the lessor’s current district showing the amount of tax assessed and the applicable periods.

California Use Tax Audits - Use of Form BOE-1164 by Auditor

In California use tax audits, taxpayers should be careful with resale certificates by purchaser, because auditor will pay attention to the nature of the goods to determine if transaction was done in bad faith. For example, if jewelry store obtains janitorial equipment, and obtains certificates, auditor will review this transaction very carefully, and may determine lack of good faith by taxpayer, leading to serious consequences. The auditor may contact the vendor to determine whether the vendor holds a valid resale certificate. In the event the vendor does not have a valid resale certificate, the tax generally will not be determined against the purchaser unless the sale occurred outside of California or is otherwise a transaction subject to use tax. Form BOE–1164 will be prepared by auditor setting forth the pertinent facts about the transaction. This form, along with any supporting documents, will be used as basis for investigation in California use tax audits.

The auditor will also prepare Form BOE–1164 if in the examination of sales invoices the auditor finds that the seller did not charge tax and has accepted a properly executed resale or exemption certificate in good faith and the auditor questions whether the buyer has in fact purchased the merchandise for resale or in fact an exemption applies. The auditor should also prepare Form BOE–1164 where it is determined that a vendor is improperly computing tax on its invoices. For example:

• Is not charging tax.

• Charges tax on repair labor or other exempt items.

• Does not charge tax on fabrication labor, trade-ins, or other components of the sale which should be included in the measure of the tax.

Unsupported sales for resale to Mexican migrants which are discovered during audits of California sellers will be disallowed against the seller. The auditor also will prepare Form BOE–1164 for such sales, which then will be forwarded to San Diego District Office.

California Use Tax Audits - Storage of Property Intended for Resale

Please note that if a purchaser who timely gives a resale certificate or purchases property for the purpose of reselling it makes any storage or use of the property other than retention, demonstration or display while holding it for sale in the regular course of business, the storage or use measured by the purchase price is taxable as of the time the property is first so stored or used. Sections 6094 and

6244 provide that for property used under the following conditions the measure of the tax is the fair rental value of the property for the period of such other use:

• Loan of property to customers as an accommodation while awaiting delivery of property purchased or leased from the lender, or the loan of property to a customer while the customer’s property is being repaired by the lender, provided it is not a loan of property pursuant to a mandatory warranty.


During California use tax audits, if a specific charge is made for use of the property, this may be used as the measure of tax provided the charge is consistent with the fair rental value. Property used frequently for purposes of demonstration or display and used partly for other purposes.


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Last updated: July 2, 2022

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law



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