Laws, Regulations & Annotations
Business Taxes Law Guide – Revision 2013
Sales And Use Tax Court Decisions
The Board filed a proof of claim for unpaid taxes in the Debtors' chapter 13 bankruptcy case. The Debtors objected to the Board's claim. The bankruptcy court set the issue of the claim's secured status for an evidentiary hearing. The Debtors' case converted to chapter 7 before the evidentiary hearing. After the Debtors received their discharge, the Board commenced collection action. The Debtors filed an adversary complaint seeking a judgment that would discharge their tax debt. The Board asserted its Eleventh Amendment sovereign immunity and moved for judgment on the pleadings. The bankruptcy court denied the motion. The Bankruptcy Appellate Panel affirmed and the Board appealed to the Ninth Circuit. The Ninth Circuit, citing the rule of Gardner v. New Jersey, 329 U.S. 565 (1947) , held that when a state files a proof of claim, it waives its sovereign immunity with respect to adjudication of that claim. Furthermore, the scope of the waiver extends to claims that arise from the same transaction or proceeding, so the bankruptcy court had jurisdiction to determine the dischargeability of the debt. State Board of Equalization v. Harleston (In re Harleston), 331 F.3d 699. (2002).
Plaintiffs were restaurant owners who also operated drive-ins providing carhop services. They sought to recover sales and use taxes paid by them on sales of "take-out" orders. Such orders are taxable under subparagraph (c) of Section 6359 of the Revenue and Taxation Code when the food is purchased at a drive-in type of operation, whether or not it is consumed on the premises, although "take-out" orders at conventional restaurants are exempt. The drive-in operators argued that subparagraph (c), and the Board's administration thereof, was unconstitutionally vague, and arbitrarily discriminated between drive-ins and conventional restaurants.
The court of appeal, in holding the provision constitutional, found that the distinctions made in the statute had a rational basis in the Legislature's desire to equalize competition and tax burdens between conventional restaurants and newly evolving forms of eating establishments where food was consumed in a similar manner, whether inside one's own car or inside a restaurant. The court also found that the statute prescribed a standard sufficiently definite to be understandable to the average person desiring to comply therewith. Henry's Restaurants of Pomona, Inc. v. State Board of Equalization (1973) 30 Cal.App.3d 1009.
Taxpayer sold tangible property to a state-chartered bank and collected sales tax reimbursement from the bank. Both taxpayer and the bank filed suits for refund of the sales taxes on the sales. Although for federal purposes the legal incidence of the sales tax fell on a national bank meaning that sales to national banks were immune from sales tax prior to 1969 federal legislation, the Court of Appeal held that for state purposes the legal incidence of the sales tax falls on the retailer, not the state bank, even though the economic burden is borne by the bank. The court also held that the California Constitution, Article Xlll, former Section 16 (now net income tax), does not prohibit sales taxes levied on retailers' sales to state banks, even though sales to national banks were not similarly taxed. Hibernia Bank v. State Board of Equalization (1985) 166 Cal.App.3d 393.
Plaintiff, who furnished and installed air conditioning control systems under lump sum contracts, claimed that Regulation 1521 and General Bulletin 67-8, distinguishing for sales tax purposes between fixtures and materials incorporated into structures, are vague, uncertain, ambiguous, conflicting, and unreasonable, and are also in conflict with Regulation 1615, which deals with the United States government contractors.
Regulation 1521 provides that construction contractors are consumers of materials and retailers of fixtures which they furnish and install in the performance of construction contracts. Where the contractor is the manufacturer of the fixtures, the retail selling price is considered to be the prevailing price at which similar fixtures in similar quantities ready for installation would be sold to contractors. General Bulletin 67-8 deals with the measure of tax on fixtures installed by manufacturers under lump sum construction contracts. Plaintiff claimed that the correct measure of tax is the cost to plaintiff of only the materials in the devices used in air conditioning control systems that it installs, because these systems become an integral and inseparable part of the completed structure.
