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Business Taxes Law Guide—Revision 2024

Sales And Use Tax Court Decisions


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Macrodyne Industries, Inc. v. State Board of Equalization … (1987)

Mantz v. State Board of Equalization … (2003)

Mapo, Inc. v. State Board of Equalization … (1975)

McClain v. Sav-On Drugs … (2019)

McConville v. State Board of Equalization … (1978)

McDonnell Douglas Corporation v. State Board of Equalization … (1992)

MCI Airsignal, Inc. v. State Board of Equalization … (1991)

MCI Communications Services, Inc. v. California Department of Tax and Fee Administration … (2018)

Mercedes-Benz of North America, Inc. v. State Board of Equalization … (1982)

Mission Pak Co. v. State Board of Equalization … (1972)

Modern Paint and Body Supply, Inc. v. State Board of Equalization … (2001)

Montgomery Elevator Co. v. State Board of Equalization … (1981)

Montgomery Ward and Co. v. State Board of Equalization … (1969)


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Macrodyne Industries, Inc. v. State Board of Equalization … (1987)

Transfer of Entire Division's Assets and Liabilities to Existing Subsidiaries Is Not a Sale Where Transferor Remains Jointly Liable for Liabilities

The company transferred both the assets and liabilities of three divisions to three of its already existing wholly-owned subsidiaries. It, however, remained jointly liable with the subsidiaries for those liabilities. The Board assessed sales tax on the transfer of assets, and the consideration for the sales was the assumption of the liabilities by the existing subsidiaries.

Taxpayer contended: (a) this was a nontaxable corporate reorganization, and (b) there was no taxable consideration because taxpayer remained jointly liable for the liabilities.

The court of appeal held in favor of the taxpayer, stating that the taxpayer and its subsidiaries were separate entities, and the transfers between them, which constituted sales, would be subject to sales tax. However, the court also held that where the taxpayer remained jointly liable for the indebtedness assumed by the subsidiaries, and the subsidiaries were pre-existing (not commencing) corporations, the taxpayer received no consideration for the transfer of assets, and there was, therefore, no sale. Macrodyne Industries, Inc. v. State Board of Equalization (1987) 192 Cal.App.3d 579 [disapproved in Beatrice Co. v. State Board of Equalization (1993) 6 Cal.4th 767].


Mantz v. State Board of Equalization … (2003)

The Bankruptcy Code Vests a Bankruptcy Court with Subject Matter Jurisdiction to Determine the Amount and Validity of a Tax Assessment Against a Debtor

The debtors filed a chapter 11 bankruptcy petition to, among other things, challenge the Board's redetermination of a sales tax deficiency. When Board staff filed a proof of claim in the debtors' chapter 11 case for the sales tax deficiency, the debtors objected to the Board's proof of claim. The bankruptcy court dismissed the debtors' objection on the basis that it could not be challenged because it had previously been redetermined by the Board. On appeal, the Ninth Circuit Court of Appeals held that 11 U.S.C. § 505(a)(2)(A) did not deprive the bankruptcy court of subject matter jurisdiction to determine the debtors' state tax liability because the debtors' state tax dispute was still pending before the Board when the debtors filed for bankruptcy. Because 11 U.S.C.S. § 505(a)(1) plainly authorized the bankruptcy court to determine the debtor's tax liability, the bankruptcy court was not required by 28 U.S.C.S. § 1738 to give preclusive effect to the Board's state tax liability determination. Mantz v. State Board of Equalization (2003) 343 F3d 1207.


Mapo, Inc. v. State Board of Equalization … (1975)

Taxpayer Held Not Subject to Tax on Transactions with Related Corporation

Plaintiff was a corporation wholly owned by WED Enterprises, Inc. (WED) which in turn was wholly owned by Walt Disney Productions (Productions). Plaintiff manufactured devices designed by WED using materials furnished by Productions. Plaintiff's services were performed solely for Productions and another related corporation. Productions retained title to all materials, ideas, and completed devices. The officers of plaintiff were on the payroll of WED. Productions and WED took care of plaintiff's payroll, purchasing, accounting functions, and insurance coverage. Plaintiff recorded no profits. A long-time employee of Productions, who was carried on the payroll of WED, supervised the day-to-day operations of plaintiff. Plaintiff was formed solely to facilitate union agreements, and was in existence for only a few years. Before it was formed, and after it was dissolved, the same operations were carried on through a division of Productions.

