Amdahl Corp. v. County of Santa Clara

• Decision Date: 03 March 2004
• Docket Number: No. H025660.,H025660.
• Citation: 10 Cal.Rptr.3d 486,116 Cal.App.4th 604
• Court: California Court of Appeals Court of Appeals
• Parties: AMDAHL CORPORATION, Plaintiff and Appellant, v. COUNTY OF SANTA CLARA, Defendant and Respondent.

10 Cal.Rptr.3d 486

116 Cal.App.4th 604

AMDAHL CORPORATION, Plaintiff and Appellant, v. COUNTY OF SANTA CLARA, Defendant and Respondent.

No. H025660.

Court of Appeal, Sixth District.

March 3, 2004.

David L. Larson, John G. Ryan, Lisa Sattler Blackburn, Peter O. Huang, McDermott, Will & Emery, Attorneys for Plaintiff and Appellants.

Ann Miller Ravel, County Counsel, James J. Rees, Deputy County Counsel, Marcy L. Berkman, Deputy County Counsel, Office of the County Counsel, Attorneys for Defendant and Respondent.

WUNDERLICH, J.

This appeal concerns a claim for refund of property taxes. Respondent, the County of Santa Clara (County), issued to appellant Amdahl Corporation (Amdahl) escape assessments covering a five-year span from 1993 through 1997. The property assessed involves a "pool" of spare parts used by Amdahl to service and repair its customers' computer equipment under extended service contracts. The County and Amdahl reached agreement as to the value of the spare parts pool subject to the tax, and Amdahl paid the taxes and interest thereon, which amounted to approximately $837,000 and $242,000, respectively.

Amdahl brought this action under Revenue and Taxation Code section 5140 et seq., for refund of the property taxes paid.¹ Amdahl claimed that the spare parts pool is exempt from taxation under section 219, which provides that no property taxes shall be assessed on "business inventories."

Amdahl and the County filed cross-motions for summary judgment, based upon stipulated facts. The trial court granted the County's motion, and judgment was entered in its favor. Amdahl appealed, asserting that the trial court erred, because, as a matter of law, the spare parts pool must be classified as "business inventories," exempt from the assessment of property taxes. For the reasons stated below, we disagree with Amdahl's assertion, and affirm the trial court's decision.

STIPULATED FACTS

Amdahl manufactures, sells and leases information technology hardware products (computer equipment) for business applications. Amdahl also services and repairs the computer equipment that it sells or leases, pursuant to warranties and extended service contracts.

In connection with its service and repair functions, Amdahl maintained a pool of spare parts (the spares pool or the rotable² spares). Amdahl utilized the rotable spares for two purposes: (a) for replacement parts in fulfilling its maintenance and repair duties under extended service contracts with its customers;³ and (b) to diagnose and isolate problems with particular computer equipment, through a trial and error method of replacing various parts to determine which part was nonfunctioning.

An Amdahl customer paid a flat monthly fee under the extended service agreement, which fee did not vary on the basis of whether the computer equipment being serviced was sold or leased. During the term of the extended service agreement, the customer's monthly fee was fixed, irrespective of either Amdahl's actual cost to perform under that agreement, or the number of replacement parts provided to that customer.⁴ The number of replacement parts utilized, however, may have impacted the fee charged for subsequently executed service contracts with that customer or with other future customers.

The standard, extended service contract required Amdahl to use new parts or refurbished ("like-new") parts as replacement parts, and provided that parts removed from the customer's computer equipment during service would become the property of Amdahl. Pursuant to the extended service contracts, Amdahl and its customers understood that Amdahl would use parts from its spares pool to satisfy Amdahl's repair and maintenance obligations.

Parts removed from the customer's computer equipment during a service call were either repaired and reconditioned (and then held for future use by Amdahl in its spares pool), or, alternatively, scrapped. The removed parts, consistent with the parties' understanding, became the property of Amdahl. Conversely, the rotable spares parts installed in the customer's computer equipment became part of the equipment owned or leased by the customer. After termination of an extended service contract, any such installed parts remained part of the equipment owned or leased by the customer.

Amdahl treated the spares pool as fixed assets (rather than as inventory) in connection with its income tax reporting and financial accounting. Amdahl capitalized the spares pool, and claimed depreciation deductions on those parts. In performing its work under extended service contracts, when Amdahl exchanged a part from the spares pool with a part from its customer's computer equipment, Amdahl continued to record depreciation expense as if there had been no exchange of parts.

The County of Santa Clara levied escape assessments⁵ against Amdahl for the fiscal years, 1993-1994, 1994-1995, 1995-1996, and 1996-1997 and 1997-1998. The escape assessments were based upon the County Assessor's conclusion that the spares pool maintained at Amdahl's distribution center in Santa Clara County were taxable property, and did not qualify as "business inventories" under section 219.

