Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales And Use Tax Court Decisions

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Industrial Asphalt v. State Board of Equalization . . . (1992)

Institute in Basic Youth Conflicts, Inc. v. State Board of Equalization . . . (1985)

Intellidata Incorporated v. State Board of Equalization . . . (1983)

International Business Machines v. State Board of Equalization . . . (1980)


A Sale Occurs when a Commencing Partnership Assumes the Liabilities of Its Partners in Exchange for Tangible Personal Property

The taxpayers formed a partnership and transferred assets to the partnership, including tangible personal property. The partnership assumed the liabilities of the taxpayers. The issue was whether the partnership's assumption of liabilities was consideration for the assets transferred to the partnership.

The court of appeals held that assumption of liabilities is consideration, and therefore, a sale occurred. Under Regulation 1595(b)(4), the transaction was subject to tax. Industrial Asphalt v. State Board of Equalization (1992) 5 Cal.App.4th 1237.

Sales Made by Nonprofit Religious Organization in the Course of Its Free Exercise of Religion Subject to Use Tax

Plaintiff, a nonprofit religious corporation exempt from federal and state income taxation, conducted religious seminars throughout the United States. In addition to charging a fee for the seminar, a separate fee was charged for printed syllabus notebooks used to help follow the seminar, and they were only available to individuals who attended the seminars. Plaintiff also sold religious books and pamphlets through the mail which were not directly related to the seminars. The Board assessed sales tax against plaintiff on the sale of syllabus notebooks and sales and use tax on the sale of other religious literature. After paying the taxes under protest, plaintiff applied for a refund on the grounds that the distribution of the syllabus notebooks to seminar participants was incidental to the rendition of seminar services, notwithstanding a separately stated charge, and that the imposition of sales and use taxes upon the sale of religious literature was a violation of the free exercise clause of the United States Constitution.

The Court of Appeal held that the application of the state sales tax law to plaintiff's activities was constitutionally infirm. The court held that the sales tax law operated as a privilege or occupation tax imposed upon the privilege of selling tangible personal property at retail, and that the state's interest in raising revenue thereby could not justify such a tax as a condition of engaging in constitutionally protected activity, i.e., the sale of religious materials. [But see Jimmy Swaggart Ministries v. Board of Equalization of California (1990) 493 U.S. 378; 107 L.Ed.2d 796.] It held, however, that, plaintiff was liable for use taxes due with respect to its sales under Revenue and Taxation Code sections 6202 and 6203. Institute in Basic Youth Conflicts, Inc. v. State Board of Equalization (1985) 166 Cal.App.3d 1093.

Keypunch Activities Are Subject to Tax

Customers delivered raw data to taxpayer, a computer service bureau, with instructions to transpose the data onto cards that could be read by the customer's computer. After the cards were read by the computer they were of no further use to the customer and were usually destroyed or recycled.

Taxpayer purchased the cards and paid the tax on them. Taxpayer considered the consumption of the cards to be part of the hourly rate it charged its customers for the keypunching and did not bill a separate amount for the cards. The cost of the cards constituted 2 percent of the overall cost to the customer.

Taxpayer filed a claim for refund for tax paid to the Board on the gross receipts from the keypunching activities. At trial, the court ruled that taxpayer was not entitled to a refund.

On appeal, taxpayer contended that the gross receipts from the sale of keypunching services are exempt from sales tax because the true object of the transactions between taxpayer and its customers is the service rendered, not the media on which the services are delivered.

The appellate court concluded that taxpayer's keypunching activities produced tangible personal property to the special order of its customers, and was subject to tax pursuant to Section 6006(f) of the Revenue and Taxation Code. Intellidata Incorporated v. State Board of Equalization (1983) 139 Cal.App.3d 594.

Lease Tax Law Exempts Prior Leases Only if Parties Are Unconditionally Bound

A lessor sued the Board to recover taxes paid on lease receipts from lease agreements between plaintiff and various banks and insurance companies constitutionally exempt from use tax liability during the effective period of former Revenue and Taxation Code Section 6006.3(b). The Board had construed the statute as providing for taxation of receipts of leases originally executed after the effective date, and renewals of existing leases after the effective date. The Supreme Court held that the Board's construction of the statute was proper in light of the statute's language, the purpose of the Legislature, and the legislative history of the statute and related enactments. The court adopted the Board's interpretation that a renewal after August 1, 1965 of leases executed before that date subjects these leases to sales tax. The court further held that the extension of the leases by failure to exercise a power of termination rendered these leases subject to sales tax; that leases executed before August 1, 1965 for equipment installed after that date were exempt unless the rental price was altered; that leases with miscellaneous equipment changes after August 1, 1965 were exempt up to any additional rental charge attributable to the equipment change; and that leases derived from conditional orders from equipment placed before August 1, 1965, but not executed until after that date, were taxable. International Business Machines v. State Board of Equalization (1980) 26 Cal.3d 923.

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