Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales And Use Tax Court Decisions

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L. A. J., Inc. v. State Board of Equalization . . . (1974)

Ladd v. State Board of Equalization . . . (1973)

Lockheed Aircraft Corporation v. State Board of Equalization . . . (1978)

Loeffler v. Target Corp. . . . (2014)

Lykes Bros. Steamship Co., Inc. v. State Board of Equalization . . . (1994)

Lyon Metal Products, Inc. v. State Board of Equalization . . . (1997)


Board Classification of Drapes as Tangible Personal Property Upheld

Plaintiff, who sold and installed custom drapes to builders of apartment houses pursuant to lump-sum contracts, sought a refund of tax. Tax had been assessed on the basis that the drapes were tangible personal property, with the tax being measured by the total sales price. Taxpayer asserted that the drapes were fixtures, in which case only the cost of the material used in the drapes would be subject to tax. The trial court classified the drapes as fixtures, ignoring the classification made by the Board.

On appeal, the court held that the trial court had no authority to disregard the Board's classification of the drapes as tangible personal property in the absence of a finding that the classification was arbitrary or capricious, or had no reasonable or rational basis. The trial court had made no such finding, nor could it have done so in light of the testimony at the trail. The court held that plaintiff had failed to carry its burden of proof that the classification was unreasonable. The uncontradicted evidence supported the conclusion that there was a reasonable basis for the Board's classification. The trial court was thus directed to enter judgment for the Board. L. A. J., Inc. v. State Board of Equalization (1974) 38 Cal.App.3d 549.

Revenue and Taxation Code Section 6006(g)(5) Not Discriminatory

On August 1, 1965, the definition of "sale" in the Sales and Use Tax Law was extended to include the lease of property rented in a form substantially different from that acquired by the lessor [Rev. & Tax Code Sec. 6006(g)(5)]. Taxpayer thereafter paid a "use" tax measured by his receipts from the rental of powered houseboats constructed prior to August 1 of materials on which he had previously paid sales or use tax. Taxpayer sought a refund of the amounts paid by him subsequent to August 1, 1965, contending, on appeal, that Section 6006(g)(5) discriminated upon lessees who leased property in a different form from that in which it was acquired by the lessor.

The court of appeal held that there was a rational basis for the distinction drawn by the challenged section. Since the labor cost would not otherwise be includable within the measure of sales and use tax, the Legislature could properly conclude that the rental to the lessee, and not the cost of tangible items to the lessor, was the amount most likely to result in a measure of tax equitable with that paid by others under the statutory scheme. Ladd v. State Board of Equalization (1973) 31 Cal.App.3d 35.

Consumers May Not Sue Retailers For Refunds of Alleged Excess Sales Tax Reimbursement When the Board of Equalization Has Not Decided the Taxability Question in the First Instance

Consumers brought a putative class action against the retailer-taxpayer under two consumer protection statutes (California Unfair Competition Law (Bus. & Prof. Code, § 17200 et seq.) and California Consumer Legal Remedies Act (Civ. Code, 1750, et seq.)) seeking a refund of the alleged excess sales tax reimbursement, damages, and an injunction forbidding the collection of the alleged excess sales tax reimbursement on sales of hot coffee "to go," which they claim are exempt from sales tax. The California Supreme Court held that the Revenue and Taxation Code provides the exclusive means by which the consumers' dispute over the taxability of a retail sale may be resolved (i.e., a postpayment refund action brought by the taxpayer), and that the consumers' lawsuit was inconsistent with California's statutory sales tax refund procedures. The Court held that the consumer protection statutes under which the consumers brought their action could not be employed to avoid the limitations and procedures set forth in the tax code. The Court further held that the propriety of a sales tax reimbursement charge that turns on the taxability of a transaction must be resolved in the first instance by the Board of Equalization in a procedure recognized in the tax code. Loeffler v. Target Corp. (2014) 58 Cal.4th 1081.

Tax Does Not Apply to Special Test Equipment Purchased by Defense Contractors

Plaintiffs, two defense contractors, sought a refund of tax assessed on special test equipment which they had acquired or manufactured and stored on their premises pursuant to defense contracts with the United States government. Under the terms of the contract, title to the equipment passed to the federal government as soon as it was ready for use. The Board, in imposing the tax, relied upon Sales Tax General Bulletin 57-22 which provided that tax applied to test equipment which is used successively to test end products during and after the manufacturing process, and which is not built into the end product, or is not itself the end product called for by the contract.

The court of appeal affirmed the Superior Court's judgment for plaintiffs, holding that plaintiffs purchased the special test equipment for resale and resold it to the federal government. Such a sale is exempt from tax. Any use or storage thereafter was not that of plaintiffs, but of the federal government in which title immediately vested. There was, therefore, no basis upon which to assess plaintiffs tax on the equipment. Lockheed Aircraft Corporation v. State Board of Equalization (1978) 81 Cal.App.3d 257.

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Actual and Not Estimated Fuel-Usage Figures Determine Tax Liability

When plaintiff purchased fuel for its steamship common carrier operations, it claimed an exemption under Revenue and Taxation Code section 6385 with respect to fuel it estimated would not be used to reach its first out-of-state destinations. It did not issue corrected bills of lading to reflect the actual fuel used to reach its first out-of-state destinations, as required by Regulation 1621. Since plaintiff relied on estimates, sometimes the fuel usage to reach the first out-of-state destination, which was taxable, was greater than the estimate, and sometimes it was less than the estimate. This means that tax was sometimes overpaid with respect to the sales to plaintiff, and sometimes was underpaid.

The Board assessed tax with respect to the underpayments of tax, but did not offset the overpayments of tax, because plaintiff had not issued corrected bills of lading as required by Regulation 1621. Plaintiff argued that estimated bills of lading were authorized. The court of appeal agreed with the decision in Delta Air Lines, Inc. v. State Board of Equalization (1989) 214 Cal.App.3d 518, and held that corrected bills of lading were required in order to qualify for the exemption. Section 6385 and Regulation 1621 require that the tax be paid with respect to fuel actually consumed by a carrier to reach its first out-of-state destination. Although carriers were authorized by Regulation 1621 to issue estimated bills of lading "to begin with," they were required to issue corrected bills of lading within the time period specified in the regulation in order to complete qualification for the exemption. Since plaintiff had not done so, the court of appeal held in favor of the Board. Lykes Bros. Steamship Co., Inc. v. State Board of Equalization (1994) 23 Cal.App.4th 1421.

Drop Shipment Rules of Revenue and Taxation Code Section 6007 Upheld

Plaintiff supplied property from its California location to out-of-state retailers. The out-of-state retailers, who were not engaged in business in California, instructed plaintiff to deliver the property directly to the out-of-state retailers' customers in California (that is, to "drop ship" the property). The Board regarded the transactions as coming within the second paragraph of Revenue and Taxation Code section 6007 and therefore assessed sales tax against plaintiff as the retailer of the property.

The Court of Appeal held that the drop shipment rule of section 6007 is an alternative definition of "retail sale," and that under section 6091 a seller must overcome the presumption that its sale is at retail, including a "retail sale" as defined by the drop shipment rule. The court also held that the drop shipment rule is valid and constitutional. Lyon Metal Products, Inc. v. State Board of Equalization (1997) 58 Cal.App.4th 906, cert. den. (1998) 524 U.S. 916; 141 L.Ed.2d 158.

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