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Business Taxes Law Guide—Revision 2024
Sales And Use Tax Court Decisions
A B C D E F G H I J K L M N O P R S T U V W Y
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Harleston v. State Board of Equalization … (In re Harleston)
Henry's Restaurants of Pomona, Inc. v. State Board of Equalization … (1973)
Hibernia Bank v. State Board of Equalization … (1985)
Honeywell, Inc. v. State Board of Equalization … (1975)
Honeywell, Inc. v. State Board of Equalization … (1975)
Honeywell, Inc. v. State Board of Equalization … (1982)
Hotel Del Coronado v. State Board of Equalization … (1971)
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Harleston, In re; State Board of Equalization v. Harleston … (2002)
Board Waived Eleventh Amendment Sovereign Immunity by Filing Proof of Claim in Bankruptcy Case.
The Board filed a proof of claim for unpaid taxes in the Debtors' chapter 13 bankruptcy case. The Debtors objected to the Board's claim. The bankruptcy court set the issue of the claim's secured status for an evidentiary hearing. The Debtors' case converted to chapter 7 before the evidentiary hearing. After the Debtors received their discharge, the Board commenced collection action. The Debtors filed an adversary complaint seeking a judgment that would discharge their tax debt. The Board asserted its Eleventh Amendment sovereign immunity and moved for judgment on the pleadings. The bankruptcy court denied the motion. The Bankruptcy Appellate Panel affirmed and the Board appealed to the Ninth Circuit. The Ninth Circuit, citing the rule of Gardner v. New Jersey, 329 U.S. 565 (1947), held that when a state files a proof of claim, it waives its sovereign immunity with respect to adjudication of that claim. Furthermore, the scope of the waiver extends to claims that arise from the same transaction or proceeding, so the bankruptcy court had jurisdiction to determine the dischargeability of the debt. State Board of Equalization v. Harleston (In re Harleston), 331 F.3d 699. (2002).
Henry's Restaurants of Pomona, Inc. v. State Board of Equalization … (1973)
Revenue and Taxation Code Section 6359(c) Held Constitutional
Plaintiffs were restaurant owners who also operated drive-ins providing carhop services. They sought to recover sales and use taxes paid by them on sales of "take-out" orders. Such orders are taxable under subparagraph (c) of Section 6359 of the Revenue and Taxation Code when the food is purchased at a drive-in type of operation, whether or not it is consumed on the premises, although "take-out" orders at conventional restaurants are exempt. The drive-in operators argued that subparagraph (c), and the Board's administration thereof, was unconstitutionally vague, and arbitrarily discriminated between drive-ins and conventional restaurants.
The court of appeal, in holding the provision constitutional, found that the distinctions made in the statute had a rational basis in the Legislature's desire to equalize competition and tax burdens between conventional restaurants and newly evolving forms of eating establishments where food was consumed in a similar manner, whether inside one's own car or inside a restaurant. The court also found that the statute prescribed a standard sufficiently definite to be understandable to the average person desiring to comply therewith. Henry's Restaurants of Pomona, Inc. v. State Board of Equalization (1973) 30 Cal.App.3d 1009.
Hibernia Bank v. State Board of Equalization … (1985)
California Constitution Does Not Prohibit Sales Tax on Sales to State Banks
Taxpayer sold tangible property to a state-chartered bank and collected sales tax reimbursement from the bank. Both taxpayer and the bank filed suits for refund of the sales taxes on the sales. Although for federal purposes the legal incidence of the sales tax fell on a national bank meaning that sales to national banks were immune from sales tax prior to 1969 federal legislation, the Court of Appeal held that for state purposes the legal incidence of the sales tax falls on the retailer, not the state bank, even though the economic burden is borne by the bank. The court also held that the California Constitution, Article Xlll, former Section 16 (now net income tax), does not prohibit sales taxes levied on retailers' sales to state banks, even though sales to national banks were not similarly taxed. Hibernia Bank v. State Board of Equalization (1985) 166 Cal.App.3d 393.
Honeywell, Inc. v. State Board of Equalization … (1975)
Board's Categorization of Air Conditioning Control Components Is Not Arbitrary or Unreasonable
Plaintiff, who furnished and installed air conditioning control systems under lump sum contracts, claimed that Regulation 1521 and General Bulletin 67-8, distinguishing for sales tax purposes between fixtures and materials incorporated into structures, are vague, uncertain, ambiguous, conflicting, and unreasonable, and are also in conflict with Regulation 1615, which deals with the United States government contractors.
Regulation 1521 provides that construction contractors are consumers of materials and retailers of fixtures which they furnish and install in the performance of construction contracts. Where the contractor is the manufacturer of the fixtures, the retail selling price is considered to be the prevailing price at which similar fixtures in similar quantities ready for installation would be sold to contractors. General Bulletin 67-8 deals with the measure of tax on fixtures installed by manufacturers under lump sum construction contracts. Plaintiff claimed that the correct measure of tax is the cost to plaintiff of only the materials in the devices used in air conditioning control systems that it installs, because these systems become an integral and inseparable part of the completed structure.
The court, noting that plaintiff manufactures and sells air conditioning control devices that are packaged ready to install and that these devices can be individually and readily removed without damage to the building, stated that it is within the power of the Board to determine that such devices are fixtures rather than materials. Plaintiff argued that the tax result where the manufacturer installs the device and the sale price of the device and the charge for installation services are stated together should differ from the tax result of the sale of the device alone. The court stated that such commingling may present an accounting problem of segregation, but the legal tax consequences do not change. The court also held that in furnishing and installing the fixtures, plaintiff was a retailer and was not making sales to contractors for resale by them.
