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Special Taxes Department Memorandum Opinions

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Special Taxes Department Memorandum Opinions

CIGARETTE AND TOBACCO PRODUCTS TAX LAW

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Max Wayne Holmes

Distributed cigarettes without valid stamps are subject to seizure and forfeiture on a strict liability basis.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

DECISION OF THE BOARD

In the Matter of the Petition for Release of Seized Property Under the Cigarette and Tobacco Products Tax Law of MAX WAYNE HOLMES Petitioner

Appearances:

For Petitioner: Max Wayne Holmes

For Property and Special Taxes Department: Blanca Breeze Senior Tax Counsel

For Appeals Division: Steve Ryan Senior Tax Counsel

MEMORANDUM OPINION

This opinion considers the merits of a petition for release of seized property under the Cigarette and Tobacco Products Tax Law. Petitioner, a sole proprietor, operates a retail shop under the business name Discount Cigarettes and Gifts from which he sells cigarettes. An investigation disclosed that cigarettes without stamps as well as cigarettes with counterfeit stamps were located at petitioner's retail place of business. Some of the unstamped and counterfeit stamped cigarettes were on petitioner's store shelves for retail sale, and the remainder of the unstamped and counterfeit stamped cigarettes were in a back room. The Board's Investigation Division seized the unstamped and counterfeit stamped cigarettes pursuant to subdivision (b) of Revenue and Taxation Code section 30436, and petitioner filed a petition for their release pursuant to Revenue and Taxation Code section 30438.

OPINION

Revenue and Taxation Code section 30436 provides, as relevant here:

"The following property, upon seizure by the board, is hereby forfeited to the State of California:

" … .

"(b) Cigarettes not contained in packages to which are affixed California cigarette tax stamp or meter impressions … , which are offered for sale, possessed, kept, stored or owned by any person with the intent of the person to sell the cigarettes … without payment of the taxes imposed by this part.

" … . "

Petitioner does not dispute that he had unstamped and counterfeit stamped cigarettes at his retail place of business. He claims that he was unaware of the counterfeit stamps. While petitioner admits he was aware that he possessed unstamped cigarettes at his retail place of business, he asserts that the unstamped cigarettes were being held there pending arrangements for transit to a distributor for stamping. As explained below, petitioner's alleged lack of knowledge is irrelevant to the determination of whether the seizure was proper. When cigarettes described by subdivision (b) of Revenue and Taxation Code section 30436 are seized, they must be forfeited to the State of California.

The Cigarette and Tobacco Products Tax Law imposes tax upon the distribution of cigarettes. (Rev. and Tax. Code, §§ 30101, 30123, 30131.2.) "Distribution" is defined to include the placing in this state of cigarettes in retail stock for the purpose of selling the cigarettes to consumers. (Rev. and Tax. Code, § 30008, subd. (c).) Thus, once cigarettes have been placed in retail stock, they have been distributed and tax must have already been paid by adding an appropriate stamp or meter impression on each package of cigarettes. (Rev. and Tax. Code, § 30163, subd. (a).)

The reference in subdivision (b) of Revenue and Taxation Code section 30436 to cigarettes "which are offered for sale, possessed, kept, stored or owned by any person with the intent of the person to sell the cigarettes" is essentially synonymous with the definition of distribution. In other words, once cigarettes are placed into retail stock, they are distributed, and they are held with the intent to sell. At that point, if the appropriate stamp or meter impression is not affixed to their packages, they are subject to seizure by, and forfeiture to, the State.

Retailers of cigarettes have a duty under the Cigarettes and Tobacco Products Tax Law to ensure that the distributed cigarettes they hold for sale have been properly stamped. Lack of knowledge is not a defense to seizure, and forfeiture, of distributed cigarettes that are not properly stamped: distributed cigarettes without valid stamps are subject to seizure and forfeiture on a strict liability basis. Accordingly, a retailer should purchase its cigarettes only from a licensed distributor who issues the retailer a purchase receipt containing the information required by law. (See Cal. Code of Regs., tit., 18, § 4092 (a cigarette distributor must give its purchaser a receipt showing the amount of tax collected, the name, address, and license number of the distributor, and other information).)

In the present case, petitioner held cigarettes with counterfeit stamps for sale at his retail place of business. Since the stamps were counterfeit, the cigarettes were being held for sale without payment of the tax imposed under the Cigarettes and Tobacco Products Tax Law. Thus, the seizure was proper and the cigarettes must be forfeited to the State of California.

Petitioner held unstamped cigarettes at his retail place of business, and some of them were actually on the store shelves for sale. The evidence does not support a contention that the unstamped cigarettes were on the store shelves by accident, and that the unstamped cigarettes in the back room were not being held for sale in their current unstamped condition. Rather, it appears that all of the unstamped cigarettes were available for retail sale. This conclusion is confirmed by the fact that some of the distributed cigarettes with counterfeit stamps were located in the same room as the unstamped cigarettes. Furthermore, even if an employee "accidentally" placed unstamped cigarettes on the store shelves, petitioner made that distribution possible by placing the cigarettes at his retail place of business, and petitioner is strictly liable for the distribution that occurred as a result. We conclude that all unstamped cigarettes at petitioner's retail place of business were part of petitioner's retail stock and had been distributed, that their seizure was proper, and that they thus must be forfeited to the State of California.

The petition for release of the seized cigarettes is denied.

Adopted at Sacramento, California, on November 13, 2002.

John Chiang, Chair

Claude Parrish, Member

Johan Klehs, Member

Dean Andal, Member

Marcy Jo Mandel, Member*

* For Kathleen Connell, pursuant to Government Code section 7.9.

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EMERGENCY TELEPHONE USERS SURCHARGE

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GTE California, Inc.

In random samples of invoices, undercollections of two cents or less per customer bill, will not be considered as errors. Undercollection exceeding two cents on an individual customer bill will be projected in the audit sample without adjustment.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

In the Matter of the Petition for Redetermination Under the Emergency Telephone Users Surcharge of GTE CALIFORNIA, INC. Petitioner

Appearances:

For Petitioner: Mr. Robert Dunn Attorney

For Appeals Section, Legal Division: Mrs. Susan M. Wengel Assistant Chief Counsel

For Excise Taxes Division: Ms. Janet Vining Senior Tax Counsel

MEMORANDUM OPINION

This opinion considers the merits of a petition for redetermination in the amount of $405,855.42 in tax for the period April 1, 1989 through March 31, 1992. The Members of the Board of Equalization heard this matter on April 9, 1997.

Petitioner is a service supplier of telephone communication services. As such, petitioner is required to collect the Emergency Telephone Users Surcharge (surcharge) from its customers. This surcharge, commonly called the "911 tax" is imposed on amounts paid by every person in the State of California for intrastate telephone communication services and is used to fund California's "911" emergency telephone system. All amounts collected by petitioner were credited to an accrual account and were reported to the Board of Equalization (Board).

The Board's Special Taxes Department's (Department) audit of petitioner was performed on a random sample basis as petitioner had in excess of 2.76 million customers and issued more than 97 million invoices during the audit period. A sample of 200 randomly selected telephone bills was initially used, but was subsequently determined to be too small. The original sample was expanded to 754 randomly selected bills. For these bills, all taxable charges were totaled and multiplied by the appropriate tax rate to determine the amount of tax petitioner was required to collect from the service users. This amount was then compared to the billed tax amount on each invoice. Overcollections of tax were used to offset undercollections only if the errors were on the same bill.

Thirty-four undercollection errors were found, ranging from $0.01 to $1.32 for a total of $2.70 or an error rate of 1.199%. The Department contends that Revenue and Taxation Code sections 41023 and 41024 provide that the surcharge required to be collected by the supplier and any amount not returned to the user, which is not a surcharge, but was collected from the user and represented as a surcharge, constitute a debt owed by the supplier to this state.

Petitioner contends that all over collections of ten cents or less should be used to offset all undercollections and that the direction given by the Board Members at a July 25, 1996 meeting should be followed. This allows offsets where there are 911 surcharge billing errors of ten cents or less. Overcollections in excess of ten cents would not be offset and would be a debt owed by the service supplier to the State of California.

We reject petitioner's argument that overcollections of ten cents should be used to offset all undercollections. The basis for petitioner's argument is that errors of ten cents are of de minimis amounts. However, a ten cent billing error relates to telephone service charges of $14.49 (using a .69% tax rate) which is not a de minimis amount. The de minimis concept would be further violated by allowing overcollections of ten cents or less to offset all undercollections which, include bills with errors ranging to $191.76 (surcharge of $1.32) in telephone service charges. However, the Board does recognize the inherent complexity of applying the tax to the variety of taxable charges in this program and the generally small amounts of tax involved per customer bill.

Therefore, unintentional under collection errors in the amount of two cents or less are not considered material and will not be recognized as errors when conducting audits. This procedure recognizes factors such as complexity of charges, rounding errors, rate changes during billing cycles, and minor coding errors for services subscribed.

OPINION

For the purposes of the Emergency Telephone User Surcharge Law, we conclude that the petitioner's undercollections of two cents or less per customer bill in the sample of customer invoices will be not be considered as errors. An undercollection exceeding two cents on an individual customer bill will be projected in the audit sample without adjustment.

Done at Sacramento, California, this 9th of October 1997.

Ernest J. Dronenburg, Jr., Chairman

Dean F. Andal, Member

Rex Halverson, Member*

* For Kathleen Connell, per Government Code section 7.9.

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GTE California, Inc.

A separately stated charge for GTE's CentraNet Special Feature Package qualifies as a charge for private communication service and is therefore exempt from the 911 Surcharge. The package includes recognized services that qualify as private communication services.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

In the Matter of the Petition for Redetermination of GTE CALIFORNIA, INC. Petitioner TU HQ 35-100012-030 CentraNet Service

Appearances:

For Petitioner: Mr. Robert Dunn Attorney

For Appeals Section, Legal Division: Mrs. Susan M. Wengel Assistant Chief Counsel

For Excise Taxes Division: Ms. Janet Vining Senior Tax Counsel

MEMORANDUM OPINION

This opinion considers the issue of whether certain charges for Petitioner's CentraNet Special Feature Packages qualify as charges for exempt private communication service under the Emergency Telephone Users Surcharge Law [1] (the "Law"). The Law imposes a surcharge on amounts paid by every person in

California for intrastate telephone communication services (the "911 Surcharge"). The 911 Surcharge must be collected by the service supplier, but charges for "private communication service" are exempt. Revenue and Taxation Code Section 41017 defines private communication service as follows:

" 'Private communication service' shall mean

(a) The communication service furnished to a subscriber which entitles the subscriber—

(1) To exclusive or priority use of any communication channel or groups of channels, or

(2) To the use of an intercommunication system for the subscriber's stations, regardless of whether such channel, groups of channels, or intercommunication system may be connected through switching with a service described in Sections 41015 and 41016,

(b) Switching capacity, extension lines and stations, or other associated services which are provided in connection with, and are necessary or unique to the use of channels or systems described in subdivision (a), and

(c) The channel mileage which connects a telephone station located outside a local telephone system area with a central office in such local telephone system, except that such term shall not include any communication service unless a separate charge is made for such service."

