Standard Oil Co. v. State Board of Equalization

The question on this appeal is whether the California sales tax applies to that portion of the gross receipts which represents the price of affixed equipment in a sale of a service station business. We affirm the trial court judgment holding such gross receipts taxable.

The facts are stipulated. Summarized, they are; Petrol Corporation was engaged in the operation of service stations

After taking possession of the leased premises Petrol installed or replaced various items of service station equipment. Petrol was a retailer holding a seller’s permit under the California Sales and Use Tax Law.

Standard purchased substantially all of Petrol’s assets and assumed its liabilities. Between January 1, 1949, and March 31, 1953, Petrol assigned to Standard all of its service station leasehold interests, together with all buildings, equipment and improvements, including the equipment placed thereon by Petrol. The equipment included gasoline pumps, lifts and hoists, compressors, loading racks and accessories, and miscellaneous equipment. All were “transferred in place.” The manner of affixation, described in detail in the stipulation, was that customary for such items.

The equipment was not severed at the time of the transfer nor immediately thereafter nor was it intended to be. Standard continued to operate the service stations and to use the equipment as before, removing and replacing some items from time to time as they became obsolete, or as replacements became desirable for other business reasons.

Respondent, State Board of Equalization, having determined the transaction to be a sale by a retailer of “tangible personal property” under the California sales and use tax, assessed a tax thereunder. Standard paid the tax under protest, claimed a refund, and brought this action to recover.

This is a case of first impression in California and, so far as we have been able to discover, in any other state having sales tax legislation. No constitutional question has been suggested and we deal solely with a matter of statutory construction : Did the Legislature intend to impose a tax on gross receipts of a sale of equipment under the circumstances described above?

Here analysis of what the Legislature intended to include as “tangible personal property” within the purview of the sales tax should begin with a consideration of the nature and purposes of the tax itself. First of all, it is not a tax

As regards the meaning of “in the regular course of business” (in § 6007) “ [g]rammatically and logically . . . the phrase must modify the resale by the purchaser; a sale thus falls outside the definition of ‘retail sale’ only if the buyer is planning to resell the property in the regular course [of] his business. ...” (Sho Sato, The Sales Tax and Capital Transactions, 45 Cal.L.Rev. 450 , at p. 453.) [Significantly, Professor Sato also says (op. cit. p. 453) : “As is apparent from this statutory definition, the purpose of the buyer in making the purchase is the determinative factor. If the principal purpose of the buyer is to use the property, rather than resell it, the sale is a retail sale. This is true even though the buyer might intend to resell the same property when he no longer has any use for it.”

Respondent's argument, reduced to simplest terms, is that the gross receipts from the retail sale of this equip

The nature of the use intended to be made of this property was made clear not only by the agreement between the seller and buyer but by their agreement with the owners of the leased properties. The equipment in the hands of the buyer— notwithstanding its affixation—was to be regarded at all times as personalty which the buyer could consume, remove, replace, and consume the replacement, etc., at its unrestrained will and pleasure. In other words, there was no distinction between the use to be made of this affixed equipment and the use of the unattached tools and equipment (i.e. wrenches, grease guns, etc.) of the service stations. The parties, by their express agreement, had just as effectively removed all possibility of classifying the equipment as real property (because of physical annexation) as though manual severance had taken place.

Consumption by the buyer (i.e. use other than for resale in the ordinary course of business) is, as we have pointed out, what the Sales Tax Act is intended to have its impact on. “The retail sales tax, although legally imposed on the retailer, is economically a consumer’s expenditure tax since the burden of the tax is intended to be and is usually shifted to the consumers.” (Sato: op. cit. p. 455, fn.22.)

Consideration of the manner in which gross receipts from the other items included in the sale were treated may aid in illustrating why gross receipts from the sale of the affixed equipment here must be deemed to fit within the framework of the Sales Tax Act. Clearly that portion of the gross receipts representing the transfer of the leases (a chattel real) was not taxable because, although personal property, it was not tangible personalty. Just as clearly, on the other hand, the unaffixed tools and equipment included in the sale were tangible personal property and the gross receipts therefrom were taxable. Clearly also, if prior to, at the time of, or as contemplated by the contract, a removal of theretofore-affixed equipment had been contemplated immediately after the sale, gross receipts therefrom would have been taxable. (See, e.g., Market St. Ry. Co. v. California State Board of Equalization,

As so frequently seems to happen, however, when one seeks an all-inclusive test to apply to a variety of different and logically unrelated legal problems having one, and only one, common factor (here the “fixture” factor), obsession with that effort obscures the end sought. One cannot “see the forest for the trees. ” We heed the warning of Professor Horowitz (in The Law of Fixtures in California, A Critical Analysis, 26 So.Cal.L.Rev., pp. 21, 22) : “What difficulty there has been with the development of a satisfactorily clear and just ‘law of fixtures’ has largely been due to the attempt to resolve far too many kinds of legal problems by determining nothing more than Avhether a particular tangible physical object has become a ‘fixture.’ . . .

