Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales And Use Tax Court Decisions

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Burroughs Corp. v. State Board of Equalization . . . (1984)

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.