The court, noting that plaintiff manufactures and sells air conditioning control devices that are packaged ready to install and that these devices can be individually and readily removed without damage to the building, stated that it is within the power of the Board to determine that such devices are fixtures rather than materials. Plaintiff argued that the tax result where the manufacturer installs the device and the sale price of the device and the charge for installation services are stated together should differ from the tax result of the sale of the device alone. The court stated that such commingling may present an accounting problem of segregation, but the legal tax consequences do not change. The court also held that in furnishing and installing the fixtures, plaintiff was a retailer and was not making sales to contractors for resale by them.
In a subsidiary issue, the court held that failure of the Board to act on a claim for refund within six months could be treated by plaintiff as a denial of the claim for purposes of instituting an action. Honeywell, Inc. v. State Board of Equalization (1975) 48 Cal.App.3d 897.
Plaintiffs, who manufactured and installed elevators or temperature control systems, sought a declaratory judgment that Regulation 1521 was arbitrary and ambiguous and therefore void as applied to transactions that plaintiffs had entered into for the installation of their products. Regulation 1521 provides that construction contractors are consumers of materials and retailers of fixtures which they furnish and install in the performance of construction contracts.
Plaintiffs also contended that the regulation was discriminatory since it distinguished between contractors generally and United States government contractors in the application of tax.
While the court stated that a taxpayer may test the validity of a tax regulation by an action for declaratory relief before he has acted so that he may govern his conduct accordingly, it seriously questioned whether such an action is appropriate after a taxpayer has entered into a transaction which the taxing authorities claim is taxable. Granting such relief would appear to circumvent Section 6931 of the Revenue and Taxation Code which prohibits the granting of an injunction or writ of mandamus to prevent the collection of tax.
The court went on to uphold the validity of Regulation 1521, stating that any difficulty in drawing lines stemmed from problems inherent in the basic legal concept of fixtures. The uncertainty in drawing a line between fixtures and materials justifies a process of initial administrative determination subject to judicial review, since it is better to resolve gray areas, no matter how laborious the effort, than to allow retail sellers of fixtures to escape their fair share of tax.
The court also held that since the United States government has a unique taxable status, a rule is not necessarily invalid just because it distinguishes between contractors generally and United States government contractors. Honeywell, Inc. v. State Board of Equalization (1975) 48 Cal.App.3d 907.
In an action by a taxpayer against the State Board of Equalization seeking refunds of sales and use taxes paid on leases of certain equipment, the trial court ruled that the taxpayer had the burden of providing that its lessees had paid the use tax.
The court of appeal affirmed, holding that the trial court had properly placed the burden on plaintiff to prove that the lessees had paid the use tax on the leased property and that the Board had properly determined the tax due on fixtures installed by plaintiff under lump sum construction contracts on the basis of the "transfer cost" of such fixtures as set forth in documents prepared by plaintiff for its use in bidding on the construction contracts, since similar fixtures were not sold to contractors on the open market. The court also held the trial court had properly found that plaintiff had not established by a preponderance of admissible evidence that certain sales it had made were in fact for resale. The court also held that the trial court properly found plaintiff failed to meet its burden of showing nontaxability as to the purchase of tangible personal property from an out-of-state manufacturer. Honeywell, Inc. v. State Board of Equalization (1982) 128 Cal.App.3d 739.
In 1991, the Legislature passed the Educational Financing Act, authorizing the San Francisco Unified School District and the San Francisco Community College District to create the Educational Financing Authority (EFA), for the general purpose of providing financial assistance to each school district within the city and county. The Act authorized the EFA to impose a sales tax by an ordinance approved by majority vote. Such an ordinance was approved by a majority (but less than two-thirds) of the qualified electors voting.
Plaintiffs asserted that the tax was unconstitutional under Article XIII A, section 4 of the California Constitution (Proposition 13), which requires that special taxes by special districts be approved by two-thirds of the qualified electors voting on the measure. The court of appeal held that school districts are special districts within the meaning of Proposition 13, and that a taxing agency such as the EFA, created and controlled by school districts, is a special district. The court of appeal also held that the tax at issue was a special tax. Therefore, the EFA needed two-thirds voter approval before imposing a one-quarter of one percent transactions and use tax. Since the tax did not get such a supermajority vote, the tax imposed was invalid. Hoogasian Flowers, Inc. v. State Board of Equalization (1994)
23 Cal.App.4th 1264.
Plaintiff sold its entire interest in the assets, fixtures, and property of a hotel it operated. Sales tax was assessed, measured by the sales price of the tangible personal property, including hotel furniture and fixtures transferred as part of the sale. Plaintiff operated a hotel, restaurant, bar, and smoke shop and had made numerous "salvage sales" of property of the type disposed of in the final sale. Plaintiff contended that the sale of its capital assets qualified as an "occasional sale" within the meaning of Section 6006.5(a) of the Revenue and Taxation Code and was thus exempt under Section 6367.
