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Business Taxes Law Guide—Revision 2024

Sales And Use Tax Court Decisions


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United States v. California State Board of Equalization … (1981)


Sales Tax Unconstitutional when Imposed on Leases to United States

The Board imposed sales tax on lessors for leases of equipment to the United States beginning January 1, 1979, under applicable law which provides that the sales tax applies when the lessee under a lease is exempt from the use tax.

The United States sought declaratory and injunctive relief, and a refund of sales taxes paid by its lessors to the Board. The U.S. District Court entered judgment in favor of the United States. The U.S. Court of Appeals, Ninth Circuit, affirmed, holding that the legal incidence, not just the economic burden, of the sales tax is placed on the United States and therefore violates the United States' constitutional immunity from state taxation.

Even though the sales tax is paid by the lessors, not the United States, under these leases, and even though Civil Code section 1656.1 is facially neutral because it provides that whether the buyer reimburses the seller for the sales tax depends on the agreement of the parties, the California sales tax scheme provides a strong economic incentive (and manifests a legislative intent) for the lessors to collect the sales tax from the United States. This is because the lessor must pay more to the state in taxes if he absorbs the tax himself and passes the economic burden on as an increase in price, than if he collects the tax from the United States. United States v. California State Board of Equalization (9th Cir. 1981) 650 F.2d 1127, affd., 456 U.S. 901 (1982).