Diamond Nat. Corp. v. State Bd. of Equalization

• Decision Date: 24 June 1975
• Docket Number: CROCKER-CITIZENS
• Citation: 123 Cal.Rptr. 160,49 Cal.App.3d 778
• Court: California Court of Appeals Court of Appeals
• Parties: DIAMOND NATIONAL CORPORATION, a Delaware Corporation, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, etc., Defendant and Appellant.NATIONAL BANK, etc., Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, etc., Defendant and Respondent. Civ. 35143 and Civ. 35698.

Page 160

123 Cal.Rptr. 160

49 Cal.App.3d 778

DIAMOND NATIONAL CORPORATION, a Delaware Corporation, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, etc., Defendant and Appellant.

CROCKER-CITIZENS NATIONAL BANK, etc., Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, etc., Defendant and Respondent.

Civ. 35143 and Civ. 35698.

Court of Appeal, First District, Division 2, California.

June 24, 1975.

For Opinion on Hearing, see 131 Cal.Rptr. 528

Franklin C. Latcham, James E. Merritt, Prentiss Willson, Jr., Morrison, Foerster, Holloway, Clinton & Clark, San Francisco, for Crocker-Citizens and Diamond National.

Evelle J. Younger, Atty. Gen., Ernest P. Goodman, Asst. Atty. Gen., Philip M. Plant, Deputy Atty. Gen., San Francisco, for respondent and appellant State Board.

TAYLOR, Presiding Justice.

These combined appeals ¹ from two actions for refunds of state and local ² sales taxes paid to the State Board of Equalization in 1968, consolidated for trial on stipulated facts, raise the question of whether, pursuant to Revenue and Taxation Code section 6052, the legal incidence of the California taxes falls on the purchasing national bank (Crocker), or on the retailer-vendor (Diamond). The parties agree that if the legal incidence of the tax is on Crocker, it is barred by former 12 United States Code section 548. ³ For the reasons set forth below, we have concluded that under California law, the legal incidence of the tax is on the vendor-retailer, and the judgment in favor of Diamond in No. 35143 must be reversed, and the judgment of dismissal as to Crocker in No. 35698 affirmed.

As the facts were stipulated, we set forth briefly only the basic facts pertinent to the central legal issue before us. Diamond supplied printed forms and other items of tangible personal property to Crocker for use in its business as a chartered national bank. The parties understood and agreed that the item prices stated by Diamond were exclusive of 'sales tax reimbursement,' which would be added to the stated price in computing the total amount Crocker would pay for the merchandise. During the period in issue (March 25, 1958-June 16, 1968), Crocker paid the sum of $292,086.49, of which $278,174.55 represented the stated price and $13,911.84 represented 'sales tax reimbursement.' ⁴ Diamond included the $278,174.55 in tax returns filed with the board, paid the appropriate tax, and subsequently filed for refund of $13,908.73; ⁵ Crocker also filed for a refund of the same amount. The board disallowed both refunds. Diamond agreed that any refund returned to it would be refunded to Crocker pursuant to Revenue and Taxation Code section 6054.5 and Decorative Carpets, Inc. v. State Board of Equalization, 58 Cal.2d 252, 23 Cal.Rptr. 589, 373 P.2d 637.

Revenue and Taxation Code section 6052 provides: 'The tax hereby imposed shall be collected by the retailer from the consumer in so far as it can be done.'

Preliminarily we note that our Supreme Court long ago held that this statute imposes a vendor tax (Western Lithograph Co. v. State Board of Equalization, 11 Cal.2d 156, 162, 78 P.2d 731). In Western Lithograph, the court construed statutes of 1933, chapter 1020, page 2602, section 8 1/2, the predecessor of Revenue and Taxation Code section 6052.

Diamond, relying on First Agricultural Bank v. Tax Commission, 392 U.S. 339, 88 S.Ct. 2173, 20 L.Ed.2d 1138, as recently reaffirmed in United States v. Mississippi Tax Commission, ---- U.S. ----, 95 S.Ct. 1872, 44 L.Ed.2d 404 (1975), urges that since we are construing a federal exemption, we are bound to conclude that the legal incidence of the tax fell on the purchaser. However, the question presented by a claim of exemption under a federal statute granting immunity to national banks from state sales taxes goes beyond the mere claim of an automatic exemption for a federal agency. The national bank must also show that the 'incidence' of the tax is on it (Huntington Nat. Bank of Columbus v. Porterfield (1970), 23 Ohio St.2d 131, 263 L.E.2d 227, cert, den., 401 U.S. 1005, 91 S.Ct. 1260, 28 L.Ed.2d 542).

