Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales And Use Tax Court Decisions

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Pacific Employers Ins. Co.; People v. . . . (1973)

Pacific Southwest Airlines v. State Board of Equalization . . . (1977)

Paine v. State Board of Equalization . . . (1982)

Parfums-Corday, Inc. v. State Board of Equalization . . . (1986)

Philips and Ober Electric Co. v. State Board of Equalization . . . (1991)

Pope v. State Board of Equalization . . . (1988)

Preston v. State Board of Equalization . . . (2001)

Purdue Frederick Co. v. State Board of Equalization . . . (1990)


Surety Liable for Penalties and Interest on Transactions Occurring Prior to Cancellation of Bond

The State of California sought to enforce respondent's liability on a surety bond for penalties and interest assessed against respondent's principal subsequent to the effective date of the cancellation of the bond. The penalties and interest were assessed for transactions all of which had occurred prior to the cancellation date. The contract of surety provided that the surety could terminate its liability to the extent and in the manner set forth in Civil Code Section 2851, but that in no event would the surety be relieved from liability with respect to transactions occurring before the effective date of cancellation of the bond. The surety contended that it was not liable for penalties and interest assessed subsequent to the cancellation of the bond since Civil Code Section 2851 provides that after the effective date of cancellation, ". . . the surety is relieved of all liability which otherwise thereafter would arise on its bond."

The court, observing that Section 2851 does not stand alone but must be applied to the contract of surety, held that respondent had waived the provisions of Civil Code Section 2851 and had agreed to be liable for the sums at issue. Since no public policy dictated that the agreement not be enforced, its terms were binding upon respondent. People v. Pacific Employers Ins. Co. (1973) 36 Cal.App.3d 296.

Six-Month Principal Use Test Invalid Where More Information Is Available

The Board had utilized a six-month principal use test for the first six months of ownership of an aircraft to establish whether tax applied to the sale of an aircraft which was used for common carrier purposes and for pilot-training purposes. Because plaintiff's use of the aircraft for common carrier purposes was less than 50 percent of the total use of the aircraft during the first six months of ownership of the aircraft by plaintiff, the Board denied plaintiff the exemption set forth in Section 6366 of the Revenue and Taxation Code.

That section exempts from sales and use tax aircraft sold to persons using such aircraft as common carriers. The court held that the exemption applied because the test had not been promulgated as a formal regulation, which would have assured constructive notice to plaintiff, and because plaintiff had no actual notice of the test. The court further held that the six month test was not justified by administrative necessity where plaintiff's records were available to establish that the aircraft was used for common carrier purposes for over 50 percent of the total use of the aircraft during the time that it was owned by plaintiff. Pacific Southwest Airlines v. State Board of Equalization (1977) 73 Cal.App.3d 32.

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Board's Use of Audit Test Upheld

Taxpayer, an operator of a retail grain and feed store, sold hay, grain, pet food, and related products. An exemption certificate pursuant to Revenue and Taxation Code Section 6358 was obtained and kept on file from each customer who purported to purchase tax-exempt feed. Following an audit during which taxpayer claimed 80 percent of its sales consisted of exempt feed, the Board conducted a field test and determined that approximately 53 percent of sales were to customers who claimed exemption.

The court of appeal affirmed the trial court's admission of the test amounts. The court held that although taxpayer kept an exemption certificate on file from each customer who purported to purchase tax exempt feed, taxpayer failed to meet the burden of proving that 80 percent of the sales were exempt because there were no records correlating sales invoices to the exemption certificates. The court also held that the trial court properly admitted the results of the Board's test, where substantial evidence supported the trial court's findings that sales during the test period were representative of those during the audit period, and that the condition and conduct of taxpayer's business remained substantially similar during both periods. Paine v. State Board of Equalization (1982) 137 Cal.App.3d 438.

Promotional Displays Subject to Use Tax when Not Resold with Merchandise

Taxpayers, Max Factor & Co. and Parfums-Corday, Inc., purchased promotional displays under resale certificates, stored them in California, and assembled them into promotional prepacks together with merchandise. Taxpayers shipped the prepacks to retailers within and outside of California, who resold the merchandise but not the displays. Taxpayers did not make a separate charge for the displays or increase the price of the merchandise to cover the cost of the displays.

Taxpayers paid use tax on the displays shipped to California retailers, but the Board also assessed use tax on the displays shipped out of state. Taxpayers contended: (1) they had resold the displays because their customers purchased the displays as an integral part of the prepacks, and (2) if they did not resell the displays, they did not use them in California because they shipped the displays as gifts out of state for use thereafter solely outside the state.

