First Am. Title Ins. Co. v. Cal. Dep't of Tax & Fee Admin., D077970

CourtCalifornia Court of Appeals
Writing for the CourtDATO, J.
Citation286 Cal.Rptr.3d 510,71 Cal.App.5th 603
Decision Date12 November 2021
Docket NumberD077970

71 Cal.App.5th 603
286 Cal.Rptr.3d 510



Court of Appeal, Fourth District, Division 1, California.

Filed November 12, 2021
As Modified on Denial of Rehearing December 9, 2021

Matthew Rodriguez, Acting Attorney General, Tamar Pachter, Assistant Attorney General, Lisa W. Chao and Van-Dzung V. Nguyen, Deputy Attorneys General for Defendant and Appellant.

Bewley, Lassleben & Miller, Joseph A. Vinatieri and Leighton M. Anderson, Whittier, for Plaintiff and Respondent.


Albert Einstein reportedly said, "The hardest thing in the world to understand is the income tax."1 The subject of this case—sales and use tax as applied to a title insurance company's lease of business

286 Cal.Rptr.3d 513

equipment—is perhaps a not too distant second.

Part of the difficulty is that the law is a bit counterintuitive. For example, under the California Revenue and Tax Code: (1) certain leases are taxed as sales, (2) sales tax is imposed on sellers, even though buyers ordinarily pay it as part of the purchase price; (3) use tax is imposed on buyers, although retailers collect and remit it to the state; and (4) as a matter of state constitutional law , a title insurer pays an annual tax on certain income "in lieu" of all other taxes—which as a practical matter means that a title insurer cannot be required to bear the legal incidence of sales or use tax. ( Cal. Const., art. XIII, § 28, subd. (f) (hereafter, Article XIII, § 28(f).)

The primary issue on appeal is whether the state may, consistent with Article XIII, § 28(f), impose sales tax on leases of business equipment to a title insurer, made by a lessor who would otherwise be subject to the California sales tax. The California Department of Tax and Fee Administration (Department) contends it does not because the lessor, not the title insurer/lessee, is the taxpayer. In the Department's view, whether the lessee reimburses the lessor for its sales tax obligation is strictly a matter of contract and does not implicate the constitutional limit on taxing insurers.

Conversely, First American Title Insurance Company (First American) points out that in equipment leases not involving an insurer, the state assesses a use tax , not a sales tax. ( Cal. Code Regs., tit. 18, § 1660, subd. (c)(1) (Regulation 1660(c)(1).) But where, as here, the lessee is constitutionally exempt from paying use tax, Regulation 1660(c)(1) solves that problem by providing that sales tax applies instead.

Although technically sales tax is imposed on the seller/lessor, First American contends that the insurer/lessee ends up paying it as part of the rent. Thus, regardless of whether the tax is on the lessee's use or instead on the lessor's sale , the economic incidence is the same. First American argues that as a result, Regulation 1660(c)(1) imposes a de facto use tax on title insurers in violation of Article XIII, § 28(f). The trial court agreed with First American. It ordered the Department to "remove, strike out and otherwise give no force or effect to that portion of Regulation 1660(c)" providing that when the lessee is not subject to use tax, the sales tax applies.

We reverse. "[T]he legal incidence and the economic burden of sales taxes are two separate and distinct concepts." ( Hibernia Bank v. State Bd. of Equalization (1985) 166 Cal.App.3d 393, 402, 212 Cal.Rptr. 556.) For example, the federal constitution immunizes the United States from taxation by the states, "but it does not forbid a tax whose legal incidence is upon a contractor doing business with the United States, even though the economic burden of the tax, by contract or otherwise, is ultimately borne by the United States." ( United States v. Boyd (1964) 378 U.S. 39, 44, 84 S.Ct. 1518, 12 L.Ed.2d 713.) Similarly here, Article XIII, section 28(f) does not prohibit a sales tax whose legal incidence is on a lessor, even though the economic burden of the tax is ultimately borne by the title insurer/lessee. ( International Business Machines v. State Bd. of Equalization (1980) 26 Cal.3d 923, 927, 163 Cal.Rptr. 782, 609 P.2d 1 ( IBM ) ["because ... insurance companies enjoy[ ] exemption from paying any use tax, the ... law provide[s] that in such cases the lessor would be liable for a sales tax"].)


