Duffy v. State Bd. of Equalization

• Decision Date: 13 March 1984
• Citation: 199 Cal.Rptr. 886,152 Cal.App.3d 1156
• Court: California Court of Appeals Court of Appeals
• Parties: Dennis L. DUFFY, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant. Civ. 21206.

Page 886

199 Cal.Rptr. 886

152 Cal.App.3d 1156

Dennis L. DUFFY, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant.

Civ. 21206.

Court of Appeal, Third District, California.

March 13, 1984.

George Deukmejian, Former Atty. Gen., John K. Van de Kamp, Atty. Gen., Edward P. Hollingshead and Derry L. Knight, Deputy Attys. Gen., for defendant and appellant.

Lobner & Bull, Philip D. Minter and Thomas R. Lincoln, Sacramento, for plaintiff and respondent.

SIMS, Associate Justice.

In this case we hold that the State Board of Equalization (Board) properly collected sales tax on amounts received by a tailor for alterations to "new clothing" (meaning clothing not previously worn except for trying on or fitting) supplied by customers even though the clothing had been previously purchased at retail establishments other than the tailor's shop.

FACTUAL AND PROCEDURAL HISTORY

Plaintiff operates dry cleaning and tailoring establishments in Sacramento. In 1978 the Board audited plaintiff's establishments and found that plaintiff owed state sales tax in the amount of $2,000.75. This tax was assessed upon amounts received by plaintiff for initial alterations of garments furnished by his customers but never worn except for trying on or fitting, an amount estimated by the Board to be 20 percent of total receipts from plaintiff's alterations. Claiming he had maintained no records of the actual volume of his initial alterations, plaintiff refused to furnish any such records to the Board and refused to cooperate with the Board in a test to develop a more precise estimate.

The Board based its assessment of tax on Revenue and Taxation Code section 6006, subdivision (b) ¹ and on Regulation 1524 ² which declares charges for alterations to "new clothing" to be taxable.

Plaintiff petitioned the Board for a redetermination of tax, which was ultimately denied. Plaintiff then paid the tax and petitioned the Board for a refund. The Board denied the petition. Plaintiff then filed a complaint for refund of the tax in superior court.

In ruling on cross-motions for summary judgment, the trial court found, inter alia, that "the term 'new' clothing as used in Regulation 1524(b)(1)(B) is defined neither in the [Revenue and Taxation] Code nor the Regulation. The definition applied by the [Board] ['never worn except for trying on or fitting'] is a 'staff interpretation' of the subject regulation and was not readily available to plaintiff from any statutory or regulatory source at the time the transactions involved herein occurred. Thus, plaintiff could have had no means of ascertaining whether a transaction involved 'new' clothing even exercising complete faith and reasonable care."

The trial court opined that due process requires that the meaning of statutes be definite and certain and granted plaintiff's motion for summary judgment. The Board's cross-motion for summary judgment was denied.

On appeal the Board contends: (1) the trial court lacked jurisdiction to decide the case since plaintiff failed to exhaust his administrative remedies, and (2) the applicable statutes and regulations require that plaintiff pay tax on alterations to "new clothing" and the trial court erred in concluding that "new clothing" needed to be further defined by regulation. We agree with the Board's second contention and shall reverse.

DISCUSSION

I

The Board first contends that plaintiff failed to exhaust his administrative remedies, thus depriving the trial court of jurisdiction to decide the matter. The Board points to plaintiff's refusal to provide business records to the Board. The Board further suggests that plaintiff had a duty to cooperate with it in conducting a test to determine what percentage of plaintiff's customers requested tailoring work consisting of alterations to "new clothing." The Board suggests the results of such a test could have provided a more precise estimate of plaintiff's sales tax liability than the 20 percent figure ultimately used.

Failure to exhaust administrative remedies before the Board is a jurisdictional procedural defect which bars court action contesting imposition of tax. (Aronoff v. Franchise Tax Bd. (1963) 60 Cal.2d 177, 180-181, 32 Cal.Rptr. 1, 383 P.2d 409; People v. West Publishing Co. (1950) 35 Cal.2d 80, 88, 216 P.2d 441; United States Steel Corp. v. Franchise Tax Board (1983) 144 Cal.App.3d 473, 479-480, 192 Cal.Rptr. 677; Barnes v. State Bd. of Equalization (1981) 118 Cal.App.3d 994, 1001, 173 Cal.Rptr. 742; see 2 Cal.Jur.3d, Administrative Law, § 262, pp. 506-510.) The purpose of the exhaustion doctrine is to lighten the burden of overworked courts in cases where administrative remedies are available and are as likely as the judicial remedy to provide the desired relief. (Morton v. Superior Court (1970) 9 Cal.App.3d 977, 982, 88 Cal.Rptr. 533; 2 Cal.Jur.3d, op. cit. supra, Administrative Law, § 263, pp. 510-511.)

