King v. State Bd. of Equalization

• Decision Date: 21 January 1972
• Citation: 22 Cal.App.3d 1006,99 Cal.Rptr. 802
• Parties: John M. KING, dba John M. King Company, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, an agency of the State of California, Defendant and Appellant. Civ. 12358.
• Court: California Court of Appeals Court of Appeals

Page 802

99 Cal.Rptr. 802

22 Cal.App.3d 1006

John M. KING, dba John M. King Company, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, an agency of the State of California, Defendant and Appellant.

Civ. 12358.

Court of Appeal, Third District, California.

Jan. 21, 1972.

Rehearing Denied Feb. 17, 1972.

Hearing Denied March 16, 1970.

Lenard S. Zipperian and Donald Ingoglia, by Lenard S. Zipperian, Sacramento, for plaintiff and appellant.

Thomas C. Lynch and Evelle J. Younger, Attys. Gen., by Ernest P. Goodman, Asst. Atty. Gen., and Edward P. Hollingshead, Deputy Atty. Gen., Sacramento, for defendant and appellant.

FRIEDMAN, Acting Presiding Justice.

This appeal involves the application of the Sales and Use Tax Law ¹ to a contractor's gross receipts for constructing an electrical power transmission line.

The retail sales tax is measured by the gross receipts from the retail sale of tangible personal property. (§ 6051.) Effective in 1965, the Legislature adopted a provision declaring that telephone and electrical transmission lines, poles and towers are not 'tangible personal property' for sales tax purposes. (§ 6016.5.) It accompanied its declaration with a statement that it was prospective only, leaving prior law unaffected. (Stats. 1965, ch. 1960, § 3.) The prior law had never been delineated by statute or judicial decision. The State Board of Equalization views the 1965 amendment as a legislative confirmation of its long-standing administrative practice, a practice which had classed such installations as tangible personal property for the purpose of the sales tax. When the Legislature stamped its action as prospective only, it manifested a 'hands off' attitude. It neither confirmed nor rejected the past but relegated pending uncertainties to judicial clarification. This decision will relate only to sales tax liabilities antedating the operative date of section 6016.5.

The facts are stipulated and permit brief summarization: In 1959 plaintiff John M. King was awarded a contract by the City and County of San Francisco calling for the construction of electrical transmission lines in Tuolumne and Mariposa counties. The city was to supply the steel towers, which the contractor would then install on heavy concrete foundations prepared by him. The contractor would supply the electrical conductor (i.e., cable or wire), insulators and other hardware, would unroll the conductor from the spools, string it on the towers and fasten it with insulators and hardware. The job was finished in April 1960.

After auditing King's books, the State Board of Equalization assessed a sales tax measured by two kinds of gross receipts: (a) $132,906 attributed to electrical conductors, insulators and hardware; (b) $378,139 for labor in erecting and fastening the lines on the towers. The board also assessed interest and penalties. It ruled that no tax was payable on the contractor's gross receipts for preparation of the concrete foundations or for installing the towers on these foundations.

King paid the principal amount of the tax under protest and refused to pay the interest and penalty. He sued for a refund. The trial court sustained that portion of the tax measured by the tangible components (wire, insulators, hardware) but held the tax inapplicable to that part of the contract price attributed to labor. The court held the contractor liable for interest on the reduced amount of the tax and sustained the penalty assessment. Both the taxpayer and the board appeal.

One provision of the sales tax law (§ 6006) defines 'sale' to include the fabrication of tangible personal property for a consumer who furnishes the materials. Another, section 6012, defines 'gross receipts' as excluding the cost of labor in installing the property sold. ²

The parties describe the issue as one pivoting upon the electrical transmission line's legal character as personal property or real property. The board characterizes it as tangible personal property, contending that section 6006, subdivision (b), demands inclusion in the tax base of the gross receipts attributable to 'fabrication labor.' The taxpayer does not deny his liability for the tax on the tangible materials, but argues that a power line is real property or an improvement to real property; hence that labor costs are exempted as 'installation labor' under section 6012.

The board states that its administrative practice since 1936 has been to apply the sales tax to contracts for the erection of electrical lines and telephone lines. It relies upon a 1936 opinion of the Attorney General (No. 10585) advising that electrical and telephone transmission lines were to be assessed as personal property for ad valorem tax purposes. The Attorney General's 1936 opinion was not aimed at sales taxation and entered into no discussion or interpretation of the sales tax law. It was based upon a judicial interpretation of former section 3617 of the former Political Code, a provision which expressly excluded telephone and telegraph lines (but not electrical lines) from the category of 'improvements' to real property. The current statutory counterpart is Revenue and Taxation Code section 105.