In First Agricultural, the U. S. Supreme Court squarely rejected the proposition that the legal incidence of a tax always fell on the person legally liable for it, and held that pursuant to the Massachusetts statute there in issue, ⁶ the Massachusetts Legislature intended that the tax be 'passed on' to the purchaser and accordingly was a tax on the purchaser and not the vendor. The court emphasized (392 U.S. at 347, 88 S.Ct. 2173) that the legislative intent was controlling. In United States v Mississippi Tax Commission, supra, slip opinion at 608 of 421 U.S., at 1878 of 95 S.Ct. which involved the question of whether the Mississippi wholesale markup fell on the out-of-state distiller or on the purchasing federal military installations, ⁷ the court emphasized '. . . the controlling significance of First Agricultural Bank for our purposes is the test formulated by that decision for the determination of where the legal incidence of the tax falls, namely, that where a state requires that its sales tax be passed on to the purchaser and be collected by the vendor from him, this establishes as a matter of law that the legal incidence of the tax falls upon the purchaser' (emphasis supplied).

First Agricultural Bank thus simply held that: 1) if the tax must be passed on, the incidence is on the purchaser; 2) legislative intent is controlling as to whether the pass-on is mandatory; and 3) lack of sanction against the vendor for failing to pass-on does not negate a clearly worded pass-on provision. In the Mississippi Tax Commission case, supra, the U. S. Supreme Court followed the mandatory pass-on test of First Agricultural, supra.

Unlike the Massachusetts sales tax law or Mississippi tax Regulation 25, this state has no mandatory requirement that its sales taxes be 'passed on' ⁸ to the purchaser. As indicated above, Revenue and Taxation Code section 6052 provides that '[t]he tax hereby imposed shall be collected by the retailer from the consumer in so far as it can be done.' It is well settled that '[t]his section merely allows a retailer to reimburse himself for payment of the tax. He is limited in so doing where the consumer's contractual or constitutional rights are infringed' (Code Commissioner's Note, citing DeAryan v. Akers. 12 Cal.2d 781, 87 P.2d 695; emphasis supplied). The retailer is permitted to pass the tax on to the consumer, but he is not charged with a mandatory duty to collect the tax (Coast Elevator Co. v. State Bd. of Equalization, 44 Cal.App.3d 576, 588, 118 Cal.Rptr. 818; Pac. Coast Eng. Co. v. State of California, 111 Cal.App.2d 31, 34, 244 P.2d 21). Moreover, '[w]hile the act authorizes the retailer to collect the tax 'from the consumer in so far as the same can be done' . . . that does not make it a consumer's tax.' (Ainsworth v. Bryant, 34 Cal.2d 465, 474, 211 P.2d 564, 569).

In DeAryan v. Akers, 12 Cal.2d 781, 87 P.2d 695, the state Supreme Court declared that the statute '. . . must be deemed to indicate a reservation only in those cases where so to pursue the authority of reimbursement to the retailer would infringe the consumer's existing contractual or other constitutional rights.' (Id. at 786, 87 P.2d at 697; emphasis supplied.) Indeed, unlike the mandatory provisions of the Massachusetts statute and the Mississippi tax Regulation 25, Revenue and Taxation Code section 6052 expressly bars the right to reimbursement when a constitutional right would be infringed. ⁹

In a bootstrap argument, Diamond attempts to equate the caveat of the California statute, 'in so far as it can be done', with the language 'as nearly as possible or practicable' from the Massachusetts statute, and further assets that the First Agricultural holding regarding the 'same provi sions' dictates abandonment of the established California construction, because determination of the incidence of the California tax is a federal question and not a state question. However, we find this argument less than convincing for two reasons.

First, in comparing caveats, Diamond takes the Massachusetts 'as nearly as possible or practicable' out of context. When read within Subsection 3 of the Massachusetts sales tax, as set forth in footnote 7 above, the term clearly refers to collection of the average equivalent of the full amount of the tax. As discussed above, this is not the meaning of the California caveat.

Second, as recently stated in Gurley v. Rhoden (1975) 421 U.S. 200, at 208, 95 S.Ct. 1605, at 1610, 44 L.Ed.2d 110: '[A] State's highest court is the final judicial arbiter of the meaning of state statutes [citation], and therefore our review of the holding of a state court respecting the legal incidence of a state excise tax is guided by the following: 'When a state court has made its own definitive determination as to the operating incidence . . . [w]e give this finding great weight in determining the natural effect of a statute, and if it is consistent with the statute's reasonable interpretation it will be deemed conclusive.'' (Emphasis added.)

Thus, given the clear mandatory wording of both the Massachusetts statute and Mississippi tax Regulation 25, and in view of the obvious difference of Revenue and Taxation Code section 6052 as construed by the courts of this state since its inception, we think neither First Agricultural nor the Mississippi Tax Commission cases have overruled Western Lithograph and the other California cases. Further, as an intermediate appellate court, we are bound to follow the construction of a state statute by the decisions of our state Supreme Court (Market St. Ry. Co. v. Cal. St. Bd. Equal., 137 Cal.App.2d 87, 98, 290 P.2d 20).

Accordingly, we need not discuss in great detail two recent federal decisions, cited by Diamond for the proposition that the legal incidence of the California sales taxes is upon the purchaser. The first ¹⁰ of these is a Federal...