The court of appeal held in favor of the Board. The court held that the Board's Regulation 1670(c) was objective and reasonable in establishing that a sale of a marketing aid occurs only when a taxpayer recoups at least 50 percent of its cost either by separate billing for the marketing aid or by increasing the price of the merchandise. Since the taxpayers did neither, they were properly deemed the consumers of the displays. Also, taxpayers had a functional purpose for the displays in California by warehousing them and assembling them into the prepacks, and thus were liable for use tax regardless of the ultimate destination of the displays. Parfums-Corday, Inc. v. State Board of Equalization (1986) 187 Cal.App.3d 630.

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A Taxpayer Who Fails to File for a Timely Refund May Not Instead Deduct the Refund Amount on Current Tax Return

Taxpayer was a subcontractor who sold tangible personal property to a construction contractor. Taxpayer collected and paid sales tax. The contractor later determined that the tangible personal property was "machinery and equipment" and therefore eligible for a resale certificate under Regulation 1521. The contractor provided taxpayer with a resale certificate, and taxpayer refunded the sales tax to the contractor. On the next sales and use tax return, taxpayer claimed a credit for the refunded sales tax, instead of filing a claim for refund. When taxpayer was audited five years later, the credit was disallowed. Taxpayer then filed suit for refund. The court of appeal held that it had no jurisdiction to grant relief because taxpayer had failed to exhaust its administrative remedies by filing a claim for refund with the Board. An improper tax-paid purchases resold credit cannot be used to avoid the requirement of a timely claim for refund. Philips and Ober Electric Co. v. State Board of Equalization (1991) 231 Cal.App.3d 723.

Delivery of Motor Homes in State to Out-of-State Purchasers Is Taxable

Taxpayer sold motor homes to out-of-state purchasers, and the contracts required shipment out of state. Taxpayer delivered the motor homes to a forwarding agent who in turn secured a one-way trip permit and delivered the motor homes in California to the purchasers (or in some cases, unnamed drivers), who drove them out of state. Taxpayer contended the deliveries satisfied the requirements for exemption from sales tax for interstate shipments.

The court of appeal held in favor of the Board. The court held that Revenue and Taxation Code Section 6396 exempts from sales tax sales in interstate commerce only when the seller or forwarding agent actually delivers the property sold to the purchaser out of state. Sales and Use Tax Regulation 1620, which requires actual out-of-state delivery, was a reasonable interpretation of Section 6396. The burden of proof to establish the exemption is on the seller, and that burden was not met for transactions where the driver was not named. Pope v. State Board of Equalization (1988) 202 Cal.App.3d 73.

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Technology Transfer Agreements

Taxpayer entered into written agreements to provide artwork on a temporary basis for use as book illustrations and rubber stamp designs. The customers copied or reproduced images from the finished artwork and returned the tangible artwork to taxpayer. Taxpayer retained all other rights in the artwork not specifically transferred under the agreements, including title. Taxpayer argued that she did not sell her artwork because the use rights she transferred were intangible property. The court held that taxpayer did, in fact, make taxable leases by transferring the artwork in tangible form for consideration. However, the court also concluded that the agreements were technology transfer agreements under Revenue and Taxation Code sections 6011(c)(10) and 6012(c)(10), and that these provisions applied on a retroactive basis to exclude from tax the charges attributable to the transfers of copyright interests. Accordingly, since taxpayer did not separately state a price for the tangible personal property, tax applied to these leases based on the price at which that tangible personal property had been sold, leased, or offered to third parties or based on 200 percent of the cost of materials and labor used to produce the tangible personal property. Preston v. State Board of Equalization (2001) 25 Cal.4th 197.

Antiseptic Sudsing Skin Scrub Used by Hospital Is an Exempt Medicine

Taxpayer manufactures Betadine Surgical Scrub, an antiseptic, microbicidal, sudsing skin cleanser, which it distributes and sells to hospitals for preoperative use on patients, preoperative scrubbing by doctors, nurses and other operating personnel, and for hand cleansing by hospital personnel caring for and treating patients. The Board determined that Betadine was not an exempt medicine, except when applied to patients.

The court of appeal held in favor of taxpayer, finding that Betadine is an exempt medicine. Betadine is a "medicine," since it is a substance or preparation intended for use by external application to the human body in the mitigation and prevention of disease, and is commonly recognized as a substance or preparation intended for that use. A medicine is exempt from taxation if, among other things, it is sold to a "health facility for the treatment of a human being." The court found that, in all its hospital uses, Betadine is applied to the human body. In addition, the application of Betadine by hospital personnel to their own bodies benefits the patient and constitutes a critical component of the patient's treatment. The court noted that the Legislature had expanded the scope of exempt medicines beyond prescription medicines. Purdue Frederick Co. v. State Board of Equalization (1990) 218 Cal.App.3d 1021.

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