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Business Taxes Law Guide—Revision 2024
Sales and Use Tax Annotations
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335.0000 Leases of Mobile Transportation Equipment— Regulation 1661
Annotation 335.0043.500
335.0043.500 Lease of Mobile Transportation Equipment (MTE)—Refund Claim. Under the terms of its lease agreement, a lessor of MTE is required to maintain, repair or alter the MTE and "shall be responsible for purchasing all repair parts and maintenance items for resale to lessee." The lessor owned and leased the equipment out of state for more than a year before bringing the MTE into California. The lessor then purchased parts used to repair the leased MTE and paid tax reimbursement to the California parts vendors. The lessor filed a claim for refund for the tax reimbursement it paid on the parts in the belief that the parts were purchased for resale to their lessee(s) pursuant to the lease agreement.
Regulation 1661 provides that "with respect to leases of mobile transportation equipment, the sale to the lessor is the retail sale and the lessor is the consumer of the equipment." The definition of MTE includes "any tangible personal property which is or becomes a component part of such equipment." Therefore, the lessor is not the retailer of the parts to the lessee; rather, the lessor is purchasing the parts for use in connection with the lease. In addition, only a person who has timely elected to measure the use tax liability by fair rental value may purchase, ex-tax for resale, equipment that becomes a component part of the MTE. (Revenue and Taxation Code section 6092.1.)
Notwithstanding how the transaction is characterized in the relevant lease agreements, the purchase of the repair parts by the lessor is not a purchase for resale under California law. The lessor did not make a timely election to report tax based on fair rental value and therefore could not issue a valid resale certificate to its California vendors. Since the lessor is the consumer, rather than the retailer, of MTE and equipment that becomes a component part the MTE, the lessor cannot claim a refund of tax reimbursement. (Revenue and Taxation Code section 6901.5.) 5/11/06. (2007–1).