The CentraNet Service offered by Petitioner has two components. First is a CentraNet charge of $9.10 per month per line for working primary station lines and direct inward and outward dialing, which it is agreed, does not constitute private communication service. Second is a choice among three optional Special Feature Packages which are separately priced at a monthly rate per station of $3 (Package 1000), $5 (Package 2000), and $6 (Package 3000). The features which are included in Package 1000 are station-to-station dialing, call forward, call hold, call pickup, call transfer, call waiting, conferencing (three way calling), speed calling (6 or 8 numbers), and station hunting. Package 2000 includes the Package 1000 features plus automatic call back (camp on), call park, last number redial, and toll restriction. Package 3000 includes the features in both Package 1000 and Package 2000 plus automatic route selection/flexible route selection, remote access to features, and message detail recording. Petitioner argues that these Special Feature Packages qualify as private communication services.

OPINION

The Board finds that the charge for a GTE CentraNet Special Feature Package qualifies as a charge for private communication service and is therefore exempt from the 911 Surcharge. This finding is based on the fact that a separately stated charge is made for the CentraNet Special Feature Package, and the services bundled together in the package include a recognized private communication service (station to station dialing), as well as other services provided in connection with the private communication service such as call forward, call hold, call pickup, call transfer, call waiting, conferencing, speed calling and station hunting.

The Board finds, however, that a package of services which includes direct inward-outward dialing would not qualify as private communication service. Therefore, no exemption will be allowed for a package of services for which a separate charge is made if the package includes direct inward-outward dialing or similar type service. Services that are not bundled into a package, but instead are separately identified along with a separate charge, will be subject to the 911 Surcharge if the individual service qualifies as taxable "intrastate telephone communication service" as defined in Revenue and Taxation Code Section 41010.

For the reasons expressed in this opinion, the amount of tax due on the charges for CentraNet Special Feature Packages is reduced by $40,591.32. With this adjustment, the amount determined to be owing pursuant to the Board's second reaudit, $366,811.31, is redetermined to $326,219.99.

Done at Sacramento, California, this 27th day of August, 1998.

Dean F. Andal, Chairman

Johan Klehs, Member

Ernest J. Dronenburg, Jr., Member

Marcy Jo Mandel, Member*

John Chiang, Acting Member**

* For Kathleen Connell, per Government Code section 7.9.

** Acting Member, 4th District

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[1] Revenue and Taxation Code Part 20, Division 2 (commencing at Section 410001).

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Information Satellite Corp.

The amounts paid by service suppliers for annual PUC fees and Universal Telephone Services Act (Moore Act) taxes are not excludable from taxable revenues for purposes of computing the Emergency Telephone Users (911) Surcharge or the (now-repealed) Moore Act tax.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

DECISION OF THE BOARD

In the Matter of the Petition for Redetermination of INFORMATION SATELLITE CORP., ET AL dba SATELLITE BUSINESS SYSTEMS Petitioner

Appearances:

For Petitioner: Harold J. Heltzer Attorney

For Department of Special Taxes and Operations, State Board of Equalization: Stella Connell Levy Tax Counsel

This Decision considers the merits of a petition for redetermination, filed pursuant to Revenue and Taxation Code Sections 41085 and 44080, of assessments of the Emergency Telephone Users Surcharge ("9-1-1 Surcharge") and the California Universal Telephone Services Act Tax ("Moore Act Tax"), in the amount of, respectively, $3,552.95 and $47,496.90, for the period October 1, 1984 to February 28, 1986. The Board heard the petitions for redetermination on October 2, 1992, in Sacramento, California. The board took the matter under submission, and, on April 22, 1993, ordered the matter redetermined without adjustment.

The issue before us is whether California Public Utility Commission (P.U.C.) fees and Moore Act taxes billed and collected by petitioner are "taxes" which can be excluded from the amounts upon which the Moore Act tax and 9-1-1 Surcharge are based. We hold that they are not.

Petitioner was engaged in providing microwave satellite communications to business and residential customers throughout the United States. Upon audit, it was discovered that petitioner had not included within the amount subject to the 9-1-1 Surcharge charges collected from its customers as reimbursement for the P.U.C. fees and for the Moore Act tax. Petitioner argues that the charges are state "taxes" excluded from the computation of the 9-1-1 Surcharge by Section 41011 and from the definition of "gross revenues" for Moore Act tax purposes pursuant to Section 44024. In making its argument, petitioner relies on the failure of the Legislature explicitly to limit the exclusion to taxes which are imposed not on the taxpayer but on the taxpayer's customers.

We find Petitioner's argument would lead to an absurd result. We can see no difference between passing on to its customers the taxes and fees that Petitioner pays to the state for P.U.C. fees and Moore Act taxes and passing on the costs of its franchise and property taxes. Such ordinary expenses of doing business, however, were clearly not intended to be deducted from the 9-1-1 and Moore Act tax base, and charges intended to recoup those expenses are not, strictly speaking, "taxes".

Statutory exclusions from taxation are to be strictly construed. Framingham Acceptance Corp. v. State Board of Equalization (1987) 191 Cal.App.3d 461. We note that the tax exclusion in the 9-1-1 Surcharge Act specifies only taxes imposed by the United States and "any charter city" (Section 41011) and does not even mention "state" taxes. Even where the Legislature has included "state" taxes in the exclusion, however, as in the Moore Act (Section 44024) we find that the only reasonable construction of the statute would restrict the exclusion to taxes imposed on the customer, where the taxpayer's charges truly function as a collection mechanism for the government, rendering the charges "taxes".

For the reasons set forth in this Decision, the petition for redetermination is denied.

Adopted at Torrance, California, this 9th day of November, 1993.

Brad Sherman, Chairman

Windie Scott, Member

Attested by: Burton W. Oliver, Executive Director

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HAZARDOUS SUBSTANCES

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Douglas C. Elliott

While the release of oil from an underground storage tank caused a hazardous substance to mix with the surrounding soil, the resulting contaminated soil, while hazardous, was not a "waste". The contaminated soil was not a "discarded material" and did not become a waste until it was excavated and submitted for disposal.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

DECISION OF THE BOARD

In the Matter of the Petition for Redetermination Under the Hazardous Substance Tax Law of DOUGLAS C. ELLIOTT Petitioner

Appearances:

For Petitioner: Douglas C. Elliott

For Department of Toxic Substances Control: Daniel Weingarten Staff Counsel

For Department of Special Taxes and Operations, State Board of Equalization: Janet Vining Senior Tax Counsel

This Decision considers the merits of a petition for redetermination, filed pursuant to Revenue and Taxation Code Section 43001, of a hazardous waste generator fee, imposed by Health and Safety Code Section 25205.5, for fiscal year 1987–88. The Board heard the petition for redetermination on August 11, 1992, in Torrance, California, and took the matter under submission.

The issue before us is whether Petitioner was the generator of contaminated soil which was excavated during the removal of a leaking underground storage tank located on Petitioner's property. We find that Petitioner was the generator of the contaminated waste and was therefore subject to the hazardous waste generator fee.

In 1984, Petitioner purchased a multi-tenant automotive repair facility located in Thousand Oaks, California. Petitioner was not aware that the property included an underground storage tank that had been used for the storage of used motor oils. Petitioner was required to remove the tank, which was leaking, and to excavate the surrounding contaminated soil. Petitioner completed the cleanup of the property in December 1987, including the disposal of 496.31 tons of contaminated soil. The contaminated soil constituted hazardous waste.

Petitioner asserts that the contamination was caused by the actions of one or more of the prior owners or tenants. There was no available information concerning when the tank was installed or over what period of time the waste oil leaked into the soil. Petitioner argues that one or more of the previous owners and/or tenants should be considered the generator of the hazardous waste. We disagree.

During the period at issue in this matter, Health and Safety Code Section 25205.5 required each generator of hazardous waste to pay the Board a generator fee for each generator site for each fiscal year. "Generator" is defined in Health and Safety Code Section 25205.1(e) to mean "a person who generates volumes of hazardous waste … at an individual site." The regulations of the Department of Toxic Substances Control (the "Department") define "generator" to mean "any person, by site, whose act or process produces hazardous waste … or whose act first causes a hazardous waste to become subject to regulation" (Title 22, California Code of Regulations, Section 66260.10, previously Section 66078). During the period at issue in this matter, Health and Safety Code Section 25124 defined "waste" as "any discarded material … "

While the release of oil from the underground storage tank caused a hazardous substance to mix with the surrounding soil, the resulting contaminated soil, while hazardous, was not a "waste" as that term is defined in Health and Safety Code Section 25124. The contaminated soil was not a "discarded material" and did not become a waste until it was excavated and submitted for disposal. Since Petitioner was responsible for that excavation, Petitioner was the generator of the waste pursuant to the definition of "generator" in Health and Safety Code Section 25205.1(e).

Chapter 6.8 of the Health and Safety Code grants the Department the authority to order the removal or remediation of a release of a hazardous substance. Therefore, the Department could have required Petitioner, as the owner of the property, to clean up the site and excavate the contaminated soil. The site was thus subject to the Department's "enforcement authority".

Chapter 6.5 of the Health and Safety Code sets forth the Department's "regulatory authority". That chapter requires the Department to regulate all phases of the management and handling of hazardous waste in the state. Once Petitioner excavated the contaminated soil and classified it as hazardous, as required by Section 66262.11 of Title 22, California Code of Regulations (previously Section 66471), Petitioner became a regulated generator. As such, Petitioner was subject to the standards adopted by the Department that pertain to generators of hazardous waste, including the proper classification, labeling, packaging, manifesting, and transporting of the waste, as well as recordkeeping and reporting requirements. These standards were developed by the Department to insure the protection of the public health and safety and the environment. By first subjecting the hazardous waste to regulation, Petitioner was also a generator as that term is defined in the Department's regulations.

