Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales And Use Tax Court Decisions

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Furnishing of Beverage Dispensing Units Is Lease Rather Than Service

Plaintiff sued for refund of taxes paid to the Board which were based on charges to users of plaintiff's equipment and services. Plaintiff manufactured beverage dispensing units used by bartenders and others to dispense mixed drink ingredients at bars and similar business places. The contracts between plaintiff and individual users called for plaintiff to install the dispensers and to provide maintenance and repair service throughout the life of the agreement. A flat monthly charge was made to each user for the use of the dispenser and for the maintenance and repair service, regardless of the amount of service actually required. Plaintiff claimed that the charge was for services and was thus exempt from tax.

The court of appeal, relying on Culligan Water Conditioning v. State Board of Equalization (1976) 17 Cal.3d 86, reversed the trial court and upheld the Board in finding that to plaintiff's customers, the true object of the contract was to obtain the use of the dispenser. The contract, regardless of the wording, was therefore a contract for the lease of tangible personal property, rather than a contract for services, and the receipts were subject to tax. Bar Master, Inc. v. State Board of Equalization (1976) 65 Cal.App.3d 408.

Failure to Exhaust Administrative Remedies Is Jurisdictional Bar

Plaintiff filed a complaint for declaratory relief and a refund of sales and use tax, alleging he had erroneously overpaid such taxes and had filed a claim for refund, which had been denied, with the State Board of Equalization. Plaintiff also alleged that certain statutes and regulations were unconstitutional in that they imposed sales and use taxes discriminating against the United States and contractors, including plaintiff, who dealt with the United States. The Board moved for summary judgment on the ground that plaintiff had failed to allege facts constituting a cause of action and had failed to exhaust its administrative remedies. The trial court granted the motion.

The court of appeal affirmed. The court held plaintiff failed to exhaust its administrative remedies and had refused to present factual documentation of its claim for tax refund to the Board so that it could render a decision on the merits of plaintiff's claim. The failure to exhaust the administrative remedy available to plaintiff was a jurisdictional bar to court proceedings, so no issues of fact could be decided by the trial court. The court held that under these circumstances it was not incumbent on the trial court to rule on any of plaintiff's allegations involving the invalidity of any statutes relating to sales or use taxes or any administrative regulations relating thereto, under either state or federal law. Barnes v. State Board of Equalization (1981) 118 Cal.App.3d 994.

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Assumption of Liabilities Constitutes Consideration

Plaintiff corporation created a subsidiary and transferred to it all the assets of one of plaintiff's divisions. In exchange for those assets, the subsidiary issued 9,000 shares of the subsidiary's stock to plaintiff and assumed substantially all of the liabilities of the former division.

The Supreme Court held that even if the plaintiff remained primarily and jointly liable for debts and obligations assumed by its subsidiary, the assumption of liabilities by the subsidiary was consideration as between the transferor (the plaintiff) and the transferee (the subsidiary). Since the transfer was for consideration, it was a sale subject to sales tax. Beatrice Co. v. State Board of Equalization (1993) 6 Cal.4th 767.

Tax Applies to Separately Stated Transportation Charges if Transportation Is Not from Retailer's Place of Business Directly to the Purchaser

Plaintiff sold women's apparel through "home fashion parties" where an agent of plaintiff solicited orders for merchandise. The parties were held at the homes of "hostesses" recruited by the agent. The hostesses received merchandise awards based on sales. A standard delivery charge was added to each order. The hostesses collected for the orders and delivered the merchandise to the individual purchasers. All orders from a single party were sent by plaintiff to the hostess of that party. Section 6011 of the Revenue and Taxation Code permits retailers to exclude from the taxable sales price separately stated charges for shipment from the retailer's place of business directly to the purchaser.

Plaintiff was assessed tax on the delivery charges on the basis that delivery was not directly to the purchaser as required by the statute. Plaintiff paid the tax and sued for refund, contending that delivery was directly to a place specified by the purchaser as required by the Board's Ruling No. 58, then in effect. The court of appeal affirmed the trial court in finding that the hostesses were paid representatives of plaintiff and that the shipments could not therefore be said to be deliveries directly to the purchaser within the meaning of the statute, nor directly to a place designated by the purchaser within the meaning of the Board's regulation. Beline Fashions, Inc. v. State Board of Equalization (1976) 56 Cal.App.3d 389.

Online Retailer Must Collect and Remit Use Tax

Borders Online (Online), which has no California locations, took orders over the Internet and shipped the purchased items to California consumers from outside the state. Those purchasers could return the items to any Borders Books and Music Store (Borders) for an exchange or credit card refund. Online and Borders were separate but related companies. The court held that, although there was no written agreement between the two, Borders acted as Online's representative in California for purposes of accepting returns from Online's California purchasers. The court further held that the acceptance of returns for Online was a selling activity under Revenue and Taxation Code section 6203. Online was therefore a retailer engaged in business in California, and required to collect the applicable California use tax from its purchasers and remit the tax to the Board. The court held that Online had substantial nexus with California, and that requiring Online to collect and remit the use tax does not violate the commerce clause of the United States Constitution. Borders Online, LLC v. State Board of Equalization (2005) 129 Cal.App.4th 1179.

Taxpayer Has Burden of Proving that Primary Purpose of Purchase Is Nontaxable

Plaintiff Burroughs Corp. manufactured certain computer components ("captive" components) and used them in testing other newly manufactured computer equipment. Burroughs later refurbished the captive components, sold or leased them at full value, and paid or collected sales or use tax on the sale and leases. The Board also imposed use taxes on Burroughs' purchases of the materials from which the captive components were manufactured. In Burroughs' action for refund of the use taxes paid, the trial court granted judgment in favor of the Board.

The court of appeal affirmed, holding that the "primary purpose" test applies. If Burroughs' primary purpose in manufacturing the captive components is to test other components, this is a taxable use. If the primary purpose is to prepare the captive components for resale, this is an exempt use.

Burroughs did not carry its burden of proving that its primary purpose in purchasing the materials used to manufacture the captive components is to sell or lease the components. Neither the manufacturing objective (testing) nor the marketing objective (resale) is the one primary purpose. Use tax therefore applies to the purchase of the materials, even though tax also later applies to the sales or leases of the components. Burroughs Corp. v. State Board of Equalization (1984) 153 Cal.App.3d 1152.

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