Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales And Use Tax Court Decisions

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Union Oil Co. v. State Board of Equalization . . . (1990)

United States v. California . . . (1993)

United States v. California State Board of Equalization . . . (1981)

United States v. California State Board of Equalization . . . (1982)

United States v. State Board of Equalization . . . (1976)

United States v. State Board of Equalization . . . (1980)

United States Fire Insurance Co.; People v. . . . (1976)

United States Lines, Inc. v. State Board of Equalization . . . (1986)


Petroleum Coke Sales Exempt from Taxation as "Waste By-Products"

Taxpayer refined crude oil into finished petroleum products, and sold petroleum coke as a solid by-product of the refining processes. The coke taxpayer produced was classified as fuel-grade petroleum coke, and taxpayer sold it to a customer who used the coke as a fuel in its chemical manufacturing facility. Taxpayer sued the Board for a refund of sales tax imposed on the sale of the petroleum coke.

The court of appeal agreed with the taxpayer that the petroleum coke was a waste by-product within the meaning of Revenue and Taxation Code Section 6358.1 and, therefore, exempt from sales and use tax. The court found that the petroleum coke was an undesirable fuel source and that its commercial value was minimal. Union Oil Co. v. State Board of Equalization (1990) 224 Cal.App.3d 665.

The United States Was Not Entitled to Recovery of Funds It Had Paid to a Construction Contractor as Reimbursement for the Contractor's Tax Liability Arising on a United States Construction Contract

The Departments of the Navy and Energy contracted with WBEC to manage oil drilling operations on federal land in California. In notices issued to WBEC in July 1978 and December 1982, the Board determined that WBEC owed approximately $14 million in sales and use taxes under Revenue and Taxation Code section 6384, which imposes tax on sales to contractors of tangible personal property for use in certain construction contracts with the United States.

WBEC paid the taxes using funds the Federal Government provided. After exhausting its administrative remedies with the Board, WBEC filed a timely suit for refund. In January 1988, the Board and WBEC stipulated to a $3 million refund for erroneous assessments and to a dismissal of the case.

In May 1988 the United States filed suit in the Eastern District of California seeking a declaratory judgment that California had classified and taxed WBEC erroneously under California law, and that the taxed property was exempt. In the course of the suit the United States also contended that it was entitled to recovery based on the federal common-law cause of action for money had and received. The District Court rejected all of its arguments.

The Supreme Court reaffirmed its prior holding that the Government is not immune from taxes merely because they have an "effect" on the Government or "even because the Federal Government shoulders the entire economic burden of the levy." In this case, California did not tax the Federal Government; it taxed WBEC.

The court also held that the Government was in no better position than as a subrogee of WBEC. Since WBEC's rights had lapsed and its claims were barred, under traditional subrogation principles, the claims of the United States were also barred. Finally, the court rejected the Government's argument that state statutes of limitation do not bind it. United States v. California (1993) 507 U.S. 746; 123 L.Ed.2d 528.

Sales Tax Unconstitutional when Imposed on Leases to United States

The Board imposed sales tax on lessors for leases of equipment to the United States beginning January 1, 1979, under applicable law which provides that the sales tax applies when the lessee under a lease is exempt from the use tax.

The United States sought declaratory and injunctive relief, and a refund of sales taxes paid by its lessors to the Board. The U.S. District Court entered judgment in favor of the United States. The U.S. Court of Appeals, Ninth Circuit, affirmed, holding that the legal incidence, not just the economic burden, of the sales tax is placed on the United States and therefore violates the United States' constitutional immunity from state taxation.

Even though the sales tax is paid by the lessors, not the United States, under these leases, and even though Civil Code section 1656.1 is facially neutral because it provides that whether the buyer reimburses the seller for the sales tax depends on the agreement of the parties, the California sales tax scheme provides a strong economic incentive (and manifests a legislative intent) for the lessors to collect the sales tax from the United States. This is because the lessor must pay more to the state in taxes if he absorbs the tax himself and passes the economic burden on as an increase in price, than if he collects the tax from the United States. United States v. California State Board of Equalization (9th Cir. 1981) 650 F.2d 1127, affd., 456 U.S. 901 (1982).

Taxes Imposed on United States Contractors Are Valid; Legal Incidence of Tax Did Not Fall on United States

The Board collected use taxes from lessors who leased personal property to United States contractors, and the United States reimbursed the contractors for the taxes. The United States sought to recover the taxes paid. The U.S. District Court entered judgment in favor of the United States.

