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.

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.

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.

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.

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.

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.

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.

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 x 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).

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.

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.

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.

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.

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.

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.

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.

A transaction will not be viewed as a lease, but rather as a grant of privilege to use when all three conditions below are present:

• The use of the property is for a period of less than 24 hours;
• The charge is less than twenty dollars ($20); and
• The privilege to use the property is restricted to use on the premise or at a business location of the grantor of the privilege to use the property.

Examples of such businesses may include:

• Laundromats
• Operators of coin operated amusement devices, such as arcade games
• Golf courses that furnish golf carts for use on the course
• Horseback riding stables where horses are restricted to the area owned or leased by the grantor of privilege

You are considered the consumer of the tangible personal property on these types of transactions. You are required to either pay sales tax to your vendor or report use tax on the purchase price directly to us.

Example:

The XYZ Aquarium provides a service called “Snorkel with Stingrays.” The aquarium provides the temporary use of the snorkel equipment for approximately two hours to the customers for a charge of $10. The equipment can only be used at the aquarium. The charge for the snorkel equipment is not subject to tax because the equipment is restricted to the use at the premise for a period of less than 24 hours, and for a charge of less than $20. This transaction is a grant of privilege to use the equipment and not a lease. The sale of the equipment to the aquarium, the consumer, is subject to tax and the aquarium cannot issue a resale certificate for its purchase.

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.

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.

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.

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.

The following charges and fees are frequently required as part of the taxable car lease agreement:

The following charges/fees are considered not required by the lease agreement and generally not subject to tax:

For additional information on leased vehicles, please see publication 34, Motor Vehicle Dealers and publication 46, Leasing Tangible Personal Property.

One-way rental trucks are motor truck vehicles not exceeding the manufacturer's gross vehicle weight rating of 24,000 pounds. These vehicles are used in a rental business and leased for a short-term period of not more than 31 days for one-way or local hauling of personal property. 

You must inform your customer that the truck is leased as a one-way rental. As a one-way rental, you are required to report tax on the rental receipts on your sales and use tax return in the first reporting period in which the truck is leased. Once you elect and declare the truck as a one-way rental and report tax measured by rental receipts, the election is irrevocable. If you do not timely elect to treat the vehicle as a one-way rental truck, it will be deemed mobile transportation equipment (MTE) and tax will generally be due based on the purchase price of the truck.

However, if you lease the heavy equipment with a mandatory operator to your customers, that is, the equipment would not be rented without your company's operator, this transaction is not considered a lease; instead you are providing a service. But, if your customer has the option to provide their own operator to operate the heavy equipment, this transaction is considered a lease, if the equipment is under their direction and control.

Examples of heavy equipment rental categories are:

• Aerial work platforms (scissor lifts, boom lifts, scaffolding, etc.)
• Air compressors and air tools (gas powered compressor, rotary, screw air, etc.)
• Compaction (rollers, rammers, compactors)
• Concrete masonry (tile saws, trowels, drills, mixers, etc.)
• Earthmoving equipment (bull dozers, sweepers, backhoes, etc.)
• Forklifts and material handling (cranes, material lifts, forklifts, etc.)
• Lawn and landscape (chain saw, tillers, stumpers, etc.)
• Light towers and generators (portable or diesel generators, work lights, etc.)

Rental receipts subject to tax includes any required services or mandatory charges associated with the lease agreement. For example, if the lessee is required to purchase a damage waiver on a taxable lease agreement, any charge for the damage waiver is taxable. For general information on how tax is charged on the training fees and delivery charges of heavy equipment rentals, please see the General tab.

Example:
XYZ Rentals leases sweepers and backhoes and provides a mandatory in-person training at the lessee's location on how to use and operate the machines as part of the taxable lease agreement. The training provided is taxable because the training is mandatory and sold as part of the lease agreement.

Applicable tax rate

You must charge the appropriate district tax rate along with the statewide tax rate when leasing heavy equipment rentals. The correct applicable rate of tax to charge on the lease transaction is the tax rate in effect in the district where the equipment is being used by the lessee. If the district of use is not known, the tax rate should be calculated where the equipment is delivered to the lessee.