First American leased computer and other office equipment in transactions constituting

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continuing sales and purchases under California law. It claimed that it paid use tax (or alternatively, sales tax reimbursement) on those transactions for the period October 1, 2005 through September 30, 2011. Asserting the tax violated Article XIII, section 28(f), First American pursued administrative remedies in seeking a refund of slightly more than $785,000.

In February 2016, staff at the Department's predecessor, the California State Board of Equalization (Board), initially denied the claim on the grounds that Regulation 1660(c)(1) authorized the tax to be imposed on the lessors as a sales tax, and the Board lacked authority to declare Regulation 1660(c)(1) unconstitutional.2 As it was permitted to do, First American prosecuted an administrative appeal to the elected Board itself.3 Its lawyer argued that Regulation 1660(c)(1) is "facially unconstitutional" because it classifies the use tax as a sales tax only for insurance companies, "and only to avoid the effects of the applicable constitutional exemption."

In April 2018, as a result of the administrative appeal, the Board ordered a refund as to out-of-state leasing companies (which did not have the required in-state activities to be subject to California sales tax) but denied the claim as to other leases. It also declined to find Regulation 1660(c)(1) unconstitutional. Based on the administrative appeal ruling, First American calculated it was entitled to a $721,205.53 refund. The Department, however, challenged that amount and refused to issue a refund.

In June 2018, First American filed a petition for a writ of mandate in the superior court, seeking an order compelling the Department to (1) pay the allowed amount of the refund claim, and (2) "vacate its regulation [i.e., Regulation 1660(c)(1)] imposing a tax on tax-exempt lessees of tangible personal property."4

In October 2019, the parties settled the case in part, stipulating to a court order that the Department refund $721,205.53 plus interest.5 In a "Consent Agreement" made part of the order, the parties agreed the refund claim was now "moot," but First American reserved its right to litigate whether Regulation 1660(c)(1) was unconstitutional. Both sides asked the trial court to adjudicate that issue. Additionally, in its reply trial brief, First American stated it had "parallel refund claims" for subsequent years that "are still being held by [the Department] without any action being taken on them, one way or another." It asked the court to "compel the agency to act on the pending refund applications in a manner consistent with applicable law."

After conducting a hearing, the court granted the writ petition, determining that Regulation 1660(c)(1) evades and circumvents "the constitutionally imposed ‘in lieu’ limitation." Alternatively, the court also found that Regulation 1660(c)(1) conflicts with Revenue and Taxation Code section 6203, subdivision (b), which the court interpreted to preclude imposing sales tax on equipment leases.6 The court also ruled

286 Cal.Rptr.3d 515

that First American was entitled to attorney's fees in an amount to be determined postjudgment.7 The court issued a judgment in First American's favor and a writ of mandate directing the Department:

"(a) to remove, strike out and otherwise give no force or effect to that portion of Regulation 1660(c) of the Sales and Use Tax Regulations, as codified in title 18 of the California Code of Regulations § 1660(c)(1), which provides, ‘When the lessee is not subject to the use tax (for example, insurance companies), the sales tax applies. The sales tax is upon the lessor and is measured by the rentals payable[’];[ ] and [¶]

"(b) to refund to petitioner First American Title Insurance Company, together with applicable interest, all sums paid as either sales or use tax for or with respect to lease of tangible personal property within the scope of said Regulation for any refund application now pending before respondent [Department], within 60 days ...."


A. Regulation 1660(c)(1) is Not Unconstitutional

1. Constitutional Provisions

The economics of the insurance industry differs from that of most other businesses. Businesses generally calculate income by subtracting costs incurred in producing a good or service from revenues received from their sale. But insurance companies collect revenues up front (in the form of premiums), and then pay claimants based on contingent events that may occur many months or even years later. It can be difficult to match-up revenues to related expenses. Accordingly, because " ‘an accurate determination of the theoretically appropriate amount of taxable income proves very difficult to achieve in practice,’ " a gross premiums tax was adopted for...

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  • First Am. Title Ins. Co. v. Cal. Dep't of Tax & Fee Admin., D077970
    • United States
    • California Court of Appeals
    • November 12, 2021
    ...71 Cal.App.5th 603286 Cal.Rptr.3d 510FIRST AMERICAN TITLE INSURANCE COMPANY, Plaintiff and Respondent,v.CALIFORNIA DEPARTMENT OF TAX AND FEE ADMINISTRATION, Defendant and Appellant.D077970Court of Appeal, Fourth District, Division 1, California.Filed November 12, 2021As Modified on Denial o......

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