The U.S. Court of Appeals, Ninth Circuit, reversed and held in favor of the Board. Even though the contractors were acting as designated agents of the United States in executing the leases, and even though the United States bears the economic burden of the tax, the tax is valid if the legal incidence of the tax is not imposed on the United States itself.

Here the legal incidence of the tax falls on the contractors, who are not performing governmental functions, but rather are engaged in commerce for their own economic advantage. United States v. California State Board of Equalization (9th Cir. 1982) 683 F.2d 316.

Leases to the United States Not Subject to Sales Tax

Plaintiff contended that the application of sales tax to rental receipts of lessors of tangible personal property to the United States was actually a tax on the United States, and that such tax violated the constitutional immunity of the United States from state taxation. The Ninth Circuit Court of Appeals relied on the U.S. Supreme Court decision in Diamond National Corp. v. State Board of Equalization (1976) 425 U.S. 268; 47 L.Ed.2d 780, in finding that the incidence of the tax was on the United States as the lessee and was thus constitutionally barred. United States v. State Board of Equalization (9th Cir. 1976) 536 F.2d 294.

California Sales Tax Properly Imposed on Sales to National Banks

The United States and a national banking association challenged the imposition of California state and local sales taxes on sales of tangible personal property to national banks during the December 24, 1969 to December 31, 1972 bridge period covered by the 1969 temporary amendment to the federal statute governing taxation of national banks. At trial, summary judgment was granted the Board, and plaintiffs appealed.

The Ninth Circuit Court of Appeals held that California's sales tax on sales of tangible personal property to national banks was a tax imposed by a state which did not impose a tax or an increased rate of tax in lieu thereof within the meaning of P.L. 91-156, nor was the built-up rate of California's franchise tax on national banks imposed in lieu of the sales tax on sales of tangible personal property to a national bank. Thus, automatic imposition of the sales tax during the bridge period could not possibly result in unintended double taxation of national banks in violation of the amendment. United States v. State Board of Equalization (9th Cir. 1980) 639 F.2d 458.

Suit Against Surety for Tax Not Barred by Statute of Limitations Where Certificate of Tax Lien Is Filed Timely

Defendant, surety for a delinquent taxpayer, contended that the Board's action to collect taxes through enforcement of the contract of surety was barred because suit was brought more than three years after the cause of action arose, i.e., the date the determination of tax became final. The court upheld the Board, holding that although Section 6711 of the Revenue and Taxation Code as it read at the time the cause of action arose provided for a limitation on the bringing of action of three years after the recording of a certificate of tax lien, the Legislature amended this section to permit the Board to bring an action within the ten-year period that a tax lien is in force. This change took effect before the cause of action was barred under the earlier version of the statute. Since the statute of limitations affects only the remedy and not the right, the period may be extended by the Legislature if it does so before the cause of action is barred. The Board's action was brought within the limitations of the statute as amended, and was timely.

The court stated that it was unnecessary to decide the Board's contention that the applicable statute was Section 337, subdivision 1 of the Code of Civil Procedure, which provides that an action founded upon a contract, obligation, or liability founded upon an instrument in writing must be brought within four years. However, in considering defendant surety's contention that a three-year period of limitation specified in Section 338 of the Code of Civil Procedure applied, the court pointed out that Section 6711 prescribes a different limitation period for actions to collect taxes. People v. United States Fire Insurance Co. (1976) 61 Cal.App.3d 231.

Sale of Cranes in Place Was a Sale of Tangible Property, Not an Improvement to Real Property

Taxpayer erected two cranes on land belonging to the Port of Oakland. After the cranes were erected, taxpayer sold the cranes to the port, and leased the cranes back from the port together with the land on which the cranes had been erected for $1 per year. Taxpayer and the port stipulated by contract that the actual purchase price of the cranes was $3.68 million, but the port did not pay any cash for the cranes. Instead, taxpayer agreed that it had received valuable consideration for the sale of the cranes in the leaseback arrangement plus related agreements. Taxpayer contended the sale of the cranes was a sale of real property fixtures, not subject to sales tax. The trial court granted summary judgment in favor of the Board.

The court of appeal affirmed. The court held that the cranes were tangible personal property in the hands of the taxpayer, even though after the transfer the cranes became real property fixtures annexed to the port's property. Thus, the sale of the cranes to the port was a taxable transfer of tangible personal property. The court also held that since the taxpayer acknowledged receipt of valuable consideration in lieu of cash under the crane leaseback and other related agreements, the Board was correct in assessing tax based on the actual purchase price stated under the terms of the crane purchase agreement. United States Lines, Inc. v. State Board of Equalization (1986) 182 Cal.App.3d 529.

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