Example:

Your customer leases a forklift in Madera County for use at their place of business in the City of Coalinga (Fresno County). You will need to charge your customer the district taxes applicable in the City of Coalinga, including Fresno County taxes, because the district taxes that apply to a lease are based on the location where the leased property is used.

Examples of rent or lease-to-own items may include but are not limited to:

• Electronics (Gaming consoles, computers, laptops, televisions, and audio and visual systems)
• Furniture
• Home appliances and vacuums
• Mattresses
• Jewelry and watches
• Health, fitness and sports equipment

A contract that is a sale under a security agreement, is a lease that binds the lessee for a fixed term payment and the lessee obtains title at the end of the term upon completing the required payments or the lessee has the option to purchase the property for a nominal amount not exceeding $100 or one percent of the total contract price, whichever is the lesser amount. This transaction is considered a financing transaction only and not a lease. The lessee obtains the title of the property at the end of the lease agreement upon completion of the required payments. In this type of transaction, tax is due on the total sales price at the time of the sale (up front) and not the monthly rental payments.

However, if the lessee purchases the property and the buyout amount is not nominal, the lessee would owe tax on the buyout price. In this case, a “not nominal” buyout amount means that the buyout price is greater than $100 or one percent of the of the total lease contract price, whichever is the lesser amount. The transaction is regarded as a lease with tax generally due on the rental payments, and the buyout price is also subject to tax.

Example 1:

Your company offers a rent-to-own contract for a sofa. You offer a 12-month fixed term with monthly payments of $50.00 and at the end of the 12 months, the customer obtains title of the sofa. By the end of the term, the total amount paid by the customer will be $600. This is considered the sales price subject to tax. Tax is due on the sales price of $600 and must be collected up front. You must remit tax to the CDTFA measured by the selling price of the sofa to your customer with your return for the reporting period in which the sale occurs or when the sofa is transferred to your customer.

Example 2:

Your company purchases furniture for $100 and offers a lease-to-own contract sold on credit to your customer, for $10 per month for twelve months. The total lease payment for the contract is $120 and includes financing charges. The contract binds the customer for a fixed term payment and the customer obtains the title of the furniture upon completing the required payments. This transaction is a sale under a security agreement and is considered a financing transaction rather than a lease. As a lessor or a retailer, you must keep adequate and complete records showing the actual selling price of the sofa less than $120. For example, your selling price is $110, and the finance charge is $10. On your customer's invoice, you must separately state the fair retail selling price of the sofa ($110) from the finance charge. Accordingly, sales tax would only apply to the actual selling price of $110 to your customer and must be collected up front.

Example 3:

You lease a bicycle for $100 per month with a $150 buyout option at the end of the lease. You paid sales tax reimbursement to your vendor when you initially purchased the bicycles and you do not collect tax on the rental payments. Tax is due on the buyout price of $150 that the customer paid.

Examples of furniture rentals may include but are not limited to:

• Living room sets
• Antiques
• Dining sets
• Bed and bath
• Accent furniture
• Décors
• Outdoor

If you make repairs and make a significant change to the furniture you rent, your rental receipts will be subject to tax because the furniture is not leased in substantially the same form as acquired, even if tax was timely paid on the purchase of the furniture. For a change to be significant and therefore cause the property not to be in the same form as acquired, the change must either substantially increase the value of the furniture or change the functional capabilities or characteristics of the furniture. In situations where there is a significant change in form but little increase in value, the fact that there is no significant increase in value is irrelevant if there is a major change in the characteristics or functional capabilities of the furniture. In a case where tax is paid on the purchase price of the furniture, you may take a tax-paid purchase resold deduction to offset the tax due on rental payments on your sales and use tax returns.

However, there are situations where there is a small change in form and a little increase in value of the furniture due to minor repairs. In such instances, if there is no substantial increase in value and there is a minor change in the form of the furniture due to minor repairs done that do not change the furniture's general function or characteristics (that is the property is leased in substantially the same form as acquired), the rentals receipts are not subject to tax provided you timely paid the tax at the time of purchase.  