Our holding today is consistent with the Legislature's intent in imposing the hazardous waste generator fee. The fee is used to fund the Department's regulatory activities, and it was the regulation of Petitioner's management of the contaminated soil after excavation that resulted in costs to the State.

Since Petitioner was the generator of the hazardous waste at issue in this case, both by virtue of producing it and by first subjecting it to regulation, Petitioner is liable for the generator fee. Therefore, the determination in the amount of $10,780 is redetermined without adjustment.

Adopted at Sacramento, California, this 9th day of March, 1994.

Brad Sherman, Chairman

Matthew K. Fong, Member

Ernest J. Dronenburg, Jr., Member

Windie Scott, Member

Attested by: Burton W. Oliver, Executive Director

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Howard Pump, Inc.

Vandals opened a valve on a feepayer's fuel tank resulting in leakage of fuel onto the ground. The feepayer excavated the contaminated soil. The contaminated soil was clearly hazardous waste. However the Legislature did not intend the generator fee to apply in circumstances such as this. The contamination did not result from the normal or anticipated usage of equipment on the site, but from an intervening criminal act.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

DECISION OF THE BOARD

In the Matter of the Petition for Redetermination Under the Hazardous Substances Tax Law of HOWARD PUMP, INC. Petitioner

Appearances:

For Petitioner: Sanford C. Shaw Attorney

For Department of Toxic Substances Control: Ramon Perez Staff Counsel

For Department of Special Taxes and Operations, State Board of Equalization: Janet Vining Tax Counsel

This Decision considers the merits of a petition for redetermination, filed pursuant to Revenue and Taxation Code Section 43301, of a hazardous waste generator fee, imposed by Health and Safety Code Section 25205.5, for fiscal years 1986–87 and 1987–88. The Board heard the petition for redetermination on September 9, 1992, in San Diego, California, and took the matter under submission.

The issue before us is whether Petitioner was the generator of contaminated soil which was excavated during the cleanup of a hazardous waste spill. For the reasons stated below, we find that Petitioner was not the generator of the contaminated soil.

Petitioner was engaged in drilling a well, when vandals opened the valve on Petitioner's fuel tank and allowed approximately 400 gallons of fuel to spill on the ground. Petitioner hired an environmental firm to clean up the site, and contaminated soil and water were excavated and transported offsite for disposal.

The version of Health and Safety Code Section 25205.5 which was in effect during the period at issue required each generator of hazardous waste to pay the Board a generator fee for each generator site for each fiscal year. "Generator" was defined in Health and Safety Code Section 25205.1(e) to mean "a person who generates volumes of hazardous waste … at an individual site." "Generator" is also defined in the regulations of the Department of Toxic Substances Control as "any person, by site, whose act or process produces hazardous waste … or whose act first causes a hazardous waste to become subject to regulation" (Title 22, California Code of Regulations, Section 66260.10, previously Section 66078).

The contaminated soil excavated by Petitioner was clearly hazardous waste. However, we find that the Legislature did not intend the generator fee to apply in the circumstances presented in this case, where vandals caused the release of fuel that contaminated the soil. The contamination did not result from the normal or anticipated usage of the equipment at the site, but from an intervening criminal act. This case is distinguishable from a situation where, for example, a person purchases a gas station and finds that the underground storage tanks at the site have been leaking and have contaminated the surrounding soil. Under such circumstances, when the new owner of the gas station excavates the contaminated soil, that person is the generator of the hazardous waste and is responsible for the generator fee.

For the reasons set forth in this Decision, the petition for redetermination is granted.

Adopted at Sacramento, California, this 9th day of March, 1994.

Brad Sherman, Chairman

Matthew K. Fong, Member

Ernest J. Dronenburg, Jr., Member

Windie Scott, Member

Attested by: Burton W. Oliver, Executive Director

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Santa Clara Ranches

The excavation of contaminated soil is the first act which causes hazardous waste to become subject to regulation. The contaminated soil itself is not waste. Accordingly the person performing the excavation is liable for the generator fee regardless of who caused the soil to become contaminated.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

In the Matter of the Petition of SANTA CLARA RANCHES for Redetermination Under the Hazardous Substances Tax Law

Appearances:

For Petitioner: J. W. Gibbons President

For Department of Health Services: Bryce Caughey Staff Attorney

For Department of Special Taxes and Operations, State Board of Equalization: E. V. Anderson Special Taxes Administrator

Janet Vining Staff Counsel

MEMORANDUM OPINION

This opinion considers the merits of a petition for redetermination of a Hazardous Waste Generator Fee in the amount of $10,780 which was heard and taken under consideration by the Board on August 13, 1991 in Torrance, California.

Petitioner owns real property which was contaminated over a number of years by a leaking gasoline tank located on the property. Petitioner was held responsible as the generator for the generator fee imposed for the subsequent removal and disposal of the contaminated soil.

The period of liability in this case was July 1, 1987 through June 30, 1988. The fee was based on the removal of over 480 tons of contaminated soil from the site in fiscal year 1987–1988. The applicable generator fee category was 250 to 2,499.9 tons. (Health and Safety Code section 25205.5(b)(5).)

The issues raised by the petition are:

(1) For purposes of the fee imposed on generators of hazardous waste by Health and Safety Code section 25205.5, is the waste generated at the time of removal of the contaminated soil constituting the waste, or over the time period during which the contamination occurs.

(2) Was the fee schedule for fiscal year 1987–1988 arbitrary, irrational, and discriminatory.

Petitioner argues that the hazardous waste which resulted from the gasoline which leaked into the soil was not generated in fiscal year 1987–1988; rather, it was generated as the leakage of gasoline occurred over a number of years. The Department of Health Services (now the Department of Toxic Substance Control) contends that waste was generated when the contaminated soil was excavated, and the volumes of waste excavated determined the amount of the generator fee.

Health and Safety Code, Chapter 6.5 (commencing with § 25100) of Division 20, provides generally for the control of hazardous waste, and delegates to the Department the authority to promulgate regulations for the enforcement of the provisions of the code. (See §§ 25141 and 25150 of the Health and Safety Code.)

Pursuant to that authority, the Department has promulgated extensive regulations in Title 22 of the California Code of Regulations (CCR).

Article 9 of Title 22 lists wastes and materials the Department has determined to be hazardous (including gasoline; § 66680(d)). In addition, Article 11 of Title 22 sets forth criteria to be used in determining whether a waste is hazardous. Section 66680 mandates that any waste which is listed in Article 9, or which satisfies any of the criteria of hazardous waste presented in Article 11, must be handled in accordance with the Department's regulations.

When petitioner in this case excavated the contaminated soil, petitioner produced waste within the meaning of Health and Safety Code sections 25120 and 25124. Under Title 22, CCR section 66305, it is the waste producer's responsibility to determine if the waste is to be classified as hazardous waste pursuant to Article 9 and Article 11 of Title 22. Once classified as hazardous by the producer, the waste must be managed pursuant to the Department's regulations. Thus, when the petitioner in this case excavated the contaminated soil, classified it as hazardous and reported it to the Department on a hazardous waste manifest, as required under Title 22, CCR Section 66480, the petitioner became a regulated generator. Pursuant to Health and Safety Code section 25205.5(b), a regulated generator is required to pay the fee for the amount of waste generated.

Health and Safety Code section 25205.1(f) defined a "generator" in fiscal year 1987–1988, "as a person who generates volumes of hazardous waste on or after July 1, 1986. …" Title 22, CCR section 66078 defines "generator" as "… any person, by site, … whose act first causes a hazardous waste to become subject to regulation." (Emphasis added.) Thus, for the purpose of the generator fee calculation, the petitioner became a generator when the hazardous waste was removed from its point of origin and manifested because it is at that time that the waste became subject to regulation. Petitioner's act of excavating and manifesting the contaminated soil was the act which first caused the hazardous waste to become subject to regulation. The statutory and regulatory scheme support the Department's contention that petitioner became a generator in this case when the waste was excavated. It is to be noted that the purpose of the fee is to provide funds for regulation by the State. Accordingly, the law provides that the act which causes regulation to begin is the act which is subject to the fee. It is not the leaking of the contaminant into the soil, but rather the management of the soil after excavation which incurs State cost.

The position that generation takes place when the contaminated soil was removed and not over the period when the contamination occurred, is consistent with 40 CFR section 264.114 which provides that a person removing waste during the closure of a hazardous waste management unit becomes a "generator" of hazardous waste.

The Board finds that hazardous waste was generated within the meaning of Health and Safety Code sections 25205.1 and 25205.5 at the time petitioner excavated and manifested the contaminated soil which constitutes the hazardous waste. Petitioner was a generator and was therefore required to pay the fee pursuant to Health and Safety Code section 25205.5(b) for the amount of waste generated in fiscal year 1987–1988.

Petitioner contends that the fee schedule for the fiscal year 1987–1988 was arbitrary, irrational, and discriminatory. Petitioner states the fee schedule favors the large-scale, ongoing producers of hazardous waste to the disadvantage of the one-time small generator.

The fee schedule established by the Legislature is based on the generation of the amount of waste over an annual period. If a small company generates the same amount of waste at a site as a large company under the fee schedule, they both pay the same fee for that period regardless of the company's size. Therefore, any generator of waste which comes within a specific fee category will pay the corresponding fee under the law relevant to fiscal year 1987–1988.

A legislative act would be required to amend the law to address petitioner's concern. An administrative agency has no power to declare a statute unenforceable, or refuse to enforce a statute, on the grounds of unconstitutionality unless an appellate court has made a final determination that such statute is unconstitutional under section 3.5 of Article III of the California Constitution. The fee schedule under Health and Safety Code section 25205.5 has not been held unconstitutional by an appellate court; therefore, the administrative agencies charged with the enforcement of the statute may not refuse to enforce it.

For the reasons expressed in this opinion, the petition for redetermination in the amount of $10,780 is redetermined without adjustment.

Done at Sacramento, California, this 10th day of December 1991.

