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Sales and Use Tax Memorandum Opinions

Continental Trailways, Inc.

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While tax does not apply to sales or leases between divisions of a corporation, it may apply to sales or leases between corporations which are components of a multi-corporate structure. Transfers between parent and subsidiary corporations, for example, have customarily been regarded as transfers between "persons" and subject to tax without regard to the business relationship.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

In the Matter of the Petitions of CONTINENTAL TRAILWAYS, INC., dba CONTINENTAL WESTERN LINES DIV., AMERICAN BUSLINES, INC., TRANSCONTINENTAL BUS SYSTEM, INC., CONTINENTAL SOUTHERN LINES, INC., ARKANSAS MOTOR COACH LTD., INC., CONTINENTAL BUS SYSTEMS, INC., CONTINENTAL CRESCENT LINES, INC., CONTINENTAL PANHANDLE LINES, INC., CONTINENTAL TENNESSEE LINES, INC., DENVER-COLORADO SPRINGS-PUEBLO MOTOR WAY, INC., DENVER-SALT LAKE-PACIFIC STAGES, INC., EDWARDS MOTOR TRANSIT CO., MIDWEST BUSLINES, INC., QUEEN CITY COACH CO., SAFEWAY TRAILS, INC., SMOKY MOUNTAIN STAGES, INC., and UNION BUS LINES, INC.

Appearances:

MEMORANDUM OPINION

This opinion considers the merits of seventeen petitions for redetermination of sales taxes and penalties determined against petitioners for the period August 1, 1965 to December 31, 1969.

Petitioners are affiliated corporations collectively doing business as "Continental Trailways". Continental Trailways, Inc., is both an operating company, dba Continental Western American Buslines, Inc., Transcontinental Bus Systems, Inc., Continental Southern Lines, Inc., Arkansas Motor Coach Ltd., Inc., Continental Tennessee Lines, Inc., Denver-Colorado Springs-Pueblo Motor Way, Inc., Denver-Salt Lake-Pacific Stages, Inc., Midwest Buslines, Inc., Queen City Coach Co., Safeway Trails, Inc., Smoky Mountain Stages, Inc., and Union Bus Lines, Inc. Continental Panhandle Lines, Inc., is 50 percent owned by Continental Trailways, Inc. Edwards Motor Transit Co., is owned by TCO Industries, a holding company and the parent corporation of Continental Trailways, Inc.

Being affiliated corporations, petitioners can offer through service without changes of buses to persons traveling from coast to coast and, as a result of membership in the National Trailways Association, they can offer such through service to numerous locations. That service is effected by means of pooling arrangements whereby companies whose routes are traversed provide the buses required, each company providing a portion of the buses required to execute the schedule as determined through the use of a ratio derived from the mileage of its portion of the route and the mileage of the entire route. For example, if through service were to be provided between Los Angeles and New York, and if the mileage of Continental Trailways, Inc.'s, route constituted 10 percent of the mileage of the entire route, Continental Trailways, Inc., would provide 10 percent of the buses required to execute the schedule for that route. As a result, petitioners are able to compete with Greyhound Lines for the carriage of such persons.

Buses of one company operated over the routes of other companies are leased to the latter, and each company is responsible for the expenses of leased buses traversing its routes. During the period August 1, 1965 to December 31, 1969, the amount attributed to such expenses was 15 cents per mile. As each petitioner was regarded as a person for purposes of the Sales and Use Tax Law, and as petitioners did not report or pay taxes measured by lease receipts derived from California, amounts equal to the amounts of such receipts were established as the taxable measures. In addition, 10 percent penalties were imposed in those instances in which petitioners failed to file sales and use tax returns.

In enacting Section 6005 of the Revenue and Taxation Code, the Legislature defined "person" as any individual, firm, copartnership, joint venture, association, social club, fraternal organization, corporation, estate, trust, business trust, receiver, assignee for the benefit of creditors, trustee, trustee in bankruptcy, syndicate, the United States, this State, any county, city and county, municipality, district, or other political subdivision of the State, or any other group or combination acting as a unit. Petitioners have asserted that they operate as a single unit and that together they constitute a group or combination acting as a unit and hence, a person, with the result that they are not required to report or pay those taxes.

In administering and enforcing that portion of Section 6005 which defines "person" as "any corporation", we have distinguished between corporations utilizing divisional structures, regarding each such corporation as a person, and corporations utilizing multi-corporate structures, regarding each corporation within such a structure as a person. Thus, while tax does not apply to sales or leases between divisions of a corporation, it may apply to sales or leases between corporations which are components of a multi-corporate structure. Transfers between parent and subsidiary corporations, for example, have customarily been treated as transfers between "persons" and subject to tax without regard to the business relationship (see Cal. Tax Service Annotations 395.1520, 1/11/55; 395.2500, 9/17/64; 395.2540, 6/29/54).

Rarely have we applied that portion of Section 6005 which defines "person" as "any other group or combination acting as a unit". Unrelated oil companies which became co-owners of a petroleum gas processing plant and operated it jointly have been regarded as a "group or combination acting as a unit", with the result that processing charges made to individual members were taxable (Cal. Tax Service Annotation 415.0080, 3/4/68). That enterprise had all of the elements of a partnership except that it was conducted to reduce costs rather than to obtain "profit" in the ordinary sense. The situation is distinguishable on its facts from the case before us and, in any event, does not constitute precedent for disregarding transfers between individual members.

While petitioners' presentation was directed to the establishment of the proposition that they operate as a single unit and that together they constitute a group or combination acting as a unit and hence, a person for purposes of Section 6005, analysis of petitioners' structure and operations discloses that each petitioner is a person for purposes thereof. That American Buslines, Inc., and Transcontinental Bus System, Inc., applied for and were issued seller's permits individually in their own names in the 1950's suggests that they also have regarded themselves as persons.

As petitioners could have utilized a divisional structure but did not do so because benefits derived from their use of a multi-corporate structure exceeded those which they might otherwise have derived, they must assume any burdens incurred as the result of that business decision. Such burdens include any obligations and liabilities arising under the California Sales and Use Tax Law and, in this instance, include those of reporting and paying taxes upon lease receipts derived from California.

Petitioners have raised a number of additional issues which they wish to preserve but have not seriously pressed in this proceeding. Without enumerating or discussing their contentions in detail, suffice it to say that we have found no merit in them.

Accordingly, the taxes as determined shall be redetermined without change.

With respect to the penalties imposed, as relief therefrom was requested in accordance with Section 6592 of the Revenue and Taxation Code, and as it was concluded that petitioners should be relieved of such penalties, the penalties imposed shall be canceled.

Done at Sacramento, California, this 7th day of February, 1973.

William M. Bennett, Chairman

George R. Reilly, Member

John W. Lynch, Member

Richard Nevins, Member

Attested by: William W. Dunlop, Executive Secretary