The issue was whether plaintiff's services constituted "sales" within the meaning of Section 6006(b) of the Revenue and Taxation Code, which provides that "sale" includes producing, fabricating, or processing tangible personal property for a consideration for consumers who furnish the materials used.

On the particular facts involved, the court concluded that Productions was fabricating items for itself through its employees in fact, and therefore no sales tax was payable. Mapo, Inc. v. State Board of Equalization (1975) 53 Cal.App.3d 245.


McClain v. Sav-On Drugs … (2019)

Consumers May Not Sue Retailers for Refunds of Alleged Excess Sales Tax Reimbursement When There Has Not Been a Prior Determination That Excess Sales Tax Reimbursement Was Collected and That a Refund Is Owed

Plaintiff consumers brought a putative class action against several retailers seeking a refund of alleged excess sales tax reimbursement collected by the defendant retail pharmacies on sales of skin puncture lancets and glucose test strips, which the plaintiffs claimed were exempt from sales tax. Plaintiffs asserted actions for breach of contract, negligence, and violations of consumer protection statutes, seeking declaratory and injunctive relief to compel the defendant retailers to file a tax refund claim with the Department and order the Department to award refunds to be passed on to consumers. The California Supreme Court held that a consumer (non-taxpayer) could not maintain a cause of action against a retailer (taxpayer) to compel it to file a claim for refund of alleged excess sales tax reimbursement collected because there had been no prior determination by the CDTFA that excess sales tax reimbursement was collected and that a refund was owed. McClain, et al. v. Sav-On Drugs, et al. (2019) 6 Cal.5th 951.


McConville v. State Board of Equalization … (1978)

The Depreciation of Property Held For Resale Is A Taxable Use

Taxpayer held a seller's permit and was engaged in the business of buying, breeding, and selling horses. Taxpayer held twenty horses for resale during the period July 1, 1969 to December 31, 1971 consisting of one "teasing stallion" and nineteen mares. Each mare was bred while being held for resale and was either in foal or with a foal at its side. Although taxpayer contended that breeding the mares was not a use inconsistent with the holding of them for resale and hence subject to use tax, it capitalized the mares on both its federal and state income tax returns.

The court of appeal held that breeding the mares was a reasonable incident to the sale and was not a use incompatible with the requirement that the mares be held only for demonstration or display. The court did, however, find that taxpayer's depreciation of the mares on its federal and state income tax returns evidenced an intent to use the animals other than for retention, demonstration, or display. The court further found that resale inventory is not ordinarily subject to a depreciation allowance as a capital asset for income tax purposes. Accordingly, the court upheld the use tax. McConville v. State Board of Equalization (1978) 85 Cal.App.3d 156.


McDonnell Douglas Corporation v. State Board of Equalization … (1992)

Sales of Aircraft Parts to a Mexican Airline Were Tax Exempt Exports

The taxpayer sold aircraft parts to Aeromexico to service Aeromexico's airplanes. Aeromexico received the parts at the taxpayer's Long Beach plant and shipped them by U.S. common carriers to the U.S.-Mexican border at San Ysidro, California. AM MEX International, a forwarding agent, processed them through U.S. and Mexican customs. After a 48-hour customs delay, the parts were loaded onto Mexican common carriers and shipped to Aeromexico's Mexico City maintenance facility. Mexican law prohibited U.S. common carriers from operating in Mexico, and U.S. law permitted Mexican common carriers to operate in the U.S. only in the immediate border area.

The court determined that the sales were tax-exempt exports. Aeromexico's clear plan to ship the parts to Mexico City for its own use was acted upon, and continued uninterrupted until completion, except for unavoidable delays incidental to their journey. McDonnell Douglas Corporation v. State Board of Equalization (1992) 10 Cal.App.4th 1413.


MCI Airsignal, Inc. v. State Board of Equalization … (1991)

Gross Receipts from the Furnishing of Telephone Paging Devices Not Subject to Sales and Use Taxes when Provided in Conjunction with the Sale of Telephone Paging Services

Taxpayer was assessed sales tax on the sale of telephone paging devices supplied to customers of their telephone paging services. There was no separately listed charge for the devices.

