Standard Oil Co. of Cal. v. State Bd. of Equalization

• Decision Date: 04 February 1965
• Court: California Court of Appeals Court of Appeals
• Parties: STANDARD OIL COMPANY OF CALIFORNIA, a corporation, Plaintiff and appellant, v. STATE BOARD OF EQUALIZATION, an agency of the State of California, Defendant and Respondent. Civ. 10923.

Page 543

42 Cal.Rptr. 543

232 Cal.App.2d 91

STANDARD OIL COMPANY OF CALIFORNIA, a corporation, Plaintiff and appellant, v. STATE BOARD OF EQUALIZATION, an agency of the State of California, Defendant and Respondent.

Civ. 10923.

District Court of Appeal, Third District, California.

Feb. 4, 1965.

Rehearing Denied March 1, 1965.

Hearing Denied March 31, 1965.

Pillsbury, Madison & Sutro, San Francisco, for appellant.

Stanley Mosk and Thomas C. Lynch, Attys. Gen., by Ernest P. Goodman, Deputy Atty. Gen., Sacramento, for respondent.

PIERCE, Chief Justice.

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 in California, such operations being carried on in all but a few cases upon leased land. Its leases provided that all improvements and equipment placed upon the leased property by Petrol 'shall at all times be and remain the personal property of and belong to the Lessee, and Lessee shall have the right to remove said improvements or equipment at any time during the term hereof and also within thirty (30) days after the expiration or other termination of this lease.'

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 constitutioinal 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 upon property, it is a tax upon 'retailers' for the privilege of making 'retail sales' and the tax is measured by the gross receipts from 'retail sales.' (Rev. & Tax.Code, sec. 6051.) 'Sale' includes any transfer of title or possession 'in any manner or by any means whatsoever, of tangible personal property for a consideration.' (Rev. & Tax.Code, sec. 6006.) (Emphasis supplied throughout.) In Select Base Materials v. Board of Equalization, 51 Cal.2d 640, at pages 645, 646, 335 P.2d 672, at page 676, the court states: 'It [i. e. the definition of sale quoted] coincides with the common-law definition of a 'sale' and is substantially the same as that used in the Uniform Sales Act. [Citations] It is reasonable to assume that the Legislature intended the basic definition of the word 'sale' to govern its interpretation in connection with 'gross receipts' for computation of the sales tax. (Rev. & Tax.Code, sec. 6012.)' 'A 'retail sale' or 'sale at retail' means a sale for any purpose other than resale in the regular course of business in the form of tangible personal property.' (Rev. & Tax.Code, sec. 6007.) 'Tangible personal property' is defined as 'personal property which may be seen, weighed, measured, felt, or touched, or which is in any other manner perceptible to the senses.' (Rev. & Tax.Code, sec. 6016; Roth Drug, Inc. v. Johnson, 13 Cal.App.2d 720, 734, 57 P.2d 1022.) In the latter case it is stated at page 734, 57 P.2d at page 1028:

'The reason for distinguishing between tangible and intangible property for the purpose of taxation is very evident. The first is visible, accessible and easy to identify and levy upon, while the other is not so readily located or its value ascertained.'

As regards the meaning of 'in the regular course of business' (in section 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.Law 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 equipment must be taxed as 'tangible personal property' because that is what it is. Affixed equipment, it says, may be either personal or real property depending upon several factors, including the nature of its use and the intent of the parties. Here a consideration of both of these factors makes it clear that this equipment is to be considered as personalty. We find this reasoning to be sound.

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, footnote 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. State Bd. of Equal., 137 Cal.App.2d 87, 92, 290 P.2d 20--sale of railroad ties and rails.) Also, if therefore unaffixed equipment had been purchased for the purpose of adding it as a permanent improvement of real property, the cost of such equipment would have been considered as a taxable gross receipt of the sale. (General Electric Co. v. State Bd. of Equal., 111 Cal.App.2d 180, 244 P.2d 427; Overly Mfg. Co. v. State Bd. of Equal., 191 cal.App.2d 20, 30, 12 Cal.Rptr. 391.) We cannot bring ourselves to the belief that it was the legislative intent that, although affixed property to become unaffixed and unaffixed property to become affixed are to be considered 'tangible personal property' for sales tax purposes, affixed property to remain affixed indefinitely (though subject to a right to removal by the buyer without restraint) is not. ¹

Since this equipment was affixed and sold in place, it is perhaps not unnatural that both parties and the trial court sought resolution of the problem of taxability by relating it to the law of fixtures. Respondent Board did so by a second-trench argument that if these items of equipment were to be regarded as fixtures at all, since they were trade fixtures, their nature as personal property could be established by recourse to a traditional three-factor test frequently applied by the...