Like many tax statutes, the sales tax law employs relatively artificial, relatively self-contained, concepts. If it utilizes popular meaning or concepts from other fields of law, it does so only by force of its own objectives and definitions. It does not define real property or 'improvements' to real property, if only because it makes little use of these terms. Its definition of tangible personal property deals with tangibility, not with distinctions between personalty and realty. ³ To pursue the will-o'-the-wisp of definitions, concepts and distinctions from other areas of law--where they are shaped by purposes and by social and economic factors unrelated to sales taxation--leads to false goals. ⁴ The coverage of the sales tax law is shaped by its own provisions and definitions and, where these are unclear, by applying its own perceived policies and concepts. (See Davis, The Purposive Approach to the Interpretation of Sales Tax Statutes, 27 Ohio St.L.J. 429 (1966).)

Neither section 3617 of former Political code nor its statutory successor, section 105, bears any designed relationship to the Sales and Use Tax Law. The former antedated the Retail Sales Tax Act of 1933 by many decades. Currently section 105 is found in that division of the Revenue and Taxation Code dealing with property taxation. Section 101 declares that such definitions govern in the construction of that division. We pointed out in Standard Oil Co. of California v. State Bd. of Equalization, supra, 232 Cal.App.2d at pages 99--100, 42 Cal.Rptr. 543, that the Legislature has not directed application of the ad valorem tax definitions to the field of sales taxation. The courts have often declared that definitions evolved for property tax purposes have no necessary conformity with definitions for other purposes. (Trabue Pittman Corp. v. County of Los Angeles (1946) 29 Cal.2d 385, 393, 175 P.2d 512, and cases cited.)

We do not stop to inquire into an interpretation which expanded a statutory reference to telephone and telegraph lines into one embracing electrical power lines for the purpose of property taxation. The statute interpreted by the Attorney General's 1936 opinion has no relevance here, because it is not imported into the scheme of sales taxation by any phase of the Sales and Use Tax Law. We have concluded that the present transaction is not a 'sale' within the meaning of section 6006; rather that it is vulnerable to the sales tax only to the extent established by the criteria for construction contracts generally. In view of that conclusion, the administrative interpretation of the sales tax act stemming from the Attorney General's 1936 property tax opinion is incorrect. The rule giving weight to contemporaneous administrative construction is not evoked when the construction is incorrect. (Atlantic Oil Co. v. County of Los Angeles (1968) 69 Cal.2d 585, 599, 72 Cal.Rptr. 886, 446 P.2d 1006.)

The California sales tax law is a privilege tax measured by retailers' gross receipts from the sale of tangible personal property. (§ 6051.) Sales tax legislation of this kind excludes transactions which are primarily sales of services.

Due, State Sales Tax Administration, p. 162 (Pub.Admin.Service, 1963)

Oster, State Retail Sales Taxation, pp. 6--7, 80, 86--91 (Ohio St. Univ., 1957)

Cohen, The Taxable Transaction in Consumers' Sales, 8 Law & Contemporary Problems 530, 530--537 (1941)

Davis, op. cit., 27 Ohio St.L.J. at 453--454

Wahrhaftig, Meaning of Retail Sale and Storage, Use or Other Consumption, 8 Law & Contemp. Problems 542, 555--557.

Where a service-supplying entrepreneur utilizes incidental, tangible material in his work, there is a tendency to regard him as a consumer and the sale to him as a retail sale.

Cohen, op. cit., p. 531.

Davis, op. cit., p. 453.

Wahrhaftig, op. cit., p. 553.

Many transactions involve mixtures of materials and services, causing much difficulty in classifying them as taxable or excluded.

In defining a sale as a 'transfer of title or possession . . . of tangible personal property for a consideration,' section 6006 (fn. 2, Ante) was designed to parallel the common law and the Commercial Code definitions of 'sale.' (Select Base Materials v. Bd. of Equalization (1959) 51 Cal.2d 640, 645--646, 335 P.2d 672.) A tangible article sold at retail is an amalgam of values created by material and services. The economic burden of the sales tax might be evaded by a consumer who furnished components to an entrepreneur who supplied nothing but services to fabricate these components into the desired end product. Subdivision (b) of section 6006 was designed to forestall that evasion. ⁵ Whether the retailer supplies the consumer with a completely fabricated article or only fabrication services, he delivers title or possession...