General Elec. Co. v. State Bd. of Equalization

• Decision Date: 19 May 1952
• Citation: 111 Cal.App.2d 180,244 P.2d 427
• Court: California Court of Appeals Court of Appeals
• Parties: GENERAL ELECTRIC CO. et al. v. STATE BOARD OF EQUALIZATION. Civ. 15115.

Page 427

244 P.2d 427

111 Cal.App.2d 180

GENERAL ELECTRIC CO. et al. v. STATE BOARD OF EQUALIZATION.

Civ. 15115.

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

May 19, 1952.

As Corrected on Denial of Rehearing June 18, 1952.

Hearing Denied July 17, 1952.

Cooley, Crowley & Gaither, William W. Godward, Edwin E. Huddleson, Jr., San Francisco, for appellant General Electric Co.

Robert H. Gerdes, Richard H. Peterson, William B. Kuder, San Francisco, for appellant Pacific Gas & Electric Co.

Edmund G. Brown, Atty. Gen., James E. Sabine, Irving H. Perluss, Ernest P. Goodman, Deputy Attys. Gen., for respondent.

PETERS, Presiding Justice.

The question involved in this case is whether the manufacturer-installer of a 521 ton turbine generator unit, which upon installation became an improvement to the real property of the buyer, is taxable under the Sales and Use Tax Law, §§ 6001-7176, Rev. & Tax.Code, as a seller at retail, or as a consumer of the parts and materials of which the generator was composed. The State Board of Equalization ruled that such manufacturer-installer sold the generator as tangible personal property at retail, and taxed the transaction as such. It denied a claim for refund. This action was then instituted to recover the claimed overpayment of the tax. The trial court held that the State Board had imposed the proper tax, denied the claim for refund, and entered its judgment accordingly. The manufacturer-installer and its purchaser, who in fact paid the tax, appeal.

There is no dispute as to the facts. On December 31, 1947, General Electric Company (hereafter referred to as General), a New York corporation that is qualified to do business in California and which is primarily a manufacturer of electrical equipment, entered into a contract with Pacific Gas and Electric Company (hereafter referred to as Pacific), a California company, under which General agreed to fabricate and install a turbine generator for Pacific as an integral part of Pacific's steam electric plant in Kern County. The full contract price was $1,164,797.85, including the cost of installation, which turned out to be $36,500. The contract provided that General 'agrees to construct the turbine generator described herein at Pacific's Kern Steam Plant.' It contains certain warranties, an agreement by General to defend and protect against any patent suits, and provided for progress payments, eighty per cent of the full purchase price being payable during fabrication, ten per cent more upon shipment, and the balance upon installation. The contract required General to furnish the cost of labor and materials in fabricating the generator and in installing it, except that Pacific was to provide the foundation and bolts and grouting necessary to install, a suitable crane with operator, a spur track, etc. Although the contract is silent as to risk of loss, the evidence indicates that General considered such risk to be on it until installation. Title remained in General until installation, when it passed to Pacific.

Each generator of the general type of the one here involved is specially designed by General to fit the needs of its customer. General is not engaged in the general construction business for the untility industry, but, because of the complexity of this type of machinery, insists on installing it. There are only two other concerns engaged in this business in the United States, and they too follow the practice of installing such equipment. Pacific always buys such equipment installed.

The generator here involved is a very large, very precise, and a very complex piece of machinery. It is designed to generate steam, which passes into a turbine, where it causes a rotary motion, which turns a generator that generates electric energy. It is the key piece of equipment in the steam plant, all other equipment being related to it. The building housing the generator, which building was constructed by Pacific, was specially designed to fit this particular piece of equipment, and has no other purpose or utility. The generator weighs about 521 tons, and is roughly 70 feet long, 22 feet wide and 19 feet high. It is attached to a concrete foundation with large bolts and cement. In spite of its size, it is a precision instrument.

The generator was manufactured by General at its factory in New York. The cost of the materials used in its manufacture was $263,990.17. It was completely assembled and tested in New York by General. Then, because of its size, it was dismantled and shipped to Kern County in fourteen freight cars. There it was installed by General, under the supervision of General's engineers, on a foundation constructed by Pacific. Installation took from January, 1948, to May, 1948. The equipment is expected to last indefinitely and to remain in place until obsolescence requires the plant to be scrapped or rebuilt.