Brad Sherman, Chairman

Matt Fong, Member

Windie Scott, Member

William Bennett, Member

Attested by: Burton W. Oliver, Executive Director

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SRI International

A research facility accumulated small explosive scraps remaining from its experiments. The scraps were ultimately detonated in the same manner as the explosives were detonated in the research activities. The detonation of the scraps did not constitute treatment of hazardous waste, and the facility fee did not therefore apply.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

DECISION OF THE BOARD

In the Matter of the Petitions for Redetermination Under the Hazardous Substances Tax Law of SRI INTERNATIONAL Petitioner

Appearances:

For Petitioner: Mr. H. Kruth General Counsel

For Department of Toxic Substances Control: Derek Van Hoorn Staff Counsel

For Department of Special Taxes and Operations, State Board of Equalization: Janet Vining Tax Counsel

This Decision considers the merits of petitions for redetermination, filed pursuant to Revenue and Taxation Code Section 43301, of a hazardous waste facility fee, imposed by Health and Safety Code Section 25205.2, for fiscal years 1987–88, 1988–89, 1989–90 and 1990–91. The Board heard the petitions for redetermination on October 2, 1992, in Sacramento, California, and took the matter under submission. The Board redetermined the matter on December 3, 1992, and issued notices of redetermination to Petitioner on January 25, 1993.

The issue before us is whether a research facility that accumulates small explosive scraps from its experiments, and then detonates those scraps in the same manner as it conducts its regular experiments, is subject to the facility fee imposed in Health and Safety Code Section 25205.2. We hold that it is not.

Petitioner conducts research for federal agencies and operates a test site where it conducts shock physics experiments involving explosive materials. Prior to 1988, Petitioner accumulated the small, odd-shaped pieces of explosives left after an experiment, and detonated them in small quantities. These detonations were carried out in essentially the same manner as Petitioner's detonations for experimental purposes. In May of 1988, Petitioner redesigned its operations so that it could utilize the scraps in the experiments.

In a Decision and Recommendation dated December 31, 1991, Appeals Attorney H. L. Cohen found that the Department of Toxic Substances Control had determined that the scraps were hazardous waste. He also found that the detonation of the scraps constituted the treatment of hazardous waste. The Appeals Attorney concluded that Petitioner was subject to the facility fee as a treatment facility for fiscal years 1987–88 and 1988–89.

However, the Appeals Attorney also found that Petitioner was not subject to the facility fee for the subsequent fiscal years, since, in 1988, it ceased treating the explosive scraps and instead incorporated them into ongoing experiments. Under the unique circumstances of this case, no further activities were required to complete the closure of the treatment facility and, thus, no additional facility fee could be imposed.

We need not address the Appeals Attorney's conclusion regarding the closure of Petitioner's treatment operation, since we find that Petitioner's accumulation of small explosive scraps from its experiments, and detonation of those scraps in the same manner as Petitioner conducted its regular experiments, did not constitute the treatment of hazardous waste. We therefore conclude that Petitioner was not liable for the facility fee in any of the fiscal years at issue.

For the reasons set forth in this Decision, the petitions for redetermination are granted.

Adopted at Torrance, California, this 8th day of September, 1993.

Brad Sherman, Chairman

Matthew K. Fong, Member

Ernest J. Dronenburg, Jr., Member

Windie Scott, Member

Attested by: Burton W. Oliver, Executive Director

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Techalloy Co. Inc.

The fact that a hazardous waste facility ceases storing, treating or disposing of hazardous waste does not end the liability for fees. The facility must be closed in accordance with a closure plan submitted by the operator and approved by the Department of Toxic Substances Control (DTSC) in order for the operator to be relieved from further liability for fees. In addition, the operator must certify that closure has been completed in accordance with the plan and DTSC must accept the certification.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

DECISION OF THE BOARD

In the Matter of the Petitions for Redetermination Under the Hazardous Substances Tax Law of TECHALLOY COMPANY, INC. Petitioner

Appearances:

For Petitioner: Lawrence L. Hoenig Attorney at Law

Margaret Rosegay-Kott Attorney at Law

Rona H. Sandler Attorney at Law

For Department of

Toxic Substances Control: Dennis Mahoney Staff Counsel

For Department of Special Taxes and Operations, State Board of Equalization: Janet Vining Senior Tax Counsel

This Decision considers the merits of petitions for redetermination, filed pursuant to Revenue and Taxation Code Section 43301, of a hazardous waste facility fee, imposed by Health and Safety Code Section 25205.2, for fiscal years 1986–87, 1987–88, 1988–89, and 1989–90. The Board heard the petitions for redetermination on July 28, 1992, in Sacramento, California, and took the matter under submission. The Board redetermined the matter on January 29, 1993, and issued notices of redetermination to Petitioner on March 11 and March 16, 1993.

The issue before us is whether a hazardous waste disposal facility that has ceased accepting hazardous waste for disposal, but has not completed the activities included in its approved closure plan, is subject to the facility fee imposed in Health and Safety Code Section 25205.2. We hold that it is.

BACKGROUND

Techalloy Company, Inc. ("Petitioner") owns and operates a plant in Perris, California, which produces high quality specialty steel wire for the aerospace and related industries. Prior to December 30, 1985, Petitioner utilized a surface impoundment for on-site disposal of hazardous wastewater generated by its operations. Petitioner applied for and received interim status from the federal Environmental Protection Agency for the surface impoundment on November 18, 1980, and, on April 6, 1981, the Department of Toxic Substances Control ("Department", then a program within the Department of Health Services) issued Petitioner a state interim status document ("ISD").

Petitioner ceased discharging hazardous wastewater to the surface impoundment by December 30, 1985, in part because of statutory changes which restricted the disposal of hazardous wastes into surface impoundments, and in part because its federal ISD was revoked by operation of law on December 30, 1985 based on its inability to provide required financial assurances.

On September 24, 1985, Petitioner submitted to the Department its draft closure plan for the surface impoundment and two other impoundments that had been taken out of service earlier. The Department approved a revised plan on September 24, 1987. On January 9, 1989, at Petitioner's request, the Department approved further modifications of the closure plan. Petitioner commenced closure activities in February 1989, which included the stabilization and encapsulation of sludge remaining in the ponds and the construction of an impervious cap over the area formerly occupied by the ponds. The closure activities were completed on July 18, 1989. Petitioner and Petitioner's certified engineer submitted certifications of closure to the Department in August 1989. The Department approved the certifications of closure on November 1, 1989.

Petitioner contends that it does not owe the hazardous waste disposal facility fee for any of the fiscal years in question.

In March 1986, Petitioner began treating its hazardous waste in tanks. At the hearing on this matter, Petitioner conceded that, if the Board found that it did not owe the hazardous waste disposal fee for any of the years at issue, it would be subject to the fee for a small hazardous waste treatment facility for such years.

FISCAL YEARS 1986–87 AND 1987–88

The Legislature first imposed the hazardous waste facility fee in fiscal year 1986–87. During fiscal years 1986–87 and 1987–88, Health and Safety Code Section 25205.2(a) provided that:

… each operator of a facility shall pay a facility fee for each state fiscal year, or any portion thereof, to the board based on the size and type of facility, …

In addition, "disposal facility" was defined in Section 25205.1(b) as "a hazardous waste facility used for the disposal of hazardous waste." Section 25205.1(c) defined a "facility" to mean "a hazardous waste storage, treatment, or disposal facility, including a resource recovery facility or waste transfer station, which has been issued a permit or a grant of interim status …"

The above-quoted version of Section 25205.2 does not specify when a facility's liability for the facility fee ends. We agree with the Department's position that the facility fee continues to be due until the facility is certified "clean-closed", that is, until the Department approves the facility's certification that it has completed all activities required in its approved closure plan. We find this position to be a reasonable interpretation of the statute.

The Health and Safety Code requires the Department to regulate the management and handling of hazardous waste in the state, and the Legislature imposed the facility fee to help fund the Department's regulatory program. The facility fee is deposited in the Hazardous Waste Control Account, and the Department draws from this Account to cover the cost of operating the regulatory program. We find that the facility fee is not in the nature of a "business tax" which is imposed on a business in relation to the revenue it produces. Instead, the facility fee is a fee imposed on the operators of facilities that manage hazardous waste, which is used to insure the protection of human health and safety and the environment from any damage which could result from such management of hazardous waste.

The Health and Safety Code and the Department's regulations require that a facility which intends to close must submit a closure plan which indicates how the facility will manage any hazardous waste remaining at the site. After the Department approves the closure plan, it must oversee the implementation of the plan and, finally, review and approve the facility's certification that all the necessary activities have been completed. The Department has significant responsibilities concerning the implementation of a closure plan and approval of a closure certification. We find that the Legislature intended that the Department's activities be funded from the continued imposition of the facility fee throughout this period.

We note that the Department's expenses during the period when a facility's closure plan is implemented may not correspond precisely with the fees collected from the facility. The Legislature imposed the annual facility fee in order to fund the Department's costs of regulating facilities during all stages of operation, including the closure phase. The costs of regulation may vary from one stage to another, just as some facilities receive more or less oversight from the Department than others of the same size and type. The Legislature provided, however, that the fee would be the same for all facilities of the same size and type.

Section 25205.2 imposes the facility fee on the "operator" of a "facility". We find that Petitioner continued to be the operator of a disposal facility after it ceased disposing of waste at the site.

The term "operator" is used in both the Health and Safety Code and the Department's regulations governing the closure process, indicating that the overall operation of a facility concerns more than the mere acceptance or disposal of waste, and includes the implementation of a closure plan.

The words "used for" in Section 25205.1(b)'s definition of a hazardous waste disposal facility do not restrict the definition to only those facilities which actively accept or dispose of hazardous waste, but include facilities that have been used for the disposal of hazardous waste. The Department continues to be responsible for regulating facilities after they have ceased accepting waste for disposal, and such facilities continue to be subject to standards and requirements imposed by the Health and Safety Code and the Department's regulations. The Health and Safety Code sections and Department regulations concerning the closure process make reference to "facilities". It is therefore clear that a disposal facility continues to meet Section 25205.1(b)'s definition throughout the implementation of its closure plan.

In fiscal years 1986–87 and 1987–88, Health and Safety Code Section 25205.1(c) defined a "facility" as a "hazardous waste storage, treatment, or disposal facility, … which has been issued a permit or a grant of interim status by the department … " While Petitioner's federal ISD was revoked on December 30, 1985, the ISD issued by the Department continued in effect. On January 1, 1989, Section 25200.5(f) was added to the Health and Safety Code, stating that any land disposal facility which lost its federal ISD would be deemed to have lost its state interim status as well. Petitioner's state ISD was thus revoked as of January 1, 1989. However, we find no basis for applying Section 25200.5(f) retroactively. Therefore, throughout the two fiscal years at issue, Petitioner was operating under a grant of interim status from the Department.

