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Business Taxes Law Guide—Revision 2024
Sales and Use Tax Annotations
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330.0000 Leases of Tangible Personal Property—In General—Regulation 1660
Annotation 330.3126
(a) In General
330.3126 Leases Subject to Use Tax—Section 6406 Credit. An out-of-state retailer (lessor) is engaged in the business of leasing motor vehicles. After lease inception, some of the lessees relocate to California and bring the leased vehicles with them. The lessor did not pay California sales tax reimbursement or make a timely election to report California use tax measured by the purchase price of the motor vehicles. As a result, these lessees become liable for California's use tax on the remaining lease payments and the lessor is obligated to collect this tax from each of these lessees as the payments become due. Thus, if a lessee is entitled to a Section 6406 credit against the California use tax for tax or tax reimbursement paid to another jurisdiction (lease state) on the same lease payments, the lessor's obligation to collect California use tax from the lessee is limited to the lessee's actual use tax liability after application of the credit.
The Section 6406 credit may be available to a lessee for an "up-front tax" previously imposed by the lease state. An "up-front tax" is measured by the total dollar amount of all the payments due under the lease and is imposed at lease inception. For "up-front leases," a Section 6406 credit is available to the lessee to the extent that the lessee paid tax directly to the lease state or paid a separately stated and identified amount of "tax" or "tax reimbursement" to the lessor for the lease payments that are subsequently subject to use tax in California. The lessee's Section 6406 credit will not exceed the amount of tax actually imposed on the lessee's lease payments. Accordingly, for example, no Section 6406 credit is available to a lessee for taxes imposed or due on the lessor's purchase, titling or registration of a vehicle that will be used for leasing purposes even though the lessor may have shifted the economic burden of this tax to the lessee.
When a lessee's lease payment is subsequently subject to California's use tax, such as when the leased property is present in California during the lease period (billing cycle) covering that payment, the creditable amount for that lease payment is also limited to the amount of tax that was previously imposed up-front by the lease state on that specific lease payment. In other words, the lessee does not receive a lump-sum Section 6406 credit equal to the total amount of tax paid up-front to the lease state at lease inception. Instead, we allocate the up-front payment of tax proportionately to every lease period included in the measure of the lease state's "up-front tax," and the Section 6406 credit is only available to a lessee against California use tax due on a lease payment to the extent that specific lease payment was previously subject to tax in the lease state.
The Section 6406 credit may also be available to a lessee if the lease state imposes a tax on the individual lease payments as they become due and payable by the lessee for each billing cycle specified under the lease. When a lease state imposes a tax on a lease payment for a specific billing cycle, the Section 6406 credit for such tax may only be applied to reduce California use tax imposed on that same lease payment covering that same billing cycle. Furthermore, the credit is only available to the extent the lessee directly paid tax to the lease state or the lessee directly paid a separately stated and identified amount of "tax" or "tax reimbursement" to the lessor for the same lease payment that is subsequently subject to tax in California.
In light of the foregoing, in any claim for credit the claimant must be able to prove that: (1) the lease state's tax was actually imposed on the lease transaction at issue between the lessor and the lessee; (2) the lessee directly paid the amount for which credit is claimed to the lease state or paid to the lessor an agreed upon and separately stated amount for that tax or tax reimbursement; and (3) the lease state's tax for which a credit is claimed was actually imposed on the same lease payments that are subject to California use tax. When a lessor's purchase or registration of a motor vehicle is subject to tax in a lease state, the lessee cannot claim a credit for such a tax even if the lessor shifts the economic burden of the tax to the lessee. No credit is ever available for tax allocable to and/or paid for a lease payment covering a billing cycle prior to the storage, use, or other consumption of leased property in California. Further, the transaction at issue must have originally been first subject to tax outside this state (i.e., at a time prior to the storage, use, or other consumption of the leased property in this state.) Finally, if a lessee paid otherwise creditable tax or tax reimbursement to a lessor, the lessee cannot claim a Section 6406 credit unless the lessor actually paid the tax to the lease state or the lessee received and retained a receipt for the tax from the lessor as explained in Regulation 1686. 6/15/09; 10/26/09.