Example 1:

You purchase used accent furniture and pay sales tax reimbursement at the time of purchase. You restore and rent them out to your customers. You restore the furniture by replacing the fabric, strapping, slings, cushions, paint, and powder coat them. The restoration increased the value and substantially changed the appearance of the furniture. As a result, the rental receipts are subject to use tax because the repairs made on this furniture were significant and it is thus not leased in the same form as acquired. It does not matter if tax was paid timely on the cost of the furniture. You may take a tax-paid purchase resold deduction for the tax you paid on the cost of the furniture in the same period in which you first leased the furniture.

Example 2:

Your company buys antique furniture, fixes it and rents them out for events. You acquire an antique table and pay tax reimbursement to your vendor. You then change out one rusted screw on the table leg. This is a minor repair that does not increase the value of the furniture. Since your company paid the sales tax on the furniture when it was first purchased, and the property continues to be leased in the same form as acquired, the rental receipts are not subject to tax.

Examples of event and party equipment rentals may include the following items:

• Linens – tablecloths, napkins, table runners, aisle runners, chair covers, stage skirting, and chandelier draping
• Furniture – benches, booths, canopies, chairs, ottomans, pillows, rugs, sectionals, sofas, stools, and tables
• Bars – bar fronts, lighted bars, branded bars, and sectional bars
• Silk floral – accent table décor, candelabras, containers, and votives
• Lighting and staging – lighting instruments, rigging, staging, and trussing
• Props – accent décor, arches, cabanas, columns, cutouts, flats, facades, games, pedestals, props, and signs

Tax applies to the charges for mandatory services if such service is a required part of the taxable lease. An optional service in a taxable lease is not subject to tax if the service occurs after the lease begins, and the service charges are separately stated on the invoice. On the other hand, if the lease is not a taxable lease, neither mandatory and nor optional services are not subject to tax.

If you are a lessor and you rent equipment from another rental company to sublease to your customers, see the Subleases topic under the Leases in General tab for detailed information on how tax applies on subleasing.

Example:

You lease linens, tables, bars, and silk floral arrangements to your customers and offer other optional services such as set-up and placing the leased property. Your customer requests that you set up the tables, bars, and set the flowers in place after the lease term has begun. Tax is collected on the rental receipts because you did not pay sales tax reimbursement at the time of purchase of these items. The separately stated charges for the optional services such as setting up and placing the property at the location are not subject to tax because this is an optional service that occurred after the lease began and the charges are separately stated on the invoice.

If you paid sales tax on the purchase of materials to incorporate and construct into the costumes, you may take a tax-paid purchase resold deduction on your sales and use tax returns in the same period in which you first leased the costumes.

You may also issue a resale certificate to your vendors when you purchase materials that are physically incorporated or assembled in the costumes that you are leasing. This will allow you to purchase the materials without payment of tax.

If you rent the photo booth with a mandatory operator to your customer, this transaction is not considered a lease for the purpose of sales and use tax. Instead, you are providing photography services. When you provide photography services and physical prints of photographs to your customer, the entire amount charged is subject to tax. However, if the pictures are only transmitted electronically and there is no intent of transferring physical prints later to your customer, the entire package is not taxable (package includes the photography service and pictures transmitted electronically).  

If your customer has the option to rent the photo booth with or without an operator, the transaction is considered a lease to your customer. In general, your lease receipts for a lump-sum (that is, charges include the rental of the booth, prints, and any use of props) amount are subject to tax, unless you timely paid sales or use tax measured by your purchase price of the booth and related equipment, and the photo booth is leased in substantially the same form as acquired. Assuming your rental receipts from the lease of the booth are subject to tax, if your customer decides to rent (sublease) the booth with an operator, the measure of the tax will include the charges for the rent of the booth, prints and any use of the props but will not include the charge for the operator service.

If you acquired the photo booth in its completed condition and paid the sales or use tax at the time of purchase, including on all the necessary equipment (for example, printer, touch screen, etc.) to operate the booth, the lease receipts are not subject to tax. As long as you bill one lump-sum fee for the use of the rental, you would be the consumer of the supplies used in creating the prints (for example, toner, ink, and papers) and should pay tax when you purchase these items.