Our finding concerning Petitioner's state interim status is not altered by Health and Safety Code Section 25159.5(b). That section required that the federal Environmental Protection Agency's regulations would be deemed to be the Department's regulations, until the Department received full authorization from the federal EPA to administer a hazardous waste regulatory program in lieu of the federal program, except that any state statute or regulation which was more stringent or extensive than a federal regulation would supersede the federal regulation. We find that the state's statutes and regulations concerning permitting and interim status continued in effect after the adoption of the federal statute which caused the revocation of Petitioner's federal interim status.

We find that Petitioner is liable for the facility fee for a hazardous waste disposal facility for fiscal years 1986–87 and 1987–88, since Petitioner operated a disposal facility under a grant of interim status from the Department, and had not yet completed the closure activities required in its approved closure plan.

FISCAL YEAR 1988–89

Fiscal year 1988–89 brought a change in the definitions in Health and Safety Code Section 25205.1 and in the imposition of the fee in Health and Safety Code Section 25205.2. We find that these changes did not terminate Petititoner's liability for the facility fee for a hazardous waste disposal facility during this fiscal year.

Section 25205.1(b)'s definition of a "disposal facility" was deleted, and the general definition of a "facility" in Section 25205.1(c) was amended to define a facility as "any structure, and all contiguous land, used for the treatment, transfer, storage, resource recovery, disposal, or recycling of hazardous waste …" This definition was also expanded to include not only those facilities which had been issued or deemed to hold permits or grants of interim status, but also those facilities which were "operated in such a manner" as to be required to obtain permits or grants of interim status.

On January 1, 1989, Petitioner's state ISD was revoked by operation of Health and Safety Code Section 25200.5(f). We find that the revocation of Petitioner's state ISD did not affect its liability for the facility fee. First, as discussed above, we see no basis for applying Section 25200.5(f) retroactively, and Petitioner's state ISD therefore was in effect for the first half of the fiscal year. Section 25205.2 required that every operator of a facility pay a facility fee for each fiscal year, "or any portion thereof", and Petitioner's ISD was in effect for a portion of the fiscal year.

In addition, the definition of a "facility" in effect during fiscal year 1988–89 included facilities which were operated in a manner that required them to obtain permits or grants of interim status. We find that Petitioner continued to meet the definition of a "facility" during fiscal year 1988–89 because it remained subject to the Department's regulatory oversight for purposes of completing its closure activities. The Department's regulations require a facility to have a permit or interim status document throughout the implementation of its closure plan. Therefore, Petitioner met the definition of a "facility", even though its state ISD had been revoked by operation of law.

In addition to the change in the definition of a "facility", subsection (c) was added to Section 25205.2 as follows:

… a person who is issued a variance by the department from the requirement of obtaining a hazardous waste facilities permit or grant of interim status, or a person who is in a closure period approved by the department pursuant to Article 9 (commencing with Section 25200) and Article 12 (commencing with Section 25245), is not subject to the fee, for any fiscal year following the fiscal year in which the variance or closure was granted or approved by the department.

We find that, in adopting subsection (c), the Legislature codified the Department's position that the facility fee continues to be due until the Department has approved a facility's completion of the activities included in its approved closure plan.

Health and Safety Code Section 25205.2(c) stated that a person who was "in a closure period approved by the department" was not subject to the facility fee for any fiscal year following the fiscal year in which the "closure was … approved by the department." We find that the Legislature's reference to the "closure period approved by the department" is a reference to the period which begins when the facility starts to implement a closure plan which has been approved by the Department. Health and Safety Code Section 25246 requires each owner or operator of a hazardous waste facility to submit a facility closure plan to the Department. The Department reviews each plan and approves it if it complies with all relevant state and federal regulations. After the closure plan is approved and the closure activities included in the plan have been completed, the facility must submit a certification to the Department indicating that such activities have been completed. The Department's acceptance or approval of the certification completes the closure period.

We further find that the Department's approval of the certification is the "approval of closure" referred to in Section 25205.2(c). By the use of different terms—"closure period" and "closure"—we assume the Legislature intended different meanings. In addition, the Department's oversight and regulatory responsibilities are heightened during the facility's implementation of its closure plan, and we believe that the Legislature intended the facility fee to continue to be due throughout this period in order to compensate the Department for costs incurred in fulfilling its responsibilities.

Our finding concerning the meaning of "approval of closure" is supported by a later amendment to subsection (c). In fiscal year 1989–90, the subsection was amended to provide that a facility was not subject to the facility fee for any fiscal year following the fiscal year in which the closure was approved by the Department or in any fiscal year in which the facility had completed all activities necessary for the Department to "approve the closure, including, but not limited to, submittal of a certification that these activities are completed to the department". The Legislature used the same term—"closure"—in the versions of subsection (c) effective in fiscal years 1988–90 and 1989–90. As the latter version makes clear, the approval of a "closure" includes the certification that the activities included in the closure plan have been completed.

One further legislative change should be noted. Health and Safety Code Section 25205.8, which was adopted in fiscal year 1988–89 and was effective only during that year, stated:

(a) In addition to the fees imposed pursuant to Sections 25174, 25205.2, and 25205.5, the department shall establish fees, based on historical workload standards, to be assessed for each permit application, application renewal, facility closure, and facility variance granted when a facility requests any of these services.

The adoption of Section 25205.8 does not alter our decision concerning Petitioner's liability for the hazardous waste facility fee in fiscal year 1988–89. Section 25205.8 gave the Department the authority to assess a fee "in addition" to the facility fee if, for example, it was required to perform duties in excess of its usual day-to-day oversight of hazardous waste facilities. The Department's regular oversight activities were funded partially by the facility fees at issue in this matter. We find no indication that the Legislature intended the fees described in Section 25205.8 to replace those assessed in other sections of the Health and Safety Code.

Petitioner was liable for the hazardous waste disposal facility fee for fiscal year 1988–89, because it held an ISD for part of the fiscal year and, when that ISD was revoked, it continued to operate a disposal facility in a manner which required it to obtain a permit or grant of interim status. In addition, although Petitioner was in a closure period approved by the Department, it had not yet completed the activities set forth in its closure plan and the Department had not yet approved its closure.

FISCAL YEAR 1989–90

As discussed above, section 25205.2(c) was amended during this fiscal year to provide that a person in an approved closure period was not subject to the facility fee for any fiscal year following the fiscal year in which closure was approved or

… in any fiscal year in which the facility has completed all activities necessary for the facility to be closed in accordance with the approved closure plan, including, but not limited to, submittal of a certification that these activities are completed to the department.

In November 1989, Petitioner submitted to the Department its certification that it had completed the closure activities included in its approved closure plan. We therefore find that Petitioner was not subject to the facility fee for a disposal facility in fiscal year 1989–90. However, as noted above, Petitioner conceded that it operated a small hazardous waste treatment facility during that fiscal year and was subject to the appropriate treatment facility fee.

For the reasons set forth in this Decision, the petitions for redetermination for calendar years 1986–87, 1987–88 and 1988–89 are redetermined without adjustment. The petition for redetermination for calendar year 1989–90 is granted in part, and the determination for that fiscal year is redetermined to $40,000, which is the hazardous waste facility fee applicable to a small treatment facility.

Adopted at Sacramento, California, this 30th day of September, 1993.

Brad Sherman, Chairman

Matthew K. Fong, Member

Ernest J. Dronenburg, Jr., Member

Windie Scott, Member

Attested by: Burton W. Oliver, Executive Director

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Texaco U.S.A.

An oil company generated hazardous waste at several sites. The application of the generator fee should be made on a site-by-site basis. If no hazardous waste is generated on a particular site during any reporting period, no fee is due for that site for that period even though hazardous waste was generated during that period at other sites owned by the oil company.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

DECISION OF THE BOARD

In the Matter of the Petition of TEXACO U.S.A. Claim for Refund Under the Hazardous Substances Tax Law

Appearances:

For Claimant: John T. McKenna Attorney at Law

Ronald B. Bruckman Tax Analyst

For Department of Toxic Substances Control: Ramon Perez Staff Attorney

For Department of Special Taxes and Operations, State Board of Equalization: Jeffrey George Supervising Tax Auditor

This Decision considers the merits of a claim for refund, filed pursuant to Revenue and Taxation Code Section 43452, of a hazardous waste generator fee in the amount of $1,212.50. The claim for refund was heard and taken under consideration by the Board on November 4, 1991 in Torrance, California.

Texaco U.S.A. (the "claimant") generated hazardous waste at its Kern Front Area site between January 1, 1988 and June 30, 1988, but no waste was generated at that site during the second half of 1988.

Health and Safety Code Section 25205.2 requires every generator of hazardous waste to pay the Board a fee for each generator site for each calendar year, or portion thereof, if at least five tons of hazardous waste were generated at the site during the year. Section 25205.1(e) defines "generator" to mean "a person who generates volumes of hazardous waste on or after July 1, 1988, … at an individual site commencing on or after July 1, 1988, …"

The statutory sections governing the imposition of the hazardous waste generator fee indicate the Legislature's intent that the fee be applied on a site-by-site basis. Claimant did not meet the definition of a "generator" as to the Kern Front Area site because it did not generate hazardous waste at that site on or after July 1, 1988. Therefore, claimant does not owe a generator fee for calendar year 1988 concerning the waste it generated at the Kern Front Area site during the first half of 1988.

For the reasons expressed in this Decision, the claim for refund is granted.

Adopted at Sacramento, California, this 21st day of April, 1993.

Brad Sherman, Chairman

Ernest Dronenburg, Jr., Member

Windie Scott, Member

Attested by: Burton W. Oliver, Executive Director

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INSURANCE TAX

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California Automobile Insurance Company

Insurance tax is imposed on a cash basis, not accrual, and insurance company is thus entitled to report insurance tax on a premiums-received basis.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

In the Matter of the Petitions for Redetermination Under the Tax on Insurers Law of CALIFORNIA AUTOMOBILE INSURANCE COMPANY Petitioner

Appearances:

For Petitioner: Derick Brannan PriceWaterhouseCoopers

Thore Stalick Witness

For Department of Insurance: Geoffrey Margolis Senior Staff Counsel

David Okumura Senior Insurance Examiner

For Property and Special Taxes Department: Trecia Nienow Supervising Tax Counsel III

For Appeals Division: Lucian Khan Tax Counsel IV

MEMORANDUM OPINION

This opinion considers the merits of two petitions for redetermination for the years 1998, 1999 and 2000. At issue is whether the gross premiums tax under Article XIII, section 28, subdivision (c), of the California Constitution and Revenue and Taxation Code section 12221 (hereinafter section 12221) should be reported and paid on a cash basis or accrual basis.