“This confusion, with a search for one all-pervasive all-inclusive fixtures ‘test,’ and the consequent oversimplification in the statement and solution of problems in this field, results in the obscuring of the policy considerations which should lie behind the solution of those problems. There is no separate universe of the law in which objects are either fixtures or not, nor is there any omnipotent force which makes metaphysical changes in physical objects, changing them from ‘personalty’ into ‘fixtures.’ Terms such as ‘realty,’ ‘personalty’ and ‘fixtures’ should be recognized to be not only descriptions of fact but also convenient but confusing descriptions of the nature of legal relations between persons in various factual situations. The use of a mechanical fixtures test for all problems, or the statement of all issues in terms of whether or not a particular object has become a fixture or realty, whatever may be the nature of the underlying policy problem, should be recognized to lead to obscuring of the pertinent policy factors which should be considered in a particular ease, thereby erecting a barrier to clear analysis.”

The contentions of Standard may be summarized as follows: It relies first upon two provisions of the Revenue and Taxation Code, sections 104 and 105. The first of these sections, 104, provides in part: “ ‘Real estate’ or ‘real property’ includes: ... (c) Improvements.” The second section, 105, says: “ ‘Improvements’ includes:

1. Be the Contention that Revenue and Taxation Code Sections 104 and 105 Require that this Equipment be Regarded as Real Property for Sales Tax Purposes.

The Revenue and Taxation Code has two divisions entitled respectively ‘ ‘ Property Taxation ’ ’ and ‘‘ State Taxes. ’ ’ Preceding both divisions are 32 sections entitled “General Provisions.” Therein are definitions applicable to both the divisions which follow them. It is significant that the statutory “definitions” (or more accurately stated, categorizations) relied upon by Standard have not been included among the 32 definitive sections of these “General Provisions.” Division 1, “Property Taxation,” has 10 “Parts,” of which part 1 is entitled “General Provisions” (§§101-134). Section 101 thereof states: “Unless the context otherwise requires, the general provisions hereinafter set forth govern the construction of this division.” (Italics supplied.) Since sec

Trabue Pittman contains language (29 Cal.2d at p. 393), “ [i]t is well settled that for purposes of taxation the definitions of real property in the revenue and taxation laws of the state control whether they conform to definitions used for other purposes or not.” There is similar language in San Diego Trust & Savings Bank v. County of San Diego, 16 Cal.2d 142 , 147 [ 105 P.2d 94 , 133 A.L.R 416 ], also relied upon by Standard. But both of these cases were concerned only with the question whether the affixed equipment therein involved was to be deemed real property for ad valorem property taxation purposes and thus taxable by the county as such. We find nothing in either case, or in the cases cited to support the quoted statement, holding or inferring that because sections 104 and 105 refer to “real property” as including “improvements” and the latter as including “fixtures” in the assessment of property taxes this must be accepted as a legislative mandate to regard removable trade fixtures as real property and not as “tangible personal property” for sales tax purposes. On the contrary, the positioning of these definitive sections in the code and the restrictive language of section 101 negates any such mandate. (This is not to say, of course, that a definitive section of one code division cannot be applied to a fact to be found in another division where apposite. It is to say that the definition cannot be regarded as binding where its application seems to defeat the legislative intent.)

2. Be the Contention that Agreements between Private Parties as to the Nature of Their Property Can Have No Effect on a Taxing Agency.

The decision in Trabue Pittman recognizes that an agreement between a landlord and tenant as to ownership, right to detach, remove and replace trade fixtures during, and upon the termination of, a lease, is an important, and perhaps determinative, factor in the categorization of such equipment as personal property where only their rights are to be considered. It held, however, that where a taxing agency was involved it was not, and should not be, concerned with the agreement. But again the problems of an assessor in

Consideration of the nature of a sales tax makes it apparent that such reasoning, unanswerable when property tax assessment is involved, has no relevancy when applied to the functions of the board and its auditors in ascertainment and assessment of a sales tax upon the sale of a business, or upon any substantial, or bulk, sale. Their ascertainment of taxable gross receipts will usually depend upon an examination of the parties ’ agreement to ascertain the true nature of the transaction and of property involved, the interests of the parties therein, whether the sale is at retail, whether it is an excepted “occasional sale,” etc. And frequently the scrutiny of the auditor must be a close one to discover the real nature of the agreement in transactions, the intricacies of which may sometimes seem—at least superficially—to be contrived. (See e.g., Union Oil Co. v. State Board of Equalization, 60 Cal.2d 441 , 446 [ 34 Cal.Rptr. 872 , 386 P.2d 496 ].) In short, the sales tax auditors simply cannot “act on the basis of outward appearances.” (29 Cal.2d at p. 392.)

3. Be the Contention that it is Necessary to Regard This Equipment as Real Property to Achieve Uniformity of Taxation.

Standard relies upon the following statement in Trabue Pittman (at p. 392 of 29 Cal.2d) : “There can be uniformity of taxation only to the extent that there is a uniform classification of real and personal property. Disregard of any distinction between improvements installed by tenants and improvements installed by an owner of property insofar as taxation is concerned expedites the work of the assessor and tends toward uniformity.”

Again it will be seen that this statement addresses itself only to the assessment of property as property; and that when the nature of property is to be considered only in the ascertainment of the nature of the gross receipts therefrom its applicability fails. This can best be illustrated by a further reference to the language of Trabue Pittman (at p. 398) : “ ‘It is the purpose of uniformity of taxation that all prop