Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales And Use Tax Court Decisions

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Southern California Edison Co. v. State Board of Equalization . . . (1972)

Payments in Settlement of Litigation

Plaintiff utilities sought refunds of sales tax reimbursement and use taxes paid with respect to purchases of electrical equipment made between 1956 and 1959. By late 1965, plaintiffs had entered into settlement agreements with the manufacturers of the equipment under which the manufacturers were to pay so-called "voluntary price adjustments" to the plaintiffs in exchange for the plaintiffs' dismissing pending treble damage actions against the manufacturers based upon the manufacturers' price-fixing activities. The plaintiffs then claimed that their taxes were subject to re-computation based on the "adjusted" price of their purchases.

The California Supreme Court, in reversing the decision of the trial court allowing the refund, held that so-called "voluntary price adjustments" arrived at in settlement of antitrust litigation do not entitle a taxpayer to a tax refund measured by the "inflated" portion of the sales price. The court observed that the payments in the instant case, although termed "voluntary price adjustments," were in no way distinguishable from other payments, by way of settlement or judgment, which might be received by a purchaser of goods from the seller as a result of litigation arising out of the sales transaction. The court also stated that the allowance of a tax refund under the circumstances of this case would, in general, produce the undesirable and inequitable effect of shifting one cost of a price-fixing conspiracy from the perpetrators of the conspiracy to the taxpayers of the state, since federal antitrust law contemplated that violators of the law are to be held liable for all damages resulting from any illegal activity, including foreseeable excess tax costs to victims of the conspiracy. Southern California Edison Co. v. State Board of Equalization (1972) 7 Cal.3d 652.