Pacific has the fee title to the site where the steam plant is located. On the first Monday of March, 1948, when the generator was about half installed, Pacific reported to the State Board, for real property tax purposes, its entire plant, including the generator, as 'construction work in progress.' In 1949 the entire plant, including the generator, was taxed as realty to Pacific. No part of the assembled portion of the generator was ever taxed to General as personal property.

General, in compliance with Rule 11 of the State Board, paid a sales tax of $28,207.45, which was calculated on the full contract price of $1,164,797.85 less a credit of $36,500 for installation. General contends it should have paid a tax computed solely on $263,990.17, the cost of the materials to it, or a tax of $6,750.70. It paid all in excess of this amount under protest, contending that it has been subjected to a $21,456.75 overpayment. Pursuant to the terms of the contract Pacific has reimbursed General for the total tax paid, and is the beneficial owner of the claim for refund.

On these facts the trial court concluded that, as to General, the generator was tangible personal property and the transaction constituted a sale of tangible personal property in California by General to Pacific within the meaning of the Sales and Use Tax. Rule 11 was upheld as reasonable and non-discriminatory. It was therefore concluded that the transaction was properly subject to the sales tax in the full amount paid.

General's basic contention is that the State Board should have imposed a use tax under section 6201 of the Revenue and Taxation Code upon this transaction, and not a sales tax. Section 6201 imposes an excise tax at a fixed rate 'on the storage, use, or other consumption in this State of tangible personal property purchased from any retailer * * * for storage, use, or other consumption in this State'. If General is subject only to this tax, admittedly such tax, under the above section and section 6011 of the same code, would be measured by the cost to General of the raw materials which it fabricated into the generator.

The State Board contends that the transaction is subject to a tax on the theory that General sold to Pacific tangible personal property in this state, that is, sold the completed generator to Pacific, and hence General was a retailer of tangible personal property under the provisions of the Revenue and Taxation Code. Section 6015(a) of that code defines a retailer as 'Every seller who makes any retail sale or sales of tangible personal property * * *.' Section 6006 provides that:

"Sale' means and includes:

'(a) Any transfer of title or possession, * * * in any manner or any means whatsoever, of tangible personal property for a consideration. * * *

'(g) A transfer for a consideration of the title or possession of tangible personal property which has been produced, fabricated, or printed to the special order of the customer * * *.'

Section 6051 provides: 'For the privilege of selling tangible personal property at retail a tax is hereby imposed upon all retailers [at a fixed rate] of the gross receipts of any retailer from the sale of all tangible personal property sold at retail in this State'.

In developing their argument that General was a consumer of the materials that went into the completed generator, and not a retailer of tangible personal property, appellants first argue that the property involved never was personal property in the hands of Pacific, so that no sale of personal property could have taken place. It is pointed out that title did not pass to Pacific until the generator was affixed in place, at which moment it became real property and taxable as such. It is undoubtedly true that upon annexation the generator became an improvement to real property, a fixture, and taxable as such. §§ 104 and 105, Rev. & Tax.Code; § 660, Civ.Code; San Diego T. & S. Bank v. San Diego, 16 Cal.2d 142, 105 P.2d 94, 133 A.L.R. 416; Trabue Pittman Corp. v. County of L. A., 29 Cal.2d 385, 175 P.2d 512.

However, the argument that, because the generator became taxable as real property in the hands of Pacific, the transaction by which title was transferred to Pacific by General is conclusively determined to be not a sale, is unsound. The generator in place was clearly real property and taxable as such. But we are not interested in the nature of the property in the hands of the buyer, but in its nature in the hands of the seller--General. The sales tax is imposed on the seller, not upon the buyer. Section 6006 of the Revenue and Taxation Code defines a sale as 'Any transfer of title * * * in any manner or any means whatsoever'. Clearly, title passed from General to Pacific. In General's hands the title it possessed was title to personal property. General never had title as real property. What it had it passed to Pacific, and that was title to tangible personal property. That is all that is required by the act. This argument of appellants lacks substance.

The much more interesting and complex argument of appellants...