The disputed language in the Constitution and section 12221 states that, in the case of an insurer not transacting title insurance business in this state, the gross premiums tax is based on "the amount of gross premiums, less return premiums, received in such year by such insurer upon its business done in this State." Through 1997, petitioner reported gross premiums tax using the accrual basis method (i.e., premiums-written method) regardless of when the premiums were actually received. Starting in 1998, however, petitioner commenced reporting its gross premiums using the cash basis method (i.e., premiums-received method). Petitioner's audit liability is for the difference between the gross premiums tax computed on an accrual and cash basis.

Petitioner contends that it correctly reported taxable premiums using the gross amount of premiums received, less return premiums, upon its business done in this state. Petitioner claims that it is unaware of any legal basis or restrictions that prevent it from reporting premiums on a "received" basis under the California Tax on Insurers Law. According to petitioner, it is only following the "plain meaning of the language" in the statute and Constitution.

The Department of Insurance (DOI) disagrees contending that it has historically interpreted the statute to impose tax on premiums written, thus requiring that tax be reported on an accrual basis. DOI's reasoning is as follows:

"In order for the plain meaning of 'premiums received' to only mean cash basis, one would have to imply that 'premiums received' means premiums received and collected and not premiums received and to be received. At the moment unpresent words are added to the statute, it becomes very difficult to declare that the existing language has only one plain meaning. Even if one could argue that it is more reasonable to imply the word 'collected,' rather than the words 'to be received,' into the statute, the fact that either could be implied suggests two possible interpretations."

In other words, DOI interprets the statute to mean that tax must be reported on premiums received and premiums to be received (i.e., the premiums-written or accrual method). [2] As further support, DOI points out that Insurance Code section 900 requires every insurer to file an annual (financial) statement in the form and methods prescribed by the commissioner. Insurance Code section 923 specifically requires that the annual statement "shall be completed in conformity with the Accounting Practices and Procedures Manual adopted by the National Association of Insurance Commissioners" (NAIC) and that "the Commissioner may make any changes from time to time in the form of the statements and the number and method of filing reports. …"

DOI also points out that Insurance Code section 900.2, subdivision (a), provides that the annual statement that insurers are required to file must be audited by a certified public accountant in accordance with the instructions adopted by NAIC and that Insurance Code section 995.5 specifically states that tax shall be reported and paid by an insurer "on the basis that it has received the full premium charge … less returned premiums as permitted by law." DOI further notes that Schedule T (which is included in the annual statement insurers must file) specifically refers to premiums "written" or "direct premiums written," as the basis for reporting gross premiums tax.

We conclude that both the Constitution and section 12221 provide that, for insurers not transacting title insurance in this state, the tax applies to the net amount of premiums received each year (i.e., gross premiums received less premiums returned). That is, the tax is imposed on a cash basis. DOI's reliance on Insurance Code section 995.5 is misplaced. The language in that statute is specifically referring to "any contingent or retrospective compensation arrangement including policy fees" as includable in gross premiums tax. In other words, unlike section 12221 which specifies that the tax is due on premiums when received, Insurance Code section 995.5 addresses amounts that are includable in gross premiums tax.

We also note from a review of DOI's own historical records (e.g., memos, returns, etc.) that, contrary to its representations to the Board, it appears that for some period of time it previously imposed the tax on the insurers' premiums-received. In other words, DOI previously taxed insurers' gross premiums using the cash (not accrual) basis method. Thus, DOI had formerly taken the same interpretation and cash-basis approach as petitioner.

Although we conclude that premiums actually received in any tax year is the appropriate method for reporting gross premiums tax for that year, we are concerned that for over 30 years DOI has incorrectly interpreted and applied the statute by requiring insurers to report gross premiums tax on an accrual basis. At present, only 38 out of approximately 1300 insurers have attempted to utilize the cash-basis method. We recognize that some accrual-basis insurers may prefer to stay on an accrual basis to avoid the necessity of filing amended returns and also to avoid the cost of converting to a cash basis.

Presumably, the accrual-basis insurers have set up their compliance systems to operate on the premiums-written basis. Such compliance systems also may tie into accrual-basis reporting responsibilities to other states and agencies. Given that DOI has been misinterpreting the statute for many years and those insurers who might now be required to convert to cash reporting have relied on DOI's misinterpretation to their detriment, we also consider whether equitable estoppel should apply to avoid any detriment insurers may face if they are immediately required to convert to cash reporting, both retroactively and prospectively.

The Board of Equalization has been recognized as a constitutional agency for resolving tax disputes (Cal. Const., Art. XIII, § 17; Citicorp North America, Inc., et al. v. Franchise Tax Board (2000) 83 Cal.App.4th 1403, 1418). As such, the Board has exercised equitable powers in resolving tax disputes, where appropriate (Appeal of Wilfred and Gertrude Winkenbach, et al., 75-SBE-081). Although Article VI, section 1 of the California Constitution provides that the judicial power of this state is vested in the Courts, it has long been recognized that judicial powers may be exercised by administrative agencies in administrative proceedings. This includes the application of equitable estoppel (Lentz v. McMahon (1989) 49 Cal.3d 393, 404–406).

Subject to some recognized exceptions, the estoppel doctrine may be applied against a government agency under appropriate facts. (13 Witkin, Summary of Cal. Law (10th ed. 2006) Equity, § 199.) As it applies here, the four elements of the doctrine of estoppel are: (1) the party to be estopped (DOI) must be apprised of the acts; (2) DOI must intend that its conduct shall be acted upon, or must so act that the party asserting the estoppel (insurers reporting on an accrual basis) has a right to believe it was so intended; (3) the insurer must be ignorant of the true state of facts; and (4) the insurer must rely upon the conduct to its injury. (Strong v. County of Santa Cruz (1975) 15 Cal.3d 720, 725.) Furthermore, the California courts have held that, in limited and narrow circumstances, a state government agency may be subject to such estoppel, even in a matter related to taxation. (Fischbach and Moore, Inc. v. State Board of Equalization (1981) 117 Cal.App.3d 627.)

In this case, we find that DOI both was aware and intended that insurers report tax on an accrual basis because it was DOI that required them to do so. The insurers who reported on an accrual basis did so based on the advice and directives of DOI. Furthermore, we find that it is likely that any insurer who now might be required to convert to a cash-reporting basis will incur additional administrative and accounting expenses in so doing.

We therefore believe that if, based upon this decision, DOI were to attempt to require any accrual-reporting insurer to retroactively convert to the cash basis for any open past years, then such insurer may be able to present a compelling case, at least factually, for application of an estoppel against DOI. (Fischbach and Moore, Inc. v. State Board of Equalization, supra, 117 Cal.App.3d 627.) Accordingly, we urge DOI not to so compel any unwilling insurer to file an amended return based upon this opinion. In the interests of fairness, equity, and sound tax administration, we further urge DOI not to require any unwilling insurer to convert to the cash-reporting basis in the future until such time as it has promulgated administrative regulations which address the proper procedure for transitioning from accrual to cash reporting, as well as all related issues, including whether or not it is possible for an insurer to elect or change a prior election of an accounting method. Of course, those insurers who wish to immediately convert to cash reporting or file amended returns for open past years may rely upon this opinion as authority for such actions.

Accordingly, we find that California law requires the imposition of the gross premiums tax on the premiums-received or cash basis. We, therefore, grant the petitions and allow petitioner to report its gross premiums tax using the premiums-received method.

Adopted at Sacramento, California, on December 12, 2006.

John Chiang, Chair

Bill Leonard, Member

Betty T. Yee, Acting Member

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[2] Note, however, that while not conceding the case, DOI's General Counsel has admitted to an Appeals Division staff attorney that his interpretation of the Constitution and section 12221 was consistent with petitioner's. In other words, the DOI General Counsel has admitted that he interprets state insurance tax law as supporting the imposition of the gross premiums tax on a premiums-received or cash (not premiums-written or accrual) basis. The apparent split of opinion between DOI and its principal attorney is unexplained.

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ReliaStar Insurance Company

Management fees and surrender charges which are imposed by an insurer against the contract value of a variable life insurance policy do not constitute "gross premiums" subject to insurance tax.

In the case of variable annuity policies for which an insurer has elected to be taxed on a "front-end" basis, management fees and surrender charges imposed by an insurer against the contract value also do not constitute "gross premiums" subject to tax.

In the case of variable annuity policies for which an insurer has elected to be taxed on a "back-end" basis, the measure of gross premiums subject to tax includes both the contract value which is applied to the purchase of the annuity, as well as any management or administrative fees which may have been charged against the contract value prior to the purchase of the annuity.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

In the Matter of the Petition for Redetermination Under the Insurance Tax Law of RELIASTAR INSURANCE COMPANY Petitioner

Appearances:

For Petitioner: Mr. Andrew G. Loeb Attorney

Ms. Lori Nuebel Attorney

For Department of Insurance: Mr. David K. Okumura Sr. Insurance Examiner

Mr. Robert Palumbo Supervising Insurance Examiner

Ms. Jenny Chuang Mr. John M. Fogg Mr. Tony Sangwand

For Special Taxes Department: Mr. David Levine Acting Assistant Chief Counsel

Mr. William Kimsey Supervising Tax Auditor II

For Appeals Section: Ms. Susan M. Wengel Senior Tax Counsel

MEMORANDUM OPINION

This opinion considers the merits of the petition for redetermination under the Insurance Tax Law for the years 1992, 1993 and 1994. Following the issuance of the Notice of Deficiency Assessment for all three years, petitioner paid the proposed assessment at the same time as it filed the petition for redetermination. Therefore, this matter will be treated as a claim for refund under Revenue and Taxation Code section 12978.