In a subsidiary issue, the court held that failure of the Board to act on a claim for refund within six months could be treated by plaintiff as a denial of the claim for purposes of instituting an action. Honeywell, Inc. v. State Board of Equalization (1975) 48 Cal.App.3d 897.
Honeywell, Inc. v. State Board of Equalization … (1975)
Validity of Regulation 1521 Upheld
Plaintiffs, who manufactured and installed elevators or temperature control systems, sought a declaratory judgment that Regulation 1521 was arbitrary and ambiguous and therefore void as applied to transactions that plaintiffs had entered into for the installation of their products. Regulation 1521 provides that construction contractors are consumers of materials and retailers of fixtures which they furnish and install in the performance of construction contracts.
Plaintiffs also contended that the regulation was discriminatory since it distinguished between contractors generally and United States government contractors in the application of tax.
While the court stated that a taxpayer may test the validity of a tax regulation by an action for declaratory relief before he has acted so that he may govern his conduct accordingly, it seriously questioned whether such an action is appropriate after a taxpayer has entered into a transaction which the taxing authorities claim is taxable. Granting such relief would appear to circumvent Section 6931 of the Revenue and Taxation Code which prohibits the granting of an injunction or writ of mandamus to prevent the collection of tax.
The court went on to uphold the validity of Regulation 1521, stating that any difficulty in drawing lines stemmed from problems inherent in the basic legal concept of fixtures. The uncertainty in drawing a line between fixtures and materials justifies a process of initial administrative determination subject to judicial review, since it is better to resolve gray areas, no matter how laborious the effort, than to allow retail sellers of fixtures to escape their fair share of tax.
The court also held that since the United States government has a unique taxable status, a rule is not necessarily invalid just because it distinguishes between contractors generally and United States government contractors. Honeywell, Inc. v. State Board of Equalization (1975) 48 Cal.App.3d 907.
Honeywell, Inc. v. State Board of Equalization … (1982)
Taxpayer Has Burden of Proof to Show It Is Entitled to Refund Claim
In an action by a taxpayer against the State Board of Equalization seeking refunds of sales and use taxes paid on leases of certain equipment, the trial court ruled that the taxpayer had the burden of providing that its lessees had paid the use tax.
The court of appeal affirmed, holding that the trial court had properly placed the burden on plaintiff to prove that the lessees had paid the use tax on the leased property and that the Board had properly determined the tax due on fixtures installed by plaintiff under lump sum construction contracts on the basis of the "transfer cost" of such fixtures as set forth in documents prepared by plaintiff for its use in bidding on the construction contracts, since similar fixtures were not sold to contractors on the open market. The court also held the trial court had properly found that plaintiff had not established by a preponderance of admissible evidence that certain sales it had made were in fact for resale. The court also held that the trial court properly found plaintiff failed to meet its burden of showing nontaxability as to the purchase of tangible personal property from an out-of-state manufacturer. Honeywell, Inc. v. State Board of Equalization (1982) 128 Cal.App.3d 739.
Hotel Del Coronado v. State Board of Equalization … (1971)
Sale of Hotel Assets Held Taxable
Plaintiff sold its entire interest in the assets, fixtures, and property of a hotel it operated. Sales tax was assessed, measured by the sales price of the tangible personal property, including hotel furniture and fixtures transferred as part of the sale. Plaintiff operated a hotel, restaurant, bar, and smoke shop and had made numerous "salvage sales" of property of the type disposed of in the final sale. Plaintiff contended that the sale of its capital assets qualified as an "occasional sale" within the meaning of Section 6006.5(a) of the Revenue and Taxation Code and was thus exempt under Section 6367.
The court of appeal held that the tax had been properly assessed. Plaintiff was engaged in the activity of making numerous sales at retail and was, therefore, required to hold a seller's permit. The property sold was held in an activity which required the holding of such a permit. Further, since the capital assets sold during the months prior to the sale in question were of the same type as those sold in the questioned sale, that sale was one of a series of sales sufficient in number, scope, and character to require the holding of a seller's permit. Hotel Del Coronado v. State Board of Equalization (1971) 15 Cal.App.3d 612.
Howell , In re … (1984)
Tax on Sales of Materials and Fixtures to Federal Construction Contractors Is Constitutional
In a bankruptcy proceeding, the Board filed a claim for sales and use taxes due on sales of materials and fixtures to a construction contractor improving real property under contracts with the U.S. Government. The U.S. District Court allowed the claim.
The U.S. Court of Appeals, Ninth Circuit, affirmed. The court held that the Sales and Use Tax Law did not discriminate against federal contractors because the legal incidence of the taxes fell on the contractor, not the United States, and the contractor had the opportunity to pass on the economic burden of the taxes to the United States. The court also held that Revenue and Taxation Code sections 6007.5 and 6384 provided statutory authority for the Board's Regulation 1521, which classified the federal contractor as a consumer of materials and fixtures, because the statutes tax the sales by suppliers to federal contractors as retail sales.
Finally, the court held that there was a rational basis for the state to distinguish between federal contractors and other sellers who sell property to the United States, because the use of property in a construction contract by attaching it to realty changes the form of the property. In re Howell (9th Cir. 1984) 731 F.2d 624.