The court determined that although sales and use taxes are imposed on the gross receipts from the sale of tangible personal property (Revenue and

Taxation Code Section 6051), and a "sale" includes the "leasing" of tangible personal property (Section 6006(g)), Regulation 1501 recognizes that services are exempt. It is possible to provide tangible personal property that is only incidental to the primary service agreement without incurring a sales or use tax.

The issue to be decided was whether the paging devices were only incidental. The test for determining whether a business activity is a service or whether it is a sale of tangible personal property depends upon the "true object" of the transaction. The court held that the true object of this contract was the providing of paging services. The paging devices were only incidental thereto. A major factor was that taxpayer retained ownership of the paging devices and was responsible for their maintenance and repair. The customer paid a flat fee, with no separate charge for the use of the paging device. MCI Airsignal, Inc. v. State Board of Equalization (1991) 1 Cal.App.4th 1527.


MCI Communications Services, Inc. v. California Department of Tax and Fee Administration … (2018)

The Tax Exclusion of Revenue and Taxation Code Section 6016.5 Applies Only to Fully Installed and Completed Telephone Lines

A provider of telecommunications services and products filed a claim for refund on use tax paid on the telephone cables, conduit, and telephone poles that it purchased. It argued that these items were excluded from the definition of tangible personal property under Revenue and Taxation Code section 6016.5, as "telephone and telegraph lines, electrical transmission and distribution lines, and the poles, towers, or conduit by which they are supported or in which they are contained," and therefore its purchases of these items were not subject to sales and use taxes.

The court of appeal held in favor of the CDTFA that the tax exclusion in section 6016.5 applies only to fully installed and completed telephone and telegraph lines, and not to the pre-installation component parts of such lines. MCI Communications Services, Inc. v. California Department of Tax and Fee Administration (2019) 28 Cal.App.5th 635.


Mercedes-Benz of North America, Inc. v. State Board of Equalization … (1982)

Tax Due on Vehicles Purchased by Subsidiary from Parent Corporation

A Delaware corporation that was a wholly-owned subsidiary of a German corporation was authorized to do business in California. It brought an action against the State Board of Equalization to recover use taxes paid on vehicles purchased from the parent corporation and another subsidiary. The trial court entered judgment in favor of the Board.

The court of appeal affirmed, rejecting plaintiff's contention it was denied equal protection of the law by being subjected to the tax on the basis of the price paid for the vehicles under section 6244 of the Revenue and Taxation Code and Sales and Use Tax Regulation 1669, while a California merchant that is merely a subdivision of a manufacturer, rather than a separate corporation, is taxed on the basis of the cost of the manufacturer's raw material. The court held there is a significant difference between wholly-owned but separate corporations, and divisions of a single corporation, and that if a business elects to use the device of separately incorporated wholly-owned subsidiaries in order to obtain the advantages of separate corporate entities, it must also suffer whatever disadvantages attach to that election. Mercedes-Benz of North America, Inc. v. State Board of Equalization (1982) 127 Cal.App.3d 871.


Mission Pak Co. v. State Board of Equalization … (1972)

Classification of Glacéd Fruits as "Candy or Confectionery" Upheld

Under Revenue and Taxation Code Section 6359 as it was operative prior to January 1, 1972, "candy and confectionery" was excluded from the definition of "food products," the sale of which generally is not subject to tax. By regulation, the Board had defined "candy and confectionery" to include "candied fruits, crystallized fruits and glacé fruits [and] preparations of fruits … in combination with … sugar." Plaintiffs, taxpayer and its predecessor, were assessed tax resulting from the sale of their glacéd fruit products. Plaintiffs contended that the regulation was invalid, as inconsistent with Section 6359, or, alternatively, that their products were not properly classified as "candy or confectionery" but as "fruit and fruit products" or "sugar and sugar products," items which were specifically classed as "food products" by Section 6359.

The court of appeal observed that the construction of a statute by officials charged with its administration is entitled to great weight and if there appears to be some reasonable basis for the classification, a court will not substitute its judgment for that of the administrative body. The court held (1) that the Board's administrative ruling was reasonable and valid, since it was supported by the dictionary definition of "confectionery," the Legislature had frequently amended the statute without attempting to modify the administratively made definition of the phrase in question, and no one had previously challenged the Board's longstanding interpretation; and (2) that the evidence supported the classification of plaintiffs' products as "candy or confectionery" since after processing, approximately 80 percent of the product was sugar. Mission Pak Co. v. State Board of Equalization (1972) 23 Cal.App.3d 120.


