Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales And Use Tax Court Decisions

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Garg; People v. . . . (1993)

Garg v. State Board of Equalization . . . (1997)

General Business Systems, Inc. v. State Board of Equalization . . . (1984)

Good Shepherd Lutheran Home of the West v. State Board of Equalization . . . (1983)

Gough Industries, Inc. v. Rothman . . . (1971)


Suit to Collect Taxes Untimely Because Not Filed within Three Years After the Tax Had Become Delinquent

In June 1982, the Board issued a demand for immediate payment against taxpayer for tax due on the purchase of an aircraft. The Board recorded a notice of state tax lien in San Diego County on February 1, 1989 and filed a suit to collect taxes on June 19, 1990. The issue was whether the Board timely filed its suit to collect taxes.

The court held that Revenue and Taxation Code section 6711 allows the state to bring an action in personam (i.e., an action to establish personal liability of taxpayer) within three years after the tax becomes due and payable and after delinquency, but no later. The reference in the statute to the period during which a recorded lien is in effect is for an action to enforce a lien, not for an in personam action. Since the Board brought the suit to collect taxes more than three years after the delinquency, the suit was not timely. People v. Garg (1993) 16 Cal.App.4th 357.

Attorney's Fees Awarded under the Taxpayers' Bill of Rights Should Not Be Offset Against Taxes Owed

In a Board-initiated action for collection of a tax lien, the trial court held in favor of taxpayer based on the statute of limitations. The court awarded attorney's fees to taxpayer under Revenue and Taxation Code section 7156, based on its finding that the Board's action was not substantially justified. The Board offset the court-ordered attorney's fees against the outstanding liability. Taxpayer filed suit, claiming in part that the action was for refund of tax.

The Court of Appeal agreed with the Board that the trial court lacked jurisdiction to decide the matter as a refund of tax because "the California Constitution forbids a court from adjudicating the validity of a tax before the tax, together with interest and penalties, has been paid in full." However, the appellate court held that litigation costs awarded under section 7156, a part of the Taxpayers' Bill of Rights, are not an ordinary debt to taxpayer which can be offset under Government Code sections 12419.4 and 12419.5. Garg v. State Board of Equalization (1997) 53 Cal.App.4th 199.

Sales of Custom Computer Programs Were Nontaxable Services

Taxpayer transferred custom computer applications programs to its customers on punched cards between 1972 and 1976. The Board imposed sales tax on these sales under Sales and Use Tax Regulation 1502(f)(2) because the computer programs were transferred on tangible storage media, the punched cards which customers used to install the programs on their computers. The trial court ordered the Board to refund the taxes paid.

The court of appeal affirmed, and held that Regulation 1502(f)(2) was void as in excess of the Board's statutory authority. Revenue and Taxation Code Section 6010.9, enacted in 1982, provided that transfers of custom computer programs on tangible storage media are neither sales nor purchases under the Sales and Use Tax Law. The Legislature further declared that transfers of custom programs were non-taxable services, and that section 6010.9 was declaratory of existing law. The court held that the 1982 legislation supports the conclusion that the true object of the transfer of the custom programs on punched cards was the performance of services by the taxpayer. General Business Systems, Inc. v. State Board of Equalization (1984) 162 Cal.App.3d 50.

Thrift Shop Did Not Qualify for Exemption

A charitable organization which operated several thrift shops brought a suit for refund of sales tax paid to the Board of Equalization on sales at its shops. It was the Board's position that the organization did not qualify for the exemption provided to charitable organizations pursuant to Section 6375 of the Revenue and Taxation Code because the organization had not received a property tax exemption pursuant to Section 214 of the code. The trial court granted judgment in favor of the Board.

The court of appeal affirmed, holding that the organization had not met its burden of showing that the sales in question were made "as a matter of assistance to the purchasers" as required by Revenue and Taxation Code Section 6375. The court noted that the organization's statement that the sales were made to the general public, without any indication of what prices were charged or what prices were lower than those charged for comparable products by retailers, resulted in the organization not qualifying for the welfare exemption. Good Shepherd Lutheran Home of the West v. State Board of Equalization (1983) 139 Cal.App.3d 876.

Tax Claims in Arrangement Proceeding

The Board sought to collect postpetition interest and pre- and postpetition penalties for late payment of sales tax from petitioner, who had reorganized pursuant to a plan of arrangement filed under Chapter XI of the Bankruptcy Act. Petitioner took the position that under the plan the interest and penalties were the obligation of the debtor estate; that certain postpetition sales tax credits resulting from the writeoff of bad debts were properly the property of petitioner, not the estate; and that postpetition penalties and interest were the obligation of the estate, in any regard, since the receiver was dilatory in paying the underlying obligations.

The court upheld the finding of the referee that the amounts in question were the obligation of the petitioner. The court held that the plan of arrangement did not purport to allow payment of the obligations in question; that under the Bankruptcy Act allowances for prearrangement penalties and postpetition interest are precluded, as are allowances for postpetition penalties in instances where the penalties cannot be prevented without payment of prepetition penalties; and that the instant obligations were not classed as expenses of the administration under the plan.

The court further held that the right to the tax credits properly passed with the underlying receivables, which passed under the plan of arrangement to the estate, since under Revenue and Taxation Code Section 6901, the credits were payable to the person who paid the excess tax amount. The receiver was not liable for the postpetition penalty and interest due to his failure to pay the tax promptly, since he could not legally pay the postpetition penalty in any regard and since the record did not clearly indicate that the receiver's delay was due to factors other than those inherent in bankruptcy proceedings. Gough Industries, Inc. v. Rothman (9th Cir. 1971) 446 F.2d 536, cert. den. (1972) 405 U.S. 916.