The court of appeal held that the tax had been properly assessed. Plaintiff was engaged in the activity of making numerous sales at retail and was, therefore, required to hold a seller's permit. The property sold was held in an activity which required the holding of such a permit. Further, since the capital assets sold during the months prior to the sale in question were of the same type as those sold in the questioned sale, that sale was one of a series of sales sufficient in number, scope, and character to require the holding of a seller's permit. Hotel Del Coronado v. State Board of Equalization (1971) 15 Cal.App.3d 612.
In 1989, the Legislature enacted the Orange County Regional Justice Facilities Act and the County Regional Justice Facilities Financing Act, which authorized counties to establish agencies for purposes of financing and coordinating the construction, acquisition, furnishing, maintenance and operation of adult and juvenile detention facilities and courthouse facilities. The Acts authorized the agencies to adopt by ordinance a county-wide sales tax by a majority of the electors voting on the measure.
Plaintiffs challenged the Acts, seeking a declaration that they unconstitutionally authorized a special district to impose an ad valorem tax without securing approval of two-thirds of the voters of the district, in violation of Section 4 of Article XIII A of the California Constitution (Proposition 13).
The court of appeal held that since the Acts created agencies that were "special districts" within the meaning of Proposition 13, any tax ordinances that would have been adopted by the agencies pursuant to a simple majority vote would have been invalid. However, the Legislature had amended the Acts to authorize the agency to require approval by at least a two-thirds vote, as mandated by Proposition 13. The court of appeal therefore refused to declare the Acts void in their entirety, instead limiting relief to a declaration that a tax adopted pursuant to the Acts would be valid only if approved by a two-thirds vote. Howard Jarvis Taxpayers' Association v. State Board of Equalization (1993) 20 Cal.App.4th 1598.
In a bankruptcy proceeding, the Board filed a claim for sales and use taxes due on sales of materials and fixtures to a construction contractor improving real property under contracts with the U.S. Government. The U.S. District Court allowed the claim.
The U.S. Court of Appeals, Ninth Circuit, affirmed. The court held that the Sales and Use Tax Law did not discriminate against federal contractors because the legal incidence of the taxes fell on the contractor, not the United States, and the contractor had the opportunity to pass on the economic burden of the taxes to the United States. The court also held that Revenue and Taxation Code sections 6007.5 and 6384 provided statutory authority for the Board's Regulation 1521, which classified the federal contractor as a consumer of materials and fixtures, because the statutes tax the sales by suppliers to federal contractors as retail sales.
Finally, the court held that there was a rational basis for the state to distinguish between federal contractors and other sellers who sell property to the United States, because the use of property in a construction contract by attaching it to realty changes the form of the property. In re Howell (9th Cir. 1984) 731 F.2d 624.
Under 1981 legislation (SB 152, Chapter 951, Statutes 1981), which authorized redevelopment agencies to impose local sales and use taxes in redevelopment areas if the city credits those taxes against its own sales and use taxes, a redevelopment agency sought a writ of mandate to compel its secretary to publish the ordinance imposing the taxes.
The California Supreme Court issued the writ of mandate. The court held that the ordinance did not violate Article XIIIA of the California Constitution, which requires "special taxes" to be approved by two-thirds vote of electors, because the agency was not empowered to levy real property taxes and was therefore not a "special district" within the meaning of Article XIIIA. The court also held the ordinance did not violate Article XIIIB of the California Constitution, which limits local government appropriations to the past year's level, because there was a transfer of the responsibility of providing services from the city to the redevelopment agency. The city and the agency could adjust their appropriations limit accordingly. Huntington Park Redevelopment Agency v. Martin (1985) 38 Cal.3d 100.