Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2021
Sales And Use Tax Court Decisions
Sales of Manufacturing Plants Not "Occasional Sales"
Plaintiff purchased two manufacturing plants and agreed to be responsible for any sales tax ultimately found to be due on those transactions. Plaintiff paid the tax, and then sued for refund contending that the sales were exempt "occasional sales" as defined in Section 6006.5(a). This section defines an "occasional sale" as a sale of property not held by a seller in the course of activities for which he is required to hold a seller's permit. "Seller" is defined in Section 6014 as every person engaged in selling tangible personal property of a kind the gross receipts from the retail sale of which are required to be included in the measure of the sales tax. Section 6066 requires all sellers to hold seller's permits.
Plaintiff's vendors held seller's permits, but prior to the sales of the plants, all sales of manufactured products had been made to distributors for resale at retail. No prior sales of manufacturing equipment had been made. Plaintiff claimed that the vendors were not sellers within the meaning of the law and that the sales of the plants were therefore exempt occasional sales. Plaintiff relied on Glass-Tite Industries, Inc. v. State Board of Equalization (1968) 266 Cal.4th 691, in which a manufacturer was found not to be a seller.
The court upheld the Board, distinguishing Glass-Tite on the basis that the products in Glass-Tite were unsuitable for sale at retail and were not property of a kind the gross receipts from the retail sale of which were taxable. The products of plaintiff's vendors were of a kind the retail sale of which were taxable; thus, the vendors were sellers under the law. The sales of the plants were therefore sales of property held in the course of activities for which seller's permits were required, so they were not "occasional sales."
Plaintiff also argued that its vendors were not retailers and so were not subject to tax because Section 6051 imposes sales tax only on retailers. The court held, however, that the vendors were "retailers" under Section 6015, which defines "retailer" as including any seller who makes a retail sale. The court stated that Section 6019, which provides that a person making more than two retail sales in a 12-month period shall be considered a retailer, supplemented rather than replaced or constricted Section 6015. Davis Wire Corp. v. State Board of Equalization (1976) 17 Cal.3d 761.
Use Tax Imposed on Leases of Property Purchased from Bankruptcy Estate Does Not Interfere with Process of Bankruptcy Court
Taxpayer was in the business of selling and leasing property purchased from a bankruptcy trustee liquidating a bankruptcy estate. The Board issued determinations for payment of the use tax on rental receipts derived from taxpayer's leases of livestock and equipment purchased from the trustee.
The Court of Appeal upheld the tax, holding that a use tax on rental receipts derived from leases of livestock and equipment purchased from a bankruptcy trustee did not constitute an unlawful interference with the process of the bankruptcy court. Debtor Reorganizers, Inc. v. State Board of Equalization (1976) 58 Cal.App.3d 691.
Tax Does Not Apply to Sale of Optional Computer Service Contracts
The court concluded that the optional service contracts were not taxable. The service contracts were not tangible personal property and were not part of the sale of computers, but a separate object of the transaction at a readily ascertainable value. While the company's computers and service contracts were sold concurrently for an aggregate price, they were distinct consumer items and each was a significant object of the transaction. The service contracts had readily ascertainable values, even without itemized invoices.
The court rejected the argument made by both the company and real party in interest tax agency that taxation of the service contracts was proper because the company sold its computers and service contracts for a single lump-sum price, without a separate statement on the invoice of the charge for the service contract. The agency could not decree that the exclusive means to establish a tax exemption for the service contract sold together with a computer was that the service contract's value be separately stated on the retailer's invoice, absent a statute, regulation, or consistent administrative interpretation of the laws mandating a separate statement of value. Dell, Inc. v. Superior Court (2008) 159 Cal.App.4th 911.
Offset of Fuel Tax Overpayment Must Be Claimed In a Timely Manner
Taxpayer is a common carrier subject to sales tax imposed by California law on fuel used by common carriers while conducting the business of interstate transportation. The fuel necessary to reach the common carrier's first out-of-state destination is subject to sales tax, while the remainder of the fuel used for transportation is exempt. Taxpayer reported the amount of fuel subject to the tax based on estimates, and the Board verified the accuracy of the estimates by requiring a five-day test of actual fuel consumption. The Board applied the five-day test period results to bills of lading filed by taxpayer, and credits for overpayments of tax as measured by the test results were offset against charges for underpayments of tax, as also measured by such results. However, in November 1977 the Board amended its Sales and Use Tax Regulation 1621(d)(1) to require that changes of "estimated" fuel consumption to actual fuel consumption be made within the appropriate reporting period. Taxpayer failed to observe the time requirements and the Board assessed additional sales tax where underpayments were found, but did not allow offsets for overpayments. Taxpayer filed a claim for refund, arguing that it was unfair for the Board to abandon its prior practice of taking into account both overpayment and underpayment. The trial court awarded taxpayer the overpayments.