Thereafter, the parties reached agreement as to the full cash value of the spares pool for the relevant fiscal years (1993-1997). On April 12, 2000, the Assessment Appeals Board for the County accepted this valuation stipulation. Based upon the stipulation as to value, the County assessed property taxes and interest upon Amdahl's spares pool, under section 506,⁶ as follows: fiscal year (FY) 1993 ($251,805.28 tax, and $92,538.44 interest); FY 1994 ($185,851.73 tax, and $64,118.85 interest); FY 1995 ($269,718.71 tax, and $68,778.27 interest); FY 1996 ($60,708.80 tax, and $10,016.95 interest); and FY 1997 ($51,726.10 tax, and $3,897.45 interest). Amdahl paid all taxes and interest assessed against the spares pool for the fiscal years 1993-1997.

PROCEDURAL HISTORY

Pursuant to section 5097, on September 4, 2000, Amdahl filed a verified claim for refund of property taxes and interest it paid relative to the spares pool for the fiscal years 1993-1997. The County Board of Supervisors did not act on Amdahl's claim within six months, and Amdahl, on August 23, 2001, filed timely a refund action in the Santa Clara County Superior Court, pursuant to section 5140 et seq.⁷

The Complaint filed by Amdahl alleged two causes of action, namely, a refund claim, and a claim for declaratory relief. Thereafter, on February 13, 2002, Amdahl filed a dismissal without prejudice of the second cause of action for declaratory relief.

The parties stipulated to a briefing schedule and the scheduling of a hearing on their cross-motions for summary judgment. On December 12 2002, the court below granted the County's motion for summary judgment, and denied Amdahl's motion. The trial court concluded that Amdahl's rotable spares "are not exempt `business inventory' [sic] under Revenue and Taxation Code section 129, as the spare parts are not `goods intended from [sic] sale or lease in the ordinary course of business....' "Judgment was entered on January 7, 2003, and Amdahl filed timely this appeal on February 25, 2003.

DISCUSSION

I. Standard Of Review

Questions of law are reviewed on appeal de novo. (People v. Figueroa (1999) 68 Cal.App.4th 1409, 1413, 81 Cal.Rptr.2d 216.) Matters of interpreting and applying a statute are questions of law. (Redevelopment Agency v. County of Los Angeles (1999) 75 Cal.App.4th 68, 74, 89 Cal.Rptr.2d 10; Gapusan v. Jay (1998) 66 Cal.App.4th 734, 740, 78 Cal.Rptr.2d 250 [de novo review for interpretation and application of statutes utilizing undisputed facts].) Thus, "`[w]e independently construe statutory law [and administrative rules and regulations] Delta Air Lines, Inc. v. State Bd. of Equalization (1989) 214 Cal.App.3d 518, 525, 262 Cal.Rptr. 803 [citation], as [their] interpretation is a question of law on which we are not bound by the trial court's analysis.' [Citation.]" (Apple Computer, Inc. v. Assessment Appeals Bd. (2003) 105 Cal.App.4th 1355, 1365, 130 Cal.Rptr.2d 335, quoting Lazar v. Hertz Corp. (1999) 69 Cal.App.4th 1494, 1502, 82 Cal.Rptr.2d 368.)

Summary judgment/summary adjudication motions also involve purely questions of law, and, as such, are reviewable de novo. (West Shield Investigations & Security Consultants v. Superior Court (2000) 82 Cal.App.4th 935, 946, 98 Cal.Rptr.2d 612.) The appellate court, therefore, need not defer to the trial court, and is not bound by the reasons for the summary judgment ruling; the court reviews the ruling of the trial court, not its rationale. (Travelers Casualty & Surety Co. v. Superior Court (1998) 63 Cal.App.4th 1440, 1450, 75 Cal.Rptr.2d 54.)

In this instance, for three distinct reasons, the judgment must be reviewed by this court de novo. The issue presented concerns the meaning and effect of sections 219 and 129, as that statutory tax exemption relates to Amdahl's spares pool. Additionally, this matter comes to this court following an order granting the County's motion for summary judgment, which motion was presented to the trial court on stipulated facts. Moreover, the classification of business assets for determining taxation issues — as the trial court correctly held — is a question of law. (Transworld Systems, Inc. v. County of Sonoma (2000) 78 Cal.App.4th 713, 716, 93 Cal.Rptr.2d 165 (Transworld Systems).) Therefore, this court decides de novo whether the trial court correctly held that Amdahl's rotable spares were not exempt from property tax under section 219.

II. Tax Exemption For "Business Inventories"

As a general proposition, all forms of tangible personal property⁸ are taxable in California. (Cal. Const., art. XIII, § 2.) By constitutional enactment and by statute, however, the California Legislature has provided that certain property is exempt from property tax. (See, e.g., Cal. Const., art. XIII, § 4, subd. (b), and Rev. & Tax Code, §§ 207...