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

• Decision Date: 14 November 1963
• Citation: 34 Cal.Rptr. 872,60 Cal.2d 441,386 P.2d 496
• Parties: , 386 P.2d 496 UNION OIL COMPANY OF CALIFORNIA, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent. Sac. 7356.
• Court: California Supreme Court

Page 872

34 Cal.Rptr. 872

60 Cal.2d 441, 386 P.2d 496

UNION OIL COMPANY OF CALIFORNIA, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, Defendant and Respondent.

Sac. 7356.

Supreme Court of California, In Bank.

Nov. 14, 1963.

Hart H. Spiegel and Brobeck, Phleger & Harrison, San Francisco, for plaintiff and appellant.

Stanley Mosk, Atty. Gen., Ernest P. Goodman and John J. Klee, Jr., Deputy Attys. Gen., for defendant and respondent.

TOBRINER, Justice.

In this controversy as to the application of the California use tax to an extra-state sale and lease-back of two tankers we hold that an owner of property 'uses' it under the tax statute when he leases it. The use of the lessor through the lease in California is a California use. The trial court's finding that the purchaser at the date of the transaction anticipated that the lessee would use the vessels in California, and the subsequent actual use in California, render the transaction a purchase for use in this state. Hence the purchaser is liable for the tax upon the basis of the purchase price. No constitutional prohibitions prevent California's application of its use tax to the transaction. We shall proceed, infra, to point out in more detail the reasons for these conclusions.

The case involves the attempt of Union Oil Company (hereinafter called Union) to recover the amount of $151,800 which Union, as tax collector, paid as use taxes for Cienega Tanker Corporation (hereinafter called Cienega), the true taxpayer.

The Board of Equalization assessed the tax in view of the following facts. Union entered into a contract in New Jersey to sell to Cienega the two bulk oil tankers, which, according to the contract, would immediately be leased back to Union. Union subsequently operated the tankers in California. Since the sale of the tankers occurred outside of California the sales tax did not apply. California, however, called upon Union to collect a use tax from Cienega. Sections 6203 and 6204 of the Revenue and Taxation Code require a retailer maintaining a place of business in this state to collect such a use tax. Union does not dispute that it is a retailer maintaining a place of business in this state. It maintains, however, that Cienega did not incur such a use tax liability, and that Union, as tax collector, should accordingly be refunded the amount of the tax.

The trial court found that the two vessels, the S.S. Santa Paula and S.S. Lompoc, 'were purchased by Cienega from a retailer (Union) for use and consumption in the State of California and were used and consumed by Cienega in the State of California.' The court therefore sustained the assessment. The finding rested upon the parties' stipulation of facts which discloses the details of the transaction.

Thus the parties entered into a contract at Jersey City, New Jersey, which provided that Cienega take legal title to the vessels and that physical possession be transferred at Astoria, Oregon or such other United States port as Union might designate. The purchase price for each vessel was $2,200,000. The contract further stipulated that concurrently with the delivery of the vessels Cienega would execute a bareboat charter for each vessel. ¹ The period for the charter for the S.S. Santa Paula was two years; that for the S.S. Lompoc, four years. Union enjoyed an option to extend the charter period for each vessel for one year.

The parties promptly executed the contract: Union delivered the ships to Cienega at Astoria, Oregon; Cienega concomitantly executed a bareboat charter for each vessel and redelivered physical possession to Union.

While we cannot assume that the sale and lease-back transactions were not bona fide, we note that the physical utilization of the two ships in the year immediately preceding, and the year immediately following, the transactions remained significantly consistent. Union did not deviate from the customary pattern of employment of the vessels. In the year preceding their transfers the Santa Paula and the Lompoc spent 252 and 289 days respectively in intrastate commerce in this state; in the year following the transfers these vessels spent 312 and 335 days respectively in predominantly California activity.

The parties do not dispute the fact that if any of the significant elements of the foregoing transactions had transpired within California the transfer would have been subject to our sales tax; since, however, no transfer of title or possession occurred in this state, no sales tax accrued. At the time of these events, moreover, neither the place of execution of the contract of sale (New Jersey) nor the point of delivery and redelivery of the vessels (Oregon) imposed either a sales tax or a use tax.