In the instant case, plaintiff tendered to the Board his contentions that (a) he is not a producer or fabricator who engages in "retail sales" of new clothing, and (b) Regulation 1524 does not tell him with sufficient particularity what "new" clothing is, so he is unable reasonably to comply with the tax laws.

These contentions do not depend upon the resolution of any disputed facts before the Board; in essence, they represent distilled contentions of law unmuddied by evidentiary conflicts. For example, a test measuring the volume of plaintiff's business would in no way be relevant to plaintiff's contention that none of such business is taxable.

The Board was aware of these contentions and denied them. Since these wholly legal contentions were tendered to the Board and ruled on, the purpose of administrative review of these contentions was satisfied. ³ (See City of Los Angeles v. Superior Court (1973) 8 Cal.3d 723, 731, 106 Cal.Rptr. 15, 505 P.2d 207.) However as we point out in part IV, post, plaintiff's failure to cooperate with the Board bars other contentions that do depend on a resolution of disputed facts.

We therefore turn to plaintiff's assertion he is not subject to tax on alterations to clothing brought to him by customers who have previously purchased the clothing elsewhere.

II

A

We start with an overview of the taxing statutes themselves.

Revenue and Taxation Code section 6006, subdivision (a) defines, as a "sale," "Any transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for a consideration...." (See fn. 1, ante.) Thus, when one buys a completely fabricated item of tangible personal property (hereafter "product") at retail, such as a lawnmower, a taxable "sale" occurs under subdivision (a) of section 6006. The sales tax is calculated on the retail sales price of the product, title to which is delivered to the purchaser. (§§ 6011, 6051.) The retail price, in turn, reflects the value of materials and labor incorporated in the finished product. As we pointed out in King v. State Bd. of Equalization (1972) 22 Cal.App.3d 1006 at page 1012, 99 Cal.Rptr. 802, "A tangible article sold at retail is an amalgam of values created by material and services."

We all know, of course, that the fabrication of a product, ultimately purchased by a consumer, is a process most easily visualized, perhaps, on an assembly line. Where the process of fabrication is complete before the product is first sold at retail, there is no problem in recognizing a finished product on which sales tax will be imposed. Thus, where the hardware store sells an assembled lawnmower, tax is imposed on the sale and, presumably, nobody complains.

Problems arise, however, where the process of fabrication is arguably not complete at the time of the initial sale at retail. An obvious example would be where the process of fabrication of a lawnmower was accomplished not by an assembly line but rather by three stores located next to each other on the same street. One store sold a consumer a lawnmower body, another store sold a consumer a lawnmower engine and the third store mounted the engine on the body at the consumer's request. Is sales tax imposed on the third store for the labor required to put the body and motor together even though no change of title has occurred under subdivision (a) of section 6006?

Given the foregoing hypothetical, it requires little imagination to perceive the potential for disparate tax treatment of businesses that sell completed products and of businesses that complete the fabrication of a product at the request of a consumer who supplies materials. Thus, absent a tax on fabrication services, consumers would be taxed differently on their purchase of the same product, depending on the way the fabrication of the product was organized. In King v. State Bd. of Equalization, supra, we said, ⁴ "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." (22 Cal.App.3d at p. 1012, fn. omitted, 99 Cal.Rptr. 802.) Subdivision (b) of section 6006 defines "sale" to include, "The producing [or] fabricating ... of tangible personal property for a consideration for consumers who furnish either directly or indirectly the materials used in the producing [or] fabricating ...." (See fn. 1, ante.)

With this overview in mind, we turn to plaintiff's specific arguments.

B

Plaintiff first contends he is not subject to tax under subdivision (b) of section 6006 because the process of altering clothing does not constitute "producing," "fabricating," or "processing" within the meaning of the statute. Thus, plaintiff argues he "makes changes in clothing by cutting it and re-sewing it into slightly different shapes or lengths. He does not, in the questioned transactions remake...