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Business Taxes Law Guide—Revision 2024
Sales And Use Tax Court Decisions
A B C D E F G H I J K L M N O P R S T U V W Y
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Kaiser Steel Corporation v. State Board of Equalization … (1979)
King v. State Board of Equalization … (1972)
Knudsen Dairy Products Co. v. State Board of Equalization … (1970)
Kuykendall v. State Board of Equalization … (1994)
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"Primary Purpose" Test Found Valid in Determining Taxability of Raw Materials Used in Manufacturing Process
Plaintiff, a manufacturer and producer of steel, pig iron and other products, purchased certain materials to charge its furnaces and remove impurities from the molten metal. The removal of impurities is accomplished by combining them with the materials to form slag. Portions of the materials were incorporated into the steel to achieve a specific quality; portions incidentally remained in the finished steel; portions were dissipated or lost in the manufacturing process; and portions became components of the slag. An independent company, which removed the slag and reprocessed it, paid plaintiff 1 cent for each ton removed and a 10 percent royalty on the net sales price of the reprocessed slag. After plaintiff either paid sales tax reimbursement on the materials or purchased them under a resale certificate and later paid use tax, it filed a claim for refund with the Board. The Board's position was that plaintiff purchased the materials for a purpose other than resale, namely to aid in the manufacture of steel. Plaintiff argued that the materials were properly purchased for resale in the form of slag, a by-product in the manufacture of steel.
The Supreme Court, relying on Sales and Use Tax Regulation 1525 and the applicable Sales and Use Tax Annotations, upheld the trial court's finding that plaintiff's "primary purpose" for purchasing the raw materials determines the application of tax. The court found the Board's conclusion that plaintiff purchased the materials to aid in manufacturing steel was reasonable, and held that if property is purchased as an aid in the manufacturing process, it is taxable despite some portion remaining in the finished product or an incidental waste or by-product results. Kaiser Steel Corporation v. State Board of Equalization (1979) 24 Cal.3d 188.
Contract for Construction of Electrical Power Transmission Line Taxable as a "Construction Contract"
Taxpayer had been assessed tax on its labor charge in erecting and fastening electrical power transmission lines to towers furnished by the power authority and installed by the contractor, and on charges for conductors, insulators, and hardware supplied by taxpayer. The Board, relying on ad valorem property tax rulings, characterized the line as "tangible personal property," and thus regarded the labor as taxable "fabrication labor" under Revenue and Taxation Code Section 6006(b), which provides that "sale" includes the fabrication of tangible personal property for a consumer who furnishes the materials.
The court found the Board's reliance on the property tax provisions to be misplaced, since there was no relationship between the property tax and sales tax provisions. In affirming the trial court's decision that tax applied to the tangible components but did not apply to that portion of the contract price attributable to labor, the court held that the transaction in question did not have the statutory characteristics of a "sale" but was taxable as a "construction contract" under regulation 1521. Tax was thus inapplicable to the contractor's labor charges. The court also held that taxpayer's defense of limitations was untimely, since the defense was not raised in taxpayer's claim for refund filed with the Board. Further, the facts did not establish an estoppel against the Board with respect to the application of interest and penalties, since the Board consistently took the position that the transaction was taxable as a "sale." King v. State Board of Equalization (1972) 22 Cal.App.3d 1006.
Related Corporation Subject to Liability as Successor
Taxpayer had made substantial sales on credit to a debtor corporation which subsequently became unable to remain current in its obligations. To avoid a loss, taxpayer acquired ownership of the outstanding stock of the debtor corporation and then directed the debtor corporation to transfer its operation assets to a wholly-owned subsidiary of taxpayer. The subsidiary issued a promissory note to taxpayer equivalent to the value of the assets which it received. Taxpayer then credited the debtor corporation, as reduction of its indebtedness, in the amount of the note.
An audit of the debtor corporation disclosed additional taxes due on sales made prior to its liquidation into the subsidiary. The amount was assessed against the subsidiary, as successor, by authority of Section 6812 of the Revenue and Taxation Code which imposes a liability upon any "purchaser of a business [who] fails to withhold purchase price" sufficient to cover any amount owed by the seller of the business under the Sales and Use Tax Law. The court, in holding that the subsidiary was properly liable for tax liabilities of the debtor corporation arising prior to the transfer of the assets, concluded that the fact that the purchase price did not flow directly to the seller was immaterial, noting that to hold otherwise would permit a taxpayer to avoid liability by the simple device of having the purchase price paid through an intermediary. Further, in the circumstances of present day business practice, it would be illogical to hold that a "purchase price" must take the form of cash or tangible personal property. Knudsen Dairy Products Co. v. State Board of Equalization (1970) 12 Cal.App.3d 47.
Statutory Procedure for Refund of Unconstitutionally Imposed Sales Tax Is Valid
Plaintiff commenced a class action against defendants State Board of Equalization and San Diego County Regional Justice Facility seeking a refund of sales taxes in the wake of a decision by the California Supreme Court declaring a local sales tax in San Diego as unconstitutional. Following the Court’s decision, the Board announced a plan for refund claims to be made through the San Diego retailers who had transferred the Jail Tax moneys to the Board. Plaintiffs commenced the consumer class action for refund, seeking direct reimbursement of the Jail Tax moneys to the consumers who effectively paid the tax. The trial court granted plaintiffs’ summary judgment finding that they the taxpayers, and ordered defendants to submit a plan to refund the taxes; however, during the pendency of the litigation, the legislature enacted California Revenue and Taxation Code section 7275 et seq. (SB 263), which, by its terms, constituted the sole manner of obtaining refunds.
The appellate court found that the trial court's judgment created no vested rights and that the legislature clearly intended the statutory scheme to apply to the pending litigation. The court of appeal further found that article XIII, §32, of the California Constitution, gave the legislature plenary power to create the refund scheme through statute and that the statute was not unconstitutional although it created different classes of taxpayers and although its ends might have been achieved through different means. Kuykendall v. State Bd. of Equalization (1994) 22 Cal.App.4th 1194.