Lessors Win Key Points in California Lease Assignment Case
Four years of tireless effort has resulted in a unanimous vote by the California Board of Equalization (BOE) Board of Directors to accept an agreed-upon decision in case #217918 involving application of sales tax to discounted or assigned true leases. Contested was an assessment where the assignment contracts ostensibly transferred title to the property but in reality title was not transferred as the leasing company retained the residual equity interest. Pacifica Capital Managing Director Bette Kerhoulas, CLP reports the outcome demonstrates benefits gained if equipment lessors stand and fight when government officials wrongly apply tax to leasing transactions.
This victory on most points brought before BOE provided an opportunity for the United Association of Equipment Leasing (UAEL) and Equipment Leasing Association (ELA) to work cooperatively on behalf of industry. Cary Boyden, Esq. of Boyden, Cooluris, Livingston & Saxe PC was instrumental in arguing the legal facts on behalf of Pacifica. In the final months when the process became political Pacifica Capital retained the same firm used successfully by ELA on electronic waste legislation, Greenberg Traurig, LLP. Jeffrey Leacox, Esq. and Patrick Shannon, Esq. provided astute guidance including official comments filed by ELA.
Individual meetings were conducted with each of five elected members at the Board of Equalization followed by sessions with Audit staff and BOE counsel. In the end, Bette Kerhoulas reports victory on virtually all issues contested with exception of the tax on documentation fees. The ELA amicus brief prepared by ELA State Government Relations Committee Chair Valerie Pfeiffer, CIT together with a brief from UAEL were among supportive texts that impressed Board members.
Pacifica Capital convinced the Board to apply Business Taxes Law Guide Annotation 330.1878 for the proposition that in sales and use tax matters, the language used by the parties to characterize their transactions does not necessarily control. The annotation specifies other evidence such as whether the transferor retained title to the subject property after the payments to the transferee (lessor/assignee), and whether the transferor claimed depreciation and was responsible for the collection of property tax in connection with the property. In other words, even if the form of an assignment document states that title to the property transfers from the Assignor to the Assignee, if the Assignor in substance is only assigning a stream of payments to the Assignee, but retains the residual position, depreciates the equipment and controls the collection of property tax, there is no second sale. BOE would not waiver on the assessment of tax on documentation fees, site inspections and similar items as they consider them part of gross receipts.
Regarding the transactions where Pacifica did indeed sell the residual and execute an Assignment Document in which title to the property transferred to the Assignee, the BOE determined that since there was no intervening use (the leases and assignments were executed contemporaneously), Pacifica should be given an allowance for tax-paid purchases resold. The BOE, however, considered all gross receipts received as part of the transaction, so Pacifica was not only taxed on the Present Value of the assignment (fee), but on the advance rentals retained, and all non-taxable items that were on the original invoice, including installation, freight and similar charges.