Business Law

Sales and Use Tax as Applied to a Title Insurance Company’s Lease of Business Equipment

Dear constituency list members of the Insolvency Law Committee, the following is a case update analyzing a recent case of interest written by Maggie E. Schroedter of Robberson Schroedter LLP, analyzing First Am. Title Ins. Co. v. California Dep’t of Tax & Fee Admin. (2021) 71 Cal. App. 5th 603, 607, as modified on denial of reh’g (Dec. 9, 2021) (First American Title).

Sales and Use Tax as Applied to a Title Insurance Company’s Lease of Business Equipment


The California Court of Appeal tackled the perplexing subject of sales and use tax by beginning its opinion acknowledging the complexity of the subject matter: “Albert Einstein reportedly said, ‘The hardest thing in the world to understand is the income tax.’ The subject of this case—sales and use tax as applied to a title insurance company’s lease of business equipment—is perhaps a not too distant second.”

First American Title (“First American”) paid sales or use tax on leased business equipment. Seeking a refund, First American argued that the tax violated Article XIII, section 28(f) of the California constitution, which prohibits the imposition of sales or use tax on a title insurer. The Court of Appeal disagreed, holding that “Article XIII, section 28(f) does not prohibit a sales tax whose legal incidence is on a lessor, even though the economic burden of the tax is ultimately borne by the title insurer/lessee.”

To read the full published decision, click here.    


First American leased computer and office equipment from a lessor. It claimed that it paid use tax on these transactions from October 1, 2005 through September 30, 2011. First American pursued administrative remedies seeking a refund of about $785,000, asserting that the tax violated Article XIII, section 28(f).

The California State Board of Equalization (the California Department of Tax & Fee Administration (CDTFA) predecessor) denied the claim, asserting that Regulation 1660(c)(1) authorized the Board to impose the sales tax on the lessors, who were not insurers. First American appealed, arguing that Regulation 1660(c)(1) is facially unconstitutional because it classifies the use tax as sales tax to avoid the constitutional exemption.

The Board then issued a refund as to the out-of-state leasing companies, only. Based on this ruling, First American calculated it was entitled to a refund in the amount of about $721,205. The CDTFA refused to issue the refund.

First American filed a petition for writ of mandate in the superior court, seeking an order compelling the Department to (1) pay the allowed amount of the refund claim, and (2) “vacate its regulation [i.e., Regulation 1660(c)(1)] imposing a tax on tax-exempt lessees of tangible personal property.” Id., at 609.  

The superior court granted the writ petition. It concluded that Regulation 1660(c)(1) “evades and circumvents ‘the constitutionally imposed ‘in lieu’ limitation.’” The court alternatively found that Regulation 1660(c)(1) conflicts with Revenue and Taxation Code section 6203, subdivision (b), which the court interpreted to preclude imposing sales tax on equipment leases. Id., at 609-610.

The Court of Appeal reversed. It noted that “the legal incidence and the economic burden of sales taxes are two separate and distinct concepts.” Id. at 608,citing Hibernia Bank v. State Bd. of Equalization (1985) 166 Cal.App.3d 393, 402. The Court held: “Article XIII, section 28(f) does not prohibit a sales tax whose legal incidence is on a lessor, even though the economic burden of the tax is ultimately borne by the title insurer/lessee.” Id., at 608, citing International Business Machines v. State Bd. of Equalization (1980) 26 Cal.3d 923, 927, [“because … insurance companies enjoy [ ] exemption from paying any use tax, the … law provide[s] that in such cases the lessor would be liable for a sales tax”].) In so holding, the Court of Appeal analogized to the federal constitution, which immunizes the United States from taxation by the states, “but it does not forbid a tax whose legal incidence is upon a contractor doing business with the United States, even though the economic burden of the tax, by contract or otherwise, is ultimately borne by the United States.” Id., citing United States v. Boyd (1964) 378 U.S. 39, 44. 


Economics of the Insurance Industry

In California, insurance companies are taxed differently than most other businesses. This is because the economics of the insurance industry differ from most other businesses. Insurance companies collect revenue in the form of premiums up front, and only incur related expenses – payouts to claimants based upon contingent events – months or years later. Matching up revenues to related expenses can be difficult. Myers v. Board of Equalization (2015) 240 Cal.App.4th 722, 736.

Thus, a gross premiums tax was adopted for taxing insurers. The California Constitution at Article XIII, section 28(f) imposes a tax on gross premiums received each year by insurance companies doing business in California. This tax is “in lieu” of all other taxes and fees payable to the state, except property taxes and vehicle license fees.