The case raises the basic issues whether the trial court properly found: (1) a taxable 'use' of these vessels occurred in California subsequent to their sale; (2) the purchaser (Cienega) contemplated, at the date of such transfer, the essential condition of such 'use'; (3) the statute itself did not exempt from taxation Cienega's use of the property, and (4) California did not violate any constitutional prohibition in imposing the tax. We set forth in the above sequence our reasons for concurrence with the trial court.

In analyzing the first issue, we shall point out that the statutory definition of 'use' includes the owner's use of the property by means of leasing it, and that, further, such an interpretation accords with the statutory design that the use and sales taxes be interpreted as complementary taxes. ²

The statutory definition of 'use' includes that exercise of dominion over property which takes the form of leasing it. The definition reads: "Use' includes the exercise of any right or power over tangible personal property incident to the ownership of that property, except that it does not include the sale of that property in the regular course of business.' (Rev. & Tax.Code, § 6009.) The lease is an articulation of that right incident to the ownership of the property. Ownership is not a single concrete entity but a bundle of rights and privileges as well as of obligations. ³ It finds expression through multiple methods. One such method is the lease. And where the owner physically uses the leased property, there, indeed, the ownership is exerted. When the tankers enter California the owner continues the exertion of its right of ownership through the instrument of the lease; the owner 'uses' the tankers in California. The taxing authority at the location where the owner expresses or exercises such ownership may properly find that such use constitutes a taxable use.

The statutory definition recognizes that the term 'use' covers the utilization of property for profit-making purposes by means of leasing; the word 'use' is by no means restricted to physical manipulation. Thus Webster's New Twentieth Century Dictionary (1950) states as one of the meanings of the word, 'The act of handling or employing in any manner, and for any purpose, but especially for a profitable purpose; the state of being employed; employment; application; conversion to a purpose; * * *.' Likewise, a Kansas court, in defining the word and describing the extent of a bequest of property in trust 'for the use and benefit' of the mother of a testatrix, holds: "As a general rule, the use of a thing does not mean the thing itself, but means that the user is to enjoy, hold, occupy, or have in some manner the benefit thereof. If the thing to be used is in the form of shape of real estate, the use thereof is its occupancy or cultivation, etc., or the rent which can be obtained for its use. If it is money or its equivalent, generally speaking, it is the interest which it will earn.' 29 A. & E. Ency. of Law, 444.' (Elwell v. Stewart (1922) 110 Kan. 218, 203 P. 922; emphasis added.)

Our interpretation finds corroboration in section 6201, which imposes the use tax upon 'storage, use, or other consumption' in this state. As the court in In re Los Angeles Lumber Products Co. (D.C.S.D.Cal.1942) 45 F.Supp. 77, has said in regard to the use tax, '* * * not only 'use' but also 'storage' or 'other consumption' is taxable under the Use Tax Act.' (P. 82 of 45 F.Supp.) The word 'consumption' encompasses a gradual 'using up or wearing away of something' (Webster's Third International Dictionary); to the extent that a deterioration, even though imperceptible, occurred in California, 'consumption' of the vessels ensued. The tax applies to 'all consumers' (Traynor, The California Use Tax (1936) 24 Cal.L.Rev. 175, 177), including the gradualist consumer.

The words 'other consumption' are supplementary, not surplusage, to the remaining words of the section (Weber v. County of Santa Barbara (1940) 15 Cal.2d 82, 86, 98 P.2d 492) and 'significance should be given' to them (Select Base Materials v. Board of Equalization (1959) 51 Cal.2d 640, 645, 335 P.2d 672). The vessels were actually used in California; here, too, the consumption as well as the use, took place.

The concept that Cienega used and consumed the vessels in California effectuates the basic purposes of the use tax and the broad statutory construction which we msut accord its provisions. ⁴ As we stated in Chicago Bridge & Iron Co. v. Johnson (1941) 19 Cal.2d 162, 165, 119 P.2d 945, 947: 'One of these purposes is to make the coverage of the tax complete to the end that the retail sales tax * * * will not result in an unfair burden being placed upon the local retailer engaged solely in intrastate commerce as compared with the case where the property is purchased for use or storage in California and is used or stored in this state. The two taxes are complemental to each other with the aim of placing the local retailers and their out-of-state competitors on an equal footing.' (Emphasis added; see also Brandtjen & Kluge v. Fincher (1941) 44 Cal.App.2d Supp. 939, 941-942, 111 P.2d 979, and Traynor, The California Use Tax (1936) 24 Cal.L.Rev....