Petitioner is an insurance company which is subject to tax in this state based on "the amount of gross premiums, less return premiums, received in such year by such insurer upon its business done in this State." (Rev. and Tax. Code, § 12221.) In 1996, following a desk audit by the Department of Insurance (DOI), petitioner received a letter from DOI questioning the reporting of certain items for 1992, 1993 and 1994. Petitioner surmised that DOI believed additional tax was due on amounts reported as investment management administration fees and surrender charges on annuity and variable life insurance products. Petitioners calculated the additional tax that would be due if these items were included in its taxable measure, and remitted the additional tax amount indicated. DOI accepted petitioner's calculations and directed the Board of Equalization to issue a determination for the amount remitted plus interest. Petitioner paid the balance and filed a petition for redetermination and a claim for refund.

This matter was heard by the Board on February 3, 2000, in Culver City. Three issues were presented for the Board's consideration:

(1) Whether administrative management fees or surrender fees charged against the contract value of a variable life insurance policy constitute gross premiums subject to tax.

(2) Whether administrative management or surrender fees charged against a premium deposit for a variable annuity contract constitute gross premiums subject to tax.

(3) Whether the claim for refund may be increased if it is asserted more than four years after April 1 of the year following the year for which tax was allegedly overpaid.

ISSUE NO. 1
Variable Life Policy Charges

A "variable life" insurance product is one in which the cash surrender value (or "contract value") and the death benefit may vary, depending upon the performance of certain investment options. In the typical case, an insurance company receives the premium payments and establishes a separate account for the policyholder. The funds are invested as the policyholder directs, among a range of investment alternatives offered. The policyholder's eventual benefit, either upon surrender of the policy or at death, is dependent upon the performance of the investment alternatives selected.

The insurance contract generally provides that the "contract value" will be charged for certain management fees. For illustration, assume the initial premium was $100, and there was no "front-end load." The policyholder directed a fixed income alternative yielding 7 percent. The management fee charged by the insurance company was 1 percent. At the end of a year, the policyholder's contract value would be $106, representing the initial premium, plus $7 in interest income, less $1 in management fees.

Variable life insurance contracts also typically contain surrender fees, if the policyholder surrenders the policy before a certain length of time. These fees are usually on a declining scale. An example might be 50 percent if the policy is surrendered in the first year, 40 percent if surrendered in the second year, down to no surrender charge if the policy is held more than five years. A policyholder canceling a policy during the surrender charge period would receive the contract value, minus the surrender charge. The question here is whether the management fees and surrender charges constitute additional "gross premiums" for purposes of the insurance tax.

The DOI regarded the charges made by petitioner (management fees) against accumulating funds as taxable gross premiums. DOI also considered surrender charges taxable as gross premiums. The position of DOI is that the charge is the administrative cost of terminating the policy and that, although usually deducted from the cash value of the policy prior to refunding the balance, it could be billed to the policyholder if the insurance company failed to deduct the surrender charge prior to the refund.

We conclude that neither the management fees nor surrender charges constitute additional "gross premiums" for purpose of the insurance tax.

Petitioner reported and paid gross premiums tax on the entire amount it received from its policyholders in connection with variable life policies. The management fees and surrender charges do not affect the amount of premium received. Rather they simply impact the amount of the benefit the policyholder or beneficiary will eventually receive. (See Equitable Life Assur. Society v. Johnson (1942) 53 Cal.App.2d 49.) They do not represent any additional out-of-pocket payment by the policyholder, and as such do not constitute additional taxable gross premiums.

ISSUE NO. 2
Variable Annuity Contract Charges Front End Annuity Products

In petitioner's variable annuity program, a policyholder deposits premiums with claimant for an annuity to begin at a point in the future. Just as in the variable life insurance product, the policyholder can direct the investment of the premium deposits until such time as the annuity payments begin. The performance of the investment impacts the amount of the eventual annuity payments. Petitioner charges administrative management fees during the period prior to the annuity payments starting, and surrender fees if the policyholder withdraws prior to annuity payments beginning.

For annuity products sold prior to 1988 (even if actual annuity payments did not begin until later), petitioner had elected to report and pay gross premiums tax upon receipt of the premium deposit. (Rev. and Tax. Code, § 12222.) If a policyholder later elected to withdraw the funds before annuity payments commenced, petitioner would treat the withdrawal as "return premiums" (See Equitable Life v. Johnson, supra.) and claim an offset against taxable premiums on other annuity sales in the period the premiums were returned.

Again, the question is whether the administrative management fees and surrender charges should have been reported as additional "gross premiums" by petitioner. Again, we conclude that they should not.

When petitioner elected front-end reporting, Revenue and Taxation Code section 12222 states that the measure of tax is the funds accepted by the insurer. There is no further tax due when the funds are actually applied to purchase the annuity in the future, although it is the purchase of the annuity that is the actual taxable event. The amount of tax due is not measured by the amount of funds actually applied to the purchase of the annuity (which may be more or less than the amount accepted by petitioner, depending on the performance of the investment, less charges), but it is measured by the original premium payment. If the account is surrendered prior to commencement of annuity payments, the surrender charges and administrative management fees do not affect the amount of the "return premium," (except in the rare case that the account has declined in value below the original premium deposit amount, where they may reduce the amount of "return premium" which petitioner could deduct). They do not constitute additional gross premium received by the petitioner.

Back-End Annuity Products

In 1988, petitioner elected to begin reporting tax on its variable annuity products on a "back-end" basis, which is an alternative method permitted by Revenue and Taxation Code section 12222. When this method is elected, petitioner does not report receipt of taxable gross premium until the time the actual annuity contract is made, i.e. when the accumulated funds which have been held and invested by petitioner for a policyholder's account are actually applied to purchase an annuity. Unlike front-end reporting, the measure of the gross premiums in this instance includes both the funds accepted by the insurer as well as the investment returns credited to the account in the period prior to actual purchase of the annuity. Petitioner properly does not reduce the taxable measure by the amount of administrative management fees previously charged, so they are included in the measure of tax at the time the annuity contract is purchased.

ISSUE NO. 3
Statute of Limitations

Petitioner has provided a recalculation of its premium tax liability based on the forms and instructions currently used by DOI, and computed without including the administrative management fees and surrender charges in taxable measure. These calculations indicate an additional claimed overpayment for 1992 of $1,164, over and above the original claim for refund regarding the assessment issued by DOI following the audit. For 1993, the alleged additional overpayment was $2,167, and for 1994 the alleged additional overpayment was $2,952. However, we conclude that petitioner's assertion of an increase in its claim for refund for those years is barred by the statute of limitations. Revenue and Taxation Code section 12978 provides that a claim for refund must be made within four years of April 1 of the year following the year for which the overpayment was made. The claim must state the specific grounds on which it is based. (Rev. and Tax. Code, § 12979.) Petitioner may not amend its claim on grounds different from those in its initial claim after the statute has expired. (Cf. Business Taxes Law Guide, Vol. IV, Annot. 465.0100 [9/11/59].) Petitioner's assertion of an increase in its alleged overpayment was not made until its brief filed on April 9, 1999. The statute of limitations for even the most recent year (1994) under review, expired on April 1, 1999. The assertion in the April 9, 1999, brief was on a different ground (calculation error) from the original claim.

OPINION

We conclude that the management fees and surrender charges deducted from a variable life insurance policy or deducted from a premium deposit for a variable annuity contract reported on a front-end basis do not constitute gross premiums subject to tax. However, insurers reporting on a back-end basis must include management fees previously deducted from premium deposit accounts in the measure of gross premiums.

We further find that the increase recalculated by petitioner for the related claims for refund will be denied and that the tax, as computed within the statute of limitations, be refunded in the following amounts:

Done at Sacramento, California, this 6th day of April, 2000.

Dean Andal, Chairman

Claude Parrish, Member

Johan Klehs, Member

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Ticor Title Insurance

In the event that an underwritten title company retains a portion of a title insurance premium on account of its services to the insured, that portion of the premium retained by the underwritten title company is not included in the title insurer's measure of "all income upon business done in this State" for insurance tax purposes under section 12231 of the Revenue and Taxation Code.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

In the Matter of the Petitions of TICOR TITLE INSURANCE COMPANY, TICOR TITLE INSURANCE COMPANY OF CAL., FIRST AMERICAN TITLE INSURANCE COMPANY for Redetermination Under the Insurance Tax Law

Appearances:

For Ticor Title Insurance: Ms. Maureen McGuirl Mr. Norman Barker Attorneys at Law

For First American Title Insurance: Mr. Harry G. Melkonian Mr. Chris Rudd Attorneys at Law

For Department of Insurance: Mr. Hon Chan Senior Staff Counsel

For Board of Equalization: Mr. Monte Williams Administrator

Mr. Gary J. Jugum Assistant Chief Counsel

Mr. David H. Levine Senior Staff Counsel

MEMORANDUM OPINION

The Board heard these petitions on June 23, 1993 in Sacramento, California. The petitions concern the proper measure of tax imposed on title insurers in California.

Section 28 of Article XIII of the California Constitution imposes a tax on title insurers measured by all income on their business done in this state, with exceptions not relevant here. These provisions are codified at Revenue and Taxation Code sections 12202 and 12231. The question before the Board is what constitutes all income of a title insurer.

FACTS

There are two basic elements of a title insurance policy issued in California: a title search to discover defects, if any, in the title; and a policy of insurance which insures against the existence of any defects in the title that were not disclosed in the title search. Both these elements may be performed by the insurer. The measure of tax with respect to such policies is not at issue here. However, in California it is more common for an "underwritten title company" (UTC) to perform the title search element of the title insurance policy, and to issue the title insurance policy as the agent of the title insurer. It is the title insurer's income from such policies issued by UTCs on behalf of the title insurer that is at issue here.

Title insurers often conduct business in this state pursuant to underwriting agreements with title companies. The title company may be wholly or partly owned by the title insurer, or its ownership may be completely independent of the title insurer. A title company that has an underwriting agreement with a title insurer is called an underwritten title company. The underwriting agreement authorizes the UTC to issue a policy of title insurance as the agent of and in the name of its principal, the title insurer. The UTC performs a title search and issues a preliminary title report that shows the defects, if any, to the title. The UTC then issues a title insurance policy, as agent of and in the name of its principal, and receives the premium for that policy. [3] For its services, the UTC retains an amount set forth in the underwriting agreement, generally about 90 percent of the total premium.

Petitioners have not reported as taxable income amounts retained by the UTCs. The Department of Insurance (Department) recommended that the Board issue, and the Board did issue, deficiency assessments measured by such amounts for tax year 1987. Petitioners filed timely petitions for redetermination.

