Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales And Use Tax Court Decisions

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Wallace Berrie & Co. v. State Board of Equalization . . . (1985)

Western Concrete Structures, Inc. v. State Board of Equalization . . . (1977)

Western Contracting Corp. v. State Board of Equalization . . . (1974)

Wilkinson v. Wilkinson . . . (1976)

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

Woo v. State Board of Equalization . . . (2000)

Woosley v. State of California . . . (1992)


Wholesaler Did Not Resell Marketing Aids Under Board Regulation

Taxpayer, a wholesaler who sold merchandise to retailers, provided free cardboard display racks for its merchandise to the retailers as marketing aids. Taxpayer had purchased the display racks under resale certificates. The Board assessed use tax against taxpayer on its purchase price of the display racks based on Regulation 1670(c), which provides that a marketing aid will be considered resold only if the supplier obtains reimbursement for the marketing aid of 50 percent or more of its purchase price; otherwise, under the regulation the supplier is the consumer of the marketing aid.

The California Supreme Court held that the Board's regulation was not arbitrary, and that taxpayer did not satisfy the regulation's requirement of proving that a sale occurred. Accordingly, the court upheld the use tax on taxpayer's purchases of the display racks. Wallace Berrie & Co. v. State Board of Equalization (1985) 40 Cal.3d 60.

Contractor Is Consumer of Materials when He Is Contractually Responsible and Provides All Supervision in Installation

Plaintiff entered into lump-sum contracts under which it furnished shop drawings, post-tensioning tendons, rental of stressing equipment, and field supervision. Under some of the contracts, plaintiff supervised the post-tensioning work which was performed by the general contractor or a subcontractor of the general contractor. Under other contracts, the post-tensioning work was done by plaintiff or a subcontractor of plaintiff. In either case plaintiff was responsible for its work, materials, and equipment. Where the post-tensioning work was performed directly by plaintiff or a subcontractor of plaintiff, it was agreed that under Regulation 1521, regarding construction contractors, plaintiff was the consumer of the materials used. Where the post-tensioning work was done under plaintiff's supervision by the general contractor or a subcontractor, the Board contended that plaintiff was the retailer of goods to the general contractor, and asserted sales tax. Plaintiff paid the tax and sued for refund.

The court of appeal upheld the trial court in granting the refund to the plaintiff. The court based its decision on what it found to be the scope of plaintiff's responsibilities under the contracts, which included all supervision and testing, the making of necessary corrections when there was a failure, and the fact that all employees involved, regardless of employer, labored under the expert direction of plaintiff's representative. Western Concrete Structures, Inc. v. State Board of Equalization (1977) 66 Cal.App.3d 543.

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No Exemption for Equipment and Supplies Used in Construction Contract Entered Into for Fixed Price Prior to August 1, 1967

Plaintiff was awarded a lump-sum fixed price contract with the State Department of Water Resources for the construction of a dam. Subsequently, the state legislature increased the sales and use tax rate by 1 percent, effective August 1, 1967, and also added Section 6376 to the law, providing an exemption from the increase for the sale and use of materials and fixtures obligated pursuant to an engineering construction contract entered into for a fixed price prior to the effective date of the rate increase. The Board took the position that the exemption was applicable only to "materials" and "fixtures" as those terms had previously been defined in the Board's Ruling 11 "Construction Contractors." This interpretation excluded from the exemption other tangible personal property such as construction equipment and supplies.

Plaintiff sought declaratory relief that the Section 6376 exemption covered equipment and supplies, and sought other alternative relief against the state as a party to the contract. Plaintiff subsequently paid approximately $102,000 in additional taxes, unsuccessfully sought a refund from the Board, and filed a suite for refund. In the consolidated actions, the trial court found that Section 6376 did not exempt the transactions in dispute and denied plaintiff relief against the state as a party to the contract.

In affirming the judgment of the lower court denying plaintiff's claim for refund of tax, the court of appeal held that the words "materials and fixtures" did not include construction equipment and supplies. The court found that it was reasonable to assume that the Legislature used the words "materials and fixtures" advisedly and in the sense which had been given them by long-standing administrative ruling and by judicial decision. Even without reference to the administrative ruling, the court observed, by no stretch of the imagination could construction equipment and supplies be considered either "fixtures" or "materials." Further, both the language of Section 6376 and the post-enactment history of the section strongly supported the interpretation urged by the Board. The court further held that the construction contract did not provide for additional compensation on account of the increased tax burden, and that plaintiff was not subject to any unconstitutional impairment of its contract with the Department of Water Resources as a result of any additional burden falling on it by virtue of the increased tax. Western Contracting Corp. v. State Board of Equalization (1974) 39 Cal.App.3d 341.