However, if you do not have a rental agreement with a customer and you set up a photo booth at an event, such as a festival or at a park, you are generally considered the retailer of the prints you sell from the booth. The prints you sell from the photo booth to the general public are on a “pay-per-print” basis and tax applies to your charge for the prints only. If you paid tax on the photo print paper, you are entitled to take a tax-paid purchase resold prior to use deduction in the same period in which you made your sales.

Example 1:

You charge a flat rate of $600 for a 3-hour photo booth rental. Your customer will operate the photo booth (without an operator) and will have unlimited prints at the event. You paid tax on the initial purchase of the photo booth and you also paid tax on the supplies used in creating the prints. Tax is not due on the rental receipts because you paid tax on the supplies used in creating the prints, and also paid tax on your initial purchase of the booth that you leased out in substantially the same form as acquired.

Example 2:

You purchased parts and equipment to custom build your photo booths. You offer a 4-hour photo booth rental without an operator for $500 to your customer. The package comes with unlimited printing of pictures at the event. Because the photo booth is not leased in the same form as acquired (that is, you custom-built the booths by purchasing parts and equipment), tax applies to the entire amount charged of $500.

Example 3:

You charge a flat rate of $500 for a 4-hour photo booth rental with an option for an operator service. The option to have a photo booth operator is an additional $50 separately stated service charge, with a total package of $550. The package comes with unlimited printing of pictures, any use of the props, and a photo booth operator (per customer request) at the event. Tax is due on the rental amount of ($500) because you did not pay tax on the initial purchase of the photo booth and the related equipment that you leased out in substantially the same form as acquired. The measure of tax will include the charge for the rent but will not include the separately stated charge for the operator service ($50).

For more information on photo booths examples and scenarios, please see our Tax Guide for Photography.

You may lease photographs or artwork to a customer or lessee and charge them for the rights included in the transfer (that is for reproduction, copyrights, or distribution rights). Although the use may be restricted, the transaction is still considered a lease.

Tax applies to the fees you charge to allow the lessee to reproduce, copy, or use a photograph or artwork for their own private use (that is not to sell) when you provide the photographic image in a tangible form such as a print, or as an image on a CD/DVD, or flash drive. Accordingly, the lessee may not issue a resale certificate because the lessee is not reselling that actual image. Instead, the lessee is using it for reproduction.

If you lease, license or assign a copyright interest in your photographs, your arrangement with your customer may be a technology transfer agreement (TTA). For more information on a TTA as it relates to your photographs and how tax applies to a TTA, please see Tax Guide for Photography and publication 38, Advertising Agencies.

If the lessee does not return the book on time and you charge the lessee a fee for the late return of the property, this late fee is also subject to tax. You are required to collect tax from the customer, issue them a receipt, and remit the tax to us.

However, if you paid the tax when you initially purchased the books or timely paid use tax to us and then rent the books in substantially the same form as acquired, tax is not due on the rental receipts or on any late fees associated with the lease.

If you rent these items for private and noncommercial use, you are required to collect and remit tax on the rental receipts regardless if you paid tax based on the cost of the property. A late charge for failing to return the property timely is subject to tax because this is a legitimate additional charge for continued possession and use of the property.

Mandatory charges such as mandatory maintenance, cleaning services, or pick up fees required by the lease contract are subject to tax. However, separately stated charges for optional maintenance or cleaning services of portable toilets are not subject to tax.

Delivery charges on portable toilets may be subject to tax depending on whether you deliver them with your own vehicle or by common carrier. If you deliver portable toilets using your own vehicle, the delivery charge is generally subject to tax, unless the charges are separately stated and the delivery occurs after the right to possession of the property is granted to your customer (after the lease commences).

If the portable toilet is delivered 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 portable toilet 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.