BACKGROUND

The manner of providing title searches and title insurance has evolved in California over the past 100 years into the current arrangement. During that time, there was a shifting of the manner of providing title insurance from the title insurer performing the title searches and providing the insurance policies to today's more common method at issue here. Prior to 1942, title insurers were taxed on the same basis as other insurers, gross premiums. In 1942, a constitutional amendment was adopted which changed the basis of tax on title insurers from gross premiums to all income.

In 1953, the California Supreme Court decided the case of Groves v. City of Los Angeles 40 Cal.2d 751, which involved a measure of tax based on gross premiums. In Groves, the insurer issued its insurance, bail bonds, through its agents, bail bondsmen. In the cases before us, the UTC typically performed the title search element of the title insurance policy. In Groves the bail bondsman performs no analogous service or function. A person purchasing a bond paid the bail bondsman, who retained 90 percent of the premium and remitted the remaining 10 percent to the insurer. The Court held that the 90 percent retained by the bail bondsman was part of the insurance premium and was taxable to the insurer. This case is the primary basis for the Department's conclusion that the amounts retained by the UTC are part of the title insurance premium and are therefore income to the title insurer, and taxable as such.

After the 1942 constitutional amendment, title insurers reported tax measured by the entire title insurance premium when the title insurer performed the title search and provided the insurance. However, when a UTC performed the title search and issued the policy of insurance as the insurer's agent, the title insurer reported tax measured only by the amounts transmitted to it from the UTC. The title insurers have been reporting tax in this manner for 50 years. Notwithstanding the Groves decision on which the Department relies, neither the State Board of Equalization nor the Department have adopted any regulations requiring that the amounts in question be included in the measure of tax. Likewise, the Department has not taken any other action contrary to the title insurers' method of reporting tax until its recommendations for the assessments at issue here. In fact, during this period the Department of Insurance issued written statements supporting the interpretation now urged by the Petitioners.

The most recent authority with regard to taxation of title insurance companies is the California Supreme Court's decision in Title Insurance Company v. State Board of Equalization, 4 Cal.4th 715 (1992). In Title Ins. Co., the Court found that the "title insurer and the title company, through the underwriting agreement, have agreed to allocate the labor, risk, liability and premium" associated with the title insurance contact. (Title Ins. Co., at 725.) Further, the Court found that the "title insurer forgoes the portion of the premium attributable to the risk that is allocated to the underwritten title company." (Ibid.) The Court held that title insurers may not be taxed on claims paid by underwritten title companies pursuant to underwriting agreements between the two.

ANALYSIS

Petitioners argue that the UTC is not an agent of the title insurance company for purposes of calculating the "all income" measure of tax under California's Insurance Tax Law. In response, the Department argues that the UTC is, in fact, the title insurer's agent for purposes of accepting not only that portion of the premium remitted to the title insurer, but rather the entire amount paid by the customer. Petitioners argue that the 1942 amendment to the constitution did not intend to increase the title insurers' tax liability by a factor of ten. The Department points out that the decision that forms the basis for regarding amounts retained by an insurer's agent as part of the insurer's gross premiums was issued more than ten years after the 1942 amendment, which means that neither title insurers nor other insurers knew what the Supreme Court would ultimately decide on that issue. Petitioners argue that Groves was a case solely on the issue of what constitutes "gross premiums" and the Department responds that it is also relevant to the question of what constitutes "all income."

We agree with the Court's analysis in Title Ins. Co. that the title insurer and the underwritten title company have divided the labor, risk, liability, and premium and that by doing so, the title insurer forgoes the premium retained by the title company. Therefore, the premium retained by the UTC should not be included in the measure of "all income" of the title insurance company.

Further, we find that the Court's decision in Groves does not apply. We note that in Groves the basis for taxation was "gross premiums" not "all income" as required for title insurance companies. As previously stated, the UTC typically performed the title search element of the title insurance policy, unlike Groves where the bail bondsman performed no such equivalent activity.

In addition to these points, for almost 50 years the Department has taken no action on this issue, almost 40 of which were after the Groves decision. Petitioners argue that a change of course at this time must be based on some principled explanation, and we agree. At this juncture, after 50 years of acquiescence in the manner of reporting by petitioners, the Department has failed to establish that a different method of taxation is correct. The longest of long-standing administrative practice is entitled to great weight. Here the interpretation in practice was contemporaneous, continuous, and enduring. (See, generally, Transamerica Occidental Life Ins. Co. v. State Board of Equalization (1991) 232 Cal.App.3d 1048; American Hospital Supply Corp. v. State Board of Equalization (1985) 169 Cal.App.3d 1088.)

We therefore hold that the amounts retained by UTCs are not part of the all income measure of title insurers' insurance tax liability, and we order that the determinations be canceled.

Done at Sacramento, California this 5th day of January 1994, by the State Board of Equalization.

Brad Sherman, Chairman

Matthew K. Fong, Member

Ernest J. Dronenburg, Jr., Member

Attested by: Burton W. Oliver, Executive Director

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[3] A single fee must be charged for the title insurance policy, which includes the title search, without a separate statement of the charges related to the title search. (Ins. Code § 12401.1.)

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Wausau Business Insurance Company

Insured employer's reimbursement to insurance company for the amount of benefits paid by the insurance company within the deductible of a workers' compensation insurance policy is not the payment of gross premiums subject to the insurance gross premiums tax.

BEFORE THE STATE BOARD OF EQUALIZATION OF THE STATE OF CALIFORNIA

In the Matter of the Petitions for Redetermination Under the Tax on Insurers Law of WAUSAU BUSINESS INSURANCE COMPANY, WAUSAU UNDERWRITERS INSURANCE CO., EMPLOYERS INS. CO. OF WAUSAU Petitioners

Appearances:

For Petitioners: Eric Miethke Attorney at Law

Richard D. Martland Attorney at Law

For Department of Insurance: Larry C. White Senior Staff Counsel

For Excise Taxes Division: Trecia M. Nienow Tax Counsel

For Appeals Division: Jeffrey G. Angeja Tax Counsel III

MEMORANDUM OPINION

This opinion considers the merits of three petitions for redetermination for the period January 1, 1997 through December 31, 1997. At issue is whether petitioners' gross premiums subject to tax under Revenue and Taxation Code sections 12201 and 12221 include deductible reimbursements received from employers for workers' compensation policies issued in California.

Under California law, all insurance companies (except those transacting title insurance and ocean marine insurance) are required to pay an annual tax based on the amount of gross premiums received less premiums returned, for business done in this state. (Rev. and Tax. Code, §§ 12201 and 12221.) Petitioners here are insurance companies who must pay the annual tax based on their gross premiums, less returned premiums.

The dispute in these petitions centers on the definition of "gross premiums" under Revenue and Taxation Code section 12221 and Insurance Code section 11735, which became operative January 1, 1995. Insurance Code section 11735, subdivision (e), changed the law for insurance companies issuing workers' compensation policies in California by allowing for deductibles, whereas before 1995, deductibles were only allowed for other forms of insurance (e.g., medical, auto, etc.). Thus, before 1995, an employer had to either be fully self-insured or obtain a workers' compensation insurance policy without any deductible.

This change in the law enabled workers' compensation insurance companies to offer to their insureds (employers) policies with deductibles. Since an employer with a deductible policy would then pay claims and benefits within the deducible layer, this reduced the amount of claims the insurer ultimately paid.

However, because the Legislature was also concerned that employers could fail to pay claims or benefits within the deductible (e.g., due to insolvency) or pay claims late (thereby disrupting benefits to injured workers), it adopted subdivision (e)(2) and (e)(3) of Insurance Code section 11735. To protect against the employers' inability (or unwillingness) to pay claims within the deductible, subdivision (e)(2) requires the deductible endorsement to include a provision that specifies "that the nonpayment of deductible amounts by the policyholder shall not relieve the insurer from payment of compensation for injuries sustained by the employee during the period of time the endorsed policy was in effect." To ensure timely payment of claims, subdivision (e)(3) requires the deductible endorsement to include a provision that provides "that notwithstanding the deductible, the insurer shall pay all the obligations of the employer for workers' compensation benefits for injuries occurring during the policy period."

From 1995 forward, when petitioners reported and paid their insurance tax liability on gross premiums, they did not include in their reported gross premiums any deductible reimbursements received from employers who were issued workers' compensation policies. On or about February 25, 2002, the Department of Insurance (DOI) sent a notice to all insurance companies licensed to issue workers' compensation policies in California. In substance, the notices informed insurers that deductible reimbursements received from insured employers under Insurance Code section 11735, subdivision (e)(2) and (7), are considered gross premiums subject to tax under Revenue and Taxation Code section 12221. DOI then recommended that the Board issue, and the Board issued, deficiency assessments to petitioners and all other insurance companies writing workers' compensation policies in California, for 1997 forward. (Deficiency assessments for 1995 and 1996 were barred by the applicable statute of limitations (see Rev. and Tax. Code, § 12432).)

Petitioners question both DOI's seven-year delay before sending out the above-referenced notices, and whether deductible reimbursements are part of gross premiums subject to tax. The DOI asserts that because Insurance Code section 11735, subdivision (e) makes the carriers responsible for payment of all obligations of the insured employer for injuries occurring during the policy period, the employer's payment of its deductible is legally a payment of premium and thus taxable.

OPINION

We conclude that the deductible reimbursements are not included within the measure of the gross premiums tax. Subdivision (e)(3) of Insurance Code section 11735 expressly states that the amount paid by the carrier on behalf of the employer is "an advancement of funds" that creates a "legal obligation for reimbursement" by the employer. Further, the Legislature provided that this statutory mechanism is intended to reduce premiums in that subdivision (e)(5) of section 11735 requires that each policy include "[a]n explanation of premium reductions reflecting the type and level of the deductible will be clearly set forth for the policyholder."

Thus, we conclude that subdivision (e) of Insurance Code section 11735 was not intended to render the deductible an insurance risk of the insurance company, but that the deductible portion of the arrangement was instead intended as a risk assumed by the employer for which the employer would be entitled to a reduction in premium. We therefore conclude that the insured employer's reimbursement to the insurance company for the amount of benefits paid by the insurance company within the deductible is not the payment of gross premiums subject to the insurance gross premiums tax, but instead is the repayment of amounts advanced to the employer by the insurance company. Accordingly, we grant the petitions for redetermination.

Adopted at Sacramento, California, on December 18, 2002.

John Chiang, Chair

Johan Klehs, Member

Dean Andal, Member

Claude Parrish, Member

Kathleen Connell, Member