Sales Tax

Sales tax is imposed upon the seller for the “privilege of selling tangible personal property at retail.” Cal. Rev. & T. Code § 6051. Sales tax is assessed at a fixed rate based upon gross receipts. Important to the Court’s analysis here, “the legal incidence of sales tax is on the seller, not the consumer.” First American Title, at 611, citing Loeffler v. Target Corp. (2014) 58 Cal.4th 1081, 1103. “The tax relationship is between the retailer only and the state; and is a direct obligation of the former.” Id., citing Livingston Rock & Gravel Co. v. De Salvo (1955) 136 Cal.App.2d 156, 160.

When a consumer purchases goods, the consumer “pays” sales tax on those goods. What the consumer is legally doing, however, is reimbursing the seller for its sales tax liability arising from the transaction. California law does not require the consumer to reimburse the seller. Rather, this is a matter of contract between the seller and the consumer. Cal. Civ. Code § 1656.1, subd. (a). The Court of Appeal observed that the “key point is that the legal incidence of the sales tax can be, and usually is distinct from its economic burden.” First American Title, at 612.

Applying this principle to insurance companies, the Court reasoned that Article XIII, section 28(f) does not prohibit imposing sales tax on goods sold to an insurance company.

Use Tax

Because certain out-of-state retailers are not subject to California sales tax law, California imposes a “use” tax in the same amount on the in-state purchaser, for the privilege of using the property in California. See MCI Communications Services, Inc. v. California Dept. of Tax & Fee Administration (2018) 28 Cal.App.5th 635, 642. Sales and use taxes are mutually exclusive, so either can apply to a single transaction, but not both.

Although the rate is the same, the significant difference is that the “legal incidence of use tax is on the buyer.” Loeffler, at 1104, fn. 5. The retailer, however, is required to collect it from the buyer and remit it to the state.

Sales and Use Tax as Applied to Leases

In 1965, the Legislature amended the tax code to expressly subject certain leases of personal property to sales and/or use tax. See i.e., § 6009, 6390, 6006.1, 6010.

Regulation 1660(c)(1) specifically addresses the situation where a lessee is an insurer that is constitutionally exempt from paying use tax. It provides in pertinent part:

(1) Nature of Tax. In the case of a lease that is a ‘sale’ and ‘purchase’ the tax is measured by the rentals payable. Generally, the applicable tax is a use tax upon the use in this state of the property by the lessee. The lessor must collect the tax from the lessee at the time rentals are paid by the lessee…. [¶]

When the lessee is not subject to use tax (for example, insurance companies), the sales tax applies. The sales tax is upon the lessor and is measured by the rentals payable.” (Italics added.)

Regulation 1660(c)(1) is Not Unconstitutional

Analyzing the pertinent legislation, above, the Court determined that Regulation 1660(c)(1) is not unconstitutional.

First American contended that the taxing scheme violated Article XIII, section 28(f) because it “transformed” use tax into sales tax and attempted to accomplish the same outcome that the California Constitution prohibited – insurer paying sales (or use) tax.

In Occidental Life, a life insurance company sought a refund for sale tax reimbursement it had paid on personal property. The court rejected the insurance company’s argument and held that the imposition of sales tax on retail sales of personal property to insurance companies did not violate Article XIII, section 28(f). Occidental Life Ins. Co. v. State Bd. of Equalization (1982) 135 Cal. App. 3d 845, 185.

The Court of Appeal concluded that Occidental Life was legally indistinguishable from First American, “that is, whether the California Constitution forbids imposing sales tax on “sales” of personal property to insurance companies. Occidental Life holds that the legal incidence of sales tax imposed under Regulation 1660(c)(1) is on the seller (or here, the lessor). Under Occidental Life, that the lessor passed the economic burden of sales tax to First American does not make First American the taxpayer.” First American, at 615.

In rejecting First American’s argument that the distinction between legal and economic incidence of sales tax could be “artificial,” it relied upon a long and unbroken line of California precedent that recognizes the distinction as legally significant.

First American also argued that even if Regulation 1660(c)(1) is constitutional, it is void because it conflicts with Revenue and Taxation Code section 6203, subdivision (b), which provides: “As respects leases constituting sales of tangible personal property, the tax shall be collected from the lessee at the time amounts are paid by the lessee under the lease.” It claimed that this section prevented the state from switching tax on personal property leases from use tax to sales tax. The Court of Appeal rejected this argument, citing two California Supreme Court decisions that construed section 6203 differently. Further, First American’s argument ignored that section 6203 is in a part of the Sales and Use Tax law that deals only with use tax.

The Court of Appeal therefore reversed the judgment of the superior court. 


This opinion underscores the unsurprising fact that there are few, if any, situations where a tax collector will walk away from an arguable taxable transaction empty handed. Even though the insurance companies in First American and its progeny were in actuality paying tax that the California Constitution prohibits, courts consistently ruled in favor of the taxing authority on grounds that the distinction between legal and economic incidence is paramount.

These materials were written by Maggie E. Schroedter of Robberson Schroedter LLP, in San Diego, California ( Editorial contributions were provided by Summer Shaw of Shaw & Hanover, PC, in Palm Desert, California ( 

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