Example:

You lease portable toilets, charging your customer a mandatory service fee for pumping and cleaning, and a delivery fee for drop off and mandatory pick-up (using your own vehicle). All charges, such as the service fee for the cleaning services, are subject to tax because they are part of your lease agreement specifying such services are part of the rental price and the lessee is required to purchase it from you (mandatory). In this scenario, the delivery charge is also subject to tax because you are using your own vehicle to deliver the portable toilets to your customer as part of the lease agreement. However, if the delivery occurs after the right to possession is granted to your customer and the delivery charges are separately stated on the invoice, the delivery charge is not subject to tax. The pick-up charge is subject to tax because the fee is mandatory.

Farm equipment and machinery means implements of husbandry, which include any new or used tool, machine, equipment, appliance, device, or apparatus used in the conduct of agricultural operations, except where such items are intended for sale in the ordinary course of business, and include such items as harrows, tractor implements, agricultural heating and cooling equipment, fuel storage equipment, wind machines, and watering and waste disposal systems for livestock, etc.

Generally, if the lease of qualifying farm equipment and machinery is measured by the rental receipts, the lease will generally qualify for the partial exemption when leased to a qualified person. A qualified person is a person primarily engaged in producing or harvesting agricultural products and must meet the requirements of Regulation 1533.1, Farm Equipment and Machinery in order for the partial exemption to apply. However, if the property is not leased to a qualified person, the lease of farm equipment and machinery will not qualify for the partial exemption.

As a lessor, you must obtain an exemption certificate in substantially the same form as described in Regulation 1533.1, Farm Equipment and Machinery, from the lessee who is a qualified person.

For more information, please see Regulation 1533.1, Farm Equipment and Machinery, or the Tax Guide for Agricultural Industry.

The lessor must obtain an exemption certificate from the lessee in substantially the same form as described in Regulation 1534, Timber Harvesting Equipment and Machinery. The lessee is not allowed to issue an exemption certificate unless the lessee is a qualified person, that is, one who is in business primarily engaged in commercial timber harvesting operations as described in Regulation 1534.

The lessor must obtain an exemption certificate from the lessee in substantially the same form as described in Regulation 1535, Racehorse Breeding Stock. The lessee is not allowed to issue an exemption certificate unless the lessee is a qualified person, that is, one who exclusively purchases racehorse breeding stock with the intent and purpose of breeding as described in Regulation 1535.

Tire fee

If you are in the business of leasing/renting new or used motor vehicles, trailers, construction equipment, or farm equipment and you purchase the vehicle/equipment on which new tires are mounted without paying the tire fee, you are responsible for paying and reporting the tire fee to us on those transactions. You are required to register for a tire fee account and report the tire fees owed.

If your customer decides to purchase the vehicle, trailer, construction equipment, or farm equipment at the end of the lease agreement, you are required to collect the fee from your customer on any tires you mount on the vehicle or equipment at the time of sale. If no new tires are mounted on the vehicle or equipment at the time of sale, or if used tires are mounted on the vehicle or equipment at the time of sale, you should not charge your customer the fee.

For more information on tire fees, please see publication 91, California Tire Fee and our online California Tire Fee Guide.

Covered electronic waste recycling fee

If you lease new or refurbished covered electronic devices (CED) that have a screen size of more than four inches measured diagonally and have been identified in the regulations adopted by the Department of Toxic Substances Control, the electronic waste (eWaste) recycling fee may apply to some of your leases.

CEDs identified in the regulation includes:

• Computer monitors that contain cathode ray tubes or use liquid crystal displays (LCD)
• Televisions that contain cathode ray tubes
• Portable DVD players with LCD screens
• Laptop computers with LCD screens
• Plasma televisions
• Bare cathode ray tubes or any other product that contains a cathode ray tube.

If the lease is a continuing sale and purchase, you must collect the fee from the lessee with the first lease payment. Lease renewals are not subject to eWaste fee unless a new or refurbished CED is provided at the time of renewal. If your customer decides to purchase a used CED, the eWaste fee does not apply to sale of used CEDs.

You may have additional registration requirements with the CDTFA.

For more information on covered electronic waste recycling fee, please see publication 95, Electronic Waste Recycling Fee and our online Covered Electronic Waste Recycling Fee Guide.