Modern Paint and Body Supply, Inc. v. State Board of Equalization … (2001)

Supplies Consumed in Repairs

Taxpayer sold supplies such as sandpaper, masking tape, and paint thinner to auto repair shops for use during repairs. Taxpayer did not report sales tax on its sales of such supplies, contending that the sales were for resale, citing in support that some of the repair shops invoiced their customers a separate line item for "paints and materials" which was intended to cover the costs of paints and supplies used and consumed in the repair process. The court noted that the repair shops did not furnish the supplies to their customers, and thus concluded that they consumed the supplies in the process of making the repairs and did not purchase the supplies for resale. Modern Paint and Body Supply, Inc. v. State Board of Equalization (2001) 87 Cal.App.4th 703.


Montgomery Elevator Co. v. State Board of Equalization … (1981)

Board Could Establish Retail Price by Using Plaintiff's Records

A construction contractor which constructed and installed specialized elevator systems brought an action to recover a portion of the sales taxes it had paid under a lump sum contract which included installation of the system as a part of the building. The tax had been imposed on the sales price for which tangible personal property was sold, excluding the amount charged for labor and services rendered in installing the property. The Board used plaintiff's bid sheets in calculating all anticipated contract costs and profits in determining the "retail price" of self-manufactured components on which the sales tax was assessed, and the trial court upheld that determination. As to electrical switching and controlling devices plaintiff purchased and assembled, the trial court agreed with plaintiff's contention that labor or service supplied by plaintiff was to be considered as labor or service required for the creation of a structure on land and not subject to the imposition of any sales tax, and ordered a refund.

The court of appeal reversed with instructions to enter judgment for the Board. The court held that the trial court was correct in denying any refund with respect to the self-manufactured components. As to the electrical switching and controlling devices, the court held it was not unreasonable for the Board to establish a sales price for those assembled components by taking into consideration the service costs incurred by plaintiff at its central facility, or to rely on the bid sheets and other records of plaintiff to establish a realistic "sales price" for those assemblies. Accordingly, the court held that that portion of the judgment awarding plaintiff a refund was erroneous. Montgomery Elevator Company v. State Board of Equalization (1981) 118 Cal.App. 887.


Montgomery Ward and Co. v. State Board of Equalization … (1969)

Border Stores Not Required to Collect Tax from California Customer where Sale and Delivery Take Place Outside California

Plaintiff was an Illinois corporation with a nationwide retail sales business. It maintained a regional administrative office in Oakland, California, for a region which encompassed its stores in Reno, Nevada and Klamath Falls, Oregon.

The Board required plaintiff to collect use tax with respect to over-the-counter credit sales made to California residents at its stores in Nevada and Oregon where delivery was made to the California customers at the Nevada and Oregon locations. Plaintiff had not collected use tax with respect to such sales even though its credit files indicated that the customers had California addresses.

The court of appeal held that since there was no relationship between the retailer's general activities in California and the generation of sales by its border stores, and since the border stores received no opportunities, protection, or benefits from California that were sufficient to allow California to burden sales to its residents completed outside its jurisdiction, the due process clause of the fourteenth amendment of the U.S. Constitution precluded California from requiring that plaintiff collect the use tax on over-the-counter cash or credit sales made at its Nevada and Oregon stores.

The court also concluded that the purchaser and the retailer could properly object to the imposition of the use tax with respect to sales in Nevada as violating the commerce clause of the U.S. Constitution because there was no credit given against use tax liability for sales tax paid in Nevada. The court concluded purchasers and retailers in Oregon, however, could not properly make the same objection to imposition of the use tax because there was no risk of multiple taxation—Oregon had no sales tax.

The use tax collection duty was held to violate the commerce clause with respect to sales in Oregon and Nevada because California contributed nothing to the sales at issue but the home residence of the purchasers. This contribution was not sufficient to support the burden of use tax collection.

The court further held that the imposition of the use tax collection duty on out-of-state stores of multi-state retailers, but not on out-of-state stores of local merchants, was inherently discriminatory and denied plaintiff equal protection and uniform operation of the law as provided in the United States and California constitutions. Montgomery Ward and Co. v. State Board of Equalization (1969) 272 Cal.4th 728, cert den., 396 U.S. 1040.