Lien Attaches to Equitable Interest in Real Property of Taxpayer

Plaintiff acquired her co-tenant's interest in real property through a quitclaim deed and sued to quiet title. The Board had previously filed a lien for unpaid sales and use taxes against the co-tenant under Section 6757 of the Revenue and Taxation Code. That section states that the amount required to be paid, together with interest and penalty, constitutes a lien upon all property in the county owned by the person. At the time the lien was filed, the plaintiff and cotenant had entered into a contract with the Department of Veterans Affairs for the purchase of the real property in question, so they owned an equitable interest in the property. The legal question was whether or not such a lien attaches to an equitable interest. The court of appeal affirmed the trial court's finding that such a lien does attach to an equitable interest. When Section 6757 was amended in 1965 by deleting the word "real" as a modifier of the property to which the lien attached, the Legislature intended to broaden the scope of the lien to "all property." Since it is clear that an equitable interest is property, the lien under Section 6757 embraces it. Wilkinson v. Wilkinson (1976) 51 Cal.App.3d 382.

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Corporate Officer Liability

The chief financial officer of a corporation willingly failed to pay sales taxes during the period at issue. After that period, he resigned, and more than a year later the corporation dissolved. The Board issued an assessment to the former chief financial officer for corporate officer liability under Revenue and Taxation Code section 6829. He argued that, since he was not a corporate officer at the time the corporation dissolved, he was not liable under section 6829 because it used the present tense. The court noted that Revenue and Taxation Code section 11 provides that in construing the Revenue and Taxation Code, the present tense includes the past and future tenses. Accordingly, the court concluded that the former chief financial officer was liable for the corporation's tax debt during the period he willingly failed to pay that tax as a responsible corporate officer. State Board of Equalization v. Wirick (2001) 93 Cal.App.4th 411.

Fraudulent Transfer

The Board notified the spouse of a taxpayer who owed sales taxes that it would seek an earnings withholding order against her to pay her husband's tax debt. Thereafter, taxpayer and his spouse entered into an agreement transmuting their future earnings from community property to separate property. The spouse thereafter became employed by Wells Fargo for an annual salary of about $500,000. The Board filed an application for an earnings withholding order arguing that the agreement did not bar garnishment because it was fraudulent and unenforceable under Family Code section 851 and Civil Code section 3439.04. The spouse argued that the agreement was not a fraudulent transfer because she was not employed by Wells Fargo when the agreement was executed and that her future earnings were a mere expectancy that could not be transferred. The court held that the taxpayer had a present interest in the future earnings of his spouse at the time the agreement was executed, and the spouse's attempt to transmute that interest to avoid the tax debt constituted a fraudulent transfer. State Board of Equalization v. Woo (2000) 82 Cal.App.4th 481.

Use Tax on Vehicles Originally Sold Outside California

In 1976 a California resident purchased an antique vehicle from a private party in North Carolina. When the taxpayer attempted to register the vehicle with the Department of Motor Vehicles, he was required to pay a vehicle license fee and use tax that were higher than the amounts he would have paid had he purchased the vehicle in California. Although the license fee and use tax charges were imposed at uniform rates, the tax base for certain out-of-state purchases of vehicles was calculated differently from the tax base for in-state purchases. As a result, the license fee and use tax were generally higher on out-of-state purchases. The plaintiff filed a class claim and a class action for a refund of the fees and use tax.

The California Supreme Court held that the state had discriminated against interstate commerce by imposing higher license fees on vehicles purchased out of state and by imposing higher use taxes on vehicles purchased from private parties in other states. Such discrimination was not justified by administrative convenience.

The court further held that the failure of the Board to comply with the Administrative Procedures Act did not exempt taxpayers from the obligation to pay taxes as required by state law and could not deprive the state of the tax revenues to which it was entitled. Thus, no refunds were due for use tax arising from private-party transactions after the Board has discontinued its discriminatory practice with respect to such transactions.

Finally, the court held that class claims were not authorized by the legislature during the periods in issue; therefore, all persons who had not filed a timely valid claim for refund should be deleted from the class in this lawsuit. Woosley v. State of California (1992) 3 Cal.4th 758.

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