The court of appeal held for the Board and upheld the validity of Regulation 1621. The regulation had a clear purpose (to facilitate the collection of sales tax by keeping payment of the tax as current as possible), set forth with particularity what was required to claim the exemption, and was not unreasonable. The court found that the relationship between the procedure established by Regulation 1621 and the legitimate objectives of the Board was evident. The court also found that taxpayer, as the real party in interest, had standing to bring the action for refund, even though the tax was paid by the vendors of the fuel and not the common carrier. Delta Air Lines, Inc. v. State Board of Equalization (1989) 214 Cal.App.3d 518.
Sales to National Banks for Prior Periods Not Subject to Tax
Plaintiffs were the sellers of business forms to a chartered national bank and the bank itself. The Board had collected sales tax from the sellers on sales of printed forms and other personal property to the bank. Plaintiffs contended that the legal incidence of the tax was on the bank and that, since the bank was exempt from the payment of sales tax under federal and state law, tax could not be applied to the sales. Despite uniform interpretation by California courts that the incidence of the sales tax is on the seller, the United States Supreme Court reversed the California Court of Appeal and found that the incidence of tax fell illegally upon the purchasing national bank. (The federal law was changed effective after the period involved in the case to permit the application of tax to sales to national banks.) Diamond National Corp. v. State Board of Equalization (1976) 425 U.S. 628, 47 L.Ed.2d 780.
Federal Tax Injunction Act Does Not Bar Out-of-State Retailers from Challenging an Obligation to Collect Use Tax from Customers
Plaintiff was a trade association whose members engaged in direct mail advertising and marketing of products for sale. A majority of plaintiff's members were mail houses located outside California that accepted orders for products by mail or telephone for shipment to customers inside the state. The Board required many of plaintiff's out-of-state members selling products to California residents by use of credit cards issued by California financial institutions to register as retailers engaged in business pursuant to former section 6203(f). That former section deemed a person engaged in business inside California where, among other things, it made substantial and recurring solicitations for orders by mail and benefited from any banking or financing activities occurring inside the state. The federal district court dismissed the action on the basis that the Tax Injunction Act barred the proceedings in federal court.
The Court of Appeals reversed, holding that the Tax Injunction Act did not bar plaintiff from relief since it was not entitled to a "plain, speedy and efficient remedy" in a state court. The court found that plaintiff lacked a state remedy for two reasons. First, plaintiff could not make a claim for refund of tax since its customers, and not plaintiff, were liable for the use tax. Second, the court found that a remedy was not available because the Board had not yet issued a determination. The issuance of a determination was speculative and did not create certainty that a remedy would be available to plaintiff. Direct Marketing Ass'n, Inc. v. Bennett (9th Cir. 1990) 916 F.2d 1451.
Alterations of New Clothing Are Taxable as Fabrication Labor
Plaintiff, a dry cleaning and tailoring shop, altered new clothing for customers who had purchased the clothing elsewhere and had not worn the clothing except for trying on or fitting. The Board estimated and determined tax on the alteration charges as fabrication labor under Revenue and Taxation Code section 6006(b) and Regulation 1524. The plaintiff filed an action for refund, and the trial court entered judgment for the plaintiff.
The court of appeal reversed and held in favor of the Board. The court held:
(1) Charges for alterations to new clothing, furnished by the customer, constituted a step in the producing or fabricating of a product and were therefore taxable as sales.
(2) Fabrication labor is taxable even though the taxpayer, rather than the customer, furnished economically insignificant materials, such as thread, to assemble or hold together the materials supplied by the customer.
(3) A transfer of title to tangible personal property is not necessary to constitute a taxable sale under section 6006(b).
(4) The phrase "new clothing" in Regulation 1524 is not unconstitutionally vague; the regulation itself, the Board's rulings, and judicial construction of section 6006(b) gave taxpayer reasonable notice that he would be liable for sales tax.
(5) Taxpayer failed to exhaust his administrative remedies when he refused to cooperate with the Board in arriving at a fair calculation of tax due. Duffy v. State Board of Equalization (1984) 152 Cal.App.3d 1156.